<PAGE>
As filed with the Securities and Exchange Commission on October 23, 1997
Registration No. 333-36489
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO.1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GREAT PEE DEE BANCORP, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 6712 (To be applied for)
(State or Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Code Identification No.)
Organization) Number)
515 Market Street
Cheraw, South Carolina 29520
(803) 537-7656
(Address and Telephone Number of Principal Executive Offices)
515 Market Street
Cheraw, South Carolina 29520
(Address of Principal Place of Business or
Intended Principal Place of Business)
Herbert W. Watts
515 Market Street
Cheraw, South Carolina 29520
(803) 537-7656
(Name, Address and Telephone Number of Agent for Service)
Copies to:
John J. Gorman, Esq.
Alan Schick, Esq.
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
Approximate date of proposed sale to the public: As soon as practicable after
this registration statement becomes effective.
If this Form is filed to register additional shares for an offering pursuant to
Rule 462(b) under the Securities Act please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================
Proposed Proposed
Amount to be maximum maximum
Title of each class of registered offering price aggregate Amount of
securities to be registered per share offering registration fee
price (1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.1 par value 2,202,125 $10.00 $22,021,250 $6,673(2)
per share =
===================================================================================================================
</TABLE>
- -------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the registration statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
================================================================================
<PAGE>
PROSPECTUS
Up to 1,897,500 Shares of Common Stock
GREAT PEE DEE BANCORP, INC.
515 Market Street
Cheraw, South Carolina 29520
(803) 537-7656
================================================================================
First Federal Savings and Loan Association of Cheraw, Cheraw, South
Carolina is converting from the mutual form to the stock form of organization.
As part of the conversion, First Federal Savings and Loan Association of Cheraw
will become a wholly-owned subsidiary of Great Pee Dee Bancorp, Inc., which was
formed in September 1997. Upon the completion of the conversion, First Federal
Savings and Loan Association of Cheraw will be a wholly-owned subsidiary of
Great Pee Dee Bancorp, Inc. The common stock of Great Pee Dee Bancorp, Inc. is
being offered to the public under the terms of a Plan of Conversion which must
be approved by a majority of the votes eligible to be cast by members of First
Federal Savings and Loan Association of Cheraw and by the Office of Thrift
Supervision. The Conversion will not go forward if First Federal Savings and
Loan Association of Cheraw does not receive these approvals and Great Pee Dee
Bancorp, Inc. does not sell at least a minimum number of shares.
================================================================================
TERMS OF OFFERING
An independent appraiser has estimated the market value of the
converted First Federal Savings and Loan Association of Cheraw to range between
$14,025,000 to $18,975,000, which establishes the number of shares to be
offered. Subject to the additional approval of the Office of Thrift Supervision,
an additional 15% above the maximum number of shares may be offered. Based on
these estimates, we are making the following offering of shares of common stock.
<TABLE>
<S> <C> <C> <C> <C>
. Price Per Share: $10
. Number of Shares
Minimum/Maximum/Adjusted Maximum: 1,402,500 1,897,500 2,182,125
. Conversion Expenses
Minimum/Maximum/Adjusted Maximum: $614,460 $705,540 $757,911
. Net Proceeds to Great Pee Dee Bancorp, Inc.
Minimum/Maximum/Adjusted Maximum: $13,410,540 $18,269,460 $21,063,339
. Net Proceeds per share to Great Pee Dee Bancorp, Inc.
Minimum/Maximum/Adjusted Maximum: $9.56 $9.63 $9.65
</TABLE>
Please refer to Risk Factors beginning on page 8 of this document.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved
these securities or determined if this Prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
Trident Securities, Inc. will use its best efforts to assist Great Pee Dee
Bancorp, Inc. in selling at least the minimum number of shares but does not
guarantee that this number will be sold. All funds received from subscribers
will be held in an interest bearing savings account at First Federal Savings and
Loan Association of Cheraw until the completion or termination of the
Conversion.
For information on how to subscribe, call the Stock Information Center
at (803) ___________.
TRIDENT SECURITIES, INC.
Prospectus dated ________________ ___, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING....................................................................1
SUMMARY .........................................................................................................3
SELECTED FINANCIAL AND OTHER DATA OF
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW.................................................... 6
RISK FACTORS.....................................................................................................7
PROPOSED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS.......................................................... 10
MARKET AREA.....................................................................................................11
USE OF PROCEEDS.................................................................................................11
DIVIDENDS.......................................................................................................12
MARKET FOR THE COMMON STOCK..................................................................................... 13
COMPETITION..................................................................................................... 13
CAPITALIZATION.................................................................................................. 13
PRO FORMA DATA.................................................................................................. 15
Historical and Pro Forma Regulatory Capital Compliance................................................. 18
THE CONVERSION..................................................................................................19
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
STATEMENT OF OPERATIONS................................................................................ 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........................................................39
BUSINESS OF FIRST FEDERAL........................................................................................47
MANAGEMENT OF GREAT PEE DEE BANCORP, INC.........................................................................62
Directors and Executive Officers of the Holding Company.................................................62
MANAGEMENT OF FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW...............................................62
EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF FIRST FEDERAL.................................................64
REGULATION......................................................................................................68
TAXATION........................................................................................................75
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
RESTRICTIONS ACQUISITION OF THE HOLDING COMPANY..................................................................76
DESCRIPTION OF CAPITAL STOCK.....................................................................................80
TRANSFER AGENT...................................................................................................81
REGISTRATION REQUIREMENTS........................................................................................82
CHANGE IN ACCOUNTANTS............................................................................................82
LEGAL AND TAX MATTERS............................................................................................82
EXPERTS ........................................................................................................82
ADDITIONAL INFORMATION...........................................................................................83
</TABLE>
This document contains forward-looking statements which involve risks
and uncertainties. Great Pee Dee Bancorp, Inc.'s actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" beginning on page 8 of this Prospectus.
Please see the Glossary beginning on page G-l for the meaning of capitalized
terms that are used in this Prospectus.
(ii)
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: What is the purpose of the offering?
A: The offering is being made in connection with the conversion of First
Federal Savings and Loan Association of Cheraw from mutual-to-stock
form. As part of the conversion, you will have the opportunity to
become a shareholder of our newly formed holding company, Great Pee
Dee Bancorp, Inc., which will allow you to share in our future as an
indirect owner of a federal stock savings and loan association. The
stock offering will increase our capital for lending and investment
activities. This will give us greater flexibility to diversify
operations and expand into other geographic markets if we choose to do
so. As a stock savings and loan association-operating through a
holding company structure, we will have the ability to plan and
develop long-term growth and improve our future access to the capital
markets.
Q: How do I order the stock?
A: You must complete and return the stock order form to us together with
your payment, on or before December _____, 1997.
Q: How much stock may I order?
A: The minimum order is 25 shares (or $250). The maximum order in the
offering is 25,000 shares (or $250,000). For purposes of these
limitations, joint account holders may not collectively exceed the
25,000 share limit. In certain instances, your order may be grouped
together with orders by other persons who are associated with you
(such as your spouse, child or relative living in your home), or with
whom you are acting in concert, and, in that event, the aggregate
order may not exceed 25,000 shares. We may decrease or increase the
maximum purchase limitation without notifying you. However, if we
increase the maximum purchase limitation, and you previously
subscribed for the maximum number of shares, you will be given the
opportunity to subscribe for additional shares.
Q: What happens if there are not enough shares to fill all orders?
A: If the offering is oversubscribed, shares will be allocated based upon
a formula set forth in the Plan and in accordance with OTS
regulations.
Q: Who will receive subscription rights?
A: The stock will be offered on a priority basis to the following
persons:
. Persons who had a deposit account of at least $50 with us on June
30, 1995. (Great Pee Dee Bancorp, Inc.'s employee stock ownership
plan will have priority over such persons if more than 1,897,500
shares are sold, to the extent of any shares sold over 1,897,500
and up to the number of shares subscribed for by such plan). Any
remaining shares will be offered to:
. The employee stock ownership plan of Great Pee Dee Bancorp, Inc.
Any remaining shares will be offered to:
. Persons who had a deposit account of at least $50 with us on
September 30, 1997. Any remaining shares will be offered to:
. Our depositors and borrowers as of October __, 1997.
Q: Will shares be offered to anyone other than persons with subscription
rights?
<PAGE>
A. If the above persons do not subscribe for all of the shares, the
remaining shares will be offered to certain members of the general
public with preference given to persons who live in Chesterfield
County, South Carolina.
Q: What particular factors should I consider when deciding whether or not
to buy the stock?
A. Before you decide to purchase stock, you should read the entire
Prospectus, including the Risk Factors section on pages 8 through 11
of this document.
Q: As a depositor or borrower of First Federal, what will happen if I do
not order any stock?
A: You presently have voting rights in us; however, once we convert to
the stock form you will lose your voting rights unless you purchase
stock. Even if you do purchase stock, your voting rights will depend
on the amount of common stock that you own and not on your deposit
account or lending relationship at First Federal. You are not required
to purchase common stock. Your deposit account, certificate accounts
and any loans you may have with us will not be affected by the
Conversion.
Q: Who can help answer any other questions I may have about the stock
offering?
A: In order to make an informed investment decision, you should read this
entire Prospectus. This section highlights selected information and
may not contain all of the information that is important to you. In
addition, you may contact:
Stock Information Center
First Federal Savings and Loan Association of Cheraw
515 Market Street
Cheraw, South Carolina 29520
(803) ___-____
2
<PAGE>
SUMMARY
This summary highlights selected information from this document and
does not contain all the information that you need to know before making an
informed investment decision. To understand the stock offering fully, you should
read carefully this entire Prospectus, including the financial statements and
the notes to the financial statements of First Federal Savings and Loan
Association of Cheraw. References in this document to "we", "us", "our" and
"First Federal" refer to First Federal Savings and Loan Association of Cheraw.
In certain instances where appropriate, "us" or "our" refers collectively to
Great Pee Dee Bancorp, Inc. and First Federal Savings and Loan Association of
Cheraw. References in this document to "the Holding Company" refer to Great Pee
Dee Bancorp, Inc.
The Companies
Great Pee Dee Bancorp, Inc.
515 Market Street
Cheraw, South Carolina 29520
(803) 537-7656
The Holding Company is not an operating company and has not engaged in
any significant business to date. It was formed in September 1997 as a Delaware
corporation to be the holding company for First Federal Savings and Loan
Association of Cheraw. The holding company structure will provide us greater
flexibility in terms of operations, expansion and diversification. See page
_____.
First Federal Savings and Loan Association of Cheraw
515 Market Street
Cheraw, South Carolina 29520
(803) 537-7656
First Federal is a community- and customer-oriented federal mutual
savings and loan association. We provide financial services to individuals,
families and small businesses through our office in Cheraw, South Carolina.
Historically, we have emphasized residential mortgage lending, primarily one- to
four-family mortgage loans. On June 30, 1997, we had total assets of $60.5
million, deposits of $46.9 million, and retained earnings of $11.1 million, or
18.3% of assets. For the fiscal year ended June 30, 1997, we had net income of
$586,000, a return on average assets of .98% and a return on average equity of
5.47%. We have historically experienced very few asset quality problems in our
loan portfolio, and at June 30, 1997, our ratio of nonperforming assets to total
assets was .18%. See pages _____ to _____.
The Stock Offering
The Holding Company is offering for sale between 1,402,500 and
1,897,500 shares of its common stock, par value $.01 per share, at $10.00 per
share. This offering may be increased to 2,182,125 shares without further notice
to you if market or financial conditions change prior to the completion of this
stock offering or if additional shares of stock are needed to fill the order of
our employee stock ownership plan.
Stock Purchase Priorities
The Holding Company will offer shares of its common stock to our
depositors who held deposit accounts as of certain dates and to our borrowers
with outstanding loans as of October __, 1997. The shares will be offered first
in a Subscription Offering and any remaining shares may be offered in a
Community Offering. See pages _____ to _____. We have engaged Trident
Securities, Inc. to assist in the selling of the common stock on a best efforts
basis.
3
<PAGE>
Prohibition on Transfer of Subscription Rights
Selling or assigning your subscription rights is illegal. All persons
exercising their subscription rights will be required to certify that they are
purchasing shares solely for their own account and that they have no agreement
or understanding regarding the sale or transfer of such shares. We intend to
pursue any and all legal and equitable remedies in the event we become aware of
the transfer of subscription rights and we will not honor orders known by us to
involve the transfer of such rights. In addition, persons who violate the
purchase limitations may be subject to sanctions and penalties imposed by the
OTS.
The Offering Range and Offering Price Per Share
The offering range is based on an independent appraisal of the pro
forma market value of the common stock by Ferguson & Co., an appraisal firm
independent of us and experienced in appraisals of savings associations.
Ferguson & Co., has estimated that, in its opinion, as of September 2, 1997, the
aggregate pro forma market value of the common stock ranged between $14.0
million and $19.0 million (with a mid-point of $16.5 million). The pro forma
market value of the shares is our market value after taking into account the
sale of shares in this offering. The appraisal was based in part upon our
financial condition and operations and the effect of the additional capital
raised by the sale of common stock in this offering. The $10.00 price per share
was determined by our board of directors and is the price most commonly used in
stock offerings involving conversions of mutual savings associations. The
independent appraisal will be updated prior to the completion of the Conversion.
If the pro forma market value of the common stock changes to either below $14.0
million or above $21.8 million (the adjusted maximum of the offering), we will
notify you and provide you with the opportunity to modify or cancel your order.
See pages _____ to _____.
Termination of the Offering
The Subscription Offering will terminate at 12:00 noon, South Carolina
time, on November ___, 1997. The Community Offering, if one is held, is expected
to begin immediately after the termination of the Subscription Offering, but may
begin at any time during the Subscription Offering. The Community Offering may
terminate on or after November __, 1997 but in any event, no later than January
___, 1997, without approval by the OTS.
Benefits to Management from the Offering
Our full-time employees will participate in our employee stock
ownership plan, which is a form of retirement plan that will purchase shares of
common stock. We also intend to implement a management recognition and retention
plan and a stock option plan following completion of the Conversion, which will
benefit our officers and directors. If we adopt the management recognition and
retention plan, our executive officers and directors will be awarded shares of
common stock without paying for the shares. However, the management recognition
and retention plan and stock option plan may not be adopted until at least six
months after the Conversion and are subject to shareholder approval and
compliance with OTS regulations. See pages _____ to _____.
Use of the Proceeds Raised from the Sale of Common Stock
The Holding Company will retain up to 50% of the net proceeds from the
offering and will use the balance of the proceeds to purchase all of the capital
stock to be issued by First Federal. The Holding Company intends to make a loan
to our employee stock ownership plan to fund its purchase of 8% of the common
stock issued in the Conversion. The Holding Company will retain approximately
42% of the net proceeds as a possible source of funds for the payment of
dividends to shareholders or to repurchase shares of common stock in the future
and for other general corporate purposes. See pages _____ to _____.
4
<PAGE>
Dividends
Management of the Holding Company intends to pay an annual dividend of
$.30 payable quarterly at $.075 per share. The payment of dividends is expected
begin the first full quarter following the completion of the Conversion. See
page _____.
Market for the Common Stock
The Holding Company is a newly organized company which has never
issued capital stock. Consequently, there is no current market for its common
stock. The Holding Company has received conditional approval to have its common
stock quoted on the National Association of Security Dealers Automated Quotation
National Market System under the symbol "_______." There can be no assurance
that an active and liquid trading market will develop. Trident Securities, Inc.
has indicated its intention to make a market in the common stock subject to
compliance with applicable provisions of federal and securities laws and other
regulatory requirements, and we anticipate that it will be able to secure at
least two additional market makers for the common stock. If you purchase shares,
you may not be able to sell them when you want to at a price that is equal to or
more than the price you paid. See pages _____ to _____.
5
<PAGE>
RECENT DEVELOPMENTS
The following is a summary of selected financial information and other
data of First Federal and does not purport to be complete and is qualified in
its entirety by reference to the detailed information and financial statements
and accompanying notes thereto appearing elsewhere in this Prospectus. Selected
financial information at September 30, 1997 and operating data for the three
months ended September 30, 1997 and 1996 have been derived from unaudited
financial statements. In the opinion of management of First Federal, such
information reflects all adjustments (which consist only of normal recurring
adjustments) necessary for a fair presentation of the selected financial
information and other data. The results of operations for the three months ended
September 30, 1997 are not necessarily indicative of the results which may be
expected for any other period.
<TABLE>
<CAPTION>
At September At June
30, 1997 30, 1997
------------ ------------
(In Thousands)
<S> <C> <C>
Financial Condition Data:
Total assets................................................................... $ 60,133 $ 60,538
Investments (1)................................................................ 4,977 5,770
Loans receivable............................................................... 54,402 53,974
Savings deposits............................................................... 46,107 46,863
FHLB advances.................................................................. 2,400 2,400
Retained earnings.............................................................. 11,301 11,090
<CAPTION>
For the Three Months
September 30,
1997 1996
------------ ------------
(In Thousands)
<S> <C> <C>
Operating Data:
Interest income................................................................ $ 1,140 $ 1,126
Interest expense............................................................... 661 656
------------ ------------
Net interest income.......................................................... 479 470
Provision for loan losses...................................................... -- --
------------ ------------
Net interest income after provision for loan losses.......................... 479 470
Other income................................................................... 9 8
Other expenses (2)............................................................. 152 452
------------ ------------
Income before income taxes................................................... 336 26
Income tax expenses............................................................ 124 10
------------ ------------
Net income................................................................... $ 212 $ 16
============ ============
<CAPTION>
At or for the Three Months
September 30,
1997 1996
------------ ------------
(In Thousands)
<S> <C> <C>
Selected Data:
Return on average assets....................................................... 1.41% 0.11%
Return on average equity....................................................... 7.57% 0.61%
Average equity to average assets............................................... 18.56% 17.65%
Interest rate spread........................................................... 2.23% 2.25%
Net yield on average interest-earning assets................................... 3.21% 3.20%
Average interest-earning assets to average interest-bearing liabilities 122.03% 121.32%
Nonperforming assets to total assets........................................... 0.032% 0.48%
Loan loss allowance to nonperforming loans at period end....................... 164.67% 65.37%
</TABLE>
- --------------------------
(i) Includes interest-earning deposits, federal funds sold, FHLB stock and
investment securities.
(2) Includes a special assessment of $312,000 for the three months ended
September 30, 1996 which was paid to recapitalize the Savings Association
Insurance Fund.
6
<PAGE>
Comparison of Financial Condition at September 30, 1997 and June 30, 1997
First Federal's total assets decreased by $405,000, or 0.7%, to $60.1
million at September 30, 1997 from $60.5 million at June 30, 1997. Net income of
$212,000 during the quarter, together with decreases of $581,000 and $200,000,
respectively, in interest-earning balances in other banks and federal funds sold
was used to fund an increase of $428,000 in loans receivable and a decrease of
$756,000 in savings deposits. Loans receivable increased from $54.0 million to
$54.4 million during the quarter, while savings deposits decreased from $46.9
million to $46.1 million. Total retained earnings increased from $11.1 million
at June 30, 1997 to $11.3 million at September 30, 1997, as First Federal
continued to substantially exceed all applicable regulatory capital
requirements.
Comparison of Results of Operations for the Three Months Ended September 30,
1997 and 1996
Net income for the three months ended September 30, 1997 was $212,000
as compared with net income of $16,000 for the three months ended September 30,
1996, an increase of $196,000. The increase in net income resulted principally
from a reduction in the costs associated with deposit insurance premiums during
the current quarter as compared with the corresponding quarter of the prior
year. During the quarter ended September 30, 1996, a special insurance
assessment was imposed on all SAIF-insured institutions by the FDIC to
recapitalize the SAIF fund. First Federal's assessment was $312,000. Net of an
income tax benefit of $115,000, this special assessment decreased earnings
during the quarter ended September 30, 1996 by $197,000.
The concentration of interest-earning assets and liabilities and the
weighted average rates of interest earned and paid during the current and prior
years' quarters were very consistent. An increase of $9,000 in net interest
income during the three months ended September 30, 1997 as compared with the
three months ended September 30, 1996 was offset by an increase of $12,000 in
other expenses exclusive of the special insurance assessment described above.
7
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
The following selected financial data of First Federal is qualified in
its entirety by, and should be read in conjunction with, the financial
statements, including notes thereto, included elsewhere in this Prospectus. All
averages presented herein have been calculated on a monthly basis unless
otherwise stated.
<TABLE>
<CAPTION>
At or for the
Year Ended June 30
---------------------------
1997 1996
------------ ------------
(Dollars in Thousands)
<S> <C> <C>
Financial Condition data:
Total assets..................................................................... $ 60,538 $ 59,694
Investments (1).................................................................. 5,770 5,470
Loans receivable................................................................. 53,974 53,335
Savings deposits................................................................. 46,863 47,949
FHLB advances.................................................................... 2,400 1,050
Retained earnings................................................................ 11,090 10,504
Operating data:
Interest income.................................................................. $ 4,558 $ 4,521
Interest expense................................................................. 2,595 2,668
--------- ---------
Net interest income............................................................ 1,963 1,853
Provision for loan losses........................................................ 143 18
--------- ---------
Net interest income after provision for loan losses............................ 1,820 1,835
Other Income..................................................................... 23 42
Other Expense.................................................................... 915(2) 654
--------- ---------
Income before income taxes..................................................... 928 1,223
Income tax expense............................................................... 342 429
--------- ---------
Net income..................................................................... $ 586 $ 794
========= =========
Selected data:
Return on average assets......................................................... 0.98% 1.33%
Return on average equity......................................................... 5.47% 7.80%
Average equity to average assets................................................. 17.89% 16.99%
Interest rate spread............................................................. 2.37% 2.24%
Net yield on average interest-earning assets..................................... 3.32% 3.13%
Average interest-earning assets to average interest-bearing liabilities 121.73% 119.79%
Ratio of noninterest expense to average total assets............................. 1.53% 1.09%
Nonperforming assets to total assets............................................. 0.18% 0.12%
Loan loss reserves to nonperforming loans at period end.......................... 312.37% 367.39%
Number of:
Outstanding loans.............................................................. 1,773 1,776
Deposit accounts............................................................... 4,206 4,486
Full-service offices........................................................... 1 1
</TABLE>
- -------------------------
(1) Includes interest-bearing deposits, federal funds sold, FHLB stock and
investment securities.
(2) Includes a special assessment of $312,000 for the year ended June 30, 1997
which was paid to recapitalize the Savings Association Insurance Fund.
8
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, you should
consider carefully the following risk factors in evaluating an investment in the
common stock.
Decreased Return on Average Equity and Increased Expenses Immediately After
Conversion
Return on average equity (net income divided by average equity) is a
ratio commonly used to compare the performance of a public company to its peers.
For the years ended June 30, 1997 and 1996, our returns on average equity were
5.47% and 7.80%, respectively. As a result of the Conversion, our equity will
increase substantially. Our expenses also will increase because of compensation
expense that we must account for as a result of establishing our ESOP, RRP, and
the costs of being a public company. Because of the increases in our equity and
expenses, our return on equity is likely to decrease significantly as compared
to our performance in previous years. Initially, First Federal intends to use a
portion of the proceeds of this offering to repay some or all of its short-term
obligations owed to the FHLB of Atlanta. First Federal may also use some of the
proceeds to purchase loan participations and mortgage-backed securities on the
secondary market and, on an interim basis, to invest in U.S. government
securities and federal agency securities which generally have lower yields than
residential mortgage loans. See "Use of Proceeds."
The Impact of Changes in Interest Rates on First Federal
Our ability to make a profit, like that of most financial institutions,
substantially depends upon our net interest income, which is the difference
between the interest income we earn on our interest earning assets (such as
mortgage loans) and the interest expense we pay on our interest-bearing
liabilities (such as deposits). Approximately 55.83% of our mortgage loans have
rates of interest which are fixed for the term of the loan ("fixed rate") and
are originated generally with terms of up to 18 years, while deposit accounts
have significantly shorter terms to maturity. Because our interest-earning
assets generally have fixed rates of interest and have longer effective
maturities than our interest-bearing liabilities, the yield on our interest
earning assets generally will adjust more slowly to changes in interest rates
than the cost of our interest-bearing liabilities. The slower adjustment of
interest earning assets as compared to interest-bearing liabilities results in
First Federal having a "negative gap." At June 30, 1997, our one year interest
rate gap was negative 25.24%. As a result, our net interest income will be
adversely affected by material and prolonged increases in interest rates. In
addition, rising interest rates may adversely affect our earnings because there
might be a lack of customer demand for loans. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of First Federal
Savings and Loan Association of Cheraw Asset Liability Management."
Changes in interest rates also can affect the average life of loans and
mortgage-backed securities. The relatively lower interest rates in recent
periods have resulted in increased prepayments of loans and mortgage-backed
securities, as borrowers refinanced their mortgages in order to reduce their
borrowing cost. Under these circumstances, we are subject to reinvestment risk
to the extent that we are not able to reinvest such prepayments at rates which
are comparable to the rates on the prepaid loans or securities.
Reliance on Certificate of Deposit Accounts
A significant percentage of our deposit accounts are certificates of
deposit rather than passbook or money market accounts. At June 30, 1997, $37.9
million, or 80.83% of our total deposits were certificate of deposit accounts.
$30.5 million of our certificates of deposit mature within one year.
Certificates of deposit can be a more interest rate sensitive source of funds
than passbook or money market accounts. In the event that interest rates
significantly increase, or if we do not offer competitive rates of interest on
its certificates of deposit, First Federal may experience a significant decrease
in its deposit accounts. Management expects that a portion of its certificates
of deposit which mature within a year will not remain with First Federal.
9
<PAGE>
Competition
We experience strong competition in our local market area in
originating loans primarily from mortgage brokers. Our competition in attracting
deposits is primarily from commercial banks, thrifts and money center banks.
Such competition may limit our growth in the future. See "Competition."
Mortgage Underwriting Practices
We historically have originated our mortgage loans pursuant to our own
underwriting standards which do not conform with the standard criteria of
Freddie Mac or the FNMA because we do not require current property surveys in
most cases. Consequently, such loans cannot be sold to Freddie Mac or FNMA. To
the extent such loans can be sold in the secondary market, they may not be sold
on terms that are as favorable as those that could be obtained from Freddie Mac
or FNMA.
Geographic Concentration of our Loans
All of our real estate mortgage loans are secured by properties located
in South Carolina, mostly in Chesterfield and Marlboro Counties. A weakening in
the local real estate market or in the local or national economy, or a reduction
in the workforce at the manufacturing facilities in the area could result in an
increase in the number of borrowers who default on their loans and a reduction
in the value of the collateral securing the loans, which would reduce our
earnings.
The Expense and Dilutive Effect of the Contribution of Shares to the Foundation
Pursuant to the Plan, we intend to establish a Foundation in connection
with the Conversion. In addition to the shares to be sold to depositors and the
public, we propose to contribute 20,000 shares of Common Stock of the Holding
Company to the Foundation, which contribution has a value equal to $200,000
based upon the Common Stock's initial offering price of $10.00 per share. The
contribution of Common Stock to the Foundation will be dilutive to the interests
of stockholders and will have an adverse impact on the reported earnings of the
Holding Company in fiscal 1998, the fiscal year in which the Foundation is to be
established and the contribution made. If the Foundation had been established at
June 30, 1997, we would have reported net income of $458,000, rather than
reporting net income of $586,000 for the year ended June 30, 1997. Upon
completion of the Conversion, the Foundation will own between 0.9% and 1.4% of
the total shares of the Common Stock to be issued and outstanding. The OTS has
imposed a condition (which may be waived in certain circumstances) on its
approval of the Conversion that the shares held by the Foundation will be voted
in the same ratio as all other shares of the Holding Company as to any proposals
considered by the stockholders. The establishment of the Foundation is subject
to the approval of First Federal's members. See "The Conversion--Establishment
of the Foundation."
First Federal's Intent to Remain Independent
We have operated as an independent community oriented savings and loan
association since 1920. It is our intention to continue to operate as an
independent community oriented savings and loan association following the
Conversion. Accordingly, you are urged not to subscribe for shares of our common
stock if you are anticipating a quick sale by us. See "Business of First
Federal."
Anti-Takeover Provisions and Statutory Provisions That Could Discourage Hostile
Acquisitions of Control
Provisions in the Holding Company's Certificate of Incorporation and
Bylaws, the corporation law of the state of Delaware, and certain federal
regulations may make it difficult and expensive to pursue a tender offer, change
in control or takeover attempt which our management opposes. As a result,
shareholders 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
current
10
<PAGE>
board of directors or management of the Holding Company, or the appointment of
new directors to the Board, more difficult. Restrictions include: restrictions
on the acquisition of the Holding Company's equity securities and limitations on
voting rights; the classification of the terms of the members of the board of
directors; certain provisions relating to meetings of shareholders; elimination
of cumulative voting by shareholders in the election of directors; the issuance
of preferred stock and additional shares of common stock without shareholder
approval; and supermajority provisions for amendments to the Certificate of
Incorporation and Bylaws, and the approval of certain business combinations.
See "Restrictions on Acquisition of the Holding Company."
Possible Voting Control by Our Directors and Officers
Our directors and executive officers intend to subscribe for 125,000
shares of common stock which, at the midpoint of the Estimated Valuation Range,
would constitute 7.6% of the outstanding shares. When aggregated with the shares
of common stock our executive officers and directors expect to acquire through
the Stock Option Plan, ESOP and RRP, our executive officers and directors could
have voting control over approximately 488,000 shares of common stock, or 25.9%
of the outstanding shares at the midpoint of the Estimated Valuation Range
(assuming that Stock Option Plan grants and RRP awards are made from authorized
but unissued shares). This ownership of common stock by our management could
make it difficult to obtain majority support for shareholder proposals which are
opposed by management. In addition, our management may be able to prevent the
approval of transactions or actions (i.e., business combinations and amendment
to our Certificate of Incorporation and Bylaws) requiring the approval of 80% of
the shareholders under the Holding Company's Certificate of Incorporation if
additional shares are issued to them pursuant to the RRP and/or the Stock Option
Plan. See "Proposed Purchases by Directors and Executive Officers," "Executive
Compensation and Related Transactions of First Federal," "Description of Capital
Stock," and "Restrictions on Acquisition of the Holding Company."
Possible Dilutive Effect of RRP and Stock Options
If the Conversion is completed and shareholders approve the RRP and
Stock Option Plan, we intend to issue shares to our officers and directors
through these plans. If the shares for the RRP are issued from our authorized
but unissued stock, your ownership percentage could be diluted by up to
approximately 3.85%. If the shares for the Stock Option Plan are issued from our
authorized by unissued stock, your ownership percentage could be diluted by up
to approximately 9.09%. In either case, the trading price of our common stock
may be reduced. See "Pro Forma Data" and "Executive Compensation and Related
Transactions of First Federal."
Financial Institution Regulation and Future of the Thrift Industry
We are subject to extensive regulation, supervision, and examination by
the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance
Corporation (the "FDIC"). A bill has been introduced in the Congress that would
consolidate the OTS with the Office of the Comptroller of the Currency. If this
legislation is enacted into law we could be forced to become a state or national
commercial bank, and become subject to regulation by a different government
agency. If we become a commercial bank, our investment authority and the ability
of the Holding Company to engage in diversified activities may be limited or
prohibited, which could affect our profitability. It is impossible at this time
to predict whether such legislation will be passed or the impact of any such
legislation on our operations. See "Regulation."
Absence of Prior Market For the Common Stock
The Holding Company is a newly organized company which has never issued
capital stock. Consequently, there is no current market for its Common Stock.
The Holding Company has received conditional approval to have its Common Stock
quoted on the National Association of Security Dealers Automated Quotation
National Market System under the symbol "_______." The development of a liquid
public trading market depends upon the existence of willing buyers and sellers,
the presence of which is not in the control of The Holding Company or any market
11
<PAGE>
maker. There can be no assurance that an active and liquid trading market will
develop. Trident Securities, Inc. has indicated its intention to make a market
in the Common Stock subject to compliance with applicable provisions of federal
and securities laws and other regulatory requirements, and we anticipate that it
will be able to secure at least two additional market makers for the Common
Stock. If you purchase shares, you may not be able to sell them when you want to
at a price that is equal to or more than the price you paid.
Risk of Delay in Completion of the Offering
Although we expect to complete the Conversion within the time periods
indicated in this Prospectus, it is possible that adverse market, economic or
other factors could significantly delay the completion of the Conversion, which
could significantly increase our Conversion costs. In this case, however, you
would have the right to modify or rescind your subscription and to have your
subscription funds returned to you promptly, with interest. See "The
Conversion."
Income Tax Consequences of Subscription Rights
If the Internal Revenue Service were to determine that the subscription
rights offered to you in connection with the Conversion have an ascertainable
value, the exercise of your subscription rights could result in the recognition
of taxable income. Whether the subscription rights are considered to have an
ascertainable value is an inherently factual determination. In the opinion of
Ferguson however, the subscription rights do not have an ascertainable fair
market value; however, Ferguson's conclusion is not binding on the IRS. See "The
Conversion--Principal Effects of Conversion--Tax Effects."
PROPOSED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the approximate purchases of common
stock by each director and executive officer and their Associates in the
Conversion. All shares will be purchased for investment purposes and not for
purposes of resale. The table assumes 1,650,000 that shares (the midpoint of the
Estimated Value Range) of the common stock will be sold at $10.00 per share and
that sufficient shares will be available to satisfy subscriptions.
<TABLE>
<CAPTION>
Total Shares
Proposed to be Aggregate Price of
Name Position Subscribed For(1) Intended Purchases Percent of Shares %
- ------------------------- ------------------------ ------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C>
Herbert W. Watts(2) President and Chief 20,000 $200,000 1.2%
Executive Officer
Robert M. Bennett Chairman of the Board 25,000 250,000 1.5%
William Rhett Butler Director 20,000 200,000 1.2%
James C. Crawford, III Director 25,000 250,000 1.5%
Henry P. Duvall, IV Director 15,000 150,000 0.9%
Cornelius B. Young Director 15,000 150,000 0.9%
Johnnie L. Craft Secretary and Treasurer 5,000 50,000 0.3%
----------- ----------- --------------
All directors and officers 125,000 $1,250,000 7.6%(3)
as a group (7 persons) =========== =========== ==============
</TABLE>
- ----------------------------
(1) Does not include shares subject to stock options which may be granted
under the Stock Option Plan, or shares which may be awarded under the
RRP.
12
<PAGE>
(2) In addition, a Non-Qualified Deferred Compensation Plan which has been
established for the benefit of Mr. Watts intends to purchase shares of
common stock in the Conversion. See "Executive Compensation and
Related Transactions of First Federal--Non-Qualified Deferred
Compensation Plan."
(3) Assuming that all shares awarded under the RRP are purchased on the
open market upon (i) the full vesting of the restricted stock awards
to directors and executive officers contemplated under the RRP and
(ii) the exercise in full of all options expected to be granted to
directors and executive officers under the Stock Option Plan, all
directors and executive officers as a group would beneficially own
321,350 shares (20.8%), 356,000 shares (19.6%), 390,650 shares
(18.7%), and 430,498 shares (17.9%) upon sales at the minimum,
midpoint, maximum, and 15% above the maximum of the Estimated
Valuation Range, respectively. See "Executive Compensation and Related
Transactions of First Federal -- RRP," "--Stock Option Plan."
MARKET AREA
Our primary market area consists of Chesterfield and Marlboro counties,
South Carolina. First Federal's economy is concentrated in the areas of
manufacturing, service and trade. The largest employers in our market area are
the Chesterfield County School District, Delta Woodside (a textile producer),
Takata (an industrial airbag producer) and INA Bearings (a needle bearing
manufacturer). The economy is characterized by a number of the industries
operating in Chesterfield and Marlboro Counties. Consequently, although there
can be no assurance that our market area will not experience an increase in
unemployment, we believe our employment base will remain stable.
USE OF PROCEEDS
The Holding Company will retain up to 50% of the net proceeds from the
offering and will use the balance of the proceeds to purchase all of the capital
stock issued by First Federal in connection with the Conversion. The Holding
Company intends to make a loan to our ESOP to fund its purchase of 8% of the
shares of common stock sold in the Conversion. On a short-term basis,
approximately 42% of the net proceeds which are retained by the Holding Company
initially may be invested in short-term investments. The Holding Company may
also use the proceeds as a source of funds for the payment of dividends to
shareholders or for the repurchase of shares of common stock. The Holding
Company will not take any action in furtherance of an extraordinary capital
distribution during the year following the Conversion. The Holding Company may
also use a portion of the net proceeds to fund the purchase of 4% of the shares
for the RRP, which we anticipate will be adopted by our Board no earlier than
six months following the Conversion, subject to shareholder approval.
First Federal intends to use a portion of the net proceeds that it
receives from the Holding Company to make adjustable- and fixed-rate mortgage
loans and commercial real estate loans to the extent there is demand for such
loans and subject to market conditions. First Federal may also use a portion of
the net proceeds to repay some or all of its borrowings from the FHLB of
Atlanta. We anticipate that the balance of the proceeds will be used to purchase
loan participations and possibly mortgage-backed securities in the secondary
market. On an interim basis, we may use a portion of the net proceeds to invest
in U.S. government securities and other federal agency securities. See "Business
of First Federal Savings and Loan Association of Cheraw--Investments."
13
<PAGE>
The following table shows estimated gross and net proceeds based upon
shares of common stock being sold in the Conversion at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range.
<TABLE>
<CAPTION>
15% Above
Minimum, Midpoint, Maximum, Maximum,
1,402,500 1,650,000 1,897,500 2,182,125
Shares Sold at Price Shares Sold at Price Shares Sold at Price Shares Sold at Price
of $10.00 of $10.00 of $10.00 of $10.00(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross proceeds............. $ 14,025,000 $ 16,500,000 $ 18,975,000 $ 21,821,250
Less:
Estimated underwriting
commissions and
other expenses(1)(2) 614,000 660,000 706,000 758,000
-------------- -------------- ------------- -------------
Estimated net conversion
proceeds(1).............. $ 13,411,000 $ 15,840,000 $ 18,269,000 $ 21,063,250
============= ============== ============= =============
</TABLE>
- -------------------------
(1) In calculating estimated net proceeds, it has been assumed that no
sales will be made through selected dealers, that all shares are sold
in the Subscription Offering, that executive officers and directors of
First Federal and their Associates purchase shares of common stock in
the Conversion, and that the ESOP acquires 8% of the shares of common
stock issued in the Conversion.
(2) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up
to 15% to reflect changes in market and financial conditions following
the commencement of the Subscription Offering and the Community
Offering, if any, as well as to reflect the demand for the common
stock.
The actual net proceeds may differ from the estimated net proceeds
calculated above for various reasons, including variances in the actual amount
of legal and accounting expenses incurred in connection with the Conversion,
commissions paid for sales made through other dealers, and the actual number of
shares of common stock sold in the Conversion. Any variance in the actual net
proceeds from the estimates provided in the table above is not expected to be
material.
DIVIDENDS
The Holding Company intends to pay annual dividends of $.30 per share,
payable on a quarterly basis beginning the first full quarter following the
completion of the Conversion. Dividends will be subject to determination and
declaration by the Board of Directors in its discretion, which will take into
account the Holding Company's consolidated financial condition and results of
operations, tax considerations, industry standards, economic conditions, capital
levels, regulatory restrictions on dividend payments by us to the Holding
Company, general business practices and other factors. See "Regulation--Savings
Association Regulatory Capital" and "--Dividend Limitations."
The Holding Company is not subject to OTS regulatory restrictions on
the payment of dividends to its shareholders although the source of such
dividends depend in part upon the receipt of dividends from us. The Holding
Company is subject, however, to the requirements of Delaware law, which
generally limit the payment of dividends to amounts that will not affect the
ability of the Holding Company, after the dividend has been distributed, to pay
its debts in the ordinary course of business and will not exceed the difference
between the Holding Company's total assets and total liabilities plus
preferential amounts payable to shareholders with rights superior to those of
the holders of common stock. First Federal must provide the OTS with 30 days
prior notice of its intention to make a capital distribution to the Holding
Company. Additional limits on the dollar amount of any capital distribution by
First Federal to the Holding Company are set forth in OTS regulations. See
"Regulation--Dividend Limitations."
14
<PAGE>
In addition to the foregoing, the portion of our earnings which has
been appropriated for bad debt reserves and deducted for federal income tax
purposes cannot be used by us to pay cash dividends to the Holding Company
without the payment of federal income taxes by us 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 Notes A and J to the Financial Statements. The Holding Company
does not contemplate any distribution by us that would result in a recapture of
our bad debt reserve or otherwise create federal tax liabilities.
MARKET FOR THE COMMON STOCK
The Holding Company has never issued common stock to the public.
Consequently, there is no established market for the common stock. The Holding
Company has received approval to have the common stock quoted on the Nasdaq
National Market under the symbol "__________" upon the successful closing of the
offering, subject to certain conditions. Trident Securities, Inc. has advised us
that it intends to act as a market maker for the common stock, subject to
compliance with applicable provisions of federal and state securities laws and
other regulatory requirements.
The existence of a public trading market will depend upon the presence
in the market of both willing buyers and willing sellers at any given time. The
presence of a sufficient number of buyers and sellers at any given time is a
factor over which neither the Holding Company nor any broker or dealer has
control. The absence of an active and liquid trading market may make it
difficult to sell the common stock and may have an adverse effect on the price
of the common stock. Purchasers should consider the potentially illiquid and
long-term nature of their investment in the shares offered hereby.
The aggregate price of the common stock is based upon an independent
appraisal of the pro forma market value of the common stock. However, there can
be no assurance that an investor will be able to sell the common stock purchased
in the Conversion at or above the Purchase Price.
COMPETITION
We originate most of our loans to and accept most of our deposits from
residents of Chesterfield and Marlboro Counties, South Carolina. We are subject
to strong competition from various financial institutions, including state and
national banks, state and federal savings associations and certain nonbanking
consumer lenders that provide similar services in Chesterfield and Marlboro
Counties. We also compete with money market funds with respect to deposit
accounts and with insurance companies with respect to individual retirement
accounts.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office location. We compete for loan
originations primarily through the efficiency and quality of the services that
we provide borrowers and through interest rates and loan fees charged.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels, and other factors that we cannot readily predict.
CAPITALIZATION
The following table presents our historical capitalization at June 30,
1997, and the pro forma consolidated capitalization of the Holding Company as of
that date, giving effect to the sale of common stock offered by this Prospectus
based on the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, and subject to the other assumptions set forth below.
The pro forma data set forth below may change significantly at the time the
Holding Company completes the Conversion due to, among other factors, a change
in the Estimated Valuation Range or a change in the current estimated expenses
of the Conversion. If the Estimated Valuation Range changes so that between
1,402,500 and 2,182,125 shares are not sold in the Conversion,
15
<PAGE>
subscriptions will be returned to subscribers who do not affirmatively elect to
continue their subscriptions during the offering at the revised Estimated
Valuation Range.
<TABLE>
<CAPTION>
At June 30, 1997
Pro Forma Holding Company
Capitalization Based on Sale of
-------------------------------------------------
1,402,500 1,650,000 1,897,500 2,182,125
Shares Shares Shares Shares
First Sold at Sold at Sold at Sold at
Federal Price of Price of Price of Price of
Historical $10.00 $10.00 $10.00 $10.00(6)
- -------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposit/(1)/................................ $ 46,863 $ 46,863 $ 46,863 $ 46,863 $ 46,863
FHLB advances............................... 2,400 2,400 2,400 2,400 2,400
-------- --------- --------- --------- ---------
Total deposits and borrowings.......... $ 49,263 $ 49,263 $ 49,263 $ 49,263 $ 49,263
======== ========= ========= ========= =========
Stockholders equity:
Preferred Stock, $.01 par value per share:
authorized - 400,000 shares; assumed
outstanding - none ........................ -- -- -- -- --
common stock, $.01 par value per share
3,200,00 authorized shares; shares to be
outstanding as shown/(2)/ ............... -- 14 17 19 22
Paid-in capital/(2)/ ..................... -- 13,469 15,895 18,322 21,113
Less: Common stock acquired by ESOP/(3)/ . -- (1,122) (1,320) (1,518) (1,746)
Common stock to be acquired by
RRP/(4)/ .......................... -- (561) (660) (759) (873)
Retained earnings, substantially
restricted/(5)/ ......................... 11,090 11,090 11,090 11,090 11,090
------- -------- -------- -------- --------
Total stockholders' equity ............... $11,090 $ 22,890 $ 25,022 $ 27,154 $ 29,606
======= ======== ======== ======== ========
</TABLE>
- -------------------------
/(1)/ Excludes withdrawals from deposit accounts for the purchase of common
stock. Such withdrawals will reduce pro forma deposits by the amount
thereof.
/(2)/ The number of shares to be issued in the Conversion may be increased or
decreased based on market and financial conditions prior to the completion
of the Conversion. Assumes estimated expenses of $614,000, $660,000,
$706,000 and $758,000 at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range, respectively. See "Use of
Proceeds." Also assumes that 20,000 shares will be contributed by the
Holding Company to the Foundation.
/(3)/ Assumes purchases by the ESOP of a number of shares equal to 8% of the
shares issued in the Conversion. The funds used to acquire the ESOP shares
will be borrowed from the Holding Company. See "Use of Proceeds." First
Federal intends to make contributions to the ESOP sufficient to service
and ultimately retire its debt. The common stock acquired by the ESOP is
reflected as a reduction of shareholders' equity. See "Executive
Compensation and Related Transactions of First Federal-- Employee Stock
Ownership Plan and Trust."
/(4)/ Assuming the receipt of shareholder approval, the Holding Company intends
to implement the RRP. Assuming such implementation, the RRP will purchase
an amount of shares equal to 4% of the common stock sold in the Conversion
for issuance to directors and officers of the Holding Company and First
Federal. Such shares may be purchased from authorized but unissued shares
or on the open market. The Holding Company currently intends that the RRP
will purchase the shares on the open market. Under the terms of the RRP,
assuming it is adopted within one year of the Conversion, shares will vest
at the rate of 20% per year. The common stock to be purchased by the RRP
represents unearned compensation and is, accordingly, reflected as a
reduction to pro forma shareholders' equity. As shares of the common stock
granted pursuant to the RRP vest, a corresponding reduction in the charge
against capital will occur. In the event that authorized but unissued
shares are acquired, the interests of existing shareholders will be
diluted. Assuming that 1,650,000 shares of common stock, the midpoint of
the Estimated Valuation Range, are issued in the Conversion, 20,000 shares
are issued to the Foundation and that all awards under the RRP are from
authorized but unissued shares, the Holding Company estimates that the per
share book value for the common stock would be diluted $.19 per share, or
1.3% on a pro forma basis as of June 30, 1997. The dilution
16
<PAGE>
would be $.23 per share (1.4%) and $.16 per share (1.1%) at the minimum and
maximum levels, respectively, of the Estimated Valuation Range on a pro
forma basis at June 30, 1997.
(5) Retained earnings are substantially restricted, see "Financial Statements."
(6) As adjusted to give effect to an increase in the number of shares which.
could occur due to an increase in the Estimated Valuation Range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the Subscription Offering and Community Offering, if any, as
well as to reflect demand for the common stock.
PRO FORMA DATA
The following table sets forth the pro forma combined consolidated net
income of the Holding Company for the year ended June 30, 1997, as though the
offering had been consummated at the beginning of the year and the investable
net proceeds had been invested at 5.65% for the year ended June 30, 1997 which
was the one year treasury bill rate at June 30, 1997. The pro forma after-tax
return for the Holding Company on a consolidated basis is assumed to be 3.62%
for the year ended June 30, 1997 after giving effect to (i) the yield on
investable net proceeds from the Conversion offering and (ii) adjusting for
taxes using a combined federal and state income tax rate of 36%. Historical and
per share amounts have been calculated by dividing historical amounts and pro
forma amounts by the indicated number of shares of common stock, assuming that
such number of shares had been outstanding during each of the entire
periods.
Book value represents the difference between the stated amount of
consolidated assets and consolidated liabilities of the Holding Company computed
in accordance with generally accepted accounting principles. Book value does not
necessarily reflect current market value of assets and liabilities, or the
amounts, if any, that would be available for distribution to shareholders in the
event of liquidation. See "The Conversion--Principal Effects of
Conversion--Effect on Liquidation Rights." Book value also does not reflect the
federal income tax consequences of the restoration to income of our special bad
debt reserve for income tax purposes, which would be required in the unlikely
event of liquidation or if a substantial portion of retained earnings were
otherwise used for a purpose other than absorption of bad debt losses. See
"Taxation--Federal Taxation." Pro forma book value includes only net proceeds
from the Conversion offering as though it occurred as of the indicated date and
does not include earnings on the proceeds for the period then ended.
The pro forma net income derived from the assumptions set forth above
should not be considered indicative of the actual results of operations of the
Holding Company that would have been attained for the year ended June 30, 1997
if the Conversion had been actually consummated at the beginning of such year
and the assumptions regarding investment yields should not be considered
indicative of the actual yield expected to be achieved during any future period.
The pro forma book values at the date indicated should not be considered as
reflecting the potential trading value of the Holding Company's stock. There can
be no assurance that an investor will be able to sell the common stock purchased
in the Conversion at prices within the range of the pro forma book values of the
common stock or at or above the Purchase Price. The pro forma data may not total
due to rounding differences.
17
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30, 1997
-----------------------------------------------------------------
2,182,125
1,402,500 1,650,000 1,897,500 Shares
Shares Shares Shares at $10.00
at $10.00 at $10.00 at $10.00 per Share
per Share per Share per Share (Maximum,
(Minimum) (Midpoint) (Maximum) as adjusted)(1)
--------- ---------- --------- ---------------
(Dollars In Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds ....................................... $ 14,025 $ 16,500 $ 18,975 $ 21,821
Plus: shares acquired by Foundation(2) .............. 200 200 200 200
----------- ----------- ----------- -----------
Pro forma market capitalization ...................... $ 14,225 $ 16,700 $ 19,175 $ 22,021
=========== =========== =========== ===========
Gross proceeds ....................................... $ 14,025 $ 16,500 $ 18,975 $ 21,821
Less estimated expenses .............................. (614) (660) (706) (758)
----------- ----------- ----------- -----------
Estimated net Conversion proceeds .................... 13,411 15,840 18,269 21,063
Less common stock acquired by ESOP(3) ................ (1,122) (1,320) (1,518) (1,746)
Less common stock to be acquired by RRP(4) ........... (561) (660) (759) (873)
----------- ----------- ----------- -----------
Estimated proceeds available for investment ....... $ 11,728 $ 13,860 $ 15,992 $ 18,445
=========== =========== =========== ===========
Consolidated net income:(2)
Historical ........................................... $ 586 $ 586 $ 586 $ 586
Pro forma adjustments:
Net income from proceeds (5)(6) ..................... 424 501 578 667
Less pro forma ESOP adjustment(3) ................... (26) (30) (35) (40)
Less pro forma RRP adjustment(4) .................... (72) (84) (97) (112)
----------- ----------- ----------- -----------
Pro forma net income .............................. $ 913 $ 973 $ 1,032 $ 1,101
=========== =========== =========== ===========
Consolidated net income per share:(2)(6)
Historical .......................................... $ 0.45 $ 0.38 $ 0.33 $ 0.29
Pro forma adjustments:
Net income from proceeds (5)(6) ..................... 0.32 0.32 0.33 0.33
Less pro forma ESOP adjustment(3) ................... (0.02) (0.02) (0.02) (0.02)
Less pro forma RRP adjustment(4) .................... (0.05) (0.05) (0.05) (0.05)
----------- ----------- ----------- -----------
Pro forma net income per share(7) ................. $ 0.69 $ 0.63 $ 0.58 $ 0.54
=========== =========== =========== ===========
Number of shares used in calculating earnings
per share(7) ...................................... 1,314,307 1,542,714 1,771,121 2,033,790
=========== =========== =========== ===========
Consolidated stockholders' equity (book value):(8)
Historical .......................................... $ 11,090 $ 11,090 $ 11,090 $ 11,090
Estimated net Conversion proceeds ................... 13,411 15,840 18,269 21,063
Plus: Shares issued to Foundation(2) ................ 200 200 200 200
Less: Contribution to Foundation(2) ................. (200) (200) (200) (200)
Plus: Tax benefit of contribution to Charitable
Foundation(2) ....................................... 72 72 72 72
Less common stock acquired or to be acquired by:
ESOP(3) ............................................ (1,122) (1,320) (1,518) (1,746)
RRP (4) ............................................ (561) (660) (759) (873)
----------- ----------- ----------- -----------
Pro forma .......................................... $ 22,890 $ 25,022 $ 27,154 $ 29,606
=========== =========== =========== ===========
Consolidated stockholders' equity per share: (8)(9)
Historical .......................................... $ 7.80 $ 6.64 $ 5.78 $ 5.04
Estimated net Conversion proceeds ................... 9.43 9.49 9.53 9.56
Plus: shares issued to Foundation .................... 0.14 0.12 0.10 0.09
Less: contribution to Foundation ..................... (0.14) (0.12) (0.10) (0.09)
Plus: tax benefit of contribution to Charitable
Foundation ........................................... 0.05 0.04 0.04 0.03
Less common stock acquired or to be acquired by:
ESOP(3) ............................................. (0.79) (0.79) (0.79) (0.79)
RRP (4) ............................................. (0.39) (0.40) (0.40) (0.40)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share ............. $ 16.09 $ 14.98 $ 14.16 $ 13.44
=========== =========== =========== ===========
Pro forma price to book value (%)(8)(9) .............. 62.1% 66.7% 70.6% 74.4%
----------- ----------- ----------- -----------
Pro forma price to earnings (P/E ratio) .............. 14.5x 15.9x 17.2x 18.5x
=========== =========== =========== ===========
Number of shares used in calculating
stockholders' equity per share ...................... 1,422,500 1,670,000 1,917,500 2,202,125
=========== =========== =========== ===========
-----------------------------
(Footnotes on following page)
</TABLE>
18
<PAGE>
/(1)/ As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following
commencement of the Offering and the Community Offering, if any, as well
as to reflect demand for the common stock.
/(2)/ Assumes the issuance of 20,000 shares of authorized but unissued shares to
the Foundation. Pro forma income and income per share does not give effect
to the non-recurring expense that will be recognized upon establishment of
the foundation and contribution of the shares to it. The after tax expense
is expected to be $128,000, assuming an effective tax rate of 36%.
Assuming the contribution was expensed during the year ended June 30,
1997, the pro forma net earnings per share would be $.60, $.55, $.51, and
$.48 at the minimum, midpoint, maximum and maximum as adjusted,
respectively.
/(3)/ It is assumed that 8% of the shares of common stock issued in the
Conversion will be purchased by the ESOP. The funds used to acquire the
ESOP shares will be borrowed by the ESOP from the Holding Company (see
'Use of Proceeds"). First Federal intends to make annual contributions to
the ESOP in an amount at least equal to the principal and interest
requirements on the debt. First Federal's total annual expense in payment
of the ESOP debt is based upon 28 equal annual installments of principal
with an assumed income tax benefit of 36%. The pro forma net income
assumes: (i) First Federal's total contributions are equivalent to the
debt service requirement for the year, and (ii) the effective income tax
rate applicable to the debt was 36%. Expense for the ESOP will be based on
the number of shares committed to be released to participants for the year
at the average market value of the shares during the year. Accordingly,
First Federal's total annual expense in payment of the ESOP for such years
may be higher than that discussed above. The loan to the ESOP is reflected
as a reduction of shareholders' equity.
/(4)/ Assuming the receipt of shareholder approval, the Holding Company intends
to implement the RRP. Assuming such implementation, the RRP will purchase
an amount of shares equal to 4% of the common stock sold in the Conversion
for issuance to directors and officers of the Holding Company and First
Federal. Such shares may be purchased from authorized but unissued shares
or on the open market. The Holding Company currently intends that the RRP
will purchase the shares on the open market, and the estimated net
Conversion proceeds have been reduced for the purchase of the shares in
determining estimated proceeds available for investment. Under the terms
of the RRP, if it is adopted within one year of the Conversion, shares
will vest at the rate of 20% per year. An income tax benefit of 36% has
been assumed. The common stock to be purchased by the RRP represents
unearned compensation and is, accordingly, reflected as a reduction to pro
forma shareholders' equity. As shares of the common stock granted pursuant
to the RRP vest, a corresponding reduction in the charge against capital
will occur. In the event that authorized but unissued shares are acquired
by the RRP, the interests of existing shareholders will be diluted.
Assuming that 1,650,000 shares of common stock are issued in the
Conversion, the midpoint of the Estimated Valuation Range, 20,000 shares
are issued to the foundation and that all awards under the RRP are from
authorized but unissued shares, the Holding Company estimates that the per
share book value for the common stock would be diluted $.19 per share, or
1.3%, on a pro forma basis as of June 30, 1997 at the midpoint of the
Estimated Valuation Range. The dilution would be $.23 per share (1.4%) and
$.16 per share (1.1%) at the minimum and maximum levels, respectively, of
the Estimated Valuation Range on a pro forma basis as of June 30, 1997.
/(5)/ See "Use of Proceeds" for assumptions utilized to determine the investable
net proceeds of the sale of common stock.
