<PAGE>
As filed with the Securities and Exchange Commission on December 10, 1997
Registration No. 333-_____
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
HERITAGE BANCORP, INC.
------------------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 6035 applied for
- ------------------------------ ----------------- -------------------------
(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
201 W. Main Street
Laurens, South Carolina 29360
(864) 984-4581
------------------------------------------------------------
(Address and telephone number of principal executive offices)
Paul M. Aguggia, Esquire
Aaron M. Kaslow, Esquire
BREYER & AGUGGIA
Suite 470 East
1300 I Street, N.W.
Washington, D.C. 20005
---------------------------------------------
(Name and address of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If 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]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, 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 of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
============================================================================================================================
Calculation of Registration Fee
============================================================================================================================
Title of Each Class of Securities Proposed Maximum Proposed Offering Proposed Maximum Amount of
Being Registered Amount Being Price(1) Aggregate Offering Registration Fee
Registered(1) Price(1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 Par Value 4,628,750 $15.00 $69,431,250 $21,039
Participation interests (2) 66,003 - - - - - -
============================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee. As
described in the Prospectus, the actual number of shares to be issued and
sold is subject to adjustment based upon the estimated pro forma market
value of the registrant and market and financial conditions.
(2) The securities of Heritage Bancorp, Inc. to be purchased by the Heritage
Federal Savings & Loan Association 401(k) Plan are included in the amount
shown for Common Stock. Accordingly, pursuant to Rule 457(h) of the
Securities Act of 1933, as amended, no separate fee is required for the
participation interests. Pursuant to such rule, the amount being registered
has been calculated on the basis of the number of shares of Common Stock
that may be purchased with the current assets of such Plan.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS SUPPLEMENT
HERITAGE BANCORP, INC.
HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION
401(K) PLAN
This Prospectus Supplement relates to the offer and sale to participants
("Participants") in the 401(k) Plan ("Plan" or "401(k) Plan") of participation
interests and shares of Heritage Bancorp, Inc. common stock, par value $.01 per
share ("Common Stock"), as set forth herein.
In connection with the proposed conversion of Heritage Federal Savings &
Loan Association ("Association" or "Employer") from a federally chartered mutual
savings association to a federally chartered stock savings bank, a holding
company, Heritage Bancorp, Inc. ("Holding Company"), has been formed. The
simultaneous conversion of the Association to stock form, the issuance of the
Association's common stock to the Holding Company and the offer and sale of the
Holding Company's Common Stock to the public are herein referred to as the
"Conversion." Applicable provisions of the 401(k) Plan permit the investment of
the Plan assets in Common Stock of the Holding Company at the direction of a
Plan Participant. This Prospectus Supplement relates to the election of a
Participant to direct the purchase of Common Stock in connection with the
Conversion.
The Prospectus, dated _________, 1998, of the Holding Company
("Prospectus"), which is attached to this Prospectus Supplement, includes
detailed information with respect to the Conversion, the Common Stock and the
financial condition, results of operations and business of the Association and
the Holding Company. This Prospectus Supplement, which provides detailed
information with respect to the Plan, should be read only in conjunction with
the Prospectus. Terms not otherwise defined in this Prospectus Supplement are
defined in the Plan or the Prospectus.
A Participant's eligibility to purchase Common Stock in the Conversion
through the Plan is subject to the Participant's general eligibility to purchase
shares of Common Stock in the Conversion and the maximum and minimum limitations
set forth in the Plan of Conversion. See "THE CONVERSION" and "--Limitations on
Purchases of Shares" in the Prospectus.
For a discussion of certain factors that should be considered by each
Participant, see "RISK FACTORS" in the Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OFFICE OF THRIFT SUPERVISION ("OTS"), THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY OTHER FEDERAL OR STATE
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR
ANY OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus Supplement is ____________, 1998.
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement in connection with the offering made hereby, and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Holding Company, the Association or the Plan. This Prospectus
Supplement does not constitute an offer to sell or solicitation of an offer to
buy any securities in any jurisdiction to any person to whom it is unlawful to
make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall
under any circumstances create any implication that there has been no change in
the affairs of the Association or the Plan since the date hereof, or that the
information herein contained or incorporated by reference is correct as of any
time subsequent to the date hereof. This Prospectus Supplement should be read
only in conjunction with the Prospectus that is attached herein and should be
retained for future reference.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
The Offering
Securities Offered...................................... S-1
Election to Purchase Common Stock in the Conversion..... S-1
Value of Participation Interests........................ S-1
Method of Directing Transfer............................ S-1
Time for Directing Transfer............................. S-2
Irrevocability of Transfer Direction.................... S-2
Direction Regarding Common Stock After the Conversion... S-2
Purchase Price of Common Stock.......................... S-2
Nature of a Participant's Interest in the Common Stock.. S-2
Voting and Tender Rights of Common Stock................ S-3
Description of the Plan
Introduction............................................ S-3
Eligibility and Participation........................... S-4
Contributions Under the Plan............................ S-4
Limitations on Contributions............................ S-5
Investment of Contributions............................. S-7
The Employer Stock Fund................................. S-7
Benefits Under the Plan................................. S-8
Withdrawals and Distributions from the Plan............. S-8
Administration of the Plan.............................. S-9
Reports to Plan Participants............................ S-10
Plan Administrator...................................... S-10
Amendment and Termination............................... S-10
Merger, Consolidation or Transfer....................... S-10
Federal Income Tax Consequences......................... S-10
Restrictions on Resale.................................. S-13
Legal Opinions............................................... S-14
Investment Form S-15
</TABLE>
i
<PAGE>
THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan and
up to _______ shares, at the actual purchase price of $15.00 per share, of
Common Stock which may be acquired by the Plan for the accounts of employees
participating in the Plan. The Holding Company is the issuer of the Common
Stock. Only employees and former employees of the Association and their
beneficiaries may participate in the Plan. Information with regard to the Plan
is contained in this Prospectus Supplement and information with regard to the
Conversion and the financial condition, results of operation and business of the
Association and the Holding Company is contained in the attached Prospectus.
The address of the principal executive office of the Association is 201 W. Main
Street, Laurens, South Carolina 29360. The Association's telephone number is
(864) 984-4581.
Election to Purchase Common Stock in the Conversion
In connection with the Association's Conversion, each Participant in the
401(k) Plan may direct the trustees of the Plan (collectively, the "Trustees")
to transfer up to 100% of a Participant's account balance to a newly created
Employer Stock Fund and to use such funds to purchase Common Stock issued in
connection with the Conversion. Amounts transferred may include salary
deferral, matching and profit sharing contributions. The Employer Stock Fund
may consist of investments in the Common Stock made on or after the effective
date of the Conversion. Funds not transferred to the Employer Stock Fund will
continue to be invested by the trustees of the Plan (the "Trustees"). See
"DESCRIPTION OF THE PLAN -- Investment of Contributions" below. A Participant's
ability to transfer funds to the Employer Stock Fund in the Conversion is
subject to the Participant's general eligibility to purchase shares of Common
Stock in the Conversion. For general information as to the ability of the
Participants to purchase shares in the Conversion, see "THE CONVERSION -- The
Subscription, Direct Community and Syndicated Community Offerings" in the
attached Prospectus.
Value of Participation Interests
The assets of the Plan are valued on an ongoing basis and each Participant
is informed of the value of his or her beneficial interest in the Plan on at
least an annual basis. This value represents the market value of past
contributions to the Plan by the Association and by the Participants and
earnings thereon, less previous withdrawals, and transfers from other plans.
Method of Directing Transfer
The last page of this Prospectus Supplement is an investment form to direct
a transfer to the Employer Stock Fund ("Investment Form"). If a Participant
wishes to transfer funds to the Employer Stock Fund to purchase Common Stock
issued in connection with the Conversion, the
S-1
<PAGE>
Participant should indicate that decision in Part 2 of the Investment Form. If a
Participant does not wish to make such an election, he or she does not need to
take any action.
Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the Employer
Stock Fund in order to purchase Common Stock issued in connection with the
Conversion is ___________, 1998. The Investment Form should be returned to
_________ at the Association no later than the close of business on such date.
Irrevocability of Transfer Direction
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion shall be
irrevocable. Participants, however, will be able to direct the sale of Common
Stock, as explained below.
Direction Regarding Common Stock After the Conversion
It is currently anticipated that Participants may be permitted to transfer
additional funds from their existing account balances to the Employer Stock Fund
following the Conversion. In addition, it is anticipated that a Participant
will, on a periodic basis, direct the purchase of Common Stock with new
Participant and employer contributions or direct the sale of Common Stock. If
Common Stock is sold, the proceeds will be credited to the Participant's account
and may be reinvested in the other investment options available under the Plan.
Special restrictions may apply to purchases or sales directed by those
Participants who are executive officers, directors and principal stockholders of
the Holding Company who are subject to the provisions of Section 16(b) of the
Securities and Exchange Act of 1934, as amended ("Exchange Act"), or applicable
OTS regulations.
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustees to purchase
shares of Common Stock. The price paid for such shares of Common Stock will be
the same price as is paid by all other persons who purchase shares of Common
Stock in the Conversion.
Nature of a Participant's Interest in the Common Stock
The Common Stock purchased for an account of a Participant will be held in
the name of the Trustees of the Plan in the Employer Stock Fund. Any earnings,
losses or expenses with respect to the Common Stock, including dividends and
appreciation or depreciation in value, will be credited or debited to the
account and will not be credited to or borne by any other accounts.
S-2
<PAGE>
Voting and Tender Rights of Common Stock
The Trustees generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust as directed by Participants with an
interest in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have the right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The percentage of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
or negative on each matter shall be the same percentage of the total number of
voting instruction rights that are exercised in either the affirmative or
negative, respectively.
DESCRIPTION OF THE PLAN
Introduction
The Association adopted the Plan effective January 1, 1987 as an amendment
and restatement of the Association's prior defined contribution retirement plan.
The Plan is a cash or deferred arrangement established in accordance with the
requirements under Section 401(a) and Section 401(k) of the Internal Revenue
Code of 1986, as amended ("Code").
The Association intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The
Association will adopt any amendments to the Plan that may be necessary to
ensure the qualified status of the Plan under the Code and applicable Treasury
Regulations. The Association has received a determination from the Internal
Revenue Service ("IRS") that the Plan is qualified under Section 401(a) of the
Code and that it satisfies the requirements for a qualified cash or deferred
arrangement under Section 401(k) of the Code.
Employee Retirement Income Security Act. The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). As
such, the Plan is subject to all of the provisions of Title I (Protection of
Employee Benefit Rights) and Title II (Amendments to the Internal Revenue Code
Relating to Retirement Plans) of ERISA, except the funding requirements
contained in Part 3 of Title I of ERISA, which by their terms do not apply to an
individual account plan (other than a money purchase pension plan). The Plan is
not subject to Title IV (Plan Termination Insurance) of ERISA. Neither the
funding requirements contained in Title IV of ERISA nor the plan termination
insurance provisions contained in Title IV will be extended to Participants or
beneficiaries under the Plan.
S-3
<PAGE>
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH
THE ASSOCIATION. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON
WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, UNLESS A
PARTICIPANT RETIRES AS PERMITTED UNDER THIS PLAN REGARDLESS OF WHETHER SUCH A
WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE ASSOCIATION OR AFTER
TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The following statements are summaries of
the material provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan, which is filed as an exhibit to the
registration statement filed with the SEC. Copies of the Plan are available to
all employees by filing a request with the Plan Administrator. Each employee is
urged to read carefully the full text of the Plan.
Eligibility and Participation
Any employee of the Association is eligible to participate and will become
a Participant in the Plan following completion of six (6) months of service with
the Association and the attainment of age 21. The Plan year is the calendar
year ("Plan Year"). Directors who are not employees of the Association are not
eligible to participate in the Plan.
During 1997, approximately __ employees participated in the Plan.
Contributions Under the Plan
Participant Contributions. Each Participant in the Plan is permitted to
elect to reduce such Participant's Compensation (as defined below) pursuant to a
salary reduction agreement in amounts ranging from 1% to 10% of Compensation and
have that amount contributed to the Plan on such Participant's behalf. Such
amounts are credited to the Participant's deferral contributions account. For
purposes of the Plan, "Compensation" means a Participant's total amount of
earnings reportable W-2 wages for federal income tax withholding purposes plus a
Participant's elective deferrals pursuant to a salary reduction agreement under
the Plan or any elective deferrals to a Section 125 plan. Due to recent
statutory changes, the annual Compensation of each Participant taken into
account under the Plan is limited to $160,000 (as adjusted under applicable Code
provisions). A Participant may elect to modify the amount contributed to the
Plan under the participant's salary reduction agreement during the Plan Year.
Deferral contributions are transferred by the Association to the Trustees of the
Plan on a periodic basis as required by applicable law.
Employer Contributions. For employees with one or more years of service,
the Association matches employee deferral contributions on a discretionary
basis. Additional
S-4
<PAGE>
contributions may also be made on a discretionary basis in proportion to each
Participant's Compensation.
Limitations on Contributions
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions allocated to
each Participant's Account during any Plan Year may not exceed the lesser of 25%
of the Participant's "Section 415 Compensation" for the Plan Year or $30,000 (as
adjusted under applicable Code provisions). A Participant's "Section 415
Compensation" is a Participant's Compensation, excluding any amount contributed
to the Plan under a salary reduction agreement or any employer contribution to
the Plan or to any other plan or deferred compensation or any distributions from
a plan of deferred compensation. In addition, annual additions are limited to
the extent necessary to prevent the limitations for the combined plans of the
Association from being exceeded. To the extent that these limitations would be
exceeded by reason of excess annual additions to the Plan with respect to a
Participant, the excess must be reallocated to the remaining Participants who
are eligible for an allocation of Employer contributions for the Plan Year.
Limitation on 401(k) Plan Contributions. The annual amount of deferred
compensation of a Participant (when aggregated with any elective deferrals of
the Participant under any other employer plan, a simplified employee pension
plan or a tax-deferred annuity) may not exceed $10,000 (as adjusted under
applicable Code provisions). Contributions in excess of this limitation
("excess deferrals") will be included in the Participant's gross federal income
tax purposes in the year they are made. In addition, any such excess deferral
will again be subject to federal income tax when distributed by the Plan to the
Participant, unless the excess deferral (together with any income allocable
thereto) is distributed to the Participant not later than the first April 15th
following the close of the taxable year in which the excess deferral is made.
Any income on the excess deferral that is distributed not later than such date
shall be treated, for federal income tax purposes, as earned and received by the
Participant in the taxable year in which the excess deferral is made.
Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 401(m) of the Code limit the amount of deferred compensation
contributed to the Plan in any Plan Year on behalf of Highly Compensated
Employees (defined below) in relation to the amount of deferred compensation
contributed by or on behalf of all other employees eligible to participate in
the Plan. Specifically, the actual deferral percentage for a Plan Year (i.e.,
----
the average of the ratios, calculated separately for each eligible employee in
each group, by dividing the amount of salary reduction contributions credited to
the salary reduction contribution account of such eligible employee by such
employee's compensation for the Plan Year) of the Highly Compensated Employees
may not exceed the greater of (a) 125% of the actual deferred percentage of all
other eligible employees, or (b) the lesser of (i) 200% of the actual deferred
percentage of all other eligible employees, or (ii) the actual deferral
percentage of all other eligible employees plus two percentage points. In
addition, the actual contribution percentage for a Plan Year (i.e., the average
----
of the ratios calculated separately for each eligible employee in each
S-5
<PAGE>
group, by dividing the amount of employer contributions credited to the Matching
contributions account of such eligible employee by each eligible employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (a) 125% of the actual contribution percentage of all
other eligible employees, or (b) the lesser of (i) 200% of the actual
contributions percentage of all other eligible employees, or (ii) the actual
contribution percentage of all other eligible employees plus two percentage
points.
In general, a Highly Compensated Employee includes any employee who, during
the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner (i.e.,
----
owns directly or indirectly more than 5% of the stock of the Employer, or stock
possessing more than 5% of the total combined voting power of all stock of the
Employer) or, (2) during the preceding Plan Year, received Section 415
Compensation in excess of $80,000 (as adjusted under applicable Code provisions)
and, if elected by the Association, was in the top paid group of employees for
such Plan Year.
In order to prevent disqualification of the Plan, any amounts contributed
by Highly Compensated Employees that exceed the average deferral limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the Association will be subject to a
10% excise tax on any excess contributions unless such excess contributions,
together with any income allocable thereto, either are recharacterized or are
distributed before the close of the first 2 1/2 months following the Plan Year
to which such excess contributions relate. In addition, in order to avoid
disqualification of the Plan, any contributions by Highly Compensated Employees
that exceed the average contribution limitation in any Plan Year ("excess
aggregate contributions") together with any income allocable thereto, must be
distributed to such Highly Compensated Employees before the close of the
following Plan Year. However, the 10% excise tax will be imposed on the
Association with respect to any excess aggregate contributions, unless such
amounts, plus any income allocable thereto, are distributed within 2 1/2 months
following the close of the Plan Year in which they arose.
Top-Heavy Plan Requirements. If, for any Plan Year, the Plan is a Top-
Heavy Plan (as defined below), then (i) the Association may be required to make
certain minimum contributions to the Plan on behalf of non-key employees (as
defined below), and (ii) certain additional restrictions would apply with
respect to the combination of annual additions to the Plan and projected annual
benefits under any defined plan maintained by the Association.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year, if as of the last day of the preceding Plan Year, the aggregate balance of
the accounts of all Participants who are key Employees exceeds 60% of the
aggregate balance of the Accounts of the Participants. "Key Employees"
generally include any employee, who at any time during the Plan Year or any
other the four preceding Plan Years, if (1) an officer of the Association having
annual compensation in excess of $60,000 who is in an administrative or policy-
making capacity, (2) one of the ten employees having annual compensation in
excess of $30,000 and owing, directly or indirectly, the largest interest in the
employer, (3) a 5% owner of the employer (i.e.,
----
S-6
<PAGE>
owns directly or indirectly more than 5% of the stock of the employer, or stock
possessing more than 5% of the total combined voting power of all stock of the
employer), or (4) a 1% owner of the employer having compensation in excess of
$150,000.
Investment of Contributions
All amounts credited to Participant's Accounts under the Plan are held in
the Trust which is administered by the Trustees who are appointed by the Savings
Bank's Board of Directors. The Plan provides that a Participant may direct the
Trustees to invest all or a portion of his or her Accounts in various investment
options, as listed below. A Participant may periodically elect to change his or
her investment directions with respect to both past contributions and additions
to the Participant's accounts invested in these investment options in accordance
with rules established by the Trustees.
Under the Plan, the Accounts of a Participant held in the Trust will be
invested by the Trustees at the direction of the Participant in the following
portfolios:
[TO BE PROVIDED]
For additional information regarding these investment options, please
contact ____________.
In connection with the Conversion, a Participant may elect to have prior
contributions and additions to the Participant's Account invested either in the
Employer Stock Fund or in any of the other portfolios listed above. Any amounts
credited to a Participant's Accounts for which investment directions are not
given will be invested in _______________.
The net gain (or loss) in the Accounts from investments (including interest
payments, dividends, realized and unrealized gains and losses on securities, and
expenses paid from the Trust) are determined on a daily basis. For purposes of
such allocation, all assets of the Trust are valued at their fair market value.
The Employer Stock Fund
The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Conversion.
Following the Conversion, when Common Stock is sold, the cost or net
proceeds will be charged or credited to the Accounts of Participants affected by
the purchase or sale. A Participant's Account will also be adjusted to reflect
changes in the value of shares of Common Stock resulting from stock dividends,
stock splits and similar changes.
S-7
<PAGE>
To the extent dividends are not paid on Common Stock held in the Employer
Stock Fund, the return on any investment in the Employer Stock Fund will consist
only of the market value appreciation of the Common Stock subsequent to its
purchase. Declarations and payments of any dividends (regular and special) by
the Board of Directors will depend upon a number of factors, including the
amount of the net proceeds retained by the Holding Company, capital
requirements, regulatory limitations, the Association's and the Holding
Company's financial condition and results of operations, tax considerations and
general economic conditions.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock. Accordingly, there is no record of the historical performance
of the Employer Stock Fund.
Investments in the Employer Stock Fund may involve certain risk factors
associated with investments in Common Stock of the Holding Company. For a
discussion of these risk factors, see "RISK FACTORS" in the Prospectus.
Benefits Under the Plan
Vesting. A Participant has, at all times, a fully vested, nonforfeitable
interest in all of his or her Participant and Employer contributions and the
earnings thereon under the Plan.
Withdrawals and Distributions from the Plan
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2
UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER
SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE ASSOCIATION.
Distribution Upon Retirement, Death, Disability or Termination of
Employment. The distribution of benefits under the 401(k) Plan to a Participant
may be made in who retires, incurs a form of a lump-sum payment or installment
periods over a specified period. Distributions generally commence as soon as
practicable following the Participant's termination of employment. At the
request of the Participant, the distribution may include an in-kind distribution
of Common Stock of the Holding Company credited to the Participant's Account.
Benefits payments ordinarily must begin not later than 60 days following the end
of the Plan Year in which occurs later of the Participant's: (i) termination of
employment; (ii) attainment of age 65; or (iii) tenth anniversary of
commencement of participation in the Plan; but in no event later than April 1
following the calendar year in which the Participant attains age 70 1/2 (if the
Participant is retired). However, if the vested portion of the Participant's
Account balances exceeds $3,500, no distribution will be made from the Plan
prior to the Participant's attaining age 65 unless the Participant consents to
an earlier distribution. Special rules may apply to the
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<PAGE>
distribution of Common Stock of the Holding Company to those Participants who
are executive officers, directors and principal shareholders of the Holding
Company who are subject to the provisions of Section 16(b) of the Exchange Act.
In-Service Withdrawals and Loans. The Plan provides for distributions of
Participant deferral contributions prior to termination of employment in the
form of hardship withdrawals. Such withdrawals are permitted where the funds
are applied to (i) uninsured medical expenses, (ii) the purchase of a principal
residence, (iii) the payment of tuition and other education expenses or (iv)
payments necessary to prevent eviction from a principal residence or foreclosure
on a mortgage. In order to qualify for a hardship withdrawal, the Participant
must satisfy certain requirements relating to his or her financial resources and
the amount of the withdrawal may not exceed the Participant's immediate and
heavy financial need.
The Plan does not provide for other in-service withdrawals or loans.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
Administration of the Plan
Trustees. The Trustees with respect to Plan assets are currently J. Edward
Wells, Edwin I. Shealy and Debra C. Garrett.
Pursuant to the terms of the Plan, the Trustees receive and hold
contributions to the Plan in trust and have exclusive authority and discretion
to manage and control the assets of the Plan pursuant to the terms of the Plan
and to manage, invest and reinvest the Trust and income therefrom. The Trustees
have the authority to invest and reinvest the Trust and may sell or otherwise
dispose of Trust investments at any time and may hold trust funds uninvested.
The Trustees have authority to invest the assets of the Trust in "any type of
property, investment or security" as defined under ERISA.
The Trustees have full power to vote any corporate securities in the Trust
in person or by proxy; provided, however, that the Participants will direct the
Trustees as to voting and tendering of all Common Stock held in the Employer
Stock Fund.
The Trustees receive no compensation for their services. The expenses of
the Trustees are paid out of the Trust except to the extent such expenses and
compensation are paid by the Association.
S-9
<PAGE>
The Trustees must render at least annual reports to the Association and to
the Participants in such form and containing such information that the Trustees
deem necessary.
Reports to Plan Participants
The Plan Administrator furnishes to each Participant a statement at least
quarterly showing (i) the balance in the Participant's Account as of the end of
that period, (ii) the amount of contributions allocated to any such
Participant's Account for that period, and (iii) the adjustments to such
Participant's Account to reflect earnings or losses (if any).
Plan Administrator
The Association currently serves as the Plan Administrator. The Plan
Administrator is responsible for the administration of the Plan, interpretation
of the provisions of the Plan, prescribing procedures for filing applications
for benefits, preparation and distribution of information explaining the Plan,
maintenance of plan records, books of account and all other data necessary for
the proper administration of the Plan, and preparation and filing of all returns
and reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and the IRS, and for all disclosures required to be made to
Participants, beneficiaries and others under Sections 104 and 105 of ERISA.
Amendment and Termination
The Association may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee who ceases to be a Participant shall have a fully vested interest
in his or her Account. The Association reserves the right to make, from time to
time, any amendment or amendments to the Plan which do not cause any part of the
Trust to be used for, or diverted to, any purpose other than the exclusive
benefit of the Participants or their beneficiaries.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
Federal Income Tax Consequences
The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and
S-10
<PAGE>
does not purport to be complete. Moreover, statutory provisions are subject to
change, as are their interpretations, and their application may vary in
individual circumstances. Finally, the consequences under applicable state and
local income tax laws may not be the same as under the federal income tax laws.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.
The Plan has received a determination from the IRS that it is qualified
under Sections 401(a) and 401(k) of the Code, and that the related Trust is
exempt from tax under Section 501(a) of the Code. A plan that is "qualified"
under these sections of the Code is afforded special tax treatment which include
the following: (1) the sponsoring employer is allowed an immediate tax deduction
for the amount contributed to the Plan of each year; (2) Participants pay no
current income tax on amounts contributed by the employer on their behalf; and
(3) earnings of the Plan are tax-exempt thereby permitting the tax-free
accumulation of income and gains on investments. The Plan will be administered
to comply in operation with the requirements of the Code as of the applicable
effective date of any change in the law. The Association expects to timely
adopt any amendments to the Plan that may be necessary to maintain the qualified
status of the Plan under the Code. Following such an amendment, the Plan will
be submitted to the IRS for a determination that the Plan, as amended, continues
to qualify under Sections 401(a) and 501(a) of the Code and that it continues to
satisfy the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:
(a) Amounts contributed to a Participant's 401(k) account and the
investment earnings are actually distributed or withdrawn from the Plan.
Special tax treatment may apply to the taxable portion of any distribution that
includes Common Stock or qualified as a "Lump Sum Distribution" (as described
below).
(b) Income earned on assets held by the Trust will not be taxable to the
Trust.
Lump Sum Distribution. A distribution from the Plan to a Participant or the
beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it is
made: (i) within a single taxable year of the Participant or beneficiary; (ii)
on account of the Participant's death or separation from service, or after the
Participant attains age 59 1/2; and (iii) consists of the balance to the credits
of the Participant under the Plan and all other profit sharing plans, if any,
maintained by the Association. The portion of any Lump Sum Distribution that is
required to be included in the Participant's or beneficiary's taxable income for
federal income tax purposes ("total taxable amount") consists of the entire
amount of such Lump Sum Distribution less the amount of after-tax contributions,
if any, made by the Participant to any other profit sharing plans maintained by
the Association which is included in such distribution.
S-11
<PAGE>
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution ("ordinary income portion") will be taxable generally as ordinary
income for federal income tax purposes. However, for distributions occurring
prior to January 1, 2000, a Participant who has completed at least five years of
participation in the Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's participation
in the Plan or any other profit sharing plan maintained by the Employer), may
elect to have the ordinary income portion of such Lump Sum Distribution taxed
according to a special averaging rule ("five-year averaging"). The election of
the special averaging rules may apply only to one Lump Sum Distribution received
by the Participant or beneficiary, provided such amount is received on or after
the Participant turns 59 1/2 and the recipient elects to have any other Lump Sum
Distribution from a qualified plan received in the same taxable year taxed under
the special averaging rule. The special five-year averaging rule has been
repealed for distributions occurring after December 31, 1999. Under a special
grandfather rule, individuals who turned 50 by 1986 may elect to have their Lump
Sum Distribution taxed under either the five-year averaging rule (if available)
or the prior law ten-year averaging rule. Such individuals also may elect to
have that portion of the Lump Sum Distribution attributable to the Participant's
pre-1974 participation in the Plan taxed at a flat 20% rate as gain from the
sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
- ----
distribution over its cost to the Plan. The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an individual retirement account ("IRA") without regard to
whether the distribution is a Lump Sum Distribution or Partial Distribution.
Effective January 1, 1993, Participants have the right to elect to have the
Trustees transfer all or any portion of an "eligible rollover distribution"
directly to another plan qualified under Section 401(a) of the Code or to an
IRA. If the Participant does not elect to have an "eligible rollover
distribution" transferred directly to another qualified plan of to an IRA, the
S-12
<PAGE>
distribution will be subject to a mandatory federal withholding tax equal to 20%
of the taxable distribution. An "eligible rollover distribution" means any
amount distributed from the Plan except: (1) a distribution that is (a) one of
a series of substantially equal periodic payments made (not less frequently than
annually) over the Participant's life of the joint life of the Participant and
the Participant's designated beneficiary, or (b) for a specified period of ten
years or more; (2) any amount that is required to be distributed under the
minimum distribution rules; and (3) any other distributions excepted under
applicable federal law. The tax law change described above did not modify the
special tax treatment of Lump Sum Distributions, that are not rolled over or
transferred, i.e., forward averaging, capital gains tax treatment and the
----
nonrecognition of net unrealized appreciation, discussed earlier.
Additional Tax on Early Distributions. A Participant who receives a
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of a Participant) on
or after the death of the Participant, (ii) attributable to the Participant's
being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lives (or joint life expectancies) of the Participant and his or her
beneficiary, (iv) made to the Participant after separation from service on
account of early retirement under the Plan after attainment of age 55, (v) made
to pay medical expenses to the extent deductible for federal income tax
purposes, (vi) pursuant to a qualified domestic relations order, or (vii) made
to effect the distribution of excess contributions or excess deferrals.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED
TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
Restrictions on Resale
Any person receiving shares of the Common Stock under the Plan who is an
"affiliate" of the Association or the Holding Company as the term "affiliate" is
used in Rules 144 and 405 under the Securities Act of 1933, as amended
("Securities Act") (e.g., directors, officers and substantial shareholders of
the Association) may reoffer or resell such shares only pursuant to a
registration statement filed under the Securities Act (the Holding Company and
the Association having no obligation to file such registration statement) or,
assuming the availability thereof, pursuant to Rule 144 or some other exemption
from the registration requirements of the Securities Act. Any person who may be
an "affiliate" of the Association or the Holding Company may
S-13
<PAGE>
wish to consult with counsel before transferring any Common Stock owned by him
or her. In addition, Participants who are officers of the Association or the
Holding Company are advised to consult with counsel as to the applicability of
the reporting and short-swing profit liability rules of Section 16 of the
Exchange Act which may affect the purchase and sale of the Common Stock where
acquired or sold under the Plan or otherwise.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Breyer & Aguggia, Washington, D.C., which firm is acting as special counsel for
the Holding Company in connection with the Conversion.
S-14
<PAGE>
Investment Form
(Employer Stock Fund)
HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION
401(k) PLAN
Name of Participant:
-----------------------------------------------------
Social Security Number:
--------------------------------------------------
1. Instructions. In connection with the proposed conversion of Heritage
Federal Savings & Loan Association ("Association") to a stock savings bank and
the simultaneous formation of a holding company ("Conversion"), participants in
the Heritage Federal Savings & Loan Association 401(k) Plan ("Plan") may elect
to direct the investment of up to 100% of their account balance into the
Employer Stock Fund ("Employer Stock Fund"). Amounts transferred at the
direction of Participants into the Employer Stock Fund will be used to purchase
shares of the common stock of Heritage Bancorp, Inc. ("Common Stock"), the
proposed holding company for the Association. A Participant's eligibility to
purchase shares of Common Stock is subject to the Participant's general
eligibility to purchase shares of Common Stock in the Conversion and the maximum
and minimum limitations set forth in the Plan Conversion. See the Prospectus
for additional information.
You may use this form to direct a transfer of funds credited to your
account to the Employer Stock Fund, to purchase Common Stock in the Conversion.