/(6)/ Assuming investable net proceeds had been invested since the beginning of
the period at 5.65%, the one year treasury bill rate at June 30, 1997, and
an assumed effective income tax rate of 36%.
/(7)/ The number of shares used in calculating earnings per share was calculated
using the indicated number of shares issued (including 20,000 shares
issued to the Foundation) reduced by the assumed number of ESOP shares
that would be unallocated at the end of the allocation period. Allocation
of ESOP shares is assumed to occur on the first day of the fiscal year.
/(8)/ Book value represents the excess of assets over liabilities. The effect of
the liquidation account is not reflected in these computations. (For
additional information regarding the liquidation account, see "The
Conversion--Principal Effects of Conversion--Effect on Liquidation
Rights.")
/(9)/ Assuming the receipt of shareholder approval at the Holding Company's
first meeting of shareholders to be held at least six months following the
Conversion, the Holding Company intends to implement the Stock Option
Plan. Assuming such implementation, common stock in an aggregate amount
equal to 10% of the shares issued in the Conversion will be reserved for
issuance by the Holding Company upon the exercise of the stock options
granted under the Stock Option Plan. No effect has been given to the
shares of common stock reserved for issuance under the Stock Option Plan.
Upon the exercise of stock options granted under the Stock Option Plan,
the interest of existing shareholders will be diluted by 9.09%. The
Holding Company estimates that the per share book value for the common
stock would be diluted $.44 per share, or 2.9%, on a pro forma basis as of
June 30, 1997, assuming the issuance of 1,650,000 shares in the Conversion
at the midpoint of the Estimated Valuation Range, the issuance of 20,000
shares to the foundation and the exercise of 165,000 options at an
exercise price of $10.00 per share. This dilution further assumes that the
shares will be issued from authorized, but unissued, shares. The dilution
would be $.55 per share (3.4%) and $.37 per share (2.6%) at the minimum
and maximum levels, respectively, of the Estimated Valuation Range on a
pro forma basis as of June 30, 1997.
19
<PAGE>
Historical and Pro Forma Regulatory Capital Compliance
The following table compares our historical and pro forma regulatory
capital levels as of June 30, 1997 to our capital requirements after giving
effect to the Conversion.
<TABLE>
<CAPTION>
Pro Forma Based Upon Sale of
----------------------------------------------------
Minimum of Midpoint of
Estimated Valuation Estimated Valuation
Range of Range of
Historical at 1,402,500 Shares 1,650,000 Shares
June 30, 1997 at $10.00 Per Share at $10.00 Per Share
-------------------------- -------------------------- ------------------------
Amount Percent Amount Percent Amount Percent
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
The Bank
- --------
<S> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting
principles........................ $ 11,090 18.3% $ 16,113 24.2% $ 17,030 25.1%
========= ========= ========= ========= ========= ========
Tangible capital/(2)/.............. $ 11,090 18.3% $ 16,113 24.2% $ 17,030 25.1%
Tangible capital requirement/(3)/ 908 1.5 1,000 1.5 1,017 1.5
--------- --------- --------- --------- -------- ---------
Excess........................... $ 10,182 16.8% $ 15,113 22.7% $ 16,013 23.6%
========= ========= ========= ========= ========= ========
Core capital/(2)/.................. $ 11,090 18.3% $ 16,113 24.2% $ 17,030 25.1%
Core capital requirement/(2)/ 1,816 3.0 2,000 3.0 2,034 3.0
--------- --------- --------- --------- -------- --------
Excess........................... $ 9,274 15.3% $ 14,113 21.2% 14,996 22.1%
========= ========= ========= ========= ========= ========
Risk-based capital/(2)//(3)/ $ 11,393 36.6% $ 16,416 50.8% $ 17,333 53.2%
Risk-based capital
requirement....................... 2,488 8.0 2,586 8.0 2,604 8.0
--------- --------- --------- --------- --------- --------
Excess........................... $ 8,905 28.6% $ 13,830 42.8% $ 14,729 45.2%
========= ========= ========= ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Based Upon Sale of
------------------------------------------------------
Maximum of Maximum, as Adjusted,
Estimated Valuation of Estimated Valuation
Range of Range of
1,897,500 Shares 2,182,125 Shares
at $10.00 Per Share at $10.00 Per Share(1)
------------------------- -----------------------
Amount Percent Amount Percent
----------- ----------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
The Bank
- --------
Capital under generally
accepted accounting
principles ....................... $17,948 26.0% $19,003 27.1%
======= ==== ======= ====
Tangible capital/(2)/ ............. $17,948 26.0% $19,003 27.1%
Tangible capital requirement/(3)/ . 1,034 1.5 1,053 1.5
------- ---- ------- ----
Excess .......................... $16,914 24.5% $17,950 25.6%
======= ==== ======= ====
Core capital/(2)/ ................. $17,948 26.0% $19,003 27.1%
Core capital requirement/(2)/ ..... 2,067 3.0 2,106 3.0
------- ---- ------- ----
Excess .......................... $15,881 23.0% $16,897 24.1%
======= ==== ======= ====
Risk-based capital/(2)//(3)/ ...... $18,251 55.7% $19,306 58.4%
Risk-based capital
requirement ...................... 2,622 8.0 2,643 8.0
------- ---- ------- ----
Excess .......................... $15,629 47.7% $16,663 50.4%
======= ==== ======= ====
</TABLE>
- ----------------------
/(1)/ As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following
commencement of the Subscription Offering and the Community Offering, if
any, as well as to reflect demand for the common stock.
/(2)/ Tangible and core capital levels are shown as a percentage of total
assets; risk-based capital levels are shown as a percentage of risk-
weighted assets.
/(3)/ Pro forma risk-based capital amounts and percentages assume net proceeds
have been invested in 20% risk-weighted assets. Computations of ratios
are based on historical adjusted total assets of $60,538,000 and risk-
weighted assets of $31,102,000.
20
<PAGE>
THE CONVERSION
THE BOARDS OF DIRECTORS OF FIRST FEDERAL AND THE HOLDING COMPANY, AND
THE OTS HAVE APPROVED THE PLAN SUBJECT TO THE PLAN'S APPROVAL BY OUR MEMBERS AT
A SPECIAL MEETING OF MEMBERS, AND SUBJECT TO THE SATISFACTION OF CERTAIN OTHER
CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. OTS APPROVAL, HOWEVER, DOES NOT
CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY THE OTS.
General
On July 14, 1997, our Board of Directors adopted a Plan of Conversion
(the "Plan") pursuant to which we will convert from a federal mutual savings and
loan association to a federal stock savings and loan association, and become a
wholly owned subsidiary of the Holding Company. The Conversion will include
adoption of the proposed Federal Stock Charter and Bylaws which will authorize
the issuance of capital stock by us. Under the Plan, our capital stock is being
sold to the Holding Company and the common stock of the Holding Company is being
offered to our customers and then to the public. The Plan has also been approved
by the OTS, subject to approval of the Plan by our members. A Special Meeting of
Members (the "Special Meeting") has been scheduled for that purpose on December
___, 1997. The approval of the Plan by the OTS does not constitute a
recommendation or endorsement of the Plan by the OTS.
We have mailed to each person eligible to vote at the Special Meeting a
proxy statement (the "Proxy Statement") containing information concerning the
business purposes of the Conversion and the effects of the Plan and the
Conversion on voting rights, liquidation rights, the continuation of our
business and existing savings accounts, FDIC insurance and loans. The Proxy
Statement also describes the manner in which the Plan may be amended or
terminated. Included with the Proxy Statement is a proxy card which should be
used to vote on the Plan and the Conversion.
The following is a summary of all of the material aspects of the Plan,
the Subscription Offering, and the Community Offering. The Plan should be
consulted for a more detailed description of its terms.
As part of the Conversion, we intend to establish a tax exempt
foundation to which the Holding Company will contribute 20,000 shares of common
stock (based upon the initial public offering price of $10.00 per share). The
Foundation is being formed as a means of complementing our existing community
reinvestment activities and to share our financial success as a locally
headquartered, community-oriented financial services institution. The Foundation
will be dedicated to the promotion of charitable purposes including community
development, grants or donations to support housing assistance, not-for-profit
community groups and other types of organizations or civic projects. See
"Establishment of a Foundation."
Reasons for Conversion
As a stock institution, we will be structured in the form used by
commercial banks, most business entities, and a growing number of savings
associations. Converting to the stock form is intended to have a positive effect
on our future growth and performance by: (i) affording our depositors and
employees the opportunity to become shareholders of the Holding Company and
thereby participate more directly in our future and the Holding Company's
future; (ii) providing the Holding Company with the flexibility to grow through
mergers and acquisitions by committing the offering of equity participations to
the shareholders of acquired companies; (iii) providing substantially increased
net worth and equity capital for investment in our business, thus enabling
management to pursue new and additional lending and investment opportunities and
to expand operations; and (iv) providing future access to capital markets
through the sale of stock of the Holding Company in order to generate additional
capital to accommodate or promote future growth. We believe that the increased
capital and operating flexibility will enhance our competitiveness with other
types of financial services organizations. Although our current members will,
upon Conversion, lose the
21
<PAGE>
voting and liquidation rights they presently have as members (except to the
limited extent of their rights in the liquidation account established in the
Conversion), they are being offered a priority right to purchase shares in the
Conversion and thereby obtain voting and liquidation rights in the Holding
Company.
The net proceeds to us from the sale of common stock offered hereby,
after retention by the Holding Company of 50% of the net proceeds, will increase
our existing net worth and thus provide an even stronger capital base to support
our lending and investment activities. In addition, the Conversion will provide
us with new opportunities to attract and retain talented and experienced
personnel by offering stock incentive programs.
Our Board of Directors believes that the Conversion to a holding
company structure is the best way to enable us to diversify our business
activities should we choose to do so. Currently, there are no plans, written or
oral, for the Holding Company to engage in any material activities apart from
holding our shares of stock that it acquires in connection with the Conversion,
although the Board may determine to further expand the Holding Company's
activities after the Conversion.
The additional common stock of the Holding Company being authorized in
the Conversion will be available for future acquisitions (although the Holding
Company has no current discussions, arrangements or agreements with respect to
any acquisition) and for issuance and sale to raise additional equity capital,
subject to market conditions and generally without shareholder approval.
Although the Holding Company currently has no plans with respect to future
issuances of equity or debt securities, the more flexible operating structure
provided by the Holding Company and the stock form of ownership is expected to
assist us in competing aggressively with other financial institutions in our
market area.
The Conversion will also permit our members who subscribe for shares of
common stock to become shareholders of the Holding Company, thereby allowing
members to indirectly own stock in the financial institution in which they
maintain deposit accounts. Such ownership may encourage shareholders to promote
us to others, thereby further contributing to our growth.
Principal Effects of Conversion
General. Each savings depositor in a mutual savings and loan
association such as First Federal has both a savings account and a pro rata
ownership in the net worth of that institution, based upon the balance in his or
her savings account. This ownership interest has no tangible market value
separate from the savings account. Upon conversion to stock form, the ownership
of our net worth will be represented by the outstanding shares of stock to be
owned by the Holding Company. Certificates are issued to evidence ownership of
the capital stock. These stock certificates are transferable and, therefore, the
shares may be transferred with no effect on any account the seller may hold with
us.
Continuity. While the Conversion is being accomplished, our normal
business of accepting deposits and making loans will be continued without
interruption. After the Conversion, we will continue to provide services for
account holders and borrowers under current policies carried on by our present
management and staff.
Our directors at the time of Conversion will continue to serve as our
directors after the Conversion until the expiration of their current terms, and
thereafter, if reelected. All of our executive officers at the time of
Conversion will retain their positions after the Conversion.
Effect on Deposit Accounts. Under the Plan, each of our depositors at
the time of the Conversion will automatically continue as a depositor after the
Conversion, and each deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each account will also continue
to be insured by the FDIC in exactly the same way as before. Depositors will
continue to hold their existing certificates, passbooks and other evidence of
their accounts.
22
<PAGE>
Effect on Loans of Borrowers. None of our loans will be affected by the
Conversion. The amount, interest rate, maturity and security for each loan will
be unchanged.
Effect on Voting Rights of Members. Currently in our mutual form, our
depositor members have voting rights and may vote for the election of directors.
Following the Conversion, depositors will cease to have voting rights. All
voting rights in First Federal will be vested in the Holding Company as our sole
shareholder. Voting rights in the Holding Company will be vested exclusively in
its shareholders, with one vote for each share of common stock. Neither the
common stock to be sold in the Conversion nor the capital stock of First Federal
will be insured by the FDIC or by any other government entity.
Effect on Liquidation Rights. Current federal regulations and the Plan
of Conversion provide for the establishment of a "liquidation account" by us for
the benefit of our deposit account holders with balances of no less than $50.00
on June 30, 1995 ("Eligible Account Holders"), and our deposit account holders
with balances of no less than $50.00 on September 30, 1997 ("Supplemental
Eligible Account Holders"), who continue to maintain their accounts with us
after the Conversion. The liquidation account will be credited to our net worth
as reflected in the latest statement of financial condition in the final
prospectus used to sell common stock in the Conversion. Each Eligible Account
Holder and Supplemental Eligible Account Holder will, with respect to each
deposit account held, have a related inchoate interest in a portion of the
balance of the liquidation account. This inchoate interest is referred to in the
Plan as a "subaccount balance." In the event of a complete liquidation of us
after the Conversion (and only in such event), Eligible Account Holders and
Supplemental Eligible Account Holders would be entitled to a distribution from
the liquidation account in an amount equal to the then current adjusted
subaccount balance then held, before any liquidation distribution would be made
to the Holding Company as our sole shareholder. We believe that a liquidation of
First Federal is unlikely.
Each Eligible Account Holder will have a subaccount balance in the
liquidation account for each deposit account held as of June 30, 1995 (the
"Eligibility Record Date"). Each Supplemental Eligible Account Holder will have
a subaccount balance in the liquidation account for each deposit account held as
of September 30, 1997 (the "Supplemental Eligibility Record Date"). Each initial
subaccount balance will be the amount determined by multiplying the total
opening balance in the liquidation account by a fraction, the numerator of which
is the amount of the qualifying deposit (a deposit of at least $50 as of June
30, 1995, or September 30, 1997, respectively) of such deposit account, and the
denominator of which is the total of all qualifying deposits on that date. If
the amount in the deposit account on any subsequent annual closing date of First
Federal is less than the balance in such deposit account on any other annual
closing date, or the balance in such account on the Eligibility Record Date or
the Supplemental Eligibility Record Date, as the case may be, this interest in
the liquidation account will be reduced by an amount proportionate to any such
reduction, and will not thereafter be increased despite any subsequent increase
in the related deposit account. An Eligible Account Holder's, as well as a
Supplemental Eligible Account Holder's, interest in the liquidation account will
cease to exist if the deposit account is closed. The liquidation account will
never increase and will be correspondingly reduced as the interests in the
liquidation account are reduced or cease to exist. In the event of liquidation,
any assets remaining after the above liquidation rights of Eligible Account
Holders and Supplemental Eligible Account Holders are satisfied will be
distributed to the Holding Company as our sole shareholder.
A merger, consolidation, sale of bulk assets, or similar combination or
transaction in which we are not the surviving entity would not be considered to
be a "liquidation" under which distribution of the liquidation account could be
made, provided the surviving institution is an FDIC-insured institution. In such
a transaction, the liquidation account would be assumed by the surviving
institution. The OTS has stated that the consummation of a transaction of the
type described in the preceding sentence in which the surviving entity is not an
FDIC-insured institution would be reviewed on a case-by-case basis to determine
whether the transaction should constitute a "complete liquidation" requiring
distribution of any then-remaining balance in the liquidation account.
The creation and maintenance of the liquidation account will not
restrict the use of or application of any of the net worth accounts, except that
we may not declare or pay a cash dividend on or repurchase our capital stock if
23
<PAGE>
the effect of such dividend or repurchase would be to cause our net worth to be
reduced below the aggregate amount then required for the liquidation account.
Tax Effects. We intend to proceed with the Conversion on the basis of
an opinion from our special counsel, Luse Lehman Gorman Pomerenk & Schick, P.C.,
Washington, D.C., as to certain tax matters that are material to the Conversion.
The opinion is based, among other things, on certain representations made by us,
including the representation that the exercise price of the subscription rights
to purchase the common stock will be approximately equal to the fair market
value of the stock at the time of the completion of the Conversion. With respect
to the subscription rights, we have received an opinion of Ferguson which, based
on certain assumptions, concludes that the subscription rights to be received by
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members do not have any economic value at the time of distribution or the time
the subscription rights are exercised, whether or not a Community Offering takes
place, and Luse Lehman Gorman Pomerenk & Schick, P.C.'s opinion is given in
reliance thereon. Luse Lehman Gorman Pomerenk & Schick, P.C.'s opinion provides
substantially as follows:
1. Our change in form from a mutual savings and loan association to a
stock savings and loan association will qualify as a reorganization
under Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as
amended (the "Code"), and no gain or loss will be recognized to us in
either our mutual form or our stock form by reason of the Conversion.
2. No gain or loss will be recognized by the converted savings association
upon receipt of money from the Holding Company for the converted
savings association's capital stock, and no gain or loss will be
recognized by the Holding Company upon the receipt of money for common
stock of the Holding Company.
3. The basis of the assets of the converted savings and loan association
will be the same as the basis in our hands prior to the Conversion.
4. The holding period of the assets of the converted savings and loan
association will include the period during which the assets were held
by us in our mutual form prior to Conversion.
5. No gain or loss will be realized by our deposit account holders, upon
the constructive issuance to them of withdrawable deposit accounts of
the converted savings association immediately after the Conversion,
interests in the liquidation account, and/or on the distribution to
them of nontransferable subscription rights to purchase common stock.
6. The basis of an account holder's deposit accounts in the converted
savings and loan association after the Conversion will be the same as
the basis of his or her deposit accounts with us prior to the
Conversion.
7. The basis of each account holder's interest in the liquidation account
will be zero. The basis of the non-transferable subscription rights
will be zero.
8. The basis of the Holding Company common stock to its shareholders will
be the actual purchase price ($10.00) thereof, and a shareholder's
holding period for common stock acquired through the exercise of
subscription rights will begin on the date on which the subscription
rights are exercised.
9. No taxable income will be realized by Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members as a result of
the exercise of the nontransferable subscription rights.
10. The converted savings association in its stock form will succeed to and
take into account our earnings and profits or deficit in earnings and
profits, in our mutual form, as of the date of Conversion.
The opinion also concludes in effect that:
1. No taxable income will be realized by us on the issuance of
subscription rights to eligible subscribers to purchase shares of
common stock at fair market value.
2. The converted savings and loan association will succeed to and take
into account the dollar amounts of those accounts of First Federal in
its mutual form which represent bad debt reserves in respect of which
First Federal in its mutual form has taken a bad debt deduction for
taxable years on or before the date of the transfer.
24
<PAGE>
3. The creation of the liquidation account will have no effect on our
taxable income, deductions, or additions to bad debt reserves or
distributions to shareholders under Section 593 of the Code.
The opinions of Luse Lehman Gorman Pomerenk & Schick, P.C., unlike a
letter ruling issued by the Internal Revenue Service, are not binding on the
Service and the conclusions expressed herein may be challenged at a future date.
The Service has issued favorable rulings for transactions substantially similar
to the proposed Conversion, but any such ruling may not be cited as precedent by
any taxpayer other than the taxpayer to whom the ruling is addressed. We do not
plan to apply for a letter ruling concerning the transactions described herein.
We have also received an opinion from Dixon, Odom & Co. that
implementation of the Plan will not result in any South Carolina income tax
liability to First Federal, its account holders, borrowers or the Holding
Company.
Offering of Common Stock
Under the Plan of Conversion, up to 1,897,500 shares of common stock
are being offered for sale, initially through the Subscription Offering (subject
to a possible increase to 2,182,125 shares). See "--Subscription Offering." The
Plan of Conversion requires, with certain exceptions, that a number of shares
equal to at least 1,402,500 shares be sold in order for the Conversion to be
effective.
The Subscription Offering expires at 12:00 noon, South Carolina time,
on December _, 1997. OTS regulations and the Plan of Conversion require that we
complete the sale of common stock within 45 days after the close of the
Subscription Offering. This 45-day period expires on January __, 1998. In the
event we are unable to complete the sale of common stock within this 45-day
period, we may request an extension of this time period from the OTS. No single
extension granted by the OTS, however, may exceed 90 days. No assurance can be
given that an extension would be granted if requested. The OTS has, however,
granted extensions due to the inability of mutual financial institutions to
complete a stock offering as a result of the development of adverse conditions
in the stock market. If an extension is granted, we will promptly notify
subscribers of the granting of the extension of time and will promptly return
subscriptions unless subscribers affirmatively elect to continue their
subscriptions during the period of extension. Such extensions may not be made
beyond November __, 1999.
Shares may also be offered to the public in a Community Offering, if
one is to be held. In the event a Community Offering is held, it may begin
immediately after the Subscription Offering, or any time during the Subscription
Offering. The Community Offering may end on or after the Subscription Offering,
but not later than January __, 1998, unless further extended with the approval
of the OTS. The Community Offering may expire at any time, but no later than
January ___, 1998, unless extended by us and the Holding Company. The offering
may be extended, subject to OTS approval, until 24 months following the members'
approval of the Plan of Conversion, or until July 14, 1999. The actual number of
shares to be sold in the Conversion will depend upon market and financial
conditions at the time of the Conversion, provided that no fewer than 1,402,500
shares or more than 2,182,125 shares will be sold in the Conversion. The per
share price to be paid by purchasers in the Community Offering, if any, for any
remaining shares will be $10.00, the same price paid by subscribers in the
Subscription Offering. See "- Stock Pricing."
As permitted by OTS regulations, the Plan of Conversion provides that
if, for any reason, purchasers cannot be found for an insignificant numbers of
unsubscribed shares of the common stock, our Board of Directors will seek to
make other arrangements for the sale of the remaining shares. Such other
arrangements will be subject to the approval of the OTS. If such other purchase
arrangements cannot be made, the Plan of Conversion will terminate. In the event
that the Conversion is not effected, we will remain a mutual savings and loan
association, all subscription funds will be promptly returned to subscribers
with interest earned thereon at our passbook rate, which is currently _____% per
annum (except for payments to have been made through withdrawal authorizations
which will have continued to earn interest at the contractual account rates),
and all withdrawal authorizations will be canceled.
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Subscription Offering
In accordance with OTS regulations, nontransferable rights to subscribe
for the purchase of the Holding Company's common stock have been granted under
the Plan of Conversion to the following persons in the following order of
priority: (1) our Eligible Account Holders; (2) the ESOP; (3) our Supplemental
Eligible Account Holders; and (4) our members other than Eligible Account
Holders and Supplemental Eligible Account Holders, at the close of business on
October __, 1997, the voting record date for the Special Meeting, including
borrowers on October __, 1997 ("Other Members"). All subscriptions received will
be subject to the availability of common stock after satisfaction of all
subscriptions of all persons having prior rights in the Subscription Offering,
and to the maximum and minimum purchase limitations set forth in the Plan of
Conversion (and described below). The June 30, 1995, date for determination of
Eligible Account Holders and the September 30,1997 date for determination of
Supplemental Eligible Account Holders were selected in accordance with federal
regulations applicable to the Conversion.
Category I: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, nontransferable subscription rights to
subscribe for up to 25,000 shares of the common stock; provided, however, that
no Eligible Account Holder may purchase alone or with his or her Associates (as
defined in the Plan, and including relatives living in the same household) and
persons acting in concert, more than 25,000 shares of common stock.
If sufficient shares are not available in this Category I, shares will
be allocated in a manner that will allow each Eligible Account Holder, to the
extent possible, to purchase a number of shares sufficient to make his or her
allocation consist of the lesser of 100 shares or the amount subscribed for.
Thereafter, unallocated shares will be allocated to subscribing Eligible Account
Holders in the proportion that the amounts of their respective qualifying
deposits bear to the total amount of qualifying deposits of all subscribing
Eligible Account Holders. To ensure a proper allocation of common stock, each
Eligible Account Holder must list on the Stock Order Form all accounts in which
he has an ownership interest as of June 30, 1995. Failure to list all such
qualifying deposit accounts may result in the inability of the Holding Company
or First Federal to fill all or part of a subscription order. Neither the
Holding Company, First Federal nor any of their agents shall be responsible for
orders on which all qualifying deposit accounts have not been fully and
accurately disclosed.
The "qualifying deposits" of an Eligible Account Holder is the amount
of the deposit balances (provided such aggregate balance is not less than
$50.00) in his or her deposit accounts, including money market accounts, as of
the close of business on June 30, 1995. Subscription rights received by
directors and officers in this category based upon their increased deposits in
First Federal during the year preceding June 30, 1995, are subordinated to the
subscription rights of other Eligible Account Holders. Notwithstanding the
foregoing, shares of common stock with a value in excess of $250,000, may be
sold to the ESOP before satisfying the subscriptions of Eligible Account
Holders. For allocation purposes, qualifying deposits will be divided in the
case of multiple orders.
Category II: The Employee Stock Ownership Plan ("ESOP"). The ESOP will
receive, without payment therefor, nontransferable subscription rights to
purchase up to 10% of the total number of shares of common stock offered in the
Conversion on behalf of participants, provided that shares remain available
after satisfying the subscription rights of Eligible Account Holders up to the
maximum of the Estimated Valuation Range as described above. The ESOP currently
intends to purchase 8% of the shares sold in the Conversion. If the ESOP is
unable to purchase any or part of the shares of common stock for which it
subscribes, the ESOP may purchase such shares on the open market or may purchase
authorized but unissued shares of the Holding Company. Any purchase by the ESOP
of authorized but unissued shares could dilute the interests of the Holding
Company's shareholders.
Category III: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, nontransferable
subscription rights to subscribe for up to 25,000 shares of the common stock;
provided, however, that no Supplemental Eligible Account Holder may purchase
alone or with his or her Associates (as defined in the Plan, and including
relatives living in the same household) and persons acting in
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concert, more than 25,000 shares of common stock. Such subscription rights will
be applicable only to such shares as remain available after the subscriptions of
the Eligible Account Holders and the ESOP have been satisfied. Any subscription
rights received by a person as a result of his or her status as an Eligible
Account Holder will reduce to the extent thereof the subscription rights granted
to such person as a result of his or her status as a Supplemental Eligible
Account Holder.
If sufficient shares are not available in this Category III, shares
will be allocated in a manner that will allow each Supplemental Eligible Account
Holder, to the extent possible, to purchase a number of shares sufficient to
make his or her allocation consist of the lesser of 100 shares or the amount
subscribed for. Thereafter, unallocated shares will be allocated to subscribing
Supplemental Eligible Account Holders in the proportion that the amounts of
their respective qualifying deposits bear to the total amount of qualifying
deposits of all subscribing Supplemental Eligible Account Holders. To ensure a
proper allocation of common stock, each Supplemental Eligible Account Holder
must list on the Stock Order Form all accounts in which he has an ownership
interest as of September 30, 1997. Failure to list all such qualifying deposit
accounts may result in the inability of the Holding Company or First Federal to
fill all or part of a subscription order. Neither the Holding Company, First
Federal nor any of their agents shall be responsible for orders on which all
qualifying deposit accounts have not been fully and accurately disclosed.
The "qualifying deposits" of a Supplemental Eligible Account Holder is
the amount of the deposit balances (provided such aggregate balance is not less
than $50.00) in his or her deposit accounts, including money market accounts, as
of the close of business on September 30, 1997.
Category IV: Other Members. The Other Members of First Federal will
receive, without payment therefor, nontransferable subscription rights to
subscribe for up to 25,000 shares of the common stock; provided, however, that
no Other Member may purchase alone or with his or her Associates (as defined in
the Plan, and including relatives living in the same household) and persons
acting in concert, more than 25,000 shares of common stock. Such subscription
rights will be applicable only to such shares as remain available after the
subscriptions of Eligible Account Holders, the ESOP, and Supplemental Eligible
Account Holders have been satisfied.
If sufficient shares are not available in this Category IV, shares will
be allocated pro rata among subscribing Other Members in the same proportion
that the number of shares subscribed for by each Other Member bears to the total
number of shares subscribed for by all Other Members.
Timing of Offering and Method of Payment. The Subscription Offering
will expire at 12:00 noon, South Carolina time, on December __, 1997 (the
"Expiration Date"). The Expiration Date may be extended by First Federal and the
Holding Company for successive 90-day periods, subject to OTS approval, to
November __, 1999.
Subscribers must, before the Expiration Date, or such date to which the
Expiration Date may be extended, return Order Forms to us, properly completed,
together with checks or money orders in an amount equal to the Purchase Price
($10.00 per share) multiplied by the number of shares for which subscription is
made. Payment for stock purchases can also be accomplished through authorization
on the order form of withdrawals from accounts with us (including a certificate
of deposit). We have the right to reject any orders transmitted by facsimile and
any payments made by wire transfer.
Until completion or termination of the Conversion, subscribers who
elect to make payment through authorization of withdrawal from accounts with us
will not be permitted to reduce the deposit balance in any such accounts below
the amount required to purchase the shares for which they subscribed. In such
cases interest will continue to be credited on deposits authorized for
withdrawal until the completion of the Conversion. Interest at the passbook
rate, which is currently _____ per annum, will be paid on amounts submitted by
check. Authorized withdrawals from certificate accounts for the purchase of
common stock will be permitted without the imposition of early withdrawal
penalties or loss of interest. However, withdrawals from certificate accounts
that reduce the balance of such accounts below the required minimum for specific
interest rate qualification will cause the cancellation
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of the certificate accounts at the effective date of the Conversion, and the
remaining balance will earn interest at the passbook savings rate or will be
returned to the depositor. Stock subscriptions received and accepted by us are
final. Subscriptions may be withdrawn only in the event that the Conversion is
not completed by January __, 1998.
Members in Non-Qualified States or Foreign Countries. We 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 reside. However, no person will be offered or sold or receive any stock
pursuant to the Subscription Offering if such person resides in a foreign
country or resides in a state in the United States with respect to which all of
the following apply: (i) a small number of persons otherwise eligible to
subscribe for shares of common stock reside in such state; (ii) the granting of
subscription rights or the offer or sale of common stock to such persons would
require us or the Holding Company or our respective officers and directors,
under the securities laws of such state, to register as a broker, dealer,
salesman or selling agent, or to register or otherwise qualify the common stock
for sale in such state; and (iii) such registration, qualification or filing in
our judgment or in the judgment of the Holding Company would be impracticable or
unduly burdensome for reasons of cost or otherwise.
To assist in the Subscription Offering and the Community Offering, if
any, the Holding Company has established a Stock Information Center that you may
contact at (803) _________ . Callers to the Stock Information Center will be
able to request a Prospectus and other information relating to the offering.
Community Offering
To the extent shares remain available for purchase after filling all
orders received in the Subscription Offering, we may offer shares of the common
stock in a Community Offering to the general public, with preference given to
residents of Chesterfield County. The right of any person to purchase shares in
the Community Offering is subject to our right to accept or reject such purchase
in whole or in part. We may terminate the Community Offering as soon as we have
received orders for at least the minimum number of shares available for purchase
in the Conversion.
Persons wishing to purchase stock in the Community Offering, if
conducted, should return the Order Form to us, properly completed, together with
a check or money order in the amount equal to the Purchase Price ($10.00 per
share) multiplied by the number of shares which that person desires to purchase.
Order Forms will be accepted until the completion of the Community Offering.
However, we may terminate the Community Offering as soon as we receive orders
for at least the minimum number of shares available for purchase in the
Conversion.
The maximum number of shares of common stock which may be purchased in
the Community Offering by any person (including such person's Associates) or
persons acting in concert is 25,000 in the aggregate. A member who, together
with his Associates and persons acting in concert, has subscribed for shares in
the Subscription Offering may subscribe for a number of additional shares in the
Community Offering that does not exceed the lesser of (i) 25,000 shares or (ii)
the number of shares which, when added to the number of shares subscribed for by
the member (and his Associates and persons acting in concert) in the
Subscription Offering, would not exceed 25,000. We reserve the right to reject
any orders received in the Community Offering in whole or in part.
If all the common stock offered in the Subscription Offering is
subscribed for, no common stock will be available for purchase in the Community
Offering. In the event of an oversubscription, purchase orders received during
the Community Offering will be filled up to a maximum of 1,000 shares of common
stock issued in the Conversion, with any remaining unfilled purchase orders to
be allocated on a pro rata basis based on the amount of their respective
subscriptions. If the Community Offering extends beyond 45 days following the
expiration of the Subscription Offering, subscribers will have the right to
increase, decrease or rescind subscriptions for stock previously submitted. All
sales of common stock in the Community Offering will be at the same price per
share as the sales of common stock in the Subscription Offering.
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Cash and checks received in the Community Offering will be placed in an
interest bearing account with us, and will earn interest at the passbook rate,
which is currently _____% per annum, from the date of deposit until completion
or termination of the Conversion. In the event that the Conversion is not
consummated for any reason, all funds submitted pursuant to the Community
Offering will be promptly refunded with interest as described above.
Prospectus Delivery and Procedure for Purchasing Common Stock
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the end of the offering, in accordance with Rule 15c2-8 under the
Securities Exchange Act of 1934, no Prospectus will be mailed later than five
days or hand delivered any later than two days prior to the end of the offering.
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 our holding company, us, nor Trident Securities is obligated
to deliver a Prospectus and an Order From by any means other than the U.S.
Postal Service.
To ensure that eligible account holders, supplemental eligible account
holders, and other members are properly identified as to their stock purchase
priorities, they must carefully complete the Order Form . Subcribers must list
all of their deposit accounts, or in the case of other members who are only
borrowers, their loans held at First Federal, on the Order Form. Subcribers must
list all the 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
an order 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.
Delivery of Certificates
Certificates representing shares issued in the Subscription Offering
and in the Community Offering, if any, pursuant to Order Forms will be mailed to
the persons entitled to them at the last addresses of such persons appearing on
the books of First Federal or to such other addresses as may be specified in
properly completed Order Forms as soon as practicable following consummation of
the Conversion. The Holding Company will not accept orders registered "in care
of" or instructed to be mailed to a third party. Any certificates returned as
undeliverable will be held by the Holding Company until claimed by the person
legally entitled to them or otherwise disposed of in accordance with applicable
law. Purchasers may not be able to sell the shares of common stock which they
purchase until certificates for the common stock are available and delivered to
them, even though trading of the common stock may have commenced. Shares sold
prior to receipt of a stock certificate are the responsibility of the purchaser.
Marketing Agent
To assist us and the Holding Company in marketing the common stock, we
have retained the services of Trident Securities, Inc. as our financial advisor.
Trident Securities, Inc. is a broker-dealer registered with the Securities and
Exchange Commission (the "SEC") and a member of the National Association of
Securities Dealers, Inc. (the "NASD"). Trident Securities, Inc. will assist us
in the Conversion as follows: (1) in training and educating our employees
regarding the mechanics and regulatory requirements of the conversion process;
(2) in keeping records of all stock subscriptions; (3) in obtaining proxies from
our members with respect to the Special Meeting; and (4) in assisting with the
Community Offering. For providing these services, we have agreed to pay Trident
Securities, Inc. a management fee of $10,000 and a commission in an amount equal
to 2.0% of the aggregate dollar amount of shares of common stock sold in the
Conversion other than shares sold to executive officers and directors and their
Associates or to the ESOP. Trident Securities, Inc. will also be reimbursed for
out-of-pocket expenses, which are not to exceed $10,000 without our consent
(excluding certain reimbursable expenses), and for legal fees, which are not to
exceed $27,500 (excluding reimbursable expenses), without our consent. Offers
and sales in the Community
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Offering will be on a best efforts basis and, as a result, Trident Securities,
Inc. is not obligated to purchase any shares of the common stock. Trident
Securities, Inc. intends to make a market in the common stock, although it is
under no obligation to do so.
We have also agreed to indemnify Trident Securities, Inc., under
certain circumstances, against liabilities and expenses (including legal fees)
arising out of Trident Securities, Inc.'s engagement by us, including
liabilities under the Securities Act of 1933 (the"1933 Act").
Selected Dealers
Trident Securities, Inc. may enter into an agreement with certain
dealers chosen by First Federal and Trident Securities, Inc. (together, the
"Selected Dealers") to assist in the sale of shares in the Community Offering.
Selected Dealers will receive commissions at an agreed upon rate for all shares
sold by such Selected Dealers. During the Community Offering, Selected Dealers
may only solicit indications of interest from their customers to place orders
with us as of a certain date (the "Order Date") for the purchase of shares of
common stock. When and if the Holding Company, First Federal and Trident
Securities, Inc. believe that enough indications of interest and orders have
been received in the Subscription Offering and the Community Offering, if any,
to consummate the Conversion, Trident Securities, Inc. will request, as of the
Order Date, Selected Dealers to submit orders to purchase shares for which they
have previously received indications of interest from the customers. Selected
Dealers will send confirmations of the orders to such customers on the next
business day after the Order Date. Selected Dealers will debit the accounts of
their customers on the date which will be three business days from the Order
Date (the "Settlement Date"). On the Settlement Date, funds received by Selected
Dealers will be remitted to us. It is anticipated that the Conversion will be
consummated on the Settlement Date. However, if consummation is delayed after
payment has been received by us from Selected Dealers, funds will earn interest
at the passbook rate, which is currently _____% per annum until the completion
of the offering. Funds will be returned promptly in the event the Conversion is
not consummated.
Limitations on Common Stock Purchases
The Plan includes a number of limitations on the number of shares of
common stock which may be purchased during the Conversion. These are summarized
below:
(1) No fewer than 25 shares may be purchased by any person purchasing shares of
common stock in the Conversion (provided that sufficient shares are available).
(2) No person either individually or together with Associates or with other
persons acting in concert may purchase more than 25,000 shares of common stock
in the Offering except for the ESOP which may purchase up to 10% of the total
number of shares of common stock offered in the Conversion. Shares purchased by
a person's tax qualified or non-tax qualified benefit plan are not added to a
person's individual purchases for purposes of determining if the maximum
purchase limit has been reached. First Federal's and the Holding Company's
Boards of Directors may, however, 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 exceeding 5% of the
shares of common stock sold in the Conversion may not exceed, in the aggregate,
10% of the shares sold in the Conversion. If the Boards of Directors decide to
increase the purchase limitation, all persons who subscribe for the maximum
number of shares of common stock offered in the Conversion will be, and certain
other large subscribers in the sole discretion of the Holding Company and First
Federal may be, given written notice of the increase in the purchase limitation
and the opportunity to increase their subscriptions accordingly, subject to the
rights and preferences of any person who has priority subscription rights. The
overall purchase limitation may be reduced in the sole discretion of the Boards
of Directors of the Holding Company and First Federal.
(3) No more than 34.78% of the shares of common stock may be purchased in the
Conversion by directors and officers First Federal and the Holding Company and
their Associates. This restriction does not apply to shares
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purchased by the ESOP or other tax qualified benefit plans which in the
aggregate may purchase up to 10% of the shares sold in the Conversion.
OTS regulations define "acting in concert" as (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. We will presume that certain
persons are acting in concert based upon various facts, including the fact that
persons have joint account relationships or the fact that such persons have
filed joint Schedules 13D with the SEC with respect to other companies.
The term "Associate" of a person is defined to mean (i) any corporation
or organization (other than First Federal or its subsidiaries or the Holding
Company) of which such person is a director, officer, partner or 10%
shareholder; (ii) any trust or other estate in which such person has a
substantial beneficial interest or serves as trustee or in a similar fiduciary
capacity; provided, however that such term shall not include any employee stock
benefit plan of the Holding Company or First Federal in which such a person has
a substantial beneficial interest or serves as a trustee or in a similar
fiduciary capacity, and (iii) any relative or spouse of such person, or relative
of such spouse, who either has the same home as such person or who is a director
or officer of First Federal or its subsidiaries or the Holding Company.
Directors are not treated as Associates of one another solely because of their
board membership. Compliance with the foregoing limitations does not necessarily
constitute compliance with other regulatory restrictions on acquisitions of the
common stock. For a further discussion of limitations on purchases of the common
stock during and subsequent to Conversion, see "-- Restrictions on Sale of Stock
by Directors and Officers," "-- Restrictions on Purchase of Stock by Directors
and Officers Following Conversion," and "Restrictions on Acquisition of the
Holding Company."
Establishment of the Foundation
General. In furtherance of the our commitment to the communities that
we serve, we intend to establish the Foundation, which will be incorporated
under Delaware law as a non-stock corporation, and we will fund the Foundation
with a contribution of 20,000 shares of common stock. By further enhancing First
Federal's visibility and reputation in the communities that it serves, we
believe that the Foundation will enhance the long-term value of our community
banking franchise. The Foundation will be dedicated exclusively to charitable
purposes within the communities served by First Federal, including community
development activities.
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities. First
Federal emphasizes community lending and community development activities within
the communities that it serves. The Foundation is being formed as a complement
to First Federal's existing community activities, not as a replacement for such
services. While we intend to continue to emphasize community lending and
community development activities following the Conversion, such activities are
not First Federal's sole corporate purpose. The Foundation, conversely, will be
completely dedicated to community activities and the promotion of charitable
causes, and may be able to support such activities in ways that are not
currently available to First Federal. We believe that the Foundation will
enhance First Federal current activities under the CRA. In this regard, the
board of directors of First Federal believes the establishment of the Foundation
is consistent with First Federal's commitment to community service. The Board
further believes that the funding of the Foundation with common stock of the
Holding Company is a means of enabling the communities served by First Federal
to share in the growth and success of the Holding Company long after completion
of the Conversion. The Foundation will accomplish that goal by providing for
continued ties between the Foundation and First Federal, thereby forming a
partnership with First Federal's community. Foundations have been formed by
other financial institutions for this purpose, among others. First Federal,
however, does not expect the contribution to the Foundation to take the place of
First Federal's traditional community lending activities.
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Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's Bylaws,
the Foundation's initial Board of Directors will comprised of two members of the
Holding Company's and First Federal's Board of Directors. Other individuals may
be selected as Board members. A Nominating Committee of the Foundation's Board
will nominate individuals eligible for election to the Board of Directors. The
members of the Foundation, who are comprised of its Board members, will elect
the directors at the annual meeting of the Foundation from those nominated by
the Nominating Committee. Only persons serving as directors of the Foundation
qualify as members of the Foundation, with voting authority. Directors will
divided into three classes with each class appointed for three-year terms. It is
not anticipated that the two members of the Holding Company's and First
Federal's Board of Directors who also serve as directors of the Foundation will
receive any additional compensation for serving as a director of the Foundation.
No determination has been made at this point what, if any, compensation the
other Foundation directors will receive. The certificate of incorporation of the
Foundation provides that the corporation is organized exclusively for charitable
purposes, including community development, as set forth in Section 501(c)(3) of
the Code. The Foundation's certificate of incorporation further provides that no
part of the net earnings of the Foundation will inure to the benefit of, or be
distributable to its directors, officers or members.
The authority for the affairs of the Foundation will be vested in the
Board of Directors of the Foundation. The Directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purposes for which
the Foundation was established. Although no formal policy governing Foundation
grants exists at this time, the Foundation's Board of Directors will adopt such
a policy upon establishment of the Foundation. As directors of a nonprofit
corporation, directors of the Foundation will at all times be bound by their
fiduciary duty to advance the Foundation's charitable goals, to protect the
assets of the Foundation and to act in a manner consistent with the charitable
purpose for which the Foundation is established. The Directors of the Foundation
will also be responsible for directing the activities of the Foundation,
including the management of the common stock of the Holding Company held by the
Foundation. However, it is expected that as a condition to receiving the
approval of the OTS to First Federal's Conversion, that the Foundation will be
required to commit to the OTS that all shares of common stock held by the
Foundation will be voted in the same ratio as all other shares of the Holding
Company's common stock on all proposals considered by stockholders of the
Holding Company; provided, however, that, consistent with such expected
condition, the OTS would waive this voting restriction under certain
circumstances if compliance with the voting restriction would: (i) cause a
violation of the law of the State of Delaware and the OTS determines that
federal law would not preempt the application of the laws of Delaware to the
Foundation, (ii) would cause the Foundation to lose its tax-exempt status, or
cause the Internal Revenue Service to deny the Foundation's request for a
determination that it is an exempt organization or otherwise have a material and
adverse tax consequence on the Foundation; or (iii) would cause the Foundation
to be subject to an excise tax under Section 4941 of the Code. In order for the
OTS to waive such voting restriction, the Holding Company's or the Foundation's
legal counsel would be required to render an opinion satisfactory to the OTS
that compliance with the voting requirement would have the effect described in
clauses (i), (ii) or (iii) above. Under those circumstances, the OTS would grant
a waiver of the voting restriction upon submission of such legal opinion(s) by
the Holding Company or the Foundation that are satisfactory to the OTS. In the
event that the OTS were to waive the voting requirement, the directors would
direct the voting of the common stock held by the Foundation.
The Foundation's place of business will be located at First Federal's
administrative offices and initially the Foundation is expected to have no
employees but will utilize the members of the staff of the Holding Company or
First Federal. The Board of Directors of the Foundation will appoint such
officers as may be necessary to manage the operations of the Foundation. In this
regard, it is expected that First Federal will be required to provide the OTS
with a commitment that, to the extent applicable, First Federal will comply with
the affiliate restrictions set forth in Sections 23A and 23B of the Federal
Reserve Act with respect to any transactions between First Federal and the
Foundation.
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The Holding Company and First Federal determined to fund the Foundation
with common stock rather than cash because it desired to form a bond with the
communities it serves in a manner that would allow them to share in the growth
and success of the Holding Company and First Federal over the long term. The
funding of the Foundation with stock also provides the Foundation with a
potentially larger endowment than if the Holding Company contributed cash to the
Foundation since, as a stockholder, the Foundation will share in the growth and
success of the Holding Company. As such, the contribution of common stock to the
Foundation has the potential to provide a self-sustaining funding mechanism
which reduces the amount of cash that the Holding Company, if it were not making
the stock donation, would have to contribute to the Foundation in future years
in order to maintain a level amount of charitable grants and donations.
The Foundation will receive working capital from any dividends that may
be paid on the common stock in the future, and subject to applicable federal and
state laws, loans collateralized by the common stock or from the proceeds of the
sale of any of the common stock in the open market from time to time as may be
permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets.
Dilution of Stockholder's Interests. The 20,000 shares of common
stock proposed to be contributed to the Foundation are in addition to the shares
to be issued and sold to depositors, members and the public in the Conversion.
Consequently, persons purchasing shares of common stock in the Conversion will
have their ownership and voting interests in the Holding Company diluted by
between 1.4% and 0.9% at the minimum and maximum, as adjusted, of the Estimated
Valuation Range. See "Pro Forma Data."
Impact of Earnings. The contribution of common stock to the Foundation
will have an adverse impact on our earnings in the year in which the
contribution is made. We will recognize the full expense in the amount of the
contribution of common stock to the Foundation in the year (and quarter) in
which the contribution occurs, which is expected to be fiscal 1998. The
contribution expense will be partially offset by the tax benefit related to the
expense. We have been advised that the contribution to the Foundation will be
tax deductible, subject to an annual limitation based on 10% of the Holding
Company's annual taxable income. We estimate that there will be a net tax
effected expense of $128,000. If the Foundation had been established at June 30,
1997, we would have reported net income of $458,000, rather than reporting net
income of $586,000 for the year ended June 30, 1997. We do not currently
anticipate making additional contributions to the Foundation within the first
five years following the initial contribution.
Tax Considerations. We have been advised that an organization created
and operated for the above charitable purposes would general qualify as a
Section 501(c)(3) exempt organization under the Code, and further that such an
organization would likely be classified as a private foundation. This opinion
presumes that the Foundation will submit a timely request to the IRS to be
recognized as an exempt organization. As long as the Foundation files its
application for recognition of tax-exempt status within 15 months from the date
of its organization, and provided the IRS approves the application, the
effective date of the Foundation's status as a Section 501(c)(3) organization
will be the date of its organization. Our tax advisor, however, has not rendered
any advice on the condition to the contribution to be agreed to by the
Foundation which requires that all shares of common stock of the Holding Company
held by the Foundation must be voted in the same ratio as all other outstanding
shares of common stock of the on all proposals considered by stockholders of the
Holding Company. Consistent with the expected condition, in the event that the
Holding Company or the Foundation receives an opinion of its legal counsel that
compliance with this voting restriction would have the effect of causing the
Foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the Foundation, or subject the Foundation to an
excise tax under Section 4941 of the Code, it is expected that the OTS would
waive such voting restriction upon submission of a legal opinion(s) by the
Company or the Foundation satisfactory to the OTS. See "-Regulatory Conditions
Imposed on the Foundation."
33
<PAGE>
Under Delaware law, the Holding Company is authorized by statute to
make charitable contributions and case law had recognized that benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
provides that a charitable gift must be within reasonable limits as to amount
and purpose to be valid. Under the Code, the Holding Company is generally
allowed a deduction for charitable contributions made to qualifying donees
within the taxable year of up to 10% of its taxable income (with certain
modifications) for such year. Charitable contributions made by the Holding
Company in excess of the annual deductible amount will be deductible over each
of the five succeeding taxable years, subject to certain limitations. We believe
that the Conversion presents a unique opportunity to establish and fund a
foundation given the substantial amount of additional capital being raised in
the Conversion. In making such a determination, we considered the dilutive
impact of the contribution of common stock to the Foundation and the impact on
earnings. Based on such consideration, the Holding Company and First Federal
believe that the contribution to the Foundation in excess of the 10% annual
deduction limitation is justified given First Federal's capital position and its
earnings, the substantial additional capital being raised in the Conversion and
the potential benefits of the Foundation to the communities served by First
Federal. In this regard, and assuming the sale of the common stock at the
midpoint of the Estimated Valuation Range, the Holding Company would have pro
forma stockholders' equity of $25.0 million or 33.6% of pro forma consolidated
assets and First Federal's pro forma tangible, core and total risk-based capital
ratios would be 24.2%, 24.2% and 50.8%, respectively. See "Historical and Pro
Forma Regulatory Capital Compliance," and "Capitalization," Thus, the amount of
the contribution will not adversely impact our financial condition and we
therefore believe that the amount of the charitable contribution is reasonable
given our pro forma capital positions. As such, the Holding Company and First
Federal believe that the contribution does not raise safety and soundness
concerns.
We have received an opinion of the tax advisors that the Holding
Company's contribution of its own stock to the Foundation would not constitute
an act of self-dealing, and that the Holding Company will be entitled to a
deduction in the amount of the fair market value of the stock at the time of the
contribution, subject to the annual deduction limitation described above. The
Holding Company, however, would be able to carry forward any unused portion of
the deduction for five years following the contribution, subject to certain
limitations. Our tax advisor, however, has not rendered advice as to fair market
value for purposes of determining the amount of the tax deduction. If the
Foundation would have been established in 1997, the Holding Company would have a
received a tax benefit of approximately $92,000 (based on First Federal's
pre-tax income for 1997). We are permitted under the Code to carry over the
excess contribution over the five-year period following the contribution to the
Foundation. We estimate that all of the contribution should be deductible over
the six-year period. Neither the Holding Company nor First Federal expect to
make any further contributions to the Foundation within the first five years
following the initial contribution. After that time, we may consider future
contributions to the Foundation. Any such decisions would be based on an
assessment of, among other factors, our financial condition , the interests of
shareholders and depositors of the , and the financial condition and operations
of the Foundation.
Although we have received an opinion we will be entitled to a
deduction for the charitable contribution, there can be no assurances that the
IRS will recognize the Foundation as a Section 501(c)(3) exempt organization or
that a deduction for the charitable contribution will be allowed. In such event,
the tax benefit related to the contribution to the Foundation would be expensed
without tax benefit, resulting in a reduction in earnings in the year in which
the IRS makes such a determination.
The Foundation will be required to make an annual filing with the IRS
within four and on-half months after the close of the Foundation's fiscal year
to maintain its tax-exempt status. The Foundation will be required to publish a
notice that the annual information return will be available for public
inspection for a period of 180 days after the date of such public notice. The
information return for a private foundation must include, among other things, an
itemized list of all grants made or approved, showing the amount of each grant,
the recipient, any relationship between a grant recipient and the Foundation's
managers and a concise statement of the purpose of each grant.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is expected to be subject to the following conditions being agreed to
by the Foundation in writing as a condition to receiving OTS'
34
<PAGE>
approval of the Conversion: (i) the Foundation will be subject to examination by
the OTS; (ii) the Foundation must comply with supervisory directives imposed by
the OTS; (iii) the Foundation will operate in accordance with written policies
adopted by the Board of Directors, including a conflict of interest policy; (iv)
any shares of Common stock held by the Foundation must be voted in the same
ratio as all other outstanding shares of common stock on all proposals
considered by stockholders of the Holding Company; provided, however, that,
consistent with the condition, the OTS would waive this voting restriction under
certain circumstances if compliance with the voting restriction would: (a) cause
a violation of the law of the State of Delaware and the OTS determines that
federal law would not preempt the application of the laws of Delaware to the
Foundation, (b) would cause the Foundation to lose its tax-exempt status or
otherwise have a material and adverse tax consequence on the Foundation; or (c)
would cause the Foundation to be subject to an excise tax under Section 4941 of
the Code copy attached; and (v) any shares of common stock subsequently
purchased by the Foundation will be aggregated with any shares repurchased by
the Holding Company or First Federal for purposes of calculating the number of
shares which may be repurchased during the three-year period subsequent to
Conversion. In order for the OTS to waive such voting restriction, the Holding
Company's or the Foundation's legal counsel would be required to render an
opinion satisfactory to the OTS. While there is no current intention for the
Holding Company or the Foundation to seek a waiver from the OTS from such
restrictions, there can be no assurances that a legal opinion addressing these
issues could be rendered, or if rendered, that the OTS would grant an
unconditional waiver of the voting restriction. In no event would the voting
restriction survive the sale of shares of the common stock held by the
Foundation.
Various OTS regulations may be deemed to apply to the Foundation
including regulations regarding (i) transactions with affiliates, (ii) conflicts
of interest, (iii) capital distributions and (iv) repurchases of capital stock
within the three-year period subsequent to a mutual-to-stock conversion. Because
only two of the six directors of the Holding Company and First Federal are
expected to serve as directors of the Foundation, the Holding Company and First
Federal do not believe that the Foundation should be deemed an affiliate of
First Federal. The Holding Company and First Federal anticipate that the
Foundation's affairs will be conducted in a manner consistent with the OTS'
conflict of interest regulations and, in keeping therewith, First Federal's
Board of Directors readopted the Plan of Conversion and reapproved the
establishment of the Foundation in October 1997 with the two directors who are
expected to become directors of the Foundation not participating in such action.
First Federal has provided information to the OTS demonstrating that the initial
contribution of common stock to the Foundation would be within the amount which
First Federal would be permitted to make as a capital distribution assuming such
contribution is deemed to have been made by First Federal.
Potential Anti-Takeover Effect. Upon completion of the Conversion, the
Foundation will own between 1.4% and 0.9% of the total shares of the common
stock outstanding. Such shares will be owned solely by the Foundation; however,
pursuant to a condition expected to be required by regulatory authorities, it is
anticipated that the shares of common stock held by the Foundation will be voted
in the same ratio as all other shares of common stock on all proposals
considered by the stockholders of the Company. As such, the Holding Company does
not believe the Foundation will have a anti-takeover effect on the Company.
However, in the event that the OTS were to waive this voting restriction for the
reasons described herein as provided in the condition, the Foundation's Board of
Directors would exercise sole voting power over such shares and would no longer
be subject to the restriction. As a majority of the Foundation's Board of
Directors will be comprised of the members of the Board of Directors of the
Holding Company, in the event the OTS waived the voting restriction (although it
is not currently anticipated that the Company and the Foundation will seek such
a waiver), management of the Company and First Federal may benefit to the extent
that the Board of Directors of the Foundation determines to vote the shares of
common stock held by the Foundation in favor of proposals supported by the
Company and First Federal. Furthermore, in such an event, when the Foundation's
shares are combined with shares purchased directly by officers and directors,
shares expected to be held by the Recognition Plan, and shares held by the ESOP
trust, the aggregate of such shares could exceed ___% of the outstanding common
stock, which could enable management to defeat stockholder proposals requiring
80% approval. Consequently, such potential voting control might preclude
takeover attempts that certain stockholders deem to be in their best interest,
and might tend to perpetuate management. However, since the ESOP shares are
allocated to all eligible employees, and any unallocated shares will be voted by
the trustees in the same proportions as allocated shares
35
<PAGE>
are voted, and because the Recognition Plan must first be approved by
stockholders no sooner than six months following completion of the Conversion,
and awards under such proposed plans may be granted to employees other than
executive officers and directors, management of the Company does not expect to
have voting control of all shares covered by the ESOP and other stock-based
benefit plans. Moreover, as the Foundation sells its shares of common stock over
time, its ownership interest and voting power in the Holding Company is expected
to decrease.