To direct such a transfer to the Employer Stock Fund, you should complete this
form and return it to _________ at the Association, no later than the close of
business on _______________, 1998. The Association will keep a copy of this
form and return a copy to you. (If you need assistance in completing this form,
please contact _________).
2. Transfer Direction. I hereby direct the Plan Administrator to
transfer $__________ (in increments of $15) to the Employer Stock Fund to be
applied to the purchase of Common Stock in the Conversion. Please transfer this
amount from the following investments in the amounts
indicated:____________________.
3. Effectiveness of Direction. I understand that this Investment Form
shall be subject to all of the terms and conditions of the Plan and the terms
and conditions of the Conversion. I acknowledge that I have received a copy of
the Prospectus and the Prospectus Supplement.
- ------------------------------------ --------------------------------
Signature Date
* * * * *
4. Acknowledgement of Receipt. This Investment Form was received by the
Plan Administrator and will become effective on the date noted below.
- ------------------------------------- --------------------------------
Plan Administrator Date
S-15
<PAGE>
PROSPECTUS
HERITAGE BANCORP, INC.
(Holding company for Heritage Federal Savings & Loan Association,
to be known as Heritage Federal Bank)
Between 2,975,000 and 4,025,000 Shares of Common Stock
Heritage Federal Savings & Loan Association is converting from the mutual form
to the stock form of organization and changing its name to Heritage Federal
Bank. As part of the conversion, Heritage Federal Savings & Loan Association
will become a wholly-owned subsidiary of Heritage Bancorp, Inc., which was
formed in November 1997. The common stock of Heritage 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 the members of
Heritage Federal Savings & Loan Association. The conversion will not go forward
if Heritage Federal Savings & Loan Association does not receive this approval
and Heritage Bancorp, Inc. does not sell at least the minimum number of shares.
- --------------------------------------------------------------------------------
OFFERING SUMMARY
The amount of common stock being offered in the conversion is based on an
independent appraisal of the market value of Heritage Federal Savings & Loan
Association, after giving effect to the conversion and the formation of Heritage
Bancorp, Inc. The independent appraiser has stated that as of November 28, 1997,
the market value of Heritage Bancorp, Inc. and the converted Heritage Federal
Savings & Loan Association ranged from $44,625,000 to $60,375,000. Subject to
approval of the Office of Thrift Supervision, an additional 15% above the
maximum number of shares may be sold.
<TABLE>
<CAPTION>
Price Per Share: $15.00
Minimum Midpoint Maximum Maximum, as adjusted
------- -------- ------- --------------------
<S> <C> <C> <C> <C>
Number of shares: 2,975,000 3,500,000 4,025,000 4,628,750
Gross offering proceeds: $44,625,000 $52,500,000 $60,375,000 $69,431,250
Estimated offering expenses: $1,098,000 $1,207,000 $1,315,000 $1,320,000
Estimated net proceeds: $43,527,000 $51,293,000 $59,060,000 $68,111,250
Estimated net proceeds per share: $14.63 $14.66 $14.67 $14.71
</TABLE>
Trident Securities, Inc. will use its best efforts to assist Heritage 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 Heritage Federal Savings & Loan
Association until the completion or termination of the conversion.
Heritage Bancorp, Inc. has received preliminary approval to have its common
stock quoted on the Nasdaq National Market under the symbol ____.
The subscription offering will terminate at 12:00 Noon, Eastern Time, on
______________, 1998, unless extended for up to ___ days.
- --------------------------------------------------------------------------------
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
For a discussion of certain risks that you should consider, see "RISK FACTORS"
beginning on page ____.
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.
- --------------------------------------------------------------------------------
For additional information about the conversion, please refer to the more
detailed information in this prospectus. For assistance, please contact the
stock information center at (___)___________.
TRIDENT SECURITIES, INC.
The date of this prospectus is ___________, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Summary....................................................................................
Risk Factors...............................................................................
Selected Consolidated Financial Information................................................
Use of Proceeds............................................................................
Dividend Policy............................................................................
Market for Common Stock....................................................................
Capitalization.............................................................................
Historical and Pro Forma Regulatory Capital Compliance.....................................
Pro Forma Data.............................................................................
Shares to be Purchased by Management Pursuant to Subscription Rights.......................
Heritage Federal Savings & Loan Association Statements of Income...........................
Management's Discussion and Analysis of Financial Condition and Results of Operations......
Business of the Holding Company............................................................
Business of the Association................................................................
Management of the Holding Company..........................................................
Management of the Association..............................................................
Regulation.................................................................................
Taxation...................................................................................
The Conversion.............................................................................
Restrictions on Acquisition of the Holding Company.........................................
Description of Capital Stock of the Holding Company .......................................
Registration Requirements..................................................................
Legal and Tax Opinions.....................................................................
Experts....................................................................................
Additional Information.....................................................................
Index to Consolidated Financial Statements.................................................
Glossary................................................................................... G-1
</TABLE>
<PAGE>
Heritage Federal Savings & Loan Association
Laurens, South Carolina
[map of South Carolina showing county boarders, with enlargement of Greenville,
Anderson, Laurens and Greenwood Counties showing the location of the towns of
Simpsonville, Belton, Laurens and Ware Shoals appears here]
<PAGE>
SUMMARY
The following summary explains the significant aspects of the
conversion. For additional information about the conversion, please refer to the
more detailed information in this prospectus. For assistance, please contact the
stock information center at (___) ____________. Throughout this prospectus,
Heritage Federal Savings & Loan Association is referred to as the "Association"
and Heritage Bancorp, Inc. is referred to as the "Holding Company." See the
glossary at the back of this prospectus for the definitions of certain terms
that are printed in boldface type the first time they appear in this prospectus.
Heritage Bancorp, Inc.
The Association formed the Holding Company under Delaware law in
November 1997 for the purpose of owning all of the Association's capital stock
following completion of the conversion. The Holding Company has received
conditional approval of the OTS to become a savings and loan holding company by
acquiring the capital stock of the Association in the conversion. Before the
completion of the conversion, the Holding Company will not have any material
assets or liabilities, and it will not engage in any material operations. After
the conversion, the Holding Company's primary assets will be all of the capital
stock of the Association, a portion of the net proceeds of the conversion and a
note receivable from the Association's ESOP. Initially, the primary activity of
the Holding Company will be to direct, plan and coordinate the Association's
business activities. In the future, the Holding Company might become an
operating company or acquire or organize other operating subsidiaries, including
other financial institutions. The Holding Company's main office is located at
201 W. Main Street, Laurens, South Carolina 29360 and its telephone number is
(864) 984-4581.
Heritage Federal Savings & Loan Association
Chartered in 1948, the Association is a federal mutual savings and loan
association. The Association was originally known as Laurens Federal Savings &
Loan Association. In 1977, the Association changed its name to Heritage Federal
Savings & Loan Association. In connection with the conversion, the Association
will change its name to Heritage Federal Bank. The Association's main office is
located at 201 W. Main Street, Laurens, South Carolina 29360 and its telephone
number is (864) 984-4581.
The Association is regulated by the OTS and the FDIC. The Association's
deposits have been federally-insured by the FDIC since 1948 and are currently
insured by the FDIC under the SAIF. The Association has been a member of the
FHLB-System since 1948.
The Association is a community oriented financial institution that
operates out of four offices in the Upstate region of South Carolina. The
Association's principal business is attracting deposits from the general public
and using those funds to originate residential mortgage loans. At September 30,
1997, the Association had total assets of $247.5 million, deposits of $215.4
million and total equity of $29.2 million. At that date, $180.6 million, or
73.0%, of the Association's assets were residential mortgage loans and $200.2
million, or 91.7%, of the Association's liabilities were certificates of
deposit. The Association emphasizes the origination of ARM loans and generally
holds its loans for long-term investment purposes. For a discussion of the
Association's business strategy and recent results of operations, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." For a discussion of the Association's business activities, see
"BUSINESS OF THE ASSOCIATION."
The Conversion
The Association is undertaking the conversion pursuant to its Plan of
Conversion. The conversion is a change in the Association's legal form of
organization. The Association currently operates as a federally chartered mutual
savings and loan association with no stockholders. Through the conversion, the
Association will become a federally chartered stock savings bank and will issue
shares of its common stock to Heritage Bancorp, Inc. As part
1
<PAGE>
of the conversion, Heritage Bancorp, Inc., as the Association's holding company,
will issue shares of its common stock to the public and to the Association's
ESOP. Currently, the Association's depositor and borrower members have voting
rights in the Association and, therefore, are entitled to elect directors of the
Association and to vote on other important matters. Following the conversion,
the Holding Company will exercise all voting rights with respect to the
Association's common stock, and the Holding Company's stockholders will elect
its directors and exercise all other voting rights with respect to the Holding
Company's common stock. The OTS has approved the conversion, subject to approval
by the Association's members at a special meeting to be held on _________, 1998.
For further description of the conversion, see "THE CONVERSION."
Reasons for the Conversion
As a federal mutual savings and loan association, the Association does
not have stockholders and does not have authority to issue capital stock. By
converting to the stock form of organization, the Association will be structured
in the form used by commercial banks, most business entities and a growing
number of savings institutions. The conversion will be important to the
Association's future growth and performance by providing a larger capital base
from which it can operate, by enhancing its ability to attract and retain
qualified management through stock-based compensation plans, by enhancing its
ability to diversify into other financial services related activities and by
expanding its ability to provide services to the public. At this time, the
Association does not have any specific plans or arrangements for diversification
or expansion. See "THE CONVERSION -- Reasons for the Conversion."
Use of Proceeds
The Holding Company will use the net conversion proceeds as follows:
- 50% will be used to buy all of the common stock of the Association.
The Association will use these funds to make loans and purchase
investments similar to the kinds it currently holds.
- 8% will be loaned to the ESOP to fund its purchase of common stock.
- 42% will be kept for general corporate purposes. These purposes may
include, for example, paying dividends or buying back shares of common
stock.
For further discussion, see "USE OF PROCEEDS."
The Subscription and Direct Community Offerings
The Holding Company is offering shares of its common stock in a
Subscription Offering to certain current and former depositor and borrower
customers of the Association and to the Association's ESOP. Pursuant to its Plan
of Conversion, the Association has granted subscription rights in the following
order of priority in accordance with applicable regulatory requirements to:
1. "Eligible Account Holders" -- the Association's depositors with
$50 or more on deposit as of June 30, 1996.
2. "ESOP" -- the Employee Stock Ownership Plan to be implemented
by the Association in the conversion.
3. "Supplemental Eligible Account Holders" -- the Association's
depositors with $50 or more on deposit as of December 31, 1997.
2
<PAGE>
4. "Other Members" -- the Association's depositors as of
____________, 1998 and borrowers of the Association as of October
21, 1997 whose loans continue to be outstanding as of
_____________, 1998.
- --------------------------------------------------------------------------------
Subscription rights are not transferable, and persons with subscription
rights may not subscribe for shares for the benefit of any other person. If you
violate this prohibition you may lose your right to purchase shares in the
conversion and may be subject to criminal prosecution and/or other sanctions.
- --------------------------------------------------------------------------------
The Subscription Offering will expire at 12:00 Noon, Eastern Time, on
___________, 1998, unless extended by the Association and the Holding Company
for up to ___ days. In the event of an oversubscription, shares will be
allocated in accordance with the Plan of Conversion.
Shares not sold in the Subscription Offering may be offered to the
general public in a Direct Community Offering with preference given to natural
persons and trusts of natural persons who are residents of the Association's
Local Community. The Direct Community Offering, if one is held, is expected to
begin immediately after the conclusion of the Subscription Offering, but may
begin at any time during the Subscription Offering. The Subscription Offering,
and the Direct Community Offering, if any, are being managed by Trident
Securities. Trident Securities is a registered broker-dealer and a member of the
NASD. Trident Securities is not obligated to purchase any shares of common stock
in this offering. Shares not sold in the Subscription Offering or Direct
Community Offering may be offered for sale in a Syndicated Community Offering,
which would be an offering to the general public on a best efforts basis by a
selling group of broker-dealers managed by Trident Securities. See "THE
CONVERSION -- The Subscription, Direct Community and Syndicated Community
Offerings."
You will not pay a commission to buy any shares in the conversion.
Stock Pricing and Number of Shares to be Issued in the Conversion
Between 2,975,000 and 4,025,000 shares of the common stock will be
sold, all at a price of $15.00 per share. With the approval of the OTS, the
number of shares may be increased to 4,628,750.
The amount of common stock being offered in the conversion is based on
an independent appraisal of the estimated pro forma market value of the Holding
Company and the Association. RP Financial, the independent appraiser, has
estimated that, in its opinion, as of November 28, 1997, the aggregate pro forma
market value of the Holding Company and the Association ranged between
$44,625,000 and $60,375,000 (with a midpoint of $52,500,000) ("Estimated
Valuation Range"). The pro forma market value is the market value of the Holding
Company and the Association after taking into account the sale of shares in this
offering. The appraisal was based in part on the Association's financial
condition and operations and the effect of the additional capital raised by the
sale of common stock in this offering. The independent appraisal will be updated
prior to the completion of the conversion. If the pro forma market value of the
Holding Company and the Association changes to either below $44,625,000 or above
$69,431,250 (the adjusted maximum of the offering), you will be notified and
provided with the opportunity to modify or cancel your order. The $15.00 per
share purchase price was determined by the Boards of Directors of the Holding
Company and the Association. See "THE CONVERSION -- Stock Pricing and Number of
Shares to be Issued."
Purchase Limitations
The minimum number of shares that you may purchase is 25. The
Association has established the following additional purchase limitations:
3
<PAGE>
- Except for the ESOP, which may subscribe for 8% of the shares issued
in the conversion, no eligible subscriber (including all persons on a
joint account) may purchase more than $330,000 of common stock (or
22,000 shares) in the Subscription Offering.
- No person may purchase more than $330,000 of common stock (or 22,000
shares) in the Direct Community Offering or Syndicated Community
Offering.
- No person, either alone or together with associates or persons acting
in concert, may purchase more than the overall maximum purchase
limitation of 1% of the total number of shares of common stock issued
in the conversion (not taking into account an increase in the number of
shares as a result of the increase of the appraisal to the adjusted
maximum).
For further discussion of the purchase limits and definitions of
"associate" and "acting in concert," see "THE CONVERSION -- Limitations on
Purchases of Shares."
Procedure for Purchasing Common Stock
To subscribe for shares of common stock in the Subscription Offering,
you should send or deliver an original, signed stock order form together with
full payment (or appropriate instructions for withdrawal from permitted deposit
accounts, as described below) to the Association in the postage-paid envelope
provided so that the stock order form is received before the end of the
Subscription Offering. You must also sign the certification that is part of the
stock order form. Payment for shares may be made in cash (if made in person) or
by check or money order. The Association will pay interest at the rate it pays
on passbook accounts from the date funds are received until completion or
termination of the conversion. Subscribers who have deposit accounts with the
Association may include instructions on the stock order form requesting
withdrawal from such deposit account(s) to purchase shares. Withdrawals from
certificates of deposit may be made without incurring an early withdrawal
penalty. All funds authorized for withdrawal from deposit accounts with the
Association will earn interest at the applicable account rate. After the
Association receives your order, your order cannot be withdrawn or changed,
except with the consent of the Association.
To ensure that your subscription rights are properly identified, you
must list all qualifying savings accounts and loans, as of the respective
qualifying dates, on the stock order form. Persons who do not list all
qualifying savings accounts and loans may be subject to reduction or rejection
of their subscription.
The Holding Company and the Association have the discretion to accept
or reject orders received either through the Direct Community Offering or the
Syndicated Community Offering. If your order is rejected in part, you will not
have the right to cancel the remainder of the order.
Owners of self-directed IRAs may use the assets of their IRAs to
purchase shares of common stock in the conversion, provided that their IRAs are
not maintained on deposit with the Association. If you want to use funds in a
self-directed IRA maintained by the Association to purchase shares of common
stock, you must transfer your account to an unaffiliated institution or broker.
If you are interested in doing so, you should contact the Association's stock
information center no later than _____________, 1998.
For further information on how to purchase stock, see "THE CONVERSION
- -- Procedure for Purchasing Shares in the Subscription and Direct Community
Offerings."
Purchases by Officers and Directors
The Association expects its directors and executive officers (together
with their associates) to subscribe for 168,336 shares, which equals 4.8% of the
shares issued at the midpoint of the offering range. The purchase price paid by
them will be the same $15.00 per share price as that paid by all other persons
who purchase shares in the
4
<PAGE>
conversion. See "SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION
RIGHTS."
Benefits of the Conversion to Management
ESOP. The Association will adopt the ESOP in connection with the
conversion. The ESOP intends to purchase 8% of the shares of common stock issued
in the conversion. If the ESOP's subscription is not filled in its entirety, the
ESOP may purchase shares in the open market or may purchase shares directly from
the Holding Company. The Holding Company will recognize additional compensation
expense as a result of the adoption of the ESOP. If the number of shares sold in
the conversion is increased above the maximum of the offering range, the ESOP
will have a first priority to purchase any such shares over the maximum of the
offering range, up to a total of 8% of the common stock. For information about
the ESOP, see "MANAGEMENT OF THE ASSOCIATION -- Benefits -- Employee Stock
Ownership Plan." See also "RISK FACTORS -- New Expenses Associated With ESOP and
MRP" and "PRO FORMA DATA."
Management Recognition Plan. The Holding Company expects to seek
stockholder approval of the MRP no earlier than six months after completion of
the conversion. The MRP will reserve a number of shares equal to 4% of the
number of shares issued in the conversion. Pursuant to the MRP, the Holding
Company would be able to make awards of shares of common stock to key employees
and directors of the Holding Company and the Association at no cost to the
recipient. All awards would be subject to vesting over a minimum of five years.
The size of individual awards will be determined prior to submitting the MRP for
stockholder approval, and disclosure of anticipated awards will be included in
the proxy materials for such meeting. For additional information about the MRP,
see "MANAGEMENT OF THE ASSOCIATION -- Benefits -- Management Recognition Plan."
See also "RISK FACTORS -- New Expenses Associated With ESOP and MRP" and "PRO
FORMA DATA."
Stock Option Plan. The Holding Company expects to seek stockholder
approval of a Stock Option Plan no earlier than six months after completion of
the conversion. The Stock Option Plan will reserve a number of shares equal to
10% of the number of shares issued in the conversion. Pursuant to the Stock
Option Plan, the Holding Company would be able to award options to acquire
shares of common stock to key employees and directors of the Holding Company and
the Association. The exercise price of such options would be 100% of the fair
market value of the common stock on the date the option is granted. All awards
would be subject to vesting over a minimum of five years. The size of individual
awards will be determined prior to submitting the Stock Option Plan for
stockholder approval, and disclosure of anticipated awards will be included in
the proxy materials for such meeting. For additional information about the Stock
Option Plan, see "MANAGEMENT OF THE ASSOCIATION -- Benefits -- Stock Option
Plan."
Employment and Severance Agreements. The Holding Company and the
Association plan to enter into an employment agreement with J. Edward Wells, the
Association's Chief Executive Officer. The employment agreement will provide
certain benefits to Mr. Wells if he is terminated following a change in control
of the Holding Company or the Association. If there is a change in control of
the Holding Company or the Association, Mr. Wells will be entitled to a package
of cash and/or benefits with a maximum value equal to 2.99 times his average
annual compensation during the five-year period preceding the change in control.
If a change of control had occurred as of September 30, 1997, the total value of
the severance benefits payable to Mr. Wells under the proposed employment
agreement would have been approximately $427,000. See "RISK FACTORS --
Provisions of Employment and Severance Agreements and Severance Plan" and
"MANAGEMENT OF THE ASSOCIATION -- Executive Compensation -- Employment
Agreement."
The Holding Company and the Association plan to enter into severance
agreements with four of the Association's senior officers, none of whom will be
covered by an employment agreement. The severance agreements provide certain
benefits to the officers if they are terminated following a change in control of
the Holding Company or the Association. If there is a change in control of the
Holding Company or the Association, each senior officer would be entitled to a
package of cash and/or benefits with a maximum value equal to two times his
5
<PAGE>
compensation during the 12-month period preceding the change in control. If a
change of control had occurred as of September 30, 1997, the total value of the
severance benefits payable to these senior officers under the proposed
agreements would have been approximately $417,000. See "RISK FACTORS --
Provisions of Employment and Severance Agreements and Severance Plan" and
"MANAGEMENT OF THE ASSOCIATION -- Executive Compensation -- Severance
Agreements."
Employee Severance Compensation Plan. In connection with the
conversion, the Board of Directors of the Association intends to adopt the
Severance Plan to provide benefits to eligible employees in the event of a
change in control of the Holding Company or the Association. Officers who enter
into separate employment or severance agreements with the Holding Company and
the Association will not be eligible to participate in the Severance Plan. The
Severance Plan will provide that, in the event of a change in control of the
Holding Company or the Association, eligible employees who are terminated or who
terminate employment (but only upon the occurrence of events specified in the
Severance Plan) within 12 months of the effective date of a change in control
will be entitled to a payment based on years of service and/or position with the
Association, subject to certain limits. If a change in control had occurred at
September 30, 1997 and all eligible employees had been terminated, the total
payment due under the Severance Plan would be approximately $529,000. See "RISK
FACTORS -- Provisions of Employment and Severance Agreements and Severance Plan"
and "MANAGEMENT OF THE ASSOCIATION -- Executive Compensation -- Employee
Severance Compensation Plan."
Market for Common Stock
The Holding Company has obtained preliminary approval for the common
stock to be quoted on the Nasdaq National Market under the symbol ______. After
shares of the common stock commence trading, interested investors may contact a
stock broker to buy or sell shares. The Holding Company cannot assure you that
there will be active trading market for the common stock. See "RISK FACTORS --
Absence of Prior Market for the Common Stock" and "MARKET FOR COMMON STOCK."
Dividend Policy
The Holding Company intends to adopt a policy of paying regular
semi-annual cash dividends at an annual rate of $0.30 per share (2.0% based on
the $15.00 per share purchase price of the common stock in the conversion).
Dividends will be subject to determination and declaration by the Board of
Directors, which will take into account a number of factors, including the
Holding Company's consolidated operating results and financial condition, net
worth and capital requirements, as well as regulatory restrictions on the
payment of dividends from the Association to the Holding Company (which would be
a primary source of funds for the Holding Company). The Holding Company cannot
assure you that dividends will in fact be paid or that if paid such dividends
will not be reduced or eliminated in the future. For further information about
the payment of dividends, see "DIVIDEND POLICY."
6
<PAGE>
RISK FACTORS
Before investing in the common stock please carefully consider the
matters discussed below. The common stock is not a savings account or deposit
and is not insured by the FDIC or any other government agency.
Reliance on Certificates of Deposit
At September 30, 1997, $200.2 million, or 92.9%, of the Association's
deposits were certificates of deposit, of which $148.9 million mature within one
year. Jumbo certificates of deposit (certificate accounts with balances of
$100,000 or more) totalled $40.3 million, or 20.1% of certificates of deposit,
at September 30, 1997. As a result of the large percentage of certificates of
deposit, the average rate paid on the Association's deposits is higher than the
average rate paid by institutions that have more checking and savings accounts,
which generally pay lower rates of interest. The Association's high cost of
deposits results in a lower interest rate spread and negatively impacts the
Association's profitability. In addition, certificates of deposit can be a more
interest rate sensitive source of funds than checking or savings accounts. If
interest rates rise significantly or if the Association does not offer
competitive interest rates on its certificates of deposit, the Association could
experience a significant decrease in its deposit accounts.
Mortgage Lending and Risks Associated with ARM Loans
At September 30, 1997, approximately 73.0% of the Association's assets
consisted of residential mortgage loans. Such loans represented 90.0% of the
total loan portfolio at that date. While generally considered to involve less
risk than other types of lending such as commercial mortgage loans, commercial
business loans and consumer loans, residential mortgage loans provided
relatively lower yields. The Association's loan portfolio also includes a
significant amount of loans with adjustable rates of interest. At September 30,
1997, $170.3 million, or 84.8%, of the Association's total loans receivable had
adjustable interest rates. Adjustable rate loans generally pose the risk that as
interest rates rise the underlying payments of the borrowers rise, thereby
increasing the potential for loan delinquencies and loan losses. At the same
time, the marketability of the underlying properties may be adversely affected
by higher interest rates. The Association's adjustable rate loans contain
periodic and lifetime interest rate adjustment limits which, in a rising
interest rate environment, may prevent such loans from repricing to market
interest rates. Furthermore, most of the Association's ARM loans have an annual
adjustment limit of 1% and a lifetime adjustment limit of 4%. Most of the
Association's ARM loans adjust based on the National Median Cost of Funds Index.
This index is a lagging market index, which means that upward adjustments in
this index may occur more slowly than changes in the Association's cost of
interest-bearing liabilities, especially during periods of rapidly increasing
interest-rates. Moreover, the Association's ability to originate ARM loans may
be affected by changes in the level of interest rates and by market acceptance
of the terms of such loans. In a relatively low interest rate environment, as
currently exists, borrowers generally tend to favor fixed-rate loans over ARM
loans. For a discussion of the Association's loan portfolio, see "BUSINESS OF
THE ASSOCIATION -- Lending Activities."
Interest Rate Risk
Changes in interest rates can have significant effects on the
Association's profitability. The Association's ability to make a profit, like
that of most financial institutions, depends largely on its net interest income,
which is the difference between the interest income received from its
interest-earning assets (such as loans and investment securities) and the
interest expense incurred in connection with its interest-bearing liabilities
(such as deposits and borrowings). The Association's net interest income and the
market value of its assets and liabilities could be significantly affected by
changes in interest rates. In a rising interest rate environment, the
Association anticipates that its net interest income could be adversely affected
as liabilities could reprice to higher market rates more quickly than assets. In
addition, rising interest rates may adversely affect the Association's earnings
because they may cause a decrease in customer demand for loans. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Asset and Liability Management."
7
<PAGE>
Changes in interest rates also can affect the average life of loans and
mortgage-backed securities. During periods of declining interest rates, loans
and mortgage-backed securities prepay faster as loans are prepaid and refinanced
at lower interest rates. During such periods, the Association generally will not
be able to reinvest the proceeds of any such prepayments at comparable yields.
Conversely, during periods of rising interest rates, the rate of prepayments
generally slows. Moreover, volatility in interest rates also can result in
disintermediation, or the flow of funds away from savings institutions into
direct investments, such as U.S. Government and corporate securities and other
investment vehicles which, because of the absence of federal insurance premiums
and reserve requirements, generally pay higher rates of return than savings
institutions.
Below Average Return on Equity After Conversion
Return on equity (net income divided by average equity) is a ratio used
by many investors to compare the performance of a particular company with other
companies. The Holding Company's post-conversion return on equity will be below
the average return on equity for many publicly held savings and loans and banks.
In addition, the expenses associated with the ESOP and MRP, along with other
post-conversion expenses, are expected to contribute to reduced earnings levels.
Over time, the Holding Company intends to deploy the net proceeds from the
conversion to increase earnings per share and book value per share, without
assuming undue risk, with the goal of achieving a return on equity competitive
with other publicly traded savings and loans. This goal could take a number of
years to achieve, and the Holding Company cannot assure you that this goal can
be attained. Consequently, you should not expect a competitive return on equity
in the near future. See "SELECTED CONSOLIDATED FINANCIAL INFORMATION,"
"CAPITALIZATION" AND "PRO FORMA DATA."
New Expenses Associated With ESOP and MRP
If the ESOP and MRP are implemented, the Association will recognize
additional material employee compensation and benefit expenses that stem from
the shares purchased or granted to employees and executives under those plans.
The Association cannot predict the actual amount of these new expenses because
applicable accounting practices require that they be based on the fair market
value of the shares of common stock when the expenses are recognized. Expenses
for the ESOP would be recognized when shares are committed to be released to
participants' accounts, and expenses for the MRP would be recognized over the
vesting period of awards made to recipients. These expenses have been reflected
in the pro forma financial information under "PRO FORMA DATA" assuming the
$15.00 per share purchase price as fair market value. Actual expenses, however,
will be based on the fair market value of the common stock at the time of
recognition, which may be higher or lower than $15.00. For further discussion of
these plans, see "MANAGEMENT OF THE ASSOCIATION -- Benefits -- Employee Stock
Ownership Plan" and "-- Benefits -- Management Recognition Plan."
Possible Dilutive Effect of Benefit Programs
If the conversion is completed and stockholders approve the MRP and
Stock Option Plan, the Holding Company intends to issue shares to its officers
and directors through these plans. If the shares for the MRP are issued from
authorized but unissued stock, your ownership interest could be diluted by up to
approximately 3.85%. If the shares for the Stock Option Plan are issued from
authorized but unissued stock, your ownership interest could be diluted by up to
approximately 9.09%. In either case, the issuance of additional shares would
decrease net income per share and stockholders' equity per share. If the ESOP is
not able to purchase 8% of the shares of common stock issued in the conversion,
the ESOP may purchase newly issued shares from the Holding Company. If this
occurs, your ownership interest would be diluted and net income per share and
stockholders' equity per share may be decreased. See "PRO FORMA DATA."
Possible Voting Control by Management and Employees
The 168,336 shares of common stock expected to be purchased by the
Association's directors and executive officers and their associates in the
conversion, combined with the shares expected to be awarded or sold to plan
8
<PAGE>
participants under the ESOP, the MRP and the Stock Option Plan, could ultimately
result in management and employees and their associates controlling up to
approximately 26.2% of the outstanding shares of the common stock (assuming the
sale of 4,025,000 shares in the conversion and that the shares issued under the
MRP and the Stock Option Plan are repurchased treasury shares) and could permit
management to benefit from certain statutory and regulatory provisions, as well
as certain provisions in the Holding Company's Certificate of Incorporation and
Bylaws, that may tend to promote the continuity of existing management. If these
individuals were to act as a group or in concert with each other, they could
have significant influence over the outcome of any stockholder vote requiring a
majority vote and in the election of directors and could effectively exercise
veto power in matters requiring the approval of stockholders, such as certain
business combinations. Management might thus have the power to authorize actions
that may be viewed as contrary to the best interests of non-affiliated holders
of the common stock and might have veto power over actions that such holders may
deem to be in their best interests. See "SHARES TO BE PURCHASED BY MANAGEMENT
PURSUANT TO SUBSCRIPTION RIGHTS," "MANAGEMENT OF THE ASSOCIATION -- Executive
Compensation" and "RESTRICTIONS ON ACQUISITIONS OF THE HOLDING COMPANY."
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 that management opposes. As a result,
stockholders who might desire to participate in such a transaction may not have
an opportunity to do so. Such provisions will also make the removal of the
current board of directors or management of the Holding Company, or the
appointment of new directors, more difficult. These provisions include:
limitations on voting rights of beneficial owners of more than 10% of the
Holding Company's common stock; supermajority voting requirements for certain
business combinations; the election of directors to staggered terms of three
years; the elimination of cumulative voting for directors; and the removal of
directors without cause only upon the vote of holders of 80% of the outstanding
voting shares. The Certificate of Incorporation of the Holding Company also
contains provisions regarding the timing and content of stockholder proposals
and nominations and limiting the calling of special meetings. See "RESTRICTIONS
ON ACQUISITION OF THE HOLDING COMPANY."
Provisions of Employment and Severance Agreements and Severance Plan
The employment and severance agreements of senior officers of the
Holding Company and the Association provide for cash severance payments and/or
the continuation of health, life and disability benefits in the event of their
termination of employment following a change in control of the Holding Company
or the Association. If a change in control had occurred at September 30, 1997,
the aggregate value of the severance benefits available to these executive
officers under the agreements would have been approximately $844,000. In
addition, if a change in control had occurred at September 30, 1997 and all
eligible employees had been terminated, the aggregate payment due under the
Severance Plan would have been approximately $529,000. These arrangements may
have the effect of increasing the costs of acquiring the Holding Company,
thereby discouraging future attempts to take over the Holding Company or the
Association. For information about the proposed employment and severance
agreements and Severance Plan, see "MANAGEMENT OF THE ASSOCIATION -- Executive
Compensation."