Potential Challenges. To date, there has been limited precedent with
respect to the establishment and funding of a foundation as part of a conversion
of a mutual savings institution to stock form. In addition, establishment and
funding of the Foundation will require the OTS to grant the First Federal and
the Holding Company waivers from its mutual-to-stock conversion regulations. As
such, the Foundation and the OTS's non-objection to the Conversion may be
subject to potential challenges with respect to, among other things, the
Company's and First Federal's ability to establish the Foundation,
notwithstanding that the Board of Directors have carefully considered the
various factors involved in the establishment of the Foundation in reaching
their determination to establish the Foundation as part of the Conversion,
and/or with respect to the OTS' authority to grant the waivers necessary to
establish the Foundation. If challenges were to be instituted seeking to require
us to eliminate establishment of the Foundation in connection with the
Conversion, no assurances can be made that the resolution of such challenges
would not result in a delay in the consummation of the Conversion or that any
objecting persons would not be ultimately successful in obtaining such removal
or other relief.
Approval of Members. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of First Federal's members
eligible to be cast at the Special Meeting. The Foundation will be considered as
a separate matter from approval of the Plan of Conversion. If the members
approve the Plan of Conversion, but not the establishment of the Foundation, we
intend to complete the Conversion without the establishment of the
Foundation.
Restrictions on Repurchase of Stock by the Holding Company
Repurchases of its shares by the Holding Company will be restricted for
a period of three years from the date of the Conversion. OTS regulations
currently prohibit that the Holding Company from repurchasing any of its shares
within one (1) year following the Conversion except in exceptional
circumstances. So long as we continue to meet certain capitalization
requirements, the Holding Company may repurchase shares in an open-market
repurchase program (which cannot exceed 5% of its outstanding shares in a
twelve-month period except in exceptional circumstances) during the second and
third year following the Conversion by giving appropriate prior notice to the
OTS. The OTS has authority to waive these restrictions under certain
circumstances. Unless repurchases are permitted under the foregoing regulations,
the Holding Company may not, for a period of three years from the date of the
Conversion, repurchase any of its capital stock from any person, except in the
event of an offer to purchase by the Holding Company on a pro rata basis from
all of its shareholders which is approved in advance by the OTS, except in
exceptional circumstances established to the satisfaction of the OTS, or except
for purchases of shares required to fund the RRP. The Holding Company may use
some of the net proceeds received from the sale of the common stock offered by
this Prospectus to repurchase such common stock, subject to OTS
requirements.
Restrictions on Sale of Stock by Directors and Officers
All shares of the common stock purchased by directors and offices of
First Federal or the Holding Company in the Conversion will be subject to the
restriction that such shares may not be sold or otherwise disposed of for value
for a period of one year following the date of purchase, except for any
disposition of such shares (i) following the death of the original purchaser or
(ii) by reason of an exchange of securities in connection with a merger or
acquisition approved by the applicable regulatory authorities. Sales of shares
of the common stock by the Holding Company's directors and officers will also be
subject to certain insider trading and other transfer restrictions under the
federal securities laws. See "Regulation -- Federal Securities Laws" and
"Description of Capital Stock."
36
<PAGE>
Each certificate for such restricted shares will bear a legend
prominently stamped on its face giving notice of the restrictions on transfer,
and instructions will be issued to the Holding Company's transfer agent to the
effect that any transfer within such time period of any certificate or record
ownership of such shares other than as provided above is a violation of the
restriction. Any shares of common stock issued pursuant to a stock dividend,
stock split or otherwise with respect to restricted shares will be subject to
the same restrictions on sale.
Restrictions on Purchase of Stock by Directors and Officers in the Conversion
OTS regulations provide that for a period of three years following the
Conversion, without prior written approval of the OTS, neither directors nor
officers of First Federal or the Holding Company nor their Associates may
purchase shares of the common stock of the Holding Company, except from a dealer
registered with the SEC. This restriction does not, however, apply to negotiated
transactions involving more than one percent of the Holding Company's
outstanding common stock, to shares purchased pursuant to stock option or other
incentive stock plans approved by the Holding Company's shareholders, or to
shares purchased by employee benefit plans maintained by the Holding Company
which may be attributable to individual officers or directors.
Restrictions on Transfer of Subscription Rights and Common Stock
Prior to the completion of the Conversion, OTS regulations and the Plan
of Conversion prohibit any person with subscription rights, including our
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members, from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of common stock to be issued upon their exercise.
Such rights may be exercised only by the person to whom they are granted and
only for his or her account. Each person exercising such subscription rights
will be required to certify that he or she is purchasing shares solely for his
or her own account and that he or she has no agreement or understanding
regarding the sale or transfer of such shares. The regulations also prohibit any
person from offering or making an announcement of an offer or intent to make an
offer to purchase such subscription rights or shares of common stock prior to
the completion of the Conversion. We intend to pursue any and all legal and
equitable remedies in the event we become aware of the transfer of subscription
rights and will not honor orders known by us to involve the transfer of such
rights. In addition, persons who violate the purchase limitations may be subject
to sanctions and penalties imposed by the OTS.
Stock Pricing
The aggregate purchase price of the Holding Company common stock being
sold in the Conversion will be based on the appraised aggregate pro forma market
value of the common stock, as determined by an independent valuation. We
retained Ferguson, which is experienced in the valuation and appraisal of
financial institutions, including savings associations involved in the
conversion process, to prepare an appraisal. Ferguson will receive a fee of
$30,000 for its appraisal and business plan services, including out-of-pocket
expenses. We have agreed to indemnify Ferguson, under certain circumstances,
against liabilities and expenses (including legal fees) arising out of
Ferguson's engagement by us.
Ferguson has prepared an appraisal that establishes the Estimated
Valuation Range of the pro forma market value of the common stock as of
September 2, 1997 from a minimum of $14,025,000 to a maximum of $18,975,000,
with a midpoint of $16,500,000. A copy of the appraisal is on file and available
for inspection at the offices of the OTS, 1700 G Street, N.W., Washington, D.C.
20552 and the Southeast Regional Office of the OTS, 1475 Peachtree Street, N.E.,
Atlanta, Georgia 30309. The appraisal has also been filed as an exhibit to the
Holding Company's Registration Statement with the SEC, and may be reviewed at
the SEC's public reference facilities. See "Additional Information." The
appraisal involved a comparative evaluation of our operating and financial
statistics with those of other financial institutions. The appraisal also took
into account such other factors as the market for savings associations
generally, prevailing economic conditions, both nationally and in South
Carolina, which affect
37
<PAGE>
the operations of savings associations, the competitive environment within which
we operate, and the effect of our becoming a subsidiary of the Holding Company.
No detailed individual analysis of the separate components of First Federal's
and the Holding Company's assets and liabilities was performed in connection
with the evaluation. The Board of Directors reviewed with management Ferguson's
methods and assumptions and accepted Ferguson's appraisal as reasonable and
adequate. The Holding Company, in consultation with Trident Securities, Inc.,
has determined to offer the common stock in the Conversion at a price of $10.00
per share. The Holding Company's decision regarding the Purchase Price was based
solely on its determination that $10.00 per share is a customary purchase price
in conversion transactions. The Estimated Valuation Range may be increased or
decreased to reflect market and financial conditions prior to the completion of
the Conversion.
Promptly after the completion of the Subscription Offering and the
Community Offering, if any, Ferguson will confirm to us that, to the best of
Ferguson's knowledge and judgment, nothing of a material nature has occurred
which would cause Ferguson to conclude that the amount of the aggregate proceeds
received from the sale of the common stock in the Conversion was incompatible
with its estimate of our total pro forma market value at the time of the sale.
If, however, the facts do not justify such a statement, a new Estimated
Valuation Range and price per share may be set. Under such circumstances, the
Holding Company will be required to resolicit subscriptions. In that event,
subscribers would have the right to modify or rescind their subscriptions and to
have their subscription funds returned promptly with interest and holds on funds
authorized for withdrawal from deposit accounts would be released or reduced;
provided that if our pro forma market value upon Conversion has increased to an
amount which does not exceed $21,821,250 (15% above the maximum of the Estimated
Valuation Range), the Holding Company and First Federal do not intend to
resolicit subscriptions unless it is determined after consultation with the OTS
that a resolicitation is required.
Depending upon market and financial conditions, the number of shares
issued may be more or less than the range in number of shares shown above. A
change in the number of shares to be issued in the Conversion will not affect
subscription rights, which are based on the 1,897,500 shares being offered in
the Subscription Offering. In the event of an increase in the maximum number of
shares being offered, persons who exercise their maximum subscription rights
will be notified of such increase and of their right to purchase additional
shares. Conversely, in the event of a decrease in the maximum number of shares
being offered, persons who exercise their maximum subscription rights will be
notified of such decrease and of the concomitant reduction in the number of
shares for which subscriptions may be made. In the event of a resolicitation,
subscribers will be afforded the opportunity to increase, decrease or maintain
their previously submitted order. The Holding Company will be required to
resolicit if the price per share is changed such that the total aggregate
purchase price is not within the minimum and 15% above the maximum of the
Estimated Valuation Range.
THE INDEPENDENT VALUATION IS NOT INTENDED AND MUST NOT BE CONSTRUED AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE
CONVERSION OR OF PURCHASING THE SHARES OF THE COMMON STOCK. MOREOVER, BECAUSE
SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER
OF MATTERS (INCLUDING CERTAIN ASSUMPTIONS AS TO THE AMOUNT OF NET PROCEEDS AND
THE EARNINGS THEREON), ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO
ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SHARES IN THE CONVERSION WILL
THEREAFTER BE ABLE TO SELL THE SHARES AT PRICES RELATED TO THE FOREGOING
VALUATION OF THE PRO FORMA MARKET VALUE.
Number of Shares to be Issued
It is anticipated that the total offering of common stock (the number
of shares of common stock issued in the Conversion multiplied by the Purchase
Price of $10.00 per share) will be within the current minimum and 15% above the
maximum of the Estimated Valuation Range. Unless otherwise required by the OTS,
no resolicitation of subscribers will be made and subscribers will not be
permitted to modify or cancel their subscriptions so long as the
38
<PAGE>
change in the number of shares to be issued in the Conversion, in combination
with the Purchase Price, results in an offering of at least the minimum and no
more than 15% above the maximum of the Estimated Valuation Range.
Any increase in the total number of shares of common stock to be issued
in the Conversion would decrease both a subscriber's ownership interest and the
Holding Company's pro forma net worth and net income on a per share basis while
increasing (assuming no change in the per share price) pro forma net income and
net worth on an aggregate basis. A decrease in the number of shares to be issued
in the Conversion would increase both a subscriber's ownership interest and the
Holding Company's pro forma net worth and net income on a per share basis while
decreasing (assuming no change in the per share price) pro forma net income and
net worth on an aggregate basis. For a presentation of the effects of such
changes, see "Pro Forma Data."
Interpretation and Amendment of the Plan
To the extent permitted by law, all interpretations of the Plan by
First Federal and the Holding Company will be final. The Plan provides that, if
deemed necessary or desirable by the Boards of Directors of the Holding Company
and First Federal, the Plan may be substantively amended by the Boards of
Directors, as a result of comments from regulatory authorities or otherwise,
with the concurrence of the OTS. Moreover, if the Plan of Conversion is so
amended, subscriptions which have been received prior to such amendment will not
be refunded unless otherwise required by the OTS.
Conditions Termination
Completion of the Conversion requires the approval of the Plan by the
affirmative vote of not less than a majority of the total number of votes of
members eligible to be cast at the Special Meeting and the sale of all shares of
the common stock within 24 months following approval of the Plan by the members.
If these conditions are not satisfied, the Plan will be terminated and we will
continue business in the mutual form of organization. The Plan may be terminated
by the Boards of Directors of First Federal and the Holding Company at any time
prior to the Special Meeting and, with the approval of the OTS, by such Boards
of Directors at any time thereafter. Furthermore, OTS regulations and the Plan
of Conversion require that the Holding Company complete the sale of common stock
within 45 days after the close of the Subscription Offering. The OTS may grant
an extension of this time period if necessary, but no assurance can be given
that an extension would be granted. See "-- Offering of common stock."
39
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
STATEMENTS OF OPERATIONS
The following Statements of Operations of First Federal for the fiscal
years ended June 30, 1997 and 1996 have been audited by Dixon, Odom & Co.,
independent certified public accountants, whose report on the financial
statements appears elsewhere in this Prospectus. These Statements of Operations
should be read in conjunction with the Financial Statements of First Federal and
the Notes thereto included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
June 30,
--------------------------
1997 1996
---------- -----------
<S> <C> <C>
Interest Income
Loans................................................................... $4,260,688 $ 4,174,191
Investments............................................................. 150,766 159,262
Deposits in other banks and federal funds sold.......................... 146,431 187,635
---------- -----------
Total Interest Income................................................. 4,557,885 4,521,088
---------- -----------
Interest Expense
Savings deposits........................................................ 2,480,441 2,607,329
Borrowed funds.......................................................... 114,369 60,503
---------- -----------
Total Interest Expense................................................ 2,594,810 2,667,832
---------- -----------
Net Interest Income................................................. 1,963,075 1,853,256
Provision For Loan Losses.................................................. 143,000 17,967
---------- -----------
Net interest income after provision for loan losses 1,820,075 1,835,289
-------------- -----------
Other Income............................................................... 23,361 41,418
---------- -----------
Other Expenses
Personnel costs......................................................... 366,672 340,918
Occupancy............................................................... 46,412 53,034
Deposit insurance premiums.............................................. 63,868 110,107
SAIF special assessment................................................. 311,693 --
Other................................................................... 127,076 149,783
---------- -----------
Total other expenses.................................................. 915,721 653,842
---------- -----------
Income before income taxes............................................ 927,715 1,222,865
Income Taxes............................................................... 342,000 428,645
---------- -----------
Net Income............................................................ $ 585,715 $ 794,220
========== ===========
</TABLE>
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Holding Company was recently formed as a Delaware corporation on
September ___, 1997, for the purpose of issuing the common stock and owning all
of the capital stock of First Federal issued in the Conversion. As a newly
formed corporation, the Holding Company has no operating history. All
information in this section should be read in conjunction with the consolidated
financial statements and notes thereto included within this document.
Our principal business has historically consisted of attracting
deposits from the general public and making loans secured by residential real
estate. The primary goals of management are to increase First Federal's
profitability, monitor its capital position and enhance its banking franchise.
Our results of operations are dependent upon net interest income, which is the
difference between income earned on interest earning assets, such as loans and
investments, and the cost of its interest bearing liabilities consisting of
deposits and advances from the FHLB. First Federal's operations are affected to
a much lesser degree by non-interest income, such as transaction and other
service fee income, and other sources of income. First Federal's net income is
also affected by, amount other things, provisions for loan losses and operating
expenses. First Federal's principal operating expenses, aside from interest
expense, consist of compensation and employee benefits, office occupancy costs,
data processing expenses and federal deposit insurance premiums. First Federal's
results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government legislation and policies concerning monetary and fiscal affairs,
housing and financial institutions and the attendant actions of regulatory
authorities.
Operating Strategy
In guiding our operations, management has implemented various
strategies designed to continue the institution's profitability while
maintaining its safety and soundness. These strategies include: (i) emphasizing
one-to four-family residential lending; (ii) maintaining asset quality; (iii)
controlling operating expenses; and (iv) monitoring interest-rate risk. It is
anticipated, subject to market conditions, that the strategies presently in
place will be continued following completion of the Conversion.
Emphasis of One-to Four-Family Residential Lending. Historically, First
Federal has been predominantly a one-to four-family residential lender. As of
June 30, 1997, approximately 89.78% of its total loan portfolio was composed of
permanent one-to four-family residential loans. As of such date, 5.64% of its
total loan portfolio was composed of construction loans, 2.66% was composed of
home improvement loans and 4.64% was composed of commercial real estate loans.
As a result, we believe we have developed expertise in mortgage loan
underwriting and origination. We have established methods to expand its loan
originations through contacts with realtors, homebuilders and past and present
customers. The institution also uses advertising and community involvement to
gain exposure within the communities it operates. As of June 30, 1997
approximately $20.7 million, or 44.17%, of our total loans secured by one- to
four-family properties was composed of adjustable rate loans.
Maintenance of Asset Quality. At June 30, 1997, our ratio of
nonperforming assets to total assets was .18%. For the years ended June 30, 1997
and 1996, annual net loan charge-offs have averaged .03% of average loans
outstanding. We have attempted to maintain asset quality through its
underwriting and collection procedures.
Monitoring of Interest-Rate Risk. Although we have a significant
"negative gap" and its net interest income would likely be negatively impacted
by increases in interest rates, management considers its interest rate exposure
to be at an acceptable level, given our historical operating results and capital
position. See "--Interest Rate Risk."
41
<PAGE>
Control of General and Administrative Expenses. First Federal closely
monitors its general and administrative expenses and seeks to control them while
maintaining the necessary personnel to properly serve its customers. For the
years ended June 30, 1997 and 1996, First Federal's ratio of general and
administrative expenses, (exclusive of the SAIF special assessment), as a
percentage of average assets, has been 1.01% and 1.09%, respectively.
Following the Conversion, we intend to increase the variety of our
deposit and loans products. In particular, we intend to introduce transaction
accounts, and to offer home equity lines of credit.
Interest Rate Risk
Our asset/liability management, or interest rate risk management,
program is focused primarily on evaluating and managing the composition of its
assets and liabilities in view of various interest rate scenarios. Factors
beyond our control, such as market interest rates and competition, also have an
impact on our interest income and interest expense.
In the absence of other factors, the yield or return associated with
our earning assets generally will increase from existing levels when interest
rates rise over an extended period of time, and conversely interest income will
decrease when interest rates decrease. In general, interest expense will
increase when interest rates rise over an extended period of time, and
conversely interest expense will decrease when interest rates decrease.
Interest Rate Gap Analysis. As a part of our interest rate risk
management policy, we calculates an interest rate "gap." Interest rate "gap"
analysis is a common, though imperfect, measure of interest rate risk, which
measures the relative dollar amounts of interest-earning assets and
interest-bearing liabilities which reprice within a specific time period, either
through maturity or rate adjustment. The "gap" is the difference between the
amounts of such assets and liabilities that are subject to repricing. We have a
negative gap. A "negative" gap for a given period means that the amount of
interest-bearing liabilities maturing or otherwise repricing within that period
exceeds the amount of interest-earning assets maturing or otherwise repricing
within the same period. Accordingly, in a declining interest rate environment,
an institution with a negative gap would generally be expected, absent the
effects of other factors, to experience a lower decrease in the yield of its
assets relative to the cost of its liabilities and its income should be
positively affected. Conversely, the cost of funds for an institution with a
negative gap would generally be expected to increase more quickly than the yield
on its assets in a rigid interest rate environment, and such institution's net
interest income generally would be expected to be adversely affected by rising
interest rates. Changes in interest rates generally have the opposite effect on
an institution with a "positive gap."
Our one-year interest sensitivity gap as a percentage of total
interest-earning assets at June 30, 1997 was a negative 25.24%. At June 30,
1997, First Federal's three-year and five-year cumulative interest sensitivity
gaps as a percentage of total interest-earning assets were a negative 32.66% and
a negative 31.45%, respectively. Our negative gap position is attributable to
the high percentage of loans in our portfolio with fixed rates of interest which
have terms of 15 years. In addition, the interest rate on our ARM loans are
indexed to the Cost of Funds Index, an index that reacts to changes in market
interest rates more slowly than other indices. As a consequence, our ARM loans
may not fully reflect current market interest rates at the time they reprice.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at June 30, 1997 which are
projected to reprice or mature in each of the future time periods chosen. Except
as stated below, the amounts of assets and liabilities shown which reprice or
mature within a particular period were determined in accordance with the
contractual terms of the assets or liabilities. Loans with adjustable rates are
shown as being due at the end of the next upcoming adjustment period. Passbook
accounts and money market deposit accounts are assumed to be subject to
immediate repricing and depositor availability and have been placed in the
shortest period. In making the gap computations, none of the assumptions
sometimes made regarding prepayment rates and deposit decay rates have been used
for any other interest-earning assets or interest-bearing liabilities. In
addition, the table
42
<PAGE>
does not reflect scheduled principal payments which will be received throughout
the lives of the loans. The interest rate sensitivity of First Federal's assets
and liabilities illustrated in the following table would vary substantially if
different assumptions were used or if actual experience differs from that
indicated by such assumptions.
<TABLE>
<CAPTION>
Terms to Repricing at June 30, 1997
----------------------------------------------------------------------
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 Years Total
----------- ----------- ----------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning Assets:
Loans receivable:
Adjustable .................................... $ 21,638 $ -- $ -- $ -- $21,638
Fixed ......................................... 1,174 415 1,392 29,339 32,320
Other loans ........................................ 319 -- -- -- 319
Interest-earning balances in other banks ........... 2,720 -- -- -- 2,720
Federal Funds Sold ................................. 800 -- -- -- 800
Investments ........................................ -- 600 1,100 66 1,766
FHLB common stock .................................. -- -- -- 484 484
-------- -------- -------- ------- -------
Total interest-earning assets ............... $ 26,651 $ 1,015 $ 2,492 $29,889 $60,047
======== ======== ======== ======= =======
Interest-bearing Liabilities:
Savings Deposits:
Regular passbook .............................. $ 2,549 $ -- $ -- $ -- $ 2,649
Money market passbook ......................... 6,436 -- -- -- 6,436
Certificate accounts .......................... 30,473 5,472 1,762 171 37,878
Advances from the Federal Home Loan Bank ........... 2,350 -- -- 50 2,400
-------- -------- -------- ------- -------
Total interest-bearing liabilities ................ $ 41,808 $ 5,472 $ 1,762 $ 221 $49,263
======== ======== ======== ======= =======
Interest Sensitivity Gap Per Period ................ $(15,157) $ (4,457) $ 730 $29,668 $10,784
Cumulative Interest Sensitivity Gap ................ $(15,157) $(19,614) $(18,884) $10,784
Cumulative Gap as a Percentage of Total
Interest-Earning Assets ......................... (25.24)% (32.66)% (31.45)% 17.96%
Cumulative Interest-Earning Assets as a
Percentage of Total Interest-Bearing
Liabilities ..................................... 63.75% 58.52% 61.49% 121.89%
</TABLE>
Net Portfolio Value. In addition to the interest rate gap analysis as
discussed above, management monitors First Federal's interest rate sensitivity
through the use of a model which estimates the change in net portfolio value
("NPV") in response to a range of assumed changes in market interest rates. NPV
is the present value of expected cash flows from assets, liabilities, and
off-balance sheet items. The model estimates the effect on First Federal's NPV
of instantaneous and permanent 100 to 400 basis point increases and decreases in
market interest rates.
43
<PAGE>
The following table presents information regarding possible changes in
First Federal's NPV as of June 30, 1997, based on information provided by the
OTS' interest rate risk model.
<TABLE>
<CAPTION>
Changes in Net Portfolio Value
Interest Rates ---------------------------------------------------------
In Basis Points
(Rate Shock) Amount $ Change % Change
- ------------------ ------------------ ------------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Up 400 $ 6,470 $ (5,481) (46)%
Up 300 7,897 (4,053) (34)
Up 200 9,335 (2,616) (22)
Up 100 10,722 (1,229) (10)
Static 11,951 -- --
Down 100 12,829 878 7
Down 200 13,340 1,389 12
Down 300 13,729 1,778 15
Down 400 14,328 2,378 20
</TABLE>
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions including relative levels of market
interest rates, loan prepayments and deposit decay, and should not be relied
upon as indicative of actual results. Further, the computations do not reflect
any actions management may undertake in response to changes in interest rates.
The tables set forth above indicate that, in the event of a 200 basis
point decrease in interest rates, First Federal would be expected to experience
a 12% increase in NPV. In the event of a 200 basis point increase in interest
rates, First Federal would be expected to experience a 22% decrease in NPV.
Certain shortcomings are inherent in the method of analysis presented
in the NPV computations and in the gap computations presented in the tables
above. Although certain assets and liabilities may have similar maturities or
periods within which they will reprice, they may react differently to changes in
market interest rates. The interest rates on certain types of assets and
liabilities my fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, adjustable-rate mortgages have interest rate caps which restrict
changes in interest rates on a short-term basis and over the life of the assets.
The proportion of adjustable-rate loans could be reduced in future periods if
market interest rates should decline and remain at lower levels for a sustained
period due to increased refinancing activity. Further, in the event of a change
in interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in the tables. Finally, the ability of many
borrowers to service their adjustable-rate debt may decrease in the event of a
sustained interest rate increase.
First Federal's net income during recent periods has been positively
impacted by decreasing interest rates, and its net income in the near future is
likely to be reduced if interest rates increase. However, management did not
view First Federal's interest rate sensitivity position at June 30, 1997 to be
unacceptable in view of first Federal's historical results of operation and
highly capitalized position. Nevertheless, in order to maintain its interest
rate risk position within levels management believes to be acceptable, First
Federal has begun: (i) attempting to originate adjustable rate loans when market
condition permit; (ii) maintaining a short-term investment portfolio; and (iii)
attempting to lengthen deposit maturities.
44
<PAGE>
Average Balance Sheet
The following tables sets forth information relating to average
balances of First Federal's assets and liabilities for the years ended June 30,
1997 and 1996. For the periods indicated, the table reflects the average yield
on interest-earning assets and the average cost of interest-bearing liabilities
(derived by dividing income or expense by the monthly average balance of
interest-earning assets or interest-bearing liabilities, respectively) as well
as the net yield on interest-earning assets (which reflects the impact of the
net earning balance). Nonaccruing loans were included in the computation of
average balances.
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------------------
At June 30, 1997 1997 1996
---------------------- ---------------------------- ------------------------------
Average Average Average Average Average
Balance Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest bearing cash
balances $ 3,520 6.15% $2,537 $ 146 5.76% $ 2,929 $ 188 6.42%
Investment securities...... 2,251 6.68 2,367 151 6.38 2,767 159 5.75
Loans...................... 53,974 7.94 54,199 4,261 7.86 53,454 4,174 7.81
------- ------- ------ ------ ------ ------- ------- -------
Total interest-earning
assets................... 59,745 7.79 59,103 4,558 7.71 59,150 4,521 7.64
------- ------ ------ ------ ------- ------- ------- -------
Other assets................ 793 780 748
------- ------ -------
Total assets.............. $60,538 $59,883 $59,899
======= ======= =======
Interest bearing liabilities:
Deposits................... $46,863 5.35 $46,568 2,481 5.33 $48,329 2,607 5.39
Borrowings................. 2,400 5.81 1,985 114 5.74 1,050 61 5.81
------- ------- ------- ------ ------ ------- ------- -------
Total interest-bearing
liabilities 49,263 5.37 48,533 2,595 5.34 49,379 2,668 5.40
-------- ------- ------- ------ ------ ------- ------- -------
Other liabilities........... 185 618 341
Retained earnings........... 11,090 10,712 10,179
------- ------ -------
Total liabilities and retained
earnings................ $60,538 $59,883 $59,899
======= ======= =======
Net interest income and interest
rate spread................ 2.42% $1,963 2.37% $ 1,853 2.24%
======= ====== ====== ======= =======
Net yield on average
interest-earning assets 3.32% 3.13%
====== =======
Ratio of interest-earning assets
to interest-bearing liabilities 121.28% 121.78% 119.79%
======= ====== =======
</TABLE>
Rate/Volume Analysis
The following table analyzes the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), and (iii) net change (the sum of the precious columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.
45
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30, 1997 vs. 1996
----------------------------------------
Increase (decrease) due to
----------------------------------------
Volume Rate Total
---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
Interest Income:
Interest-bearing cash balances................................... $ (24) (18) $ (42)
Investments...................................................... (24) 16 (8)
Loans............................................................ 58 29 87
--------- --------- --------
Total interest income......................................... 10 27 37
--------- --------- --------
Interest expense:
Deposits......................................................... (94) (32) (126)
Borrowings....................................................... 54 (1) 53
--------- ---------- --------
Total interest expense........................................ (40) (33) (73)
---------- ---------- ---------
Net interest income.................................................. $ 50 $ 60 $ 110
========= ========= ========
</TABLE>
Comparison of Financial Condition at June 30, 1997 and 1996
At June 30, 1997, First Federal's assets totaled $60.5 million as
compared to $59.7 million at June 30, 1996, an increase of 1.4%. Interest
bearing balances in other banks, federal funds sold and net loans receivable
increased by $428,000, $300,000 and $639,000; respectively, while total deposits
decreased by $1.1 million. These activities were funded by the maturity of
$430,000 in investment securities, an increase of $1.4 million in advances from
the FHLB of Atlanta, and net income of $586,000. Total retained earnings
increased from $10.5 million at June 30, 1996 to $11.1 million at June 30, 1997.
At June 30, 1997, First Federal continued to substantially exceed all applicable
regulatory capital requirements.
Comparison of Results of Operations for the Years Ended June 30, 1997 and 1996
Net Income. First Federal earned net income of $586,000 during the year
ended June 30, 1997 as compared with net income of $794,000 during the prior
year, a decrease of $208,000. The decrease resulted principally from a special
insurance assessment imposed on all SAIF-insured institutions by the FDIC to
recapitalize the SAIF fund. First Federal's assessment was $312,000. Net of an
income tax benefit of $115,000, this special assessment decreased earnings
during the year by $197,000. In addition, during the year ended June 30, 1997,
the provision for loan losses was $125,000 higher than during the preceding
year.
Net Interest Income. Net interest income increased to $2.0 million
during the year ended June 30, 1997 as compared with $1.9 million during the
previous year. This increase resulted principally from a combination of a slight
increase of .07% in the weighted average yield on average interest-earning
assets and a slight reduction in the rate of interest paid on customer deposits,
which declined from a weighted average rate of 5.39% during the year ended June
30, 1996 to a weighted average rate of 5.33% during the year ended June 30,
1997. Average interest earning assets decreased $47,000 during fiscal 1997.
Average interest-bearing liabilities decreased $846,000 during fiscal 1997. The
decrease in interest bearing liabilities resulted from a decrease in jumbo
certificates of deposit accounts which matured during the year.
Provision for Loan Losses. The provision for loan losses was $143,000
and $18,000 for the years ended June 30, 1997 and 1996, respectively. The higher
provision during the current year resulted from management's decision to broaden
its loan composition by originating more commercial real estate loans and in
recognition of the cyclical nature of the local economy. Management believes
that the loan loss allowance at June 30, 1997 was adequate
46
<PAGE>
to absorb losses on existing loans at that date. There were $8,000 in loan
charge-offs during the year ended June 30, 1996. Nonaccrual loans aggregated
$97,000 at June 30, 1997.
Other Income. Other income consisting of late fees, mortgage insurance
premiums and gains and losses on foreclosed real estate decreased from $41,000
during the year ended June 30, 1996 to $23,000 during the current year. The
decrease resulted from sales of foreclosed real estate which generated a gain of
$11,000 in fiscal 1996 and a loss of $9,000 in fiscal 1997.
Other Expenses. Exclusive of the costs incurred for deposit insurance,
including the SAIF Special Assessment, general and administrative expenses
consisting of personnel, occupancy expense, postage, data processing/supplies
remained relatively stable, decreasing $4,000 to $540,000 during the year ended
June 30, 1997 as compared with $544,000 during the year ended June 30, 1996.
Provision for Income Taxes. The provision for income taxes was $342,000
and $429,000 for the years ended June 30, 1997 and 1996, respectively, which
represented a percentage of income before income taxes, of 36.9% and 35.1% for
the years ended June 30, 1997 and 1996, respectively.
Capital Resources and Liquidity
The objective of First Federal's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses First
Federal's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
First Federal's primary sources of internally generated funds are
principal and interest payments on loans receivable, cash flows generated from
operation, and cash flows generated by investments. External sources of funds
include increases in deposits and advances from the FHLB of Atlanta.
First Federal is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of United
States Government, federal agency and other investments having maturities of
five years of less. Current OTS regulations require that a savings association
maintain liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity requirements.
At June 30, 1997, First Federal's liquidity, as measured for regulatory
purposes, was 9.1%, or $2.0 million in excess of the minimum OTS requirement.
At June 30, 1997, First Federal had outstanding $905,000 in commitments
to originate mortgage loans and $1.3 million in undisbursed construction loans.
First Federal believes that it has adequate resources to fund loan commitments
as they arise. If First Federal requires funds beyond its internal funding
capabilities, additional advances from the FHLB of Atlanta are available. At
June 30, 1997, approximately $30.5 million in certificates of deposit were
scheduled to mature within a year. First Federal expects that a portion of these
certificates of deposit will not be renewed upon maturity.
Following the Conversion, the Holding Company will initially conduct no
business other than holding the capital stock of First Federal and the loan it
will make to the ESOP. In order to provide sufficient funds for its operations,
the Holding Company expects to retain at the Holding Company level and invest
50% of the net proceeds of the Conversion remaining after making the loan to the
ESOP. In the future, the Holding Company's primary source of funds, other than
income from its investments and principal and interest payments received from
the ESOP with respect to the ESOP loan, is expected to be dividends from First
Federal. As a stock savings and loan association, First Federal may not declare
or pay a cash dividend on or repurchase any of its capital stock if the effect
of such transaction would be to reduce the net worth of the institution to an
amount which is less than the minimum
47
<PAGE>
amount required by applicable federal regulations. At June 30, 1997, First
Federal was in compliance with all applicable capital requirements.
Impact of Inflation and Changing Prices
The Financial Statements and related Notes have been prepared in
accordance with generally accepted accounting principles, which generally
requires 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 impact of inflation is reflected
in the increased cost of First Federal's operations. Nearly all the assets and
liabilities of First Federal are financial, unlike most industrial companies. As
a result, First Federal's performance is directly impacted by changes in
interest rates, which are indirectly influenced by inflationary expectations.
First Federal's ability to match the interest sensitivity of its financial
assets to the interest sensitivity of it financial liabilities in its
asset/liability management may tend to minimize the effect of changes in
interest rates on First Federal's performance. Changes in interest rates do not
necessarily move to the same extent as changes in the price of goods and
services. In the current interest rate environment, liquidity and the maturity
structure of First Federal's assets and liabilities are critical to the
maintenance of acceptable performance levels.
Impact of New Accounting Standards
FASB Statement on Earnings Per Share. In March 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128. The Statement establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. This Statement simplifies the standards
for computing earnings per share previously found in Accounting Principle Board
("APB") Opinion No. 15, "Earnings per Share" ("EPS"), and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
the presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and the
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. This Statement
supersedes Opinion 15 and AICPA Accounting Interpretation 1.102 of Opinion 15.
This Statement will be effective for the Association's fiscal year ending June
30, 1999. Management does not believe the impact of adopting SFAS No. 128 will
be material to the Association's financial statements.
FASB Statement on Accounting for Stock-Based Compensation. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB has encouraged all entities to adopt the fair
value based method; however, it will allow entities to continue the use of the
"intrinsic value based method" prescribed by APB Opinion No. 25. Under the
intrinsic value based method, compensation cost is the excess of the market
price of the stock at the grant date over the amount an employee must pay to
acquire the stock. However, most stock option plans have no intrinsic value at
the grant date and, as such, no compensation cost is recognized under APB
Opinion No. 25. Entities electing to continue use of the accounting treatment of
APB Opinion No. 25 must make certain pro forma disclosures as if the fair value
based method had been applied. The accounting requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years beginning after December
15, 1995. Pro forma disclosures must include the effects of all awards granted
in fiscal years beginning after December 15, 1994. The Association expects to
use the "intrinsic value based method" as prescribed by APB Opinion No. 25.
Accordingly, management does not believe the impact of adopting SFAS No. 123
will be material to the Association's financial statements.
48
<PAGE>
FASB Statement on Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.. In June 1996, the FASB issued SFAS No. 125.
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial- components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer control and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. If a transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured borrowing with
pledge of collateral. This Statement is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. The effective date for certain
provisions of this Statement have been postponed for one year. Management
anticipates that the adoption of the Statement should have no material impact on
its financial statements.
FASB Statement on Reporting Comprehensive Income. In June 1997, the
FASB issued SFAS No. 130. This Statement establishes standards of reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. This Statement will be effective for the
Association's fiscal year ending June 30, 1999, and the Association does not
intend to early adopt. Had the Association early-adopted this Statement, it
would have reported comprehensive income in the same amounts as reported net
income for the years ended June 30, 1997 and 1996, respectively.
BUSINESS OF FIRST FEDERAL
General
We were originally organized in 1920 and became a federally-chartered
savings and loan association in 1935. Since then, we have conducted our business
from our full-service office located in Cheraw, South Carolina. Our principal
business consists of attracting deposits from the general public and originating
fixed-rate and adjustable-rate loans secured primarily by first mortgage liens
on one- to four-family residential real estate. Our deposit accounts are insured
up to applicable limits by the SAIF of the FDIC.
We believe that we have developed a reputation among our loyal customer
base because of our commitment to personal service and because of strong support
of the local community. We offer a number of financial services including: (i)
residential real estate loans;(ii) construction loans; (iii) commercial real
estate loans; (iv) home improvement loans; (v) money market demand accounts
("MMDAs"); (vi) passbook savings accounts; and (vii) certificates of deposit.
Lending Activities
We have historically concentrated our lending activities on the
origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
our loan origination activities, representing $48.5 million or 89.78% of our
total loan portfolio at June 30,1997. We also offer commercial real estate
loans, construction loans and consumer loans. Loans secured by commercial real
estate totaled approximately $2.5 million or 4.64% of our total loan portfolio
at June 30,1997. Construction loans totaled approximately $3.0 million or 5.64%
of our total loans as of June 30,1997. Home improvement loans totaled $1.4
million, or 2.66% of our total loan portfolio at June 30,1997.
49
<PAGE>
Loan Portfolio Data. The following table sets forth the composition of
our loan portfolio by loan type and security type as of the dates indicated,
including a reconciliation of gross loans receivable after consideration of the
allowance for loan losses and loans in process.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------
1997 1996
------------------ ------------------
Amount Percent Amount Percent
-------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Type of loan:
Real estate loans:
One- to four-family residential................... $48,460 89.78% $48,297 90.55%
Commercial........................................ 2,502 4.64% 2,089 3.92%
Construction...................................... 3,044 5.64% 3,123 5.86%
Home improvement loans............................ 1,437 2.66% 1,430 2.68%
------- ------ ------- ------
Total real estate loans........................ 55,443 102.72% 54,939 103.01%
Other loans:
Loans secured by deposits......................... 319 0.59% 305 0.57%
------- ------ ------- ------
Total loans.................................... 55,762 103.31% 55,244 103.58%
Less:
- ----
Construction loans in process..................... 1,306 2.42% 1,536 2.88%
Allowance for losses.............................. 303 0.56% 169 0.32%
Deferred loan origination fees, net of costs...... 179 0.33% 204 0.38%
------- ------ ------- ------
Total, net........................................... $53,974 100.00% $53,335 100.00%
======= ====== ======= ======
</TABLE>
The following table sets forth certain information at June 30, 1997,
regarding the dollar amount of loans maturing in our loan portfolio based on the
earlier of their contractual terms to maturity or their repricing. Demand loans
having no stated schedule of repayments and no stated maturity and overdrafts
are reported as due in one year or less. This schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses. We expect
that prepayments will cause actual maturities to be shorter.
<TABLE>
<CAPTION>
At June 30, 1997
-----------------------------------------------------------------------
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 Years Total
----------- ----------- ----------- ----------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Real estate loans:
Adjustable....................... $ 21,638 $ -- $ -- $ -- $ 21,638
Fixed............................ 1,174 415 1,392 29,339 32,320
Other loans........................... 319 -- -- -- 319
Less:
Allowance for loan losses........... (303) -- -- -- (303)
--------- --------- --------- --------- ---------
Total............................ $ 22,828 $ 415 $ 1,392 $ 29,339 $ 53,974
========= ========= ========= ========= =========
</TABLE>
As of June 30, 1997, the dollar amount of all loans due after one year
that have fixed interest rates was $31.1 million. None of First Federal's loans
with floating or adjustable interest rates are shown as being due after one
year.
One- to Four-Family Residential Loans. Our primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in our primary market area. We generally originate
one- to four-family residential mortgage loans in amounts up to 95% of the
lesser of the appraised value or purchase price, with private mortgage insurance
required on loans with a loan-to-value ratio in excess of 80%. We originate and
retain fixed rate loans which provide for the payment of principal and interest
for up to an 18-year period.
50
<PAGE>
We also offer adjustable-rate mortgage ("ARM") loans. The interest rate
on ARM loans is indexed to the cost of funds index ("COFI"). The COFI reacts to
changes in market interest rates more slowly than other indices. Consequently,
our ARM loans may not fully reflect current market interest rates at the time
they reprice. A substantial portion of the ARM loans in our portfolio at June
30, 1997 provide for maximum rate adjustments per year and over the life of the
loan of 1% and 5%, respectively. Our residential ARMs are amortized for terms up
to 30 years.
ARM loans decrease the risk associated with changes in interest rates
by periodically repricing, but involve other risks because as interest rates
increase, the underlying payments by the borrower increase, thus increasing the
potential for default by the borrower. At the same time, the marketability of
the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore, is potentially limited in effectiveness during
periods of rapidly rising interest rates. At June 30,1997, approximately 44.17%
of our one- to four-family residential loans had adjustable rates of interest.
All of the one- to four-family residential mortgage loans that we
originate include "due-on-sale" clauses, which give us the right to declare a
loan immediately due and payable in the event that, among other things, the
borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not repaid. However, we occasionally permit assumptions
of existing residential mortgage loans on a case-by-case basis.
At June 30, 1997, approximately $48.5 million, or 89.78% of our
portfolio of loans, consisted of one- to four-family residential loans.
Approximately $88,000, or .17% of total loans (which were comprised of three
loans secured by one- to four-family properties), were included in
non-performing assets as of that date. See "--Non-Performing and Problem
Assets."
Commercial Real Estate Loans. At June 30,1997, $2.5 million, or 4.64%
of our total loan portfolio, consisted of commercial real estate loans. Our
commercial real estate loans are secured by churches, office buildings, and
other commercial properties. We generally originate fixed rate commercial real
estate loans with maximum terms of 15 years. We also will originate adjustable
rate commercial real estate loans with terms of up to 30 years. The interest
rate on adjustable rate commercial real estate loans is indexed to the COFI with
maximum Loan-to-Value ratios of 80%. At June 30,1997, our largest commercial
loan had a principal balance of $183,000 and was secured by a church. On June
30, 1997, there were no commercial real estate loans included in nonperforming
assets.
Loans secured by commercial real estate generally are larger than one-
to four-family residential loans and involve a greater degree of risk.
Commercial real estate loans often involve large loan balances to single
borrowers or groups of related borrowers. Payments on these loans depend to a
large degree on results of operations and management of the properties and may
be affected to a greater extent by adverse conditions in the real estate market
or the economy in general. Accordingly, the nature of the loans makes them more
difficult for management to monitor and evaluate.
Construction Loans. We offer construction loans with respect to
residential and commercial real estate and, in certain cases, to builders or
developers constructing such properties on a speculative basis (i.e., before the
builder/developer obtains a commitment from a buyer). Funds are disbursed to
borrowers upon the successful completion of particular stages of construction.
Typically, loans made to builders who do not have a commitment for the sale of
the property under construction will be for a term of no more than six months.
Except for construction loans made on speculative basis, upon the successful
completion of construction the loan can be converted into permanent financing.
At June 30,1997, $3.0 million, or 5.64% of our total loan portfolio, consisted
of construction loans. The largest construction loan had a principal balance of
$107,000 on June 30, 1997 and was secured by a one-to four-family residence.
None of our construction loans were included in non-performing assets on that
date.
51
<PAGE>
Construction loans generally match the term of the construction
contract and are written with interest calculated on the amount disbursed under
the loan and payable monthly. The maximum Loan-to-Value Ratio for a construction
loan is based upon the nature of the construction project. For example, a
construction loan for a one-to four-family residence may be written with a
maximum Loan-to-Value ratio of 95% with mortgage insurance.
Inspections are made prior to any disbursement under a construction loan.
While providing us with a comparable, and in some cases higher, yield
than a conventional mortgage loan, construction loans involve a higher level of
risk. For example, if a project is not completed and the borrower defaults, we
may have to hire another contractor to complete the project at a higher cost.
Also, a project may be completed, but may not be salable, resulting in the
borrower defaulting and our taking title to the project.
Home Improvement Loans. At June 30, 1997, home improvement loans
totaled $1.4 million, or 2.66% of total loans. Home improvement loans are
typically secured by second mortgages on the secured property. At June 30, 1997,
one home improvement loan with a balance of $9,000, was included in
non-performing assets. See "--Non-Performing and Problem Assets."
Origination, Purchase and Sale of Loans. We historically have
originated our mortgage loans pursuant to our own underwriting standards which
do not conform with the standard criteria of Freddie Mac or the FNMA because we
do not require current property surveys in most cases. In the event that we
begin originating fixed-rate residential mortgage loans for sale to Freddie Mac
in the secondary market, such loans will be originated in accordance with the
guidelines established by Freddie Mac and could be sold after they are
originated.
We confine our loan origination activities primarily to Chesterfield
County and the surrounding counties. At June 30, 1997, we had no loans secured
by property located outside of South Carolina. Our loan originations are
generated from referrals from existing customers, real estate brokers, and
advertising. Loan applications are underwritten and processed at our office.
Our loan approval process is intended to assess the borrower's ability
to repay the loan, the viability of the loan and the adequacy of the value of
the property that will secure the loan. To assess the borrower's ability to
repay, we study the employment and credit history and information on the
historical and projected income and expenses of our mortgagors. All mortgage
loans are approved by our Loan Committee.
We generally require appraisals on all real property securing our loans
and require an attorney's opinion and a valid lien on the mortgaged real estate.
Appraisals for all real property securing mortgage loans are performed by
independent appraisers who are state-licensed. We require fire and extended
coverage insurance in amounts at least equal to the principal amount of the loan
and also require flood insurance to protect the property securing its interest
if the property is in a flood plain. We also generally require private mortgage
insurance for all residential mortgage loans with Loan-to-Value Ratios of
greater than 80%. We require escrow accounts for insurance premiums and taxes
for loans that require private mortgage insurance. All real estate loans up to
$75,000 must be approved by our loan committee. All real estate loans for
amounts in excess of $75,000 must be approved by the Board of Directors.
Our underwriting standards for home improvement loans are intended to
protect against some of the risks inherent in making home improvement loans.
Borrower paying habits and financial strengths are important considerations.
52
<PAGE>
The following table shows our loan origination, sales and repayment
activity during the years indicated. During fiscal 1997 and 1996 First Federal
did not purchase any loans.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------
1997 1996
--------- ----------
(In Thousands)
<S> <C> <C>
Originations by Type:
- ---------------------
Adjustable rate:
Real estate:
One-to four-family......................................................... $ 4,598 $ 3,909
Commercial................................................................. 404 62
Construction............................................................... -- --
Home improvement loans..................................................... -- --
Other:
Secured by deposits.......................................................... -- --
--------- ---------
Total adjustable rate.................................................... 5,002 3,971
--------- ---------
Fixed rate:
Real estate:
One-to four-family......................................................... 1,988 3,630
Commercial................................................................. 208 248
Construction............................................................... 2,265 2,648
Home improvement loans..................................................... -- --
Other:
Secured by deposits........................................................ 150 287
--------- ---------
Total fixed-rate......................................................... 4,611 6,813
--------- ---------
Total loans originated................................................... 9,613 10,784
--------- ---------
Sales and Repayments:
- ---------------------
Real estate:
One-to four-family......................................................... 525 --
Commercial................................................................. -- --
Construction............................................................... -- --
Home improvement loans..................................................... -- --
Other:
Secured by deposits........................................................ -- --
--------- ---------
Total loans sold......................................................... 525 --
Principal repayments......................................................... 7,917 9,916
--------- ---------
Total reductions......................................................... 8,442 9,916
(Increase)decrease in other items, net.......................................... 121 (330)
--------- ---------
Net increase (decrease).................................................. $ 1,292 $ 538
========= =========
</TABLE>
Our one-to four-family residential loan originations during the year
ended June 30, 1997 totaled $6.6 million, compared to $7.5 million during the
year ended June 30, 1996.
Origination and Other Fees. We realize income from late charges, and
fees for other miscellaneous services. We currently charge a 1% origination fee
on all loans originated. We also may charge points on a mortgage loan as
consideration for a lower interest rate, although we do so infrequently. Late
charges are generally assessed if payment is not received within a specified
number of days after it is due.
53
<PAGE>
Non Performing and Problem Assets
After a mortgage loan becomes 30 days past due, we deliver a computer
generated delinquency notice to the borrower. When loans become 60 days past
due, we send additional delinquency notices and make personal contact by letter
or telephone with the borrower to establish acceptable repayment schedules. When
a mortgage loan is 90 days delinquent, we will have either entered into a
workout plan with the borrower or referred the matter to our attorney for
collection. Management is authorized to commence foreclosure proceedings for any
loan upon making a determination that it is prudent to do so.
We review mortgage loans on a regular basis and place such loans on a
non-accrual status when they are specifically determined to be impaired or when
they become 90 days delinquent. When loans are placed on a non-accrual status,
unpaid accrued interest is written off, and further income is recognized only to
the extent received.
Nonperforming Assets. At June 30, 1997, $107,000, or .18% of our total
assets, were nonperforming (nonperforming loans and non-accruing loans). At June
30, 1997, loans secured by real estate accounted for $97,000 of our non
performing assets. We had real estate owned ("REO") properties in the amount of
$10,000 as of June 30, 1997.
The table below sets forth the amounts and categories of our
nonperforming assets (nonperforming loans and foreclosed real estate) for the
last two years. It is our policy that all earned but uncollected interest on all
loans be reviewed monthly to determine if any portion thereof should be
classified as uncollectible for any loan past due in excess of 90 days.
Delinquent loans that are 90 days or more past due are considered nonperforming
assets. During the periods presented, we did not have any troubled debt
restructurings.
<TABLE>
<CAPTION>
At June 30,
-----------------------
1997 1996
------- ------
(Dollars In Thousands)
<S> <C> <C>
Loans not accruing interest............................................ $ 97 $ 46
Accruing loans 90 days or more past due................................ -- --
------ -------
Total nonperforming loans........................................... 97 46
Foreclosed real estate................................................. 10 27
------ -------
Total nonperforming assets.......................................... $ 107 $ 73
====== =======
Nonperforming assets to total assets................................ 0.18% 0.12%
====== =======
</TABLE>
Interest on loans of $10,000 would have been reported for the year
ended June 30,1997 if the non-performing loans summarized above had been current
in accordance with their original terms. Interest totaling $6,000 was reported
on nonperforming loans for the year ended June 30, 1997.
54
<PAGE>
At June 30, 1997, we held loans delinquent from 60 to 89 days totaling
approximately $482,000. Other than these loans and the other delinquent loans
disclosed elsewhere in this section, we were not aware of any other loans, the
borrowers of which were experiencing financial difficulties.
<TABLE>
<CAPTION>
Loans Delinquent For:
-------------------------------------------------------------------
60-89 Days 90 Days and Over Total
------------------------------- ---------------------------------- -------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ --------- ------ ------ ---------- ------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family...... 14 $388 .80% 3 $88 .18% 17 $476 .98%
Commercial............... -- -- -- -- -- -- -- -- --
Construction............. 2 93 3.06% -- -- -- 2 93 3.06%
Home improvement......... 1 1 .07% 1 9 .63% 2 10 .70%
Other loans:
Loans secured by
deposits................ -- -- -- -- -- -- -- -- --
--- ---- ---- --- --- --- --- ---- ----
Total................. 17 $482 .87% 4 $97 .17% 21 $579 1.04%
=== ==== ==== === === === === ==== ====
</TABLE>
Classified Assets. Federal regulations and our Asset Classification
Policy provide for the classification of loans and other assets such as debt and
equity securities considered by the OTS to be of lesser quality as
"substandard," "doubtful" or "loss" assets. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obliger or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
55
<PAGE>
At June 30, 1997, the aggregate amount of our classified assets, and of
our general and specific loss allowances were as follows:
<TABLE>
<CAPTION>
Loan Loss
Amount Allowance
------ ---------
(In Thousands)
<S> <C> <C>
Classified loans receivable:
Substandard.......................... $276 $69
Doubtful............................. 17 9
Loss................................. -- --
---- ----
$293 78
====
General unallocated loss allowance..... 225
---
Total allowance........................ $303
====
</TABLE>
We regularly review our loan portfolio to determine whether any loans
require classification in accordance with applicable regulations. Not all of our
classified assets constitute non-performing assets.
Allowance for Loan Losses
We provide for loan losses on the allowance method. Accordingly, all
loan losses are charged to the related allowance and all recoveries are credited
to it. Additions to the allowance for loan losses are provided by charges to
operations based on various factors which, in management's judgment, deserve
current recognition in estimating possible losses. Such factors considered by
management include the market value of the underlying collateral, growth and
composition of the loan portfolio, the relationship of the allowance for loan
losses to outstanding loans, delinquency trends, and economic conditions. We
evaluate the carrying value of loans periodically and the allowance is adjusted
accordingly. While management uses the best information available to make
evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the evaluations.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review our allowance for loan losses. Such
agencies may require us to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
56
<PAGE>
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance during the fiscal years ended June 30, 1997, and 1996.
<TABLE>
<CAPTION>
At June 30,
-----------------------
1997 1996
------- ------
(Dollars In Thousands)
<S> <C> <C>
Balance at beginning of period......................................... $ 169 $ 172
------ -------
Loans charged off:
Real estate......................................................... 9 21
Other............................................................... -- --
------ -------
Total loans charged-off............................................. 9 21
Recoveries:
Real estate......................................................... -- --
Other............................................................... -- --
------ -------
Total Recoveries.................................................... -- --
------ -------
Net loans charged-off.................................................. 9 21
------ -------
Provision for loan losses.............................................. 143 18
------ -------
Balance at end of period............................................... $ 303 $ 169
====== =======
Ratio of net charge-offs to average loans
outstanding during the period........................................ 0.02% 0.04%
====== =======
</TABLE>
Allocation of Allowance for Loan Losses. The following table presents
an analysis of the allocation of our allowance for loan losses at the dates
indicated. The allocation of the allowance to each category is not necessarily
indicative of future loss in any particular category and does not restrict our
use of the allowance to absorb losses in other categories.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------
1997 1996
------------------------------- --------------------------------
Percent of Percent Percent of Percent
Amount of Allowance of Loans Amount of Allowance of Loans
Loan Loss to Total to Gross Loan Loss to Total to Gross
Allowance Allowance Loans Allowance Allowance Loans
--------- ---------- -------- --------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential......................... $ 169 55.78% 86.91% $ 126 74.56% 87.42%
Commercial.............................................. 24 7.92 4.49 21 12.43 3.78
Construction............................................ 33 10.89 5.46 8 4.73 5.65
Home improvement loans.................................. 10 3.30 2.58 7 4.14 2.59
-------- ------- ------- ------- ------ --------
Total real estate loans.............................. 236 77.89 99.43 162 95.86 99.45
Other loans:
Loans secured by deposits............................... 1 0.33 0.57 1 0.59 0.55
Unallocated............................................. 66 21.78 -- 6 3.55 --
-------- ------- ------- ------- ------ --------
Total allowance for loan losses.................... $ 303 100.00% 100.00% $ 169 100.00% 100.00%
======== ======= ====== ======= ====== ========
</TABLE>
57
<PAGE>
Investments
Investments. Our investment portfolio consists of short-term U.S.
Treasury and federal agency securities, interest earning deposits in other
financial institutions, federal funds sold, and to a lesser extent mortgage back
securities and FHLB stock. At June 30, 1997, approximately $5.8 million, or
9.5%, of our total assets consisted of such investments. We had $2.7 million in
interest-earning deposits as of that date.
The following table sets forth the carrying value of First Federal's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------
1997 1996
-------- ---------
(In Thousands)
<S> <C> <C>
Securities held to maturity:
U.S. government and agency securities.................................. $ 1,700 $ 2,099
Mortgage-backed securities............................................. 66 97
-------- ---------
Total securities held to maturity................................... 1,766 2,196
Interest-earning balances in other banks............................... 2,720 2,292
Federal Funds sold..................................................... 800 500
Federal Home Loan Bank Stock........................................... 484 482
-------- ---------
Total investments................................................... $ 5,770 $ 5,470
======== =========
</TABLE>
At June 30, 1997, the market value of First Federal's investment
securities held to maturity totaled $1.8 million.
58
<PAGE>
The following table sets forth the amount of investment securities
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at June 30, 1997.