Competition
The Association faces intense competition both in making loans and
attracting deposits. Competition for loans principally comes from commercial
banks, savings associations, credit unions, mortgage banking companies and
insurance companies. Historically, commercial banks, savings associations and
credit unions have been the Association's most direct competition for deposits.
The Association also competes with short-term money market funds and with other
financial institutions, such as brokerage firms and insurance companies, for
deposits. In competing for loans, the Association may be forced to offer lower
loan interest rates periodically. Conversely, in
9
<PAGE>
competing for deposits, the Association may be forced to offer higher deposit
interest rates periodically. Either case or both cases could adversely affect
net interest income. See "BUSINESS OF THE ASSOCIATION -- Competition."
Absence of Prior Market for the Common Stock
The Holding Company has never issued capital stock and, consequently,
there is no existing market for the common stock. Although the Holding Company
has received preliminary approval to list its common stock on the Nasdaq
National Market under the symbol _____, the Holding Company cannot guarantee
that an active and liquid trading market for its common stock will develop, or
if it does develop, that it will continue. Furthermore, the Holding Company
cannot guarantee that if you purchase shares in the conversion you will be able
to sell your shares at or above the $15.00 purchase price. See "MARKET FOR
COMMON STOCK."
Possible Increase in Estimated Price Range and Number of Shares Issued
RP Financial may increase the Estimated Valuation Range up to 15% to
reflect material changes in the financial condition or results of operations of
the Association or changes in market conditions or general financial, economic
or regulatory conditions following the commencement of the offering. If the
Estimated Valuation Range is increased, the Holding Company anticipates that it
would issue up to 4,628,750 shares of common stock for an aggregate price of up
to $69,431,250. This increase in the number of shares would decrease pro forma
net earnings per share and stockholders' equity per share, increase the Holding
Company's pro forma consolidated stockholders' equity and net earnings, and
increase the purchase price as a percentage of pro forma stockholders' equity
per share and net earnings per share. See "PRO FORMA DATA."
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
If the IRS were to determine that the subscription rights granted
pursuant to the Plan of Conversion have an ascertainable value, receipt of such
rights may be a taxable event (either as capital gain or ordinary income), to
those persons who receive and/or exercise the subscription rights in an amount
equal to such value. Additionally, the IRS could require the Association to
recognize a gain for tax purposes on the distribution of subscription rights.
Whether subscription rights are considered to have ascertainable value is an
inherently factual determination. RP Financial has advised the Association in
writing that such rights have no value, but RP Financial's conclusion is not
binding on the IRS. See "THE CONVERSION -- Effects of Conversion to Stock Form
on Depositors and Borrowers of the Association -- Tax Effects."
Financial Institution Regulation and the Future of the Thrift Industry
The Association is subject to extensive regulation, supervision and
examination by the OTS and the FDIC. Legislation has been introduced into
Congress that would consolidate the OTS with the Office of the Comptroller of
the Currency, which regulates national banks. If this or similar legislation is
enacted into law, the Association could be forced to become a state or national
bank and become subject to regulation by a different government agency. If the
Association is required to change charters, its investment authority and the
ability of the Holding Company to engage in diversified activities may be
limited. It is impossible at this time to predict whether such legislation will
be passed or the impact of any such legislation on the operations of the
Association and the Holding Company.
10
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
financial position and results of operations of the Association at the dates and
for the periods indicated. This information should be read in conjunction with
the Financial Statements and Notes thereto presented elsewhere in this
prospectus.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
SELECTED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Total assets ............................................ $ 247,499 $ 244,659 $ 233,780 $ 214,817 $ 211,493
Investment securities ................................... 24,378 37,892 29,823 32,819 24,681
Mortgage-backed securities .............................. 6,665 9,726 11,989 14,097 13,356
Loans receivable, net ................................... 192,663 182,950 178,259 159,682 158,536
Loans held for sale ..................................... 1,045 -- -- -- 1,674
Deposit accounts ........................................ 215,412 209,730 201,473 189,922 190,728
FHLB advances ........................................... -- 5,000 5,000 -- --
Total equity ............................................ 29,235 26,740 25,692 23,367 19,599
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
SELECTED OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Interest income ......................................... $ 17,773 $ 16,974 $ 16,164 $ 15,361 $ 16,474
Interest expense ........................................ 12,230 12,212 10,431 8,550 9,382
--------- --------- --------- --------- ---------
Net interest income ..................................... 5,543 4,762 5,733 6,811 7,092
Provision for loan losses (recovery of allowance) ....... 337 (7) 47 62 35
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses ..... 5,206 4,769 5,686 6,749 7,057
--------- --------- --------- --------- ---------
Other income ............................................ 202 227 218 107 251
Other operating expenses ................................ 2,362 3,877(1) 2,379 2,255 2,400
--------- --------- --------- --------- ---------
Income before income taxes .............................. 3,046 1,119 3,525 4,601 4,908
Provision for income taxes .............................. 1,094 360 1,546 1,691 1,763
Cumulative effect of change in
accounting principle ................................... -- -- -- 570(2) --
--------- --------- --------- --------- ---------
Net income .............................................. $ 1,952 $ 759 $ 1,979 $ 3,480 $ 3,145
========= ========= ========= ========= =========
</TABLE>
- -----------------
(1) Includes one-time SAIF assessment of $1.2 million.
(2) Reflects adoption of SFAS No. 109, "Accounting for Income Taxes."
11
<PAGE>
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
SELECTED OTHER DATA:
<S> <C> <C> <C> <C> <C>
Number of:
Mortgage loans outstanding ......................... 3,366 3,340 3,418 3,360 3,493
Deposit accounts ................................... 11,424 11,576 11,684 11,480 11,957
Full-service offices ............................... 4 4 4 4 4
</TABLE>
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
SELECTED FINANCIAL RATIOS:
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets(1) ......................... 0.80% 0.32% 0.87% 1.62% 1.52%
Return on average equity(2) ......................... 6.93 2.87 8.08 16.11 17.61
Average equity as a percent of average assets ....... 11.49 10.99 10.79 10.09 8.62
Interest rate spread(3) ............................. 1.76 1.51 2.09 2.84 3.13
Net interest margin(4) .............................. 2.33 2.04 2.59 3.24 3.51
Average interest-earning assets to
average interest-bearing liabilities ............... 1.11 1.10 1.10 1.10 1.08
Other operating expenses as a
percent of average total assets .................... 0.96 1.61 1.05 1.05 1.16
Capital Ratios:
Tangible ............................................ 11.3 10.6 10.8 10.9 9.3
Core ................................................ 11.3 10.6 10.8 10.9 9.3
Risk-based .......................................... 23.3 22.2 23.1 23.6 20.5
Asset Quality Ratios:
Nonperforming loans as a percent
of loans receivable, net(5) ........................ 0.48 0.56 0.52 0.84 1.25
Nonperforming assets as a
percent of total assets(6) ......................... 0.54 0.45 0.44 0.81 1.28
Allowance for loan losses as a percent
of gross loans receivable .......................... 0.44 0.35 0.32 0.37 0.34
Allowance for loan losses as a
percent of nonperforming loans ..................... 93.58 65.24 63.10 46.28 28.18
Net charge-offs as a percent of
average outstanding loans .......................... 0.07 (0.05) 0.05 0.00 0.00
</TABLE>
- -------------------
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
(5) Nonperforming loans consist of loans accounted for on a nonaccrual basis.
(6) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans, but exclude restructured loans. See
"BUSINESS OF THE ASSOCIATION -- Lending Activities -- Nonperforming Assets
and Delinquencies."
12
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the common stock offered hereby are
estimated to range from $43.5 million to $59.1 million, or up to $68.1 million
if the Estimated Valuation Range is increased by 15%. See "PRO FORMA DATA" for
the assumptions used to arrive at such amounts. The Holding Company has received
conditional OTS approval to purchase all of the capital stock of the Association
to be issued in the conversion in exchange for 50% of the net proceeds of the
conversion. This will result in the Holding Company retaining approximately
$21.8 million to $29.5 million of net proceeds, or up to $34.1 million if the
Estimated Valuation Range is increased by 15%, and the Association receiving an
equal amount.
Receipt of 50% of the net proceeds of the sale of the common stock will
increase the Association's capital and will support the expansion of the
Association's existing business activities. The Association will use the funds
contributed to it for general corporate purposes, including, initially, lending
and investment in short-term U.S. Government and agency obligations. Depending
on loan demand, the Association may consider using a portion of the conversion
proceeds for investment in mortgage-backed securities.
In connection with the conversion and the establishment of the ESOP,
the Holding Company intends to loan the ESOP the amount necessary to purchase 8%
of the shares of common stock sold in the conversion. The Holding Company's loan
to fund the ESOP may range from $3,570,000 to $4,830,000 based on the sale of
238,000 shares to the ESOP (at the minimum of the Estimated Valuation Range) and
322,000 shares (at the maximum of the Estimated Valuation Range), respectively,
at $15.00 per share. If 15% above the maximum of the Estimated Valuation Range,
or 4,628,750 shares, are sold in the conversion, the Holding Company's loan to
the ESOP would be approximately $5,554,500 (based on the sale of 370,300 shares
to the ESOP). It is anticipated that the ESOP loan will have a 15-year term with
interest payable at the prime rate as published in The Wall Street Journal on
the closing date of the conversion. The loan will be repaid principally from the
Association's contributions to the ESOP and from any dividends paid on shares of
common stock held by the ESOP.
The remaining net proceeds retained by the Holding Company initially
will be invested primarily in short-term U.S. Government and agency obligations.
Such proceeds will be available for additional contributions to the Association
in the form of debt or equity, to support future diversification or acquisition
activities, as a source of dividends to the stockholders of the Holding Company
and for future repurchases of common stock to the extent permitted under
Delaware law and federal regulations. The Holding Company will consider
exploring opportunities to use such funds to expand operations through acquiring
or establishing additional branch offices or acquiring other financial
institutions. Currently, there are no specific plans, arrangements, agreements
or understandings, written or oral, regarding any expansion activities.
Following consummation of the conversion, the Board of Directors will
have the authority to adopt plans for repurchases of common stock, subject to
statutory and regulatory requirements. Since the Holding Company has not yet
issued stock, there currently is insufficient information upon which an
intention to repurchase stock could be based. The facts and circumstances upon
which the Board of Directors may determine to repurchase stock in the future
would include but are not limited to: (i) market and economic factors such as
the price at which the stock is trading in the market, the volume of trading,
the attractiveness of other investment alternatives in terms of the rate of
return and risk involved in the investment, the ability to increase the book
value and/or earnings per share of the remaining outstanding shares, and the
ability to improve the Holding Company's return on equity; (ii) the avoidance of
dilution to stockholders by not having to issue additional shares to cover the
exercise of stock options or to fund employee stock benefit plans; and (iii) any
other circumstances in which repurchases would be in the best interests of the
Holding Company and its stockholders. Any stock repurchases will be subject to a
determination by the Board of Directors that both the Holding Company and the
Association will be capitalized in excess of all applicable regulatory
requirements after any such repurchases and that capital will be adequate,
taking into account, among other things, the Association's level of
nonperforming and classified assets, the Holding Company's and the Association's
current and projected results of operations and asset/liability structure, the
economic environment and tax and other
13
<PAGE>
regulatory considerations. For a discussion of the regulatory limitations
applicable to stock repurchases, see "THE CONVERSION -- Restriction on
Repurchase of Stock."
DIVIDEND POLICY
General
The Holding Company's Board of Directors anticipates declaring and paying
semi-annual cash dividends on the common stock at an annual rate of $0.30 per
share per year, or 2.0% based on the $15.00 per share purchase price. The first
cash dividend is expected to be declared and paid during the second full quarter
following the consummation of the conversion. In addition, the Board of
Directors may determine to pay periodic special cash dividends in addition to,
or in lieu of, regular cash dividends. Declarations or payments of any dividends
(regular and special) will be subject to determination by the Holding Company's
Board of Directors, which will take into account the amount of the net proceeds
retained by the Holding Company, the Holding Company's financial condition,
results of operations, tax considerations, capital requirements, industry
standards, economic conditions and other factors, including the regulatory
restrictions that affect the payment of dividends by the Association to the
Holding Company discussed below. Under Delaware law, the Holding Company will be
permitted to pay cash dividends after the conversion either out of surplus or,
if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. In order to pay such cash
dividends, however, the Holding Company must have available cash either from the
net proceeds raised in the conversion and retained by the Holding Company,
borrowings by the Holding Company, dividends received from the Association or
earnings on Holding Company assets. No assurances can be given that any
dividends, either regular or special, will be declared or, if declared, what the
amount of dividends will be or whether such dividends, if commenced, will
continue.
Current Restrictions
Dividends from the Holding Company may depend, in part, upon receipt of
dividends from the Association because the Holding Company initially will have
no source of income other than dividends from the Association and earnings from
the investment of the net proceeds from the offering retained by the Holding
Company. OTS regulations require the Association to give the OTS 30 days'
advance notice of any proposed declaration of dividends to the Holding Company,
and the OTS has the authority under its supervisory powers to prohibit the
payment of dividends to the Holding Company. The OTS imposes certain limitations
on the payment of dividends from the Association to the Holding Company which
utilize a three-tiered approach that permits various levels of distributions
based primarily upon a savings association's capital level. The Association
currently meets the criteria to be designated a Tier 1 association, as
hereinafter defined, and consequently could at its option (after prior notice to
and no objection made by the OTS) distribute up to 100% of is net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year. In
addition, the Association may not declare or pay a cash dividend on its capital
stock if the effect thereof would be to reduce the regulatory capital of the
Association below the amount required for the liquidation account to be
established pursuant to the Association's Plan of Conversion. See "REGULATION --
Federal Regulation of Savings Associations -- Limitations on Capital
Distributions," "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Association -- Liquidation Account" and Note __
of Notes to the Financial Statements included elsewhere herein.
Additionally, in connection with the conversion, the Holding Company and
the Association have committed to the OTS that during the one-year period
following consummation of the conversion, the Holding Company will not take any
action to declare an extraordinary dividend to stockholders that would be
treated by recipients as a tax-free return of capital for federal tax purposes.
14
<PAGE>
Tax Considerations
In addition to the foregoing, retained earnings of the Association
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used by the Association to pay cash dividends to the Holding Company
without the payment of federal income taxes by the Association at the then
current income tax rate on the amount deemed distributed, which would include
the amount of any federal income taxes attributable to the distribution. See
"TAXATION -- Federal Taxation" and Note 9 of Notes to the Financial Statements
included elsewhere herein. The Holding Company does not contemplate any
distribution by the Association that would result in a recapture of the
Association's bad debt reserve or create the above-mentioned federal tax
liabilities.
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock and, consequently, there
is no existing market for the common stock. Although the Holding Company has
received preliminary approval to list its common stock on the Nasdaq National
Market under the symbol _____, there can be no assurance that the Holding
Company will meet Nasdaq National Market listing requirements, which include a
minimum market capitalization, at least three market makers and a minimum number
of record holders. Trident Securities has agreed to make a market for the
Holding Company's common stock following consummation of the conversion and will
assist the Holding Company in seeking to encourage at least two additional
market makers to establish and maintain a market in the common stock. Making a
market involves maintaining bid and ask quotations and being able, as principal,
to effect transactions in reasonable quantities at those quoted prices, subject
to various securities laws and other regulatory requirements. The Holding
Company anticipates that prior to the completion of the conversion it will be
able to obtain the commitment from at least two additional broker-dealers to act
as market makers for the common stock. Additionally, the development of a liquid
public market depends on the existence of willing buyers and sellers, the
presence of which is not within the control of the Holding Company, the
Association or any market maker. There can be no assurance that an active and
liquid trading market for the common stock will develop or that, if developed,
it will continue. The number of active buyers and sellers of the common stock at
any particular time may be limited. Under such circumstances, investors in the
common stock could have difficulty disposing of their shares on short notice and
should not view the common stock as a short-term investment. Furthermore, there
can be no assurance that purchasers will be able to sell their shares at or
above the purchase price or that quotations will be available on the Nasdaq
National Market as contemplated.
15
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the
Association at September 30, 1997, and the pro forma consolidated capitalization
of the Holding Company after giving effect to the assumptions set forth under
"PRO FORMA DATA," based on the sale of the number of shares of common stock at
the minimum, midpoint, maximum and maximum, as adjusted, of the Estimated
Valuation Range. The shares that would be issued at the maximum, as adjusted, of
the Estimated Valuation Range would be subject to receipt of OTS approval of
an updated appraisal confirming such valuation. A change in the number of shares
to be issued in the conversion may materially affect pro forma consolidated
capitalization.
<TABLE>
<CAPTION>
Holding Company
Pro Forma Consolidated Capitalization
Based Upon the Sale of
------------------------------------------------------------
2,975,000 3,500,000 4,025,000 4,628,750
Capitalization Shares at Shares at Shares at Shares at
as of $15.00 $15.00 $15.00 $15.00
September 30, 1997 Per Share(1) Per Share(1) Per Share(1) Per Share(2)
------------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits(3)............................ $215,412 $215,412 $215,412 $215,412 $215,412
======== ======== ======== ======== ========
Stockholders' equity:
Preferred stock:
500,000 shares, $.01
par value per share,
authorized; none issued
or outstanding.................... $ -- $ -- $ -- $ -- $ --
Common stock:
10,000,000 shares, $.01 par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding(4).................... -- 30 35 40 46
Additional paid-in capital.......... -- 43,497 51,258 59,020 68,065
Retained income(5).................. 29,235 29,235 29,235 29,235 29,235
Less:
Common Stock acquired
by ESOP(6)...................... -- (3,570) (4,200) (4,830) (5,555)
Common Stock to be acquired
by MRP(7)....................... -- (1,785) (2,100) (2,415) (2,777)
-------- -------- -------- -------- --------
Total stockholders' equity............. $ 29,235 $ 67,407 $ 74,228 $ 81,050 $ 89,015
======== ======== ======== ======== ========
</TABLE>
(footnotes on the following page)
16
<PAGE>
- ------------------------
(1) Does not reflect the possible increase in Estimated Valuation Range to
reflect material changes in the financial condition or results of
operations of the Association or changes in market conditions or general
financial, economic and regulatory conditions, or the issuance of
additional shares under the Stock Option Plan.
(2) This column represents the pro forma capitalization of the Holding Company
in the event the aggregate number of shares of common stock issued in the
conversion is 15% above the maximum of the Estimated Valuation Range. See
"PRO FORMA DATA" and Footnote 1 thereto.
(3) Withdrawals from deposit account for the purchase of common stock are not
reflected. Such withdrawals will reduce pro forma deposits by the amount
thereof.
(4) The Association's authorized capital will consist solely of 1,000 shares
of common stock, par value $1.00 per share, 1,000 shares of which will be
issued to the Holding Company, and 9,000 shares of preferred stock, no par
value per share, none of which will be issued in connection with
conversion.
(5) Retained income is substantially restricted by applicable regulatory
capital requirements. Additionally, the Association will be prohibited from
paying any dividend that would reduce its regulatory capital below the
amount in the liquidation account, which will be established for the
benefit of the Association's Eligible Account Holders and Supplemental
Eligible Account Holders at the time of the conversion and adjusted
downward thereafter as such account holders reduce their balances or cease
to be depositors. See "THE CONVERSION -- Effects of Conversion to Stock
Form on Depositors and Borrowers of the Association -- Liquidation
Account."
(6) Assumes that 8% of the common stock in the conversion will be acquired by
the ESOP in the conversion with funds borrowed from the Holding Company.
Under GAAP, the amount of common stock to be purchased by the ESOP
represents unearned compensation and is, accordingly, reflected as a
reduction of capital. As shares are released to ESOP participant's
accounts, a corresponding reduction in the charge against capital will
occur. Since the funds are borrowed from the Holding Company, the borrowing
will be eliminated in consolidation and no liability or interest expense
will be reflected in the consolidated financial statements of the Holding
Company, See "MANAGEMENT OF THE ASSOCIATION -- Benefits -- Employee Stock
Ownership Plan."
(7) Assumes the purchase in the open market at $15.00 per share, pursuant to
the proposed MRP, of a number of shares equal to 4% of the shares of common
stock issued in the conversion at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range. The issuance of an
additional 4% of the shares of common stock for the MRP from authorized but
unissued shares would dilute the ownership interest of stockholders by
3.85%. The shares are reflected as a reduction of stockholders' equity. See
"RISK FACTORS -- Possible Dilutive Effect of Benefit Programs," "PRO FORMA
DATA" and "MANAGEMENT OF THE ASSOCIATION -- Benefits -- Management
Recognition Plan." The MRP is subject to stockholder approval, which is
expected to be sought at a meeting to be held no earlier than six months
following consummation of the conversion.
17
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table presents the Association's historical and pro forma
capital position relative to its capital requirements at September 30, 1997.
The amount of capital infused into the Association for purposes of the following
table is 50% of the net proceeds of the offering. For purpose of the table
below, the amount expected to be borrowed by the ESOP and the cost of the shares
expected to be acquired by the MRP are deducted from pro forma regulatory
capital. For a discussion of the assumptions underlying the pro forma capital
calculations presented below, see "USE OF PROCEEDS," "CAPITALIZATION" AND "PRO
FORMA DATA." The definitions of the terms used in the table are those provided
in the capital regulations issued by the OTS. For a discussion of the capital
standards applicable to the Association, see "REGULATION -- Federal Regulation
of Savings Associations -- Capital Requirements."
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1997
------------------------------------------------
Minimum of Estimated Midpoint of Estimated
Valuation Range Valuation Range
-------------------- ---------------------
2,975,000 Shares 3,500,000 Shares
September 30, 1997 at $15.00 Per Share at $15.00 Per Share
---------------------------- -------------------- ---------------------
Percent of Percent of Percent of
Adjusted Adjusted Adjusted
Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1)
------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital(2)..................... $29,235 11.9% $45,643 17.2% $48,581 18.0%
Tangible capital(2)................. $27,769 11.3% $44,177 16.6% $47,115 17.5%
Tangible capital requirement........ 3,690 1.5 3,990 1.5 4,044 1.5
------- ---- ------- ---- ------- ----
Excess.............................. $24,079 9.8% $40,187 15.1% $43,071 16.0%
======= ==== ======= ==== ======= ====
Core capital(2)..................... $27,769 11.3% $44,177 16.6% $47,115 17.5%
Core capital requirement(3)......... 7,381 3.0 7,980 3.0 8,087 3.0
------- ---- ------- ---- ------- ----
Excess.............................. $20,388 8.3% $36,197 13.6% $39,028 14.5%
======= ==== ======= ==== ======= ====
Total capital(4).................... $28,519 23.3% $44,927 35.5% $47,865 37.6%
Risk-based
capital requirement............... 9,796 8.0 10,116 8.0 10,173 8.0
------- ---- ------- ---- ------- ----
Excess.............................. $18,723 15.3% $34,811 27.5% $37,692 29.6%
======= ==== ======= ==== ======= ====
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1997
----------------------------------------------
15% above
Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range
-------------------- --------------------
4,025,000 Shares 4,628,750 Shares
at $15.00 Per Share at $15.00 Per Share
-------------------- --------------------
Percent of Percent of
Adjusted Adjusted
Total Total
Amount Assets(1) Amount Assets(1)
------ --------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
GAAP capital(2)..................... $51,516 18.9% $54,959 19.8%
Tangible capital(2)................. $50,052 18.3% $53,493 19.3%
Tangible capital requirement........ 4,097 1.5 4,160 1.5
------- ---- ------- ----
Excess.............................. $45,955 16.8% $49,333 17.8%
======= ==== ======= ====
Core capital(2)..................... $50,052 18.3% $53,493 19.3%
Core capital requirement(3)......... 8,194 3.0 8,319 3.0
------- ---- ------- ----
Excess.............................. $41,858 15.3% $45,174 16.3%
======= ==== ======= ====
Total capital(4).................... $50,802 39.7% $54,243 42.1%
Risk-based
capital requirement............... 10,230 8.0 10,296 8.0
------- ---- ------- ----
Excess.............................. $40,572 31.7% $43,947 34.1%
======= ==== ======= ====
</TABLE>
- --------------------
(1) Based upon total adjusted assets of $246.0 million at September 30, 1997 and
$267.8 million, $271.7 million, $275.6 million and $280.1 million at the
minimum, midpoint, maximum, and maximum, as adjusted, of the Estimated
Valuation Range, respectively, for purposes of the tangible and core capital
requirements, and upon risk-weighted assets of $122.4 million at September
30, 1997 and $126.8 million, $127.6 million, $128.4 million and $129.3
million at the minimum, midpoint, maximum, and maximum, as adjusted, of the
Estimated Valuation Range, respectively, for purposes of the risk-based
capital requirement.
(2) An unrealized gain on securities available-for-sale, net of taxes, accounts
for the difference between GAAP capital and each of tangible capital and
core capital.
(3) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3 % of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and soundness
and a core capital ratio of 4% to 5% for all other thrifts.
(4) Percentage represents total core and supplementary capital divided by total
risk-weighted assets. Assumes net proceeds are invested in assets that carry
a 20% risk-weighting.
18
<PAGE>
PRO FORMA DATA
Under the Plan of Conversion, the common stock must be sold at a price
equal to the estimated pro forma market value of the Holding Company and the
Association as converted, based upon an independent valuation. The Estimated
Valuation Range as of November 28, 1997 is from a minimum of $44,625,000 to a
maximum of $60,375,000 with a midpoint of $52,500,000. At a price per share of
$15.00, this results in a minimum number of shares of 2,975,000, a maximum
number of shares of 4,025,000 and a midpoint number of shares of 3,500,000. The
actual net proceeds from the sale of the common stock cannot be determined until
the conversion is completed. However, net proceeds set forth on the following
table are based upon the following assumptions: (i) Trident Securities will
receive fees of approximately $578,000, $687,000, $795,000 and $800,000 at the
minimum, midpoint, maximum and 15% above the Estimated Valuation Range,
respectively (see "THE CONVERSION -- Plan of Distribution for the Subscription,
Direct Community and Syndicated Community Offerings); (ii) all of the common
stock will be sold in the Subscription and Direct Community Offerings; and (iii)
conversion expenses, excluding the fees paid to Trident Securities, will total
approximately $520,000 at each of the minimum, midpoint, maximum and 15% above
the Estimated Valuation Range. Actual expenses may vary from this estimate, and
the fees paid will depend upon the percentages and total number of shares sold
in the Subscription Offering, Direct Community Offering and Syndicated Community
Offering and other factors.
The following table summarizes the historical net income and retained
income of the Association and the pro forma consolidated net income and
stockholders' equity of the Holding Company for the periods and at the dates
indicated, based on the minimum, midpoint and maximum of the Estimated Valuation
Range and based on a 15% increase in the maximum of the Estimated Valuation
Range. The pro forma consolidated net income of the Association for the year
ended September 30, 1997 has been calculated as if the conversion had been
consummated at the beginning of the period and the estimated net proceeds
received by the Holding Company and the Association had been invested at 5.68%,
at the beginning of the period, which represents the one-year U.S. Treasury Bill
yield as of September 30, 1997. As discussed under "USE OF PROCEEDS," the
Holding Company expects to retain 50% of the net proceeds of the offering from
which it will fund the ESOP loan. A pro forma after-tax return of 3.61% is used
for both the Holding Company and the Association for the period, after giving
effect to an incremental combined federal and state income tax rate of 36.5%.
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the number of shares of common stock
indicated in the footnotes to the table. Per share amounts have been computed as
if the common stock had been outstanding at the beginning of the respective
periods or at September 30, 1997, but without any adjustment of per share
historical or pro forma stockholders' equity to reflect the earnings on the
estimated net proceeds.
No effect has been given to: (i) the shares to be reserved for issuance
under the Holding Company's Stock Option Plan, which is expected to be voted
upon by stockholders at a meeting to be held no earlier than six months
following consummation of the conversion; (ii) withdrawals from deposit accounts
for the purpose of purchasing common stock in the conversion; (iii) the issuance
of shares from authorized but unissued shares to the MRP, which is expected to
be voted upon by stockholders at a meeting to be held no earlier than six months
following consummation of the conversion; or (iv) the establishment of a
liquidation account for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. See "MANAGEMENT OF THE ASSOCIATION -- Benefits --
Stock Option Plan" and "THE CONVERSION -- Stock Pricing and Number of Shares to
be Issued."
The following pro forma information may not be representative of the
financial effects of the conversion at the date on which the conversion actually
occurs and should not be taken as indicative of future results of operations.
Stockholders' equity represents the difference between the stated amounts of
consolidated assets and liabilities of the Holding Company computed in
accordance with GAAP. Stockholders' equity has not been increased or decreased
to reflect the difference between the carrying value of loans and other assets
and market value. Stockholders' equity is not intended to represent fair market
value nor does it represent amounts that would be available for distribution to
stockholders in the event of liquidation.
19
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended September 30, 1997
-------------------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
--------- --------- --------- ---------
2,975,000 3,500,000 4,025,000 4,628,750(1)
Shares Shares Shares Shares
at $15.00 at $15.00 at $15.00 at $15.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds ........................................ $ 44,625 $ 52,500 $ 60,375 $ 69,431
Less: estimated expenses .............................. 1,098 1,207 1,315 1,320
-------- -------- -------- --------
Estimated net proceeds ................................ 43,527 51,293 59,060 68,111
Less: Common stock acquired by ESOP ................... (3,570) (4,200) (4,830) (5,555)
Less: Common stock to be acquired by MRP .............. (1,785) (2,100) (2,415) (2,777)
-------- -------- -------- --------
Net investable proceeds .......................... $ 38,172 $ 44,993 $ 51,815 $ 59,779
======== ======== ======== ========
Consolidated net income:
Historical ........................................... $ 1,952 $ 1,952 $ 1,952 $ 1,952
Pro forma income on net proceeds(2) .................. 1,377 1,623 1,869 2,156
Pro forma ESOP adjustments(3) ........................ (151) (178) (204) (235)
Pro forma MRP adjustments(4) ......................... (227) (267) (307) (353)
-------- -------- -------- --------
Pro forma net income ............................... $ 2,951 $ 3,130 $ 3,310 $ 3,520
======== ======== ======== ========
Consolidated net income per share (5)(6):
Historical ........................................... $ 0.71 $ 0.60 $ 0.52 $ 0.46
Pro forma income on net proceeds ..................... 0.50 0.50 0.50 0.50
Pro forma ESOP adjustments(3) ........................ (0.05) (0.05) (0.05) (0.05)
Pro forma MRP adjustments(4) ......................... (0.08) (0.08) (0.08) (0.08)
-------- -------- -------- --------
Pro forma net income per share ..................... $ 1.08 $ 0.97 $ 0.89 $ 0.83
======== ======== ======== ========
Consolidated stockholders' equity (book value):
Historical ........................................... $ 29,235 $ 29,235 $ 29,235 $ 29,235
Estimated net proceeds ............................... 43,527 51,293 59,060 68,111
Less: Common stock acquired by ESOP .................. (3,570) (4,200) (4,830) (5,555)
Less: Common stock to be acquired by MRP(4) .......... (1,785) (2,100) (2,415) (2,777)
-------- -------- -------- --------
Pro forma stockholders' equity(7) .................. $ 67,407 $ 74,228 $ 81,050 $ 89,015
======== ======== ======== ========
Consolidated stockholders' equity per share(6)(8):
Historical(6) ........................................ $ 9.83 $ 8.35 $ 7.26 $ 6.32
Estimated net proceeds ............................... 14.63 14.66 14.67 14.71
Less: Common stock acquired by ESOP .................. (1.20) (1.20) (1.20) (1.20)
Less: Common stock to be acquired by MRP(4) .......... (0.60) (0.60) (0.60) (0.60)
-------- -------- -------- --------
Pro forma stockholders' equity per share(9) ........ $ 22.66 $ 21.21 $ 20.13 $ 19.23
======== ======== ======== ========
Purchase price as a percentage of pro forma
stockholders' equity per share ....................... 66.20% 70.72% 74.52% 78.00%
Purchase price as a multiple of pro forma
net income per share ................................. 13.89x 15.46x 16.85x 18.07x
</TABLE>
(footnotes on following page)
20
<PAGE>
- -------------
(1) Gives effect to the sale of an additional 603,750 shares in the
conversion, which may be issued to cover an increase in the pro forma
market value of the Holding Company and the Association as converted,
without the resolicitation of subscribers or any right of cancellation.