<TABLE>
<CAPTION>
After One Year After Five Years
One Year or Less Through Five Years Through Ten Years
---------------- ------------------- -----------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
U.S. government and agency securities..... $ -- -- $ 1,700 6.43% $ -- --
Mortgage-backed securities................ -- -- -- -- 66 8.95%
Other:
Interest-earning balances in other banks.. 2,720 6.23% -- -- -- --
Federal Funds Sold........................ 800 5.88% -- -- -- --
Federal Home Loan Bank Stock.............. -- -- -- -- -- --
------- ------- -------
Total $ 3,520 6.15% $ 1,700 6.43% $ 66 8.95%
======= ======= =======
<CAPTION>
After Ten Years Total
---------------- -----------------
Carrying Average Carrying Average
Value Yield Value Yield
----- ----- ----- -----
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. government and agency securities..... $ -- -- $ 1,700 6.43%
Mortgage-backed securities................ -- -- 66 8.95%
Other:
Interest-earning balances in other banks.. -- -- 2,720 6.23%
Federal Funds Sold........................ -- -- 800 5.88%
Federal Home Loan Bank Stock.............. 484 7.25% 484 7.25%
------ -------
Total $ 484 7.25% $ 5,770 6.36%
====== =======
</TABLE>
59
<PAGE>
Sources of Funds
General. Deposits have traditionally been our primary source of funds
for use in lending and investment activities. In addition to deposits, we derive
funds from scheduled loan payments, investment maturities, loan prepayments,
retained earnings, income on earning assets and borrowings. While scheduled loan
payments and income on earning assets are relatively stable sources of funds,
deposit inflows and outflows can vary widely and are influenced by prevailing
interest rates, market conditions and levels of competition. Borrowings from the
FHLB of Atlanta may be used in the short-term to compensate for reductions in
deposits or deposit inflows at less than projected levels.
Deposits. We attract deposits principally from within Chesterfield
County and Marlboro County through the offering of a selection of deposit
instruments, including passbook accounts, money market accounts, fixed term
certificates of deposit, individual retirement accounts and savings accounts. We
do not actively solicit or advertise for deposits outside of Chesterfield County
and adjacent Marlboro County, and substantially all of our depositors are
residents of Chesterfield or Marlboro County. Deposit account terms vary, with
the principal differences being the minimum balance required, the amount of time
the funds remain on deposit and the interest rate. We do not pay broker fees for
any deposits we receive.
We establish the interest rates paid, maturity terms, service fees and
withdrawal penalties on a periodic basis. Determination of rates and terms are
predicated on funds acquisition and liquidity requirements, rates paid by
competitors, growth goals, and applicable regulations. We rely, in part, on
customer service and long-standing relationships with customers to attract and
retain our deposits. We also closely price our deposits to the rates offered by
our competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and other prevailing interest rates and
competition. The variety of deposit accounts that we offer has allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term fluctuations in
deposit flows as customers have become more interest rate conscious. We manage
the pricing of our deposits in keeping with our asset/liability management and
profitability objectives. Based on our experience, we believe that our passbook
and MMDAs are relatively stable sources of deposits. However, the ability to
attract and maintain certificates of deposit, and the rates we pay on these
deposits, have been and will continue to be significantly affected by market
conditions. At June 30, 1997, 80.83% of our deposit accounts were certificate of
deposit accounts, of which $30.5 million have maturities of one year or less.
See "Risk Factors--Reliance on Certificate of Deposit Accounts."
The following table sets forth an analysis of our deposit accounts by
type, maturity, and rate at June 30, 1997 and 1996, as well as the savings
flows.
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
-------------------------------- -------------------------------
Weighted Increase Weighted
Average % of (Decrease) Average % of
Amount Rate Total in Amount Amount Rate Total
------ ---- ------- --------- ------ ---- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Savings deposits:
Regular passbook...................... $2,549 2.96% 5.44% $ (34) 2,583 2.80% 5.39%
Money market passbook................. 6,436 4.18% 13.73% 650 5,786 4.24% 12.06%
------ ---- ------ ------- ------ ---- -----
Total demand deposits............... 8,985 3.83% 19.17% 616 8,369 3.80% 17.45%
------ ---- ------ ------- ------ ---- -----
Certificate accounts with original
maturities of:
6 months or less...................... 9,181 5.28% 19.59% 3,463 5,718 5.41% 11.93%
Over 6 to 12 months................... 10,578 5.63% 22.57% (1,752) 12,330 5.54% 25.71%
Over 12 months........................ 18,119 5.99% 38.66% 3,413 21,532 6.00% 44.91%
------ ---- ------ ------- ------ ----- -----
Total certificates.................. 37,878 5.71% 80.83% (1,702) 39,580 5.77% 82.55%
------ ---- ------ ------- ------ ---- -----
Total deposits...................... $46,863 5.35% 100.00% $(1,086) $47,949 5.43% 100.00%
======= ==== ====== ======= ======= ==== ======
</TABLE>
60
<PAGE>
The following table sets forth by various interest rate categories the
composition of time deposits of First Federal at the dated indicated.
<TABLE>
<CAPTION>
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 Years Total
--------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of $100,000 or more.... $ 6,746 5.74% $ 644 6.38% $ 409 6.30% $ -- -- $ 7,799 5.82%
Certificates of less than $100,000.. 23,727 5.56% 4,828 6.07% 1,353 6.26% 171 7.21% 30,079 5.64%
-------- ------- ------
Total.......................... $ 30,473 5.60% $ 5,472 6.11% $ 1,762 6.27% $ 171 7.21% $ 37,878 5.71%
========= ======= ======= ====== ========
</TABLE>
61
<PAGE>
The following table indicates the amount of First Federal's
certificates of deposit and other deposits by time remaining until maturity as
of June 30, 1997.
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------------- ------------ ------------ ------------------ --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000....... $ 10,305 $ 5,495 $ 7,927 $ 6,352 $ 30,079
Certificates of deposit of $100,000 or more...... 2,664 1,295 1,628 1,053 6,640
Public funds..................................... 500 659 -- -- 1,159
--------- --------- --------- --------- ---------
Total certificates of deposit.................... $ 13,469 $ 7,449 $ 9,555 $ 7,405 $ 37,878
========= ========= ========= ========= =========
</TABLE>
Total deposits at June 30,1997 were approximately $46.9 million,
compared to approximately $47.9 million at June 30, 1996. Our deposit base is
somewhat dependent upon the manufacturing sector of Chesterfield and Marlboro
Counties. Although the manufacturing sector in Chesterfield and Marlboro
Counties is relatively diversified and not significantly dependent upon any
industry, a loss of a material portion of the manufacturing workforce could
adversely affect our ability to attract deposits due to the loss of personal
income attributable to the lost manufacturing jobs and the attendant loss in
service industry jobs.
In the unlikely event of our liquidation after the Conversion, all
claims of creditors (including those of deposit account holders, to the extent
of their deposit balances) would be paid first followed by distribution of the
liquidation account to certain deposit account holders, with any assets
remaining thereafter distributed to the Holding Company as the sole shareholder
of First Federal. See "The Conversion -- Principal Effects of Conversion --
Effect on Liquidation Rights."
Borrowings. We focus on generating high quality loans and then seek the
best source of funding from deposits, investments or borrowings. At June 30,
1997, we had borrowings in the amount of $2.4 million from the FHLB of Atlanta
which bear fixed and variable interest rates and are due at various dates
through 2003. We are required to maintain eligible loans in our portfolio of at
least 170% of outstanding advances as collateral for advances from the FHLB of
Atlanta. We do not anticipate any difficulty in obtaining advances appropriate
to meet our requirements in the future.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances, for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------
1997 1996
---------- -----------
<S> <C> <C>
Maximum Balance:
- ---------------
FHLB advances........................................................... $2,400,000 $ 1,050,000
Average Balance:
- ---------------
FHLB advances........................................................... $1,985,000 $ 1,050,000
</TABLE>
62
<PAGE>
The following table presents certain information relating to the
maturities of FHLB of Atlanta borrowings at or for the years ended June 30, 1997
and 1996.
<TABLE>
<CAPTION>
Maturing during the year Balance At June 30,
------------------------ -------------------
ended June 30, Interest Rates 1997 1996
-------------- -------------- ---- ----
<S> <C> <C> <C>
1997 5.58-5.72% $ -- $1,000,000
1998 5.83-5.95% $2,350,000 --
1999 -- -- --
2000 -- -- --
2001 -- -- --
Thereafter 3.00% 50,000 50,000
---------- ----------
Total $2,400,000 $1,050,00
========== =========
Weighted average interest
rate 5.81% 5.51%
</TABLE>
Properties
The following table provides certain information with respect to our
office as of June 30,1997:
<TABLE>
<CAPTION>
Net Book Value of Real
Year Leased or Property and
Location Leased or Owned Acquired Equipment
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
515 Market Street Owned 1981 $183,000
Cheraw, SC 29520
</TABLE>
The net book value of our electronic data processing equipment,
furniture and equipment was approximately $8,000 at June 30,1997.
Service Corporation Subsidiary
We do not have any subsidiary corporations. However, OTS regulations
permit federal savings associations to invest in the capital stock, obligations
or other specified types of securities of subsidiaries (referred to as "service
corporations") and to make loans to such subsidiaries and joint ventures in
which such subsidiaries are participants in an aggregate amount not exceeding 2%
of the association's assets, plus an additional 1% of assets if the amount over
2% is used for specified community or inner-city development purposes. In
addition, federal regulations permit associations to make specified types of
loans to such subsidiaries (other than special purpose finance subsidiaries) in
which the association owns more than 10% of the stock, in an aggregate amount
not exceeding 50% of the association's regulatory capital if the association's
regulatory capital is in compliance with applicable regulations. A savings
association that acquires a non-savings association subsidiary, or that elects
to conduct a new activity within a subsidiary, must give the FDIC and the OTS at
least 30 days advance written notice. The FDIC may, after consultation with the
OTS, prohibit specified activities if it determines such activities pose a
serious threat to the SAIF. Moreover, a savings association must deduct from
capital, for purposes of meeting the core capital, tangible capital and
risk-based capital requirements, its entire investment ire and loans to a
subsidiary engaged in activities not permissible for a national bank (other than
exclusively agency activities for its customers or mortgage banking
subsidiaries).
63
<PAGE>
Employees
As of June 30, 1997, we employed five persons on a full-time basis and
five persons on a part-time basis. None of our employees is represented by a
collective bargaining group and we consider our employee relations to be good.
Legal Proceedings
Although we are involved, from time to time, in various legal
proceedings in the normal course of business, other than as set forth below,
there are no material legal proceedings to which we presently are a party or to
which any of our property is subject. We have been named as a defendant in
Richard Furr and Gail Furr vs. First Federal Savings and Loan Association of
Cheraw, a lawsuit that alleges that we improperly released the final installment
on the plaintiffs construction loan. The lawsuit was filed in Circuit Court of
Common Please in Chesterfield County in July 1996. The plaintiffs are requesting
damages of $1.0 million. While there can be no certainty as to the outcome of
this lawsuit, we believe we acted properly, that the lawsuit has no merit, and
we intend to vigorously defend against this action.
MANAGEMENT OF GREAT PEE DEE BANCORP, INC.
Directors and Executive Officers of the Holding Company
The Board of Directors of the Holding Company consists of the same
individuals who serve as directors of First Federal. The Holding Company's
Certificate of Incorporation and Bylaws require that directors be divided into
three classes with each class of directors to serve for a three-year period.
Approximately one-third of the directors will be elected each year. The Holding
Company's officers will be elected annually by its Board of Directors and will
serve at the Board's discretion. The Holding Company's President and Chief
Executive Officer is Herbert W. Watts, and the Secretary and Treasurer is
Johnnie L. Craft. For information regarding the directors and officers, See
"Management of First Federal Savings and Loan Association of Cheraw."
MANAGEMENT OF FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
Directors and Officers of First Federal
Our Board of Directors currently consists of six persons. Each director
holds office for a term of three years, and one-third of the Board is elected at
each annual meeting of our members.
Our Board of Directors met 24 times during the fiscal year ended June
30, 1997. No director attended fewer than 75% of the aggregate number of
meetings of the Board of Directors and the Board's committees in the past 12
months.
64
<PAGE>
Listed below are the current directors of First Federal:
<TABLE>
<CAPTION>
Name Ages at June 30, 1997 Position Director Since Current Term Expires
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Herbert W. Watts 53 President, Chief 1977 1999
Executive Officer,
Director
Robert M. Bennett 65 Chairman of the Board 1973 2000
William R. Butler 48 Director 1992 2000
James C. Crawford, III 40 Director 1992 1999
Henry P. Duvall, IV 66 Director 1964 1998
Cornelius B. Young 64 Director 1985 1999
</TABLE>
The business experience for the past five years for each of First
Federal's directors and officers is as follows:
Herbert W. Watts is the President and Chief Executive Officer of First
Federal. Mr. Watts has been employed by First Federal in various capacities
since 1973.
Robert M. Bennett is President of Bennett Motor Company, a General
Motors dealership located in Cheraw, South Carolina.
William R. Butler is the owner of P&H Pharmacy which is a retail
pharmacy located in Cheraw, South Carolina. Mr. Butler is a licensed pharmacist.
James C. Crawford III is the Chief Operating Officer of B.C. Moore &
Sons, Inc., a department store chain.
Henry P. Duvall IV is retired. Prior to his retirement, Mr. Duvall was
the President and Chief Executive Officer of Cheraw Hardware and Supply Company.
Cornelius B. Young is retired. Prior to his retirement Mr. Young was a
Senior Manager of Delta Mills, a division of Delta-Woodside, Inc., a textile
manufacturing company.
Johnnie L. Craft has been the Secretary and Treasurer of First Federal
since 1988.
Committees of the Boards of Directors of First Federal and the Holding Company
Our Board of Directors has various committees. The entire Board of
Directors establishes the compensation for our employees and officers. The
Budget and Finance Investments Committee reviews and approves our operating
budget for the following fiscal year and reviews and approves investments that
First Federal makes.
The Nominating Committee is composed of three directors who are not up
for reelection.
The Audit Committee reviews the audit and recommends to the entire
Board of Directors the appointment of the independent auditors for the upcoming
fiscal year.
The Budget and Finance Committee acts as First Federal's Compensation
Committee.
65
<PAGE>
EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF FIRST FEDERAL
Remuneration of Named Executive Officer
The following table sets forth information as to annual, long-term and
other compensation for services in all capacities to our President and Chief
Executive Officer for the fiscal year ended June 30, 1997. No executive officers
earned over $100,000 in salary and bonuses during fiscal 1997. Set forth below
is information regarding the compensation of Herbert W. Watts, President and
Chief Executive Officer of the Holding Company and First Federal.
<TABLE>
<CAPTION>
====================================================================================================================================
Summary Compensation Table
- ------------------------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
Annual Compensation/(1)/ Awards
- ----------------------------------------------------------------------------------------------------------------
Other Restricted
Annual Stock Options/ All Other
Name and Principal Fiscal Compensation Award SARs Compensation
Position Year/(1)/ Salary($) Bonus($) ($) ($) (#) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Herbert W. Watts,
President and Chief
Executive Officer 1997 $70,275 $8,981 $8,000/(2)/ -- -- --
====================================================================================================================================
</TABLE>
- --------------------
/(1)/ In accordance with the rules on executive officer and director
compensation disclosure adopted by the SEC, Summary Compensation
information is excluded for the fiscal years ended June 30, 1996 and
1995, as the Bank was not a public company during such periods.
/(2)/ Represents director fees.
Compensation of Directors
Directors of First Federal received a monthly retainer of $310, plus
$150 for each meeting of the Board of Directors during the year ended June 30,
1997. Directors will receive a monthly retainer of $700, plus $150 for each
meeting of the Board of Directors for the year ending June 30, 1998.
Directors of the Holding Company are not currently paid directors'
fees. The Holding Company may, if it believes it is necessary to attract
qualified directors or is otherwise beneficial to the Holding Company, adopt a
policy of paying directors' fees.
Benefits
Insurance Plans. Our officers and employees are covered by a
contributory medical insurance plan.
Thrift Plan. Our employees are eligible to join the Thrift Plan on the
first of the month following completion of 12 months of continuous employment
(during which 1,000 hours are completed). Employees are eligible to contribute,
on either a pre-tax or after-tax basis, up to 15% of their eligible salary, in
increments of 1%. The First Federal makes a matching contribution equal to 100%
of an employee's contributions, up to the first 6% of an employee's eligible
salary. In addition, First Federal annually contributes an amount equal to at
least 2% of the first $3,750 of every participating employees' eligible salary.
All amounts contributed under the Thrift Plan are at all times fully 100%
vested. Employees are entitled to borrow, within tax law limits, from amounts
allocated to
66
<PAGE>
their profit sharing account. In addition, the Thrift Plan permits employees to
withdraw their after-tax contributions, and in certain circumstances, First
Federal's matching contributions to their accounts.
Employment Agreement. First Federal intends to enter into an employment
agreement with Mr. Watts, which provides for a term of thirty-six months. On
each anniversary date, the agreement may be extended for an additional twelve
months, so that the remaining term shall be thirty-six months. If the agreement
is not renewed, the agreement with Mr. Watts will expire thirty-six months
following the anniversary date. The current Base Salary for Mr. Watts is
$________. The Base Salary may be increased but not decreased. In addition to
the Base Salary, the agreement provides for, among other things, participation
in stock benefit plans and other employee and fringe benefits applicable to
executive personnel. The agreement provides for termination by the Bank for
cause at any time. In the event the Bank terminates the executive's employment
for reasons other than for cause, or in the event of the executive's resignation
from the Bank upon (i) failure to re-elect the executive to his current offices,
(ii) a material change in the executive's functions, duties or responsibilities,
or relocation of his principal place of employment by more than 30 miles, (iii)
liquidation or dissolution of the Bank, or (iv) a breach of the agreement by the
Bank, the executive, or in the event of death, his beneficiary would be entitled
to severance pay in an amount equal to three times the annual rate of Base
Salary (which includes any salary deferred at the election of Mr. Watts) at the
time of termination. The Bank would also continue the executive's life, health,
dental and disability coverage for the remaining unexpired term of the
agreement. In the event the payments to the Executive would include an "excess
parachute payment" as defined by Code Section 280G (relating to payments made in
connection with a change in control), the payments would be reduced in order to
avoid having an excess parachute payment.
Mr. Watts employment may be terminated upon his attainment of normal
retirement age (i.e., age 65) or in accordance with any retirement policy
established with Mr. Watts consent with respect to him. Upon Mr. Watts
retirement, he will be entitled to all benefits available to him under any
retirement or other benefit plan maintained by First Federal. In the event of
Mr. Watts disability for a period of six months, First Federal may terminate the
Agreement provided that First Federal will be obligated to pay Mr. Watts his
Base Salary for the remaining term of the Agreement or one year, whichever is
longer, reduced by any benefits paid to Mr. Watts pursuant to any disability
insurance policy or similar arrangement maintained by the Bank. In the event of
Mr. Watts death, First Federal will pay his Base Salary to his named
beneficiaries for one year following his death, and will also continue medical,
dental, and other benefits to his family for one year.
The employment agreement provides that, following his termination of
employment, Mr. Watts will not compete with First Federal for a period of one
year, provided, however, that in the event of a termination in connection with a
change in control within the meaning of HOLA and the rules and regulations
thereunder, the non-compete provisions will not apply.
Non-Qualified Deferred Compensation Plan. We have entered into a
non-qualified deferred compensation plan ("Non-qualified Plan") for the benefit
of Mr. Herbert Watts. The Non-qualified Plan provides Mr. Watts with the
opportunity to annually defer a portion of his base salary and bonus into the
Non-qualified Plan. In addition, First Federal intends to make an additional
contribution to the Non-qualified Plan on Mr. Watts behalf. The Non-qualified
Plan will be amended to permit amounts that are credited to Mr. Watts' account
to be used to purchase stock in the offering and on the open market. In the
event of Mr. Watts termination of employment, amounts credited to his account
under the Non-qualified Plan will be paid to him in one hundred eighty (180)
equal monthly installments beginning not later than the first day of the third
month following his termination of employment. In the event of Mr. Watts death,
amounts under the Non-qualified Plan will be paid to his estate.
The Non-qualified Plan is an unfunded plan for tax purposes and for
purposes of the Employee Retirement Income Security Act ("ERISA"). All
obligations arising under the Non-qualified Plan are payable from the general
assets of First Federal, however, First Federal has set up a trust to ensure
that sufficient assets will be available to pay the benefits under the
Non-qualified Plan. As of June 30, 1997, the fair market value of Mr. Watts'
account balance under the Non-qualified Plan was approximately $285,000.
67
<PAGE>
Non-Qualified Supplemental Employee Stock Ownership Plan. First Federal
has adopted a non-qualified supplemental employee stock ownership plan
("Non-qualified ESOP") for the benefit of a select group of highly compensated
and management level employees. The Non-qualified ESOP is intended, initially,
to require a contribution for any highly compensated employee (as defined under
the Internal Revenue Code) whose allocations under the tax-qualified ESOP are
cut-back due to certain limitations under the Internal Revenue Code. For
example, a contribution would be required under the Non-qualified ESOP if the
allocation to highly compensated employees under the tax-qualified ESOP is
cut-back due to the restriction on highly compensated employees, in the
aggregate, receiving more than one-third of the shares allocated to employees
for the plan year. If no highly compensated employee is cut back in the
allocation to his or her account under the tax-qualified ESOP, no contribution
would be required for the year under the Non-qualified ESOP.
The Non-qualified ESOP is an unfunded plan for tax and ERISA purposes.
All obligations arising under the Non-qualified ESOP are payable from the
general assets of First Federal, however, First Federal has set up a trust to
ensure that sufficient assets will be available to pay the benefits under the
Non-qualified ESOP.
Employee Stock Ownership Plan and Trust
First Federal has established for our eligible employees an ESOP
effective in January 1997, subject to our conversion to stock form. Employees
with at least one year of employment with us and who have attained age 21 are
eligible to participate. As part of the Conversion, the ESOP intends to borrow
funds from the Holding Company and use those funds to purchase a number of
shares equal to 8.0% of the common stock to be issued in the Conversion.
Collateral for the loan will be the common stock purchased by the ESOP. The loan
will be repaid principally from our discretionary contributions to the ESOP over
a period of not less than twenty-eight years. It is anticipated that the
interest rate for the loan will be a floating rate equal to the prime rate
published in The Wall Street Journal from time to time. Shares purchased by the
ESOP will be held in a suspense account for allocation among participants as the
loan is repaid.
Contributions to the ESOP and shares released from the suspense
accounts in an amount proportional to the repayment of the ESOP loan will be
allocated among ESOP participants on the basis of compensation in the year of
allocation. Participants in the ESOP will receive credit for service prior to
the effective date of the ESOP. Benefits generally vest over a seven year
period. A participant will vest in 20% of his or her account balance after 2
years of credited service and will vest in an additional 20% fore each
subsequent year of credited service until a participant is 100% vested after
seven years. A participant who terminates employment for reasons other than
death, retirement, or disability prior to seven years of credited serve will
forfeit the nonvested portion of his or her benefits under the ESOP. Benefits
will be payable in the form of common stock and cash upon death, retirement,
early retirement, disability or separation from service. Our contributions to
the ESOP are discretionary, subject to the loan terms and tax law limits, and,
therefore, benefits payable under the ESOP cannot be estimated. In November
1993, the American Institute of Certified Public Accountants (the "AICPA")
issued Statement of Position ("SOP") 93-6, which requires us to record
compensation expense in an amount equal to the fair market value of the shares
released from the suspense account.
In connection with the establishment of the ESOP, First Federal will
establish a committee of non-employee directors to administer the ESOP. First
Federal will either appoint its non-employee directors or an independent
financial institution to serve as trustee of the ESOP. The ESOP committee may
instruct the trustee regarding investment of funds contributed to the ESOP. The
ESOP trustee, subject to its fiduciary duty, must vote all allocated shares held
in the ESOP in accordance with the instructions of participating employees.
Under the ESOP, nondirected shares, and shares held in the suspense account,
will be voted in a manner calculated to most accurately reflect the instructions
it has received from participants regarding the allocated stock so long as such
vote is in accordance with the provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
68
<PAGE>
Stock Option Plan
At a meeting of the Holding Company's shareholders to be held at least
six months after the completion of the Conversion, the Board of Directors
intends to submit for shareholder approval the Stock Option Plan for directors
and officers of First Federal and of the Holding Company. If approved by the
shareholders, common stock in an aggregate amount equal to 10% of the shares
issued in the Conversion would be reserved for issuance by the Holding Company
upon the exercise of the stock options granted under the Stock Option Plan. Ten
percent of the shares issued in the Conversion would amount to 140,250 shares,
165,000 shares, 189,750 shares or 218,213 shares at the minimum, mid-point,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively. Assuming the issuance of shares in the Conversion, an aggregate of
shares would be reserved for issuance under the Stock Option Plan. No options
would be granted under the Stock Option Plan until the date on which shareholder
approval is received.
It is anticipated that options would be granted for terms of 10 years
(in the case of incentive options) or 10 years and one day (in the case of
non-qualified options), and at an option price per share equal to the fair
market value of the shares on the date of grant of the stock options. If the
Stock Option Plan is adopted within one year following the Conversion, options
will become exercisable at a rate of 20% at the end of each twelve (12) months
of service with us after the date of grant, subject to early vesting in the
event of death or disability. Options granted under the Stock Option Plan are
adjusted for capital changes such as stock splits and stock dividends.
Notwithstanding the foregoing, awards will be 100% vested upon termination of
employment due to death or disability, and if the Stock Option Plan is adopted
more than 12 months after the Conversion, awards would be 100% vested upon
normal retirement or a change in control of First Federal or the Holding
Company. Unless the Holding Company decides to call an earlier special meeting
of shareholders, the date of grant of these options is expected to be the date
of the Holding Company's annual meeting of shareholders to be held at least six
months after the Conversion. Under OTS rules, if the Stock Option Plan is
adopted within the first 12 months after the Conversion, no individual officer
can receive more than 25% of the awards under the plan, no outside director can
receive more than 5% of the awards under the plan, and all outside directors as
a group can receive no more than 30% of the awards under the plan in the
aggregate.
The Stock Option Plan would be administered by a Committee of
non-employee members of the Holding Company's Board of Directors. Options
granted under the Stock Option Plan to employees could be "incentive" stock
options designed to result in a beneficial tax treatment to the employee but no
tax deduction to the Holding Company. Non-qualified stock options could also be
granted under the Stock Option Plan, and will be granted to the non-employee
directors who receive grants of stock options. In the event an option recipient
terminated his or her employment or service as an employee or director, the
options would terminate during certain specified periods.
Recognition and Retention Plan
At a meeting of the Holding Company's shareholders to be held at least
six months after the completion of the Conversion, the Board of Directors also
intends to submit a Recognition and Retention Plan (the "RRP") for shareholder
approval. The RRP will provide our directors and officers an ownership interest
in the Holding Company in a manner designed to encourage them to continue their
service with us. First Federal will contribute funds to the RRP from time to
time to enable it to acquire an aggregate amount of common stock equal to up to
4% of the shares of common stock issued in the Conversion, either directly from
the Holding Company or in open market purchases. Four percent of the shares
issued in the Conversion would amount to 56,100 shares, 66,000 shares, 75,900 or
87,285 shares at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, respectively. In the event that additional authorized
but unissued shares would be acquired by the RRP after the Conversion, the
interests of existing shareholders would be diluted. Our executive officers and
directors will be awarded common stock under the RRP without having to pay cash
for the shares. No awards under the RRP would be made until the date the RRP is
approved by the Holding Company's shareholders.
69
<PAGE>
Awards would be nontransferable and nonassignable, and during the
lifetime of the recipient could only be earned by him or her. If the RRP is
adopted within one year following the Conversion, the shares which are subject
to an award would vest and be earned by the recipient at a rate of 20% of the
shares awarded at the end of each full twelve (12) months of service with us
after the date of grant of the award, provided, however, that awards to outside
directors between the ages of 62 and 69 who are receiving social security
benefits shall not vest until such director attains age 70. Awards are adjusted
for capital changes such as stock dividends and stock splits. Notwithstanding
the foregoing, awards would be 100% vested upon termination of employment or
service due to death or disability, and if the RRP is adopted more than 12
months after the Conversion, awards would be 100% vested upon normal retirement
or a change in control of First Federal or the Holding Company. If employment or
service were to terminate for other reasons, the award recipient would forfeit
any nonvested award. If employment or service is terminated for cause (as would
be defined in the RRP), shares not already delivered under the RRP would be
forfeited. Under OTS rules, if the RRP is adopted within the first 12 months
after the Conversion, no individual officer can receive more than 25% of the
awards under the plan, no outside director can receive more than 5% of the
awards under the plan, and all outside directors as a group can receive no more
than 30% of the awards under the plan in the aggregate.
When shares become vested under the RRP, the participant will recognize
income equal to the fair market value of the common stock earned, determined as
of the date of vesting, unless the recipient makes an election under (S)83(b)
of the Code to be taxed earlier. The amount of income recognized by the
participant would be a deductible expense for tax purposes for the Holding
Company. If the RRP is adopted within one year following the Conversion,
dividends and other earnings will accrue and be payable to the award recipient
when the shares vest. Shares not yet vested under the RRP will be voted by the
Trustee of the RRP, taking into account the best interests of the recipients of
the RRP awards.
Transactions With Certain Related Persons
We have followed a policy of offering to our directors, officers, and
employees real estate mortgage loans secured by their principal residence as
well as other loans. All of our loans to our directors, officers and employees
are made on substantially the same terms, including interest rates and
collateral as those prevailing at the time for comparable transactions, and do
not involve more than minimal risk of collectibility. Loans to directors,
executive officers and their associates totaled $50,000 at June 30, 1997.
Current law authorizes us to make loans or extensions of credit to our
executive officers, directors, and principal shareholders on the same terms that
are available with respect to loans made to all of our employees. At present,
our loans to executive officers, directors, principal shareholders and employees
are made on the same terms generally available to the public. We may in the
future, however, adopt a program under which we may waive loan application fees
and closing costs with respect to loans made to such persons.
REGULATION
General
As a federally chartered, SAIF-insured savings association, we are
subject to extensive regulation by the OTS and the FDIC. For example, we must
obtain OTS approval before we may engage in certain activities and must file
reports with the OTS regarding our activities and financial condition. The OTS
periodically examines our books and records and, in conjunction with the FDIC in
certain situations, has examination and enforcement powers. This supervision and
regulation are intended primarily for the protection of depositors and federal
deposit insurance funds. Our semi- annual assessment owed to the OTS, which is
based upon a specified percentage of assets, is approximately $10,000.
We are also subject to federal and state regulation as to such matters
as loans to officers, directors, or principal shareholders, required reserves,
limitations as to the nature and amount of our loans and investments,
70
<PAGE>
regulatory approval of any merger or consolidation, issuance or retirements of
our securities, and limitations upon other aspects of banking operations. In
addition, our activities and operations are subject to a number of additional
detailed, complex and sometimes overlapping federal and state laws and
regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and antitrust
laws.
The United States Congress is considering legislation that would
require all federal savings associations, such as First Federal, to either
convert to a national bank or a state-chartered bank by a specified date to be
determined. In addition, under the legislation, the Holding Company likely would
not be regulated as a savings and loan holding company but rather as a bank
holding company. This proposed legislation would abolish the OTS and transfer
its functions among the other federal banking regulators. Certain aspects of the
legislation remain to be resolved and, therefore, no assurance can be given as
to whether or in what form the legislation will be enacted or its effect on the
Holding Company and First Federal.
Savings and Loan Holding Company Regulation
As the holding company for First Federal, the Holding Company will be
regulated as a "non-diversified savings and loan holding company" within the
meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA"), and subject
to regulatory oversight of the Director of the OTS. As such, the Holding Company
is registered with the OTS and thereby subject to OTS regulations, examinations,
supervision and reporting requirements. As a subsidiary of a savings and loan
holding company, we are subject to certain restrictions in our dealings with the
Holding Company and with other companies affiliated with the Holding Company.
In general, the HOLA prohibits a savings and loan holding company,
without prior approval of the Director of the OTS, from acquiring control of
another savings association or savings and loan holding company or retaining
more than 5% of the voting shares of a savings association or of another holding
company which is not a subsidiary. The HOLA also restricts the ability of a
director or officer the Holding Company, or any person who owns more than 25% of
the Holding Company's stock, from acquiring control of another savings
association or savings and loan holding company without obtaining the prior
approval of the Director of the OTS.
The Holding Company's Board of Directors presently intends to operate
the Holding Company as a unitary savings and loan holding company. There are
generally no restrictions on the permissible business activities of a unitary
savings and loan holding company.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply.) See "--Qualified
Thrift Lender." At June 30, 1997, our asset composition was in excess of that
required to qualify us as a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with First
Federal, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than First Federal or other subsidiary savings
associations) would thereafter be subject to further restrictions. The HOLA
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings association shall commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity other than (i)
furnishing or performing management services for a subsidiary savings
association, (ii) conducting an
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insurance agency or escrow business, (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings association, (iv) holding
or managing properties used or occupied by a subsidiary savings association, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by the FSLIC 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 (the "FRB") as permissible for bank holding
companies, unless the Director of the OTS by regulation prohibits or limits such
activities for savings and loan holding companies. Those activities described in
(vii) above must also be approved by the Director of the OTS before a multiple
holding company may engage in such activities.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5,1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without
giving notice shall be invalid.
Federal Home Loan Bank System
We are a member of the FHLB of Atlanta, which is one of twelve regional
FHLBs. Each FHLB serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from funds deposited by savings
associations and proceeds derived from the sale of consolidated obligations of
the FHLB system. It makes loans to members ("FHLB advances") in accordance with
policies and procedures established by the Board of Directors of the FHLB. All
FHLB advances must be fully secured by sufficient collateral as determined by
the FHLB. The Federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System, including the FHLB of Atlanta.
As a member, we are required to purchase and maintain stock in the FHLB
of Atlanta in an amount equal to at least 1% of our aggregate unpaid residential
mortgage loans, home purchase contracts, or similar obligations at the beginning
of each year. At June 30, 1997, our investment in stock of the FHLB of Atlanta
was $485,000. The FHLB imposes various limitations on advances such as limiting
the amount of certain types of real estate-related collateral to 30% of a
member's capital and limiting total advances to a member. Interest rates charged
for advances vary depending upon maturity, the cost of funds to the FHLB of
South Carolina and the purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended June 30, 1997, dividends paid by the
FHLB of Atlanta to us totaled approximately $35,000, for an annual rate of
7.25%.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that
insures savings institution deposits up to applicable limits, of banks and
thrifts and safeguards the safety and soundness of the banking and thrift
industries. The FDIC administers two separate insurance funds, the BIF for
commercial banks and state savings banks and the
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SAIF for savings associations such as First Federal and banks that have acquired
deposits from savings associations. The FDIC is required to maintain designated
levels of reserves in each fund. As of September 30, 1996, the reserves of the
SAIF were below the level required by law, primarily because a significant
portion of the assessments paid into the SAIF have been used to pay the cost of
prior thrift failures, while the reserves of the BIF met the level required by
law in May, 1995. However, on September 30, 1996, provisions designed to
recapitalize the SAIF and eliminate the premium disparity between the BIF and
SAIF were signed into law. See "-- Assessments" below.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
On September 30, 1996, President Clinton signed into law legislation
which included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
we were charged a one-time special assessment equal to $.657 per $100 in
assessable deposits at March 31, 1995. We recognized this one-time assessment as
a non-recurring operating expense of $312,000 ($197,000 after tax) during the
three-month period ending September 30, 1996. The assessment was fully
deductible for both federal and state income tax purposes. Beginning January
1, 1997, our annual deposit insurance premium was reduced from .23% to .0644% of
total assessable deposits. BIF institutions pay lower assessments than
comparable SAIF institutions because BIF institutions pay only 20% of the rate
paid by SAIF institutions on their deposits with respect to obligations issued
by the federally-chartered corporation which provided some of the financing to
resolve the thrift crisis in the 1980's ("FICO"). The 1996 law also provides for
the merger of the SAIF and the BIF by 1999, but not until such time as bank and
thrift charters are combined. Until the charters are combined, savings
associations with SAIF deposits may not transfer deposits into the BIF system
without paying various exit and entrance fees, and SAIF institutions will
continue to pay higher FICO assessments. Such exit and entrance fees need not be
paid if a SAIF institution converts to a bank charter or merges with a bank, as
long as the resulting bank continues to pay applicable insurance assessments to
the SAIF, and as long as certain other conditions are met.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
Under the tangible capital requirement, a savings association must maintain
tangible capital (core capital less all intangible assets except purchased
mortgage servicing rights which may be included after making the above-noted
adjustment in an amount up to 100% of tangible capital) of at least 1.5% of
total assets. Under the risk-based capital requirements, a minimum amount of
capital must be maintained by a savings association to account for the relative
risks inherent in the type and amount of assets held by the savings association.
The risk-based capital requirement requires a savings association to maintain
capital (defined generally for these purposes as core capital plus general
valuation allowances and permanent or maturing capital instruments such as
preferred stock and subordinated debt less assets required to be deducted) equal
to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four
categories (0-100%). A credit risk-free asset, such as cash, requires no
risk-based capital, while an asset with a significant credit risk, such as a
non-accrual loan, requires a risk factor of 100%. Moreover, a savings
association must deduct from capital, for purposes of meeting the core capital,
tangible capital and risk-based capital requirements, its entire investment in
and loans to a subsidiary engaged in activities not permissible for a national
bank
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(other than exclusively agency activities for its customers or mortgage banking
subsidiaries). At June 30, 1997, we were in compliance with all capital
requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation, we
would be exempt from its provisions because we have less than $300 million in
assets and our risk-based capital ratio exceeds 12%. We nevertheless measure our
interest rate risk in conformity with the OTS regulation. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
First Federal Savings and Loan Association of Cheraw - Asset Liability
Management."
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FDICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At June 30,
1997, we were categorized as "well capitalized," meaning that our total
risk-based capital ratio exceeded 10%, our Tier I risk-based capital ratio
exceeded 6%, our leverage ratio exceeded 5%, and we were not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital
to take corrective actions. For example, a savings association which is
categorized as "undercapitalized" would be subject to growth limitations and
would be required to submit a capital restoration plan, and a holding company
that controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Dividend Limitations
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an association to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized associations. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An association that has total capital at least equal to its
minimum capital requirements, but less than its capital requirements, would be a
Tier 2 institution ("Tier 2 Institution"). An institution having total capital
that is less than its minimum capital requirements would be a Tier 3 institution
("Tier 3 Institution"). However, an institution which otherwise qualifies as a
Tier 1 Institution may be designated by the OTS as a Tier 2 or Tier 3
Institution if the OTS determines that the institution is "in need of more than
normal supervision." We are currently a Tier 1 Institution.
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A Tier 1 Institution may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the greater
of (a) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" at the beginning of
the calendar year (the smallest excess over its capital requirements), or (b)
75% of its net income over the most recent four-quarter period. Any additional
amount of capital distributions would require prior regulatory approval.
Accordingly, at June 30, 1997, we had available approximately $5.0 million for
distribution, without consideration of any capital infusion from the Conversion.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a prior notice with the OTS
concerning such dividend declaration.
Pursuant to the Plan of Conversion, we will establish a liquidation
account for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders. See "The Conversion -- Principal Effects of Conversion." We
will not be permitted to pay dividends to the Holding Company if our net worth
would be reduced below the amount required for the liquidation account. We must
also must file a notice with the OTS 30 days before declaring a dividend to the
Holding Company.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FDICIA place
limitations on the ability of insured depository institutions to accept, renew
or roll over deposits by offering rates of interest which are significantly
higher than the prevailing rates of interest on deposits offered by other
insured depository institutions having the same type of charter in the
institution's normal market area. Under these regulations, "well-capitalized"
depository institutions may accept, renew or roll such deposits over without
restriction, "adequately capitalized" depository institutions may accept, renew
or roll such deposits over with a waiver from the FDIC (subject to certain
restrictions on payments of rates) and "undercapitalized" depository
institutions may not accept, renew or roll such deposits over. The regulations
contemplate that the definitions of "well capitalized," "adequately capitalized"
and "undercapitalized" will be the same as the definition adopted by the
agencies to implement the corrective action provisions of FDICIA. We do not
believe that these regulations will have a materially adverse effect on our
current operations.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Loans to One Borrower
Under OTS regulations, we may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of our unimpaired capital
and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings association may lend up to
30 percent of unimpaired capital and surplus to one borrower for purposes of
developing domestic residential housing, provided that the association meets its
regulatory capital requirements and the OTS authorizes the association to use
this expanded lending authority. At June 30, 1997, we did not have any loans or
extensions of credit to a single
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or related group of borrowers in excess of our lending limits. We do not believe
that the loans-to-one-borrower limits will have a significant impact on our
business operations or earnings following the Conversion.
Qualified Thrift Lender
Savings associations must meet a QTL test. If we maintain an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualify as a QTL, we will continue to
enjoy full borrowing privileges from the FHLB of Atlanta. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every twelve months. As of June 30, 1997, we were in compliance with our QTL
requirement, with approximately 89.78% of our assets invested in QTIs.
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to the SAIF) or be subject to the following penalties: (i) it
may not enter into any new activity except for those permissible for a national
bank and for a savings association; (ii) its branching activities shall be
limited to those of a national bank; (iii) it shall not be eligible for any new
FHLB advances; and (iv) it shall be bound by regulations applicable to national
banks respecting payment of dividends. Three years after failing the QTL test
the association must (i) dispose of any investment or activity not permissible
for a national bank and a savings association and (ii) repay all outstanding
FHLB advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
Acquisitions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located.
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Finally, The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de nova expansion.
Transactions with Affiliates
We are subject to Sections 22(h), 23A and 23B of the Federal Reserve
Act, which restrict financial transactions between banks and affiliated
companies. The statute limits credit transactions between a bank or savings
association and its executive officers and its affiliates, prescribes terms and
conditions for bank affiliate transactions deemed to be consistent with safe and
sound banking practices, and restricts the types of collateral security
permitted in connection with a bank's extension of credit to an affiliate.
Federal Securities Law
The shares of common stock of the Holding Company will be registered
with the SEC under the Securities Exchange Act of 1934, as amended (the "1934
Act") as soon as practicable after the Conversion. The Holding Company will be
subject to the information, proxy solicitation, insider trading restrictions and
other requirements the 1934 Act and the rules of the SEC thereunder. After three
years following our conversion to stock form, if the Holding Company has fewer
than 300 shareholders, it may deregister its shares under the 1934 Act and cease
to be subject to the foregoing requirements.
Shares of common stock held by persons who are affiliates of the
Holding Company may not be resold without registration unless sold in accordance
with the resale restrictions of Rule 144 under the 1933 Act. If the Holding
Company meets the current public information requirements under Rule 144, 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.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating--outstanding, satisfactory, needs to
improve, and substantial noncompliance--and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first time home
buyers. The OTS has designated our record of meeting community credit needs as
"outstanding."
TAXATION
Federal Taxation
Historically, savings associations, such as First Federal, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, no savings association may use the percentage of taxable
income method of computing its allowable bad debt deduction for tax purposes.
Instead, all savings associations are required to compute their allowable
deduction using the experience method. As a result of the repeal of the
percentage of taxable income method, reserves taken after 1987 using the
percentage of taxable income method generally must be included in future taxable
income over a six-year period, although a two-year delay may be permitted for
associations meeting a residential mortgage
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loan origination test. First Federal will recapture approximately $20,000 over a
six-year period beginning with the fiscal 1999 income tax returns. In addition,
the pre-1988 reserve, for which no deferred taxes have been recorded, need not
be recaptured into income unless (i) the savings association no longer qualifies
as a bank under the Code, or (ii) the savings association pays out excess
dividends contributions.
Depending on the composition of its items of income and expense, a
savings association may be subject to the alternative minimum tax. A savings
association must pay an alternative minimum tax on the amount (if any) by which
20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption
varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable
income increased or decreased by certain tax preferences and adjustments,
including depreciation deductions in excess of that allowable for alternative
minimum tax purposes, tax-exempt interest on most private activity bonds issued
after August 7, 1986 (reduced by any related interest expense disallowed for
regular tax purposes), the amount of the bad debt reserve deduction claimed in
excess of the deduction based on the experience method and 75% of the excess of
adjusted current earnings over AMTI (before this adjustment and before any
alternative tax net operating loss). AMTI may be reduced only up to 90% by net
operating loss carryovers, but alternative minimum tax paid can be credited
against regular tax due in later years.
For federal income tax purposes, we have been reporting our income and
expenses on the accrual method of accounting. Our federal income tax returns
have not been audited during the past five years.
State Taxation
Our state income tax returns have not been audited during the past five
years.
For further information relating to the tax consequences of the
Conversion, see "The Conversion--Principal Effects of Conversion -- Tax
Effects."
RESTRICTIONS ACQUISITION OF THE HOLDING COMPANY
General
Although the Boards of Directors of First Federal and the Holding
Company are not aware of any effort that might be made to obtain control of the
Holding Company after the Conversion, the Boards of Directors believe that it is
appropriate to include certain provisions in the Holding Company's Certificate
of Incorporation (the "Certificate") to protect the interests of the Holding
Company and its shareholders from unsolicited changes in the control of the
Holding Company in circumstances that the Board of Directors of the Holding
Company concludes will not be in the best interests of First Federal, the
Holding Company or the Holding Company's shareholders.
Although the Holding Company's Board of Directors believes that the
restrictions on acquisition described below are beneficial to shareholders, the
provisions may have the effect of rendering the Holding Company less attractive
to potential acquirers, thereby discouraging future takeover attempts which
would not be approved by the Board of Directors but which certain shareholders
might deem to be in their best interest or pursuant to which shareholders might
receive a substantial premium for their shares over then current market prices.
These provisions will also render the removal of the incumbent Board of
Directors and of management more difficult. The Board of Directors has, however,
concluded that the potential benefits of these restrictive provisions outweigh
the possible disadvantages.
The following general discussion contains a summary of the material
provisions of the Holding Company's Certificate of Incorporation By-Laws (the
"By-Laws"), and certain other regulatory provisions, that may be deemed to have
an effect of delaying, deferring or preventing a change in the control of the
Holding Company. The following description of certain of these provisions is
general and not necessarily complete, and with respect to provisions contained
in the Certificate and Bylaws, reference should be made in each case to the
document in question, each of
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which is part of our application for approval of the Conversion or the Holding
Company's Registration Statement filed with the SEC. See "Additional
Information."
Provisions of the Company's Certificate of Incorporation and Bylaws
Directors. Certain provisions of the Holding Company's Certificate of
Incorporation and Bylaws will impede changes in majority control of the Board of
Directors. The Holding Company's Certificate of Incorporation provides that the
Board of Directors of the Holding Company will be divided into three classes,
with directors in each class elected for three-year staggered terms except for
the initial directors. Thus, it would take two annual elections to replace a
majority of the Holding Company's Board. The Holding Company's Certificate of
Incorporation provides that the size of the Board of Directors may be increased
or decreased only by a majority vote of the Board. The Certificate of
Incorporation also provides that any vacancy occurring in the Board of
Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. Finally, the Certificate of Incorporation
and Bylaws impose certain notice and information requirements in connection with
the nomination by stockholders of candidates for election to the Board of
Directors or the proposal by stockholders of business to be acted upon at an
annual meeting of stockholders.
The Certificate of Incorporation provides that a director may only be
removed for cause by the affirmative vote of 80% of the shares eligible to vote.
Removal for "cause" is limited to the grounds for termination in the federal
regulations that applies to employment contracts of federally insured savings
institutions.
Restrictions on Call of Special Meetings. The Certificate of
Incorporation provides that a special meeting of stockholders may be called by
the Chairman of the Board of the Holding Company or pursuant to a resolution
adopted by a majority of the Board of Directors. Stockholders are not authorized
to call a special meeting.
Absence of Cumulative Voting. The Certificate of Incorporation provides
that there shall be no cumulative voting rights in the election of directors.
Authorization of Preferred Stock. The Certificate of Incorporation
authorizes 400,000 shares of serial preferred stock, without par value. The
Holding Company is authorized to issue preferred stock from time to time in one
or more series subject to applicable provisions of law; and the Board of
Directors is authorized to fix the designations, and relative preferences,
limitations, voting rights, if any, including without limitation, conversion
rights of such shares (which could be multiple or as a separate class). In the
event of a proposed merger, tender offer or other attempt to gain control of the
Holding Company that the Board of Directors does not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
preferred stock with rights and preferences that would impede the completion of
such a transaction. An effect of the possible issuance of preferred stock,
therefore, may be to deter a future takeover attempt. The Board of Directors has
no present plans or understandings for the issuance of any preferred stock but
it may issue any preferred stock on terms which the Board deems to be in the
best interests of the Holding Company and its stockholders.
Limitation on Voting Rights. The Certificate of Incorporation provides
that (i) no person shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of equity security of the
Holding Company (provided that such limitation shall not apply to the
acquisition of equity securities by any one or more tax-qualified employee stock
benefit plans maintained by the Holding Company); and that (ii) shares
beneficially owned in violation of the stock ownership restriction described
above shall not be entitled to vote and shall not be voted by any person or
counted as voting stock in connection with any matter submitted to a vote of
stockholders. For these purposes, a person (including management) who has
obtained the right to vote shares of the common stock pursuant to revocable
proxies shall not be deemed to be the "beneficial owner" of those shares if that
person is not otherwise deemed to be a beneficial owner of those shares.
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<PAGE>
The Certificate of Incorporation further provides that the Board of
Directors of the Holding Company, when determining to take or refrain from
taking corporate action on any matter, including making or declining to make any
recommendation to the Holding Company's stockholders, may, in connection with
the exercise of its judgment in determining what is in the best interest of the
Holding Company, First Federal, and the stockholders of the Holding Company,
give due consideration to all relevant factors, including, without limitation,
the social and economic effects of acceptance of such offer on the Holding
Company's customers and First Federal's present and future account holders,
borrowers and employees; the effect on the communities in which the Holding
Company and First Federal operate or are located; and the effect on the ability
of the Holding Company to fulfill the objectives of a financial institution
holding company and of First Federal or future subsidiaries to fulfill the
objectives of a financial institution under applicable statutes and regulations.
The Certificate of Incorporation of the Holding Company also authorizes the
Board of Directors to take certain actions to encourage a person to negotiate
for a change of control of the Holding Company or to oppose such a transaction
deemed undesirable by the Board of Directors including the adoption of so-called
shareholder rights plans. By having these standards and provisions in the
Certificate of Incorporation of the Holding Company, the Board of Directors may
be in a stronger position to oppose such a transaction if the Board concludes
that the transaction would not be in the best interest of the Holding Company,
even if the price offered is significantly greater than the then market price of
any equity security of the Holding Company.
Procedures for Certain Business Combinations. The Certificate of
Incorporation requires that certain business combinations between the Holding
Company (or any majority-owned subsidiary thereof) and a 10% or greater
stockholder either (i) be approved by at least 80% of the total number of
outstanding voting shares of the Holding Company or (ii) be approved by a
majority of certain directors unaffiliated with such 10% or greater stockholder
or (iii) involve consideration per share generally equal to the higher of (A)
the highest amount paid by such 10% stockholder or its affiliates in acquiring
any shares of the common stock or (B) the "Fair Market Value" (generally, the
highest closing bid paid on the common stock during the 30 days preceding the
date of the announcement of the proposed business combination or on the date the
10% or greater stockholder became such, whichever is higher).
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Certificate of Incorporation must be approved by the Holding Company's Board of
Directors and also by a majority of the outstanding shares of the Holding
Company's voting stock; provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for certain provisions (i.e.,
provisions relating to number, classification, election and removal of
directors, amendment of bylaws, call of special stockholder meetings, criteria
for evaluating certain offers, offers to acquire and acquisitions of control,
director liability, certain business combinations, power of indemnification, and
amendments to provisions relating to the foregoing in the Certificate of
Incorporation).
The bylaws may be amended by the affirmative vote of the total number
of directors of the Holding Company or the affirmative vote of at least 80% of
the total votes eligible to be voted at a duly constituted meeting of
stockholders.
Purpose and Takeover Defensive Effects of the Holding Company's
Certificate of Incorporation and Bylaws. The Board of Directors believes that
the provisions described above are prudent and will reduce the Holding Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by its Board of Directors. These provisions
will also assist in the orderly deployment of the Stock Conversion proceeds into
productive assets during the initial period after the Stock Conversion. The
Board of Directors believes these provisions are in our best interests and the
best interests of our 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 interests 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
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<PAGE>
transaction at prices reflective of the true value of the Holding Company and
which is in the best interests of all stockholders.
Attempts to take over financial institutions and their holding
companies have become increasingly common. Takeover attempts which have not been
negotiated with and approved by the Board of Directors present to stockholders
the risk of a takeover on terms which may be less favorable than might otherwise
be available. A transaction which 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 for the Holding Company and 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
then-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
which is under different management and whose objectives may not be similar to
those of the remaining stockholders.
Potential Anti-Takeover Effects. Despite our belief 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 which 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.
Our Boards of Directors, however, have concluded that the potential benefits
outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Stock Conversion, the Holding Company may adopt
additional provisions to its Certificate of Incorporation regarding the
acquisition of its equity securities that would be permitted to a Delaware
corporation. We do not presently intend to propose the adoption of further
restrictions on the acquisition of the Holding Company's equity securities.
OTS Regulations. OTS regulations prohibit any person, prior to the
completion of a conversion, from transferring, or entering into any agreement or
understanding to transfer, the legal or beneficial ownership of the subscription
rights issued under a plan of conversion or the stock to be issued upon their
exercise. These regulations also prohibit any person prior to the completion of
a conversion from offering, or making an announcement of an offer or intent to
make an offer, to purchase such subscription rights or stock. For three years
following conversion, this regulation prohibits any person, without the prior
approval of the OTS, from acquiring or making an offer (if opposed by the
institution) to acquire more than 10% of the stock of any converted savings
institution if such person is, or after consummation of such acquisition would
be, the beneficial owner of more than 10% of such stock. In the event that any
person, directly or indirectly, violates this regulation, the securities
beneficially owned by such person in excess of 10% shall not be counted as
shares entitled to vote and shall not be voted by any person or counted as
voting shares in connection with any matter submitted to a vote of stockholders.
Federal law provides that no company "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. "Acting in
concert" is defined very broadly. In addition, federal regulations require that,
prior to obtaining control of a savings association, a person, other than a
company, must give 60 days' prior notice to the OTS and have received no OTS
objection to such acquisition of control. Any company that acquires such control
becomes a "savings and loan holding company" subject to registration,
examination and regulation as a savings and loan holding company. Under federal
law (as well as the
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<PAGE>
regulations referred to below) the term "savings association" includes state and
federally chartered SAIF-insured institutions and federally chartered savings
banks whose accounts are insured by the FDIC's BIF and holding companies
thereof.
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 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.
DESCRIPTION OF CAPITAL STOCK
Holding Company Capital Stock
The 3,600,000 shares of capital stock authorized by the Holding
Company's Certificate of Incorporation are divided into two classes, consisting
of 3,200,000 shares of common stock ($.01 par value) and 400,000 shares of
serial preferred stock ($.01 par value). The Holding Company currently expects
to issue between 1,402,500 and 1,897,500 shares, with an adjusted maximum of
2,182,125 shares, of common stock in the Stock Conversion. The aggregate stated
value of the issued shares will constitute the capital account of the Holding
Company on a consolidated basis. The balance of the Purchase Price of common
stock, less expenses of Stock Conversion, will be reflected as paid-in capital
on a consolidated basis. See "Capitalization." 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, validly issued and nonassessable.
Each share of the common stock will have the same relative rights and
will be identical in all respects with each other share of the common stock. The
common stock of the Holding Company will represent non-withdrawable capital,
will not be of an insurable type and will not be insured by the FDIC.
Under Delaware law, the holders of the common stock will possess
exclusive voting power in the Holding Company. Each stockholder will be entitled
to one vote for each share held on all matters voted upon by stockholders,
subject to the limitation discussed under "Restrictions on Acquisitions of Stock
and Related Takeover Defensive Provisions-- Provisions of the Holding Company's
Certificate of Incorporation and Bylaws--Limitation on Voting Rights." If the
Holding Company issues preferred stock subsequent to the Conversion, holders of
the preferred stock may also possess voting powers.
Liquidation or Dissolution. In the unlikely event of the liquidation or
dissolution of the Holding Company, the holders of the common stock will be
entitled to receive -- after payment or provision for payment of all debts and
liabilities of the Holding Company (including all deposits in First Federal and
accrued interest thereon) and after distribution of the liquidation account
established upon Stock Conversion for the benefit of Eligible Account Holders
and Supplemental Eligible Account Holders who continue their deposit accounts at
First Federal -- all assets of the Holding Company available for distribution,
in cash or in kind. See "The Conversion--Effects of Conversion to Stock
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<PAGE>
Form on Depositors and Borrowers of First Federal." If preferred stock is issued
subsequent to the Conversion, the holders thereof may have a priority over the
holders of common stock in the event of liquidation or dissolution.
No Preemptive Rights. Holders of the common stock will not be entitled
to preemptive rights with respect to any shares which may be issued. The common
stock will not be subject to call for redemption, and, upon receipt by the
Holding Company of the full purchase price therefor, each share of the common
stock will be fully paid and nonassessable.
Preferred Stock. After Stock Conversion, the Board of Directors of the
Holding Company will be authorized to issue preferred stock in series and to fix
and state the voting powers, designations, preferences and relative,
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions thereof. Preferred
stock may rank prior to the common stock as to dividend rights, liquidation
preferences, or both, and may have full or limited voting rights. The holders of
preferred stock will be entitled to vote as a separate class or series under
certain circumstances, regardless of any other voting rights which such holders
may have.
Except as discussed herein, the Holding Company has no present plans
for the issuance of the additional authorized shares of common stock or for the
issuance of any shares of preferred stock. In the future, the authorized but
unissued and unreserved shares of common stock will be available for general
corporate purposes including but not limited to possible issuance as stock
dividends or stock splits, in future mergers or acquisitions, under a cash
dividend reinvestment and stock purchase plan, in a future underwritten or other
public offering or under an employee stock ownership plan, stock option or
restricted stock plan. The authorized but unissued shares of preferred stock
will similarly be available for issuance in future mergers or acquisitions, in a
future underwritten public offering or private placement or for other general
corporate purposes. Except as described above or as otherwise required to
approve the transaction in which the additional authorized shares of common
stock or authorized shares of preferred stock would be issued, no stockholder
approval will be required for the issuance of these shares. Accordingly, the
Board of Directors of the Holding Company, without stockholder approval, can
issue preferred stock with voting and conversion rights which could adversely
affect the voting power of the holders of common stock.
Restrictions on Acquisitions. See "Restrictions on Acquisitions of
Stock and Related Takeover Defensive Provisions" for a description of certain
provisions of the Holding Company's Certificate of Incorporation and bylaws
which may affect the ability of the Holding Company's stockholders to
participate in certain transactions relating to acquisitions of control of the
Holding Company.
Dividends. Upon consummation of the formation of the Holding Company,
the Holding Company's only asset will be First Federal's common stock. Although
it is anticipated that the Holding Company will retain up to 50% of the net
proceeds in the Conversion, dividends from First Federal will be an important
source of income for the Holding Company. Should First Federal elect to retain
its income, the ability of the Holding Company to pay dividends to its own
shareholders may be adversely affected. Furthermore, if at any time in the
future the Holding Company owns less than __% of the outstanding stock of First
Federal, certain tax benefits under the Code as to inter-company distributions
will not be fully available to the Holding Company and it will be required to
pay federal income tax on a portion of the dividends received from First
Federal, thereby reducing the amount of income available for distribution to the
shareholders of the Holding Company.
TRANSFER AGENT
________________________ will act as transfer agent and registrar for
the common stock. __________________'s phone number is (_____) ________________
or (800) __________________.
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<PAGE>
REGISTRATION REQUIREMENTS
The Holding Company's common stock will be registered pursuant to
Section 12(g) of the 1934 Act and may not be deregistered for a period of at
least three years following the Conversion. As a result of the registration
under the 1934 Act, certain holders of common stock will be subject to certain
reporting and other requirements imposed by the 1934 Act. For example,
beneficial owners of more than 5% of the outstanding common stock will be
required to file reports pursuant to Section 13(d) or Section 13(g) of the 1934
Act, and officers, directors and 10% shareholders of the Holding Company will
generally be subject to reporting requirements of Section 16(a) and to the
liability provisions for profits derived from purchases and sales of Holding
Company common stock occurring within a six-month period pursuant to Section
16(b) of the 1934 Act. In addition, certain transactions in common stock, such
as proxy solicitations and tender offers, will be subject to the disclosure and
filing requirements imposed by Section 14 of the 1934 Act and the regulations
promulgate thereunder.
CHANGE IN ACCOUNTANTS
Prior to the fiscal year ended June 30, 1997, our financial statements
were audited by Philip Lee & Company. Philip Lee & Company was replaced and
Dixon, Odom & Co. was engaged and continues as our independent auditors. The
decision to change auditors was recommended by the Audit Committee of our Board
of Directors on July 8, 1997, and was approved by the Board of Directors.
For the fiscal year ended June 30, 1996 and up to the date of the
replacement of Philip Lee & Company, there were no disagreements with Philip Lee
& Company on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of Philip Lee & Company, would have caused it to make a
reference to the subject matter of the disagreement in connection with its
reports. The independent auditors' report of Philip Lee & Company on the
financial statements for the fiscal year ended June 30, 1996 did not contain an
adverse opinion or a disclaimer of opinion, and was not qualified or modified as
to uncertainty, audit scope, or accounting principles.
We did not consult with Dixon, Odom & Co. during our two most recent
fiscal years nor during any subsequent interim period prior to their engagement.
LEGAL AND TAX MATTERS
Luse Lehman Gorman Pomerenk & Schick, P.C., 5335 Wisconsin Avenue, N.W.
Suite 400, Washington, D.C. 20015, special counsel to First Federal, will pass
upon the legality and validity of the shares of common stock being issued in the
Conversion. Luse Lehman Gorman Pomerenk & Schick, P.C. has issued an opinion
concerning certain federal and state income tax aspects of the Conversion and
that the Conversion, as propose, constitutes a tax-free reorganization under
federal law. Luse Lehman Gorman Pomerenk & Schick, P.C. have consented to the
references herein to their opinions. Certain legal matters related to this
offering will be passed upon for Trident Securities, Inc. by Breyer & Aguggia,
Washington, D.C.
EXPERTS
Our consolidated financial statements at June 30,1997 and 1996, and for
each of the two years in the period ended June 30, 1997 appearing in this
Prospectus and Registration Statement have been audited by Dixon, Odom & Co.,
L.L.P. independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
Ferguson has consented to the publication of the summary herein of its
appraisal report as to the estimated pro forma market value of the common stock
of the Holding Company to be issued in the Conversion, to the
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reference to its opinion relating to the value of the subscription rights, and
to the filing of the appraisal report as an exhibit to the registration
statement filed by the Holding Company under the 1933 Act.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a registration statement
under the 1933 Act with respect to the common stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus does not contain all
the information set forth in the registration statement. Such information can be
inspected and copied at the SEC's public reference facilities located at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's Regional Office in
New York (Seven World Trade Center, 13th Floor, New York, New York 10048) and
Chicago (Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511) and copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. This information can also be found on the SEC's
website, located at http://www.sec.gov.
First Federal has filed with the OTS an Application for Conversion from
a federal mutual savings bank to a federal stock savings bank, and the Holding
Company has filed with the OTS an Application to become a savings and loan
holding company. This Prospectus omits certain information contained in such
Applications. The Applications may be inspected at the offices of the OTS, 1700
G Street, N.W., Washington, D.C. 20552 and at the Southeast Regional Officer of
the OTS, 1475 Peachtree Street, N.E., Atlanta, Georgia 30309.
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FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHERAW
<PAGE>
First Federal Savings and Loan Association of Cheraw
================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Independent Auditors' Report....................................... F-1
Financial Statements
Statements of Financial Condition............................... F-2
Statements of Operations........................................ 40
Statements of Retained Earnings................................. F-3
Statements of Cash Flows........................................ F-4
Notes to Financial Statements................................... F-6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
First Federal Savings and Loan Association of Cheraw
Cheraw, South Carolina
We have audited the accompanying statements of financial condition of First
Federal Savings and Loan Association of Cheraw as of June 30, 1997 and 1996 and
the related statements of operations, retained earnings, and cash flows for the
years then ended. These financial statements are the responsibility of the
Association's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Federal Savings and Loan
Association of Cheraw at June 30, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Dixon, Odom & Co., L.L.P.
Southern Pines, North Carolina
August 22, 1997
--------
Page F-1
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
STATEMENTS OF FINANCIAL CONDITION
June 30, 1997 and 1996
================================================================================
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------ -----------
<S> <C> <C>
Cash on hand and in banks $ 222,334 $ 284,592
Interest-bearing balances in other banks 2,719,538 2,291,728
Federal funds sold 800,000 500,000
Investment securities held to maturity, at amortized
cost (fair value of $1,755,793 and $2,194,520 at
June 30, 1997 and 1996, respectively) (Note B) 1,765,939 2,195,931
Loans receivable, net (Note C) 53,973,837 53,334,639
Accrued interest receivable 238,432 242,743
Premises and equipment, net (Note D) 183,440 196,326
Foreclosed real estate 10,100 27,166
Stock in the Federal Home Loan Bank, at cost 484,600 482,000
Other assets 139,327 138,903
----------- -----------
TOTAL ASSETS $60,537,547 $59,694,028
=========== ===========
LIABILITIES AND RETAINED EARNINGS
Savings deposits (Note G) $46,863,007 $47,949,233
Advances from Federal Home Loan Bank (Note F) 2,400,000 1,050,000
Accrued interest payable 105,706 73,121
Advance payments by borrowers for property taxes and
insurance 59,985 88,999
Accrued expenses and other liabilities 19,183 28,724
----------- -----------
TOTAL LIABILITIES 49,447,881 49,190,077
----------- -----------
Commitments and contingencies (Notes C, F and L)
Retained earnings, substantially restricted (Notes J
and K) 11,089,666 10,503,951
----------- -----------
TOTAL LIABILITIES AND
RETAINED EARNINGS $60,537,547 $59,694,028
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes. Page F-2
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
STATEMENTS OF RETAINED EARNINGS
Years Ended June 30, 1997 and 1996
================================================================================
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
BALANCE, BEGINNING $10,503,951 $ 9,709,731
NET INCOME 585,715 794,220
----------- -----------
BALANCE, ENDING $11,089,666 $10,503,951
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes. Page F-3
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997 and 1996
================================================================================
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 585,715 $ 794,220
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 17,392 17,989
Amortization, net (25,792) (33,258)
(Gain) loss on sale of foreclosed real estate, net 9,454 (10,501)
Provision for loan losses 143,000 17,967
Deferred income taxes (23,525) 38,307
Change in assets and liabilities
(Increase) decrease in accrued interest receivable 4,311 (6,539)
(Increase) decrease in other assets 38,101 (28,182)
Increase (decrease) in accrued interest payable 32,585 (909)
Decrease in accrued expenses and other liabilities (9,541) (16,199)
----------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 771,700 772,895
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest bearing balances in other
banks (427,810) (292,863)
Net increase in federal funds sold (300,000) (300,000)
Purchases of held to maturity investment securities (1,300,000) (500,000)
Proceeds from maturities and calls of
held to maturity investment securities 1,730,571 632,720
Purchase of Federal Home Loan Bank stock (2,600) (8,700)
Proceeds from sale of loans 524,661 -
Net increase in loans (1,292,446) (538,067)
Purchase of premises and equipment (4,506) (1,827)
Proceeds from sale of real estate acquired in
settlement of loans 21,907 169,838
Capital expenditures for real estate acquired in
settlement of loans (3,495) (6,258)
----------- ---------
NET CASH USED BY
INVESTING ACTIVITIES (1,053,718) (845,157)
----------- ---------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes. Page F-4
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997 and 1996
================================================================================
<TABLE>
<CAPTION>
1997 1996
------------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in savings deposits $(1,086,226) $ 967
Increase (decrease) in advance payments by
borrowers for taxes and insurance (29,014) 14,553
Stock conversion costs incurred (15,000) -
Net increase in advances from Federal Home Loan
Bank 1,350,000 -
----------- ----------
NET CASH PROVIDED
BY FINANCING ACTIVITIES 219,760 15,520
----------- ----------
NET DECREASE IN CASH ON
HAND AND IN BANKS (62,258) (56,742)
CASH ON HAND AND IN BANKS, BEGINNING 284,592 341,334
----------- ----------
CASH ON HAND
AND IN BANKS, ENDING $ 222,334 $ 284,592
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 2,562,225 $2,668,741
=========== ==========
Income taxes $ 352,500 $ 465,000
=========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Loans receivable transferred to real estate
acquired in settlement of loans $ 10,800 $ 53,535
=========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes. Page F-5
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
- ---------------------------
First Federal Savings and Loan Association of Cheraw ("First Federal" or the
"Association") is an operating federally chartered mutual savings and loan
association primarily engaged in the business of obtaining savings deposits and
providing loans to the general public.
Nature of Business
- ------------------
First Federal maintains its sole office and conducts its primary business in
Cheraw, Chesterfield County, South Carolina. The Association is primarily
engaged in the business of attracting deposits from the general public and using
such deposits to make mortgage loans secured by one-to-four family residential
real estate located in its primary market area. The Association also makes home
improvement loans, multi-family residential loans, construction loans and loans
secured by deposit accounts. First Federal is a portfolio lender in that it does
not originate its fixed or adjustable rate loans for sale in the secondary
market. First Federal has been and intends to continue to be a community-
oriented financial institution offering a variety of financial services to meet
the needs of the communities it serves.
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.
Material estimates that are particularly sensitive to significant change relate
to the determination of the allowance for losses on loans and the valuation of
real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for losses on
loans and foreclosed real estate, management obtains independent appraisals for
significant properties.
- --------------------------------------------------------------------------------
Page F-6
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates (Continued)
- ---------------------------
A majority of the Association's loan portfolio consists of single-family
residential loans in its market area. The regional economy is currently stable
and consists of various types of industry. Real estate prices in this market are
also stable; however, the ultimate collectibility of a substantial portion of
the Association's loan portfolio is susceptible to changes in local market
conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
Association's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Association to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination. Because of these factors, it is reasonably possible that the
allowances for losses on loans and foreclosed real estate may change materially
in the near term.
Investment Securities
- ---------------------
The Association classifies its securities in one of three categories: trading,
available for sale, or held to maturity. There were no trading or available for
sale securities at June 30, 1997 or 1996. Securities held to maturity are those
securities for which the Association has the ability and intent to hold to
maturity.
Held to maturity securities are recorded at cost and are adjusted for the
amortization or accretion of premiums or discounts. Premiums and discounts are
amortized or accreted over the life of the related security as an adjustment to
the yield. Realized gains and losses are included in earnings, and the costs of
securities sold are derived using the specific identification method. A decline
in the market value of any held to maturity investment below cost that is deemed
other than temporary is charged to earnings and establishes a new cost basis for
the security.
- --------------------------------------------------------------------------------
Page F-7
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable
- ----------------
Loans receivable are stated at unpaid balances, less the allowance for loan
losses and net deferred loan fees.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method. Amortization of deferred loan fees is
discontinued when a loan is placed on nonaccrual status.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
The Association accounts for impaired loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," amended for SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure." A loan is impaired
when, based on current information and events, it is probable that all amounts
due according to the contractual terms of the loan agreement will not be
collected. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, the loan's
observable market price, or the fair value of the collateral of the loan if the
loan is collateral dependent. Interest income from impaired loans is recognized
using the cash basis method of accounting during the time within that period in
which the loans were impaired.
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 it. Additions to the allowance for loan losses are provided by
charges to operations based on various factors which, in management's judgment,
deserve current recognition in estimating possible losses. Such factors
considered by management include the market value of the underlying collateral,
growth and composition of the loan portfolio, the relationship of the allowance
for loan losses to outstanding loans, delinquency trends, and economic
conditions. Management evaluates the carrying value of loans periodically and
the allowance is adjusted accordingly. While management uses the best
information available to make evaluations, future adjustments to the allowance
may be necessary if conditions differ substantially from the assumptions used in
making the evaluations.
- --------------------------------------------------------------------------------
Page F-8
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
- ------------------------------------
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Association's allowance for loan
losses. Such agencies may require the Association to recognize additions to the
allowance based on their judgments of information available to them at the time
of their examination.
Premises and Equipment
- ----------------------
Association premises and equipment are stated at cost less accumulated
depreciation. Depreciation of premises and equipment is recorded on a straight-
line basis over the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are charged to expense as incurred,
while those for improvements are capitalized. The costs and accumulated
depreciation relating to premises and equipment retired or otherwise disposed of
are eliminated from the accounts, and any resulting gains or losses are credited
or charged to earnings.
Investment in Federal Home Loan Bank Stock
- ------------------------------------------
As a requirement for membership, the Association invests in stock of the Federal
Home Loan Bank of Atlanta ("FHLB"). This investment is carried at cost.
Real Estate Acquired In Settlement of Loans
- -------------------------------------------
Real estate acquired in settlement of loans is carried at the lower of cost or
fair value less estimated costs to dispose. Generally accepted accounting
principles define fair value as the amount that is expected to be received in a
current sale between a willing buyer and seller other than in a forced or
liquidation sale. Fair values at foreclosure are based on appraisals. Losses
arising from the acquisition of foreclosed properties are charged against the
allowance for loan losses. Subsequent writedowns are provided by a charge to
operations through the allowance for losses on other real estate in the period
in which the need arises.
Income Taxes
- ------------
Deferred tax assets and liabilities are recorded for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Future tax
benefits are recognized to the extent that realization of such benefits is more
likely than not. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which the assets
and liabilities are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income tax
expense in the period that includes the enactment date.
- --------------------------------------------------------------------------------
Page F-9
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
- -----------------------
In the event the future tax consequences of differences between the financial
reporting bases and the tax bases of the Association's assets and liabilities
result in deferred tax assets, applicable accounting standards require an
evaluation of the probability of being able to realize the future benefits
indicated by such assets. A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. In assessing the realizability of the deferred tax assets, management
considers the scheduled reversals of deferred tax liabilities, projected future
taxable income, and tax planning strategies.
A deferred tax liability is not recognized for portions of the allowance for
loan losses for income tax purposes in excess of the financial statement
balance, as described in Note J. Such a deferred tax liability will only be
recognized when it becomes apparent that those temporary differences will
reverse in the foreseeable future.
Recent Accounting Pronouncements
- --------------------------------
FASB Statement on Earnings Per Share. In March 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128. The Statement establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. This Statement simplifies the standards for
computing earnings per share previously found in Accounting Principles Board
("APB") Opinion No. 15, "Earnings per Share" ("EPS"), and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
the presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and the
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. This Statement
supersedes Opinion 15 and AICPA Accounting Interpretations 1-102 of Opinion 15.
This Statement will be effective for the Association's fiscal year ending June
30, 1998. Management does not believe the impact of adopting SFAS No. 128 will
be material to the Association's financial statements.
- --------------------------------------------------------------------------------
Page F-10
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
- -------------------------------------------
FASB Statement on Accounting for Stock-Based Compensation. In October 1995, the
FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based method" of
accounting for an employee stock option whereby compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period. FASB has encouraged all entities to adopt the fair value based
method; however, it will allow entities to continue the use of the "intrinsic
value based method" prescribed by APB Opinion No. 25. Under the intrinsic value
based method, compensation cost is the excess of the market price of the stock
at the grant date over the amount an employee must pay to acquire the stock.
However, most stock option plans have no intrinsic value at the grant date and,
as such, no compensation cost is recognized under APB Opinion No. 25. Entities
electing to continue use of the accounting treatment of APB Opinion No. 25 must
make certain pro forma disclosures as if the fair value based method had been
applied. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years beginning after December 15, 1995. Pro
forma disclosures must include the effects of all awards granted in fiscal years
beginning after December 15, 1994. The Association expects to use the "intrinsic
value based method" as prescribed by APB Opinion No. 25. Accordingly, management
does not believe the impact of adopting SFAS No. 123 will be material to the
Association's financial statements.
FASB Statement on Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996, the FASB issued SFAS No. 125. This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. If a transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured borrowing with
pledge of collateral. This Statement is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. The effective date for certain
provisions of this Statement have been postponed for one year. Management
anticipates that the adoption of the Statement should have no material impact on
its financial statements.
FASB Statement on Reporting Comprehensive Income. In June 1997, the FASB issued
SFAS No. 130. This Statement establishes standards of reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This Statement will be effective for the Association's
fiscal year ending June 30, 1999, and the Association does not intend to early
adopt. Had the Association adopted this Statement early, it would have reported
comprehensive income in the same amounts as reported net income for the years
ended June 30, 1997 and 1996.
- --------------------------------------------------------------------------------
Page F-11
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE B - INVESTMENT SECURITIES
The following is a summary of the securities portfolios by major classification:
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities held-to-maturity:
U. S. government securities and
obligations of U. S.
government agencies $1,699,558 $2,780 $ 5,092 $1,697,246
Mortgage-backed securities 66,381 267 8,101 58,547
---------- ------ ------- ----------
$1,765,939 $3,047 $13,193 $1,755,793
========== ====== ======= ==========
<CAPTION>
June 30, 1996
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities held-to-maturity:
U. S. government securities and
obligations of U. S.
government agencies $2,099,393 $7,587 $ 9,338 $2,097,642
Mortgage-backed securities 96,538 504 164 96,878
---------- ------ ------- ----------
$2,195,931 $8,091 $ 9,502 $2,194,520
========== ====== ======= ==========
</TABLE>
- --------------------------------------------------------------------------------
Page F-12
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE B - INVESTMENT SECURITIES (Continued)
The amortized cost and fair values of securities held to maturity at June 30,
1997 by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Held to Maturity
---------------------------
Amortized Fair
Cost Value
----------- ----------
<S> <C> <C>
Due within one year $ - $ -
Due after one year through five years 1,699,558 1,697,246
Due after five years through ten years 66,381 58,547
Due after ten years - -
---------- ----------
$1,765,939 $1,755,793
========== ==========
</TABLE>
Proceeds from maturities and calls of investment securities held to maturity
during the years ended June 30, 1997 and 1996 were $1,730,571 and $632,720,
respectively. No gains or losses were realized on those maturities and calls.
Securities with a carrying value of $1,042,281 and $1,070,522 and a fair value
of $1,038,397 and $1,068,000 at June 30, 1997 and 1996, respectively, were
pledged to secure public monies on deposit as required by law.
- --------------------------------------------------------------------------------
Page F-13
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE C - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Type of loan
Real estate loans
One-to-four family residential $48,459,996 $48,297,344
Commercial 2,502,108 2,088,530
Construction 3,043,900 3,122,950
Home improvement loans 1,437,110 1,429,711
----------- -----------
Total real estate loans 55,443,114 54,938,535
Other loans
Loans secured by deposits 319,183 305,630
----------- -----------
Total loans 55,762,297 55,244,165
Less
Construction loans in process 1,305,981 1,536,372
Allowance for loan losses 303,381 168,842
Deferred loan origination fees, net of costs 179,098 204,312
----------- -----------
$53,973,837 $53,334,639
=========== ===========
<CAPTION>
The allowance for loan losses is summarized as follows:
1997 1996
------------ ------------
<S> <C> <C>
Balance at beginning of year $ 168,842 $ 172,000
Provision for loan losses 143,000 17,967
Charge-offs (8,461) (21,125)
Recoveries - -
----------- -----------
Balance at end of year $ 303,381 $ 168,842
=========== ===========
</TABLE>
At June 30, 1997 and 1996, respectively, the Association had loans totaling
approximately $97,000 and $46,000 which were in a nonaccrual status.
- --------------------------------------------------------------------------------
Page F-14
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE C - LOANS RECEIVABLE (Continued)
Loans serviced for other investors amounted to $1,322,665 and $1,115,918 at June
30, 1997 and 1996, respectively. The Association had no loans held for sale at
June 30, 1997 or 1996.
At June 30, 1997, the Association had mortgage loan commitments outstanding of
$905,050. In management's opinion, these commitments, and undisbursed proceeds
on construction loans in process reflected above, represent no more than normal
lending risk to the Association and will be funded from normal sources of
liquidity.
The Association has had loan transactions with its directors and executive
officers. Such loans were made in the ordinary course of business and also on
substantially the same terms and collateral as those comparable transactions
prevailing at the time and did not involve more than the normal risk of
collectibility or present other unfavorable features. A summary of related party
loan transactions is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Balance at beginning of year $ 79,893 $79,830
Additional borrowings 587 8,383
Loan repayments (30,393) (8,320)
-------- -------
Balance at end of year $ 50,087 $79,893
======== =======
</TABLE>
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land $ 59,250 $ 59,250
Building and improvements 316,090 316,090
Furniture and equipment 142,102 137,596
--------- ---------
517,442 512,936
Accumulated depreciation (334,002) (316,610)
--------- ---------
$ 183,440 $ 196,326
========= =========
</TABLE>
NOTE E - FEDERAL INSURANCE OF DEPOSITS
Eligible deposit accounts are insured up to $100,000 by the Federal Deposit
Insurance Corporation.
- --------------------------------------------------------------------------------
Page F-15
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE F - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Atlanta, with weighted average
interest rates, are as follows:
<TABLE>
<CAPTION>
June 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
5.58% due on or before June 30, 1997 $ - $ 250,000
5.62% due on or before June 30, 1997 - 250,000
5.61% due on or before June 30, 1997 - 250,000
5.72% due on or before June 30, 1997 - 250,000
5.95% due on or before June 30, 1998 500,000 -
5.83% due on or before June 30, 1998 250,000 -
5.83% due on or before June 30, 1998 500,000 -
5.92% due on or before June 30, 1998 250,000 -
5.89% due on or before June 30, 1998 350,000 -
5.83% due on or before June 30, 1998 250,000 -
5.83% due on or before June 30, 1998 250,000 -
3.00% due on or before June 30, 2003 50,000 50,000
---------- ----------
$2,400,000 $1,050,000
========== ==========
</TABLE>
At June 30, 1997, First Federal also had $3,400,000 available on a line of
credit from the Federal Home Loan Bank.
All advances are secured by a blanket floating lien on the Association's one-to-
four family residential mortgage loans.
- --------------------------------------------------------------------------------
Page F-16
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE G - DEPOSIT ACCOUNTS
A comparative summary of deposit accounts at June 30, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- ------------------------
Weighted Weighted
Balance Avg. Rate Balance Avg. Rate
------------ ----------- ----------- -----------
Savings deposits:
<S> <C> <C> <C> <C>
Regular passbook $ 2,548,819 2.96% $ 2,583,352 2.80%
Money market passbook 6,435,965 4.18% 5,785,953 4.24%
----------- -----------
8,984,784 8,369,305
Certificates of deposit 37,878,223 5.71% 39,579,928 5.77%
----------- -----------
Total deposit accounts $46,863,007 5.35% $47,949,233 5.43%
=========== ===========
</TABLE>
A summary of certificate accounts by maturity as of June 30, 1997 follows
(amounts in thousands):
<TABLE>
<CAPTION>
Less than $100,000
$100,000 or More Total
----------- ----------- ----------
<S> <C> <C> <C>
One year or less $ 23,727 $ 6,746 $ 30,473
More than one year to three years 4,828 644 5,472
More than three years to five years 1,353 409 1,762
More than five years 171 - 171
---------- ----------- ----------
Total certificate accounts $ 30,079 $ 7,799 $ 37,878
========== =========== ==========
</TABLE>
Interest expense on deposits for the years ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Passbook savings accounts $ 70,007 $ 74,741
Money market savings accounts 241,970 240,427
Certificates of deposit 2,175,361 2,295,685
----------- ----------
2,487,338 2,610,853
Penalties for early withdrawal (6,897) (3,524)
----------- ----------
$ 2,480,441 $2,607,329
=========== ==========
</TABLE>
- --------------------------------------------------------------------------------
Page F-17
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS
Deferred Compensation Plan
- --------------------------
The Association has a deferred compensation plan for certain officers whereby
the executive officers can make elective deferrals in lieu of receiving a
portion of the salary to which they otherwise would be entitled. This plan is
not entitled to favorable tax treatment under current law. Related deferred
income tax benefits are included in the accompanying financial statements.
Expenses associated with this plan were $13,044 and $16,055 for the years ended
June 30, 1997 and 1996, respectively.
401(k) Retirement Plan
- ----------------------
The Association maintains for the benefit of its eligible employees a 401(k)
plan. Under the plan, the Association contributes two percent of each
participant's base compensation and matches participant's elective contributions
up to an additional four percent of base compensation. The only eligibility
requirement is completion of one year's full time service. At June 30, 1997 and
1996, substantially all full-time employees are eligible and are covered by the
plan. 401(k) contributions are funded when accrued. The total retirement plan
expense was $14,659 and $12,984 for the years ended June 30, 1997 and 1996,
respectively.
NOTE I - SPECIAL SAIF ASSESSMENT
On September 30, 1996, the Deposit Insurance Funds Act of 1996 was signed into
law. The legislation included a special assessment to recapitalize the SAIF
insurance fund up to its statutory goal of 1.25% of insured deposits. The
assessment required the Association to pay an amount equal to 65.7 basis points
of its SAIF-assessable deposit base as of March 31, 1995, which resulted in a
charge to income during the year ended June 30, 1997 of $311,693.
NOTE J - INCOME TAXES
The components of income tax expense are as follows for the years ended June 30,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Current tax expense $365,525 $390,338
Deferred tax expense (benefit)
Tax on temporary differences (23,525) 38,307
-------- --------
$342,000 $428,645
======== ========
</TABLE>
- --------------------------------------------------------------------------------
Page F-18
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE J - INCOME TAXES (Continued)
The differences between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate of 34% to income before income
taxes were as follows for the years ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Income tax at federal statutory rate $315,423 $415,774
State income tax, net of federal tax benefit 21,494 27,926
Other 5,083 (15,055)
-------- --------
$342,000 $428,645
======== ========
</TABLE>
Deferred tax assets and liabilities arising from temporary differences at June
30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets relating to:
Deferred compensation $ 75,601 $ 69,753
Allowance for loan losses 104,153 56,621
Loan fees and costs - 29,041
--------- ---------
Gross deferred tax assets 179,754 155,415
Valuation allowance - -
--------- ---------
Total deferred tax assets 179,754 155,415
--------- ---------
Deferred tax liabilities relating to:
Premises and equipment (45,131) (45,075)
FHLB stock dividends (72,390) (72,390)
Loan fees and costs (758) -
--------- ---------
Total deferred tax liabilities (118,279) (117,465)
--------- ---------
Net deferred tax asset $ 61,475 $ 37,950
========= =========
</TABLE>
Retained earnings at June 30, 1997 includes approximately $1,670,000 for which
no deferred income tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions for income tax purposes only.
Reductions of the amount so allocated for purposes other than tax bad debt
losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then current
corporate income tax rate.
- --------------------------------------------------------------------------------
Page F-19
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE J - INCOME TAXES (Continued)
During 1996, Congress enacted certain tax legislation that exempted thrift
institutions from being taxed on these pre-1987 bad debt reserves. Further, the
use of the reserve method is now required for all thrifts. The Association will
be recapturing $20,000 of its bad debt reserve created in prior years by using
the percentage of taxable income method, requiring payment of additional income
taxes of approximately $8,000. Deferred income taxes have been previously
established for the taxes arising from the reserve recapture, and thus the
ultimate payment of the taxes will not result in a charge to earnings.
NOTE K - REGULATORY MATTERS
Capital Requirements
- --------------------
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the 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 classifications are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of total and Tier
1 capital (as defined) to risk-weighted assets (as defined), and of Tier 1
capital (as defined) to adjusted assets (as defined) and of tangible capital to
adjusted assets. Management believes, as of June 30, 1997, that the Association
meets all capital adequacy requirements to which it is subject.
As of June 30, 1997, the most recent notification from the Office of Thrift
Supervision categorized the Association as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Association must maintain minimum total risk-based, Tier 1 risk-based and
Tier 1 leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
- --------------------------------------------------------------------------------
Page F-20
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE K - REGULATORY MATTERS (Continued)
Capital Requirements (Continued)
- --------------------
The Association's actual capital amounts and ratios are presented below.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
------ -----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
As of June 30, 1997
Total Capital
(to Risk Weighted Assets) $11,393,047 36.6% (greater than $2,488,240 (greater than 8.0%
or equal to) or equal to)
Tier 1 Capital
(to Risk Weighted Assets) 11,089,666 35.6% (greater than 1,244,120 (greater than 4.0%
or equal to) or equal to)
Tier 1 Capital
(to Adjusted Assets) 11,089,666 18.3% (greater than 1,816,126 (greater than 3.0%
or equal to) or equal to)
Tangible Capital
(to Adjusted Assets) 11,089,666 18.3% (greater than 908,063 (greater than 1.5%
or equal to) or equal to)
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
-----------------
Amount Ratio
------ -----
<S> <C> <C>
As of June 30, 1997
Total Capital
(to Risk Weighted Assets) (greater than $3,110,300 (greater than 10.0%
or equal to) or equal to)
Tier 1 Capital
(to Risk Weighted Assets) (greater than 1,866,180 (greater than 6.0%
or equal to) or equal to)
Tier 1 Capital
(to Adjusted Assets) (greater than 3,026,877 (greater than 5.0%
or equal to) or equal to)
Tangible Capital
(to Adjusted Assets) N/A N/A
</TABLE>
NOTE L - CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK
The Association generally originates single-family residential loans within its
primary lending area of Chesterfield County and surrounding counties. The
Association's underwriting policies require such loans to be made at no greater
than 80% loan-to-value based upon appraised values unless private mortgage
insurance is obtained. These loans are secured by the underlying properties.
The Association is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to extend credit on mortgage
loans. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the statements of
financial condition. The contract or notional amounts of those instruments
reflect the extent of involvement the Association has in particular classes of
financial instruments.
A summary of the contract amount of the Association's exposure to off-balance
sheet risk as of June 30, 1997 is as follows:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit, mortgage loans $ 905,050
Undisbursed construction loans in process 1,305,981
- --------------------------------------------------------------------------------
Page F-21
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE M - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The Association has implemented Statement of Financial Accounting Standards No.
107, Disclosures about Fair Value of Financial Instruments ("SFAS 107"), which
requires disclosure of the estimated fair values of the Association's financial
instruments whether or not recognized in the balance sheet, where it is
practical to estimate that value. Such instruments include cash, interest-
earning balances, federal funds sold, investment securities, loans, stock in the
Federal Home Loan Bank of Atlanta, deposit accounts, advances from the Federal
Home Loan Bank, and commitments. Fair value estimates are made at a specific
point in time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Association's entire
holdings of a particular financial instrument. Because no active market readily
exists for a portion of the Association's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash on hand and in banks, interest bearing balances in other banks, and
federal funds sold
The carrying amounts for these approximate fair value because of the
short maturities of those instruments.
Investment Securities
Fair value for investment securities equals quoted market price if such
information is available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Loans
For certain homogenous categories of loans, such as residential
mortgages, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities.
- --------------------------------------------------------------------------------
Page F-22
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE M - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Stock in Federal Home Loan Bank of Atlanta
The fair value for FHLB stock is its carrying value, since this is the
amount for which it could be redeemed. There is no active market for this
stock and the Association is required to maintain a minimum balance based
on the unpaid principal of home mortgage loans.
Deposit Liabilities
The fair value of savings deposits is the amount payable on demand at the
reporting date. The fair value of fixed maturity certificates of deposit
is estimated using rates currently offered for deposits of similar
remaining maturities.
Advances from Federal Home Loan Bank
The fair value of these advances is based upon the discounted present
value using current rates at which borrowings of similar maturity could
be obtained.
Financial Instruments with Off-Balance Sheet Risk
With regard to financial instruments with off-balance sheet risk
discussed in Note L, it is not practicable to estimate the fair value of
future financing commitments.
The carrying amounts and estimated fair values of the Association's financial
instruments, none of which are held for trading purposes, are as follows at
June 30, 1997:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
----------- -----------
<S> <C> <C>
Financial assets:
Cash, interest bearing balances, federal funds sold $ 3,741,872 $ 3,741,872
Investment securities 1,765,939 1,755,793
Loans 53,973,837 54,101,000
Stock in Federal Home Loan Bank of Atlanta 484,600 484,600
Financial liabilities:
Deposits $46,863,007 $46,773,000
Advances from Federal Home Loan Bank 2,400,000 2,394,000
</TABLE>
NOTE N - PLAN OF CONVERSION
On July 14, 1997, the Board of Directors of the Association adopted a Plan of
Holding Company Conversion whereby the Association will convert from a federally
charted mutual savings and loan association to a South Carolina-chartered stock
savings bank and will become a wholly-owned subsidiary of a holding company
formed in connection with the conversion. The holding company will issue common
stock to be sold in the conversion and will use that portion of the net proceeds
thereof which it does not retain to purchase the capital stock of the Bank. The
Plan is subject to approval by regulatory authorities and the members of the
Association at a special meeting.
- --------------------------------------------------------------------------------
Page F-23
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
================================================================================
NOTE N - PLAN OF CONVERSION (Continued)
The stockholders of the holding company will be asked to approve a proposed
stock option plan and a proposed management recognition plan at a meeting of the
stockholders after the conversion. Shares issued to directors and employees
under these plans may be from authorized but unissued shares of common stock or
they may be purchased in the open market. In the event that options or shares
are issued under these plans, such issuances will be included in the earnings
per share calculation; thus, the interests of existing stockholders will be
diluted.
At the time of conversion, the Association will establish a liquidation account
in an amount equal to its net worth as reflected in its latest statement of
financial condition used in its final conversion prospectus. The liquidation
account will be maintained for the benefit of eligible deposit account holders
who continue to maintain their deposit accounts in the Bank after conversion.
Only in the event of a complete liquidation will each eligible deposit account
holder be entitled to receive a subaccount balance for deposit accounts then
held before any liquidation distribution may be made with respect to common
stock. Dividends paid by the Association subsequent to the conversion cannot be
paid from this liquidation account
The Association may not declare or pay a cash dividend on or repurchase any of
its common stock if its net worth would thereby be reduced below either the
aggregate amount then required for the liquidation account or the minimum
regulatory capital requirements imposed by federal and state regulations.
Conversion costs of approximately $15,000 have been incurred and are included in
other assets as of June 30, 1997. If the conversion is ultimately successful,
conversion costs will be accounted for as a reduction of the stock proceeds. If
the conversion is unsuccessful, conversion costs will be charged to the
Association's operations.
- --------------------------------------------------------------------------------
Page F-24
<PAGE>
GLOSSARY
1933 Act Securities Act of 1933, as amended
1934 Act Securities Exchange Act of 1934, as amended
Associate The term "Associate" of a person is defined to mean
(i) any corporation or organization (other than
First Federal or its subsidiaries or the Holding
Company) of which such a person is a director,
officer, partner or 10% shareholder;
(ii) any trust or other estate in which such person
has a substantial beneficial interest or serves as
trustee or in a similar fiduciary capacity;
provided, however that such term shall not include
any employee stock benefit plan of the Holding
Company or First Federal in which such a person has
a substantial beneficial interest or as a trustee
or in a similar fiduciary capacity, and
(iii) any relative or spouse or relative of such
spouse, who either has the same home as such person
or who is a director or officer of First Federal or
its subsidiaries or the Holding Company.
ATM Automated Teller Machine
BIF Bank Insurance Fund of the FDIC
Code The Internal Revenue Code of 1986, as amended
Community Offering Offering for sale to members of the general public
of any shares of common stock not subscribed for in
the Subscription Offering, with preference given to
residents of Chesterfield County
Common Stock Up to 1,897,500 shares of common stock, par value
of $.01 per share, offered by Great Pee Dee
Bancorp, Inc. in connection with the Conversion
Conversion Simultaneous conversion of First Federal Savings
and Loan Association of Cheraw to stock form, the
issuance of First Federal's outstanding capital
stock to Great Pee Dee Bancorp, Inc. and Great Pee
Dee Bancorp, Inc.'s offer and sale of common stock
Eligible Account Holders Savings account holders of First Federal with
account balances of at least $50 as of the close of
business on Jun 30, 1995
ERISA Employee Retirement Income Security Act of 1974, as
amended
ESOP The Great Pee Dee Bancorp, Inc. Employee Stock
Ownership Plan and Trust
G-1
<PAGE>
Estimated Valuation Range Estimated pro forma market value of the common
stock ranging from $14,025,000 to $18,975,000. The
estimated valuation range may be increased to
$21,821,250 without a resolicitation of subscribers
Expiration Date 12:00 noon, South Carolina Time, on ________, 1997
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FDICIA Federal Deposit Insurance Corporation Improvement
Act of 1991, as amended
First Federal First Federal Savings and Loan Association of
Cheraw
Freddie Mac Freddie Mac
FHLB of Atlanta Federal Home Loan Bank of Atlanta
Ferguson Ferguson & Company
Foundation Charitable Foundation of the First Federal Savings
and Loan Association of Cheraw to be established by
First Federal and to which the Holding Company will
contribute 20,000 shares of common stock
FNMA Federal National Mortgage Association
Holding Company Great Pee Dee Bancorp, Inc.
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
MMDA Money Market Demand Account
NASD National Association of Securities Dealers, Inc.
Nasdaq System National Association of Securities Dealers
Automated Quotation System
NOW account Negotiable Order of Withdrawal Account
NPV Net portfolio value
Order Form Form for ordering stock accompanied by a
certification concerning certain matters
Other Members Savings account holders (other than Eligible
Account Holders and Supplemental Eligible Account
Holders) who are entitled to vote at the Special
Meeting due to the existence of a savings account
on the Voting Record Date for the Special Meeting
and borrowers who are entitled to vote at the
Special meeting
OTS Office of Thrift Supervision
G-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Plan or Plan of Conversion Plan of First Federal Savings and Loan
Association of Cheraw to convert from a federally
chartered mutual savings and loan association to
a federally chartered stock savings and loan
association and the issuance of all of First
Federal's outstanding capital stock to Great Pee
Dee Bancorp, Inc. and the issuance of Great Pee
Dee Bancorp, Inc.'s common stock to the
public
Purchase Price $10.00 per share price of the common stock
QTI Qualified thrift investment
QTL Qualified thrift lender
REO Real Estate Owned
RRP Management Recognition and Retention Plan to be
submitted for approval at a meeting of the
Holding Company's shareholders to be held at
least six months after the completion of the
Conversion
SAIF Savings Association Insurance Fund of the FDIC
SEC Securities and Exchange Commission
Special Meeting Special Meeting of members of First Federal
called for the purpose of approving the Plan
Stock Option Plan The Great Pee Dee Bancorp, Inc. Stock Option Plan
for directors and officers to be submitted for
approval at a meeting of the Holding Company's
shareholders to be held at least six months after
the completion of the Conversion
Subscription Offering Offering of non-transferable rights to subscribe
for the common stock, in order of priority, to
Eligible Account Holders, the ESOP, Supplemental
Eligible Account Holders and Other Members
Supplemental Eligible
Account Holders Depositors of First Federal Savings and Loan
Association of Cheraw who are not Eligible
Account Holders with account balances of at least
$50 on September 30, 1997
Trident Securities Trident Securities, Inc.
Valuation Conversion Valuation Report of First Federal
Valued as of September 2, 1997 prepared by
Ferguson & Company
Voting Record Date The close of business on October , 1997, the
--
date for determining members entitled to vote at
the Special Meeting
</TABLE>
G-3
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Holding Company or First Federal. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any security
other than the shares of common stock offered hereby to any person in any
jurisdiction in which such offer or solicitation is not authorized, or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale hereunder shall, under any
circumstances, create any implication that information herein is correct as of
any time subsequent to the date hereof.
GREAT PEE DEE BANCORP, INC.
(Proposed Holding Company for
First Federal Savings and Loan Association of Cheraw)
Up to 1,897,500 Shares
Common Stock
($.01 par value per share)
SUBSCRIPTION AND
COMMUNITY OFFERING
PROSPECTUS
TRIDENT SECURITIES, INC.
__________ ___, 1997
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED
Until ______________, or 25 days after the commencement of the offerings of
common stock, 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.
================================================================================
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers of First Federal Savings
and Loan Association of Cheraw
Generally, federal regulations define areas for indemnity coverage for federal
savings associations, as follows:
(a) Any person against whom any action is brought by reason of
the fact that such person is or was a director or officer of the savings
association shall be indemnified by the savings association for:
(i) Reasonable costs and expenses, including reasonable
attorneys' fees, actually paid or incurred by such person in
connection with proceedings related to the defense or settlement of
such action;
(ii) Any amount for which such person becomes liable by
reason of any judgment in such action;
(iii) Reasonable costs and expenses, including reasonable
attorneys' fees, actually paid or incurred in any action to enforce
his rights under this section, if the person attains a final
judgment in favor of such person in such enforcement action.
(b) Indemnification provided for in subparagraph (a) shall be
made to such officer or director only if the requirements of this
subsection are met:
(i) The savings association shall make the indemnification
provided by subparagraph (a) in connection with any such action
which results in a final judgment on the merits in favor of such
officer or director.
(ii) The savings association shall make the indemnification
provided by subparagraph (a) in case of settlement of such action,
final judgment against such director or officer or final judgment in
favor of such director or officer other than on the merits except in
relation to matters as to which he shall be adjudged to be liable
for negligence or misconduct in the performance of duty, only if a
majority of the directors of the savings association determines that
such a director or officer was acting in good faith within what he
was reasonably entitled to believe under the circumstances was the
scope of his employment or authority and for a purpose which he was
reasonably entitled to believe under the circumstances was in the
best interest of the savings association or its members.
(c) As used in this paragraph:
(i) "Action" means any action, suit or other judicial or
administrative proceeding, or threatened proceeding, whether civil,
criminal, or otherwise, including any appeal or other proceeding for
review;
(ii) "Court" includes, without limitation, any court to
which or in which any appeal or any proceeding for review is
brought;
(iii) "Final Judgment" means a judgment, decree, or order
which is appealable and as to which the period for appeal has
expired and no appeal has been taken;
(iv) "Settlement" includes the entry of a judgment by
consent or by confession or upon a plea of guilty or of nolo
contenders.
<PAGE>
Indemnification of Directors and Officers of the Corporation
Article TENTH of the Certificate of Incorporation of Great Pee Dee
Bancorp, Inc. (the "Corporation") sets forth circumstances under which
directors, officers, employees and agents of the Corporation may be insured or
indemnified against liability which they may incur in their capacities as such.
TENTH:
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter and "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a Director or Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, services to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article TENTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount to the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expenses of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee,
<PAGE>
be a defense to such suit. In any suit brought by the indemnitee to enforce a
right to indemnification or to an advancement of expenses hereunder, or by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the burden of proving that the indemnitee is not entitled to be
indemnified, or to such advancement of expenses, under this Article TENTH or
otherwise, shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by
the Board of Directors, grant rights to indemnification and to the advancement
of expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
<TABLE>
<CAPTION>
Item 25. Other Expenses of Issuance and Distribution Amount
---------
<C> <S> <C>
* Legal Fees and Expenses........................... $ 125,000
* Printing, Postage and Mailing..................... 60,000
* Appraisal and Business Plan Fees and Expenses..... 30,000
* Accounting Fees and Expenses...................... 36,000
* Blue Sky Filing Fees and Expenses
(including counsel fees)......................... 10,000
* Conversion Data Processing........................ 10,000
** Underwriter's Fees and Expenses................... 286,000
* Filing Fees (NASD, OTS and SEC)................... 37,500
* Stock Transfer Agreements & Certificates......... 10,000
* Other Expenses.................................... 27,400
---------
* Total............................................. $ 660,000
=========
</TABLE>
- ----------------
* Estimated
** Great Pee Dee Bancorp, Inc. has retained Trident Securities, Inc.
("Trident Securities") to assist in the sale of common stock on a best
efforts basis in the Offerings. Trident Securities will receive fees of
$286,000, exclusive of estimated expenses of $37,500, assuming the sale of
16,500,000 shares in the Offerings.
<PAGE>
Item 26. Recent Sales of Unregistered Securities
Not Applicable.
Item 27. Exhibits:
The exhibits filed as part of this registration statement are as
follows:
(a) List of Exhibits
1.1 Engagement Letter between First Federal Savings and Loan Association of
Cheraw and Trident Securities, Inc.*
1.2 Agency Agreement among Great Pee Dee Bancorp, Inc., First Federal
Savings and Loan Association of Cheraw and Trident Securities, Inc.
2 Plan of Convention
3.1 Certificate of Incorporation of Great Pee Dee Bancorp, Inc.*
3.2 Bylaws of Great Pee Dee Bancorp, Inc.*
3.3 Proposed Charter of First Federal Savings and Loan Association of
Cheraw*
3.4 Proposed Bylaws of First Federal Savings and Loan Association of Cheraw*
4 Form of Common Stock Certificate of Great Pee Dee Bancorp, Inc.*
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality
of securities being registered*
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick,
P.C.*
8.2 Form of State Tax Opinion of Dixon, Odom & Co.*
8.3 Opinion of Ferguson & Co. with respect to Subscription Rights
10.1 Form of Employment Agreement for Herbert W. Watts*
10.2 Form of Employee Stock Ownership Plan*
10.3 Form of Restated Non-Qualified Deferred Compensation Plan*
10.4 Form of Non-Qualified Supplemental Employee Stock Ownership Plan*
21 Subsidiaries of the Registrant*
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
Opinions included on Exhibits 5 and 8.1)
23.2 Consent of Dixon, Odom & Co.
23.3 Consent of Ferguson & Co.*
24 Power of Attorney (set forth on signature page)
<PAGE>
27.1 EDGAR Financial Data Schedule*
99.1 Appraisal Agreement between First Federal Savings and Loan Association of
Cheraw and Ferguson & Co.*
99.2 Appraisal Report of Ferguson & Co.*
99.3 Proxy Statement
99.4 Marketing Materials*
99.5 Order and Acknowledgment Form and Certification Form*
- --------------------------
*Previously Filed
<PAGE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any duration from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
The small business issuer will provide to the underwriter at the
closing specified in the Underwriting Agreement certificates in such
documentation and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
questions whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Cheraw, South Carolina on October 22,
1997.
GREAT PEE DEE BANCORP, INC.
By: /s/ Herbert W. Watts
-----------------------------------------
Herbert W. Watts
President, Chief Executive Officer and Director
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Great Pee Dee Bancorp, Inc.
(the "Company") hereby severally constitute and appoint Herbert W. Watts as our
true and lawful attorney and agent, to do any and all things in our names in the
capacities indicated below which said Herbert W. Watts may deem necessary or
advisable to enable the Company to comply with the Securities Act of 1933, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the registration statement on Form SB-2 relating
to the offering of the Company's Common Stock, including specifically, ,but not
limited to, power and authority to sign for us in our names in the capacities
indicated below the registration statement and any and all amendments (including
post-effective amendments) thereto; and we hereby approve, ratify and confirm
all that said Herbert W. Watts shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Herbert W. Watts President, Chief Executive October 22, 1997
- -------------------------- Officer and Director
Herbert W. Watts (Principal Executive Officer)
/s/ Johnnie Lee Craft Chief Financial Officer October 22, 1997
- -------------------------- (Principal Accounting Officer)
Johnnie Lee Craft
/s/ Robert M. Bennett Chairman of the Board October 22, 1997
- --------------------------
Robert M. Bennett
/s/ William Rhett Butler Director October 22, 1997
- --------------------------
William Rhett Butler
/s/ James C. Crawford, III Director October 22, 1997
- --------------------------
James C. Crawford, III
/s/ Henry P. Duvall Director October 22, 1997
- --------------------------
Henry P. Duvall
/s/ Cornelius Bryd Young Director October 22, 1997
- --------------------------
Cornelius Bryd Young
</TABLE>
<PAGE>
As filed with the Securities and Exchange Commission on October 23, 1997
Registration No. 333-[ ]
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO.1 TO
REGISTRATION STATEMENT
ON
FORM SB-2
-------------------------
GREAT PEE DEE BANCORP, INC.
Cheraw, South Carolina
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
1.1 Engagement Letter between First Federal Savings and Loan Association of
Cheraw and Trident Securities, Inc.*
1.2 Agency Agreement among Great Pee Dee Bancorp, Inc., First Federal Savings
and Loan Association of Cheraw and Trident Securities, Inc.
2 Plan of Conversion
3.1 Certificate of Incorporation of Great Pee Dee Bancorp, Inc.*
3.2 Bylaws of Great Pee Dee Bancorp, Inc.*
3.3 Charter of First Federal Savings and Loan Association of Cheraw*
3.4 Bylaws of First Federal Savings and Loan Association of Cheraw*
4 Form of Common Stock Certificate of Great Pee Dee Bancorp, Inc.*
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality
of securities being registered*
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.*
8.2 Form of State Tax Opinion of Dixon, Odom & Co.*
8.3 Opinion of Ferguson & Co. with respect to Subscription Rights
10.1 Form of Employment Agreement for Herbert W. Watts*
10.2 Employee Stock Ownership Plan*
10.3 Non-Qualified Deferred Compensation Plan*
10.4 Non-Qualified Supplemental Executive Retirement Plan*
21 Subsidiaries of the Registrant*
23.1 Consent of Luse Gorman Pomerenk & Schick, P.C. (contained in Opinions
included on Exhibits 5 and 8.1)
23.2 Consent of Dixon, Odom & Co.
23.3 Consent of Ferguson & Co.*
24 Power of Attorney (set forth on signature page)
27.1 EDGAR Financial Data Schedule*
99.1 Appraisal Agreement between First Federal Savings and Loan Association
of Cheraw and Ferguson & Co.*
99.2 Appraisal Report of Ferguson & Co.*
99.3 Proxy Statement
</TABLE>
<PAGE>
<TABLE>
<S> <C>
99.4 Marketing Materials*
99.5 Order and Acknowledgment Form and Certification Form*
</TABLE>
- -----------------------
* To be filed supplementally or by amendment.
<PAGE>
EXHIBIT 1.2
<PAGE>
GREAT PEE DEE BANCORP, INC.
Up to 1,897,500 Shares of Common Stock
(Par Value $0.01 Per Share)
$10.00 Per Share
AGENCY AGREEMENT
----------------
November ___, 1997
Trident Securities, Inc.
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
Dear Sirs:
Great Pee Dee Bancorp, Inc., a Delaware corporation ("Company"), and
First Federal Savings and Loan Association of Cheraw, a federally chartered and
insured mutual savings and loan association ("Association"), hereby confirm as
of the date above their respective agreements with Trident Securities, Inc.
("Trident"), a broker-dealer registered with the Securities and Exchange
Commission ("Commission") and a member of the National Association of Securities
Dealers, Inc. ("NASD"), as follows:
1. Introduction. The Association intends to convert from a federally
------------
chartered mutual savings and loan association to a federally chartered stock
savings and loan association as a wholly- owned subsidiary of the Company
(together with the Offerings (as defined below), the issuance of shares of
common stock of the Association to the Company, the incorporation of the
Company, and the establishment and operation of the Foundation (as defined
below), collectively the "Conversion") pursuant to a plan of conversion adopted
by the Association's Board of Directors on July 14, 1997 ("Plan"). In accordance
with the Plan, the Company is offering up to 1,897,500 shares ("Shares") of its
common stock, par value $0.01 per share ("Common Stock"), pursuant to
nontransferable subscription rights in a subscription offering ("Subscription
Offering"), in order of priority, to (i) the Association's Eligible Account
Holders (as defined in the Plan), (ii) the Employee Stock Ownership Plan
("ESOP"), (iii) the Association's Supplemental Eligible Account Holders (as
defined in the Plan), (iv) the Association's Other Members (as defined in the
Plan), and (v) directors, officers and employees of the Association. Shares of
the Common Stock not sold in the Subscription Offering are being offered to the
general public in a community offering, with preference being given to natural
persons residing in Chesterfield County, South Carolina ("Association's Local
Community") ("Community Offering"), and, if necessary, through a syndicate of
NASD-registered broker-dealers managed by Trident in a syndicated community
offering ("Syndicated Community Offering"). The Community Offering and the
Syndicated Community Offering may commence any time during the Subscription
Offering
<PAGE>
Trident Securities, Inc.
Page 2
or after the expiration of the Subscription Offering. The Subscription
Offering, the Community Offering and the Syndicated Community Offering are
collectively referred to as the "Offerings." Purchases of Shares in the
Offerings are subject to certain limitations and restrictions as described in
the Plan.
In addition, in connection with the Conversion and pursuant to the
terms of the Plan as described in the Prospectus, the Company has established a
charitable foundation ("Foundation"). Immediately following the consummation of
the Conversion, subject to the approval of the establishment of the Foundation
by the members of the Association and compliance with all conditions as may be
imposed by the OTS and any other regulatory authorities, the Company will
contribute 20,000 newly issued shares of Common Stock ("Foundation Shares") to
the Foundation.
The Company and the Association have been advised by Trident that it
intends to utilize its best efforts to assist the Company and the Association
with the sale of the Shares in the Subscription Offering and, if deemed
necessary, in the Community Offering and the Syndicated Community Offering.
2. Representations and Warranties.
------------------------------
(a) The Company and the Association jointly and severally represent and
warrant to Trident that:
(i) The Company has filed with the Commission a registration
statement, including exhibits and an amendment or amendments thereto, on
Form SB-2 (No. 333-_____), including a Prospectus, for the registration of the
Shares and the Foundation Shares under the Securities Act of 1933, as amended
("Securities Act"); and such registration statement has been declared effective
under the Securities Act and no stop order has been issued with respect thereto
and no proceedings therefor have been initiated or, to the Company's best
knowledge, threatened by the Commission. Except as the context may otherwise
require, such registration statement, as amended or supplemented, on file with
the Commission at the time the registration statement became effective,
including the Prospectus, financial statements, schedules, exhibits and all
other documents filed as part thereof, as amended and supplemented, is herein
called the "Registration Statement," and the prospectus, as amended or
supplemented, on file with the Commission at the time the Registration Statement
became effective is herein called the "Prospectus," except that if any
prospectus filed by the Company with the Commission pursuant to Rule 424(b) of
the general rules and regulations of the Commission under the Securities Act
(together with the published policies and actions of the Commission thereunder,
the "Securities Act Regulations") differs from the form of prospectus on file at
the time the Registration Statement became effective, the term "Prospectus"
shall refer to the Rule 424(b) prospectus from and after the time it is filed
with the Commission and shall include any amendments or supplements thereto from
and after their dates of effectiveness or use, respectively.
<PAGE>
Trident Securities, Inc.