The issuance of such additional shares will be conditioned on a
determination by RP Financial that such issuance is compatible with its
determination of the estimated pro forma market value of the Holding
Company and the Association as converted. See "THE CONVERSION -- Stock
Pricing and Number of Shares to be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing common stock in the conversion. Since funds on
deposit at the Association may be withdrawn to purchase shares of common
stock (which will reduce deposits by the amount of such purchases), the
net amount of funds available to the Association for investment following
receipt of the net proceeds of the conversion will be reduced by the
amount of such withdrawals.
(3) It is assumed that 8% of the shares of common stock offered in the
conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP (at an interest rate equal to the
prime rate as published in The Wall Street Journal on the closing date of
the conversion, which rate is currently 8.50%) from the net proceeds from
the conversion retained by the Holding Company. The amount of this
borrowing has been reflected as a reduction from gross proceeds to
determine estimated net investable proceeds. The Association intends to
make contributions to the ESOP in amounts at least equal to the principal
and interest requirement of the debt. As the debt is paid down,
stockholders' equity will be increased. The Association's payment of the
ESOP debt is based upon equal installments of principal over a 15-year
period, assuming a combined federal and state income tax rate of 36.5%.
Interest income earned by the Holding Company on the ESOP debt offsets the
interest paid by the Association on the ESOP loan. No reinvestment is
assumed on proceeds contributed to fund the ESOP. Applicable accounting
practices require that compensation expense for the ESOP be based upon
shares committed to be released and that unallocated shares be excluded
from earnings per share computations. The valuation of shares committed to
be released would be based upon the average market value of the shares
during the year, which, for purposes of this calculation, was assumed to
be equal to the $15.00 per share purchase price. See "MANAGEMENT OF THE
ASSOCIATION -- Benefits -- Employee Stock Ownership Plan."
(4) In calculating the pro forma effect of the MRP, it is assumed that the
required stockholder approval has been received, that the shares were
acquired by the MRP at the beginning of the period presented in open
market purchases at the $15.00 per share purchase price, that 20% of the
amount contributed was an amortized expense during such period, and that
the combined federal and state income tax rate is 36.5%. The issuance of
authorized but unissued shares of the common stock instead of open market
purchases would dilute the voting interests of existing stockholders by
approximately 3.85% and pro forma net income per share would be $1.05,
$0.95, $0.87 and $0.81 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range for the year ended September 30,
1997, respectively, and pro forma stockholders' equity per share would be
$22.36, $20.97, $19.94 and $19.07 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range at September 30,
1997, respectively. Shares issued under the MRP vest 20% per year and for
purposes of this table compensation expense is recognized on a straight-
line basis over each vesting period. In the event the fair market value
per share is greater than $15.00 per share on the date shares are awarded
under the MRP, total MRP expense would increase. The total estimated MRP
expense was multiplied by 20% (the total percent of shares for which
expense is recognized in the first year) resulting in pre-tax MRP expense
of $357,000, $420,000, $483,000 and $555,000 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range for the
year ended September 30, 1997, respectively. No effect has been given to
the shares reserved for issuance under the proposed Stock Option Plan.
(5) Per share amounts are based upon shares outstanding of 2,752,867,
3,238,667, 3,724,467 and 4,283,137 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range for the year ended
September 30, 1997, respectively, which includes the shares of common
stock sold in the conversion less the number of shares assumed to be held
by the ESOP not committed to be released within the first year following
the conversion.
21
<PAGE>
(6) Historical per share amounts have been computed as if the shares of common
stock expected to be issued in the conversion had been outstanding at the
beginning of the period or on the date shown, but without any adjustment
of historical net income or historical retained earnings to reflect the
investment of the estimated net proceeds of the sale of shares in the
conversion, the additional ESOP expense or the proposed MRP expense, as
described above.
(7) "Book value" represents the difference between the stated amounts of the
Association's assets and liabilities. The amounts shown do not reflect the
liquidation account which will be established for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in the
conversion, or the federal income tax consequences of the restoration to
income of the Association's special bad debt reserves for income tax
purposes which would be required in the unlikely event of liquidation. See
"THE CONVERSION-- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Association" and "TAXATION." The amounts shown for book
value do not represent fair market values or amounts distributable to
stockholders in the unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 2,975,000,
3,500,000, 4,025,000 and 4,628,750 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively.
(9) Does not represent possible future price appreciation or depreciation of
the common stock.
22
<PAGE>
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth certain information as to the
approximate purchases of common stock by each director and executive officer of
the Association, including their associates, as defined by applicable
regulations. No individual has entered into a binding agreement with respect to
such intended purchases, and, therefore, actual purchases could be more or less
than indicated below. Directors and officers of the Association and their
associates may not purchase in excess of 29% of the shares sold in the
conversion. For purposes of the following table, it has been assumed that
sufficient shares will be available to satisfy subscriptions in all categories.
Directors, officers, their associates and employees will pay the same price for
the shares for which they subscribe as the price that will be paid by all other
subscribers.
<TABLE>
<CAPTION>
Percent of Percent of
Shares at Shares at
Minimum of Maximum of
Name and Anticipated Number of Anticipated Dollar Estimated Estimated
Position Shares Purchased (1) Amount Purchased Valuation Range Valuation Range
-------- -------------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
J. Edward Wells 33,334 $500,010 1.12% 0.83%
President, Chief Executive
Officer and Director
Aaron H. King 20,000 300,000 0.67 0.50
Director
J. Riley Bailes 28,000 420,000 0.94 0.70
Director
John H. Lake 13,334 200,010 0.45 0.33
Director
G. Edwin Owings 6,667 100,005 0.22 0.17
Director
Edwin I. Shealy 20,000 300,000 0.67 0.50
Chief Financial Officer
James H. Wasson, Jr. 16,667 250,005 0.56 0.41
Vice President
John M. Swofford 8,334 125,010 0.28 0.21
Vice President
Will B. Ferguson 22,000 330,000 0.74 0.55
Vice President ------ ------- ---- ----
Total 168,336 $2,525,040 5.66% 4.18%
======= ========== ==== ====
</TABLE>
- --------------
(1) Excludes any shares awarded pursuant to the ESOP and MRP and options to
acquire shares pursuant to the Stock Option Plan.
23
<PAGE>
HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION
STATEMENTS OF INCOME
The following Statements of Income of Heritage Federal Savings & Loan
Association for the fiscal years ended September 30, 1997, 1996 and 1995 have
been audited by Deloitte & Touche LLP, Greenville, South Carolina, independent
auditors, whose report thereon appears elsewhere in this prospectus. These
statements should be read in conjunction with the Financial Statements and
related Notes included elsewhere herein.
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
INTEREST INCOME:
Loans:
First mortgage loans............................................. $14,056 $13,166 $12,660
Other loans...................................................... 978 872 889
Investment securities and other................................... 2,289 2,310 1,866
Mortgage-backed securities........................................ 450 626 749
-------- -------- --------
Total interest income........................................... 17,773 16,974 16,164
-------- -------- --------
INTEREST EXPENSE:
Deposits.......................................................... 12,004 11,885 9,941
Federal Home Loan Bank borrowings................................. 226 327 490
-------- -------- --------
Total interest expense.......................................... 12,230 12,212 10,431
-------- -------- --------
NET INTEREST INCOME................................................ 5,543 4,762 5,733
PROVISION FOR LOAN LOSSES
(RECOVERY OF ALLOWANCE) (Note 4).................................. 337 (7) 47
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES......................................... 5,206 4,769 5,686
-------- -------- --------
OTHER INCOME (EXPENSE):
Service charge and fees........................................... 205 206 210
Gain (loss) of sale of mortgage loans held-for-sale............... 6 16 0
Gain (loss) on sale of investments available-for-sale............. (13) 2 0
Other income, other............................................... 4 3 8
-------- -------- --------
Total other income, net......................................... 202 227 218
-------- -------- --------
OTHER OPERATING EXPENSES:
Employee compensation and benefits (Note 11)...................... 1,450 1,344 1,329
Deposit insurance premiums (Note 1)............................... 234 1,725 416
Occupancy and equipment expense................................... 397 413 142
Data processing - service bureau fees............................. 132 129 114
Office supplies, postage, printing, etc........................... 81 97 82
Professional fees................................................. 56 54 41
Advertising and promotions........................................ 24 31 22
Net (income)/cost of real estate operations....................... (167) (120) 77
Other............................................................. 155 204 156
-------- -------- --------
Total other operating expenses................................... 2,362 3,877 2,379
-------- -------- --------
INCOME BEFORE INCOME TAXES......................................... 3,046 1,119 3,525
PROVISION FOR INCOME TAXES (Note 9)................................ 1,094 360 1,546
-------- -------- --------
NET INCOME......................................................... $ 1,952 $ 759 $ 1,979
======== ======== ========
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition and
results of operations of the Association. The information contained in this
section should be read in conjunction with the Financial Statements and
accompanying Notes thereto and the other sections contained in this prospectus.
Operating Strategy
The Association's business consists principally of attracting retail
deposits (primarily certificates of deposit) from the general public and using
these funds to originate mortgage loans secured by one- to four-family
residences located in South Carolina. To a lesser extent, the Association also
originates commercial real estate loans, home equity loans, builder construction
loans and savings account loans. The Association intends to continue to fund its
assets primarily with retail deposits, although FHLB-Atlanta advances may be
used as a supplemental source of funds.
The Association's profitability depends primarily on its net interest
income, which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits and borrowings. Net interest income is also affected by the relative
amounts of interest-earning assets and interest-bearing liabilities. When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The
Association's profitability is also affected by the level of other operating
income and expenses. Other operating income includes service charges and fees,
gain on sale of mortgage loans and gain on sale of investments. Other operating
expenses include compensation and benefits, occupancy and equipment expenses,
deposit insurance premiums, data processing expenses and other operating costs.
The Association's results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government legislation and regulation and monetary and fiscal
policies.
The Association's business strategy is to operate as a
well-capitalized, profitable and independent financial institution dedicated to
financing home ownership and providing quality customer service. In recent years
the Association has emphasized the origination for retention in its portfolio of
adjustable-rate mortgage loans in order to reduce its interest rate risk.
Beginning in the year ended September 30, 1997, to increase the yield on its
loan portfolio, the Association has emphasized the origination for its portfolio
of fixed-rate mortgage loans with terms of 15 years or less and ARM loans with
an interest rate that is fixed for an initial period of ten years. In addition,
the Association has purchased $1.0 million of conforming fixed-rate loans for
its held for sale portfolio and plans to continue this activity depending on
market conditions. The Association relies heavily on certificates of deposit as
its source of funds. As a result, the Association's cost of funds is generally
higher than that of institutions that have more checking and savings accounts.
The Association's high cost of funds has contributed to a lower interest rate
spread and reduced profitability in recent years. The Association intends to
attempt to reduce its reliance on certificates of deposit by increasing its
emphasis on transaction accounts.
Comparison of Financial Condition at September 30, 1997 and 1996
Total assets increased $2.8 million, or 1.2%, to $247.5 million at
September 30, 1997 from $244.7 million at September 30, 1996. Loans receivable
increased $9.7 million to $192.7 million from $183.0 million. The Association
used funds from maturities and prepayments of investment and mortgage-backed
securities to fund loan growth. Investment securities decreased to $24.4 million
from $37.9 million and mortgage-backed securities decreased to $6.7 million from
$9.7 million. Cash and cash equivalents increased to $14.7 million from $5.9
million.
25
<PAGE>
Total liabilities increased $345,000, or 0.2%, to $218.3 million at
September 30, 1997 from $217.9 million at September 30, 1996. Deposit accounts
increased $5.7 million to $215.4 million from $209.7 million. The increase in
deposit accounts was offset by a decrease in FHLB advances from $5.0 million to
$0.
Total equity increased $2.5 million, or 9.3%, to $29.2 million at
September 30, 1997 from $26.7 million at September 30, 1996. Retained income
increased $1.9 million to $27.8 million, while unrealized gain on
available-for-sale securities increased $543,000 to $1.5 million.
Comparison of Operating Results for the Years Ended September 30, 1997 and 1996
Net Income. Net income increased $1.2 million, or 157.2%, to $2.0
million for the year ended September 30, 1997 from $759,000 for the year ended
September 30, 1996. The results for fiscal 1996 reflect the payment of a
one-time, industry wide special assessment to recapitalize the SAIF, which for
the Association was $1.2 million. Without the payment of the SAIF special
assessment, net income for fiscal 1996 would have been $1.5 million.
Net Interest Income. Net interest income increased $781,000, or 16.4%,
to $5.5 million for fiscal 1997 from $4.8 million for fiscal 1996. The
Association's interest rate spread increased 25 basis points to 1.76% for fiscal
1997 from 1.51% for fiscal 1996 as the Association experienced a 19 basis point
increase in the yield on its interest-earning assets and a 6 basis point
decrease in the cost of its interest-bearing liabilities.
Total interest income increased $799,000, or 4.7%, from fiscal 1996 to
fiscal 1997. Interest income on loans receivable increased $996,000 largely as a
result of an increase of $11.6 million, or 6.5%, in the average balance of
loans. The Association's average yield on loans increased 5 basis points to
7.93% in fiscal 1997. The growth in interest income on loans was partially
offset by a reduction in interest income on mortgage-backed securities and
federal funds sold and interest-bearing deposits, as the Association reduced the
average balance of these investments. The yield on the Association's
interest-earning assets increased to 7.47% from 7.28% as a result of having a
larger percentage of interest-earning assets invested in loans.
Total interest expense increased $18,000, or 0.1%, from fiscal 1996 to
fiscal 1997. The average balance of interest-bearing liabilities increased $2.6
million, or 1.2%, while the average rate paid decreased to 5.71% from 5.77%.
Interest paid on passbook, NOW and money market accounts decreased a total of
$25,000 primarily because of a decrease in the average balance of such accounts.
Interest paid on certificates of deposit increased $144,000 because of an
increase in the average balance of such accounts. This was partially offset by a
decrease in the average rate paid on certificates of deposit to 5.91% from
6.00%. Interest paid on FHLB advances decreased $101,000 as the decrease in the
average balance of advances was partially offset by the increase in the average
rate paid. By the end of fiscal 1997, the Association had repaid all of its FHLB
advances.
Provision for Loan Losses. Provisions for loan losses are charged to
operations to bring the total allowance for loan losses to a level considered by
management to be adequate to provide for estimated losses based on management's
evaluation of such factors as the delinquency status of loans, current economic
conditions, the net realizable value of the underlying collateral and prior loan
loss experience. The provision for loan losses was $337,000 in fiscal 1997
compared with a recovery of $7,000 in fiscal 1996. During fiscal 1997, the
Association added $137,000 to the allowance for loan losses to provide for
estimated losses on specific problem loans. The Association added an additional
$200,000 to the allowance for loan losses based on its re-evaluation of the
risks inherent in the loan portfolio. At September 30, 1997, the Association's
allowance for loan losses totalled $874,000, which equaled .44% of total loans.
Although management uses the best information available, future adjustments to
the allowance may be necessary due to changes in economic, operating, regulatory
and other conditions that may be beyond the Association's control. While the
Association maintains its allowance for loan losses at a level which it
considers to be adequate to provide for estimated losses, there can be no
assurance that further additions will not be made to the allowance for loan
losses and that actual losses will not exceed the estimated amounts.
26
<PAGE>
Other Income. Other income decreased $25,000, or 11.0%, to $202,000 for
fiscal 1997 from $227,000 for fiscal 1996. Substantially all of the
Association's other income is derived from service charges and fees. Service
charges and fees totalled $205,000 in fiscal 1997 compared with $206,000 in
fiscal 1996. Gain on sale of mortgage loans decreased to $6,000 in fiscal 1997
from $16,000 in fiscal 1996 as a result of fewer loan sales in 1997. The
Association realized a loss of $13,000 on the sale of investments in fiscal 1997
compared with a gain of $2,000 in fiscal 1996.
Other Operating Expenses. Other operating expenses were $2.4 million in
fiscal 1997 compared to $3.9 million in fiscal 1996. Included in other operating
expenses for fiscal 1996 is the SAIF special assessment. Excluding the SAIF
special assessment, other operating expenses were $2.6 million for fiscal 1996.
As a result of the recapitalization of the SAIF, the FDIC substantially reduced
deposit insurance premiums. Since January 1, 1997, the Association has paid
deposit insurance premiums at the rate of $.065 per $100 of deposits. Prior to
the recapitalization of the SAIF, deposit insurance premiums were $.23 per $100
of deposits. Employee compensation and benefits expense increased $106,000, or
7.9%, as a result of an increase in directors' fees, normal wage increases and
an increase in benefits costs. Income from real estate operations was $167,000
in fiscal 1997 as a result of gains on sales of real estate owned, as compared
with $120,000 in fiscal 1996. The Association anticipates that other operating
expenses will increase following the conversion as a result of increased costs
associated with operating as a public company and increased compensation expense
as a result of adoption of the ESOP and, if approved by the Holding Company's
stockholders, the MRP. Because the Association uses an outside data processing
service, the Association believes that its cost of addressing Year 2000 issues
will not be significant. See "RISK FACTORS -- Below Average Return on Equity
After Conversion" and "-- New Expenses Associated with ESOP and MRP."
Income Taxes. The provision for income taxes increased to $1.1 million
for fiscal 1997 from $360,000 for fiscal 1996. Income taxes in fiscal 1996 were
lower because of the SAIF special assessment.
Comparison of Operating Results for the Years Ended September 30, 1996 and 1995
Net Income. Net income decreased $1.2 million, or 61.6%, to $759,000
for the year ended September 30, 1996 from $2.0 million for the year ended
September 30, 1995. The results for fiscal 1996 include the payment of the $1.2
million special SAIF assessment. Without the payment of the SAIF assessment, net
income for fiscal 1996 would have been $1.5 million.
Net Interest Income. Net interest income decreased $971,000, or 16.9%,
to $4.8 million for fiscal 1996 from $5.7 million for fiscal 1995. The
Association's interest rate spread decreased to 1.51% for fiscal 1996 from 2.09%
for fiscal 1995 as a result of an increase in the cost of the Association's
interest-bearing liabilities. The decrease in the interest rate spread was
partially offset by an increase in the average balance of interest-earning
assets.
Total interest income increased $810,000, or 5.0%, from fiscal 1995 to
fiscal 1996. Interest income on loans receivable increased $489,000, or 3.6%, as
a result of growth of the loan portfolio. The average yield on loans receivable
was essentially unchanged between fiscal 1995 and 1996. The remainder of the
growth in interest income is primarily attributable to increases in the average
balances of investment securities and federal funds sold and overnight deposits.
Interest income on mortgage-backed securities decreased as a result of principal
repayments on mortgage-backed securities.
Total interest expense increased $1.8 million, or 17.1%, from fiscal
1995 to fiscal 1996. Total interest paid on deposits increased $1.9 million as a
result of an increase in the average balance of certificates of deposit and an
increase in the average rate paid on certificates of deposit from 5.39% to
6.00%. The average rate paid on certificates of deposit increased as depositors
sought higher yields through longer maturities. Interest paid on FHLB advances
decreased $163,000 as a decrease in the average balance was partially offset by
an increase in the rate paid on such advances.
27
<PAGE>
Provision for Loan Losses. The Association had a recovery of $7,000 in
fiscal 1996 compared to a provision of $47,000 in fiscal 1995. The provision was
larger in fiscal 1995 as a result of larger charge-offs that year. The
Association had net charge-offs of $79,000 in fiscal 1995 compared to net
recoveries of $87,000 in fiscal 1996.
Other Income. Other income increased $9,000 to $227,000 for fiscal 1996
from $218,000 for fiscal 1995. Service charges and fees totalled $206,000 in
fiscal 1996 compared to $210,000 in fiscal 1995. The Association had $16,000 of
gain on the sale of mortgage loans in fiscal 1996 with no such gain in fiscal
1995.
Other Operating Expenses. Other operating expenses were $3.9 million in
fiscal 1996, compared to $2.4 million in fiscal 1995. Excluding the SAIF
assessment, other operating expenses were $2.6 million for fiscal 1996, an
increase of $251,000, or 10.55%, over fiscal 1995. Occupancy and equipment
expense increased $271,000, or 190.8%, as a result of increased depreciation
expense associated with its new main office opened in October 1995. Other
expenses such as office supplies, advertising and promotion also increased as a
result of the opening of the new main office. Income from real estate operations
was $120,000 in fiscal 1996 as a result of gains on the sale of real estate
owned compared with a cost of $77,000 in fiscal 1995.
Income Taxes. The provision for income taxes decreased to $360,000 for
fiscal 1996 from $1.5 million for fiscal 1995. The decrease was the result of
the payment of the SAIF assessment.
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs. Such yields and costs for the periods indicated are derived by dividing
income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. Average balances for the year ended
September 30, 1995 were derived from month-end balances. Management does not
believe that the use of month-end balances instead of daily balances has caused
any material differences in the information presented.
28
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------------------
1997 1996
---------------------------------- --------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ------ ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1)................ $189,689 $ 15,034 7.93% $178,081 $ 14,038 7.88%
Mortgage-backed securities............... 8,401 450 5.36 11,192 626 5.59
Investment securities (3)................ 32,397 1,856 5.73 35,684 1,815 5.09
FHLB stock............................... 2,042 148 7.25 2,042 147 7.20
Federal funds sold and overnight deposits 5,335 285 5.34 6,317 348 5.51
-------- -------- ---- -------- -------- ----
Total interest-earning assets........... 237,864 17,773 7.47 233,316 16,974 7.28
-------- -------- ---- -------- -------- ----
Non-interest-earning assets.............. 7,315 7,328
-------- --------
Total average assets.................... $245,179 $240,644
======== ========
Interest-bearing liabilities (2):
Passbook accounts........................ $ 11,561 340 2.94 $ 12,270 362 2.95
NOW and money market accounts............ 3,751 89 2.37 3,784 92 2.43
Certificates of deposit.................. 195,853 11,575 5.91 190,572 11,431 6.00
-------- -------- ---- -------- -------- ----
Total deposits.......................... 211,165 12,004 5.68 206,626 11,885 5.75
FHLB advances............................ 3,082 226 7.33 5,000 327 6.54
-------- -------- ---- -------- -------- ----
Total interest-bearing liabilities...... 214,247 12,230 5.71 211,626 12,212 5.77
-------- -------- ---- -------- -------- ----
Noninterest-bearing liabilities.......... 2,759 2,570
-------- --------
Total average liabilities............... 217,006 214,196
-------- --------
Average equity........................... 28,173 26,448
-------- --------
Total average liabilities and equity.... $245,179 $240,644
======== ========
Net interest income...................... $ 5,543 $ 4,762
======== ========
Interest rate spread..................... 1.76% 1.51%
Net interest margin...................... 2.33% 2.04%
Ratio of average interest-earning assets
to average interest-bearing liabilities. 1.11x 1.10x
<CAPTION>
Year Ended September 30,
--------------------------------------
1995
--------------------------------------
Interest
Average and Yield/
Balance Dividends Cost
------- --------- ------
<S> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1)................ $172,133 $ 13,549 7.87%
Mortgage-backed securities............... 13,020 749 5.75
Investment securities (3)................ 31,882 1,580 4.96
FHLB stock............................... 2,042 153 7.49
Federal funds sold and overnight deposits 2,202 133 6.04
-------- -------- ----
Total interest-earning assets........... 221,279 16,164 7.30
-------- -------- ----
Non-interest-earning assets.............. 5,632
--------
Total average assets.................... $226,911
========
Interest-bearing liabilities (2):
Passbook accounts........................ $ 13,343 393 2.95
NOW and money market accounts............ 3,751 94 2.51
Certificates of deposit.................. 175,431 9,454 5.39
-------- -------- ----
Total deposits.......................... 192,525 9,941 5.16
FHLB advances............................ 7,812 490 6.27
-------- -------- ----
Total interest-bearing liabilities...... 200,337 10,431 5.21
-------- -------- ----
Noninterest-bearing liabilities.......... 2,091
--------
Total average liabilities............... 202,428
--------
Average equity........................... 24,483
--------
Total average liabilities and equity.... $226,911
========
Net interest income...................... $ 5,733
========
Interest rate spread..................... 2.09%
Net interest margin...................... 2.59%
Ratio of average interest-earning assets
to average interest-bearing liabilities. 1.10x
</TABLE>
- ----------------------
(1) Loans receivable, net includes Loans held-for-sale and nonaccrual loans.
Interest on Loan receivable does not include interest on nonaccrual loans.
(2) Does not include escrow balances.
(3) Yield information does not give affect to changes in fair value that are
reflected as a component of equity.
29
<PAGE>
Yields Earned and Rates Paid
The following table sets forth at the date and for the periods
indicated the weighted average yields earned on the Association's assets and the
weighted average interest rates paid on the Association's liabilities, together
with the net yield on interest-earning assets.
<TABLE>
<CAPTION>
At Years Ended September 30,
September 30, ----------------------------
1997 1997 1996 1995
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average yield earned on:
Loans receivable, net.............................. 7.89% 7.93% 7.88% 7.87%
Mortgage-backed securities......................... 5.30 5.36 5.59 5.75
Investment securities.............................. 6.03 5.73 5.09 4.96
FHLB stock......................................... 7.24 7.25 7.20 7.49
Federal funds sold and overnight deposits.......... 6.13 5.34 5.51 6.04
Total interest-earning assets.................... 7.53 7.47 7.28 7.30
Weighted average rate paid on:
Passbook accounts.................................. 3.00 2.94 2.95 2.95
NOW and money market accounts...................... 2.27 2.37 2.43 2.51
Certificates of deposit............................ 5.93 5.91 6.00 5.39
Total average deposits........................... 5.71 5.68 5.75 5.16
FHLB advances...................................... -- 7.33 6.54 6.27
Total interest-bearing liabilities............... 5.71 5.71 5.77 5.21
Interest rate spread (spread between weighted average
rate earned on all interest-earning assets and
paid on all interest-bearing liabilities).......... 1.82 1.76 1.51 2.09
Net interest margin (net interest
income as a percentage of average
interest-earning assets)............................ 2.33 2.04 2.59
</TABLE>
30
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and
volumes on the interest income and interest expense of the Association.
Information is provided with respect: (i) to effects attributable to changes in
volume (changes in volume multiplied by prior rate); and (ii) to effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The net change attributable to the combined impact of volume and rate has been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Year Ended September 30, 1997 Year Ended September 30, 1996
Compared to September 30, 1996 Compared to September 30, 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------- -------------------------------
Rate Volume Total Rate Volume Total
---- ------ ----- ---- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1).......... $ 88 $ 908 $ 996 $ 17 $ 472 $ 489
Mortgage-backed securities......... (25) (151) (176) (20) (103) (123)
Investment securities.............. 153 (112) 41 42 193 235
FHLB stock......................... 1 -- 1 (6) -- (6)
Federal funds sold and
overnight deposits................ (11) (52) (63) (11) 226 215
------ ------ ------ ------ ------ ------
Total net change in income
on interest-earning assets......... 206 593 799 22 788 810
------ ------ ------ ------ ------ ------
Interest-bearing liabilities:
Passbook accounts.................. (1) (21) (22) -- (31) (31)
NOW and money market
accounts.......................... (2) (1) (3) (3) 1 (2)
Certificates of deposit............ (171) 315 144 1,122 855 1,977
------ ------ ------ ------ ------ ------
Total average deposits........... (174) 293 119 1,119 825 1,944
FHLB advances...................... 48 (149) (101) 22 (185) (163)
------ ------ ------ ------ ------ ------
Total net change in expense
on interest-bearing
liabilities........................ (126) 144 18 1,141 640 1,781
------ ------ ------ ------ ------ ------
Net change in net interest
income............................. $ 332 $ 449 $ 781 $(1,119) $ 148 $ (971)
====== ====== ====== ====== ====== ======
</TABLE>
- -------------
(1) Does not include interest on nonaccrual loans.
Asset and Liability Management
Quantitative Aspects of Market Risk. The Association does not maintain
a trading account for any class of financial instrument nor does the Association
engage in hedging activities or purchase purchase high-risk derivative
instruments. Furthermore, the Association is not subject to foreign currency
exchange rate risk or commodity price risk. For information regarding the
sensitivity to interest rate risk of the Association's interest-earning assets
and interest-bearing liabilities, see the tables under "BUSINESS OF THE
ASSOCIATION -- Lending Activities -- Maturity of Loan Portfolio," "-- Investment
Activities" and "-- Deposit Activities and Other Sources of Funds -- Time
Deposits by Maturities."
31
<PAGE>
Qualitative Aspects of Market Risk. The Association's principal
financial objective is to achieve long-term profitability while reducing its
exposure to fluctuating market interest rates. The Association has sought to
reduce the exposure of its earnings to changes in market interest rates by
attempting to manage the mismatch between asset and liability maturities and
interest rates. The principal element in achieving this objective is to increase
the interest-rate sensitivity of the Association's interest-earning assets by
retaining for its portfolio loans with interest rates subject to periodic
adjustment to market conditions and selling fixed-rate one- to- four family
mortgage loans with terms over 15 years. In addition, the Association maintains
an investment portfolio of U.S. Government and agency securities with
contractual maturities of between one and five years. The Association relies on
retail deposits as its primary source of funds. Management believes retail
deposits, compared to brokered deposits, reduce the effects of interest rate
fluctuations because they generally represent a more stable source of funds.
In order to encourage institutions to reduce their interest rate risk,
the OTS adopted a rule incorporating an interest rate risk component into the
risk-based capital rules. Using data compiled by the OTS, the Association
receives a report which measures interest rate risk by modeling the change in
NPV (net portfolio value) over a variety of interest rate scenarios. This
procedure for measuring interest rate risk was developed by the OTS to replace
the "gap" analysis (the difference between interest-earning assets and
interest-bearing liabilities that mature or reprice within a specific time
period). NPV is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The calculation is intended to
illustrate the change in NPV that will occur in the event of an immediate change
in interest rates of at least 200 basis points with no effect given to any steps
that management might take to counter the effect of that interest rate movement.
Under OTS regulations, an institution with a greater than "normal" level of
interest rate risk is subject to a deduction from total capital for purposes of
calculating its risk-based capital. The OTS, however, has delayed the
implementation of this regulation. An institution with a "normal" level of
interest rate risk is defined as one whose "measured interest rate risk" is less
than 2.0%. Institutions with assets of less than $300 million and a risk-based
capital ratio of more than 12.0% are exempt. The Association is exempt because
of its asset size. Based on the Association's regulatory capital levels at
September 30, 1997, the Association believes that, if the proposed regulation
was implemented at that date, the Association's level of interest rate risk
would have caused it to be treated as an institution with greater than "normal"
interest rate risk.
The following table is provided by the OTS and sets forth the change in
the Association's NPV at June 30, 1997, based on OTS assumptions, that would
occur in the event of an immediate change in interest rates, with no effect
given to any steps that management might take to counteract that change.
Basis Point ("bp") Estimated Change in
Change in Rates Net Portfolio Value
--------------- -------------------
(Dollars in thousands)
+400 ($15,494)
+300 (10,826)
+200 (6,391)
+100 (2,645)
0 0
(100) 1,360
(200) 2,285
(300) 3,283
(400) 4,712
The above table illustrates, for example, that an instantaneous 200
basis point increase in market interest rates at June 30, 1997 would reduce the
Association's NPV by approximately $6.4 million, or 20%, at that date.