Page 3
(ii) The Association has filed an Application for Approval of
Conversion on Form AC, including exhibits (as amended or supplemented, the "Form
AC" or the "Conversion Application") with the Office of Thrift Supervision
("OTS") under the Home Owners' Loan Act, as amended ("HOLA"), and the rules and
regulations, including published policies and actions, of the OTS thereunder
(collectively, the "OTS Regulations"), which has been approved by the OTS; and
the Prospectus and the proxy statement for the solicitation of proxies from
members for the special meeting to approve the Plan ("Proxy Statement") included
as part of the Form AC have been approved for use by the OTS. No order has been
issued by the OTS preventing or suspending the use of the Prospectus or the
Proxy Statement and no action by or before the OTS revoking such approvals is
pending or, to the Association's best knowledge, threatened. The Company has
filed with the OTS the Company's application on Form H-e(1)-S ("Holding Company
Application") promulgated under the savings and loan holding company provisions
of the HOLA and the regulations promulgated thereunder and has received approval
of its acquisition of the Association from the OTS.
(iii) As of the date hereof (i) the Registration Statement and the
Prospectus comply with the Securities Act and the Securities Act Regulations,
(ii) the Registration Statement does not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and (iii) the Prospectus does not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Representations or warranties in this subsection shall not apply to statements
or omissions made in reliance upon and in conformity with written information
furnished to the Company or the Association by or on behalf of Trident relating
to Trident expressly for use in the Registration Statement or Prospectus.
(iv) The Company has been duly incorporated as a Delaware corporation
and the Association has been duly organized as a mutual savings bank under the
laws of the United States, and each of them is validly existing and in good
standing under the laws of their jurisdiction of organization with full power
and authority to own its property and conduct its business as described in the
Registration Statement and Prospectus; the Association is a member in good
standing of the Federal Home Loan Bank of Atlanta; and the deposit accounts of
the Association are insured by the Savings Association Insurance Fund ("SAIF")
administered by the Federal Deposit Insurance Corporation ("FDIC") up to the
applicable legal limits. The Company is qualified to transact business as a
foreign corporation in the State of South Carolina. Each of the Company and the
Association is not required to be qualified to do business as a foreign
corporation in any jurisdiction where non-qualification would have a material
adverse effect on the financial condition, operations, business, properties or
assets of the Company and the Association, taken as a whole.
<PAGE>
Trident Securities, Inc.
Page 4
(v) The Association has good, marketable and insurable title to all
assets material to its business and to those assets described in the Prospectus
as owned by it, free and clear of all liens, charges, encumbrances or
restrictions, except for liens for taxes not yet due, except as described in the
Prospectus and except as do not in the aggregate have a material adverse effect
upon the financial condition, operations, business, properties or assets of the
Association; and all of the leases and subleases material to the financial
condition, operations, business, assets or properties of the Association, under
which it holds properties, including those described in the Prospectus, are in
full force and effect as described therein.
(vi) The Association has no direct or indirect subsidiaries.
(vii) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly authorized by
all necessary actions on the part of each of the Company and the Association,
and this Agreement is a valid and binding obligation of each of the Company and
the Association, enforceable in accordance with its terms (except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization, conservatorship, receivership or similar laws relating to or
affecting the enforcement of creditors' rights generally or the rights of
creditors of insured financial institutions and their holding companies, the
accounts of whose subsidiaries are insured by the FDIC, by general equity
principles, regardless of whether such enforceability is considered in a
proceeding in equity or at law, or laws relating to the safety and soundness of
insured depository institutions and their affiliates, and except to the extent
that the provisions of Sections 8 and 9 hereof may be unenforceable as against
public policy or by applicable law, including without limitation, Section 23A of
the Federal Reserve Act, 12 U.S.C. Section 371c (("Section 23A")).
(viii)Except as referred to in the Prospectus, there is no litigation
or governmental proceeding pending or, to the best knowledge of the Company or
the Association, threatened against or involving the Company or the Association,
or any of their respective assets which individually or in the aggregate would
reasonably be expected to have a material adverse effect on the financial
condition, results of operations, business, assets or properties of the Company
or the Association, taken as a whole. (For purposes of this representation, any
litigation or governmental proceeding is not considered "threatened" unless the
potential litigation or governmental authority had manifested to the management
of the Company or the Association a present intention to initiate such
litigation or proceeding.).
(ix) The Company and the Association have received the opinions of
Luse Lehman Gorman Pomerenk & Schick, P.C. with respect to the federal income
tax consequences of the Conversion and the federal income tax consequences of
the Foundation, and of Dixon, Odom & Co., LLP, with respect to South Carolina
income tax consequences of the Conversion, to the effect that the Conversion
will constitute a tax-free reorganization under the Internal Revenue Code of
1986, as amended, and will not be a taxable transaction for the Association or
the Company under
<PAGE>
Trident Securities, Inc.
Page 5
the laws of South Carolina; and the facts and representations made by the
Company and the Association and relied upon in rendering such opinions are
accurate and complete, and neither the Company nor the Association have taken
any action inconsistent therewith.
(x) Neither the Company nor the Association is in violation of any
rule or regulation of the OTS or the FDIC that could reasonably be expected to
result in any enforcement action against the Company or the Association, or
their officers or directors, that might have a material adverse effect on the
financial condition, operations, businesses, assets or properties of the Company
and the Association, taken as a whole.
(xi) Ferguson & Co. ("Ferguson"), the firm that prepared the
independent appraisal dated as of September 2, 1997, is independent with respect
to the Company and the Association within the meaning of the OTS Regulations.
The Company and the Association believe Ferguson to be experienced and expert in
rendering appraisals of thrift institutions, and nothing has come to the
attention of the Company and the Association which has caused them to believe
that the appraisal by Ferguson was not prepared in accordance with the
requirements of the OTS Regulations.
(xii) Dixon, Odom & Co., LLP, the firm that certified the financial
statements of the Association filed as part of the Registration Statement and
the Conversion Application, is independent with respect to the Company and the
Association as required by the Securities Act, the Securities Act Regulations,
the Code of Professional Ethics of the American Institute of Certified Public
Accountants, and Title 12 of the Code of Federal Regulations Parts 563c and 571,
and nothing has come to the attention of the Company and the Association which
has caused them to believe that such firm is not independent within the meaning
of such provisions.
(xiii)The financial statements and related notes which are included in
the Registration Statement and the Prospectus fairly present the financial
condition, earnings, equity and cash flows of the Association at the respective
dates thereof and for the respective periods covered thereby and comply as to
form with the applicable accounting requirements of the Securities Act
Regulations and the OTS Regulations. Such financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
consistently applied throughout the periods involved, except as set forth
therein, and such financial statements are consistent with financial statements
and other reports filed by the Association with the OTS, except as GAAP may
otherwise require. The financial tables in the Prospectus accurately present the
information purported to be shown thereby at the respective dates thereof and
for the respective periods covered thereby.
(xiv) There has been no material change in the financial condition,
operations, business, assets or properties of the Company and the Association,
taken as a whole, since the latest date as of which such condition is set forth
in the Prospectus, except as set forth therein; and the
<PAGE>
Trident Securities, Inc.
Page 6
capitalization, assets, properties and business of each of the Company and the
Association conform in all material aspects to the descriptions thereof
contained in the Prospectus. Neither the Company nor the Association has any
material liabilities of any kind, contingent or otherwise, except as set forth
in the Prospectus.
(xv) There has been no breach or default (or the occurrence of any
event which, with notice or lapse of time or both, would constitute a default)
under, or creation or imposition of any lien, charge or other encumbrance upon
any of the properties or assets of the Company or the Association pursuant to
any of the terms, provisions or conditions of, any agreement, contract,
indenture, bond, debenture, note, instrument or obligation to which the Company
or the Association is a party or by which any of them or any of their respective
assets or properties may be bound or is subject, or violation of any
governmental license or permit or any enforceable published law, administrative
regulation or order or court order, writ, injunction or decree, which breach,
default, encumbrance or violation would have a material adverse effect on the
financial condition, operations, business, assets or properties of the Company
and the Association, taken as a whole; all agreements which are material to the
financial condition, results of operations or business of the Company and the
Association, taken as a whole, are in full force and effect, and no party to any
such agreement has instituted or, to the best knowledge of the Company and the
Association, threatened any action or proceeding wherein the Company or the
Association would be alleged to be in default thereunder.
(xvi) Neither the Company nor the Association is in violation of its
respective charter, certificate of incorporation or bylaws. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby (including the establishment and operation of the Foundation) do not
conflict with or result in a breach of the charter, certificate of incorporation
or bylaws of the Company or the Association (in either mutual or stock form) or
constitute a material breach of or default (or an event which, with notice or
lapse of time or both, would constitute a default) under, give rise to any right
of termination, cancellation or acceleration contained in, or result in the
creation or imposition of any lien, charge or other encumbrance upon any of the
properties or assets of the Company or the Association pursuant to any of the
terms, provisions or conditions of, any material agreement, contract, indenture,
bond, debenture, note, instrument or obligation to which the Company or the
Association is a party (other than the establishment of a liquidation account
pursuant to the Plan) or violate any governmental license or permit or any law,
administrative regulation or order or court order, writ, injunction or decree
(subject to the satisfaction of certain conditions imposed by the OTS in
connection with its approval of the Conversion Application), which breach,
default, encumbrance or violation would have a material adverse effect on the
financial condition, operations or business of the Company and the Association,
taken as a whole.
(xvii)Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, except as otherwise may be
indicated or contemplated
<PAGE>
Trident Securities, Inc.
Page 7
therein, neither the Company nor the Association has issued any securities which
will remain issued at the Closing Date or incurred any liability or obligation,
direct or contingent, or borrowed money, except borrowings or liabilities in the
ordinary course of business, or entered into any other transaction not in the
ordinary course of business and not consistent with prior practices, which is
material in light of the business of the Company and the Association, taken as a
whole.
(xviii) The issuance and the sale of the Shares and the issuance of the
Foundation Shares have been duly authorized by all necessary action of the
Company and approved by the OTS and, when issued in accordance with the terms of
the Plan and paid for, shall be validly issued, fully paid and nonassessable and
shall conform to the description thereof contained in the Prospectus; the
issuance of the Shares and the Foundation Shares is not subject to preemptive
rights, except for subscription rights to the Shares granted pursuant to the
Plan; and good title to the Shares and the Foundation Shares will be transferred
by the Company upon issuance thereof against payment therefor, free and clear of
all claims, encumbrances, security interests and liens against the Company
whatsoever. The issuance and sale of the capital stock of the Association to the
Company has been duly authorized by all necessary action of the Association and
the Company and the OTS (subject to the satisfaction of various conditions
imposed by the OTS in connection with its approvals of the Conversion
Application and the Holding Company Application), and such capital stock, when
issued in accordance with the terms of the Plan, will be fully paid and
nonassessable and will conform in all material respects to the description
thereof contained in the Prospectus.
(xix) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and delivery of this
Agreement or the issuance of the Shares and the Foundation Shares, except such
approvals as have been obtained and except for the declaration of effectiveness
of any required post-effective amendment by the Commission and approval thereof
by the OTS, the issuance of the Association's Federal Stock Charter by the OTS
and as may be required under the "blue sky" or securities laws of various
jurisdictions.
(xx) All contracts and other documents required to be filed as
exhibits to the Registration Statement, the Conversion Application or the
Holding Company Application have been filed with the Commission or the OTS or
both, as the case may be.
(xxi) The Company and the Association have timely filed all required
federal, state and local tax returns, and no deficiency has been asserted with
respect to such returns by any taxing authorities, and the Company and the
Association have paid all taxes that have become due and, to the best of their
knowledge, have made adequate reserves for accrued tax liabilities, except where
any failure to make such filings, payments and reserves, or the assertion of
such a deficiency, would not have a material adverse effect on the financial
condition or results of operations of the Company and the Association, taken as
a whole.
<PAGE>
Trident Securities, Inc.
Page 8
(xxii) All of the loans represented as assets of the Association as of
the most recent date for which financial condition data is included in the
Prospectus meet or are exempt from all requirements of federal, state or local
law pertaining to lending, including without limitation truth in lending
(including the requirements of Regulation Z and 12 C.F.R. Part 226 and Section
563.99), real estate settlement procedures, consumer credit protection, equal
credit opportunity and all disclosure laws applicable to such loans, except for
violations which, if asserted, would not have a material adverse effect on the
Company and the Association, taken as a whole.
(xxiii) The records of Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members (as those terms are defined in the Plan)
delivered to Trident by the Association or its agent for use during the
Conversion have been reviewed by the Association and are believed to be
accurate, reliable and complete and Trident shall have no liability to any
person relating to the reliability, accuracy or completeness of such records or
for any denial or allocation of a subscription to purchase shares to any person
based upon such records.
(xxiv) Neither the Company nor the Association has made any payment of
funds of the Company or the Association prohibited by law, and no funds of the
Company or the Association have been set aside to be used for any payment
prohibited by law.
(xxv) To the best knowledge of the Company and the Association, the
Company and the Association are in compliance with all laws, rules and
regulations relating to environmental protection and neither the Company nor the
Association is subject to liability under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, or any similar
law, except for violations which, if asserted, would not have a material adverse
effect on the Company and the Association, taken as a whole. There are no
actions, suits, regulatory investigations or other proceedings pending or, to
the best knowledge of the Company or the Association, threatened against the
Company or the Association relating to environmental protection. To the best
knowledge of the Company and the Association, no disposal, release or discharge
of hazardous or toxic substances, pollutants or contaminants, including
petroleum and gas products, as any of such terms may be defined under federal,
state or local law, has been caused by the Company or the Association or, to the
best knowledge of the Company and the Association, and except as already
disclosed in the Prospectus, has occurred on, in or at any of the facilities or
properties owned or leased by the Company or the Association or in which the
Company or the Association has a security interest, except such disposal,
release or discharge which would not have a material adverse effect on the
financial condition, operations, business, assets or properties of the Company,
the Association or the subsidiary, taken as a whole.
(xxvi) All documents delivered by the Association or the Company or
their representatives in connection with the issuance and sale of the Common
Stock, except for those documents that were prepared by parties other than the
Bank, the Company or their representatives, were, on the dates on which they
were delivered, true, complete and correct.
<PAGE>
Trident Securities, Inc.
Page 9
(b) Trident represents and warrants to the Company and the
Association that:
(i) Trident is registered as a broker-dealer and is in good
standing with the Commission and the NASD.
(ii) Trident is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, with full corporate power
and authority to provide the services to be furnished to the Company and the
Association hereunder.
(iii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of Trident, and this Agreement is
a legal, valid and binding obligation of Trident, enforceable in accordance with
its terms (except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, reorganization or similar laws relating to or affecting
the enforcement of creditors' rights generally or the rights of creditors of
registered broker-dealers accounts of whose may be protected by the Securities
Investor Protection Corporation or by general equity principles, regardless of
whether such enforceability is considered in a proceeding in equity or at law,
and except to the extent that the provisions of Sections 8 and 9 hereof may be
unenforceable as against public policy).
(iv) Trident and, to Trident's best knowledge, its employees, agents
and representatives who shall perform any of the services required hereunder to
be performed by Trident, shall be duly authorized and shall have all licenses,
approvals and permits necessary to perform such services, and Trident is a
registered selling agent in the jurisdictions in which the Company is relying on
such registration for the sale of the Shares, and will remain so registered
until the Conversion is consummated or terminated.
(v) The execution and delivery of this Agreement by Trident, the
fulfillment of the terms set forth herein and the consummation of the
transactions contemplated hereby shall not violate or conflict with the charter
or bylaws of Trident or violate, conflict with or constitute a breach of, or
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, any material agreement, indenture or other
instrument by which Trident is bound or under any governmental license or permit
or any law, administrative regulation, authorization, approval or order or court
decree, injunction or order.
(vi) All funds received by Trident to purchase Common Stock will
be handled in accordance with Rule 15c2-4 under the Securities Exchange Act of
1934, as amended ("Exchange Act").
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Trident Securities, Inc.
Page 10
(vii) No action or proceeding against Trident before the Commission,
the NASD, any state securities commission, or any state or federal court is
pending or, to Trident's best knowledge, threatened concerning Trident's
activities as a broker-dealer.
3. Engagement of Trident; Sale and Delivery of the Shares. On the
------------------------------------------------------
basis of the representations and warranties herein contained, but subject to the
terms and conditions herein set forth, the Company and the Association hereby
engage Trident as their agent to utilize its best efforts to assist the Company
with the Company's sale of the Shares in the Offerings, and Trident hereby
accepts such engagement. The engagement of Trident hereunder shall terminate (a)
forty-five (45) days after the Subscription and Community Offering closes,
unless the Company and the Association, with the approval of the OTS, are
permitted to extend such period of time, or (b) upon consummation of the
Conversion, whichever date shall first occur.
In the event the Company is unable to sell a minimum of 892,500 Shares
(or such lesser amount as the OTS may permit) within the period herein provided,
this Agreement shall terminate, and the Company and the Association shall refund
promptly to any persons who have subscribed for any of the Shares, the full
amount which it may have received from them, together with interest as provided
in the Prospectus, and no party to this Agreement shall have any obligation to
the other party hereunder, except as set forth in Sections 6, 8, 9 and 10
hereof. Appropriate arrangements for placing the funds received from
subscriptions for Shares in special interest-bearing accounts with the
Association until all Shares are sold and paid for will be made prior to the
commencement of the Subscription and Community Offering, with provision for
prompt refund to the purchasers as set forth above, or for delivery to the
Company if all Shares are sold.
If all conditions precedent to the consummation of the Conversion are
satisfied, including the sale of all Shares required by the Plan to be sold, the
Company agrees to issue or have issued such Shares and to release for delivery
certificates to subscribers thereof for such Shares on or as soon as possible
following the Closing Date against payment to the Company by any means
authorized pursuant to the Prospectus, at the principal office of the Company,
515 Market Street, Cheraw, South Carolina, or at such other place as shall be
agreed upon between the parties hereto. The date upon which the Company shall
release or deliver the Shares sold in the Offerings, in accordance with the
terms hereof, is herein called the "Closing Date."
Trident agrees either (a) upon receipt of an executed order form of a
subscriber to forward the offering price of the Common Stock ordered on or
before twelve noon on the next business day following receipt or execution of an
order form by Trident to the Association for deposit in a segregated account or
(b) to solicit indications of interest in which event (i) Trident will
subsequently contact any potential subscriber indicating interest to confirm the
interest and give instructions to execute and return an order form or to receive
authorization to execute the order form on the subscriber's behalf, (ii) Trident
will mail acknowledgements of receipt of orders to each subscriber confirming
interest on the business day following such confirmation, (iii) Trident
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Trident Securities, Inc.
Page 11
will debit accounts of such subscribers on the third business day ("debit date")
following receipt of the confirmation referred to in (i), and (iv) Trident will
forward completed order forms together with such funds to the Association on or
before twelve noon on the next business day following the debit date for deposit
in a segregated account. Trident acknowledges that if the procedure in (b) is
adopted, subscribers' funds are not required to be in their accounts until the
debit date.
Trident shall receive the following compensation and expense
reimbursement for its services hereunder:
(a) (i) a management fee of $10,000, (ii) a commission equal
to 2% of the aggregate dollar amount of the Shares sold in the
Subscription Offering and Community Offering (excluding Shares sold to
the Association's directors, executive officers, the ESOP, and
associates (as defined in the Plan) of the Association's directors and
executive officers, and (iii) a commission to be agreed upon by Trident
and the Company for Shares sold by other member firms of the NASD
through a selected dealers arrangement in the Syndicated Community
Offering, which aggregate commission shall be determined at the
discretion of the Company and the Association with the advice of
Trident. All such fees shall be paid to Trident in next-day funds on
the Closing Date.
(b) Reimbursement for reasonable out-of-pocket allocable
expenses, including but not limited to travel, food, lodging and legal
fees, incurred by it whether or not the Offerings are successfully
completed; provided, however, that reimbursable legal fees will not
exceed $27,500 and that other reimbursable expenses will not exceed
$10,000, and, provided further, that neither the Company nor the
Association shall reimburse Trident for any of the foregoing expenses
accrued after Trident shall have notified the Company or the
Association of its election to terminate this Agreement pursuant to
Section 11 hereof or after such time as the Company or the Association
shall have given notice in accordance with Section 12 hereof that
Trident is in breach of this Agreement. Full reimbursement of Trident
shall be made in next-day funds on the Closing Date or, if the
Conversion is not completed and is terminated for any reason, within
ten (10) business days of receipt by the Company of a written request
detailing allocable expenses from Trident for reimbursement of such
expenses. Trident acknowledges receipt of a $10,000 advance payment
from the Association, which shall be credited against the total
reimbursement due Trident hereunder. In the event this Agreement is
terminated pursuant to Section 11 hereof, Trident shall be reimbursed
only for its actual allocable expenses.
(c) Reimbursement for any expenses of the Company and the
Association set forth in Section 6 hereof to the extent paid by Trident
on behalf of the Company and the Association. Full reimbursement shall
be made in next-day funds on the Closing Date or, if the Conversion is
not completed and is terminated for any reason, within ten (10)
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Trident Securities, Inc.
Page 12
business days of receipt by the Company and the Association of a
written request for such reimbursement detailing such reimbursements.
Notwithstanding the limitations on reimbursement of Trident for its
allocable expenses provided in subsection (b) above and notwithstanding any
reimbursement of Trident pursuant to subsection (c) above, in the event that a
resolicitation or other event causes the Offerings to be extended beyond their
original expiration date, Trident shall be reimbursed for its reasonable
allocable expenses incurred during such extended period, provided that the
allowance for allocable expenses provided for in subsection (b) above has been
exhausted and subject to the following: such reimbursement shall be in an amount
equal to the product obtained by dividing $37,500 (the reimbursable expenses and
legal fees limitation set forth in Section (b) above by the total number of days
of the unextended Subscription Offering (calculated from the date of the
Prospectus to the intended close of the Subscription Offering as stated in the
Prospectus) and multiplying such product by the number of days of the extension
(that number of days from the date of the supplemental prospectus used in the
extended Subscription Offering to the closing of the extension of the
Subscription Offering described in such supplemental prospectus).
4. Offering. Subject to the provisions of Section 7 hereof,
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Trident is assisting the Company on a best efforts basis in offering a minimum
of 1,402,500 and a maximum of 1,897,500 Shares, subject to adjustment up to
2,182,125 Shares (except as the OTS may permit to be decreased or increased) in
the Offerings. The Shares are to be offered to the public at the price set forth
on the cover page of the Prospectus and the first page of this Agreement.
5. Further Agreements. The Company and the Association jointly and
------------------
severally covenant and agree that:
(a) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus and through and including the
Closing Date, except as otherwise may be indicated or contemplated therein,
neither the Company nor the Association will issue any securities which will
remain issued at the Closing Date or incur any liability or obligation, direct
or contingent, or borrow money, except borrowings or liabilities in the ordinary
course of business, or enter into any other transaction not in the ordinary
course of business and consistent with prior practices, which is material in
light of the financial condition, operations, business, properties or assets of
the Company and the Association, taken as a whole.
(b) If any Shares remain unsubscribed following completion of the
Subscription Offering and the Community Offering, the Company (i) will, if
deemed necessary, promptly file with the Commission a post-effective amendment
to such Registration Statement relating to the results of the Subscription and
the Community Offerings, any additional information with respect to the proposed
plan of distribution and any revised pricing information or (ii) if no such
post-effective amendment is required, will file with, or mail for filing to, the
Commission a prospectus
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Trident Securities, Inc.
Page 13
or prospectus supplement containing information relating to the results of the
Subscription and Community Offerings and pricing information pursuant to Rule
424(c) of the Securities Act Regulations, in either case in a form reasonably
acceptable to the Company and Trident.
(c) Upon consummation of the Conversion (including the
establishment and operation of the Foundation), the authorized, issued and
outstanding equity capital of the Company shall be within the range as set forth
in the Prospectus under the caption "Capitalization," and no Common Stock of the
Company shall be outstanding immediately prior to the Closing Date (other than
shares of Common Stock issued in connection with the initial capitalization of
the Company, which shares will be canceled upon consummation of the Conversion);
and the certificates representing the Common Stock will conform in all material
respects with the requirements of applicable laws and OTS Regulations.
(d) Upon consummation of the Conversion, the Foundation will be
duly incorporated and validly existing as a non-stock corporation in good
standing under the laws of the State of Delaware with corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Prospectus; the Foundation will not be a savings and loan
holding company within the meaning of 12 C.F.R. Section 574.2(q) as a result of
the issuance of the Foundation Shares in accordance with the terms of the Plan
and in the amounts as described in the Prospectus; no approvals are required to
establish the Foundation and to contribute the shares of Common Stock thereto as
described in the Prospectus other than those set forth in the OTS approval of
the Conversion Application; except as specifically disclosed in the Prospectus
and the Proxy Statement, there are no agreements and/or understandings, written
or oral, between the Company and/or the Savings Bank and the Foundation with
respect to the control, directly or indirectly, over the voting or the
acquisition or disposition of the Foundation Shares; at the time of the
Conversion, the Foundation Shares will have been duly authorized for issuance
and, when issued and contributed by the Company pursuant to the Plan, will be
duly and validly issued and fully paid and non-assessable; and the issuance of
the Foundation Shares is not subject to preemptive or similar rights.
(e) At all times subsequent to the date of the Prospectus through
and including the Closing Date (i) the Registration Statement and the Prospectus
will comply with the Securities Act and the Securities Act Regulations, (ii) the
Registration Statement will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and (iii) the Prospectus will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. (Further agreements in
this subsection shall not apply to statements or omissions made in reliance upon
and in conformity with written information furnished to the Company or the
Association
<PAGE>
Trident Securities, Inc.
Page 14
relating to Trident by or on behalf of Trident expressly for use in the
Registration Statement or Prospectus.).
(f) Upon amendment of the Association's charter and bylaws as
provided in the OTS Regulations and completion of the sale and issuance of the
Shares and the issuance of the Foundation Shares by the Company as contemplated
by the Prospectus, (i) the Association will be converted pursuant to the Plan to
a federally chartered capital stock savings bank with full power and authority
to own its property and conduct its business as described in the Prospectus,
(ii) all of the authorized and outstanding capital stock of the Association will
be owned of record and beneficially by the Company, (iii) the Company will have
no direct subsidiaries other than the Association, and (iv) the Foundation will
be duly incorporated and validly existing as a non-stock corporation in good
standing under the laws of the State of Delaware.
(g) The Company shall deliver to Trident, from time to time, such
number of copies of the Prospectus as Trident reasonably may request. The
Company authorizes Trident to use the Prospectus in any lawful manner in
connection with the offer and sale of the Shares.
(h) The Company will notify Trident immediately, and confirm the
notice in writing, (i) when any post-effective amendment to the Registration
Statement becomes effective or any supplement to the Prospectus has been filed,
(ii) of the issuance by the Commission of any stop order relating to the
Registration Statement or of the initiation or the threat of any proceedings for
that purpose, (iii) of the receipt of any notice with respect to the suspension
of the qualification of the Shares for offering or sale in any jurisdiction, and
(iv) of the receipt of any comments from the staff of the Commission relating to
the Registration Statement. If the Commission enters a stop order relating to
the Registration Statement at any time, the Company will make every reasonable
effort to obtain the lifting of such order at the earliest possible moment.
(i) During the time when a prospectus is required to be delivered
under the Securities Act, the Company will comply with all requirements imposed
upon it by the Securities Act and by the Securities Act Regulations to permit
the continuance of offers and sales of or dealings in the Shares in accordance
with the provisions hereof and the Prospectus. If during the period when the
Prospectus is required to be delivered in connection with the offer and sale of
the Shares any event relating to or affecting the Company and the Association,
taken as a whole, shall occur as a result of which it is necessary, in the
reasonable opinion of counsel for Trident, to amend or supplement the Prospectus
in order to make the Prospectus not false or misleading in light of the
circumstances existing at the time it is delivered to a purchaser of the Shares,
the Company forthwith shall prepare and furnish to Trident a reasonable number
of copies of an amendment or amendments or of a supplement or supplements to the
Prospectus (in form and substance reasonably satisfactory to counsel for
Trident) which shall amend or supplement the Prospectus so that, as amended or
supplemented, the Prospectus shall not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in
<PAGE>
Trident Securities, Inc.
Page 15
light of the circumstances existing at the time the Prospectus is delivered to a
purchaser of the Shares, not misleading. The Company will not file or use any
amendment or supplement to the Registration Statement or the Prospectus unless
Trident has been first furnished a copy or if Trident shall reasonably object
after having been furnished such copy. For the purposes of this subsection the
Company and the Association shall furnish such information with respect to
themselves as Trident from time to time may reasonably request.
(j) The Company and the Association will take all reasonably
necessary action as may be required to qualify or register the Shares for offer
and sale by the Company under the securities or blue sky laws of such
jurisdictions as Trident and the Company or its counsel may agree upon;
provided, however, that the Company shall not be obligated to qualify as a
foreign corporation to do business under the laws of any such jurisdiction. In
each jurisdiction where such qualification or registration shall be effected,
the Company, unless Trident agrees that such action is not necessary or
advisable in connection with the distribution of the Shares, shall file and make
such statements or reports as are, or reasonably may be, required by the laws of
such jurisdiction.
(k) Appropriate entries will be made in the financial records of
the Association to establish a liquidation account for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders (as those terms are
defined in the Plan) in accordance with the OTS Regulations.
(l) The Company will file a registration statement for the Common
Stock under Section 12(g) of the Exchange Act prior to completion of the
Offerings pursuant to the Plan and shall request that such registration
statement be effective upon completion of the Conversion. The Company shall
maintain the effectiveness of such registration for a minimum period of three
years or for such shorter period as may be required by applicable law.
(m) The Company will make generally available to its security
holders as soon as practicable, but not later than 90 days after the close of
the period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the Securities Act Regulations) covering a twelve-
month period beginning not later than the first day of the Company's fiscal
quarter next following the effective date (as defined in said Rule 158) of the
Registration Statement.
(n) For a period of three (3) years from the date of this
Agreement, the Company will furnish to Trident, as soon as publicly available
after the end of each fiscal year, a copy of its annual report to shareholders
for such year; and the Company will furnish to Trident (i) as soon as publicly
available, a copy of each report or definitive proxy statement of the Company
filed with the Commission under the Exchange Act or mailed to shareholders, and
(ii) from time to time, such other public information concerning the Company as
Trident may reasonably request.
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Trident Securities, Inc.
Page 16
(o) The Company shall use the net proceeds from the sale of the Shares in
the manner set forth in the Prospectus.
(p) The Company shall not deliver the Shares and issue the Foundation
Shares until each and every condition set forth in Section 7 hereof has been
satisfied, unless such condition is waived in writing by Trident.
(q) The Company shall advise Trident, if necessary, as to the allocation
of deposits, in the case of Eligible Account Holders and Supplemental Eligible
Account Holders, and votes, in the case of Other Members, and of the Shares in
the event of an oversubscription, and shall provide Trident final instructions
as to the allocation of the Shares ("Allocation Instructions") in such event and
the Allocation Instructions shall be accurate, reliable and complete. Trident
shall be entitled to rely on the Allocation Instructions and shall have no
liability in respect of its reliance thereon, including without limitation, no
liability for or related to any denial or grant of a subscription in whole or in
part.
(r) The Company and the Association will take such actions and furnish
such information as are reasonably requested by Trident in order for Trident to
comply with the NASD's "Interpretation Relating to Free-Riding and Withholding."
(s) At the Closing Date, the Company and the Association will have
completed the conditions precedent to, and shall have conducted the Conversion
(including the establishment and operation of the Foundation) in all material
respects in accordance with, the Plan, OTS Regulations and all other applicable
laws, regulations, published decisions and orders, including all terms,
conditions, requirements and provisions precedent imposed by the OTS.
(t) The Company will use its best efforts to obtain approval for and
maintain quotation of its shares of common stock on the Nasdaq stock market
effective on or prior to the Closing Date.
6. Payment of Expenses. Subject to Section 3(c) hereof, whether or not
-------------------
the Conversion is consummated, the Company and the Association shall pay the
following expenses: (a) all regulatory filing fees, including but not limited to
those payable to the Commission, OTS, "blue sky" authorities and the NASD
(including fees payable to the NASD for Trident's filing pursuant to the NASD
Corporate Finance Rule), (b) all stock issue and transfer taxes which may be
payable with respect to the sale of the Shares, (c) attorneys' fees of the
Company and the Association, (d) attorneys' fees relating to any required "blue
sky" laws research and filings, (e) telephone charges, (f) air freight, (g)
rental equipment, (h) supplies, (i) transfer agent and registrar fees and
expenses, (j) auditing and accounting fees and expenses, (k) costs of printing
and mailing all documents necessary in connection with the Conversion, and (l)
slide production expenses in connection with any community investor meetings to
be held by Trident.
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Trident Securities, Inc.
Page 17
7. Conditions of Trident's Obligations. Except as may be waived in
-----------------------------------
writing by Trident, the obligations of Trident as provided herein shall be
subject to the accuracy of the representations and warranties contained in
Section 2 hereof as of the date hereof and as of the Closing Date, to the
performance by the Company and the Association of their obligations hereunder,
and to the following conditions:
(a) At the Closing Date, Trident shall receive the favorable
opinion of Luse Lehman Gorman Pomerenk & Schick, P.C., special counsel for
the Company and the Association, dated the Closing Date, addressed to
Trident, in form and substance reasonably satisfactory to counsel for
Trident and stating that:
(i) the Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware,
and the Association is validly existing in good standing as a mutual
savings bank under the laws of the United States, each with full power and
authority to own its properties and conduct its business as described in
the Prospectus;
(ii) the Association is a member of the Federal Home Loan Bank of
Atlanta, and the deposit accounts of the Association are insured by the
SAIF up to the applicable legal limits; and no action or proceeding to
suspend or revoke such membership or insurance coverage is pending or, to
such counsel's Actual Knowledge, threatened;
(iii) the activities of the Association as described in the
Prospectus are permitted under the HOLA and OTS Regulations;
(iv) to such counsel's Actual Knowledge, the Association has no
direct or indirect subsidiary corporations;
(v) the Foundation has been duly incorporated and is validly
existing as a non-stock corporation in good standing under the laws of the
State of Delaware with corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus; the Foundation is not a savings and loan holding company within
the meaning of 12 C.F.R. Section 574.2(q) as a result of the issuance of
the Foundation Shares to it in accordance with the terms of the Plan and in
the amounts as described in the Prospectus; no approvals are required to
establish the Foundation and to contribute the Foundation Shares thereto as
described in the Prospectus other than those set forth in the OTS approval
related thereto.
(vi) the Company and the Association are duly qualified to do
business and are in good standing as a foreign corporation in each
jurisdiction where the ownership or leasing of its properties or the
conduct of its business requires such qualification, unless
<PAGE>
Trident Securities, Inc.
Page 18
the failure to be so qualified would not have a material adverse effect on
the Company and the Association, taken as a whole.
(vii) to such counsel's Actual Knowledge, the Association has
obtained all licenses, permits and other governmental authorizations
required for the conduct of its business as described in the Prospectus,
except where the failure to obtain such licenses, permits or governmental
authorizations would not have a material adverse effect on the financial
condition, operations, business, properties or assets of the Company and
the Association, taken as a whole; to such counsel's Actual Knowledge, all
of the leases and subleases material to the business of the Association
under which the Association holds properties are in full force and effect;
the Association is not in violation of its charter or, to such counsel's
Actual Knowledge, its bylaws;
(viii) the Plan has been duly adopted by the Boards of Directors of
the Association and the Company and the members of the Association; the
Plan complies with, and to such counsel's Actual Knowledge, the Conversion
(including the establishment and operation of the Foundation) has been
effected in all material respects in accordance with, the HOLA, the OTS
Regulations and applicable OTS approvals issued thereunder; to such
counsel's Actual Knowledge, all of the terms, conditions, requirements and
provisions with respect to the Plan and the Conversion (including the
establishment and operation of the Foundation) imposed by the OTS, except
with respect to the Conversion Application and the filing or submission of
certain required post-Conversion reports by the Company or the Association,
have been complied with by the Company and the Association; and, to such
counsel's Actual Knowledge, no person has sought to obtain regulatory or
judicial review of the final action of the OTS in approving the Plan;
(ix) the Company has authorized Common Stock as set forth in the
Registration Statement and the Prospectus, and the description thereof in
the Registration Statement and the Prospectus is accurate and complete in
all material respects;
(x) the issuance and sale of the Shares and the issuance of the
Foundation Shares have been duly and validly authorized by all necessary
corporate action on the part of the Company; the Shares and the Foundation
Shares, upon receipt of consideration and issuance in accordance with the
terms of the Plan and this Agreement, will be validly issued, fully paid,
nonassessable and, except as disclosed in the Prospectus, free of
preemptive rights, and good title thereto shall be transferred by the
Company free and clear of all claims, encumbrances, security interests and
liens created by the Company;
(xi) the certificates for the Common Stock are in due and proper
form and comply in all material respects with applicable Delaware law and
OTS Regulations;
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Trident Securities, Inc.
Page 19
(xii) the issuance and sale of the capital stock of the Association
to the Company have been duly authorized by all necessary corporate action
of the Association and have received the approval of the OTS, and such
capital stock, upon receipt of payment and issuance in accordance with the
terms of the Plan, will be validly issued, fully paid and nonassessable and
good title thereto shall be transferred by the Association free and clear
of all claims, encumbrances, security interests and liens created by the
Association;
(xiii) subject to the satisfaction of the conditions to the OTS
approval of the Conversion Application and the Holding Company Application,
no further approval, authorization, consent or other order of any
regulatory agency is required in connection with the execution and delivery
of this Agreement, the issuance and sale of the Shares and the Foundation
Shares and the consummation of the Conversion (including the establishment
and operation of the Foundation), except with respect to the issuance to
the Association's Federal Stock Charter by the OTS, and except as may be
required under the "blue sky" securities laws of various jurisdictions and
the regulations of the NASD (as to which no opinion need be rendered);
(xiv) the execution and delivery of this Agreement and the
consummation of the Conversion (including the establishment and operation
of the Foundation) have been duly and validly authorized by all necessary
corporate action on the part of each of the Company and the Association;
and this Agreement is a legal, valid and binding obligation of each of the
Company and the Association, enforceable in accordance with its terms
(except as the enforceability thereof may be limited by (i) bankruptcy,
insolvency, moratorium, reorganization, receivership, conservatorship or
other similar laws relating to or affecting the enforcement of creditors'
rights generally or the rights of creditors of depository institutions
whose accounts are insured by the FDIC or savings and loan holding
companies the accounts of whose subsidiaries are insured by the FDIC; (ii)
general equity principles, regardless of whether such enforceability is
considered in a proceeding in equity or at law, or (iii) laws relating to
the safety and soundness of insured depository institutions and their
affiliates, and except to the extent that the provisions of Sections 8 and
9 hereof may be unenforceable as against public policy or applicable law,
including but not limited to, Section 23A of the Federal Reserve Act, as
amended);
(xv) except as set forth in the Prospectus, there are no legal or
governmental proceedings pending or, to such counsel's Actual Knowledge,
threatened against or involving the assets of the Company or the
Association which would have a material adverse effect on the Company and
the Association, taken as a whole (provided that for this purpose such
counsel need not regard any litigation or governmental procedure to be
"threatened" unless the potential litigant or government authority has
manifested to the management of the Company or the Association, or to such
counsel, a present intention to initiate such litigation or proceeding);
<PAGE>
Trident Securities, Inc.
Page 20
(xvi) the statements in the Prospectus under the captions
"Regulation," "Taxation," "Dividends," "Certain Restrictions on Acquisition
of the Holding Company," "Description of Capital Stock," and "The
Conversion," insofar as they are, or refer to, statements of law or legal
conclusions (excluding financial or statistical data or stock valuation
information included therein, as to which an opinion need not be
expressed), have been prepared or reviewed by such counsel and are accurate
and complete in all material respects;
(xvii) the Form AC has been approved by the OTS, and the Prospectus
and the Proxy Statement have been authorized for use by the OTS; the
Registration Statement has been declared effective by the Commission; and
no proceedings are pending by or before the Commission or the OTS seeking
to revoke or rescind the orders declaring the Registration Statement
effective or approving the Conversion Application or, to such counsel's
Actual Knowledge, are contemplated or threatened (provided that for this
purpose such counsel need not regard any litigation or governmental
procedure to be "threatened" unless the potential litigant or government
authority has manifested to the management of the Company or the
Association, or to such counsel, a present intention to initiate such
litigation or proceeding);
(xviii) the execution and delivery of this Agreement and the
consummation of the Conversion (including the establishment and operation
of the Foundation) do not conflict with or result in a breach of the
charter, certificate of incorporation or bylaws of the Company or the
Association (in either mutual or stock form), or, to such counsel's Actual
Knowledge, constitute a breach of or default (or an event which, with
notice or lapse of time or both, would constitute a default) under, give
rise to any right of termination, cancellation or acceleration contained
in, or result in the creation or imposition of any lien, charge or other
encumbrance upon any of the properties or assets of the Company or the
Association pursuant to any of the terms, provisions or conditions of, any
material agreement, contract, indenture, bond, debenture, note, instrument
or obligation to which the Company or the Association is a party (other
than the establishment of the liquidation account pursuant to the Plan) or
violate any governmental license or permit or any law, administrative
regulation or order or court order, writ, injunction or decree (subject to
the satisfaction of certain conditions imposed by the OTS in connection
with its approval of the Conversion Application and the Holding Company
Application), which breach, default, encumbrance or violation would have a
material adverse effect on the financial condition, operations, business,
assets or properties of the Company and the Association, taken as a whole;
(xix) there has been no breach of any provision of the Company's or
the Association's charter or certificate of incorporation, as the case may
be; to such counsel's Actual Knowledge, bylaws or breach or default (or the
occurrence of any event which,
<PAGE>
Trident Securities, Inc.
Page 21
with notice or lapse of time or both, would constitute a default) by the
Company or the Association under any agreement, contract, indenture, bond,
debenture, note, instrument or obligation to which the Company or the
Association is a party or by which any of them or any of their respective
assets or properties may be bound, which breach or default would have a
material adverse effect on the financial condition, operations, business,
assets or properties of the Company and the Association, taken as a whole;
(xx) at the time the Conversion Application was approved by the OTS
and the Registration Statement was declared effective by the Commission,
the Conversion Application and the Registration Statement (including the
Prospectus and the Proxy Statement contained therein), complied as to form
in all material respects with the requirements of the Securities Act, the
HOLA, the Securities Act Regulations and the OTS Regulations, as the case
may be (except as to information provided in writing by Trident with
respect to Trident included therein and financial statements, notes to
financial statements, financial tables and other financial and statistical
data and stock valuation information included therein, as to which no
opinion need be rendered); to such counsel's Actual Knowledge, all
documents and exhibits required to be filed with the Conversion Application
and the Registration Statement have been so filed; and the descriptions in
the Conversion Application and the Registration Statement of such documents
and exhibits are accurate and complete in all material respects; and
(xxi) upon the effectiveness of the Association's stock charter and
bylaws in accordance with applicable regulations and completion of the sale
by the Company of the Shares and the issuance of the Foundation Shares as
contemplated by the Prospectus and the Plan, (i) the Association will be
converted to a permanent capital stock savings bank under the laws of the
United States with full power and authority to own its property and conduct
its business as described in the Prospectus, (ii) all of the outstanding
capital stock of the Association will be owned of record and, to such
counsel's Actual Knowledge, beneficially by the Company, free and clear of
all liens, charges, encumbrances and restrictions, and (iii) the Foundation
will be duly incorporated and validly existing as a non-stock corporation
in good standing under the laws of the State of Delaware.
In rendering such opinion, such counsel may rely as to certain
matters of fact on certificates of executive officers and directors of the
Company and the Association and certificates of public officials delivered
pursuant hereto. Such counsel may assume that any agreement is the valid
and binding obligation of any parties to such agreement other than the
Company and the Association. Such opinion shall be governed by, and
interpreted in accordance with, the Legal Opinion Accord ("Accord") of the
ABA Section of Business Law (1991), and, as a consequence, references in
such opinion to such counsel's "Actual Knowledge" shall be as such term is
defined in the Accord (or knowledge based on certificates). The opinion of
Luse Lehman Gorman Pomerenk & Schick, P.C. shall cover
<PAGE>
Trident Securities, Inc.
Page 22
matters of federal law, Delaware General Business Corporation La, and the
laws of the State of South Carolina. With respect to matters of South
Carolina law, such counsel may rely upon the opinion of
______________________, ___________, South Carolina, which opinion shall be
in form and substance satisfactory to Trident and its counsel. For purposes
of such opinion, no proceeding shall be deemed to be pending, no order or
stop order shall be deemed to be issued, and no action shall be deemed to
be instituted unless, in each case, a director or executive officer of the
Company or the Association, or its counsel, shall have received a copy of
such proceeding, order, stop order or action. Such opinion may be limited
to statutes, regulations and judicial interpretations and to facts as they
exist as of the date of such opinions. In rendering such opinion, such
counsel need assume no obligation to revise or supplement it should such
statutes, regulations and judicial interpretations be changed by
legislative or regulatory action, judicial decision or otherwise. Such
counsel need express no view, opinion or belief with respect to whether any
proposed or pending legislation, if enacted, or any proposed or pending
regulations or policy statements issued by any regulatory agency, whether
or not promulgated pursuant to any such legislation, would affect the
validity of the execution and delivery by the Company and the Association
of this Agreement or the issuance of the Shares and the Foundation Shares.
(b) At the Closing Date, Trident shall receive the letter of Luse
Lehman Gorman Pomerenk & Schick, P.C., special counsel for the Company and
the Association, dated the Closing Date, addressed to Trident, in form and
substance reasonably satisfactory to counsel for Trident and to the effect
that: (i) based on such counsel's participation in conferences with
representatives of the Company, the Association, its counsel, the
independent appraiser, the independent certified public accountants,
Trident and its counsel, review of documents and applicable law (including
the requirements of Form SB-2 and Form AC) and the experience such counsel
has gained in its practice under the Securities Act (relying as to factual
matters on certificates of officers and other written factual
representations by the Company and the Association), nothing has come to
such counsel's attention that would lead it to believe that the
Registration Statement, as amended or supplemented (except as to
information in respect of Trident contained therein and except as to the
financial statements, notes to financial statements, financial tables and
other financial and statistical data and stock valuation information
contained therein, as to which such counsel need express no view), at the
time it became effective contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading, and that the
Prospectus, as amended or supplemented (except as to information in respect
of Trident contained therein and except as to financial statements, notes
to financial statements, financial tables and other financial and
statistical data and stock valuation information contained therein as to
which such counsel need express no view), as of its date and at the Closing
Date, contained any untrue
<PAGE>
Trident Securities, Inc.
Page 23
statement of a material fact or omitted to state a material fact necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading (in issuing such letter, such counsel may
indicate that it has not confirmed the accuracy or completeness of or
otherwise verified the factual information contained in the Registration
Statement or the Prospectus and that it does not assume any responsibility
for the accuracy or completeness thereof.)
(c) Counsel for Trident shall have been furnished such documents as
they reasonably may require for the purpose of enabling them to review or
pass upon the sale of the Shares as herein contemplated and related
proceedings, and for the purpose of evidencing the accuracy, completeness
or satisfaction of any of the representations, warranties or conditions
herein contained, including but not limited to, resolutions of the Board of
Directors of the Company and the Association regarding the authorization of
this Agreement and the transactions contemplated hereby.
(d) Prior to and at the Closing Date, in the reasonable opinion of
Trident, (i) there shall have been no material adverse change in the
financial condition, business, operations, assets or properties of the
Company and the Association, taken as a whole, since the latest date as of
which such condition is set forth in the Prospectus, except as referred to
or contemplated therein; (ii) there shall have been no transaction entered
into by the Company or the Association after the latest date as of which
the financial condition of the Company or the Association is set forth in
the Prospectus other than transactions referred to or contemplated therein,
transactions in the ordinary course of business, and transactions which are
not material to the Company and the Association, taken as a whole; (iii)
none of the Company or the Association shall have received from the OTS or
Commission any directive (oral or written) to make any change in the method
of conducting their respective businesses which is material to the business
of the Company and the Association, taken as a whole, with which they have
not complied; (iv) no action, suit or proceeding, at law or in equity or
before or by any federal or state commission, board or other administrative
agency, shall be pending or threatened against the Company or the
Association or affecting any of their respective assets, wherein an
unfavorable decision, ruling or finding would have a material adverse
effect on the business, operations, financial condition or income of the
Company and the Association, taken as a whole; and (v) the Shares and the
Foundation Shares shall have been qualified or registered for offering and
sale by the Company under the securities or "blue sky" laws of such
jurisdictions as Trident and the Company shall have agreed upon.
(e) At the Closing Date, Trident shall receive a certificate of the
principal executive officer and the principal financial officer of each of
the Company and the Association, dated the Closing Date, to the effect
that: (i) they have examined the Prospectus and the Prospectus does not
contain an untrue statement of a material fact or
<PAGE>
Trident Securities, Inc.
Page 24
omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading with respect to the Company or the Association; (ii) no event
has occurred since the date of the Prospectus which should have been set
forth in an amendment or supplement to the Prospectus which has not been so
set forth, including specifically, but without limitation, any material
adverse change in the business, financial condition, operations, assets or
properties of the Company or the Association and, the conditions set forth
in clauses (ii) through (iv) inclusive of subsection (d) of this Section 7
have been satisfied; (iii) no order has been issued by the Commission or
the OTS to suspend the Offerings or the effectiveness of the Prospectus,
and, to the best knowledge of such officers, no action for such purposes
has been instituted or threatened by the Commission or the OTS; (iv) to the
best knowledge of such officers, no person has sought to obtain review of
the final actions of the OTS approving the Plan; and (v) all of the
representations and warranties contained in Section 2 of this Agreement are
true and correct, with the same force and effect as though expressly made
on the Closing Date.
(f) At the Closing Date, Trident shall receive, among other
documents, (i) copies of the letters from the OTS authorizing the use of
the Prospectus and the Proxy Statement and the establishment of the
Foundation, (ii) a copy of the order of the Commission declaring the
Registration Statement effective; (iii) copy of the certificate from the
OTS evidencing the corporate existence of the Association; (iv) copy of the
certificate from the FDIC evidencing the insured status of the Association,
(v) a copy of the letter from the appropriate Delaware authority evidencing
the incorporation (and, if generally available from such authority, good
standing) of the Company; (vi) a copy of the Company's certificate of
incorporation certified by the appropriate Delaware governmental authority;
and (vii) a copy of the letter from the OTS approving the Association's
Federal Stock Charter.
(g) As soon as available after the Closing Date, Trident shall
receive a certified copy of the Association's Federal Stock Charter as
executed by the OTS.
(h) Concurrently with the execution of this Agreement, Trident
acknowledges receipt of a letter from Dixon, Odom & Co., LLP, independent
certified public accountants, addressed to Trident, in substance and form
reasonably satisfactory to counsel for Trident, with respect to the
financial statements of the Association and certain financial information
contained in the Prospectus.
(i) At the Closing Date, Trident shall receive a letter in form and
substance reasonably satisfactory to counsel for Trident from Dixon, Odom &
Co., LLP, independent certified public accountants, dated the Closing Date
and addressed to Trident, confirming the statements made by them in the
letter delivered by them pursuant to the
<PAGE>
Trident Securities, Inc.
Page 25
preceding subsection as of a specified date not more than five (5) days
prior to the Closing Date.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are, in the reasonable
opinion of Trident and its counsel, satisfactory to Trident and its counsel. Any
certificates signed by an officer or director of the Company or the Association
prepared for Trident's reliance and delivered to Trident or to counsel for
Trident shall be deemed a representation and warranty by the Company and the
Association to Trident as to the statements made therein. If any condition to
Trident's obligations hereunder to be fulfilled prior to or at the Closing Date
is not so fulfilled, Trident may terminate this Agreement or, if Trident so
elects, may waive in writing any such conditions which have not been fulfilled,
or may extend the time of their fulfillment.
8. Indemnification.
---------------
(a) The Company and the Association jointly and severally agree to
indemnify and hold harmless Trident, its officers, directors and employees and
each person, if any, who controls Trident within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act, against any and all
loss, liability, claim, damage and expense whatsoever and shall further promptly
reimburse such persons for any legal or other expenses reasonably incurred by
each or any of them in investigating, preparing to defend or defending against
any action, proceeding or claim (whether commenced or threatened) arising out of
or based upon (A) (i) any untrue or alleged untrue statement of a material fact
or the omission or alleged omission of a material fact required to be stated or
necessary to make the statements, in light of the circumstances under which they
were made, not misleading in (i) the Registration Statement or the Prospectus
(ii) any application (including the Form AC) or other document or communication
(in this Section 8 collectively called "Application") prepared or executed by or
on behalf of the Company, the Association or based upon written information
furnished by or on behalf of the Company or the Association, filed in any
jurisdiction to register or qualify the Shares under the securities laws thereof
or filed with the OTS or Commission with respect to the offering of the Shares,
unless such statement or omission was made in reliance upon and in conformity
with information furnished in writing to the Company or the Association with
respect to Trident by or on behalf of Trident expressly for use in the
Prospectus or any amendment or supplement thereof or in any Application, as the
case may be, or (B) the Conversion (including the establishment and operation of
the Foundation) or the engagement of Trident hereunder; provided, however, that
such indemnification shall be unavailable if such action, proceeding or claim
arises as a result of Trident's gross negligence, bad faith or willful
misconduct.
(b) The Company shall indemnify and hold Trident harmless for any
liability whatsoever arising out of (i) the Allocation Instructions or (ii) any
records of Eligible Account
<PAGE>
Trident Securities, Inc.
Page 26
Holders, Supplemental Eligible Account Holders and Other Members (as those terms
are defined in the Plan) delivered to Trident by the Association or its agents
for use during the Conversion.
(c) Trident agrees to indemnify and hold harmless the Company and the
Association, their officers, directors and employees and each person, if any,
who controls the Company and the Association within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act, to the same extent as
the foregoing indemnity from the Company and the Association to Trident, but
only with respect to statements or omissions, if any, made in the Prospectus or
any amendment or supplement thereof, in any Application or to a purchaser of the
Shares in reliance upon, and in conformity with, information furnished in
writing to the Company or the Association with respect to Trident by or on
behalf of Trident expressly for use in the Prospectus or any amendment or
supplement thereof or in any Application.
(d) Promptly after receipt by an indemnified party under this Section 8
of notice of any action, proceeding or claim (whether commenced or threatened)
such indemnified party will, if a claim in respect thereof is to be made against
the indemnifying party under this Section 8, notify the indemnifying party of
such action, proceeding or claim; but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under this Section 8. In case any such action
is brought against any indemnified party, and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with the other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than the
reasonable cost of investigation except as otherwise provided herein. In the
event the indemnifying party elects to assume the defense of any such action and
retain counsel acceptable to the indemnified party, the indemnified party may
retain additional counsel, but shall bear the fees and expenses of such counsel
unless (i) the indemnifying party shall have specifically authorized the
indemnified party to retain such counsel or (ii) the parties to such suit
include such indemnifying party and the indemnified party, and such indemnified
party shall have been advised by counsel that one or more material legal
defenses may be available to the indemnified party which may not be available to
the indemnifying party, in which case the indemnifying party shall not be
entitled to assume the defense of such suit notwithstanding the indemnifying
party's obligation to bear the fees and expenses of such counsel. In no event
shall the indemnifying parties be liable for the fees and expenses of more than
one separate firm of attorneys (and any special counsel that said firm may
retain) for all indemnified parties in connection with any one action,
proceeding, claim or suit or separate but similar or related actions,
proceedings or claims in the same jurisdiction arising out of the same general
allegations or circumstances. An indemnifying party against whom indemnity may
be sought shall not be liable to indemnify an indemnified party under this
Section 8 if any
<PAGE>
Trident Securities, Inc.
Page 27
settlement of any such action is effected without such indemnifying party's
consent. To the extent applicable, this Section 8 is subject to and limited by
public policy and the provisions of applicable law, including but not limited
to, Section 23A.
9. Contribution. In order to provide for just and equitable
------------
contribution in circumstances in which the indemnity agreement provided for in
Section 8 above is for any reason held to be unavailable to Trident, the Company
and/or the Association other than in accordance with its terms, the Company and
the Association or Trident shall contribute to the aggregate losses,
liabilities, claims, damages, and expenses of the nature contemplated by said
indemnity agreement incurred by the Company and the Association or Trident (i)
in such proportion as is appropriate to reflect the relative benefits received
by the Company and the Association, on the one hand, and Trident, on the other,
from the offering of the Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above, but
also the relative fault of the Company or the Association, on the one hand, and
Trident, on the other, in connection with the statements or omissions which
resulted in such losses, claims, damages, liabilities or judgments, as well as
any other relevant equitable considerations. The relative benefits received by
the Company and the Association, on the one hand, and Trident, on the other,
shall be deemed to be in the same proportion as the total net proceeds from the
Conversion received by the Company and the Association bear to the total fees
received by Trident under this Agreement. The relative fault of the Company or
the Association, on the one hand, and Trident, on the other, shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the Association
or by Trident and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Association and Trident agree that it would not be just
and equitable if contribution pursuant to this Section 9 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by the indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9, Trident shall not be required
to contribute any amount in excess of the amount by which fees owed Trident
pursuant to this Agreement exceeds the amount of any damages which Trident has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who is not guilty of such
<PAGE>
Trident Securities, Inc.