32
<PAGE>
Certain assumptions utilized by the OTS in assessing the interest rate
risk of savings associations within its region were utilized in preparing the
preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, expected rates
of prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
Liquidity and Capital Resources
The Association's primary sources of funds are customer deposits,
proceeds from principal and interest payments on and the sale of loans, maturing
securities and FHLB advances. While maturities and scheduled amortization of
loans are a predictable source of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition.
The Association must maintain an adequate level of liquidity to ensure
the availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Association generally maintains sufficient cash
and short-term investments to meet short-term liquidity needs. At September 30,
1997, cash and cash equivalents totalled $14.7 million, or 5.9% of total assets,
and investment securities classified as available-for-sale totalled $8.4
million. At September 30, 1997, the Association also maintained, but did not
draw upon, an uncommitted credit facility with the FHLB-Atlanta, which provided
for immediately available advances up to an aggregate amount of $32.0 million.
OTS regulations require savings institutions to maintain an average
daily balance of liquid assets (cash and eligible investments) equal to at least
4.0% of the average daily balance of its net withdrawable deposits and
short-term borrowings. The Association's actual liquidity ratio at September 30,
1997 was 19.2%. See "-- Comparison of Financial Condition at September 30, 1997
and 1996" and "BUSINESS OF THE ASSOCIATION -- Investment Activities."
The Association's primary investing activity is the origination of one-
to- four family mortgage loans. During the years ended September 30, 1997, 1996
and 1995, the Association originated $37.0 million, $36.5 million, and $39.4
million of such loans, respectively. At September 30, 1997, the Association had
loan commitments totalling $1.4 million, unused lines of credit of $6.3 million
and undisbursed loans in process totalling $7.0 million. The Association
anticipates that it will have sufficient funds available to meet current loan
commitments. Certificates of deposit that are scheduled to mature in less than
one year from September 30, 1997 totalled $148.9 million. Historically, the
Association has been able to retain a significant amount of its deposits as they
mature.
OTS regulations require the Association to maintain specific amounts of
regulatory capital. As of September 30, 1997, the Association complied with all
regulatory capital requirements as of that date with tangible, core and
risk-based capital ratios of 11.3%, 11.3% and 23.3%, respectively. For a
detailed discussion of regulatory capital requirements, see "REGULATION --
Federal Regulation of Savings Associations -- Capital Requirements." See also
"HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE."
Year 2000 Issues
Computer programs that use only two digits to identify a year could
fail or create erroneous results by or at the year 2000. All of the material
data processing of the Association that could be affected by this problem is
33
<PAGE>
provided by a third party service bureau. The Association has contaced its
service bureau and has received assurances that the service bureau will properly
function in the year 2000. Internally, the Association has determined that
certain computer programs must be revised in advance of the year 2000. The
Association does not beleive that the costs associated with its actions and
those of its vendors will be material to the Association. However, in the event
the Association's service bureau is unable to fulfill its contractual
obligations to the Association, it could have a significant adverse impact on
the financial condition and results of operations of the Association.
Impact of Accounting Pronouncements and Regulatory Policies
Accounting for Stock-Based Compensation. SFAS No. 123, "Accounting for
Stock-Based Compensation," establishes financial accounting and reporting
standards for stock-based employee compensation plans. This statement encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting method are required to disclose in a footnote to the financial
statements pro forma net income and, if presented, earnings per share, as if
this statement had been adopted. The accounting requirements of this statement
are effective for transactions entered into in fiscal years that begin after
December 15, 1995; however, companies are required to disclose information for
awards granted in their first fiscal year beginning after December 15, 1994.
Management of the Association has not completed an analysis of the potential
effects of SFAS No. 123 on its financial condition or results of operations, but
expects to use the intrinsic value method upon consummation of the Conversion.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. This statement applies prospectively
to transactions occurring after December 31, 1996, and establishes new standards
that focus on control whereas, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. The adoption of SFAS No. 125 did
not have a material impact on the Association's results of operations or
financial position.
Deferral of the Effective Date of Certain Provisions of SFAS No. 125.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125." SFAS No. 127 defers for one
year the effective date of portions of SFAS No. 125 that address secured
borrowings and collateral for all transactions. Additionally, SFAS No. 127
defers for one year the effective date of transfers of financial assets that are
part of repurchase agreements, securities lending and similar transactions.
Earnings Per Share. SFAS No. 128, "Earnings Per Share," standardizes
the international calculation for earnings per share and requires companies with
complex capital structures that have publicly held common stock or potential
common stock to present both basic and diluted earnings per share on the face of
the income statement. SFAS No. 128 becomes effective for periods ending after
December 15, 1997.
Comprehensive Income. SFAS No. 130, "Reporting Comprehensive Income,"
issued in July 1997, establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements. SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial condition.
SFAS No. 130 is effective for fiscal years
34
<PAGE>
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comprehensive purposes is required.
Segment Information. SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" establishes standards for the way public
business enterprises report information about operating segments and establishes
standards for related disclosures about products and services, geographic areas
and major customers. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. Information required to be disclosed includes segment
profit or loss, certain specific revenue and expense items, segment assets and
certain other information. This statement is effective for the Holding Company
for financial statements issued for the fiscal year ending September 30, 1999.
Effect of Inflation and Changing Prices
The financial statements and related financial data presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The primary impact of inflation is reflected in the increased cost
of the Association's operations. Unlike most industrial companies, virtually all
the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods and services.
BUSINESS OF THE HOLDING COMPANY
General
The Holding Company was organized as a Delaware business corporation at
the direction of the Association in November 1997 for the purpose of becoming
the holding company for the Association upon completion of the conversion. As a
result of the Conversion, the Association will be a wholly-owned subsidiary of
the Holding Company and all of the issued and outstanding capital stock of the
Association will be owned by the Holding Company.
Business
Prior to the conversion, the Holding Company has not and will not
engage in any significant activities other than of an organizational nature.
Upon completion of the Conversion, the Holding Company's sole business activity
will be the ownership of the outstanding capital stock of the Association. The
Holding Company will also hold a note receivable from the ESOP. In the future,
the Holding Company may acquire or organize other operating subsidiaries,
although there are no current plans, arrangements, agreements or understandings,
written or oral, to do so.
Initially, the Holding Company will neither own nor lease any property
but will instead use the premises, equipment and furniture of the Association
with the payment of appropriate rental fees, as required by applicable law and
regulations.
Since the Holding Company will only hold the outstanding capital stock
of the Association upon consummation of the conversion, the competitive
conditions applicable to the Holding Company will be the same as those
confronting the Association. See "BUSINESS OF THE ASSOCIATION -- Competition."
35
<PAGE>
BUSINESS OF THE ASSOCIATION
General
The Association operates as a community oriented financial institution.
The Association's business consists primarily of attracting retail deposits from
the general public and using those funds to originate real estate loans. The
Association emphasizes the origination of adjustable-rate mortgages and
generally holds its loans for long-term investment purposes. See "-- Lending
Activities."
Market Area
The Association conducts operations out of its main office in Laurens,
South Carolina (in Laurens County) and three branch offices in Upstate South
Carolina, Belton (in Anderson County), Ware Shoals (in Greenwood County) and
Simpsonville (in Greenville County). Most of the Association's depositors live
in the areas surrounding the Association's offices and most of the Association's
loans are made to persons in the counties in which its branches are located, as
well as in the Columbia, South Carolina metropolitan area.
Laurens County, with an estimated population of 62,000, is located to
the east of the Greenville-Spartanburg-Anderson metropolitan area. Although a
rural county, the completion of U.S. Interstate Routes I-26 and I-385 has
provided access to the larger population and employment centers of Columbia and
Greenville-Spartanburg-Anderson. The Association's Belton and Simpsonville
branches are within the Greenville-Spartanburg-Anderson metropolitan area, while
the Ware Shoals branch is in a rural area between Laurens and the city of
Greenwood. South Carolina's economy, historically dependent on the textile
industry, has expanded into a broad variety of employment sectors in recent
years as the textile industry has declined. The development of major
transportation routes, low cost of living and labor, and aggressive marketing by
local and state government have resulted in an increase in industrial
development. As a result, the Association's market areas have reported increases
in population, households and income in recent years.
The Association faces intense competition for deposits and loan
originations from the many financial institutions conducting business within its
market area. See "-- Competition" and "RISK FACTORS -- Competition."
Lending Activities
General. At September 30, 1997, the Association's total loans
receivable portfolio amounted to $192.7 million, or 77.8% of total assets at
that date. The Association has traditionally concentrated its lending activities
on mortgage loans, with such loans amounting to $191.3 million, or 95.3% of the
total loans receivable at September 30, 1997. At that date, $170.3 million, or
84.8% of the Association's total loans receivable had adjustable interest rates.
In addition to one- to four-family mortgage loans, the Association originates
construction loans, commercial real estate loans, home equity loans and savings
account loans. All of the Association's mortgage loan portfolio is secured by
real estate, either as primary or secondary collateral, located in South
Carolina.
36
<PAGE>
Loan Portfolio Analysis. The following table sets forth the composition
of the Association's loan portfolio (excluding loans held-for-sale) at the dates
indicated. The Association had no concentration of loans exceeding 10% of total
loans receivable other than as disclosed below.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------
1997 1996 1995
------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family........... $180,609 90.0% $173,925 90.4% $167,092 90.2%
Builder construction.......... 2,601 1.3 3,836 2.0 2,735 1.5
Commercial.................... 8,136 4.0 6,450 3.3 7,573 4.1
-------- ----- -------- ----- -------- -----
Total mortgage loans........ 191,346 95.3 184,211 95.7 177,400 95.8
Savings account loans.......... 1,419 0.7 1,146 0.6 1,439 0.8
Home equity loans.............. 8,124 4.0 7,050 3.7 6,429 3.4
-------- ----- -------- ----- -------- -----
Total loans receivable....... 200,889 100.0% 192,407 100.0% 185,268 100.0%
===== ===== =====
Less:
Undisbursed loan funds........ 6,989 8,375 5,995
Deferred loan origination fees 363 412 424
Allowance for loan losses..... 874 670 590
------- ------- -------
Loans receivable, net........ $192,663 $182,950 $178,259
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------
1994 1993
------------------ -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family........... $151,238 89.9% $147,968 90.0%
Builder construction.......... 2,763 1.6 1,871 1.1
Commercial.................... 7,536 4.5 7,731 4.7
------- ----- ------- -----
Total mortgage loans........ 161,537 96.0 157,570 95.8
Savings account loans.......... 1,133 0.7 1,444 0.9
Home equity loans.............. 5,607 3.3 5,476 3.3
------- ----- ------- -----
Total loans receivable....... 168,277 100.0% 164,490 100.0%
===== =====
Less:
Undisbursed loan funds........ 7,584 4,980
Deferred loan origination fees 389 414
Allowance for loan losses..... 622 560
------- -------
Loans receivable, net........ $159,682 $158,536
======== ========
</TABLE>
37
<PAGE>
One- to Four-Family Real Estate Loans. The Association has concentrated
its lending activities on the origination of loans secured by first mortgage
loans on one- to four-family residences located in South Carolina. At September
30, 1997, $180.6 million, or 90.0%, of the Association's total loan portfolio
consisted of such loans. Included in this amount are $8.1 million of
construction loans that will convert to permanent mortgage loans after the
completion of the construction phase.
The Association offers ARM loans at rates and terms competitive with
market conditions. At September 30, 1997, $154.1 million, or 85.3%, of the
Association's one- to four-family real estate loans were subject to periodic
interest rate adjustments. Substantially all of the Association's ARM loans are
underwritten and documented in accordance with guidelines established by Freddie
Mac, even though the Association originates ARM loans primarily for its own
portfolio. The Association originates for its portfolio ARM loans which provide
for an interest rate that adjusts every year or that is fixed for three or ten
years and then adjusts every year after the initial period. The Association's
ARM loans generally provide for annual and lifetime interest rate adjustment
limits of 1% and 4%, respectively. The Association's ARM loans adjust based on
the National Median Cost of Funds Index. This index is a lagging market index,
which means that upward adjustments in this index may occur more slowly than
changes in the Association's cost of interest-bearing liabilities, especially
during periods of rapidly increasing interest-rates. The Association's ARM loans
are typically based on a 30-year amortization schedule. The initial rate on most
of the Association's ARM loans is .75% to 1% below the fully indexed rate for
the loan.
The Association offers fixed-rate, one- to four-family mortgage loans
with maturities ranging from ten to 30 years. These loans are fully amortizing
with monthly payments sufficient to repay the total amount of the loan with
interest by the end of the loan term. Generally, they are underwritten and
documented in accordance with guidelines established by Freddie Mac. The
Association's fixed-rate loans customarily include "due on sale" clauses, which
give the Association the right to declare a loan immediately due and payable in
the event the borrower sells or otherwise disposes of the real property subject
to the mortgage and the loan is not paid. In recent years, as part of its
asset/liability management, the Association has retained for its portfolio
fixed-rate loans with terms of ten to 15 years. The Association determines
whether to sell or retain fixed-rate loans with terms of more than 15 years on a
case-by-case basis.
The Association also offers loans to individuals for the construction
and acquisition of their personal residence. Such loans are made on the same
terms as the Association's one- to four-family mortgage loans, but provide for
the payment of interest only during the construction phase, which is usually six
months. At the end of the construction phase, the loan converts to a permanent
mortgage loan.
The Association offers second mortgage loans, although these have become
less popular since the introduction of home equity lines of credit. The
Association's second mortgage loans have fixed interest rates and terms of up to
ten years. At September 30, 1997, the Association had $1.1 million of second
mortgage loans included in its one- to four-family mortgage loans.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The retention of ARM loans in the Association's loan portfolio helps
reduce the Association's exposure to changes in interest rates. There are,
however, unquantifiable credit risks resulting from the potential of increased
costs due to changed rates to be paid by the borrower. It is possible that
during periods of rising interest rates the risk of default on ARM loans may
increase as a result of repricing and the increased payments required by the
borrower. See "RISK FACTORS -- Risks Associated with ARM Loans." In addition,
although ARM loans allow the Association to increase the sensitivity of its
asset base to changes in the interest rates, the extent of this interest
sensitivity is limited by the annual and lifetime interest rate adjustment
limits. Because of these considerations and its use of a lagging market index,
the Association has no assurance that yields on ARM loans will be sufficient to
38
<PAGE>
offset increases in the Association's cost of funds. The Association believes
these risks, which have not had a material adverse effect on the Association to
date, generally are less than the risks associated with holding fixed-rate loans
in portfolio during a rising interest rate environment.
The Association generally requires title insurance insuring the status
of its lien or an acceptable attorney's opinion on all loans where real estate
is the primary source of security. The Association also requires that fire and
casualty insurance (and, if appropriate, flood insurance) be maintained in an
amount at least equal to the outstanding loan balance.
The Association's one- to four-family residential mortgage loans
typically do not exceed 80% of the appraised value of the security property.
Pursuant to underwriting guidelines adopted by the Association's Board of
Directors, the Association can lend up to 95% of the appraised value of the
property securing a one- to- four family residential loan; however, the
Association generally obtains private mortgage insurance on the portion of the
principal amount that exceeds 80% of the appraised value of the security
property.
Builder Construction Loans. The Association originates residential
construction loans to local home builders, generally with whom it has an
established relationship. At September 30, 1997, builder construction loans
amounted to $2.6 million, or 1.3% of the Association's total loans receivable.
The Association's construction loans to builders generally have fixed
interest rates and are for a term of one year. Such loans to builders are
typically made with a maximum loan to value ratio of 80%. These loans are made
either on a pre-sold or speculative (unsold) basis. However, the Association
generally limits the number of outstanding loans on unsold homes under
construction to individual builders, with the amount dependent on the financial
strength of the builder, the present exposure of the builder, the degree of loan
concentration and prior sales of homes in the development. At September 30,
1997, the largest amount of construction loans outstanding to one builder was
$455,000, all of which was for speculative construction.
Prior to making a commitment to fund a construction loan, the
Association requires an appraisal of the property by a state-licensed and
qualified appraiser. The Association's staff or a paid inspector also reviews
and inspects each project prior to disbursement of funds during the term of the
construction loan. Loan proceeds are disbursed after inspection of the project
based on percentage of completion.
Construction lending affords the Association the opportunity to earn
higher interest rates with shorter terms to maturity relative to single-family
permanent mortgage lending. Construction lending, however, is generally
considered to involve a higher degree of risk than single-family permanent
mortgage lending because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, the Association may be required to advance funds beyond the
amount originally committed to permit completion of the project. If the estimate
of value upon completion proves to be inaccurate, the Association may be
confronted with a project whose value is insufficient to assure full repayment.
Projects may also be jeopardized by disagreements between borrowers and builders
and by the failure of builders to pay subcontractors. Loans to builders to
construct homes for which no purchaser has been identified carry more risk
because the payoff for the loan is dependent on the builder's ability to sell
the property prior to the time that the construction loan is due.
The Association has attempted to minimize the foregoing risks by, among
other things, limiting its construction lending primarily to residential
properties. It is also the Association's general policy to obtain personal
guarantees from financially capable parties where the loan is made to a
corporation or other legal entity.
Commercial Real Estate Loans. The Association originates mortgage loans
for the acquisition and refinancing of commercial real estate properties. The
Association does not actively solicit commercial real estate loans. At September
30, 1997, $8.1 million, or 4.0% of the Association's total loans receivable,
consisted of loans
39
<PAGE>
secured by existing commercial real estate properties. The majority of the
Association's commercial real estate loans are secured by office buildings,
churches, retail shops and warehouses, all of which are located in South
Carolina. Occasionally, the Association makes land acquisition and development
loans. At September 30, 1997, the Association's largest commercial real estate
loan was $1.8 million and is secured by improved and unimproved lots in a
subdivision near Greenwood, South Carolina.
Most of the Association's commercial real estate loans have adjustable
interest rates and 15-year terms. The Association requires appraisals of all
properties securing commercial real estate loans. Appraisals are performed by an
independent appraiser designated by the Association, all of which are reviewed
by management.
Commercial real estate lending affords the Association an opportunity to
receive interest at rates higher than those generally available from one- to
four-family residential lending. However, loans secured by such properties
usually are greater in amount and are more difficult to evaluate and monitor,
and, therefore, involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial
properties are often dependent on the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy. The Association seeks to minimize these risks
by limiting the maximum loan-to-value ratio to 80% and strictly scrutinizing the
financial condition of the borrower, the cash flow of the project, the quality
of the collateral and the management of the property securing the loan. The
Association also obtains loan guarantees from financially capable parties based
on a review of personal financial statements.
Savings Account Loans. The Association offers loans secured by savings
deposits. At September 30, 1997, savings account loans totalled $1.4 million, or
0.7% of total loans receivable. Generally, such loans are made up to 90% of the
amount on deposit at the Association.
Home Equity Loans. The Association originates home equity loans in the
form of lines of credit. At September 30, 1997, the Association had $8.1 million
of home equity loans and unused commitments to extend credit under home equity
loans of $6.3 million. Most of these loans are made to existing customers. The
Association's home equity loans have variable interest rates tied to the prime
lending rate. The Association imposes a maximum loan-to-value ratio of 90% after
considering both the first and second mortgage loans.
The Association's home equity loans may have greater credit risk than
one- to four-family residential mortgage loans because they are secured by
mortgages subordinated to an existing first mortgage on the property, which, in
most cases, is held by the Association.
40
<PAGE>
Maturity of Loan Portfolio. The following table sets forth certain
information at September 30, 1997 regarding the dollar amount of loans maturing
in the Association's portfolio based on their contractual terms to maturity, but
does not include scheduled payments or potential prepayments. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as becoming due within one year. Loan balances do not
include undisbursed loan proceeds, unearned discounts, unearned income and
allowance for loans losses.
<TABLE>
<CAPTION>
After After After
One Year 3 Years 5 Years
Within Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
-------- ------- ------- -------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family...... $ 146 $1,085 $4,888 $18,032 $156,458 $180,609
Builder construction..... 2,601 -- -- -- -- 2,601
Commercial............... -- 589 2,088 857 4,602 8,136
Savings account loans...... 1,419 -- -- -- -- 1,419
Home equity loans ......... 8,124 -- -- -- -- 8,124
------- ------ ------ ------- -------- --------
Total................... $12,290 $1,674 $6,976 $18,889 $161,060 $200,889
======= ====== ====== ======= ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1998, which have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed- Floating- or
Rates Adjustable-Rates
----- ----------------
(In thousands)
<S> <C> <C>
Mortgage loans:
One- to- four family..... $26,348 $154,115
Builder construction..... -- --
Commercial............... 1,494 6,642
Savings account loans...... -- --
Home equity loans ......... -- --
-------- ---------
Total.................. $27,842 $160,757
======== =========
</TABLE>
41
<PAGE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Association the right to declare loans
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of a mortgage loan tends to increase, however, when current
mortgage loan market rates are substantially higher than rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgage loans
are substantially higher than current mortgage loan market rates.
Loan Solicitation and Processing. The Association's lending activities
are subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Association's Board of Directors and
management. Loan originations come from a number of sources. The customary
sources of loan originations are realtors, walk-in customers, referrals and
existing customers. The Association also uses one mortgage broker in Columbia
and one mortgage broker in Greenwood to originate loans. For the year ended
September 30, 1997, the Association originated $11.8 million loans, or 26.1% of
total originations, through these brokers. All loans originated through these
mortgage brokers are underwritten by the Association pursuant to the
Association's underwriting guidelines.
All single-family residential mortgage loans up to $300,000 and all
other loans up to $200,000 must be approved by two members of the Association's
Loan Committee. All loans in excess of such amounts but below $500,000 must be
approved by a committee consisting of the President, two Vice Presidents in
charge of lending operations and two outside Directors. All loans of $500,000 or
more must be approved by the Association's Board of Directors.
Loan Originations, Purchases and Sales. While the Association
originates both adjustable-rate and fixed-rate loans, its ability to generate
each type of loan depends upon relative customer demand for loans in its primary
market area. During the years ended September 30, 1997, 1996 and 1995, the
Association originated $45.1 million, $46.3 million and $47.1 million of loans,
respectively. Of the $45.1 million of loans originated in the year ended
September 30, 1997, $35.8 million, or 79.3%, had adjustable rates of interest.
In fiscal 1997, the Association began purchasing loans from a mortgage
banking company in Greenville, South Carolina. All of the loans purchased in
fiscal 1997 were purchased through this company and all of the property securing
such loans is located in Upstate South Carolina. These loans are written to
Freddie Mac guidelines with all exceptions reviewed and approved by the
Association. The Association anticipates that it will continue to purchase loans
from time to time to supplement its own originations.
The Association sells loans in order to manage the interest rate risk
associated with holding long-term, fixed-rate mortgages, to enable the
Association to offer a wide variety of mortgage products, and to earn
origination fees and premiums. In 1995, the Association established a
relationship with another financial institution pursuant to which the
Association sells fixed-rate, one- to four-family mortgage loans with terms in
excess of 15 years. The Association does not retain servicing rights on the
loans that it sells.
42
<PAGE>
The following table sets forth total loans originated, purchased, sold
and repaid during the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loans originated:
Mortgage loans:
One- to four-family ................... $37,020 $36,450 $39,444
Builder construction................... 2,901 5,255 4,175
Commercial............................. 1,958 1,739 543
Savings account loans................... 1,128 572 1,079
Home equity loans....................... 2,139 2,243 1,871
------- ------- -------
Total loans originated................ 45,146 46,259 47,112
------- ------- -------
Loans purchased:
Mortgage loans:
One- to four-family.................... 2,975 -- --
Builder construction................... -- -- --
Commercial............................. 541 -- --
------- ------- -------
Total loans purchased................. 3,516 -- --
------- ------- -------
Loans sold............................... (479) (954) --
Principal repayments..................... (35,198) (42,970) (26,764)
Transfer to real estate owned............ (996) (92) (185)
Increase (decrease) in other items, net.. (1,231) 2,448 (1,586)
------- ------- -------
Net increase (decrease) in loans
receivable, net......................... $10,758 $ 4,691 $18,577
======= ======= =======
</TABLE>
Loan Commitments. The Association issues commitments for mortgage loans
conditioned upon the occurrence of certain events. Such commitments are made in
writing on specified terms and conditions and are honored for up to 30 days from
approval, depending on the type of transaction. At September 30, 1997, the
Association had loan commitments (excluding undisbursed portions of interim
construction loans of $7.0 million) of $1.4 million and unused lines of credit
of $6.3 million. See Note 10 of Notes to the Financial Statements.
Loan Fees. In addition to interest earned on loans, the Association
receives income from fees in connection with loan originations, loan
modifications, late payments and for miscellaneous services related to its
loans. Income from these activities varies from period to period depending upon
the volume and type of loans made and competitive conditions.
The Association charges loan origination fees which are calculated as a
percentage of the amount borrowed. In accordance with applicable accounting
procedures, loan origination fees and discount points in excess of loan
origination costs are deferred and recognized over the contractual remaining
lives of the related loans on a level yield basis. Discounts and premiums on
loans purchased are accreted and amortized in the same manner. At September 30,
1997, the Association had $363,000 of deferred loan fees. The Association
recognized $151,000, $162,000 and $100,000 of deferred loan fees during the
years ended September 30, 1997, 1996 and 1995, respectively, in connection with
loan refinancings, payoffs, sales and ongoing amortization of outstanding loans.
43
<PAGE>
Nonperforming Assets and Delinquencies. When a borrowers fails to make
a required payment on a loan, the Association attempts to cure the deficiency by
contacting the borrower and seeking the payment. A late notice is mailed 15 days
after a payment is due. In most cases, deficiencies are cured promptly. If a
delinquency continues, additional contact is made either through additional
notices or other means and the Association will attempt to work out a payment
schedule. While the Association generally prefers to work with borrowers to
resolve such problems, the Association will institute foreclosure or other
proceedings, as necessary, to minimize any potential loss.
Loans are placed on nonaccrual status generally if, in the opinion of
management, principal or interest payments are not likely in accordance with the
terms of the loan agreement, or when principal or interest is past due more than
90 days. Interest accrued but not collected at the date the loan is placed on
nonaccrual status is reversed against income in the current period. Loans may be
reinstated to accrual status when payments are 90 days or less past due and, in
the opinion of management, collection of the remaining past due balances can be
reasonably expected.
The Association's Board of Directors is informed monthly of the amounts
of loans delinquent more than 30, 60 and 90 days, all loans in foreclosure and
all foreclosed and repossessed property owned by the Association.
44
<PAGE>
The following table sets forth information with respect to the
Association's nonperforming assets and restructured loans within the meaning of
SFAS No. 15 at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on
a nonaccrual basis:
Mortgage loans:
One- to four-family ....................... $ 444 $ 679 $ 867 $1,010 $1,329
Builder construction ...................... 411 348 40 121 103
Commercial ................................ 33 -- 28 187 539
Savings account loans ...................... -- -- -- -- --
Home equity loans .......................... 46 -- -- 26 16
------ ------ ------ ------ ------
Total of nonaccrual loans ............ 934 1,027 935 1,344 1,987
Real estate owned ........................... 410 86 104 388 724
------ ------ ------ ------ ------
Total nonperforming assets ............. $1,344 $1,113 $1,039 $1,732 $2,711
====== ====== ====== ====== ======
Restructured loans .......................... $732 $769 $588 $479 $481
====== ====== ====== ====== ======
Nonaccrual loans as a percentage
of loans receivable, net ................... 0.48% 0.56% 0.52% 0.84% 1.25%
Nonaccrual loans as a percentage
of total assets ............................ 0.38% 0.42% 0.40% 0.63% 0.94%
Nonperforming assets as a
percentage of total assets ................. 0.54% 0.45% 0.44% 0.81% 1.28%
</TABLE>
Interest income that would have been recorded for the year ended
September 30, 1997 had nonaccruing loans been current in accordance with their
original terms amounted to $85,000. The amount of interest included in interest
income on such loans for the year ended September 30, 1997 amounted to $42,000.
Interest income that would have been recorded for the year ended September 30,
1997 had restructured loans been current in accordance with their original terms
amounted to $60,000, and the amount of interest included in interest income on
such loans for that period amounted to $74,000.
Real Estate Owned. Real estate acquired by the Association as a result
of foreclosure or by deed-in-lieu of foreclosure is classified as real estate
owned until sold. When property is acquired it is recorded at fair market value
at the date of foreclosure. Subsequent to foreclosure, real estate owned is
carried at the lower of the foreclosed amount or fair value, less estimated
selling costs. At September 30, 1997, the Association had $410,000 of real
estate owned, which consisted of three single family residences.
Restructured Loans. Under GAAP, the Association is required to account
for certain loan modifications or restructuring as a "troubled debt
restructuring." In general, the modification or restructuring of a debt
constitutes a troubled debt restructuring if the Association for economic or
legal reasons related to the borrower's financial difficulties grants a
concession to the borrowers that the Association would not otherwise consider. A
debt restructuring or loan modification for a borrower does not necessarily
always constitute a troubled debt restructuring, however, and a troubled debt
restructuring does not necessarily result in a nonaccrual loan. The Association
had
45
<PAGE>
$732,000 of restructured loans as of September 30, 1997, which consisted of
one commercial mortgage loan and six one- to four-family mortgage loans.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover possible losses related to assets
classified substandard or doubtful can be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention" and monitored by the Association.
The aggregate amounts of the Association's classified and special
mention assets at the dates indicated were as follows:
<TABLE>
<CAPTION>
At September 30,
-------------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Classified assets:
Loss................ $ 123 $120
Doubtful............ 592 264
Substandard......... 1,190 881
Special mention..... 1,072 1,549
</TABLE>
At September 30, 1997, assets classified as loss consisted of one
builder construction loan totalling $8,000 and one commercial mortgage loan
totalling $115,000; assets classified as doubtful consisted of 14 one- to four-
family mortgage loans totalling $592,000; and assets classified as substandard
consisted of 21 one- to four-family mortgage loans totalling $668,000 and nine
builder construction loans totalling $522,000. At September 30, 1997, assets
classified as special mention consisted primarily of one- to four-family
mortgage loans that were delinquent more than 60 days.
Allowance for Loan Losses. In originating loans, the Association
recognizes that losses will be experienced and that the risk of loss will vary
with, among other things, the type of loan being made, the creditworthiness of
the borrower over the term of the loan, general economic conditions and, in the
case of a secured loan, the quality of the security for the loan. The allowance
method is used in providing for loan losses. Accordingly, all loan losses are
charged to the allowance and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan losses charged to
operations. The provision for loan losses is based on management's periodic
evaluation of such factors as the delinquency status of loans, current economic
conditions, the net realizable value of the underlying collateral and prior loan
loss experience.
At September 30, 1997, the Association had an allowance for loan losses
of $874,000. Although management believes that it uses the best information
available to establish the allowance for loan losses, future
46
<PAGE>
adjustments to the allowance for loan losses may be necessary and results of
operations could be significantly and adversely affected if circumstances differ
substantially from the assumptions used in making the determinations.
Furthermore, while the Association believes it has established its existing
allowance for loan losses in accordance with GAAP, there can be no assurance
that regulators, in reviewing the Association's loan portfolio, will not request
the Association to increase significantly its allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that substantial increases will not be necessary
should the quality of any loans deteriorate as a result of the factors discussed
above. Any material increase in the allowance for loan losses may adversely
affect the Association's financial condition and results of operations.
The following table sets forth an analysis of the Association's
allowance for loan losses.
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period ............................. $670 $590 $622 $560 $525
Provision for loan losses .................................... 337 (7) 47 62 35
Recoveries:
Mortgage loans:
One- to four-family ........................................ -- -- -- -- --
Builder construction ....................................... -- -- -- -- --
Commercial ................................................. -- 115 -- -- --
Savings account loans ....................................... -- -- -- -- --
Home equity loans ........................................... -- -- -- -- --
----- ----- ----- ---- ----
Total recoveries ......................................... -- 115 -- -- --
----- ----- ----- ---- ----
Charge-offs:
Mortgage loans:
One- to four-family ........................................ -- 28 -- -- --
Builder construction ....................................... -- -- -- -- --
Commercial ................................................. 133 -- 79 -- --
Savings account loans ....................................... -- -- -- -- --
Home equity loans ........................................... -- -- -- -- --
----- ----- ----- ---- ----
Total charge-offs ........................................ 133 28 79 -- --
----- ----- ----- ---- ----
Net charge-offs .......................................... 133 (87) 79 -- --
----- ----- ----- ---- ----
Balance at end of period ................................. $874 $670 $590 $622 $560
===== ===== ===== ==== ====
Allowance for loan losses as a percentage
of total loans outstanding at the end of
the period .................................................. 0.44% 0.35% 0.32% 0.37% 0.34%
Net charge-offs (recoveries) as a percentage of average
loans outstanding during the period ......................... 0.07% (0.05%) 0.05% 0.00% 0.00%
Allowance for loan losses as a percentage of
nonperforming loans at end of period ........................ 93.58% 65.24% 63.10% 46.28% 28.18%
</TABLE>
For additional discussion regarding the provisions for loan losses in
recent periods, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Comparison of Operating Results for the Years Ended
September 30, 1997 and 1996 -- Provision for Loan Losses," and "-- Comparison of
Operating Results for the Years Ended September 30, 1996 and 1995 -- Provision
for Loan Losses."
47
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------------------
1997 1996 1995 1994
----------------------- ----------------------- ---------------------- -------------
Percent Percent Percent
of Loans of Loans of Loans
in Category in Category in Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount
------ ----- ------ ----- ------ ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family................ $668 90.0% $452 90.4% $540 90.2% $486
Builder construction............... 42 1.3 26 2.0 8 1.5 12
Commercial......................... 138 4.0 175 3.3 19 4.1 111
Savings account loans............... -- 0.7 -- 0.6 -- 0.8 --
Home equity loans................... 26 4.0 17 3.7 23 3.4 13
Unallocated......................... -- N/A -- N/A -- N/A --
---- ----- ---- ----- ---- ----- ----
Total allowance for loan losses.. $874 100.0% $670 100.0% $590 100.0% $622
==== ===== ==== ===== ==== ===== ====
<CAPTION>
At September 30,
------------------------------------------
1994 1993
------------- --------------------------
Percent Percent
of Loans of Loans
in Category in Category
to Total to Total
Loans Amount Loans
----- ------ -----
<S> <C> <C> <C>
Mortgage loans:
One- to four-family................ 89.9% $450 90.0%
Builder construction............... 1.6 9 1.1
Commercial......................... 4.5 89 4.7
Savings account loans............... 0.7 -- 0.9
Home equity loans................... 3.3 12 3.3
Unallocated......................... N/A -- N/A
----- ---- -----
Total allowance for loan losses.. 100.0% $560 100.0%
===== ==== =====
</TABLE>
48
<PAGE>
Investment Activities
The Association is permitted under federal law to invest in various
types of liquid assets, including U.S. Government obligations, securities of
various federal agencies and of state and municipal governments, deposits at the
FHLB-Atlanta, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Association may also invest a portion of its assets in commercial paper and
corporate debt securities. Savings institutions like the Association are also
required to maintain an investment in FHLB stock. The Association is required
under federal regulations to maintain a minimum amount of liquid assets. See
"REGULATION" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." Such securities are reported at fair value, and
unrealized gains and losses on such securities would be included in earnings.
The Association does not currently use or maintain a trading account. Debt and
equity securities not classified as either "held to maturity" or "trading
securities" are classified as "available for sale." Such securities are reported
at fair value, and unrealized gains and losses on such securities are excluded
from earnings and reported as a net amount in a separate component of equity.
The Association's investment policies limit investments to U.S.
Government and agency securities, Federal Funds and overnight deposits and
mortgage-backed securities. The Association's investment policy does not permit
engaging directly in hedging activities or purchasing high risk mortgage
derivative products. Investments are made based on certain considerations, which
include the interest rate, yield, settlement date and maturity of the
investment, the Association's liquidity position, and anticipated cash needs and
sources (which in turn include outstanding commitments, upcoming maturities,
estimated deposits and anticipated loan amortization and repayments). The effect
that the proposed investment would have on the Association's credit and interest
rate risk and risk-based capital is also considered.
The Association purchases investment securities to provide for
necessary liquidity for day-to-day operations. The Association also purchases
investment securities when investable funds exceed loan demand. In recent years,
the Association's investment securities purchases have been limited to U.S.
Government and agency securities with contractual maturities of up to five
years. Depending on loan demand, the Association may consider increasing its
investment in mortgage-backed securities after the conversion.
49
<PAGE>
The following table sets forth the amortized cost and fair value of the
Association's securities, by accounting classification and by type of security,
at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
Investment securities:
U.S. Treasury obligations .............. $ 2,010 $ 2,008 $ 7,536 $ 7,472 $10,061 $ 9,944
U.S. Government Agency
obligations .......................... 3,996 3,976 7,841 7,761 -- --
Freddie Mac common stock ................. 57 2,406 57 1,666 57 1,180
------- ------- ------- ------- ------- -------
Total available for sale ........... 6,063 8,390 15,434 16,899 10,118 11,124
------- ------- ------- ------- ------- -------
Held to maturity:
Investment securities:
U.S. Government Agency
obligations .......................... 15,988 15,954 20,993 20,778 18,699 18,349
Mortgage-backed securities:
Fannie Mae ............................. 788 781 1,142 1,117 1,455 1,423
Freddie Mac ............................ 5,877 5,854 8,584 8,467 10,534 10,363
------- ------- ------- ------- ------- -------
Total held to maturity ............. 22,653 22,589 30,719 30,362 30,688 30,135
------- ------- ------- ------- ------- -------
Total .............................. $28,716 $30,979 $46,153 $47,261 $40,806 $41,259
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth certain information regarding the
carrying value, weighted average yields and maturities or periods to repricing
of the Association's debt securities and mortgage-backed securities at September
30, 1997. U.S. Treasury obligations and certain U.S. Government agency
obligations are exempt from state taxation. Their yields, however, have not been
computed on a tax equivalent basis for purposes of the table.
<TABLE>
<CAPTION>
Less Than One to
One Year Five Years Totals
----------------- ------------------ ---------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
Investment securities:
U.S. Treasury obligations.... $ 501 6.03% $ 1,509 5.44% $ 2,010 5.52%
U.S. Government Agency
obligations................ 2,496 5.30 1,500 5.46 3,996 5.36
------ ------ ------
Total available for sale. 2,997 6.49 3,009 5.45 6,006 5.41
------ ------ ------
Held to maturity:
Investment securities:
U.S. Government Agency
obligations................ 2,002 5.09 13,986 6.16 15,988 6.07
Mortgage-backed securities:
Fannie Mae................... -- -- 788 5.75 788 5.75
Freddie Mac.................. 3,574 5.39 2,303 5.06 5,877 5.21
------ ------ ------
Total held to maturity... 5,576 5.26 17,077 5.99 22,653 5.88
------ ------ ------
Total.................... $8,573 5.82 $20,086 5.91 $28,659 5.89
====== ======= =======
</TABLE>
50
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for the
Association's lending and other investment activities. In addition, the
Association also generates funds internally from loan principal repayments and
prepayments and maturing investment and mortgage-backed securities. Scheduled
loan repayments are a relatively stable source of funds, while deposit inflows
and outflows and loan prepayments are influenced significantly by general
interest rates and money market conditions. Borrowings from the FHLB-Atlanta may
be used to compensate for reductions in the availability of funds from other
sources. Presently, the Association has no other borrowing arrangements.
Deposit Accounts. A substantial number of the Association's depositors
reside in South Carolina. The Association's deposit products include NOW
accounts, money market accounts, regular passbook savings, and term certificate
accounts. Deposit account terms vary with the principal difference being the
minimum balance deposit, early withdrawal penalties and the interest rate. The
Association reviews its deposit mix and pricing weekly. The Association does not
utilize brokered deposits, nor has it aggressively sought jumbo certificates of
deposit. To attract larger deposits, from time to time the Association has paid
bonus rates on large deposits.
The Association believes it is competitive in the interest rates it
offers on its deposit products. The Association does not seek to pay the highest
deposit rates but a competitive rate. The Association determines the rates paid
based on a number of conditions, including rates paid by competitors, the
Association's interest rate spread, loan demand and deposit balances.
In the unlikely event the Association is liquidated after the
conversion, depositors will be entitled to full payment of their deposit
accounts before any payment is made to the Holding Company as the sole
stockholder of the Association.
The following table sets forth information concerning the Association's
time deposits and other interest-bearing deposits at September 30, 1997.
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate Term Checking and Savings Deposits Amount Balance Deposits
- ------------- ---- ----------------------------- ------ ------- --------
(In thousands)
<S> <C> <C> <C> <C>
3.00% None Passbook accounts $ 200 $ 11,423 5.3%
2.03 None NOW accounts 250 2,833 1.3
3.00 None Money market deposit accounts 2,500 939 0.4
Certificate Accounts
--------------------
5.44 Within 6 months Fixed term, fixed rate 2,500 91,350 42.5
5.83 7 - 12 months Fixed term, fixed rate 2,500 57,509 26.7
6.11 13 - 36 months Fixed term, fixed rate 500 48,943 22.7
5.96 37 - 60 months Fixed term, fixed rate 500 2,415 1.1
-------- -----
TOTAL $215,412 100.0%
======== =====
</TABLE>
51
<PAGE>
The following table indicates the amount of the Association's jumbo
certificate accounts by time remaining until maturity as of September 30, 1997.
Jumbo certificate accounts have principal balances of $100,000 or more.
<TABLE>
<CAPTION>
Certificate
Maturity Period Accounts
--------------- -----------
(In thousands)
<S> <C>
Three months or less............... $ 7,069
Over three through six months...... --
Over six through 12 months......... 4,715
Over 12 months..................... 28,473
--------
Total......................... $40,257
========
</TABLE>
Deposit Flow. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amounts of deposits in the various
types of accounts offered by the Association between the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ----------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ---------- ------ ----- ---------- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts..................... $ 11,423 5.3% $(444) $ 11,867 5.6% $(608) $12,475 6.2%
NOW and money market accounts......... 3,772 1.7 (149) 3,921 1.9 255 3,666 1.8
Fixed-rate certificate accounts which
mature in the year ending:
Within 1 year....................... 148,859 69.1 39,787 109,072 52.0 (18,637) 127,709 63.4
After 1 year, but within 2 years.... 41,284 19.2 (18,054) 59,338 28.3 34,110 25,228 12.5
After 2 years, but within 5 years... 10,074 4.7 (15,458) 25,532 12.2 (6,863) 32,395 16.1
-------- ----- -------- -------- ----- -------- -------- -----
Total............................ $215,412 100.0% $5,682 $209,730 100.0% $8,257 $201,473 100.0%
======== ===== ====== ======== ===== ====== ======== =====
</TABLE>
Time Deposits by Rates. The following table sets forth the amount of
time deposits in the Association categorized by rates at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
3.01 - 4.00%........ $ 5,575 $ 6,826 $ 3,262
4.01 - 5.00%........ 1,218 2,216 17,716
5.01 - 6.00%........ 95,528 97,960 59,427
6.01 - 7.00%........ 92,245 81,430 98,864
7.01 - 8.00%........ 5,651 5,510 5,958
8.01 - 9.00%........ -- -- 105
-------- -------- ---------
Total............. $200,217 $193,942 $185,332
======== ======== =========
</TABLE>
52
<PAGE>
Time Deposits by Maturities. The following table sets forth the amount
of time deposits in the Association categorized by maturities at September 30,
1997.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
-------- ----- ----- ----- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
3.01 - 4.00%....... $ 5,575 $ -- $ -- $ -- $ -- $ 5,575
4.01 - 5.00%....... 1,218 -- -- -- -- 1,218
5.01 - 6.00%....... 73,227 18,886 2,257 872 286 95,528
6.01 - 7.00%....... 64,327 22,298 4,363 974 283 92,245
7.01 - 8.00%....... 4,512 100 1,039 -- -- 5,651
-------- ------- ------ ------ ---- --------
Total............ $148,859 $41,284 $7,659 $1,846 $569 $200,217
======== ======= ====== ====== ==== ========
</TABLE>
Deposit Activity. The following table sets forth the deposit activity
of the Association for the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Beginning balance.................. $209,730 $201,473 $189,922
-------- -------- --------
Net deposits (withdrawals)
before interest credited......... (3,430) (821) 3,963
Interest credited.................. 9,112 9,078 7,588
-------- -------- --------
Net increase in deposits........... 5,682 8,257 11,551
-------- -------- --------
Ending balance..................... $215,412 $209,730 $201,473
======== ======== ========
</TABLE>
Borrowings. The Association has the ability to use advances from the
FHLB-Atlanta to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB-Atlanta functions as a central reserve bank
providing credit for savings associations and certain other member financial
institutions. As a member of the FHLB-Atlanta, the Association is required to
own capital stock in the FHLB-Atlanta and is authorized to apply for advances on
the security of such stock and certain of its mortgage loans and other assets
(principally securities that are obligations of, or guaranteed by, the U.S.
Government or agencies thereof) provided certain creditworthiness standards have
been met. Advances are made pursuant to several different credit programs. Each
credit program has its own interest rate and range of maturities. Depending on
the program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit.
53
<PAGE>
The following table sets forth certain information regarding the
Association's use of FHLB advances during the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Maximum balance at any month end....... $5,000 $5,000 $13,250
Average balance........................ 3,082 5,000 7,812
Year end balance....................... -- 5,000 5,000
Weighted average interest rate:
At end of year....................... -- 6.54% 6.54%
During the year...................... 7.33% 6.54% 6.27%
</TABLE>
Competition
The Association faces intense competition in its primary market area
for the attraction of deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for deposits has historically
come from commercial banks, credit unions, other thrifts operating in its market
area, and other financial institutions, such as brokerage firms and insurance
companies. Particularly in times of high interest rates, the Association has
faced additional significant competition for investors' funds from short-term
money market securities and other corporate and government securities. The
Association's competition for loans comes from commercial banks, thrift
institutions, credit unions and mortgage bankers. Such competition for deposits
and the origination of loans may limit the Association's growth in the future.
See "RISK FACTORS -- Competition."
Subsidiary Activities
Under OTS regulations, the Association generally may invest up to 3% of
its assets in service corporations, provided that at least one-half of
investment in excess of 1% is used primarily for community, inner-city and
community development projects. The Association does not have any subsidiaries.
54
<PAGE>
Properties
At September 30, 1997, the net book value of the Association's
properties (including land and buildings), fixtures, furniture and equipment was
$4.3 million. The following table sets forth certain information regarding the
Association's offices at September 30, 1997, all of which are owned.
<TABLE>
<CAPTION>
Approximate
Location Year Opened Square Footage Deposits
- -------- ----------- -------------- --------
(In thousands)
<S> <C> <C> <C>
Main Office 1995(1) 24,500 $104,187
201 West Main Street
Laurens, SC 29360
Belton Office 1962 1,800 63,380
208 Anderson Street
Belton, SC 29627
Ware Shoals Office 1968 1,444 23,570
81 North Greenwood Avenue
Ware Shoals, SC 29692
Simpsonville Office 1977 3,668 24,275
514 North Main Street
Simpsonville, SC 29681
</TABLE>
- -------------------
(1) The Association occupied a smaller facility at the same location from 1955
to 1995.
Personnel
As of September 30, 1997, the Association had 35 full-time and four
part-time employees, none of whom is represented by a collective bargaining
unit. The Association believes its relationship with its employees is good.
Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Association, such as claims to enforce liens, condemnation proceedings on
properties in which the Association holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Association's business. The Association is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Association.
55
<PAGE>
MANAGEMENT OF THE HOLDING COMPANY
Directors shall be elected by the stockholders of the Holding Company
for staggered three-year terms, or until their successors are elected and
qualified. The Holding Company's Board of Directors consists of five persons
divided into three classes, each of which contains approximately one third of
the Board. One class, consisting of Messrs. John H. Lake and G. Edwin Owings,
has a term of office expiring at the first annual meeting of stockholders; a
second class, consisting of Messrs. Aaron H. King and J. Riley Bailes, has a
term of office expiring at the second annual meeting of stockholders; and a
third class, consisting of Mr. J. Edward Wells, has a term of office expiring at
the third annual meeting of stockholders.
The executive officers of the Holding Company are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Holding Company are:
Name Position
- ---- --------
J. Edward Wells Chairman of the Board, President,
Chief Executive Officer, and Secretary
Edwin I. Shealy Chief Financial Officer and Treasurer
Since the formation of the Holding Company, none of the executive
officers, directors or other personnel has received remuneration from the
Holding Company. Initially, no separate compensation will be paid for service as
an executive officer of the Holding Company. For information concerning the
principal occupations, employment and compensation of the directors and
executive officers of the Holding Company during the past five years, see
"MANAGEMENT OF THE ASSOCIATION -- Biographical Information."
MANAGEMENT OF THE ASSOCIATION
Directors and Executive Officers
The Board of Directors of the Association is presently composed of five
members who are elected for terms of three years, approximately one third of
whom are elected annually in accordance with the Bylaws of the Association. The
executive officers of the Association are elected annually by the Board of
Directors and serve at the Board's discretion. The following table sets forth
information with respect to the Directors and executive officers of the
Association.
<TABLE>
<CAPTION>
Directors
Current
Director Term
Name Age (1) Position with Association Since Expires
- ---- ------- ------------------------- ------- -------
<S> <C> <C> <C> <C>
John H. Lake 69 Director 1977 1999
G. Edwin Owings 84 Director 1949 1999
Aaron H. King 73 Director 1972 2000
J. Riley Bailes 58 Director 1986 2000
J. Edward Wells 58 President, Chief Executive 1971 2001
Officer and Director
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Executive Officers Who Are Not Directors
Name Age (1) Position with Association
- ---- ------- -------------------------
<S> <C> <C>
Edwin I. Shealy 50 Chief Financial Officer and Treasurer
James H. Wasson 53 Vice President and Secretary
John M. Swofford 52 Vice President
Will B. Ferguson 40 Vice President
</TABLE>
- -----------------
(1) As of September 30, 1997.
Biographical Information
Set forth below is certain information regarding the Directors and
executive officers of the Association. Unless otherwise stated, each Director
and executive officer has held his current occupation for the last five years.
There are no family relationships among or between the Directors or executive
officers, except that Mr. Wasson is the first cousin of Mr. Wells' wife.
J. Edward Wells is the President and Chief Executive Officer of the
Association, positions he has held since 1972. Mr. Wells joined the Association
in 1967.
Aaron H. King retired as Senior Vice President and Branch Manager of
the Association in 1996 after 34 years with the Association.
J. Riley Bailes is the retired owner of a retail clothing store in
Laurens, South Carolina.
John H. Lake is a retired dentist.
G. Edwin Owings is the retired owner of Laurens Lumber Co. in Laurens,
South Carolina.
Edwin I. Shealy is the Chief Financial Officer and Treasurer of the
Association, positions he has held since 1990.
John M. Swofford is a Vice President of the Association and manager of
the Association's Laurens branch, positions he has held since 1988. From 1976 to
1988, Mr. Swofford served as the manager of the Association's Simpsonville
branch.
James H. Wasson, Jr. is Secretary and Vice President of the Association
responsible for mortgage lending, positions he has held since 1977. Mr. Wasson
has been employed by the Association since 1968.
Will B. Ferguson is a Vice President of the Association, a position he
has held since 1995. Mr. Ferguson has been employed by the Association since
1984.
Meetings and Committees of the Board of Directors
The business of the Association is conducted through meetings and
activities of the Board of Directors and its committees. During the fiscal year
ended September 30, 1997, the Board of Directors held 13 regular meetings. No
director attended fewer than 75% of the total meetings of the Board of Directors
and of committees on which such director served.
57
<PAGE>
The Audit Committee, consisting of the non-employee members of the
Board of Directors, receives and reviews all reports prepared by the
Association's external auditor. The Audit Committee met one time during the year
ended September 30, 1997.
The full Board of Directors acts as a Nominating Committee for the
annual selection of management's nominees for election as directors. The full
Board of Directors met once in its capacity as Nominating Committee during the
year ended September 30, 1997.
Directors' Compensation
Fees. Directors of the Association receive a monthly retainer and a
monthly attendance fee. First term members receive a retainer of $425 and
attendance fee of $425. Second term members receive a retainer of $475 and
attendance fee of $475. For subsequent terms, directors receive a retainer of
$625 and attendance fee of $625. No additional fees are paid for service on
committees. If the Board of Directors declares a bonus for employees, then each
Director who is not also an employee receives a bonus based on their annual
remuneration and computed at the same rate as the employee bonus. For the year
ended September 30, 1997, the Association paid an aggregate of $1,800 in bonuses
to non-employee Directors. Following consummation of the conversion, directors'
fees will continue to be paid by the Association and, initially, no separate
fees are expected to be paid for service on the Holdings Company's Board of
Directors.
Executive Compensation
Summary Compensation Table. The following information is furnished for
Mr. Wells for the year ended September 30, 1997. No other executive officer of
the Association received salary and bonus of $100,000 or more during the year
ended September 30, 1997.
<TABLE>
<CAPTION>
Annual Compensation(1)
-----------------------------------------------------
Name and Other Annual All Other
Position Year Salary Bonus Compensation(2) Compensation
- -------- ---- ------ ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
J. Edward Wells 1997 $145,052 $4,372 $1,698 $21,754(3)
President and Chief
Executive Officer
</TABLE>
- -----------------
(1) Compensation information for the years ended September 30, 1996 and 1995 has
been omitted as the Association was not a public company nor a subsidiary
thereof at such time.
(2) The aggregate amount of perquisites and other personal
benefits was less than 10% of the total annual salary and bonus reported.
(3) Consists of $5,824 contribution to 401(k) plan, $14,560 contribution to
money purchase pension plan and $1,370 of life insurance premiums.
Employment Agreement. In connection with the conversion, the Holding
Company and the Association (collectively, the "Employers") plan to enter into a
three-year employment agreement ("Employment Agreement") with Mr. Wells. Under
the Employment Agreement, the initial salary level for Mr. Wells will be
$________ which amount will be paid by the Association and may be increased at
the discretion of the Board of Directors or an authorized committee of the
Board. On each anniversary of the commencement date of the Employment Agreement,
the term of each agreement may be extended for an additional year at the
discretion of the Board. The agreement is terminable by the Employers at any
time, by Mr. Wells if he is assigned duties inconsistent with his initial
position, duties, responsibilities and status, or upon the occurrence of certain
events specified by federal regulations. In the event that Mr. Wells' employment
is terminated without cause or upon Mr. Wells' voluntary termination
58
<PAGE>
following the occurrence of an event described in the preceding sentence, the
Association would be required to honor the terms of the agreement through the
expiration of the current term, including payment of current cash compensation
and continuation of employee benefits.
The Employment Agreement also provides for a severance payment and
other benefits in the event of involuntary termination of employment in
connection with any change in control of the Employers. A severance payment also
will be provided on a similar basis in connection with a voluntary termination
of employment where, subsequent to a change in control, Mr. Wells is assigned
duties inconsistent with his position, duties, responsibilities and status
immediately prior to such change in control. The term "change in control" is
defined in the agreement as having occurred when, among other things, (a) a
person other than the Holding Company purchases shares of the Holding Company's
common stock pursuant to a tender or exchange offer for such shares, (b) any
person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act)
is or becomes the beneficial owner, directly or indirectly, of securities of the
Holding Company representing 25% or more of the combined voting power of the
Holding Company's then outstanding securities, (c) the membership of the Board
of Directors changes as the result of a contested election, or (d) shareholders
of the Holding Company approve a merger, consolidation, sale or disposition of
all or substantially all of the Holding Company's assets, or a plan of partial
or complete liquidation.
The maximum value of the severance benefits under the Employment
Agreements is 2.99 times Mr. Wells' average annual compensation during the
five-year period preceding the effective date of the change in control (the
"base amount"). The Employment Agreement provides that the value of the maximum
benefit may be distributed, at Mr. Wells' election, (i) in the form of a lump
sum cash payment equal to 2.99 times Mr. Wells' base amount or (ii) a
combination of a cash payment and continued coverage under the Employers'
health, life and disability programs for a 36-month period following the change
in control, the total value of which does not exceed 2.99 times the Executive's
base amount. Assuming that a change in control had occurred at September 30,
1997 and that Mr. Wells elected to receive a lump sum cash payment, he would
have been entitled to a payment of approximately $427,000. Section 280G of the
Internal Revenue Code of 1986, as amended ("Code"), provides that severance
payments that equal or exceed three times the individual's base amount are
deemed to be "excess parachute payments" if they are contingent upon a change in
control. Individuals receiving excess parachute payments are subject to a 20%
excise tax on the amount of such excess payments, and the Employers would not be
entitled to deduct the amount of such excess payments.
The Employment Agreement restrict Mr. Wells' right to compete against
the Employers for a period of one year from the date of termination of the
agreement if he voluntarily terminates employment, except in the event of a
change in control.
Severance Agreements. In connection with the conversion, the Holding
Company and the Association plan to enter into severance agreements with Mr.
Shealy, the Holding Company's Chief Financial Officer and the Association's
Treasurer and Chief Financial Officer, and Messrs. Swofford, Wasson and
Ferguson, each a Vice President of the Association. On each anniversary of the
commencement date of the severance agreements, the term of each agreement may be
extended for an additional year at the discretion of the Board. It is
anticipated that the four severance agreements will have an initial term of two
years.
The severance agreements will provide for severance payments and
continuation of insured employee welfare benefits in the event of involuntary
termination of employment in connection with any change in control of the
Employers in the same manner as provided for in the employment agreements.
Severance payments and benefits also will be provided on a similar basis in
connection with a voluntary termination of employment where, subsequent to a
change in control, an officer is assigned duties inconsistent with his position,
duties, responsibilities and status immediately prior to such change in control.
The term "change in control" is defined in the agreement as having occurred
when, among other things, (a) a person other than the Holding Company purchases
shares of the Holding Company's common stock pursuant to a tender or exchange
offer for such shares, (b) any person (as such term is used in Sections 13(d)
and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly
or indirectly, of securities of the Holding Company representing 25% or more of
the combined voting power of the Holding
59
<PAGE>
Company's then outstanding securities, (c) the membership of the Board of
Directors changes as the result of a contested election, or (d) shareholders of
the Holding Company approve a merger, consolidation, sale or disposition of all
or substantially all of the Holding Company's assets, or a plan of partial or
complete liquidation.
Assuming that a change in control had occurred at September 30, 1997,
and excluding any other benefits due under the severance agreements, the
aggregate value of the severance benefits payable to the four officers would
have been approximately $417,000.
Employee Severance Compensation Plan. In connection with the
conversion, the Board of Directors of the Association intends to adopt the
Severance Plan to provide benefits to eligible employees in the event of a
change in control of the Holding Company or the Association. In general, all
employees (except for officers who enter into separate employment or severance
agreements with the Holding Company and the Association) will be eligible to
participate in the Severance Plan. Under the Severance Plan, in the event of a
change in control of the Holding Company or the Association, eligible employees,
other than officers of the Association, who are terminated or who terminate
employment (but only upon the occurrence of events specified in the Severance
Plan) within 12 months of the effective date of a change in control will be
entitled to a payment based on years of service with the Association. However,
the maximum payment for any eligible employee would be equal to 52 weeks of
their current compensation. The Severance Plan also provides that employees who
have not met the three year service requirement for participation would receive
a payment equal to two weeks' compensation. Assuming that a change in control
had occurred at September 30, 1997 and the termination of all eligible
employees, the maximum aggregate payment due under the Severance Plan would be
approximately $529,000.
Benefits
General. The Association currently pays 100% of the premiums for
medical, dental, life and disability insurance benefits for full-time employees,
subject to certain deductibles.
401(k) Plan. The Association maintains the Heritage Federal Savings &
Loan Association 401(k) Plan ("401(k) Plan") for the benefit of eligible
employees of the Association. The 401(k) Plan is intended to be a tax-qualified
plan under Sections 401(a) and 401(k) of the Code. Employees of the Association
who have completed six months of service and who have attained age 21 are
eligible to participate in the 401(k) Plan on the January 1 next following the
date such requirements are satisfied. Participants may contribute up to 10% of
their annual compensation to the 401(k) Plan through a salary reduction
election. The Association matches participant contributions on a discretionary
basis.
In addition to employer matching contributions, the Association may
contribute a discretionary amount to the 401(k) Plan in any plan year which is
allocated to individual participants in the proportion that their annual
compensation bears to the total compensation of all participants during the plan
year. Participants are at all times 100% vested in all salary reduction
contributions and employer matching and profit-sharing contributions. For the
year ended September 30, 1997, the Association incurred total
contribution-related expenses of $43,000 in connection with the 401(k) Plan.
The Association formerly maintained a money purchase pension plan for
the benefit of eligible officers and employees. The money purchase pension plan
was merged with the 401(k) Plan effective December 31, 1997.
Generally, the investment of 401(k) Plan assets is directed by plan
participants. In connection with the conversion, the investment options
available to participants will be expanded to include the opportunity to direct
the investment of up to 100% of their 401(k) Plan account balance to purchase
shares of the Holding Company's common stock. A participant in the 401(k) Plan
who elects to purchase common stock in the conversion through the 401(k) Plan
will receive the same subscription priority and be subject to the same
individual purchase limitations as if the participant had elected to make such
purchase using other funds. See "THE CONVERSION -- Limitations on Purchases of
Shares."
60
<PAGE>
Employee Stock Ownership Plan. The Board of Directors has authorized
the adoption by the Association of an ESOP for employees of the Association to
become effective upon the completion of the conversion. The ESOP is intended to
satisfy the requirements for an employee stock ownership plan under the Code and
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Full-time employees of the Holding Company and the Association who have been
credited with at least 1,000 hours of service during a 12-month period and who
have attained age 21 will be eligible to participate in the ESOP.
In order to fund the purchase of up to 8% of the common stock to be
issued in the conversion, it is anticipated that the ESOP will borrow funds from
the Holding Company. Such loan will equal 100% of the aggregate purchase price
of the common stock. The loan to the ESOP will be repaid principally from the
Association's contributions to the ESOP and dividends payable on common stock
held by the ESOP over the anticipated 15-year term of the loan. The interest
rate for the ESOP loan is expected to be the prime rate as published in The Wall
Street Journal on the closing date of the conversion. See "PRO FORMA DATA." To
the extent that the ESOP is unable to acquire 8% of the common stock issued in
the conversion, such additional shares will be acquired following the conversion
through open market purchases.
In any plan year, the Association may make additional discretionary
contributions to the ESOP for the benefit of plan participants in either cash or
shares of common stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders or which
constitute authorized but unissued shares or shares held in treasury by Holding
Company. The timing, amount, and manner of such discretionary contributions will
be affected by several factors, including applicable regulatory policies, the
requirements of applicable laws and regulations, and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held
in a suspense account and released on a pro rata basis as the loan is repaid.
Discretionary contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of each participant's
proportional share of total compensation. Forfeitures will be reallocated among
the remaining plan participants.
Participants will vest in their accrued benefits under the ESOP at the
rate of ___% per year, beginning upon the completion of ____ years of
participation. A participant is fully vested at retirement, in the event of
disability or upon termination of the ESOP. Benefits are distributable upon a
participant's retirement, early retirement, death, disability, or termination of
employment. The Association's contributions to the ESOP are not fixed, so
benefits payable under the ESOP cannot be estimated.