Page 28
fraudulent misrepresentation. To the extent applicable, this Section 9 is
subject to and limited by public policy and the provisions of applicable law,
including but not limited to, Section 23A.
10. Survival of Agreements, Representations and Indemnities. The
-------------------------------------------------------
respective indemnities of the Company and the Association and Trident and the
representation and warranties of the Company and the Association and of Trident
set forth in or made pursuant to this Agreement shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of Trident or the Company or the Association
or any controlling person or indemnified party referred to in Section 8 hereof,
and shall survive any termination or consummation of this Agreement and/or the
issuance of the Shares, and any legal representative of Trident, the Company,
the Association and any such controlling persons shall be entitled to the
benefit of the respective agreements, indemnities, warranties and
representations.
11. Termination. Trident may terminate this Agreement by giving the
-----------
notice indicated below in this Section at any time after this Agreement becomes
effective as follows:
(a) If any domestic or international event or act or occurrence has
materially disrupted the United States securities markets such as to make it, in
Trident's reasonable opinion, impracticable to proceed with the offering of the
Shares; or if trading on the New York Stock Exchange shall have suspended; or if
the United States shall have become involved in a war or major hostilities; or
if a general banking moratorium has been declared by a state or federal
authority which has material effect on the Association or the Conversion; or if
a moratorium in foreign exchange trading by major international banks or persons
has been declared; or if there shall have been a material change in the
capitalization, condition or business of the Company, or if the Association
shall have sustained a material or substantial loss by fire, flood, accident,
hurricane, earthquake, theft, sabotage or other calamity or malicious act,
whether or not said loss shall have been insured; or if there shall have been a
material change in the condition or prospects of the Company or the Association.
(b) Any party hereto may terminate this Agreement by giving notice
pursuant to Section 12 hereof of a material breach of this Agreement by the
other party at any time after this Agreement becomes effective.
(c) If this Agreement is terminated as provided in this Section 11, the
party terminating this Agreement shall notify the non-terminating party promptly
by telephone or telegram, confirmed by letter.
(d) If this Agreement is terminated by Trident for any of the reasons set
forth in subsection (a) above, and to fulfill its obligations, if any, pursuant
to Sections 3, 6, 8(a) and 9 of this Agreement and upon demand, the Company and
the Association shall pay Trident the full amount so owing thereunder.
<PAGE>
Trident Securities, Inc.
Page 29
(e) The Association may terminate the Conversion in accordance with the
terms of the Plan. Such termination shall be without liability to any party,
except that the Company and the Association shall be required to fulfill their
obligations pursuant to Sections 3(b), 3(c), 6, 8(a), 9 and 10 of this
Agreement.
12. Notices. All communications hereunder, except as herein otherwise
-------
specifically provided, shall be in writing and if sent to Trident shall be
mailed, delivered or telegraphed and confirmed to Trident Securities, Inc., 4601
Six Forks Road, Suite 400, Raleigh, North Carolina 27609, Attention: Mr. R. Lee
Burrows, Jr. (with a copy to Breyer & Aguggia, 1300 I Street, N.W., Suite 470
East, Washington, D.C. 20005, Attention: Paul M. Aguggia, Esquire) and if sent
to the Company or the Association, shall be mailed, delivered or telegraphed and
confirmed to First Federal Savings and Loan Association of Cheraw, 515 Market
Street, Cheraw, South Carolina 29520, Attention: Herbert W. Watts, President
(with a copy to Luse Lehman Gorman Pomerenk & Schick, P.C., 5335 Wisconsin
Avenue, NW, Washington, DC 20015, Attention: John Gorman, Esquire).
13. Parties. This Agreement shall inure solely to the benefit of, and
-------
shall be binding upon, Trident, the Company, the Association and the controlling
and other persons referred to in Section 8 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
14. Construction. Unless preempted by federal law, this Agreement shall
------------
be governed by and construed in accordance with the substantive laws of North
Carolina.
15. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which when so executed and delivered shall be an original,
but all of which together shall constitute but one and the same instrument.
* * *
<PAGE>
Trident Securities, Inc.
Page 30
Please acknowledge your agreement to the foregoing by signing below and
returning to the Company one copy of this letter.
GREAT PEE DEE BANCORP, INC.
By:
----------------------------------------
Herbert W. Watts
President and Chief Executive Officer
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
By:
----------------------------------------
Herbert W. Watts
President and Chief Executive Officer
Agreed to and accepted as of
the date first written above:
TRIDENT SECURITIES, INC.
By:
-----------------------------------
Name:
Title:
<PAGE>
EXHIBIT 2
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
Cheraw, South Carolina
PLAN OF CONVERSION
From Mutual to Stock Form of Organization
I. GENERAL
-------
On July 14, 1997, the Board of Directors of First Federal Savings and
Loan Association of Cheraw (the "Bank") adopted a Plan of Conversion whereby the
Bank would convert from a federal mutual savings institution to a federal stock
savings institution pursuant to the Rules and Regulations of the OTS. The Plan
includes, as part of the conversion, the concurrent formation of a holding
company. The new holding company is proposed to be chartered as a Delaware
corporation under the name "Great Pee Dee Bancorp." The Plan provides that
non-transferable subscription rights to purchase Holding Company Conversion
Stock will be offered first to Eligible Account Holders of record as of the
Eligibility Record Date, then to the Bank's Tax-Qualified Employee Plans, then
to Supplemental Eligible Account Holders of record as of the Supplemental
Eligibility Record Date, and then to Other Members. Concurrently with, at any
time during, or promptly after the Subscription Offering, and on a lowest
priority basis, an opportunity to subscribe may also be offered to the general
public in a Direct Community Offering, with a priority given to natural persons
residing in the counties in the State of South Carolina where the Bank maintains
an office. The price of the Holding Company Conversion Stock will be based upon
an independent appraisal of the Bank and will reflect its estimated pro forma
market value, as converted. It is the desire of the Board of Directors of the
Bank to attract new capital to the Bank in order to increase its capital,
support future savings growth and increase the amount of funds available for
residential and other mortgage lending. The Converted Bank is also expected to
benefit from its management and other personnel having a stock ownership in its
business, since stock ownership is viewed as an effective performance incentive
and a means of attracting, retaining and compensating management and other
personnel. No change will be made in the Board of Directors or management as a
result of the Conversion.
As part of the Conversion, the Holding Company and the Bank intend to
establish a charitable foundation that will qualify as an exempt organization
under Section 501(c)(3) of the Internal Revenue Code (the "Foundation"), and to
donate to the Foundation 20,000 shares of Common Stock of the Holding Company.
The Foundation is being formed in connection with the Conversion in order to
complement the Bank's existing community reinvestment activities and to share
with the Bank's local community a part of the Bank's financial success as a
locally headquartered, community-oriented, financial services institution. The
Foundation will be dedicated to, the promotion of charitable purposes including
community development, grants or donations to support housing assistance,
not-for-profit community groups and other types of organizations or civic-minded
projects. It is expected that the Foundation will annually distribute total
grants to assist
A-1
<PAGE>
charitable organizations or to fund projects within its local community of not
less than 5% of the average fair value of Foundation assets each year. In order
to serve the purposes for which it was formed and maintain its Section 501(c)(3)
qualification, the Foundation may sell, on an annual basis, a limited portion of
any securities contributed to it by the Holding Company. The board of directors
of the Foundation will be comprised of individuals who are Officers or Directors
of the Bank. The board of directors of the Foundation will be responsible for
establishing the policies of the Foundation with respect to grants or donations,
consistent with the stated purposes of the Foundation, respectively. The
establishment and funding of the Foundation as part of the Conversion is subject
to the approval of the OTS and themembers.
II. DEFINITIONS
-----------
Acting in Concert: The term "acting in concert" shall have the same
-----------------
meaning given it in (S)574.2(c) of the Rules and Regulations of the OTS.
Actual Subscription Price: The price per share, determined as provided
-------------------------
in Section V of the Plan, at which Holding Company Conversion Stock will be sold
in the Subscription Offering.
Affiliate: An "affiliate" of, or a Person "affiliated" with, a
---------
Specified Person, is a Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by or is under common control with,
the Person specified.
Associate: The term "associate," when used to indicate a relationship
---------
with any Person, means (i) any corporation or organization (other than the
Holding Company, the Bank or a majority-owned subsidiary of the Holding Company)
of which such Person is an officer or partner or is, directly or indirectly, the
beneficial owner of ten percent 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, and (iii) any relative or spouse of such Person, or any relative of
such spouse, who has the same home as such Person or who is a director or
officer of the Holding Company or the Bank or any subsidiary of the Holding
Company; provided, however, that any Tax-Qualified or Non-Tax-Qualified Employee
Plan shall not be deemed to be an associate of any director or officer of the
Holding Company or the Bank, to the extent provided in Section V hereof.
Bank: First Federal Savings and Loan Association of Cheraw, or such
----
other name as the institution may adopt.
Conversion: Change of the Bank's charter and bylaws to federal stock
----------
charter and bylaws; sale by the Holding Company of Holding Company Conversion
Stock; and issuance and sale by the Converted Bank of Converted Bank Common
Stock to the Holding Company, all as provided for in the Plan.
Converted Bank: The federally chartered stock savings institution
--------------
resulting from the Conversion of the Bank in accordance with the Plan.
A-2
<PAGE>
Deposit Account: Any withdrawable account or deposit in excess
---------------
of $50 in the Bank.
Direct Community Offering: The offering to the general public of
-------------------------
any unsubscribed shares which may be effected as provided in Section V hereof.
Eligibility Record Date: The close of business on June 30, 1995.
-----------------------
Eligible Account Holder: Any Person holding a Qualifying Deposit
-----------------------
in the Bank on the Eligibility Record Date.
Exchange Act: The Securities Exchange Act of 1934, as amended.
------------
Holding Company: Great Pee Dee Bancorp, a Delaware corporation,
---------------
which upon completion of the Conversion will own all of the outstanding common
stock of the Converted Bank.
Holding Company Conversion Stock: Shares of common stock, par value
--------------------------------
$.01 per share, to be issued and sold by the Holding Company as a part of the
Conversion; provided, however, that for purposes of calculating Subscription
Rights and maximum purchase limitations under the Plan, references to the number
of shares of Holding Company Conversion Stock shall refer to the number of
shares offered in the Subscription Offering.
Market Maker: A dealer (i.e., any Person who engages directly or
------------
indirectly as agent, broker or principal in the business of offering, buying,
selling, or otherwise dealing or trading in securities issued by another Person)
who, with respect to a particular security, (i) regularly publishes bona fide,
competitive bid and offer quotations in a recognized inter-dealer quotation
system; or (ii) furnishes bona fide competitive bid and offer quotations on
request; and (iii) is ready, willing, and able to effect transactions in
reasonable quantities at his quoted prices with other brokers or dealers.
Maximum Subscription Price: The price per share of Holding Company
--------------------------
Conversion Stock to be paid initially by subscribers in the Subscription
Offering.
Member: Any Person or entity that qualifies as a member of the Bank
------
pursuant to its charter and bylaws.
Non-Tax-Qualified Employee Plan: Any defined benefit plan or defined
-------------------------------
contribution plan of the Bank or the Holding Company, such as an employee stock
ownership plan, stock bonus plan, profit-sharing plan or other plan, which with
its related trust does not meet the requirements to be "qualified" under Section
401 of the Internal Revenue Code.
OTS: Office of Thrift Supervision, Department of the Treasury.
---
Officer: An executive officer of the Holding Company or the Bank,
-------
including the Chairman of the Board, President, Executive Vice Presidents,
Senior Vice Presidents in charge of principal business functions, Secretary and
Treasurer.
A-3
<PAGE>
Order Forms: Forms to be used in the Subscription Offering and in the
-----------
Direct Community Offering to exercise Subscription Rights.
Other Members: Members of the Bank, other than Eligible Account
-------------
Holders, Tax-Qualified Employee Plans or Supplemental Eligible Account Holders,
as of the Voting Record Date.
Person: An individual, a corporation, a partnership, an Bank, a joint-
------
stock company, a trust, any unincorporated organization, or a government or
political subdivision thereof.
Plan: This Plan of Conversion of the Bank, including any amendment
----
approved as provided in this Plan.
Public Offering: The offering for sale by the Underwriters to the
---------------
general public of any shares of Holding Company Conversion Stock not subscribed
for in the Subscription Offering or the Direct Community Offering.
Public Offering Price: The price per share at which any unsubscribed
---------------------
shares of Holding Company Conversion Stock are initially offered for sale in the
Public Offering.
Qualifying Deposit: The aggregate balance of each Deposit Account of
------------------
an Eligible Account Holder as of the Eligibility Record Date or of a
Supplemental Eligible Account Holder as of the Supplemental Eligibility Record
Date.
SAIF: Savings Association Insurance Fund.
----
SEC: Securities and Exchange Commission.
---
Special Meeting: The Special Meeting of Members called for the
---------------
purpose of considering and voting upon the Plan of Conversion.
Subscription Offering: The offering of shares of Holding Company
---------------------
Conversion Stock for subscription and purchase pursuant to Section V of the
Plan.
Subscription Rights: Non-transferable, non-negotiable, personal rights
-------------------
of the Bank's Eligible Account Holders, Tax-Qualified Employee Plans,
Supplemental Eligible Account Holders, Other Members, and directors, Officers
and employees, or trusts of any such persons including individual retirement
accounts and Keogh accounts, to subscribe for shares of Holding Company
Conversion Stock in the Subscription Offering.
Supplemental Eligibility Record Date: The last day of the calendar
------------------------------------
quarter preceding approval of the Plan by the OTS.
Supplemental Eligible Account Holder: Any person holding a Qualifying
------------------------------------
Deposit in the Bank (other than an officer or director and their associates) on
the Supplemental Eligibility Record Date.
A-4
<PAGE>
Tax-Qualified Employee Plans: Any defined benefit plan or defined
----------------------------
contribution plan of the Bank or the Holding Company, such as an employee stock
ownership plan, stock bonus plan, profit-sharing plan or other plan, which with
its related trust meets the requirements to be "qualified" under Section 401 of
the Internal Revenue Code.
Underwriters: The investment Banking firm or firms agreeing to purchase
------------
Holding Company Conversion Stock in order to offer and sell such Holding Company
Conversion Stock in the Public Offering.
Voting Record Date: The date set by the Board of Directors in
------------------
accordance with federal regulations for determining Members eligible to vote at
the Special Meeting.
III. STEPS PRIOR TO SUBMISSION OF PLAN OF CONVERSION TO THE MEMBERS FOR
------------------------------------------------------------------
APPROVAL
--------
Prior to submission of the Plan of Conversion to its Members for
approval, the Bank must receive from the OTS approval of the Application for
Approval of Conversion to convert to the federal stock form of organization. The
following steps must be taken prior to such regulatory approval:
A. The Board of Directors shall adopt the Plan by not less
than a two-thirds vote.
B. The Bank shall notify its Members of the adoption of the
Plan by publishing a statement in a newspaper having a general
circulation in each community in which the Bank maintains an office.
C. Copies of the Plan adopted by the Board of Directors shall
be made available for inspection at each office of the Bank.
D. The Bank will promptly cause an Application for Approval of
Conversion on Form AC to be prepared and filed with the OTS, an
Application on Form H-(e)1 (or other applicable form) to be prepared
and filed with the OTS and a Registration Statement on Form S-1 (or
other applicable form) to be prepared and filed with the SEC.
E. Upon receipt of notice from the OTS to do so, the Bank
shall notify its Members that it has filed the Application for Approval
of Conversion by posting notice in each of its offices and by
publishing notice in a newspaper having general circulation in each
community in which the Bank maintains an office.
IV. CONVERSION PROCEDURE
--------------------
Following approval of the application by the OTS, the Plan will be
submitted to a vote of the Members at the Special Meeting. If the Plan is
approved by Members holding a majority of the total
A-5
<PAGE>
number of votes entitled to be cast at the Special Meeting, the Bank will take
all other necessary steps pursuant to applicable laws and regulations to convert
to a federal stock savings institution as part of a concurrent holding company
formation pursuant to the terms of the Plan.
The Holding Company Conversion Stock will be offered for sale in the
Subscription Offering at the Maximum Subscription Price to Eligible Account
Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account Holders,
and Other Members, prior to or within 45 days after the date of the Special
Meeting. The Bank may, either concurrently with, at any time during, or promptly
after the Subscription Offering, also offer the Holding Company Conversion Stock
to and accept subscriptions from other Persons in a Direct Community Offering;
provided that the Bank's Eligible Account Holders, Tax-Qualified Employee Plans,
Supplemental Eligible Account Holders, and Other Members shall have the priority
rights to subscribe for Holding Company Conversion Stock set forth in Section V
of this Plan. However, the Holding Company and the Bank may delay commencing the
Subscription Offering beyond such 45 day period in the event there exist
unforeseen material adverse market or financial conditions. If the Subscription
Offering commences prior to the Special Meeting, subscriptions will be accepted
subject to the approval of the Plan at the Special Meeting.
The period for the Subscription Offering will be not less than 20 days
nor more than 45 days and the period for the Direct Community Offering will be
not more than 45 days, unless extended by the Bank. Upon completion of the
Subscription Offering and the Direct Community Offering, if any, any
unsubscribed shares of Holding Company Conversion Stock will, if feasible, be
sold to the Underwriters for resale to the general public in the Public
Offering. If for any reason the Public Offering of all shares not sold in the
Subscription Offering and Direct Community Offering cannot be effected, the
Holding Company and the Bank will use their best efforts to obtain other
purchasers, subject to OTS approval. Completion of the sale of all shares of
Holding Company Conversion Stock not sold in the Subscription Offering and
Direct Community Offering is required within 45 days after termination of the
Subscription Offering, subject to extension of such 45 day period by the Holding
Company and the Bank with the approval of the OTS. The Holding Company and the
Bank may jointly seek one or more extensions of such 45 day period if necessary
to complete the sale of all shares of Holding Company Conversion Stock. In
connection with such extensions, subscribers and other purchasers will be
permitted to increase, decrease or rescind their subscriptions or purchase
orders to the extent required by the OTS in approving the extensions. Completion
of the sale of all shares of Holding Company Conversion Stock is required within
24 months after the date of the Special Meeting.
V. STOCK OFFERING
--------------
A. Total Number of Shares and Purchase Price of Conversion Stock
-------------------------------------------------------------
The total number of shares of Holding Company Conversion Stock to be
issued and sold in the Conversion will be determined jointly by the Boards of
Directors of the Holding Company and the Bank prior to the commencement of the
Subscription Offering, subject to adjustment if necessitated by market or
financial conditions prior to consummation of the Conversion. The total
A-6
<PAGE>
number of shares of Holding Company Conversion Stock shall also be subject to
increase in connection with any oversubscriptions in the Subscription Offering
or Direct Community Offering.
The aggregate price for which all shares of Holding Company Conversion
Stock will be sold will be based on an independent appraisal of the estimated
total pro forma market value of the Holding Company and the Converted Bank. Such
appraisal shall be performed in accordance with OTS guidelines and will be
updated as appropriate under or required by applicable regulations.
The appraisal will be made by an independent investment banking or
financial consulting firm experienced in the area of thrift institution
appraisals. The appraisal will include, among other things, an analysis of the
historical and pro forma operating results and net worth of the Converted Bank
and a comparison of the Holding Company, the Converted Bank and the Conversion
Stock with comparable thrift institutions and holding companies and their
respective outstanding capital stocks.
Based upon the independent appraisal, the Boards of Directors of the
Holding Company and the Bank will jointly fix the Maximum Subscription Price.
If, following completion of the Subscription Offering and Direct
Community Offering, a Public Offering is effected, the Actual Subscription Price
for each share of Holding Company Conversion Stock will be the same as the
Public Offering Price at which unsubscribed shares of Holding Company Conversion
Stock are initially offered for sale by the Underwriters in the Public Offering.
The Public Offering Price will be a price negotiated by the Holding Company and
the Bank with the Underwriters, not in excess of the Maximum Subscription Price.
The price paid by the Underwriters for each unsubscribed share will be the
Public Offering Price less a negotiated underwriting discount.
If, upon completion of the Subscription Offering and Direct Community
Offering, all of the Holding Company Conversion Stock is subscribed for or only
a limited number of shares remain unsubscribed for, or if a Public Offering
otherwise cannot be effected, the Actual Subscription Price for each share of
Holding Company Conversion Stock will be determined by dividing the estimated
appraised aggregate pro forma market value of the Holding Company and the
Converted Bank, based on the independent appraisal as updated upon completion of
the Subscription Offering or other sale of all of the Holding Company Conversion
Stock, by the total number of shares of Holding Company Conversion Stock to be
issued and sold by the Holding Company upon Conversion. Such appraisal will then
be expressed in terms of a specific aggregate dollar amount rather than as a
range.
B. Subscription Rights
-------------------
Non-transferable Subscription Rights to purchase shares will be issued
without payment therefor to Eligible Account Holders, Tax-Qualified Employee
Plans, Supplemental Eligible Account Holders, Other Members and directors,
Officers and employees of the Bank as set forth below.
A-7
<PAGE>
1. Preference Category No. 1: Eligible Account Holders
----------------------------------------------------
Each Eligible Account Holder shall receive non-transferable
Subscription Rights to subscribe for shares of Holding Company
Conversion Stock in an amount equal to the greater of $250,000,
one-tenth of one percent (.10%) of the total offering of shares, 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 the qualifying
deposit of the Eligible Account Holder and the denominator is the total
amount of qualifying deposits of all Eligible Account Holders in the
converting Bank in each case on the Eligibility Record Date. If
sufficient shares are not available, shares shall be allocated first to
permit each subscribing Eligible Account Holder to purchase to the
extent possible 100 shares, and thereafter among each subscribing
Eligible Account Holder pro rata in the same proportion that his
Qualifying Deposit bears to the total Qualifying Deposits of all
subscribing Eligible Account Holders whose subscriptions remain
unsatisfied.
Non-transferable Subscription Rights to purchase Holding
Company Conversion Stock received by directors and Officers of the Bank
and their Associates, based on their increased deposits in the Bank in
the one year period preceding the Eligibility Record Date, shall be
subordinated to all other subscriptions involving the exercise of
non-transferable Subscription Rights of Eligible Account Holders.
2. Preference Category No. 2: Tax-Qualified Employee Plans
--------------------------------------------------------
Each Tax-Qualified Employee Plan shall be entitled to receive
non-transferable Subscription Rights to purchase up to 10% of the
shares of Holding Company Conversion Stock, provided that singly or in
the aggregate such plans (other than that portion of such plans which
is self-directed) shall not purchase more than 10% of the shares of the
Holding Company Conversion Stock. Subscription Rights received pursuant
to this Category shall be subordinated to all rights received by
Eligible Account Holders to purchase shares pursuant to Category No. 1;
provided, however, that notwithstanding any other provision of this
Plan to the contrary, the Tax-Qualified Employee Plans shall have a
first priority Subscription Right to the extent that the total number
of shares of Holding Company Conversion Stock sold in the Conversion
exceeds the maximum of the appraisal range as set forth in the
subscription prospectus.
3. Preference Category No. 3: Supplemental Eligible Account
---------------------------------------------------------
Holders
-------
Each Supplemental Eligible Account Holder shall receive
non-transferable Subscription Rights to subscribe for shares of Holding
Company Conversion Stock in an amount equal to the greater of $250,000,
one-tenth of one percent (.10%) of the total offering of shares, 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
A-8
<PAGE>
the numerator is the amount of the qualifying deposit of the
Supplemental Eligible Account Holder and the denominator is the total
amount of qualifying deposits of all Supplemental Eligible Account
Holders in the converting Bank in each case on the Supplemental
Eligibility Record Date.
Subscription Rights received pursuant to this category shall
be subordinated to all Subscription Rights received by Eligible Account
Holders and Tax-Qualified Employee Plans pursuant to Category Nos. 1
and 2 above.
Any non-transferable Subscription Rights to purchase shares
received by an Eligible Account Holder in accordance with Category No.
1 shall reduce to the extent thereof the Subscription Rights to be
distributed to such person pursuant to this Category.
In the event of an oversubscription for shares under the
provisions of this subparagraph, the shares available shall be
allocated first to permit each subscribing Supplemental Eligible
Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his total allocation (including the number of
shares, if any, allocated in accordance with Category No. 1) equal to
100 shares, and thereafter among each subscribing Supplemental Eligible
Account Holder pro rata in the same proportion that his Qualifying
Deposit bears to the total Qualifying Deposits of all subscribing
Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied.
4. Preference Category No. 4: Other Members
-----------------------------------------
Each Other Member shall receive non-transferable Subscription
Rights to subscribe for shares of Holding Company Conversion Stock
remaining after satisfying the subscriptions provided for under
Category Nos. 1 through 3 above, subject to the following conditions:
a. Each Other Member shall be entitled to subscribe for an
amount of shares equal to the greater of $250,000 or one-tenth
of one percent (.10%) of the total offering of shares of
common stock in the Conversion, to the extent that Holding
Company Conversion Stock is available.
b. In the event of an oversubscription for shares under
the provisions of this subparagraph, the shares available
shall be allocated among the subscribing Other Members pro
rata in the same proportion that his number of votes on the
Voting Record Date bears to the total number of votes on the
Voting Record Date of all subscribing Other Members on such
date. Such number of votes shall be determined based on the
Bank's mutual charter and bylaws in effect on the date of
approval by members of this Plan of Conversion.
A-9
<PAGE>
C. Public Offering and Direct Community Offering
---------------------------------------------
1. Any shares of Holding Company Conversion Stock not
subscribed for in the Subscription Offering may be offered for sale in
a Direct Community Offering. This will involve an offering of all
unsubscribed shares directly to the general public with a preference to
those natural persons residing in the counties in which the Bank
maintains its offices. The Direct Community Offering, if any, shall be
for a period of not more than 45 days unless extended by the Holding
Company and the Bank, and shall commence concurrently with, during or
promptly after the Subscription Offering. The purchase price per share
to the general public in a Direct Community Offering shall be the same
as the Actual Subscription Price. The Holding Company and the Bank may
use an investment banking firm or firms on a best efforts basis to sell
the unsubscribed shares in the Subscription and Direct Community
Offering. The Holding Company and the Bank may pay a commission or
other fee to such investment banking firm or firms as to the shares
sold by such firm or firms in the Subscription and Direct Community
Offering and may also reimburse such firm or firms for expenses
incurred in connection with the sale. The Direct Community Offering may
include a syndicated community offering managed by such investment
banking firm or firms. The Holding Company Conversion Stock will be
offered and sold in the Direct Community Offering, in accordance with
OTS regulations, so as to achieve the widest distribution of the
Holding Company Conversion Stock. No person, by himself or herself, or
with an Associate or group of Persons acting in concert, may subscribe
for or purchase more than $250,000 of Holding Company Conversion Stock
offered in the Direct Community Offering. Further, the Bank may limit
total subscriptions under this Section V.C.1 so as to assure that the
number of shares available for the Public Offering may be up to a
specified percentage of the number of shares of Holding Company
Conversion Stock. Finally, the Bank may reserve shares offered in the
Community Offering for sales to institutional investors.
In the event of an oversubscription for shares in the
Community Offering, shares may be allocated (to the extent shares
remain available) first to cover any reservation of shares for a public
offering or institutional orders, next to cover orders of natural
persons residing in the counties in which the Bank maintains its
offices, then to cover the orders of any other person subscribing for
shares in the Community Offering so that each such person may receive
1,000 shares, and thereafter, on a pro rata basis to such persons based
on the amount of their respective subscriptions.
The Bank and the Holding Company, in their sole discretion,
may reject subscriptions, in whole or in part, received from any Person
under this Section V.C.
2. Any shares of Holding Company Conversion Stock not sold in
the Subscription Offering or in the Direct Community Offering, if any,
shall then be sold to the Underwriters for resale to the general public
at the Public Offering Price in the Public Offering. It is expected
that the Public Offering will commence as soon as practicable after
termination of the Subscription Offering and the Direct Community
Offering, if any. The Public Offering shall be completed within 45 days
after the termination of the Subscription Offering, unless such period
is extended as provided in Section IV hereof. The Public Offering Price
and the
A-10
<PAGE>
underwriting discount shall be determined as provided in Section V.A
hereof and set forth in the underwriting agreement between the Holding
Company, the Bank and the Underwriters. Such underwriting agreement
shall be filed with the OTS and the SEC.
3. If for any reason a Public Offering of unsubscribed shares
of Holding Company Conversion Stock cannot be effected and any shares
remain unsold after the Subscription Offering and the Direct Community
Offering, if any, the Boards of Directors of the Holding Company and
the Bank will seek to make other arrangements for the sale of the
remaining shares. Such other arrangements will be subject to the
approval of the OTS and to compliance with applicable securities laws.
D. Additional Limitations Upon Purchases of Shares of Holding
----------------------------------------------------------
Company Conversion Stock
------------------------
The following additional limitations shall be imposed on all purchases
of Holding Company Conversion Stock in the Conversion:
1. No Person, by himself or herself, or with an Associate or
group of Persons acting in concert, may subscribe for or purchase in
the Conversion a number of shares of Holding Company Conversion Stock
which exceeds $250,000 of the Holding Company Conversion Stock offered
in the Conversion. For purposes of this paragraph, an Associate of a
Person does not include a Tax-Qualified or Non-Tax Qualified Employee
Plan in which the person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity. Moreover, for
purposes of this paragraph, shares held by one or more Tax-Qualified or
Non-Tax Qualified Employee Plans attributed to a Person shall not be
aggregated with shares purchased directly by or otherwise attributable
to that Person.
2. Directors and Officers and their Associates may not
purchase in all categories in the Conversion an aggregate of more than
34.78% of the Holding Company Conversion Stock. For purposes of this
paragraph, an Associate of a Person does not include any Tax-Qualified
Employee Plan. Moreover, any shares attributable to the Officers and
directors and their Associates, but held by one or more Tax-Qualified
Employee Plans shall not be included in calculating the number of
shares which may be purchased under the limitation in this paragraph.
3. The minimum number of shares of Holding Company
Conversion Stock that may be purchased by any Person in the Conversion
is 25 shares, provided sufficient shares are available.
4. The Boards of Directors of the Holding Company and the Bank
may, in their sole discretion, increase the maximum purchase limitation
referred to in subparagraph 1. herein up to 9.99%, provided that orders
for shares exceeding 5% of the shares being offered in the Subscription
Offering shall not exceed, in the aggregate, 10% of the shares being
offered in the Subscription Offering. Requests to purchase additional
shares of Holding Company
A-11
<PAGE>
Conversion Stock under this provision will be allocated by the Boards
of Directors on a pro rata basis giving priority in accordance with the
priority rights set forth in this Section V.
Depending upon market and financial conditions, the Boards of Directors
of the Holding Company and the Bank, with the approval of the OTS and without
further approval of the Members, may increase or decrease any of the above
purchase limitations.
For purposes of this Section V, the directors of the Holding Company
and the Bank shall not be deemed to be Associates or a group acting in concert
solely as a result of their serving in such capacities.
Each Person purchasing Conversion Stock in the Conversion shall be
deemed to confirm that such purchase does not conflict with the above purchase
limitations.
E. Restrictions and Other Characteristics of Holding Company
---------------------------------------------------------
Conversion Stock Being Sold
---------------------------
1. Transferability. Holding Company Conversion Stock purchased
---------------
by Persons other than directors and Officers of the Holding Company or
the Bank will be transferable without restriction. Shares purchased by
directors or Officers shall not be sold or otherwise disposed of for
value for a period of one year from the date of Conversion, except for
any disposition of such shares (i) following the death of the original
purchaser, or (ii) resulting from an exchange of securities in a merger
or acquisition approved by the applicable regulatory authorities. Any
transfers that could result in a change of control of the Bank or the
Holding Company or result in the ownership by any Person or group
acting in concert of more than 10% of any class of the Bank's or the
Holding Company's equity securities are subject to the prior approval
of the OTS.
The certificates representing shares of Holding Company
Conversion Stock issued to directors and Officers shall bear a legend
giving appropriate notice of the one year holding period restriction.
Appropriate instructions shall be given to the transfer agent for such
stock with respect to the applicable restrictions relating to the
transfer of restricted stock. Any shares of common stock of the Holding
Company subsequently issued as a stock dividend, stock split, or
otherwise, with respect to any such restricted stock, shall be subject
to the same holding period restrictions for Holding Company or Bank
directors and Officers as may be then applicable to such restricted
stock.
No director or Officer of the Holding Company or of the Bank,
or Associate of such a director or Officer, shall purchase any
outstanding shares of capital stock of the Holding Company for a period
of three years following the Conversion without the prior written
approval of the OTS, except through a broker or dealer registered with
the SEC or in a "negotiated transaction" involving more than one
percent of the then-outstanding shares of common stock of the Holding
Company. As used herein, the term "negotiated transaction" means a
transaction in which the securities are offered and the terms and
arrangements relating to any sale are arrived at through direct
communications between the seller or any
A-12
<PAGE>
Person acting on its behalf and the purchaser or his investment
representative. The term "investment representative" shall mean a
professional investment advisor acting as agent for the purchaser and
independent of the seller and not acting on behalf of the seller in
connection with the transaction.
2. Repurchase and Dividend Rights. For a period of three years
------------------------------
following Conversion, the Converted Bank shall not repurchase any
shares of its capital stock, except as permitted by OTS Regulations,
and except in the case of an offer to repurchase on a pro rata basis
made to all holders of capital stock of the Converted Bank. Any such
offer shall be subject to the prior non-objection of the OTS. A
repurchase of qualifying shares of a director shall not be deemed to be
a repurchase for purposes of this Section V.E.2.
Present regulations also provide that the Converted Bank may
not declare or pay a cash dividend on or repurchase any of its stock
(i) if the result thereof would be to reduce the regulatory capital of
the Converted Bank below the amount required for the liquidation
account to be established pursuant to Section XII hereof, and (ii)
except in compliance with requirements of Section 563.134 of the Rules
and Regulations of the OTS.
The above limitations are subject to Section 563b.3(g)(3) of
the Rules and Regulations of the OTS, which generally provides that the
Converted Bank may repurchase its capital stock provided (i) no
repurchases occur within one year following conversion, (ii)
repurchases during the second and third year after conversion are part
of an open market stock repurchase program that does not allow for a
repurchase of more than 5% of the Bank's outstanding capital stock
during a twelve-month period without OTS approval, (iii) the
repurchases do not cause the Bank to become undercapitalized, and (iv)
the Bank provides notice to the OTS at least 10 days prior to the
commencement of a repurchase program and the OTS does not object. In
addition, the above limitations shall not preclude payments of
dividends or repurchases of capital stock by the Converted Bank in the
event applicable federal regulatory limitations are liberalized
subsequent to OTS approval of the Plan or as otherwise permitted by the
OTS.
3. Voting Rights. After Conversion, holders of deposit
-------------
accounts will not have voting rights in the Bank or the Holding
Company. Exclusive voting rights as to the Bank will be vested in the
Holding Company, as the sole stockholder of the Bank. Voting rights as
to the Holding Company will be held exclusively by its stockholders.
F. Exercise of Subscription Rights; Order Forms
--------------------------------------------
1. If the Subscription Offering occurs concurrently with the
solicitation of proxies for the Special Meeting, the subscription
prospectus and Order Form may be sent to each Eligible Account Holder,
Tax-Qualified Employee Plan, Supplemental Eligible Account Holder, and
Other Member, at their last known address as shown on the records of
the Bank. However, the Bank may, and if the Subscription Offering
commences after the Special Meeting the Bank shall, furnish a
subscription prospectus and Order Form only to Eligible Account
Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account
Holders,
A-13
<PAGE>
and Other Members who have returned to the Bank by a specified date
prior to the commencement of the Subscription Offering a post card or
other written communication requesting a subscription prospectus and
Order Form. In such event, the Bank shall provide a postage-paid post
card for this purpose and make appropriate disclosure in its proxy
statement for the solicitation of proxies to be voted at the Special
Meeting and/or letter sent in lieu of the proxy statement to those
Eligible Account Holders, Tax-Qualified Employee Plans or Supplemental
Eligible Account Holders who are not Members on the Voting Record Date.
2. Each Order Form will be preceded or accompanied by a
subscription prospectus describing the Holding Company and the
Converted Bank and the shares of Holding Company Conversion Stock being
offered for subscription and containing all other information required
by the OTS or the SEC or necessary to enable Persons to make informed
investment decisions regarding the purchase of Holding Company
Conversion Stock.
3. The Order Forms (or accompanying instructions) used for the
Subscription Offering will contain, among other things, the following:
(i) A clear and intelligible explanation of the
Subscription Rights granted under the Plan to Eligible Account
Holders, Tax-Qualified Employee Plans, Supplemental Eligible
Account Holders, and Other Members;
(ii) A specified expiration date by which Order Forms
must be returned to and actually received by the Bank or its
representative for purposes of exercising Subscription Rights,
which date will be not less than 20 days after the Order Forms
are mailed by the Bank;
(iii) The Maximum Subscription Price to be paid for each
share subscribed for when the Order Form is returned;
(iv) A statement that 25 shares is the minimum number of
shares of Holding Company Conversion Stock that may be
subscribed for under the Plan;
(v) A specifically designated blank space for
indicating the number of shares being subscribed for;
(vi) A set of detailed instructions as to how to
complete the Order Form including a statement as to the
available alternative methods of payment for the shares being
subscribed for;
(vii) Specifically designated blank spaces for dating and
signing the Order Form;
A-14
<PAGE>
(viii) An acknowledgment that the subscriber has
received the subscription prospectus;
(ix) A statement of the consequences of failing to
properly complete and return the Order Form, including a
statement that the Subscription Rights will expire on the
expiration date specified on the Order Form unless such
expiration date is extended by the Holding Company and the
Bank, and that the Subscription Rights may be exercised only
by delivering the Order Form, properly completed and
executed, to the Bank or its representative by the
expiration date, together with required payment of the
Maximum Subscription Price for all shares of Holding Company
Conversion Stock subscribed for;
(x) A statement that the Subscription Rights are
non-transferable and that all shares of Holding Company
Conversion Stock subscribed for upon exercise of
Subscription Rights must be purchased on behalf of the
Person exercising the Subscription Rights for his own
account; and
(xi) A statement that, after receipt by the Bank or
its representative, a Subscription may not be modified,
withdrawn or canceled without the consent of the Bank.
G. Method of Payment
-----------------
Payment for all shares of Holding Company Conversion Stock subscribed
for, computed on the basis of the Maximum Subscription Price, must accompany all
completed Order Forms. Payment may be made in cash (if presented in Person), by
check, or, if the subscriber has a Deposit Account in the Bank (including a
certificate of deposit), the subscriber may authorize the Bank to charge the
subscriber's account.
If a subscriber authorizes the Bank to charge his or her account, the
funds will continue to earn interest, but may not be used by the subscriber
until all Holding Company Conversion Stock has been sold or the Plan of
Conversion is terminated, whichever is earlier. The Bank will allow subscribers
to purchase shares by withdrawing funds from certificate accounts without the
assessment of early withdrawal penalties with the exception of prepaid interest
in the form of promotional gifts. In the case of early withdrawal of only a
portion of such account, the certificate evidencing such account shall be
canceled if the remaining balance of the account is less than the applicable
minimum balance requirement, in which event the remaining balance will earn
interest at the passbook rate. This waiver of the early withdrawal penalty is
applicable only to withdrawals made in connection with the purchase of Holding
Company Conversion Stock under the Plan of Conversion. Interest will also be
paid, at not less than the then-current passbook rate, on all orders paid in
cash, by check or money order, from the date payment is received until
consummation of the Conversion. Payments made in cash, by check or money order
will be placed by the Bank in an escrow or other account established
specifically for this purpose.
A-15
<PAGE>
In the event of an unfilled amount of any subscription order, the
Converted Bank will make an appropriate refund or cancel an appropriate portion
of the related withdrawal authorization, after consummation of the Conversion,
including any difference between the Maximum Subscription Price and the Actual
Subscription Price (unless subscribers are afforded the right to apply such
difference to the purchase of additional whole shares). If for any reason the
Conversion is not consummated, purchasers will have refunded to them all
payments made and all withdrawal authorizations will be canceled in the case of
subscription payments authorized from accounts at the Bank.
If any Tax-Qualified Employee Plans or Non-Tax-Qualified Employee Plans
subscribe for shares during the Subscription Offering, such plans will not be
required to pay for the shares subscribed for at the time they subscribe, but
may pay for such shares of Holding Company Conversion Stock subscribed for upon
consummation of the Conversion. In the event that, after the completion of the
Subscription Offering, the amount of shares to be issued is increased above the
maximum of the appraisal range included in the Prospectus, the Tax Qualified and
Non-Tax Qualified Employee Plans shall be entitled to increase their
subscriptions by a percentage equal to the percentage increase in the amount of
shares to be issued above the maximum of the appraisal range provided that such
subscriptions shall continue to be subject to applicable purchase limits and
stock allocation procedures.
H. Undelivered, Defective or Late Order Forms; Insufficient Payment
----------------------------------------------------------------
The Boards of Directors of the Holding Company and the Bank shall have
the absolute right, in their sole discretion, to reject any Order Form,
including but not limited to, any Order Forms which (i) are not delivered or are
returned by the United States Postal Service (or the addressee cannot be
located); (ii) are not received back by the Bank or its representative, or are
received after the termination date specified thereon; (iii) are defectively
completed or executed; (iv) are not accompanied by the total required payment
for the shares of Holding Company Conversion Stock subscribed for (including
cases in which the subscribers' Deposit Accounts or certificate accounts are
insufficient to cover the authorized withdrawal for the required payment); or
(v) are submitted by or on behalf of a Person whose representations the Boards
of Directors of the Holding Company and the Bank believe to be false or who they
otherwise believe, either alone or acting in concert with others, is violating,
evading or circumventing, or intends to violate, evade or circumvent, the terms
and conditions of this Plan. In such event, the Subscription Rights of the
Person to whom such rights have been granted will not be honored and will be
treated as though such Person failed to return the completed Order Form within
the time period specified therein. The Bank may, but will not be required to,
waive any irregularity relating to any Order Form or require submission of
corrected Order Forms or the remittance of full payment for subscribed shares by
such date as the Bank may specify. The interpretation of the Holding Company and
the Bank of the terms and conditions of this Plan and of the proper completion
of the Order Form will be final, subject to the authority of the OTS.
A-16
<PAGE>
I. Member in Non-Qualified States or in Foreign Countries
------------------------------------------------------
The Holding Company and the Bank will make reasonable efforts to comply
with the securities laws of all states in the United States in which Persons
entitled to subscribe for Holding Company Conversion Stock pursuant to the Plan
reside. However, no shares will be offered or sold under the Plan of Conversion
to any such Person who (1) resides in a foreign country or (2) resides in a
state of the United States in which a small number of Persons otherwise eligible
to subscribe for shares under the Plan of Conversion reside or as to which the
Holding Company and the Bank determine that compliance with the securities laws
of such state would be impracticable for reasons of cost or otherwise,
including, but not limited to, a requirement that the Holding Company or the
Bank or any of their officers, directors or employees register, under the
securities laws of such state, as a broker, dealer, salesman or agent. No
payments will be made in lieu of the granting of Subscription Rights to any such
Person.
VI. FEDERAL STOCK CHARTER AND BYLAWS
--------------------------------
A. As part of the Conversion, the Bank will take all appropriate
steps to amend its charter to read in the form of federal stock savings
institution charter as prescribed by the OTS. A copy of the proposed stock
charter is available upon request. By their approval of the Plan, the Members of
the Bank will thereby approve and adopt such charter.
B. The Bank will also take appropriate steps to amend its bylaws to
read in the form prescribed by the OTS for a federal stock savings institution.
A copy of the proposed federal stock bylaws is available upon request.
C. The effective date of the adoption of the Bank's federal stock
charter and bylaws shall be the date of the issuance and sale of the Holding
Company Conversion Stock as specified by the OTS.
VII. HOLDING COMPANY CERTIFICATE OF INCORPORATION
--------------------------------------------
A copy of the proposed certificate of incorporation of the Holding
Company will be made available from the Bank upon request.
VIII. DIRECTORS OF THE CONVERTED BANK
-------------------------------
Each Person serving as a member of the Board of Directors of the
Bank at the time of the Conversion will thereupon become a director of the
Converted Bank.
IX. STOCK OPTION AND INCENTIVE PLAN AND RECOGNITION AND RETENTION PLAN
------------------------------------------------------------------
In order to provide an incentive for directors, Officers and employees
of the Holding Company and its subsidiaries (including the Bank), the Board of
Directors of the Holding Company
A-17
<PAGE>
intends to adopt, subject to shareholder approval, a Stock option and incentive
plan and a recognition and retention plan following completion of the
Conversion.
X. CONTRIBUTIONS TO TAX-QUALIFIED EMPLOYEE PLANS
---------------------------------------------
The Converted Bank and the Holding Company may in their discretion make
scheduled contributions to any Tax-Qualified Employee Plans, provided that any
such contributions which are for the acquisition of Holding Company Conversion
Stock, or the repayment of debt incurred for such an acquisition, do not cause
the Converted Bank to fail to meet its regulatory capital requirements.
XI. SECURITIES REGISTRATION AND MARKET MAKING
-----------------------------------------
Promptly following the Conversion, the Holding Company will register
its common stock with the SEC pursuant to the Exchange Act. In connection with
the registration, the Holding Company will undertake not to deregister such
common stock, without the approval of the OTS, for a period of three years
thereafter.
The Holding Company shall use its best efforts to encourage and assist
two or more market makers to establish and maintain a market for its common
stock promptly following Conversion. The Holding Company will also use its best
efforts to cause its common stock to be quoted on the Nasdaq System or to be
listed on a national or regional securities exchange.
XII. STATUS OF SAVINGS ACCOUNTS AND LOANS SUBSEQUENT TO CONVERSION
-------------------------------------------------------------
Each Deposit Account holder shall retain, without payment, a
withdrawable Deposit Account or Accounts in the Converted Bank, equal in amount
to the withdrawable value of such account holder's Deposit Account or Accounts
prior to Conversion. All Deposit Accounts will continue to be insured by the
Federal Deposit Insurance Corporation up to the applicable limits of insurance
coverage, and shall be subject to the same terms and conditions (except as to
voting and liquidation rights) as such Deposit Account in the Bank at the time
of the Conversion. All loans shall retain the same status after Conversion as
these loans had prior to Conversion.
XIII. LIQUIDATION ACCOUNT
-------------------
For purposes of granting to Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain Deposit Accounts at the
Converted Bank a priority in the event of a complete liquidation of the
Converted Bank, the Converted Bank will, at the time of Conversion, establish a
liquidation account in an amount equal to the net worth of the Bank as shown on
its latest statement of financial condition contained in the final offering
circular used in connection with the Conversion. The creation and maintenance of
the liquidation account will not operate to restrict the use or application of
any of the regulatory capital accounts of the Converted Bank; provided, however,
that such regulatory capital accounts will not be voluntarily reduced below the
required dollar amount of the liquidation account. Each Eligible Account Holder
and
A-18
<PAGE>
Supplemental Eligible Account Holder shall, with respect to the Deposit Account
held, have a related inchoate interest in a portion of the liquidation account
balance ("subaccount balance").
The initial subaccount balance of a Deposit Account held by an Eligible
Account Holder or 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 the Qualifying Deposit in the Deposit
Account on the Eligibility Record Date or the Supplemental Eligibility Record
Date and the denominator is the total amount of the Qualifying Deposits of all
Eligible Account Holders and Supplemental Eligible Account Holders on such
record dates in the Bank. 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 Deposit Account of an Eligible Account
Holder or Supplemental Eligible Account Holder at the close of business on any
annual closing date subsequent to the record date is less than the lesser of (i)
the deposit balance in such Deposit Account at the close of business on any
other annual closing date subsequent to the Eligibility Record Date or the
Supplemental Eligibility Record Date or (ii) the amount of the Qualifying
Deposit in such Deposit Account on the Eligibility Record Date or Supplemental
Eligibility Record Date, the subaccount balance shall be reduced in an amount
proportionate to the reduction in such deposit balance. In the event of a
downward adjustment, the subaccount balance shall not be subsequently increased,
notwithstanding any increase in the deposit balance of the related Deposit
Account. If all funds in such Deposit Account are withdrawn, the related
subaccount balance shall be reduced to zero.
In the event of a complete liquidation of the Bank (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 balances for
Deposit Accounts then held before any liquidation distribution may be made to
stockholders. No merger, consolidation, bulk purchase of assets with assumptions
of Deposit Accounts and other liabilities, or similar transactions with another
institution the accounts of which are insured by the Federal Deposit Insurance
Corporation, shall be considered to be a complete liquidation. In such
transactions, the liquidation account shall be assumed by the surviving
institution.
XIV. RESTRICTIONS ON ACQUISITION OF CONVERTED BANK
---------------------------------------------
Regulations of the OTS limit acquisitions, and offers to acquire,
direct or indirect beneficial ownership of more than 10% of any class of an
equity security of the Converted Bank or the Holding Company. In addition,
consistent with the regulations of the OTS, the charter of the Converted Bank
shall provide that for a period of five years following completion of the
Conversion: (i) no Person (i.e., no individual, group acting in concert,
corporation, partnership, Bank, joint stock company, trust, or unincorporated
organization or similar company, syndicate, or any other group formed for the
purpose of acquiring, holding or disposing of securities of an insured
institution) shall directly or indirectly offer to acquire or acquire beneficial
ownership of more than 10% of any class of the Bank's equity securities. Shares
beneficially owned in violation of this charter provision shall not be counted
as shares entitled to vote and shall not be voted by any Person or counted as
voting shares
A-19
<PAGE>
in connection with any matter submitted to the shareholders for a vote. This
limitation shall not apply to any offer to acquire or acquisition of beneficial
ownership of more than 10% of the common stock of the Bank by a corporation
whose ownership is or will be substantially the same as the ownership of the
Bank, provided that the offer or acquisition is made more than one year
following the date of completion of the Conversion; (ii) shareholders shall not
be permitted to cumulate their votes for elections of directors; and (iii)
special meetings of the shareholders relating to changes in control or amendment
of the charter may only be called by the Board of Directors.
XV. ESTABLISHMENT AND FUNDING OF CHARITABLE FOUNDATION
--------------------------------------------------
As part of the Conversion, the Holding Company and the Bank intend to
establish a charitable foundation that will qualify as an exempt organization
under Section 501(c)(3) of the Code (the "Foundation"). To fund the Foundation,
the Bank will contribute funds prior to completion of the Conversion or,
immediately subsequent to the Conversion, the Holding Company will contribute
20,000 authorized but unissued shares of Holding Company Common Stock (provided,
however, that such amount may be reduced by the Holding Company and the Bank),
subject to the receipt of any required regulatory approval or consent. The
Foundation is being formed in connection with the Conversion in order to
complement the Bank's existing community reinvestment activities and to share
with the Bank's local community a part of the Bank's financial success as a
locally headquartered, community minded, financial services institution.
The Foundation will be dedicated to the promotion of charitable
purposes, including community development grants or donations to support housing
assistance and affordable housing programs, not-for-profit community groups and
other similar types of organizations or civic minded projects. In order to serve
the purposes for which it is formed and to maintain its qualification under
Section 501(c)(3) of the Code, the Foundation may sell, on an annual basis, a
limited portion of the Holding Company Common Stock contributed to it by the
holding Company.
The Board of Directors of the Foundation may be comprised of
individuals who are Officers and/or Directors of the Bank or the Holding
Company, but such individuals may not represent more than a majority of the
Board of Directors of the Association. The Board of Directors of the Foundation
will be responsible for establishing the polices of the Foundation with respect
to grants or donations, consistent with the stated purposes of the
Foundation.
The establishment and funding of the Foundation as part of the
Conversion and Reorganization is subject to the receipt of any required
regulatory approval or consent.
XVI. AMENDMENT OR TERMINATION OF PLAN
--------------------------------
If necessary or desirable, the Plan may be amended at any time prior to
submission of the Plan and proxy materials to the Members by a two-thirds vote
of the respective Boards of Directors of the Holding Company and the Bank. After
submission of the Plan and proxy materials to the Members, the Plan may be
amended by a two-thirds vote of the respective Boards of Directors of the
Holding Company and the Bank only with the concurrence of the OTS. Any
amendments to the
A-20
<PAGE>
Plan made after approval by the Members with the concurrence of the OTS shall
not necessitate further approval by the Members unless otherwise required.
The Plan may be terminated by a two-thirds vote of the Bank's Board of
Directors at any time prior to the Special Meeting of Members, and at any time
following such Special Meeting with the concurrence of the OTS. In its
discretion, the Board of Directors of the Bank may modify or terminate the Plan
upon the order or with the approval of the OTS and without further approval by
Members. The Plan shall terminate if the sale of all shares of Conversion Stock
is not completed within 24 months of the date of the Special Meeting. A specific
resolution approved by a majority of the Board of Directors of the Bank is
required in order for the Bank to terminate the Plan prior to the end of such 24
month period.
XVII. EXPENSES OF THE CONVERSION
--------------------------
The Holding Company and the Bank shall use their best efforts to assure
that expenses incurred by them in connection with the Conversion shall be
reasonable.
XVIII. TAX RULING
----------
Consummation of the Conversion is expressly conditioned upon prior
receipt of either a ruling of the United States Internal Revenue Service or an
opinion of tax counsel with respect to federal taxation, and either a ruling of
the South Carolina taxation authorities or an opinion of tax counsel or other
tax advisor with respect to South Carolina taxation, to the effect that
consummation of the transactions contemplated herein will not be taxable to the
Holding Company or the Bank.
XIX. EXTENSION OF CREDIT FOR PURCHASE OF COMMON STOCK
------------------------------------------------
The Bank may not knowingly loan funds or otherwise extend credit to any
Person to purchase in the Conversion shares of Holding Company Conversion Stock.
A-21
<PAGE>
EXHIBIT 8.3
<PAGE>
[LETTERHEAD OF FERGUSON & COMPANY APPEARS HERE]
September 15, 1997
Board of Directors
First Federal Savings and Loan Association
515 Market Street
Cheraw, South Carolina 29520
Plan of Conversion, Subscription Rights
---------------------------------------
Dear Directors:
Terms used in this letter not otherwise defined herein have the same
meanings for such terms in the Plan of Conversion adopted by the Board of
Directors of First Federal Savings and Loan Association ("First Federal" or the
"Association"), under which the Association will convert from a mutual savings
association to a stock savings association and issue all of the Association's
stock to Great Pee Dee Bancorp, Inc. (the "Holding Company").
Simultaneously, the Holding Company will issue shares of common stock.
We understand that in accordance with the Plan of Conversion,
Subscription Rights to purchase shares of Common Stock in the Holding Company
are to be issued to (1) Eligible Account Holders, (2) The Association's tax
qualified employee plans, (3) Supplemental Eligible Account Holders, and (4)
Other Members. Based solely upon our observation that the Subscription Rights
will be available to such parties without cost, will be legally non-transferable
and of short duration, and will afford such parties the right only to purchase
shares of Common Stock at the same price to be paid by members of the general
public in the Community Offering, but without undertaking any independent
investigation of state or federal laws or the position of the Internal Revenue
Service with respect to such issue, in our opinion:
=======
(1) the Subscription Rights will have no ascertainable market value;
and
(2) the price at which the Subscription Rights are exercisable will
not be more or less than the pro forma market value of the shares
upon issuance.
Changes in the local and national economy, the legislative and
regulatory environment, the stock market, interest rates and other external
forces (e.g., natural disasters or significant global events) occur from time to
time and may materially affect the value of thrift stocks as a whole or the
Holding Company's value. Accordingly, no assurance can be given that persons who
subscribe to shares of Common Stock in the Conversion will thereafter be able to
sell such shares at the same price paid in the Subscription Offering.
Sincerely,
/s/ Robin L. Fussell
Robin L. Fussell
Principal
<PAGE>
EXHIBIT 23.2
<PAGE>
[LETTERHEAD OF DIXON, ODOM & CO., L.L.P. APPEARS HERE]
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors
First Savings and Loan Association of Cheraw
Cheraw, South Carolina
We consent to the use in the Registration Statement of Great Pee Dee Bancorp,
Inc. on Form SB-2 and the Application for Conversion on Form AC of our report
dated August 22, 1997 on the financial statements of First Federal Savings and
Loan Association of Cheraw as of and for the years ended June 30, 1997 and 1996,
and to the references to our firm under the headings "Legal and Tax Matters"
and "Experts" in the Registration Statement.
/s/ Dixon, Odom & Co., L.L.P.