It is anticipated that Messrs. _____, _____ and _____ will be appointed
by the Board of Directors of the Association to serve as trustees of the ESOP.
Under the ESOP, the trustees must vote all allocated shares held in the ESOP in
accordance with the instructions of plan participants and unallocated shares and
allocated shares for which no instructions are received must be voted in the
same ratio on any matter as those shares for which instructions are given.
Pursuant to Statement of Position 93-6, compensation expense for a
leveraged ESOP is recorded at the fair market value of the ESOP shares when
committed to be released to participants' accounts. See "PRO FORMA DATA" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Comparison of Operating Results for the Years Ended September 30,
1997 and 1996.
If the ESOP purchases newly issued shares from the Holding Company,
total stockholders' equity would neither increase nor decrease. However, on a
per share basis, stockholders' equity and per share net earnings would decrease
because of the increase in the number of outstanding shares.
The ESOP will be subject to the requirements of ERISA and the
regulations of the IRS and the Department of Labor issued thereunder. The
Association intends to request a determination letter from the IRS regarding the
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tax-qualified status of the ESOP. Although no assurance can be given that a
favorable determination letter will be issued, the Association expects that a
favorable determination letter will be received by the ESOP.
Stock Option Plan. The Board of Directors of the Holding Company
intends to adopt the Stock Option Plan and to submit the Stock Option Plan to
the stockholders for approval at a meeting held no earlier than six months
following consummation of the conversion. Under current OTS regulations, the
approval of a majority vote of the Holding Company's outstanding shares is
required prior to the implementation of the Stock Option Plan within one year of
the consummation of the conversion. The Stock Option Plan will comply with all
applicable regulatory requirements. However, the Stock Option Plan will not be
approved or endorsed by the OTS.
The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, key
employees and nonemployee directors with a proprietary interest in the Holding
Company as an incentive to contribute to the success of the Holding Company and
the Association, and to reward officers and key employees for outstanding
performance. The Stock Option Plan will provide for the grant of incentive stock
options ("ISOs") intended to comply with the requirements of Section 422 of the
Code and for nonqualified stock options ("NQOs"). Upon receipt of stockholder
approval of the Stock Option Plan, stock options may be granted to key employees
of the Holding Company and its subsidiaries, including the Association. Unless
sooner terminated, the Stock Option Plan will continue in effect for a period of
ten years from the date the Stock Option Plan is approved by stockholders.
A number of authorized shares of common stock equal to 10% of the
number of shares of common stock issued in connection with the conversion will
be reserved for future issuance under the Stock Option Plan (402,500 shares
based on the issuance of 4,025,000 shares at the maximum of the Estimated
Valuation Range). Shares acquired upon exercise of options will be authorized
but unissued shares or treasury shares. In the event of a stock split, reverse
stock split, stock dividend, or similar event, the number of shares of common
stock under the Stock Option Plan, the number of shares to which any award
relates and the exercise price per share under any option may be adjusted by the
Committee (as defined below) to reflect the increase or decrease in the total
number of shares of common stock outstanding.
The Stock Option Plan will be administered and interpreted by a
committee of the Board of Directors ("Committee"). Subject to applicable OTS
regulations, the Committee will determine which nonemployee directors, officers
and key employees will be granted options, whether, in the case of officers and
employees, such options will be ISOs or NQOs, the number of shares subject to
each option, and the exercisability of such options. All options granted to
nonemployee directors will be NQOs. The per share exercise price of all options
will equal at least 100% of the fair market value of a share of common stock on
the date the option is granted.
Under current OTS regulations, if the Stock Option Plan is implemented
within one year of the consummation of the conversion, (i) no officer or
employees could receive an award of options covering in excess of 25%, (ii) no
nonemployee director could receive in excess of 5% and (iii) nonemployee
directors, as a group, could not receive in excess of 30% of the number of
shares reserved for issuance under the Stock Option Plan.
It is anticipated that all options granted under the Stock Option Plan
will be granted subject to a vesting schedule whereby the options become
exercisable over a specified period following the date of grant. Under OTS
regulations, if the Stock Option plan is implemented within the first year
following consummation of the conversion the minimum vesting period will be five
years. All unvested options will be immediately exercisable in the event of the
recipient's death or disability. Unvested options also will be exercisable
following a change in control (as defined in the Stock Option Plan) of the
Holding Company or the Association to the extent authorized or not prohibited by
applicable law or regulations. OTS regulations currently provide that if the
Stock Option Plan is implemented prior to the first anniversary of the
conversion, vesting may not be accelerated upon a change in control of the
Holding Company or the Association.
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Each stock option that is awarded to an officer or key employee will
remain exercisable at any time on or after the date it vests through the earlier
to occur of the tenth anniversary of the date of grant or three months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended by the Committee. Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
nonemployee director's service on the Board. All stock options are
nontransferable except by will or the laws of descent or distribution.
Under current provisions of the Code, the federal tax treatment of ISOs
and NQOs is different. With respect to ISOs, an optionee who satisfies certain
holding period requirements will not recognize income at the time the option is
granted or at the time the option is exercised. If the holding period
requirements are satisfied, the optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of common stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference between the fair market value of the common stock on
the date of grant and the option exercise price, if any, will be taxable to the
optionee at ordinary income tax rates. A federal income tax deduction generally
will not be available to the Holding Company as a result of the grant or
exercise of an ISO, unless the optionee fails to satisfy the holding period
requirements. With respect to NQOs, the grant of an NQO generally is not a
taxable event for the optionee and no tax deduction will be available to the
Holding Company. However, upon the exercise of an NQO, the difference between
the fair market value of the common stock on the date of exercise and the option
exercise price generally will be treated as compensation to the optionee upon
exercise, and the Holding Company will be entitled to a compensation expense
deduction in the amount of income realized by the optionee.
Although no specific award determinations have been made at this time,
the Holding Company and the Association anticipate that if stockholder approval
is obtained it would provide awards to its directors, officers and employees to
the extent and under terms and conditions permitted by applicable regulations.
The size of individual awards will be determined prior to submitting the Stock
Option Plan for stockholder approval, and disclosure of anticipated awards will
be included in the proxy materials for such meeting.
Management Recognition Plan. Following the conversion, the Board of
Directors of the Holding Company intends to adopt an MRP for officers,
employees, and nonemployee directors of the Holding Company and the Association,
subject to shareholder approval. The MRP will enable the Holding Company and the
Association to provide participants with a proprietary interest in the Holding
Company as an incentive to contribute to the success of the Holding Company and
the Association. The MRP will comply with all applicable regulatory
requirements. However, the MRP will not be approved or endorsed by the OTS.
Under current OTS regulations, the approval of a majority vote of the Holding
Company's outstanding shares is required prior to the implementation of the MRP
within one year of the consummation of the conversion.
The MRP expects to acquire a number of shares of the Holding Company's
common stock equal to 4% of the common stock issued in connection with the
conversion (161,000 shares based on the issuance of 4,025,000 shares in the
conversion at the maximum of the Estimated Valuation Range). Such shares will be
acquired on the open market, if available, with funds contributed by the Holding
Company or the Association to a trust which the Holding Company may establish in
conjunction with the MRP ("MRP Trust") or from authorized but unissued shares or
treasury shares of the Holding Company.
A committee of the Board of Directors of the Holding Company will
administer the MRP, the members of which will also serve as trustees of the MRP
Trust, if formed. The trustees will be responsible for the investment of all
funds contributed by the Holding Company or the Association to the MRP Trust.
The Board of Directors of the Holding Company may terminate the MRP at any time
and, upon termination, all unallocated shares of common stock will revert to the
Holding Company.
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Shares of common stock granted pursuant to the MRP will be in the form
of restricted stock payable ratably over a specified vesting period following
the date of grant. During the period of restriction, all shares will be held in
escrow by the Holding Company or by the MRP Trust. Under OTS regulations, if the
MRP is implemented within the first year following consummation of the
conversion, the minimum vesting period will be five years. All unvested MRP
awards will vest in the event of the recipient's death or disability. Unvested
MRP awards will also vest following a change in control (as defined in the MRP)
of the Holding Company or the Association to the extent authorized or not
prohibited by applicable law or regulations. OTS regulations currently provide
that, if the MRP is implemented prior to the first anniversary of the
conversion, vesting may not be accelerated upon a change in control of the
Holding Company or the Association.
A recipient of an MRP award in the form of restricted stock generally
will not recognize income upon an award of shares of common stock, and the
Holding Company will not be entitled to a federal income tax deduction, until
the termination of the restrictions. Upon such termination, the recipient will
recognize ordinary income in an amount equal to the fair market value of the
common stock at the time and the Holding Company will be entitled to a deduction
in the same amount after satisfying federal income tax withholding requirements.
However, the recipient may elect to recognize ordinary income in the year the
restricted stock is granted in an amount equal to the fair market value of the
shares at that time, determined without regard to the restrictions. In that
event, the Holding Company will be entitled to a deduction in such year and in
the same amount. Any gain or loss recognized by the recipient upon subsequent
disposition of the stock will be either a capital gain or capital loss.
Although no specific award determinations have been made at this time,
the Holding Company and the Association anticipate that if stockholder approval
is obtained it would provide awards to its directors, officers and employees to
the extent and under terms and conditions permitted by applicable regulations.
Under current OTS regulations, if the MRP is implemented within one year of the
consummation of the conversion, (i) no officer or employees could receive an
award covering in excess of 25%, (ii) no nonemployee director could receive in
excess of 5% and (iii) nonemployee directors, as a group, could not receive in
excess of 30% of the number of shares reserved for issuance under the MRP. The
size of individual awards will be determined prior to submitting the MRP for
stockholder approval, and disclosure of anticipated awards will be included in
the proxy materials for such meeting.
Transactions with the Association
Federal regulations require that all loans or extensions of credit to
executive officers and directors must generally be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons (unless the loan or
extension of credit is made under a benefit program generally available to all
other employees and does not give preference to any insider over any other
employee) and must not involve more than the normal risk of repayment or present
other unfavorable features. The Association's policy is not to make any new
loans or extensions of credit to the Association's executive officers and
directors at different rates or terms than those offered to the general public.
In addition, loans made to a director or executive officer in an amount that,
when aggregated with the amount of all other loans to such person and his
related interests, are in excess of the greater of $25,000 or 5% of the
Association's capital and surplus (up to a maximum of $500,000) must be approved
in advance by a majority of the disinterested members of the Board of Directors.
See "REGULATION -- Federal Regulation of Savings Associations -- Transactions
with Affiliates." The aggregate amount of loans by the Association to its
executive officers and directors was $383,000 at September 30, 1997, or
approximately 0.5% of pro forma stockholders' equity (based on the issuance of
the maximum of the Estimated Valuation Range).
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REGULATION
General
The Association is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by
the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and
the FDIC to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which federal savings associations may
engage. Lending activities and other investments must comply with various
statutory and regulatory capital requirements. In addition, the Association's
relationship with its depositors and borrowers is also regulated to a great
extent, especially in such matters as the ownership of deposit accounts and the
form and content of the Association's mortgage documents. The Association must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to review
the Association's compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have a
material adverse impact on the Association and its operations.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner. The Association, as a
member of the FHLB-Atlanta, is required to acquire and hold shares of capital
stock in the FHLB-Atlanta in an amount equal to the greater of (i) 1.0% of the
aggregate outstanding principal amount of residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or
(ii) 1/20 of its advances (i.e., borrowings) from the FHLB-Atlanta. The
Association is in compliance with this requirement with an investment in FHLB-
Atlanta stock of $2.0 million at September 30, 1997. Among other benefits, the
FHLB-Atlanta provides a central credit facility primarily for member
institutions. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB-Atlanta.
Federal Deposit Insurance Corporation. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
depository institutions. The FDIC currently maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. As insurer of the
Association's deposits, the FDIC has examination, supervisory and enforcement
authority over the Association.
The Association's accounts are insured by the SAIF to the maximum extent
permitted by law. The Association pays deposit insurance premiums based on a
risk-based assessment system established by the FDIC. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital -- "well capitalized,"
"adequately capitalized," and "undercapitalized" -- which are defined in the
same manner as the regulations establishing the prompt corrective action system,
as discussed below. These
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three groups are then divided into three subgroups which reflect varying levels
of supervisory concern, from those which are considered to be healthy to those
which are considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications, with rates that until
September 30, 1996 ranged from 0.23% for well capitalized, financially sound
institutions with only a few minor weaknesses to 0.31% for undercapitalized
institutions that pose a substantial risk of loss to the SAIF unless effective
corrective action is taken.
Pursuant to the Deposit Insurance Funds Act ("DIF Act"), which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio. In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including the Association, paying 0%. This
assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of .065% of SAIF-assessable deposits for the
purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately .013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Association.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Association.
Liquidity Requirements. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
4.0%) of its net withdrawable accounts plus short-term borrowings. Monetary
penalties may be imposed for failure to meet liquidity requirements. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."
Prompt Corrective Action. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions that
it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action. Under
the regulations, an institution shall be deemed to be (i) "well capitalized" if
it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-
based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is
not subject to specified requirements to meet and maintain a specific capital
level for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, has a Tier I risk-based capital ratio
of 4.0% or more, has a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, has a Tier I risk-based capital ratio that is less than 4.0% or has a
leverage ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%,
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has a Tier I risk-based capital ratio that is less than 3.0% or has a leverage
ratio that is less than 3.0%; and (v) "critically undercapitalized" if it has a
ratio of tangible equity to total assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. (The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At September 30, 1997, the Association was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the OTS determines that the Association
fails to meet any standard prescribed by the Guidelines, the agency may require
the Association to submit to the agency an acceptable plan to achieve compliance
with the standard. OTS regulations establish deadlines for the submission and
review of such safety and soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either convert to a national bank charter or be subject to the following
restrictions on its operations: (i) the association may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the association may not establish any new branch office where a
national bank located in the savings institution's home state would not be able
to establish a branch office; (iii) the association shall be ineligible to
obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the rules regarding the statutory and regulatory
dividend restrictions applicable to national banks. Also, beginning three years
after the date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date on
which a savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if
it thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Internal Revenue Code or that
65% of an institution's "portfolio assets" (as defined) consist of certain
housing and consumer-related assets on a monthly average basis in nine out of
every 12 months. Assets that qualify without limit for inclusion as part of the
65% requirement are loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject
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to an overall limit of 20% of the savings institution's portfolio assets: 50% of
residential mortgage loans originated and sold within 90 days of origination;
100% of consumer loans; and stock issued by Freddie Mac or Fannie Mae. Portfolio
assets consist of total assets minus the sum of (i) goodwill and other
intangible assets, (ii) property used by the savings institution to conduct its
business, and (iii) liquid assets up to 20% of the institution's total assets.
At September 30, 1997, the Association was in compliance with the QTL test.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and non-includable subsidiaries. Institutions
that fail to meet the core capital requirement would be required to file with
the OTS a capital plan that details the steps they will take to reach
compliance. In addition, the OTS's prompt corrective action regulation provides
that a savings institution that has a leverage ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See "--
Federal Regulation of Savings Associations -- Prompt Corrective Action."
Savings associations also must maintain "tangible capital" not less than
1.5% of the Association's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans
are assigned a 100% risk weight, as are nonqualifying residential mortgage loans
and that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totalled to arrive at total risk-weighted assets. Off-
balance sheet items are included in risk-weighted assets by converting them to
an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.
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The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
----
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's total
capital in calculating compliance with its risk-based capital requirement. Under
the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure. In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in lieu
of the OTS-calculated amount. The OTS has postponed the date that the component
will first be deducted from an institution's total capital.
See "HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE" for a table
that sets forth in terms of dollars and percentages the OTS tangible, core and
risk-based capital requirements, the Association's historical amounts and
percentages at September 30, 1997 and pro forma amounts and percentages based
upon the assumptions stated therein.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Association to give the OTS
30 days' advance notice of any proposed declaration of dividends, and the OTS
has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
Tier 1 savings association may make (without application but upon prior notice
to, and no objection made by, the OTS) capital distributions during a calendar
year up to 100% of its net income to date during the calendar year plus one-half
its surplus capital ratio (i.e., the amount of capital in excess of its fully
----
phased-in requirement) at the beginning of the calendar year or the amount
authorized for a Tier 2 association. Capital distributions in excess of such
amount require advance notice to the OTS. A Tier 2 savings association has
capital equal to or in excess of its minimum capital requirement but below its
fully phased-in capital requirement (both before and after the proposed capital
distribution). Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the previous
four quarters depending on how close the association is to meeting its fully
phased-in capital requirement. Capital distributions exceeding this amount
require prior OTS approval. Tier 3 associations are savings associations with
capital below the minimum capital requirement (either before or after the
proposed capital distribution). Tier 3 associations may not make any capital
distributions without prior approval from the OTS.
The Association currently meets the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.
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Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower. Generally, this
limit is 15% of the Association's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. The OTS by regulation has amended the loans to one
borrower rule to permit savings associations meeting certain requirements,
including capital requirements, to extend loans to one borrower in additional
amounts under circumstances limited essentially to loans to develop or complete
residential housing units. At September 30, 1997, the Association's regulatory
limit on loans to one borrower was $4.2 million. At September 30, 1997, the
Association's largest aggregate amount of loans to one borrower was $1.8
million.
Activities of Associations and Their Subsidiaries. A savings association
may establish operating subsidiaries to engage in any activity that the savings
association may conduct directly and service corporation subsidiaries to engage
in certain preapproved activities or, with approval of the OTS, other activities
reasonably related to the activities of financial institutions. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. A savings and loan holding
company, its subsidiaries and any other company under common control are
considered affiliates of the subsidiary savings association under the HOLA.
Generally, Sections 23A and 23B: (i) limit the extent to which the insured
association or its subsidiaries may engage in certain covered transactions with
an affiliate to an amount equal to 10% of such institution's capital and surplus
and place an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable to the
institution or subsidiary, as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, the purchase of assets, the
issuance of a guarantee and similar types of transactions. Any loan or
extension of credit by the Association to an affiliate must be secured by
collateral in accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve, as is currently the case with respect to all FDIC-
insured banks.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment. Regulation O also places individual and aggregate limits on the
amount of loans the Association may make to such persons based, in part, on the
Association's capital position, and requires certain board approval
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procedures to be followed. The OTS regulations, with certain minor variances,
apply Regulation O to savings institutions.
Community Reinvestment Act. Banks are also subject to the provisions of the
Community Reinvestment Act of 1977, which requires the appropriate federal bank
regulatory agency, in connection with its regular examination of a bank, to
assess the bank's record in meeting the credit needs of the community serviced
by the bank, including low and moderate income neighborhoods. The regulatory
agency's assessment of the bank's record is made available to the public.
Further, such assessment is required of any bank which has applied, among other
things, to establish a new branch office that will accept deposits, relocate an
existing office or merge or consolidate with, or acquire the assets or assume
the liabilities of, a federally regulated financial institution.
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof. They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding company,
the Holding Company generally is not subject to activity restrictions under the
HOLA. If the Holding Company acquires control of another savings association as
a separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. The HOLA provides
that, among other things, no multiple savings and loan holding company or
subsidiary thereof which is not an insured association shall commence or
continue for more than two years after becoming a multiple savings and loan
association holding company or subsidiary thereof, any business activity other
than: (i) furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
insured institution, (iv) holding or managing properties used or occupied by a
subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by regulation as of March 5,
1987 to be engaged in by multiple holding companies or (vii) those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies, unless the OTS by regulation, prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
also must be approved by the OTS prior to being engaged in by a multiple savings
and loan holding company.
Qualified Thrift Lender Test. The HOLA provides that any savings and loan
holding company that controls a savings association that fails the QTL test, as
explained under "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
TAXATION
Federal Taxation
General. The Holding Company and the Association will report their income
on a fiscal year basis using the accrual method of accounting and will be
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Association's reserve for bad debts
discussed below.
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The following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
Association or the Holding Company.
Bad Debt Reserve. Historically, savings institutions such as the
Association which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Association's
deductions with respect to "qualifying real property loans," which are generally
loans secured by certain interest in real property, were computed using an
amount based on the Association's actual loss experience, or a percentage equal
to 8% of the Association's taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the non-qualifying
reserve. Due to the Association's loss experience, the Association generally
recognized a bad debt deduction equal to 8% of taxable income.
In August 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Association has
previously recorded a deferred tax liability equal to the bad debt recapture and
as such the new rules will have no effect on the net income or federal income
tax expense. For taxable years beginning after December 31, 1995, the
Association's bad debt deduction will be determined under the experience method
using a formula based on actual bad debt experience over a period of years or,
if the Association is a "large" association (assets in excess of $500 million)
on the basis of net charge-offs during the taxable year. The new rules allow an
institution to suspend bad debt reserve recapture for the 1996 and 1997 tax
years if the institution's lending activity for those years is equal to or
greater than the institution's average mortgage lending activity for the six
taxable years preceding 1996 adjusted for inflation. For this purpose, only
home purchase or home improvement loans are included and the institution can
elect to have the tax years with the highest and lowest lending activity removed
from the average calculation. If an institution is permitted to postpone the
reserve recapture, it must begin its six year recapture no later than the 1998
tax year. The unrecaptured base year reserves will not be subject to recapture
as long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continue to be subject
to provisions of present law referred to below that require recapture in the
case of certain excess distributions to shareholders.
Distributions. To the extent that the Association makes "nondividend
distributions" to the Holding Company, such distributions will be considered to
result in distributions from the balance of its bad debt reserve as of December
31, 1987 (or a lesser amount if the Association's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in the Association's taxable income. Nondividend distributions
include distributions in excess of the Association's current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. However, dividends paid out of the
Association's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Association's bad debt reserve. The amount of additional taxable
income created from an Excess Distribution is an amount that, when reduced by
the tax attributable to the income, is equal to the amount of the distribution.
Thus, if, after the conversion, the Association makes a "nondividend
distribution," then approximately one and one-half times the Excess Distribution
would be includable in gross income for federal income tax purposes, assuming a
34% corporate income tax rate (exclusive of state and local taxes). See
"REGULATION" and "DIVIDEND POLICY" for limits on the payment of dividends by the
Association. The Association does not intend to pay dividends that would result
in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. In addition, only 90%
of AMTI can be offset by net operating loss
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carryovers. AMTI is increased by an amount equal to 75% of the amount by which
the Association's adjusted current earnings exceeds its AMTI (determined without
regard to this preference and prior to reduction for net operating losses). For
taxable years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Association, whether
or not an Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Holding Company may exclude from its
income 100% of dividends received from the Association as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Holding Company and the Association will not file a consolidated
tax return, except that if the Holding Company or the Association owns more than
20% of the stock of a corporation distributing a dividend, then 80% of any
dividends received may be deducted.
Audits. The Association's federal income tax returns have not been audited
within the past five years.
State Taxation
South Carolina. The provisions of South Carolina tax law mirror the Code,
with certain modifications, as it relates to savings and loan associations. The
Association is subject to South Carolina income tax at the rate of 6%. This
rate of tax is imposed on savings and loan associations in lieu of the general
state business corporation income tax. The Association's state income tax
returns have not been audited within the last five years.
Delaware. As a Delaware holding company not earning income in Delaware,
the Holding Company is exempt from Delaware corporate income tax, but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
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THE CONVERSION
The OTS has approved the Plan of Conversion subject to its approval by the
members of the Association entitled to vote thereon and to the satisfaction of
certain other conditions imposed by the OTS in its approval. OTS approval does
not constitute a recommendation or endorsement of the Plan of Conversion.
General
On September 10, 1997, the Board of Directors of the Association
unanimously adopted the Plan of Conversion, which was subsequently amended on
November 19, 1997, pursuant to which the Association will be converted from a
federally chartered mutual savings and loan association to a federally chartered
stock savings bank to be held as a wholly-owned subsidiary of the Holding
Company, a newly formed Delaware corporation. The following discussion of the
Plan of Conversion is qualified in its entirety by reference to the Plan of
Conversion, which is attached as Exhibit A to the Association's Proxy Statement
and is available to members of the Association upon request. The Plan of
Conversion is also filed as an exhibit to the Registration Statement. See
"ADDITIONAL INFORMATION." The OTS has approved the Plan of Conversion subject
to its approval by the members of the Association entitled to vote on the matter
at a Special Meeting called for that purpose to be held on ___________, 1998,
and subject to the satisfaction of certain other conditions imposed by the OTS
in its approval.
The conversion will be accomplished through adoption of a Federal Stock
Charter and Bylaws to authorize the issuance of capital stock by the
Association. As part of the conversion, the Association will issue all of its
newly issued common stock (1,000 shares) to the Holding Company in exchange for
50% of the net proceeds from the sale of common stock by the Holding Company.
The Plan of Conversion provides generally that: (i) the Association will
convert from a federally chartered mutual savings and loan association to a
federally chartered stock savings bank; (ii) the common stock will be offered by
the Holding Company in the Subscription Offering to persons having subscription
rights; (iii) if necessary, shares of common stock not subscribed for in the
Subscription Offering will be offered in a Direct Community Offering to certain
members of the general public, with preference given to natural persons and
trusts of natural persons residing in the Local Community, and then to certain
members of the general public in a Syndicated Community Offering through a
syndicate of registered broker-dealers pursuant to selected dealers agreements;
and (iv) the Holding Company will purchase all of the capital stock of the
Association to be issued in connection with the conversion. The conversion will
be effected only upon completion of the sale of at least $44,625,000 of common
stock to be issued pursuant to the Plan of Conversion.
As part of the conversion, the Holding Company is making a Subscription
Offering of its common stock to holders of subscription rights in the following
order of priority: (i) Eligible Account Holders (depositors with $50.00 or more
on deposit as of June 30, 1996); (ii) the Association's ESOP; (iii) Supplemental
Eligible Account Holders (depositors with $50.00 or more on deposit as of
December 31, 1997); and (iv) Other Members (depositors of the Association as of
____ __, 1998 and borrowers of the Association with loans outstanding as of
October 21, 1997 which continue to be outstanding as of ____ __, 1998).
Shares of common stock not subscribed for in the Subscription Offering may
be offered for sale in the Direct Community Offering. The Direct Community
Offering, if one is held, is expected to begin immediately after the expiration
of the Subscription Offering, but may begin at any time during the Subscription
Offering. Shares of common stock not sold in the Subscription and Direct
Community Offerings may be offered in the Syndicated Community Offering.
Regulations require that the Direct Community and Syndicated Community Offerings
be completed within 45 days after completion of the fully extended Subscription
Offering unless extended by the Association or the Holding Company with the
approval of the regulatory authorities. If the Syndicated Community Offering is
determined not to be feasible, the Board of Directors of the Association will
consult with the regulatory authorities to determine an appropriate alternative
method for selling the unsubscribed shares of common stock. The
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Plan of Conversion provides that the conversion must be completed within 24
months after the date of the approval of the Plan of Conversion by the members
of the Association.
No sales of common stock may be completed, either in the Subscription
Offering, Direct Community Offering or Syndicated Community Offering unless the
Plan of Conversion is approved by the members of the Association.
The completion of the offering, however, is subject to market conditions
and other factors beyond the Association's control. No assurance can be given
as to the length of time after approval of the Plan of Conversion at the Special
Meeting that will be required to complete the Direct Community or Syndicated
Community Offerings or other sale of the common stock. If delays are
experienced, significant changes may occur in the estimated pro forma market
value of the Holding Company and the Association as converted, together with
corresponding changes in the net proceeds realized by the Holding Company from
the sale of the common stock. In the event the conversion is terminated, the
Association would be required to charge all Conversion expenses against current
income.
Orders for shares of common stock will not be filled until at least
2,975,000 shares of common stock have been subscribed for or sold and the OTS
approves the final valuation and the conversion closes. If the conversion is
not completed within 45 days after the last day of the fully extended
Subscription Offering and the OTS consents to an extension of time to complete
the conversion, subscribers will be given the right to increase, decrease or
rescind their subscriptions. Unless an affirmative indication is received from
subscribers that they wish to continue to subscribe for shares, the funds will
be returned promptly, together with accrued interest at the Association's
passbook rate from the date payment is received until the funds are returned to
the subscriber. If such period is not extended, or, in any event, if the
conversion is not completed, all withdrawal authorizations will be terminated
and all funds held will be promptly returned together with accrued interest at
the Association's passbook rate from the date payment is received until the
conversion is terminated.
Reasons for the Conversion
The Board of Directors and management believe that the conversion is in the
best interests of the Association, its members and the communities it serves.
The Association's Board of Directors has formed the Holding Company to serve as
a holding company, with the Association as its subsidiary, upon the consummation
of the conversion. By converting to the stock form of organization, the Holding
Company and the Association will be structured in the form used by holding
companies of commercial banks, most business entities and by a growing number of
savings institutions. Management of the Association believes that the
conversion offers a number of advantages which will be important to the future
growth and performance of the Association. The capital raised in the conversion
is intended to support the Association's current lending and investment
activities and may also support possible future expansion and diversification of
operations, although there are no current specific plans, arrangements or
understandings, written or oral, regarding any such expansion or
diversification. The conversion is also expected to afford the Association's
management, members and others the opportunity to become stockholders of the
Holding Company and participate more directly in, and contribute to, any future
growth of the Holding Company and the Association. The conversion will also
enable the Holding Company and the Association to raise additional capital in
the public equity or debt markets should the need arise, although there are no
current specific plans, arrangements or understandings, written or oral,
regarding any such financing activities. The Association, as a mutual savings
and loan association, does not have the authority to issue capital stock or debt
instruments, other than by accepting deposits.
Effects of Conversion to Stock Form on Depositors and Borrowers of the
Association
Voting Rights. Savings members and borrowers will have no voting rights in
the converted Association or the Holding Company and therefore will not be able
to elect directors of the Association or the Holding Company or to control their
affairs. Currently, these rights are accorded to savings members of the
Association. Subsequent
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to the conversion, voting rights will be vested exclusively in the Holding
Company with respect to the Association and the holders of the common stock as
to matters pertaining to the Holding Company. Each holder of common stock shall
be entitled to vote on any matter to be considered by the stockholders of the
Holding Company. A stockholder will be entitled to one vote for each share of
common stock owned.
Savings Accounts and Loans. The Association's savings accounts, account
balances and existing FDIC insurance coverage of savings accounts will not be
affected by the conversion. Furthermore, the conversion will not affect the
loan accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with the Association.
Tax Effects. The Association has received an opinion from Breyer &
Aguggia, Washington, D.C., that the conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that:
(i) no gain or loss will be recognized to the Association in its mutual or
stock form by reason of the conversion;
(ii) no gain or loss will be recognized to its account holders upon the
issuance to them of accounts in the Association immediately after the
conversion, in the same dollar amounts and on the same terms and conditions
as their accounts at the Association in its mutual form plus interest in
the liquidation account;
(iii) the tax basis of account holders' accounts in the Association
immediately after the conversion will be the same as the tax basis of their
accounts immediately prior to conversion;
(iv) the tax basis of each account holder's interest in the liquidation
account will be equal to the value, if any, of that interest;
(v) the tax basis of the common stock purchased in the conversion will be
the amount paid and the holding period for such stock will commence at the
date of purchase; and
(vi) no gain or loss will be recognized to account holders upon the receipt
or exercise of subscription rights in the conversion, except to the extent
subscription rights are deemed to have value as discussed below.
Unlike a private letter ruling issued by the IRS, an opinion of counsel is
not binding on the IRS and the IRS could disagree with the conclusions reached
therein. In the event of such disagreement, no assurance can be given that the
conclusions reached in an opinion of counsel would be sustained by a court if
contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that the
receipt of subscription rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan of Conversion will be
taxable to the extent, if any, that the subscription rights are deemed to have a
fair market value. RP Financial, a financial consulting firm retained by the
Association, whose findings are not binding on the IRS, has issued a letter
indicating that the subscription rights do not have any value, based on the fact
that such rights are acquired by the recipients without cost, are
nontransferable and of short duration and afford the recipients the right only
to purchase shares of the common stock at a price equal to its estimated fair
market value, which will be the same price paid by purchasers in the Direct
Community Offering for unsubscribed shares of common stock. If the subscription
rights are deemed to have a fair market value, the receipt of such rights may
only be taxable to those Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members who exercise their subscription rights. The
Association could also recognize a gain on the distribution of such subscription
rights. Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members are encouraged to consult with their own tax advisors as to the
tax consequences in the event the subscription rights are deemed to have a fair
market value.