Southern Pines, North Carolina
October 21, 1997
<PAGE>
EXHIBIT 99.3
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
515 Market Street
Cheraw, South Carolina 29520
(803) 537-7656
---------------------------------
NOTICE OF SPECIAL MEETING OF MEMBERS
---------------------------------
Notice is hereby given that a Special Meeting of Members (the "Special
Meeting") of First Federal Savings and Loan Association of Cheraw (the
"Association") will be held at the main office of the Association, located at
515 Market Street, Cheraw, South Carolina, on ______________, _______________ ,
1997 at ____ _.m., South Carolina time. The purpose of this Special Meeting is
to consider and vote upon:
1. A Plan of Conversion providing for the conversion of the Association
from a federally chartered mutual savings and loan association to a
federally chartered stock savings association, and the related
transactions provided for in the Plan, including the adoption of a
federal stock savings association charter and bylaws, to a federally
chartered stock savings association, the concurrent sale of all the
Association's common stock to Great Pee Dee Bancorp, Inc., a Delaware
corporation (the "Holding Company"), and the sale by the Holding
Company to the public of shares of its Common Stock, and
2. The establishment of a tax exempt Foundation, which will be a Delaware
chartered non-stock corporation dedicated to the promotion of
charitable purposes within the Association's market area; and
such other business as may properly come before this Special Meeting or any
adjournment thereof. Management is not aware of any such other business.
The members who shall be entitled to notice of and to vote at the
Special Meeting and any adjournment thereof are depositors at the close of
business on _____________, 1997 and borrowers of the Bank as of the close of
business ______________, 1997 who remained borrowers as of ____________, 1997.
In the event there are insufficient votes for approval of the Plan of Conversion
at the time of the Special Meeting, the Special Meeting may be adjourned from
time to time in order to permit further solicitation of proxies.
BY ORDER OF THE BOARD OF DIRECTORS
Herbert W. Watts
President and Chief Executive Officer
Cheraw, South Carolina
______________, 1997
- --------------------------------------------------------------------------------
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE PLAN OF
CONVERSION AND THE ESTABLISHMENT OF THE CHARITABLE FOUNDATION BY COMPLETING THE
ENCLOSED PROXY CARD AND RETURNING IT IN THE ENCLOSED POSTAGE-PAID ENVELOPE AS
SOON AS POSSIBLE. YOUR VOTE IS VERY IMPORTANT
================================================================================
<PAGE>
SUMMARY OF PROPOSED CONVERSION
This summary does not purport to be complete and is qualified in its
entirety by the more detailed information contained in the remainder of this
Proxy Statement and the accompanying Prospectus.
Under its present mutual form of organization, the Association has no
stockholders. Its deposit account holders and certain of its borrowers are
members of the Association and have voting rights in that capacity. In the
unlikely event of liquidation, the Association's deposit account holders would
have the sole right to receive any assets of the Association remaining after
payment of its liabilities (including the claims of all deposit account holders
to the withdrawal value of their deposits). Under the Plan of Conversion (the
"Plan of Conversion") to be voted on at the Special Meeting, the Association
would be converted into a federally chartered savings and loan association
organized in stock form and all of the Association's common stock would be held
by to the Holding Company (the "Stock Conversion"). The Holding Company will
offer and sell its common stock (the "Common Stock") in a subscription offering
to (1) depositors with an account balance of $50 or more as of June 30, 1995
("Eligible Account Holders"), (2) the Employee Stock Ownership Plan ("ESOP")
established by the Association and Holding Company, (3) depositors of the
Association with an account balance of $50 or more as of September 30, 1997
("Supplemental Eligible Account Holders"), and (4) depositors of the Association
as of _____________, 1997, other then Eligible or Supplemental Eligible Account
Holders, and borrowers who remained borrowers as of ______________, 1997 ("Other
Members") (the "Subscription Offering"). Notwithstanding the foregoing, to the
extent orders for shares exceed the maximum of the appraisal range, the ESOP
shall be afforded a first priority to purchase shares sold above the maximum of
the appraisal range. It is anticipated that the ESOP will purchase 8% of the
Common Stock sold in the Stock Conversion.
Concurrent with, during or following completion of the Subscription
Offering, to the extent the Common Stock is not all sold to the persons in the
foregoing categories, the Holding Company may offer Common Stock to members of
the general public to whom a prospectus (the "Prospectus") has been delivered
("Other Subscribers"), with first preference to natural persons residing in
Chesterfield County, the County in which the Association maintains its office
(the "Community Offering"). The Subscription Offering and the Community Offering
are referred to collectively as the "Subscription and Community Offering."
Voting and liquidation rights with respect to the Association would thereafter
be held by the Holding Company, except to the limited extent of the liquidation
account (the "Liquidation Account") that will be established for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders of the
Association . Voting and liquidation rights in the Holding Company would be held
only by those persons who become stockholders of the Holding Company through
purchases of shares of its Common Stock. See "Description of the Plan of
Conversion - Principal Effects of Conversion - Liquidation Rights of Depositor
Members."
THE CONVERSION WILL NOT AFFECT THE BALANCE, INTEREST RATE OR FEDERAL
INSURANCE PROTECTION OF ANY SAVINGS DEPOSIT, AND NO PERSON WILL BE OBLIGATED TO
PURCHASE ANY STOCK IN THE STOCK CONVERSION.
Business Purposes Net Stock Conversion proceeds are expected to increase the
for Conversion capital of the Association, which will support the
expansion of its financial services to the public. The
conversion to stock form and the use of a holding company
structure are also expected to enhance its ability to
expand through possible mergers and acquisitions (although
no such transactions are contemplated at this time) and
will facilitate the Association's future access to the
capital markets. The Association will continue to be
subject to comprehensive regulation and examination by the
Office of Thrift Supervision, Department of Treasury (the
"OTS") and the Federal Deposit Insurance Corporation (the
"FDIC").
Subscription and As part of the Stock Conversion, Common Stock is being
Community Offering offered for sale in the Subscription Offering, in the
priorities summarized below, to the Association's (1)
Eligible Account Holders, (2) ESOP, (3) Supplemental
Eligible Account Holders and (4) Other Members. In
addition, in the Community Offering, Other Subscribers may
purchase Common Stock to the extent shares are available
after satisfaction of subscriptions in the Subscription
Offering,
ii
<PAGE>
with a preference first to natural persons residing in the
County in which the Association maintains its office.
Subscription Rights Each Eligible Account Holder has been given non-
of Eligible Account transferable rights to subscribe for an amount of shares
Holders equal to the greater of (i) $250,000 of the Common Stock
sold in the Stock Conversion; (ii) one-tenth of one percent
of the total offering of shares of Common Stock in the
Stock Conversion, to the extent such shares are available;
or (iii) 15 times the product (rounded down to the whole
next number) obtained by multiplying the total number of
shares to be issued by a fraction of which the numerator is
the amount of qualifying deposits of such subscriber and
the denominator is the total qualifying deposits of all
account holders in this category on the qualifying date.
Subscription Rights The ESOP has given non-transferable rights to subscribe,
of ESOP individually and in the aggregate, for up to 10% of the
total number of shares sold in the Stock Conversion after
satisfaction of subscriptions of Eligible Account Holders.
Notwithstanding the foregoing, to the extent orders for
shares exceed the maximum of the appraisal range, ESOP
shall be afforded a first priority to purchase shares sold
above the maximum of the appraisal range. It is anticipated
that the ESOP will purchase 8% of the Common Stock sold in
the Stock Conversion.
Subscription Rights After satisfaction of subscriptions of Eligible Account
of Supplemental Holders and the ESOP Plans, each Supplemental Eligible
Eligible Account Account Holder (other than directors and officers of the
Holders Association and their associates) has been given non-
transferable rights to subscribe for an amount of shares
equal to the greater of (i) $250,000 of the Common Stock
sold in the Stock Conversion; (ii) one-tenth of one percent
of the total offering of shares of Common Stock in the
Stock Conversion, to the extent such shares are available;
or (iii) 15 times the product (rounded down to the whole
next number) obtained by multiplying the total number of
shares to be issued by a fraction of which the numerator is
the amount of qualifying deposits of such subscriber and
the denominator is the total qualifying deposits of all
account holders in this category on the qualifying date.
The subscription rights of each Supplemental Eligible
Account Holder shall be reduced to the extent of such
person's subscription rights as an Eligible Account
Holders.
Subscription Rights Each Other Member has been non-transferable rights to
of Other Members subscribe for an amount of shares equal to the greater of
(i) $250,000 of the Common Stock sold in the Stock
Conversion; or (ii) one-tenth of one percent of the total
number of shares offered in the Stock Conversion after
satisfaction of the subscriptions of the Association's
Eligible Account Holders, the ESOP and Supplemental
Eligible Account Holders.
Purchase No person or entity, together with associates, and persons
Limitations acting in concert, may purchase more than 25,000 shares of
the Common Stock offered in the Stock Conversion based on
the Estimated Valuation Range (as calculated without giving
effect to any increase in such range subsequent to the date
hereof). The Boards of Directors of the Holding Company and
the Association may, in their sole discretion, increase the
maximum purchase limitation up to 9.99% of the shares sold,
provided that orders for shares exceeding 5% shall not
exceed in the aggregate, 10% of the shares offered in the
Subscription Offering. Should the Association increase the
maximum purchase limitation , persons who previously
subscribed for the maximum number of shares will be given
the opportunity to subscribe for additional shares. The
aggregate purchases of directors and executive officers and
their associates may not exceed 34.78% of the total number
of shares offered in the Stock Conversion. These purchase
limitations do not apply to the ESOP.
Expiration Date of All subscriptions for Common Stock must be received by
Subscription and Noon, South Carolina time on _____________, 1997.
Community Offerings
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How to Subscribe For information on how to subscribe for Common Stock being
for Shares offered in the Stock Conversion, please read the Prospectus
and the stock order form and instructions accompanying this
Proxy Statement. Subscriptions will not become effective
until the Plan of Conversion has been approved by the
Association's members and all of the Common Stock offered
in the Stock Conversion has been subscribed for or sold in
the Subscription and Community Offering or through such
other means as may be approved by the OTS.
Price of Common All sales of Common Stock in the Subscription and Community
Stock Offering will be made at the same price per share which is
currently expected to be $10.00 per share on the basis of
an independent appraisal of the pro forma market value of
the Association and the Holding Company upon Stock
Conversion. On the basis of a preliminary appraisal by
Ferguson & Co. ("Ferguson") which has been reviewed by the
OTS, a minimum of 1,402,500 and a maximum of 1,897,500
shares (subject to adjustment) will be offered in the Stock
Conversion. See "The Conversion - Stock Pricing and Number
of Shares to be Issued" in the Prospectus.
Tax Consequences The Association has received an opinion from its special
counsel, Luse Lehman Gorman Pomerenk & Schick, P.C.,
stating that the Stock Conversion is a nontaxable
reorganization under Section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended (the "Code"). The
Association also has received an opinion from Dixon, Odom &
Co. ("Dixon") stating that the Stock Conversion will not be
a taxable transaction for South Carolina income tax
purposes.
Required Vote Approval of the Plan of Conversion will require the
affirmative vote of a majority of all votes eligible to be
cast at the Special Meeting.
YOUR BOARD OF DIRECTORS URGES YOU TO VOTE FOR
THE PLAN OF CONVERSION
SUMMARY OF PROPOSED CHARITABLE FOUNDATION
This summary does not purport to be complete and is qualified in its
entirety by the more detailed information contained in the remainder of this
Proxy Statement and the accompanying Prospectus.
As a reflection of the Association's long-standing commitment to the
local community, the Holding Company intends to establish the Foundation upon
the completion of the Conversion, subject to member approval. The Foundation
will be incorporated in the State of Delaware. The Foundation will be funded
with a contribution consisting of 20,000 shares of Common Stock which, will have
a value of $200,000 based upon the initial offering price of the Common Stock of
$10 per share.
Structural Purpose of the Foundation. The purpose of the Foundation is
to provide funding to support charitable purposes within the communities in
which the Association operates. The Association has long emphasized community
lending and community development activities and currently has a satisfactory
rating under the Community Reinvestment Act ("CRA"). The Foundation is being
formed as a complement to the Association's existing community activities, not
as a replacement for such activities. The Foundation may be able to support
community charitable activities even in periods when the Association or the
Holding Company would not be in a position to do so.
The Foundation will be a private foundation under the Code.
As a tax-exempt private foundation, the Foundation will be required to
distribute annually in grants or donations at least 5% of its net investment
assets. The Foundation will be dedicated to the promotion of charitable purposes
within the communities in which the Association operates, including, but not
limited to, providing grants or donations to support housing assistance,
not-for-profit medical facilities, community groups and other types of
organizations or projects. While the Foundation is authorized to engage directly
in charitable activities, in order to limit overhead costs, it is currently
anticipated that the Foundation's primary activity will consist of making grants
to other charitable organizations.
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Funding of the Foundation. The Foundation will be initially funded with
20,000 shares of Common Stock which will have a value of $200,000 based upon the
initial offering price of the Common Stock of $10 per share. Future
contributions to the Foundation may be made either in cash or Common Stock. The
amount of such future contributions, if any, will be determined based on, among
other factors, an assessment of the Holding Company's then current financial
condition, operations and prospects and of the need for charitable donations in
the Holding Company's market area. Any such additional contribution swill reduce
earnings and may have a material impact on the Holding Company's earnings for
such quarter and for the year. The Holding Company does not anticipate making
any contributions to the Foundation that will not be tax deductible.
Tax Considerations. The Holding Company has been advised that an
organization created for the above purposes will qualify as a 501(c)(3) exempt
organization under the Code, and will be classified as a private foundation
rather than a public charity. A private foundation typically receives its
support from one person or one corporation whereas a public charity receives its
support from the public. The Foundation will submit a request to the IRS to be
recognized as an exempt organization after approval of the Foundation by the
Association's members at the Special Meeting. So long as the Foundation files
its application for tax-exempt status within 15 months from the date of its
organization, and provided the IRS approves the application, the effective date
of the Foundation's status as a Section 501(c)(3) organization will be the date
of its organization.
Regulatory Conditions Imposed on the Foundation. Establishment of
the Foundation is subject to the following conditions imposed by the OTS: (i)
the Foundation will be subject to examination by the OTS, at the Foundation's
own expense; (ii) the Foundation must comply with supervisory directives imposed
by the OTS; (iii) the Foundation will provide annual reports to the OTS
describing grants made and grant recipients; (iv) the Foundation will operate in
accordance with written policies adopted by the board of directors, including a
conflict of interest policy; (v) unless required by another condition imposed by
the OTS, the Foundation will not engage in self-dealing and will comply with all
laws necessary to maintain its tax-exempt status; and (vi) any shares of Common
Stock of the Holding Company held by the Foundation must be voted in the same
ratio as all other shares of the Holding Company's Common Stock on all proposals
considered by stockholders of the Holding Company.
YOUR BOARD OF DIRECTORS URGES YOU TO VOTE FOR
---
THE CHARITABLE FOUNDATION
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FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
PROXY STATEMENT
SPECIAL MEETING OF MEMBERS TO BE HELD ON _____________, 1997
PURPOSE OF MEETING
This Proxy Statement is being furnished to you in connection with the
solicitation on behalf of the Board of Directors of First Federal Savings and
Loan Association of Cheraw (the "Association") of the proxies to be voted at the
Special Meeting of Members (the "Special Meeting") of the Association to be held
at the main office of the Association, located at 515 Market Street, Cheraw,
South Carolina, on _____________, 1997 at _____ _.m. local time and at any
adjournments thereof. The Special Meeting is being held for the purpose of
considering and voting upon a Plan of Conversion under which the Association
would be converted (the "Stock Conversion") from its present mutual form of
organization into a federally chartered savings association organized in stock
form, the concurrent sale of all the common stock of the stock savings
association to Great Pee Dee Bancorp, Inc. (the "Holding Company"), a Delaware
corporation, and the sale by the Holding Company of shares of its common stock
(the "Common Stock"). The Special Meeting is also being held to consider and
vote upon the establishment of a tax exempt Foundation and such other business
as may properly come before the meeting and any adjournment thereof. References
to the Association include the Association when organized in stock form as
indicated by the context.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE ASSOCIATION RECOMMENDS THAT YOU VOTE TO
APPROVE THE PLAN OF CONVERSION AND THE ESTABLISHMENT OF THE CHARITABLE
FOUNDATION.
The Association is currently organized in mutual rather than stock
form, meaning that it has no stockholders and no authority under its federal
mutual charter to issue capital stock. The Association's Board of Directors has
adopted the Plan of Conversion providing for the Conversion. The sale of Common
Stock of the Holding Company, which was recently formed to become the holding
company of the Association, will substantially increase the Association's net
worth. The Holding Company will exchange a portion of the net proceeds from the
sale of the Common Stock for the common stock of the Association to be issued
upon Stock Conversion. The Holding Company expects to retain the balance of the
net proceeds (up to 50%), as its initial capitalization of which the Holding
Company intends to lend funds to the ESOP to fund its purchase of Common Stock.
This increased capital will support the expansion of the Association's financial
services to the public. The Board of Directors of the Association also believes
that the conversion to stock form and the use of a holding company structure
will enhance the Association's ability to expand through possible mergers and
acquisitions (although no such transactions are contemplated at this time) and
will facilitate its future access to the capital markets.
The Plan of Conversion provides for the establishment of the
Foundation, which will be incorporated under Delaware law as a non-stock
corporation. The Holding Company will fund the Foundation with a contribution of
20,000 shares of Common Stock.
The Board of Directors of the Association believes that the Stock
Conversion will further benefit the Association by enabling it to attract and
retain key personnel through prudent use of stock-related incentive compensation
and benefit plans. See "EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF FIRST
FEDERAL - Employee Stock Ownership Plan and Trust, - Stock Option Plan, and -
Recognition and Retention Plan" in the accompanying Prospectus.
Voting in favor of the Plan of Conversion will not obligate any person
to purchase any Common Stock.
THE OTS HAS APPROVED THE PLAN OF CONVERSION SUBJECT TO THE APPROVAL OF
THE ASSOCIATION'S MEMBERS AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS.
HOWEVER, SUCH APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF
THE PLAN OF CONVERSION BY THE OTS.
<PAGE>
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
The Board of Directors of the Association has fixed _____________, 1997
as the voting record date ("Voting Record Date") for the determination of
members entitled to notice of the Special Meeting. All Association depositors
are members of the Association under its current charter. All Association
members of record as of the close of business on the Voting Record Date will be
entitled to vote at the Special Meeting or any adjournment thereof.
Each depositor (including IRA and Keogh account beneficiaries) will be
entitled at the Special Meeting to cast one vote for each $100, or fraction
thereof, of the aggregate withdrawal value of all of such depositor's accounts
in the Association as of the Voting Record Date, up to a maximum of 1,000 votes.
Each borrower of the savings association as of _____________, 1997 shall be able
to cast one vote as a borrower member as long as such borrower's borrowings as
of _____________, 1997 remain outstanding as of the Voting Record Date. Joint
accounts shall be entitled to no more than 1,000 votes, and any owner may cast
all the votes unless notified in writing. In general, accounts held in different
ownership capacities will be treated as separate memberships for purposes of
applying the 1,000 vote limitation. For example, if two persons hold a $100,000
account in their joint names and each of the persons also holds a separate
account for $100,000 in his own name, each person would be entitled to 1,000
votes for each separate account and they would together be entitled to cast
1,000 votes on the basis of the joint account. Where no proxies are received
from IRA and Keogh account beneficiaries, after due notification, the
Association, as trustee of these accounts, is entitled to vote these accounts in
favor of the Plan of Conversion and the establishment of the Foundation.
Approval of both the Plan of Conversion and the establishment of the
Foundation requires the affirmative vote of a majority of the total outstanding
votes of the Association's members eligible to be cast at the Special Meeting.
As of _____________, 1997, the Association had _____________ members who were
entitled to cast a total of _____________ votes at the Special Meeting.
Association members may vote at the Special Meeting or any adjournment
thereof in person or by proxy. Any member giving a proxy will have the right to
revoke the proxy at any time before it is voted by giving written notice to the
Secretary of the Association, provided that such written notice is received by
the Secretary prior to the Special Meeting or any adjournment thereof, or upon
request if the member is present and chooses to vote in person.
All properly executed proxies received by the Board of Directors of the
Association will be voted in accordance with the instructions indicated thereon
by the members giving such proxies. If no instructions are given, such proxies
will be voted in favor of the Plan of Conversion and in favor of establishing
the Foundation. If any other matters are properly presented at the Special
Meeting and may properly be voted on, the proxies solicited hereby will be voted
on such matters in accordance with the best judgment of the proxy holders named
thereon. Management is not aware of any other business to be presented at the
Special Meeting.
If a proxy is not executed and is returned or the member does not vote
in person, the Association is prohibited by OTS regulations from using a
previously executed proxy to vote for the Conversion and establishing the
Foundation. AS A RESULT, FAILURE TO VOTE MAY HAVE THE SAME EFFECT AS A VOTE
AGAINST THE PLAN OF CONVERSION AND THE ESTABLISHMENT OF THE CHARITABLE
FOUNDATION.
To the extent necessary to permit approval of the Plan of Conversion,
proxies may be solicited by officers, directors or regular employees of the
Association, in person, by telephone or through other forms of communication
and, if necessary, the Special Meeting may be adjourned to a later date. Such
persons will be reimbursed by the Association for their expenses incurred in
connection with such solicitation. The Association will bear all costs of this
solicitation. The proxies solicited hereby will be used only at the Special
Meeting and at any adjournment thereof.
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PROPOSAL 1 - APPROVAL OF THE PLAN OF CONVERSION
Description of The Plan of Conversion
The Plan of Conversion to be presented for approval at the Special
Meeting provides for the Conversion to be accomplished through adoption of an
amended charter and bylaws for the Association to authorize the issuance of
capital stock along with the concurrent formation of a holding company, and the
related transactions provided for in the Plan of Conversion, including the
adoption of an amended Federal Stock Charter and Bylaws for the Association. As
part of the Conversion, the Plan of Conversion provides for the Subscription
Offering of the Common Stock to (i) Eligible Account Holders (deposit account
holders with an account balance of $50 or more as of June 30, 1995); (ii)
the ESOP, (iii) Supplemental Eligible Account Holders (deposit account holders
with an account balance of $50 or more as of September 30, 1997); and (iv) Other
Members (certain deposit account holders as of the close of business on
_____________, 1997 who are not Eligible Account Holders or Supplemental
Eligible Account Holders and borrowers as of the Voting Record Date).
Notwithstanding the foregoing, to the extent orders for shares exceed the
maximum of the appraisal range, the Employee Stock Ownership Plan ("ESOP") shall
be afforded a first priority to purchase shares sold above the maximum of the
appraisal range. It is anticipated that the ESOP will purchase 8% of the Common
Stock sold in the Stock Conversion. Concurrently with, during or following
completion of the Subscription Offering, members of the general public, with a
preference first to natural persons residing in the County in which the
Association maintains its office, will be afforded the opportunity to purchase
the Common Stock not subscribed for in the Subscription Offering.
THE SUBSCRIPTION OFFERING HAS COMMENCED AS OF THE DATE OF MAILING OF
THIS PROXY STATEMENT. A PROSPECTUS EXPLAINING THE TERMS OF THE SUBSCRIPTION AND
COMMUNITY OFFERING, INCLUDING HOW TO ORDER AND PAY FOR SHARES AND DESCRIBING THE
BUSINESS OF THE ASSOCIATION AND THE HOLDING COMPANY, ACCOMPANIES THIS PROXY
STATEMENT AND SHOULD BE READ BY ALL PERSONS WHO WISH TO CONSIDER SUBSCRIBING FOR
COMMON STOCK. THE SUBSCRIPTION AND COMMUNITY OFFERING EXPIRES AT NOON, LOCAL
TIME ON DECEMBER __, 1997 UNLESS EXTENDED BY THE ASSOCIATION AND THE HOLDING
COMPANY.
The federal conversion regulations require that all stock offered in a
conversion must be sold in order for the conversion to become effective. The
conversion regulations require that the offering be completed within 45 days
after completion of the Subscription Offering period unless extended by the
Association and the Holding Company with the approval of the OTS. This 45-day
period expires _____________, 1998 unless the Subscription Offering is extended.
If this is not possible, an occurrence that is currently not anticipated, the
Board of Directors of the Association and the Holding Company will consult with
the OTS to determine an appropriate alternative method of selling all
unsubscribed shares offered in the Stock Conversion. The Plan of Conversion
provides that the Stock Conversion must be completed within 24 months after the
date of the Special Meeting.
The Subscription and Community Offering or any other sale of the
unsubscribed shares will be made as soon as practicable after the date of the
Special Meeting. No sales of shares may be completed, either in the Subscription
and Community Offering or otherwise, unless the Plan of Conversion is approved
by the members of the Association.
The commencement and completion of the Subscription and Community
Offering, however, is subject to market conditions and other factors beyond the
Association's control. Due to adverse conditions in the stock market in the
past, a number of converting thrift institutions encountered significant delays
in completing their stock offerings or were not able to complete them at all. 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
Subscription and Community Offering or other sale of the Common Stock to be
offered in the Stock Conversion. If delays are experienced, significant changes
may occur in the estimated pro forma market value of the Common Stock, together
with corresponding changes in the offering price and the net proceeds realized
by the Association and the Holding Company from the sale of the Common Stock.
The Association and the Holding Company may also incur substantial additional
printing, legal, accounting and other expenses in completing the Conversion.
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The following is a brief summary of the Conversion and is qualified in
its entirety by reference to the Plan of Conversion. The Association will
provide to you a copy of the Plan of Conversion if you return the enclosed,
postage-paid postcard by _____________, 1997. A copy of the Holding Company's
Certificate of Incorporation and Bylaws are also available from the Association
upon written request.
Principal Effects of Conversion
Depositors. The Conversion will not change the amount, interest rate,
withdrawal rights or federal insurance protection of deposit accounts, or affect
deposit accounts in any way other than with respect to voting and liquidation
rights as discussed below.
Borrowers. The rights and obligations of borrowers under their loan
agreements with the Association will remain unchanged by the Conversion. The
principal amount, interest rate and maturity date of loans will remain as they
were contractually fixed prior to the Conversion.
Voting Rights of Depositors. Under the Association's current federal
mutual charter, depositors have voting rights as members of the Association with
respect to the election of directors and certain other affairs of the
Association. After the Conversion, exclusive voting rights with respect to all
such matters will be vested in the Holding Company as the sole stockholder of
the Association. Depositors will no longer have any voting rights, except to the
extent that they become stockholders of the Holding Company through the purchase
of its Common Stock. Voting rights in the Holding Company will be held
exclusively by its stockholders.
Liquidation Rights of Depositor Members. Currently, in the unlikely
event of liquidation of the Association, any assets remaining after satisfaction
of all creditors' claims in full (including the claims of all depositors to the
withdrawal value of their accounts) would be distributed pro rata among the
depositors of the Association, with the pro rata share of each being the same
proportion of all such remaining assets as the withdrawal value of each
depositor's account is of the total withdrawal value of all accounts in the
Association at the time of liquidation. After the Conversion, the assets of the
Association would first be applied, in the event of liquidation, against the
claims of all creditors (including the claims of all depositors to the
withdrawal value of their accounts). Any remaining assets would then be
distributed to the persons who qualified as Eligible Account Holders or
Supplemental Eligible Account Holders under the Plan of Conversion to the extent
of their interests in a "Liquidation Account" that will be established at the
time of the completion of the Stock Conversion and then to the Holding Company
as the sole stockholder of the Association's outstanding common stock. The
Association's depositors who did not qualify as Eligible Account Holders or
Supplemental Eligible Account Holders would have no right to share in any
residual net worth of the Association in the event of liquidation after the
Stock Conversion, but would continue to have the right as creditors of the
Association to receive the full withdrawal value of their deposits prior to any
distribution to the Holding Company as the Association's sole stockholder. In
addition, the Association's deposit accounts will continue to be insured by the
FDIC to the maximum extent permitted by law, currently up to $100,000 per
insured account. The Liquidation Account will initially be established in an
amount equal to the net worth of the Association as of the date of the
Association's latest statement of financial condition contained in the final
prospectus used in connection with the Stock Conversion. Each Eligible Account
Holder and/or Supplemental Eligible Account Holder will receive an initial
interest in the Liquidation Account in the same proportion as the balance in all
of his qualifying deposit accounts was of the aggregate balance in all
qualifying deposit accounts of all Eligible Account Holders and Supplemental
Eligible Account Holders on June 30, 1995 or September 30, 1997, respectively.
For accounts in existence on both dates, separate subaccounts shall be
determined on the basis of the qualifying deposits in such accounts on the
record dates. However, if the amount in the qualifying deposit account on any
annual closing date of the Association is less than the lowest amount in such
deposit account on the Eligibility Record Date and/or Supplemental Eligibility
Record Date, and any subsequent annual closing date, this interest in the
Liquidation Account will be reduced by an amount proportionate to such reduction
in the related deposit account and will not thereafter be increased despite any
subsequent increase in the related deposit account.
The Association. Under federal law, the stock savings association
resulting from the Stock Conversion will be deemed to be a continuation of the
mutual association rather than a new entity and will continue to have all of the
rights, privileges, properties, assets and liabilities of the Association prior
to the Stock Conversion. The Stock Conversion will enable the Association to
issue capital stock, but will not change the general objectives, purposes or
4
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types of business currently conducted by the Association, and no assets of the
Association will be distributed in order to effect the Stock Conversion, other
than to pay the expenses incident thereto. After the Stock Conversion, the
Association will remain subject to examination and regulation by the OTS and
will continue to be a member of the Federal Home Loan Bank System. The Stock
Conversion will not cause any change in the executive officers or directors of
the Association.
Tax Consequences. Consummation of the Stock Conversion is expressly
conditioned upon prior receipt by the Association of either a ruling from the
Internal Revenue Service or an opinion of Luse Lehman Gorman Pomerenk & Schick,
P.C. with respect to federal taxation, and a ruling of the South Carolina
taxation authorities or an opinion of Dixon, Odom & Co. with respect to South
Carolina taxation, to the effect that consummation of the Stock Conversion will
not be taxable to the Association or the Holding Company.
An opinion has been received from Luse Lehman Gorman Pomerenk & Schick,
P.C. with respect to the proposed Stock Conversion of the Association, to the
effect that (i) the Stock Conversion will qualify as a reorganization under
Section 368(a)(1)(F) of the Code, and no gain or loss will be recognized to the
Association in either its mutual form or its stock form by reason of the
proposed Stock Conversion, (ii) no gain or loss will be recognized to the
Association upon the receipt of money from the Holding Company for stock of the
Association; and no gain or loss will be recognized to the Holding Company upon
the receipt of money for Common Stock of the Holding Company; (iii) the basis of
the assets of the Association in its stock form will have the same basis as the
assets of the Association in its mutual form prior to the Stock Conversion; (iv)
the holding period of the assets of the Association will include the period
during which the assets were held by the Association in its mutual form prior to
conversion; (v) no gain or loss will be recognized by the depositors of the
Association upon the constructive issuance to them of withdrawable deposit
accounts of the Association immediately after the Stock Conversion, interests in
the Liquidation Account, and/or on the distribution to them of nontransferable
subscription rights to purchase Common Stock; (vi) the basis of the account
holder's deposit accounts in the Association after the Stock Conversion will be
the same as the basis of his or her deposit accounts in the Association prior to
the Stock Conversion; (vii) the basis of each account holder's interest in the
Liquidation Account will be zero; the basis of the nontransferable subscription
rights will be zero; (viii) the basis of the Common Stock to its shareholders
will be the actual Purchase Price thereof plus, in the case of stock acquired by
account holders, the basis, if any, in the Subscription Rights; (ix) no taxable
income will be realized by Eligible Account Holders, Supplemental Eligible
Account Holders or Other Members as a result of the exercise of the
nontransferable subscription rights; and (x) the Association in stock form will
succeed to and take into account Holding Company earnings and profits, or
deficit in earnings and profits of the Association in its mutual form, as of the
date of the Stock Conversion.
The opinion concludes in effect that: (i) no taxable income will be
realized by the Association on the issuance of subscription rights to eligible
subscribers to purchase shares of Common Stock at fair market value; (ii) the
Association in its stock form will succeed to and take into account the dollar
amounts of those accounts of the Association in its mutual form which represent
bad debt reserves in respect of which the Association in its mutual form has
taken a bad debt deduction for taxable years on or before the date of the
transfer; and (iii) the creation of the Liquidation Account will have no effect
on the Association's taxable income, deductions, or additions to bad debt
reserves or distributions to the Holding Company's shareholders under Section
593 of the Code.
The opinion from Luse Lehman Gorman Pomerenk & Schick, P.C. is based,
among other things, on certain assumptions, including the assumptions that the
exercise price of the Subscription Rights to purchase Holding Company Common
Stock will be approximately equal to the fair market value of that stock at the
time of the completion of the proposed Stock Conversion. The Holding Company and
the Association have received a letter issued by Ferguson & Co. ("Ferguson")
stating that pursuant to Ferguson's valuation, Ferguson is of the belief that
Subscription Rights issued in connection with the Stock Conversion will have no
value.
If it is subsequently established that the Subscription Rights received
by such persons have an ascertainable fair market value, then, in such event,
the Subscription Rights will be taxable to the recipient in the amount of their
fair market value. In this regard, the Subscription Rights may be taxed
partially or entirely at ordinary income tax rates.
With respect to South Carolina taxation, the Association has received
an opinion from Dixon, Odom & Co. to the effect that, assuming the Stock
Conversion does not result in any federal taxable income, gain or loss to the
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Association in its mutual or stock form, the Holding Company, the account
holders, borrowers, officers, directors and employees and Tax-Qualified Employee
Plans of the Association, the Stock Conversion should not result in any South
Carolina income tax liability to such entities or persons.
Approval, Interpretation, Amendment and Termination
Under the Plan of Conversion, the letter from the OTS giving approval
thereto, and applicable regulations, consummation of the Conversion is subject
to the satisfaction of the following conditions: (a) approval of the Plan of
Conversion by members of the Association casting at least a majority of the
votes eligible to be cast at the Special Meeting; (b) sale of all of the Common
Stock to be offered in the Stock Conversion; and (c) receipt of favorable
rulings or opinions of counsel as to the federal and South Carolina tax
consequences of the Stock Conversion.
The Plan of Conversion may be substantively amended by the Boards of
Directors of the Association and the Holding Company with the concurrence of the
OTS. If the Plan of Conversion is amended, proxies which have been received
prior to such amendment will not be resolicited unless otherwise required by the
OTS. Also, as required by the federal regulations, the Plan of Conversion
provides that the transactions contemplated thereby may be terminated by the
Board of Directors of the Association alone at any time prior to the Special
Meeting and may be terminated by the Board of Directors of the Association at
any time thereafter with the concurrence of the OTS, notwithstanding approval of
the Plan of Conversion by the members of the Association at the Special Meeting.
All interpretations by the Association and the Holding Company of the Plan of
Conversion and of the Stock Order Forms and related materials for the
Subscription and Community Offering will be final, except as regards or affects
the OTS.
Judicial Review
Section 5(i)(2)(B) of the Home Owners' Loan Act, as amended, 12 U.S.C.
ss.1464(i)(2)(B) and Section 563b.8(u) of the Rules and Regulations promulgated
thereunder (12 C.F.R. Section 563b.8(u)) provide: (i) that persons aggrieved by
a final action of the OTS which approves, with or without conditions, or
disapproves a plan of conversion, may obtain review of such final action only by
filing a written petition in the United States Court of Appeals for the circuit
in which the principal office or residence of such person is located, or in the
United States Court of Appeals for the District of Columbia, requesting that the
final action of the OTS be modified, terminated or set aside, and (ii) that such
petition must be filed within 30 days after publication of notice of such final
action in the Federal Register, or 30 days after the date of mailing of the
notice and proxy statement for the meeting of the converting institution's
members at which the conversion is to be voted on, whichever is later. The
notice of the Special Meeting of the Association's members to vote on the Plan
of Conversion described herein is included at the beginning of this Proxy
Statement. The statute and regulation referred to above should be consulted for
further information.
PROPOSAL 2 - APPROVAL OF THE
CHARITABLE FOUNDATION
Establishment of the Foundation
General. In furtherance of the our commitment to the communities that
we serve, we intend to establish a foundation, which will be incorporated under
Delaware law as a non-stock corporation, and we will fund the foundation with a
contribution of 20,000 shares of common stock. By further enhancing First
Federal's visibility and reputation in the communities that it serves, we
believe that the Foundation will enhance the long-term value of our community
banking franchise. The Foundation will be dedicated to charitable purposes
within the communities served by First Federal, including community development
activities.
Purpose of the Foundation. The purpose of the Foundation is to
provide funding to support charitable causes and community development
activities. First Federal emphasizes community lending and community development
activities within the communities that it serves. The Foundation is being formed
as a complement to First Federal's existing community activities, not as a
replacement for such services. While we intend to continue to emphasize
community lending and community development activities following the Conversion,
such activities are not
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First Federal's sole corporate purpose. The Foundation, conversely, will be
completely dedicated to community activities and the promotion of charitable
causes, and may be able to support such activities in ways that are not
currently available to First Federal. We believe that the Foundation will
enhance First Federal current activities under the CRA. In this regard, the
board of directors of First Federal believes the establishment of a foundation
is consistent with First Federal's commitment to community service. The Board
further believes that the funding of the Foundation with common stock of the
Holding Company is a means of enabling the communities served by First Federal
to share in the growth and success of the Holding Company long after completion
of the Conversion. The Foundation will accomplish that goal by providing for
continued ties between the Foundation and First Federal, thereby forming a
partnership with First Federal's community. Foundations have been formed by
other financial institutions for this purpose, among others. First Federal,
however, does not expect the contribution to the Foundation to take the place of
First Federal's traditional community lending activities.
Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's Bylaws,
the Foundation's initial Board of Directors will comprised of two members of the
Holding Company's and First Federal's Board of Directors. Other individuals may
be selected as Board members. A Nominating Committee of the Foundation's Board
will nominate individuals eligible for election to the Board of Directors. The
members of the Foundation, who are comprised of its Board members, will elect
the directors at the annual meeting of the Foundation from those nominated by
the Nominating Committee. Only persons serving as directors of the Foundation
qualify as members of the Foundation, with voting authority. Directors will
divided into three classes with each class appointed for three-year terms. It is
not anticipated that the two members of the Holding Company's and First
Federal's Board of Directors who also serve as directors of the Foundation will
receive any additional compensation for serving as a director of the Foundation.
No determination has been made at this point what, if any, compensation the
other Foundation directors will receive. The certificate of incorporation of the
Foundation provides that the corporation is organized exclusively for charitable
purposes, including community development, as set forth in Section 501(c)(3) of
the Code. The Foundation's certificate of incorporation further provides that no
part of the net earnings of the Foundation will inure to the benefit of, or be
distributable to its directors, officers or members.
The authority for the affairs of the Foundation will be vested in the
Board of Directors of the Foundation. The Directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect
to grants or donations by the Foundation, consistent with the purposes for which
the Foundation was established. Although no formal policy governing Foundation
grants exists at this time, the Foundation's Board of Directors will adopt such
a policy upon establishment of the Foundation. As directors of a nonprofit
corporation, directors of the Foundation will at all times be bound by their
fiduciary duty to advance the Foundation's charitable goals, to protect the
assets of the Foundation and to act in a manner consistent with the charitable
purpose for which the Foundation is established. The Directors of the Foundation
will also be responsible for directing the activities of the Foundation,
including the management of the common stock of the Holding Company held by the
Foundation. However, it is expected that as a condition to receiving the
approval of the OTS to First Federal's Conversion, that the Foundation will be
required to commit to the OTS that all shares of common stock held by the
Foundation will be voted in the same ratio as all other shares of the Holding
Company's common stock on all proposals considered by stockholders of the
Holding Company; provided, however, that , consistent with such expected
condition, the OTS would waive this voting restriction under certain
circumstances if compliance with the voting restriction would: (i) cause a
violation of the law of the State of Delaware and the OTS determines that
federal law would not preempt the application of the laws of Delaware to the
Foundation, (ii) would cause the Foundation to lose its tax-exempt status, or
cause the Internal Revenue Service to deny the Foundation's request for a
determination that it is an exempt organization or otherwise have a material and
adverse tax consequence on the Foundation; or (iii) would cause the Foundation
to be subject to an excise tax under Section 4941 of the Code. In order for the
OTS to waive such voting restriction, the Holding Company's or the Foundation's
legal counsel would be required to render an opinion satisfactory to the OTS
that compliance with the voting requirement would have the effect described in
clauses (i), (ii) or (iii) above. Under those circumstances, the OTS would grant
a waiver of the voting restriction upon submission of such legal opinion(s) by
the Holding Company or the Foundation that are satisfactory to the OTS. In the
event that the OTS were to waive the voting requirement, the directors would
direct the voting of the common stock held by the Foundation.
The Foundation's place of business will be located at First Federal's
administrative offices and initially the Foundation is expected to have no
employees but will utilize the members of the staff of the Holding Company or
First Federal. The Board of Directors of the Foundation will appoint such
officers as may be necessary to manage the
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<PAGE>
operations of the Foundation. In this regard, it is expected that First Federal
will be required to provide the OTS with a commitment that, to the extent
applicable, First Federal will comply with the affiliate restrictions set forth
in Sections 23A and 23B of the Federal Reserve Act with respect to any
transactions between First Federal and the Foundation.
The Holding Company and First Federal determined to fund the Foundation
with common stock rather than cash because it desired to form a bond with the
communities it serves in a manner that would allow them to share in the growth
and success of the Holding Company and First Federal over the long term. The
funding of the Foundation with stock also provides the Foundation with a
potentially larger endowment than if the Holding Company contributed cash to the
Foundation since, as a stockholder, the Foundation will share in the growth and
success of the Holding Company. As such, the contribution of common stock to the
Foundation has the potential to provide a self-sustaining funding mechanism
which reduces the amount of cash that the Holding Company, if it were not making
the stock donation, would have to contribute to the Foundation in future years
in order to maintain a level amount of charitable grants and donations.
The Foundation will receive working capital from any dividends that may
be paid on the common stock in the future, and subject to applicable federal and
state laws, loans collateralized by the common stock or from the proceeds of the
sale of any of the common stock in the open market from time to time as may be
permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets.
Dilution of Stockholder's Interests. The 20,000 shares of common stock
proposed to be contributed to the Foundation are in addition to the shares to be
issued and sold to depositors, members and the public in the Conversion, persons
purchasing shares of common stock in the Conversion will have their ownership
and voting interests in the Holding Company diluted by between 1.4% and 0.9% at
the minimum and maximum, as adjusted, of the Estimated Valuation Range. See "Pro
Forma Data."
Impact of Earnings. The contribution of common stock to the Foundation
will have an adverse impact on our earnings in the year in which the
contribution is made. We will recognize the full expense in the amount of the
contribution of common stock to the Foundation in the year (and quarter) in
which the contribution occurs, which is expected to be fiscal 1998. The
contribution expense will be partially offset by the tax benefit related to the
expense. We have been advised that the contribution to the Foundation will be
tax deductible, subject to an annual limitation based on 10% of the Holding
Company's annual taxable income. We estimate that there will be a net tax
effected expense of $128,000. If the Foundation had been established at June 30,
1997, we would have reported net income of $458,000, rather than reporting net
income of $586,000 for the year ended June 30, 1997. We do not currently
anticipate making additional contributions to the Foundation within the first
five years following the initial contribution.
Tax Considerations. We have been advised that an organization created
and operated for the above charitable purposes would general qualify as a
Section 501(c)(3) exempt organization under the Code, and further that such an
organization would likely be classified as a private foundation . This opinion
presumes that the Foundation will submit a timely request to the IRS to be
recognized as an exempt organization . As long as the Foundation files its
application for recognition of tax-exempt status within 15 months from the date
of its organization, and provided the IRS approves the application, the
effective date of the Foundation's status as a Section 501(c)(3) organization
will be the date of its organization. Our tax advisor, however, has not rendered
any advice on the condition to the contribution to be agreed to by the
Foundation which requires that all shares of common stock of the Holding Company
held by the Foundation must be voted in the same ratio as all other outstanding
shares of common stock of the on all proposals considered by stockholders of the
Holding Company. Consistent with the expected condition, in the event that the
Holding Company or the Foundation receives an opinion of its legal counsel that
compliance with this voting restriction would have the effect of causing the
Foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the Foundation, or subject the Foundation to an
excise tax under Section 4941 of the Code, it is expected that the OTS would
waive such voting restriction upon submission of a legal opinion(s) by the
Company or the Foundation satisfactory to the OTS. See "-Regulatory Conditions
Imposed on the Foundation."
Under Delaware law, the Holding Company is authorized by statute to
make charitable contributions and case law had recognized that benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
8
<PAGE>
provides that a charitable gift must be within reasonable limits as to amount
and purpose to be valid. Under the Code, the Holding Company is generally
allowed a deduction for charitable contributions made to qualifying donees
within the taxable year of up to 10% of its taxable income (with certain
modifications) for such year. Charitable contributions made by the Holding
Company in excess of the annual deductible amount will be deductible over each
of the five succeeding taxable years, subject to certain limitations. We believe
that the Conversion presents a unique opportunity to establish and fund a
foundation given the substantial amount of additional capital being raised in
the Conversion. In making such a determination, we considered the dilutive
impact of the contribution of common stock to the Foundation and the impact on
earnings. Based on such consideration, the Holding Company First Federal
believe that the contribution to the Foundation in excess of the 10% annual
deduction limitation is justified given First Federal's capital position and
its earnings, the substantial additional capital being raised in the Conversion
and the potential benefits of the Foundation to the communities served by First
Federal. In this regard, and assuming the sale of the common stock at the
midpoint of the Estimated Valuation Range, the Holding Company would have pro
forma stockholders' equity of $25.0 million or 33.6% of pro forma consolidated
assets and First Federal's pro forma tangible, core and total risk-based
capital ratios would be 24.2%, 24.2% and 50.8%, respectively. See "Historical
and Pro Forma Regulatory Capital Compliance," and "Capitalization," Thus, the
amount of the contribution will not adversely impact our financial condition
and we therefore believe that the amount of the charitable contribution is
reasonable given our pro forma capital positions. As such, the Holding Company
and First Federal believe that the contribution does not raise safety and
soundness concerns.
We have received an opinion of the tax advisors that the Holding
Company's contribution of its own stock to the Foundation would not constitute
an act of self-dealing, and that the Holding Company will be entitled to a
deduction in the amount of the fair market value of the stock at the time of the
contribution, subject to the annual deduction limitation described above. The
Holding Company, however, would be able to carry forward any unused portion of
the deduction for five years following the contribution, subject to certain
limitations. Our tax advisor, however, has not rendered advice as to fair market
value for purposes of determining the amount of the tax deduction. If the
Foundation would have been established in 1997, the Holding Company would have a
received a tax benefit of approximately $92,000 (based on First Federal's
pre-tax income for 1997). We are permitted under the Code to carry over the
excess contribution over the five-year period following the contribution to the
Foundation. We estimate that all of the contribution should be deductible over
the six-year period. Neither the Holding Company nor First Federal expect to
make any further contributions to the Foundation within the first five years
following the initial contribution. After that time, we may consider future
contributions to the Foundation. Any such decisions would be based on an
assessment of, among other factors, our financial condition, the interests of
shareholders and depositors of the, and the financial condition and operations
of the Foundation.
Although we have received an opinion we will be entitled to a deduction
for the charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that
a deduction for the charitable contribution will be allowed. In such event, the
tax benefit related to the contribution to the Foundation would be expensed
without tax benefit, resulting in a reduction in earnings in the year in which
the IRS makes such a determination.
The Foundation will be required to make an annual filing with the IRS
within four and on-half months after the close of the Foundation's fiscal year
to maintain its tax-exempt status. The Foundation will be required to publish a
notice that the annual information return will be available for public
inspection for a period of 180 days after the date of such public notice. The
information return for a private foundation must include, among other things, an
itemized list of all grants made or approved, showing the amount of each grant,
the recipient, any relationship between a grant recipient and the Foundation's
managers and a concise statement of the purpose of each grant.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is expected to be subject to the following conditions being agreed to
by the Foundation in writing as a condition to receiving OTS' approval of the
Conversion: (i) the Foundation will be subject to examination by the OTS; (ii)
the Foundation must comply with supervisory directives imposed by the OTS; (iii)
the Foundation will operate in accordance with written policies adopted by the
Board of Directors, including a conflict of interest policy; (iv) any shares of
Common stock held by the Foundation must be voted in the same ratio as all other
outstanding shares of common stock on all proposals considered by stockholders
of the Holding Company; provided, however, that , consistent with the condition,
the OTS would waive this voting restriction under certain circumstances if
compliance with the voting
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restriction would: (a) cause a violation of the law of the State of Delaware
and the OTS determines that federal law would not preempt the application of the
laws of Delaware to the Foundation, (b) would cause the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (c) would cause the Foundation to be subject to an excise tax
under Section 4941 of the Code copy attached; and (v) any shares of common stock
subsequently purchased by the Foundation will be aggregated with any shares
repurchased by the Holding Company or First Federal for purposes of calculating
the number of shares which may be repurchased during the three-year period
subsequent to Conversion. In order for the OTS to waive such voting restriction,
the Holding Company's or the Foundation's legal counsel would be required to
render an opinion satisfactory to the OTS. While there is no current intention
for the Holding Company or the Foundation to seek a waiver from the OTS from
such restrictions, there can be no assurances that a legal opinion addressing
these issues could be rendered, or if rendered, that the OTS would grant an
unconditional waiver of the voting restriction. In no event would the voting
restriction survive the sale of shares of the common stock held by the
Foundation.
Various OTS regulations may be deemed to apply to the Foundation
including regulations regarding (i) transactions with affiliates, (ii) conflicts
of interest, (iii) capital distributions and (iv) repurchases of capital stock
within the three-year period subsequent to a mutual-to-stock conversion. Because
only two directors of the Holding Company and First Federal are expected to
serve as directors of the Foundation, the Holding Company and First Federal do
not believe that the Foundation should be deemed an affiliate of First Federal.
The Holding Company and First Federal anticipate that the Foundation's affairs
will be conducted in a manner consistent with the OTS' conflict of interest
regulations and, in keeping therewith, First Federal's Board of Directors
readopted the Plan of Conversion and reapproved the establishment of the
Foundation in September 1997 with the two directors who are expected to become
directors of the Foundation not participating in such action. First Federal has
provided information to the OTS demonstrating that the initial contribution of
common stock to the Foundation would be within the amount which First Federal
would be permitted to make as a capital distribution assuming such contribution
is deemed to have been made by First Federal.
Potential Anti-Takeover Effect. Upon completion of the Conversion, the
Foundation will own between 1.4% and 0.9% of the total shares of the common
stock outstanding. Such shares will be owned solely by the Foundation; however,
pursuant to a condition expected to be required by regulatory authorities, it is
anticipated that the shares of common stock held by the Foundation will be voted
in the same ratio as all other shares of common stock on all proposals
considered by the stockholders of the Company. As such, the Holding Company does
not believe the Foundation will have a anti-takeover effect on the Company.
However, in the event that the OTS were to waive this voting restriction for the
reasons described herein as provided in the condition, the Foundation's Board of
Directors would exercise sole voting power over such shares and would no longer
be subject to the restriction. As a majority of the Foundation's Board of
Directors will be comprised of the members of the Board of Directors of the
Holding Company, in the event the OTS waived the voting restriction (although it
is not currently anticipated that the Company and the Foundation will seek such
a waiver), management of the Company and First Federal may benefit to the extent
that the Board of Directors of the Foundation determines to vote the shares of
common stock held by the Foundation in favor of proposals supported by the
Company and First Federal. Furthermore, in such an event, when the Foundation's
shares are combined with shares purchased directly by officers and directors,
shares expected to be held by the Recognition Plan, and shares held by the ESOP
trust, the aggregate of such shares could exceed ___% of the outstanding common
stock, which could enable management to defeat stockholder proposals requiring
80% approval. Consequently, such potential voting control might preclude
takeover attempts that certain stockholders deem to be in their best interest,
and might tend to perpetuate management. However, since the ESOP shares are
allocated to all eligible employees, and any unallocated shares will be voted by
the trustees in the same proportions as allocated shares are voted, and because
the Recognition Plan must first be approved by stockholders no sooner than six
months following completion of the Conversion, and awards under such proposed
plans may be granted to employees other than executive officers and directors,
management of the Holding Company does not expect to have voting control of all
shares covered by the ESOP and other stock-based benefit plans. Moreover, as the
Foundation sells its shares of common stock over time, its ownership interest
and voting power in the Holding Company is expected to decrease.
Potential Challenges. To date, there has been limited precedent with
respect to the establishment and funding of a foundation as part of a conversion
of a mutual savings institution to stock form. In addition, establishment and
funding of the Foundation will require the OTS to grant the First Federal and
the Holding Company waivers from its mutual-to-stock conversion regulations. As
such, the Foundation and the OTS's non-objection to the Conversion may
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be subject to potential challenges with respect to, among other things, the
Holding Company's and First Federal's ability to establish the Foundation,
notwithstanding that the Board of Directors have carefully considered the
various factors involved in the establishment of the Foundation in reaching
their determination to establish the Foundation as part of the Conversion,
and/or with respect to the OTS' authority to grant the waivers necessary to
establish the Foundation. If challenges were to be instituted seeking to require
us to eliminate establishment of the Foundation in connection with the
Conversion, no assurances can be made that the resolution of such challenges
would not result in a delay in the consummation of the Conversion or that any
objecting persons would not be ultimately successful in obtaining such removal
or other relief.
Approval of Members. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of First Federal's members
eligible to be cast at the Special Meeting. The Foundation will be considered as
a separate matter from approval of the Plan of Conversion. If the members
approve the Plan of Conversion, but not the establishment of the Foundation, we
intend to complete the Conversion without the establishment of the
Foundation.
ADDITIONAL INFORMATION
The information contained in the accompanying Prospectus, including a
more detailed description of the Plan of Conversion, financial statements of the
Association and a description of the capitalization and business of the
Association and the Holding Company, including the Association's directors and
executive officers and their compensation, the anticipated use of the net
proceeds from the sale of the Common Stock, the establishment of the Foundation
and a description of the Common Stock, is intended to help you evaluate the
Conversion and is incorporated herein by this reference.
YOUR VOTE IS VERY IMPORTANT TO US. PLEASE TAKE A MOMENT NOW TO COMPLETE
AND RETURN YOUR PROXY CARD IN THE POSTAGE-PAID ENVELOPE PROVIDED. YOU MAY STILL
ATTEND THE SPECIAL MEETING AND VOTE IN PERSON EVEN THOUGH YOU HAVE VOTED YOUR
PROXY. FAILURE TO SUBMIT A PROXY WILL HAVE THE SAME EFFECT AS VOTING AGAINST THE
CONVERSION AND THE ESTABLISHMENT OF THE CHARITABLE FOUNDATION.
If you have any questions, please call our Stock Information Center at
(803) ___-____.
IMPORTANT: YOU MAY BE ENTITLED TO VOTE IN MORE THAN ONE CAPACITY.
PLEASE SIGN, DATE AND PROMPTLY RETURN EACH PROXY CARD YOU RECEIVE.
--------------------------
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
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REVOCABLE PROXY
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHERAW
FOR A SPECIAL MEETING OF MEMBERS
TO BE HELD ON _____________, 1997
The undersigned member of First Federal Savings and Loan Association of
Cheraw (the "Association"), hereby appoints the full 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 votes as the undersigned may be entitled to
vote at the Special Meeting of Members of the Association, to be held at the
main office of the Association, located at 515 Market Street, Cheraw, South
Carolina on _____________, 1997, at _____________, local time, and at any and
all adjournments thereof. They are authorized to cast all votes to which the
undersigned is entitled as follows:
<TABLE>
<CAPTION>
FOR AGAINST
--- -------
<S> <C> <C>
1. A Plan of Conversion providing for the [ ] [ ]
conversion of the Association from a
federally chartered mutual savings and
loan association, including the adoption
of a federal stock savings association
charter and bylaws, with the concurrent
sale of all the Association's common
stock to Great Pee Dee Bancorp, Inc., a
Delaware corporation (the "Holding
Company"), sale by the Holding Company
to the public of shares of its Common
Stock.
<CAPTION>
FOR AGAINST
--- -------
<S> <C> <C>
2. The establishment of a tax exempt [ ] [ ]
Foundation and the donation by the
Holding Company of 20,000 shares of
its Common Stock to the Foundation.
3. Such other matters as may properly
come before the Special Meeting.
NOTE: The Board of Directors is not aware of
any other matter that may come before
the Special Meeting of Members.
</TABLE>
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THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE PROPOSITIONS STATED. IF ANY OTHER BUSINESS IS
PRESENTED AT THE MEETING, THIS PROXY WILL BE VOTED BY A MAJORITY OF THE BOARD OF
DIRECTORS IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS
KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
- --------------------------------------------------------------------------------
<PAGE>
Votes will be cast in accordance with the Proxy. Should the undersigned
be present and elect to vote at the Special 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 and a Proxy Statement dated _____________, 1997, prior to the execution
of this Proxy.
--------------------------------
Date
--------------------------------
Signature
NOTE: Only one signature is required
in the case of a joint account.
- ------------------------------------------------------------------------------
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN
THE ENCLOSED ENVELOPE.
- ------------------------------------------------------------------------------