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The Association has also received an opinion from Deloitte & Touche LLP,
Greenville, South Carolina, that, assuming the conversion does not result in any
federal income tax liability to the Association, its account holders, or the
Holding Company, implementation of the Plan of Conversion will not result in any
South Carolina income tax liability to such entities or persons.
The opinions of Breyer & Aguggia and Deloitte & Touche LLP and the letter
from RP Financial are filed as exhibits to the Registration Statement. See
"ADDITIONAL INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
Liquidation Account. In the unlikely event of a complete liquidation of
the Association in its present mutual form, each depositor in the Association
would receive a pro rata share of any assets of the Association remaining after
payment of claims of all creditors (including the claims of all depositors up to
the withdrawal value of their accounts). Each depositor's pro rata share of
such remaining assets would be in the same proportion as the value of his or her
deposit account to the total value of all deposit accounts in the Association at
the time of liquidation.
After the conversion, holders of withdrawable deposit(s) in the
Association, including certificates of deposit ("Savings Account(s)"), shall not
be entitled to share in any residual assets in the event of liquidation of the
Association. However, pursuant to OTS regulations, the Association shall, at
the time of the conversion, establish a liquidation account in an amount equal
to its total equity as of the date of the latest statement of financial
condition contained herein.
The liquidation account shall be maintained by the Association subsequent
to the conversion for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who retain their Savings Accounts in the Association.
Each Eligible Account Holder and Supplemental Eligible Account Holder shall,
with respect to each Savings Account held, have a related inchoate interest in a
portion of the liquidation account balance ("subaccount").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or a Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's "qualifying deposit" in the
Savings Account and the denominator is the total amount of the "qualifying
deposits" of all such holders. Such initial subaccount balance shall not be
increased, and it shall be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing day of the Association subsequent to June 30, 1996, or December 31, 1997
is less than the lesser of (i) the deposit balance in such Savings Account at
the close of business on any other annual closing date subsequent to June 30,
1996 or December 31, 1997 or (ii) the amount of the "qualifying deposit" in such
Savings Account on June 30, 1996 or December 31, 1997, then the subaccount
balance for such Savings Account shall be adjusted by reducing such subaccount
balance in an amount proportionate to the reduction in such deposit balance. In
the event of a downward adjustment, such subaccount balance shall not be
subsequently increased, notwithstanding any increase in the deposit balance of
the related Savings Account. If any such Savings Account is closed, the related
subaccount balance shall be reduced to zero.
In the event of a complete liquidation of the Association (and only in such
event) each Eligible Account Holder and Supplemental Eligible Account Holder
shall be entitled to receive a liquidation distribution from the liquidation
account in the amount of the then current adjusted subaccount balance(s) for
Savings Account(s) then held by such holder before any liquidation distribution
may be made to stockholders. No merger, consolidation, bulk purchase of assets
with assumptions of Savings Accounts and other liabilities or similar
transactions with another federally insured institution in which the Association
is not the surviving institution shall be considered to be a complete
liquidation. In any such transaction the liquidation account shall be assumed
by the surviving institution.
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In the unlikely event the Association is liquidated after the conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to the Holding Company as the sole stockholder of the
Association.
The Subscription, Direct Community and Syndicated Community Offerings
Subscription Offering. In accordance with the Plan of Conversion,
nontransferable subscription rights to purchase the common stock have been
issued to persons and entities entitled to purchase the common stock in the
Subscription Offering. The amount of the common stock which these parties may
purchase will be subject to the availability of the common stock for purchase
under the categories set forth in the Plan of Conversion. Subscription
priorities have been established for the allocation of stock to the extent that
the common stock is available. These priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or more
on deposit at the Association as of June 30, 1996 will receive nontransferable
subscription rights to subscribe for up to the greater of $330,000 of common
stock, one-tenth of one percent of the total offering of common stock or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders. If the exercise of subscription
rights in this category results in an oversubscription, shares of common stock
will be allocated among subscribing Eligible Account Holders so as to permit
each Eligible Account Holder, to the extent possible, to purchase a number of
shares sufficient to make such person's total allocation equal 100 shares or the
number of shares actually subscribed for, whichever is less. Thereafter,
unallocated shares will be allocated among subscribing Eligible Account Holders
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all Eligible Account Holders.
Subscription rights received by officers and directors in this category based on
their increased deposits in the Association in the one year period preceding
December 31, 1995 are subordinated to the subscription rights of other Eligible
Account Holders.
Category 2: ESOP. The Plan of Conversion provides that the ESOP shall
receive nontransferable subscription rights to purchase up to 8% of the shares
of common stock issued in the conversion. The ESOP intends to purchase 8% of
the shares of common stock issued in the conversion. In the event the number of
shares offered in the conversion is increased above the maximum of the Estimated
Valuation Range, the ESOP shall have a priority right to purchase any such
shares exceeding the maximum of the Estimated Valuation Range up to an aggregate
of 8% of the common stock. If the ESOP's subscription is not filled in its
entirety, the ESOP may purchase shares in the open market or may purchase shares
directly from the Holding Company.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit as of December 31, 1997 will receive nontransferable
subscription rights to subscribe for up to the greater of $330,000 of common
stock, one-tenth of one percent of the total offering of common stock or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of qualifying deposits of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. If the
exercise of subscription rights in this category results in an oversubscription,
shares of common stock will be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each Supplemental Eligible Account Holder, to
the extent possible, to purchase a number of shares sufficient to make his or
her total allocation equal 100 shares or the number of shares actually
subscribed for, whichever is less. Thereafter, unallocated shares will be
allocated among subscribing Supplemental Eligible Account Holders
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all Supplemental Eligible Account
Holders.
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Category 4: Other Members. Each depositor of the Association as of the
Voting Record Date (_________ __, 1998) and each borrower with a loan
outstanding on October 21, 1997 which continues to be outstanding as of the
Voting Record Date will receive nontransferable subscription rights to purchase
up to $330,000 of common stock in the conversion to the extent shares are
available following subscriptions by Eligible Account Holders, the Association's
ESOP and Supplemental Eligible Account Holders. In the event of an
oversubscription in this category, the available shares will be allocated
proportionately based on the amount of the respective subscriptions.
Subscription rights are nontransferable. Persons selling or otherwise
transferring their rights to subscribe for common stock in the Subscription
Offering or subscribing for common stock on behalf of another person will be
subject to forfeiture of such rights and possible further sanctions and
penalties imposed by the OTS or another agency of the U.S. Government. Each
person exercising subscription rights will be required to certify that he or she
is purchasing such shares solely for his or her own account and that he or she
has no agreement or understanding with any other person for the sale or transfer
of such shares. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT THE
CONSENT OF THE ASSOCIATION AND THE HOLDING COMPANY.
The Holding Company and the Association will make reasonable attempts to
provide a prospectus and related offering materials to holders of subscription
rights. However, the Subscription Offering and all subscription rights under
the Plan of Conversion will expire at 12:00 Noon, Eastern Time, on the
Expiration Date, whether or not the Association has been able to locate each
person entitled to such subscription rights. Orders for common stock in the
Subscription Offering received in hand by the Association after the Expiration
Date will not be accepted. The Subscription Offering may be extended by the
Holding Company and the Association up to _____ __, 1998 without the OTS's
approval. OTS regulations require that the Holding Company complete the sale of
common stock within 45 days after the close of the Subscription Offering. If
the Direct Community Offering and the Syndicated Community Offerings are not
completed within such period all funds received will be promptly returned with
interest at the Association's passbook rate and all withdrawal authorizations
will be canceled. If regulatory approval of an extension of the time period has
been granted, all subscribers will be notified of such extension and of the
duration of any extension that has been granted, and will be given the right to
increase, decrease or rescind their orders. If an affirmative response to any
resolicitation is not received by the Holding Company from a subscriber, the
subscriber's order will be rescinded and all funds received will be promptly
returned with interest (or withdrawal authorizations will be canceled). No
single extension can exceed 90 days.
Direct Community Offering. Any shares of common stock which remain
unsubscribed for in the Subscription Offering will be offered by the Holding
Company to certain members of the general public in a Direct Community Offering,
with preference given to natural persons and trusts of natural persons residing
in the Local Community. Purchasers in the Direct Community Offering are
eligible to purchase up to $330,000 of common stock. In the event an
insufficient number of shares are available to fill orders in the Direct
Community Offering, the available shares will be allocated on a pro rata basis
determined by the amount of the respective orders. The Direct Community
Offering, if held, is expected to commence immediately subsequent to the
Expiration Date, but may begin at anytime during the Subscription Offering. The
Direct Community Offering may terminate on or at any time subsequent to the
Expiration Date, but no later than 45 days after the close of the Subscription
Offering, unless extended by the Holding Company and the Association, with
approval of the OTS. Any extensions beyond 45 days after the close of the fully
extended Subscription Offering would require a resolicitation of orders, wherein
subscribers for the maximum numbers of shares of common stock would be, and
certain other large subscribers in the discretion of the Holding Company and the
Association may be, given the opportunity to continue their orders, in which
case they will need to reconfirm affirmatively their subscriptions prior to the
expiration of the resolicitation offering or their subscription funds will be
promptly refunded with interest at the Association's passbook rate, or be
permitted to modify or cancel their orders. The right of any person to purchase
shares in the Direct Community Offering is subject to the absolute right of the
Holding Company and the Association to accept or reject such purchases in whole
or in part. If an order is rejected in part, the purchaser does not have the
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right to cancel the remainder of the order. The Holding Company presently
intends to terminate the Direct Community Offering as soon as it has received
orders for all shares available for purchase in the conversion.
If all of the common stock offered in the Subscription Offering is
subscribed for, no common stock will be available for purchase in the Direct
Community Offering.
Syndicated Community Offering. The Plan of Conversion provides that, if
necessary, all shares of common stock not purchased in the Subscription Offering
and Direct Community Offering, if any, may be offered for sale to certain
members of the general public in a Syndicated Community Offering through a
syndicate of registered broker-dealers to be formed and managed by Trident
Securities acting as agent of the Holding Company. The Holding Company and the
Association have the right to reject orders, in whole or part, in their sole
discretion in the Syndicated Community Offering. Neither Trident Securities nor
any registered broker-dealer shall have any obligation to take or purchase any
shares of the common stock in the Syndicated Community Offering; however,
Trident Securities has agreed to use its best efforts in the sale of shares in
the Syndicated Community Offering.
Stock sold in the Syndicated Community Offering also will be sold at the
$15.00 purchase price. See "--Stock Pricing and Number of Shares to be Issued."
No person will be permitted to subscribe in the Syndicated Community Offering
for shares of common stock with an aggregate purchase price of more than
$330,000. See "--Plan of Distribution for the Subscription, Direct Community
and Syndicated Community Offerings" for a description of the commission to be
paid to the selected dealers and to Trident Securities.
Trident Securities may enter into agreements with selected dealers to
assist in the sale of shares in the Syndicated Community Offering. During the
Syndicated Community Offering, selected dealers may only solicit indications of
interest from their customers to place orders with the Holding Company as of a
certain date ("Order Date") for the purchase of shares of Conversion Stock.
When and if Trident Securities and the Holding Company believe that enough
indications of interest and orders have been received in the Subscription
Offering, the Direct Community Offering and the Syndicated Community Offering to
consummate the conversion, Trident Securities will request, as of the Order
Date, selected dealers to submit orders to purchase shares for which they have
received indications of interest from their customers. Selected dealers will
send confirmations to such customers on the next business day after the Order
Date. Selected dealers may debit the accounts of their customers on a date
which will be three business days from the Order Date ("Settlement Date").
Customers who authorize selected dealers to debit their brokerage accounts are
required to have the funds for payment in their account on but not before the
Settlement Date. On the Settlement Date, selected dealers will remit funds to
the account that the Holding Company established for each selected dealer. Each
customer's funds so forwarded to the Holding Company, along with all other
accounts held in the same title, will be insured by the FDIC up to the
applicable $100,000 legal limit. After payment has been received by the Holding
Company from selected dealers, funds will earn interest at the Association's
passbook rate until the completion of the offering. At the completion of the
conversion, the funds received will be used to purchase the shares of common
stock ordered. The shares issued in the conversion cannot and will not be
insured by the FDIC or any other government agency. In the event the conversion
is not consummated as described above, funds with interest will be returned
promptly to the selected dealers, who, in turn, will promptly credit their
customers' brokerage accounts.
The Syndicated Community Offering may terminate no more than 45 days after
the expiration of the Subscription Offering, unless extended by the Holding
Company and the Association, with approval of the OTS.
In the event the Association is unable to find purchasers from the general
public for all unsubscribed shares, other purchase arrangements will be made by
the Board of Directors of the Association, if feasible. Such other arrangements
will be subject to the approval of the OTS. The OTS may grant one or more
extensions of the offering period, provided that (i) no single extension exceeds
90 days, (ii) subscribers are given the right to increase, decrease or rescind
their subscriptions during the extension period, and (iii) the extensions do not
go more than two years beyond the date on which the members approved the Plan of
Conversion. If the conversion is not completed within
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45 days after the close of the Subscription Offering, either all funds received
will be returned with interest (and withdrawal authorizations canceled) or, if
the OTS has granted an extension of time, all subscribers will be given the
right to increase, decrease or rescind their subscriptions at any time prior to
20 days before the end of the extension period. If an extension of time is
obtained, all subscribers will be notified of such extension and of their rights
to modify their orders. If an affirmative response to any resolicitation is not
received by the Holding Company from a subscriber, the subscriber's order will
be rescinded and all funds received will be promptly returned with interest (or
withdrawal authorizations will be canceled).
Persons in Non-Qualified States. The Holding Company and the Association
will make reasonable efforts to comply with the securities laws of all states in
the United States in which persons entitled to subscribe for stock pursuant to
the Plan of Conversion reside. However, the Holding Company and the Association
are not required to offer stock in the Subscription Offering to any person who
resides in a foreign country or resides in a state of the United States with
respect to which (i) a small number of persons otherwise eligible to subscribe
for shares of common stock reside in such state or (ii) the Holding Company or
the Association determines that compliance with the securities laws of such
state would be impracticable for reasons of cost or otherwise, including but not
limited to a request or requirement that the Holding Company and the Association
or their officers, directors or trustees register as a broker, dealer, salesman
or selling agent, under the securities laws of such state, or a request or
requirement to register or otherwise qualify the subscription rights or common
stock for sale or submit any filing with respect thereto in such state. Where
the number of persons eligible to subscribe for shares in one state is small,
the Holding Company and the Association will base their decision as to whether
or not to offer the common stock in such state on a number of factors, including
the size of accounts held by account holders in the state, the cost of reviewing
the registration and qualification requirements of the state (and of actually
registering or qualifying the shares) or the need to register the Holding
Company, its officers, directors or employees as brokers, dealers or salesmen.
Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings
The Association and the Holding Company have retained Trident Securities to
consult with and advise the Association and to assist the Association and the
Holding Company, on a best efforts basis, in the distribution of shares in the
offering. Trident Securities is a broker-dealer registered with the SEC and a
member of the NASD. Trident Securities will assist the Association in the
conversion as follows: (i) it will act as marketing advisor with respect to the
Subscription Offering and will represent the Association as placement agent on a
best efforts basis in the sale of the common stock in the Direct Community
Offering if one is held; (ii) it will conduct training sessions with directors,
officers and employees of the Association regarding the conversion process; and
(iii) it will assist in the establishment and supervision of the Association's
stock information center and, with management's input, will train the
Association's staff to record properly and tabulate orders for the purchase of
common stock and to respond appropriately to customer inquiries.
Based upon negotiations between Trident Securities on the one hand and the
Holding Company and the Association on the other hand concerning fee structure,
Trident Securities will receive a commission equal to 1.5% of the aggregate
amount of common stock sold in the Subscription and Direct Community Offerings,
excluding shares sold to the ESOP and to directors, officers and employees of
the Association and associates of such persons. Fees payable to Trident
Securities will not exceed $800,000. Trident Securities and selected dealers
participating in the Syndicated Community Offering may receive a commission in
the Syndicated Community Offering in an amount to be agreed upon by the Holding
Company and the Association. Fees and commissions paid to Trident Securities
and to any selected dealers may be deemed to be underwriting fees, and Trident
Securities and such selected dealers may be deemed to be underwriters. Trident
Securities will also be reimbursed for its reasonable out-of-pocket expenses not
to exceed $7,500 and its legal fees not to exceed $27,500. Trident Securities
has received an advance of $7,500 towards its reimbursable expenses. For
additional information, see "-- Stock Pricing and Number of Shares to be Issued"
and "USE OF PROCEEDS."
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Subject to certain limitations, the Holding Company and the Association
have also agreed to indemnify Trident Securities against liabilities and
expenses (including legal fees) incurred in connection with certain claims or
litigation arising out of or based upon untrue statements or omissions contained
in the offering material for the common stock or with regard to allocations of
shares (in the event of oversubscription) or determinations of eligibility to
purchase shares.
Description of Sales Activities
The common stock will be offered in the Subscription Offering and Direct
Community Offering principally by the distribution of this prospectus and
through activities conducted at the Association's stock information center at
its main office facility. The stock information center is expected to operate
during normal business hours throughout the Subscription Offering and Direct
Community Offering. It is expected that at any particular time one or more
Trident Securities employees will be working at the stock information center.
Such employees of Trident Securities will be responsible for mailing materials
relating to the offering, responding to questions regarding the conversion and
the offering and processing stock orders.
Sales of common stock will be made by registered representatives affiliated
with Trident Securities or by the selected dealers managed by Trident
Securities. The management and employees of the Association may participate in
the offering in clerical capacities, providing administrative support in
effecting sales transactions or, when permitted by state securities laws,
answering questions of a mechanical nature relating to the proper execution of
the order form. Management of the Association may answer questions regarding the
business of the Association when permitted by state securities laws. Other
questions of prospective purchasers, including questions as to the advisability
or nature of the investment, will be directed to registered representatives. The
management and employees of the Holding Company and the Association have been
instructed not to solicit offers to purchase common stock or provide advice
regarding the purchase of common stock.
No officer, director or employee of the Association or the Holding Company
will be compensated, directly or indirectly, for any activities in connection
with the offer or sale of securities issued in the conversion.
None of the Association's personnel participating in the offering is
registered or licensed as a broker or dealer or an agent of a broker or dealer.
The Association's personnel will assist in the above-described sales activities
pursuant to an exemption from registration as a broker or dealer provided by
Rule 3a4-1 promulgated under the Exchange Act. Rule 3a4-1 generally provides
that an "associated person of an issuer" of securities shall not be deemed a
broker solely by reason of participation in the sale of securities of such
issuer if the associated person meets certain conditions. Such conditions
include, but are not limited to, that the associated person participating in the
sale of an issuer's securities not be compensated in connection therewith at the
time of participation, that such person not be associated with a broker or
dealer and that such person observe certain limitations on his or her
participation in the sale of securities. For purposes of this exemption,
"associated person of an issuer" is defined to include any person who is a
director, officer or employee of the issuer or a company that controls, is
controlled by or is under common control with the issuer.
Procedure for Purchasing Shares in the Subscription and Direct Community
Offerings
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 under the Exchange Act, no
prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
forms will only be distributed with a prospectus. The Association will accept
for processing only orders submitted on original order forms. The Association
is not obligated to accept orders submitted on photocopied or telecopied order
forms. Orders cannot and will not be accepted without the execution of the
certification appearing on the reverse side of the order form.
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To purchase shares in the Subscription Offering, an executed order form
with the required full payment for each share subscribed for, or with
appropriate authorization for withdrawal of full payment from the subscriber's
deposit account with the Association (which may be given by completing the
appropriate blanks in the order form), must be received by the Association by
12:00 Noon, Eastern Time, on the Expiration Date. Order forms that are not
received by such time or are executed defectively or are received without full
payment (or without appropriate withdrawal instructions) are not required to be
accepted. The Holding Company and the Association have the right to waive or
permit the correction of incomplete or improperly executed order forms, but do
not represent that they will do so. Pursuant to the Plan of Conversion, the
interpretation by the Holding Company and the Association of the terms and
conditions of the Plan of Conversion and of the order form will be final. In
order to purchase shares in the Direct Community Offering, the order form,
accompanied by the required payment for each share subscribed for, must be
received by the Association prior to the time the Direct Community Offering
terminates, which may be on or at any time subsequent to the Expiration Date.
Once received, an executed order form may not be modified, amended or rescinded
without the consent of the Association unless the conversion has not been
completed within 45 days after the end of the Subscription Offering, unless such
period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (June 30,
1996) and/or the Supplemental Eligibility Record Date (December 31, 1997) and/or
the Voting Record Date (___________ __, 1998) must list all accounts on the
order form giving all names in each account, the account number and the
approximate account balance as of such date. Failure to list an account could
result in fewer shares being allocated in the event of an oversubscription than
if all accounts had been disclosed.
Full payment for subscriptions may be made (i) in cash if delivered in
person at the Association's stock information center, (ii) by check, bank draft,
or money order, or (iii) by authorization of withdrawal from deposit accounts
maintained with the Association. Appropriate means by which such withdrawals
may be authorized are provided on the order form. No wire transfers will be
accepted. Interest will be paid on payments made by cash, check, bank draft or
money order at the Association's passbook rate from the date payment is received
until the completion or termination of the conversion. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the conversion (unless the
certificate matures after the date of receipt of the order form but prior to
closing, in which case funds will earn interest at the passbook rate from the
date of maturity until consummation of the conversion), but a hold will be
placed on such funds, thereby making them unavailable to the depositor until
completion or termination of the conversion. At the completion of the
conversion, the funds received in the offering will be used to purchase the
shares of common stock ordered. The shares of common stock issued in the
conversion cannot and will not be insured by the FDIC or any other government
agency. In the event that the conversion is not consummated for any reason, all
funds submitted will be promptly refunded with interest as described above.
If a subscriber authorizes the Association to withdraw the amount of the
aggregate purchase price from his or her deposit account, the Association will
do so as of the effective date of conversion, though the account must contain
the full amount necessary for payment at the time the subscription order is
received. The Association will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization the certificate
will be canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the Association's passbook rate.
The ESOP will not be required to pay for the shares subscribed for at the
time it subscribes, but rather may pay for such shares of common stock
subscribed for at the $15.00 purchase price upon consummation of the conversion,
provided that there is in force from the time of its subscription until such
time, a loan commitment from an unrelated financial institution or the Holding
Company to lend to the ESOP, at such time, the aggregate purchase price of the
shares for which it subscribed.
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IRAs maintained in the Association do not permit investment in the common
stock. A depositor interested in using his or her IRA funds to purchase common
stock must do so through a self-directed IRA. Since the Association does not
offer such accounts, it will allow such a depositor to make a trustee-to-trustee
transfer of the IRA funds to a trustee offering a self-directed IRA program with
the agreement that such funds will be used to purchase the Holding Company's
common stock in the offering. There will be no early withdrawal or IRS interest
penalties for such transfers. The new trustee would hold the common stock in a
self-directed account in the same manner as the Association now holds the
depositor's IRA funds. An annual administrative fee may be payable to the new
trustee. Depositors interested in using funds in an Association IRA to purchase
common stock should contact the stock information center as soon as possible so
that the necessary forms may be forwarded for execution and returned prior to
the Expiration Date. In addition, the provisions of ERISA and IRS regulations
require that officers, directors and 10% shareholders who use self-directed IRA
funds to purchase shares of common stock in the Subscription Offering, make such
purchases for the exclusive benefit of IRAs.
Certificates representing shares of common stock purchased, and any refund
due, will be mailed to purchasers at such address as may be specified in
properly completed order forms or to the last address of such persons appearing
on the records of the Association as soon as practicable following consummation
of the sale of all shares of common stock. Any certificates returned as
undeliverable will be disposed of in accordance with applicable law. Purchasers
may not be able to sell the shares of common stock which they purchased until
certificates for the common stock are available and delivered to them, even
though trading of the common stock may have commenced.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities sold in connection with the conversion be based upon an estimated pro
forma value of the Holding Company and the Association as converted (i.e.,
----
taking into account the expected receipt of proceeds from the sale of securities
in the conversion), as determined by an independent appraisal. The Association
and the Holding Company have retained RP Financial to prepare an appraisal of
the pro forma market value of the Holding Company and the Association as
converted, as well as a business plan. RP Financial will receive a fee expected
to total approximately $42,500 for its appraisal services and assistance in the
preparation of a business plan, plus reasonable out-of-pocket expenses incurred
in connection with the appraisal. The Association has agreed to indemnify RP
Financial under certain circumstances against liabilities and expenses
(including legal fees) arising out of, related to, or based upon the conversion.
RP Financial has prepared an appraisal of the estimated pro forma market
value of the Holding Company and the Association as converted taking into
account the formation of the Holding Company as the holding company for the
Association. For its analysis, RP Financial undertook substantial
investigations to learn about the Association's business and operations.
Management supplied financial information, including annual financial
statements, information on the composition of assets and liabilities, and other
financial schedules. In addition to this information, RP Financial reviewed the
Association's Form AC Application for Approval of Conversion and the Holding
Company's Form S-1 Registration Statement. Furthermore, RP Financial visited
the Association's facilities and had discussions with the Association's
management and its special conversion legal counsel, Breyer & Aguggia. No
detailed individual analysis of the separate components of the Holding Company's
or the Association's assets and liabilities was performed in connection with the
evaluation.
In estimating the pro forma market value of the Holding Company and the
Association as converted, as required by applicable regulatory guidelines, RP
Financial's analysis utilized three selected valuation procedures, the
Price/Book ("P/B") method, the Price/Earnings ("P/E") method, and Price/Assets
("P/A") method, all of which are described in its report. RP Financial placed
the greatest emphasis on the P/E and P/B methods in estimating pro forma market
value. In applying these procedures, RP Financial reviewed, among other
factors, the economic make-up of the Association's primary market area, the
Association's financial performance and condition in relation to publicly-traded
institutions that RP Financial deemed comparable to the Association, the
specific terms of the offering of the Holding Company's common stock, the pro
forma impact of the additional capital raised in the conversion,
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conditions of securities markets in general, and the market for thrift
institution common stock in particular. RP Financial's analysis provides an
approximation of the pro forma market value of the Holding Company and the
Association as converted based on the valuation methods applied and the
assumptions outlined in its report. Included in its report were certain
assumptions as to the pro forma earnings of the Holding Company after the
conversion that were utilized in determining the appraised value. These
assumptions included expenses as described under "PRO FORMA DATA," an assumed
after-tax rate of return on the net conversion proceeds of ____%, purchases by
the ESOP of 8% of the common stock sold in the conversion and purchases in the
open market by the MRP of a number of shares equal to 4% of the common stock
sold in the conversion at the $15.00 purchase price. See "PRO FORMA DATA" for
additional information concerning these assumptions. The use of different
assumptions may yield different results.
On the basis of the foregoing, RP Financial has advised the Holding Company
and the Association that, in its opinion, as of November 28, 1997, the aggregate
estimated pro forma market value of the Holding Company and the Association as
converted and, therefore, the common stock was within the valuation range of
$44,625,000 to $60,375,000 with a midpoint of $52,500,000. After reviewing the
methodology and the assumptions used by RP Financial in the preparation of the
appraisal, the Board of Directors established the Estimated Valuation Range
which is equal to the valuation range of $44,625,000 to $60,375,000 with a
midpoint of $52,500,000. Assuming that the shares are sold at $15.00 per share
in the conversion, the estimated number of shares would be between 2,975,000 and
4,025,000 with a midpoint of 3,500,000. The purchase price of $15.00 was
determined by discussion among the Boards of Directors of the Association and
the Holding Company and Trident Securities, taking into account, among other
factors (i) the requirement under OTS regulations that the common stock be
offered in a manner that will achieve the widest distribution of the stock, (ii)
desired liquidity in the common stock subsequent to the conversion, and (iii)
the expense of issuing shares for purposes of Delaware franchise taxes. Since
the outcome of the offering relates in large measure to market conditions at the
time of sale, it is not possible to determine the exact number of shares that
will be issued by the Holding Company at this time. The Estimated Valuation
Range may be amended, with the approval of the OTS, if necessitated by
developments following the date of such appraisal in, among other things, market
conditions, the financial condition or operating results of the Association,
regulatory guidelines or national or local economic conditions.
RP Financial's appraisal report is filed as an exhibit to the Registration
Statement. See "ADDITIONAL INFORMATION."
If, upon completion of the Subscription Offering, at least the minimum
number of shares are subscribed for, RP Financial, after taking into account
factors similar to those involved in its prior appraisal, will determine its
estimate of the pro forma market value of the Holding Company and the
Association as converted, as of the close of the Subscription Offering.
No sale of the shares will take place unless prior thereto RP Financial
confirms to the OTS that, to the best of RP Financial's knowledge and judgment,
nothing of a material nature has occurred that would cause it to conclude that
the actual total purchase price on an aggregate basis was incompatible with its
estimate of the total pro forma market value of the Holding Company and the
Association as converted at the time of the sale. If, however, the facts do not
justify such a statement, the offering or other sale may be canceled, a new
Estimated Valuation Range and price per share set and new Subscription, Direct
Community and Syndicated Community Offerings held. Under such circumstances,
subscribers would have the right to modify or rescind their subscriptions and to
have their subscription funds returned promptly with interest and holds on funds
authorized for withdrawal from deposit accounts would be released or reduced.
Depending upon market and financial conditions, the number of shares issued
may be more or less than the range in number of shares discussed herein. In the
event the total amount of shares issued is less than 2,975,000 or more than
4,628,750 (15% above the maximum of the Estimated Valuation Range), for
aggregate gross proceeds of less than $44,625,000 or more than $69,431,250,
subscription funds will be returned promptly with interest to each
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subscriber unless he indicates otherwise. In the event a new valuation range is
established by RP Financial, such new range will be subject to approval by the
OTS.
If purchasers cannot be found for an insignificant residue of unsubscribed
shares from the general public, other purchase arrangements will be made by the
Boards of Directors of the Association and the Holding Company, if possible.
Such other purchase arrangements will be subject to the approval of the OTS and
may provide for purchases for investment purposes by directors, officers, their
associates and other persons in excess of the limitations provided in the Plan
of Conversion and in excess of the proposed director purchases set forth herein,
although no such purchases are currently intended. If such other purchase
arrangements cannot be made, the Plan of Conversion will terminate.
In formulating its appraisal, RP Financial relied upon the truthfulness,
accuracy and completeness of all documents the Association furnished to it. RP
Financial also considered financial and other information from regulatory
agencies, other financial institutions, and other public sources, as
appropriate. While RP Financial believes this information to be reliable, RP
Financial does not guarantee the accuracy or completeness of such information
and did not independently verify the financial statements and other data
provided by the Association and the Holding Company or independently value the
assets or liabilities of the Holding Company and the Association. The appraisal
by RP Financial is not intended to be, and must not be interpreted as, a
recommendation of any kind as to the advisability of voting to approve the Plan
of Conversion or of purchasing shares of common stock. Moreover, because the
appraisal is necessarily based on many factors which change from time to time,
there is no assurance that persons who purchase such shares in the conversion
will later be able to sell shares thereafter at prices at or above the purchase
price.
Limitations on Purchases of Shares
The Plan of Conversion provides for certain limitations to be placed upon
the purchase of common stock by eligible subscribers and others in the
conversion. Each subscriber must subscribe for a minimum of 25 shares. With
the exception of the ESOP, which is expected to subscribe for 8% of the shares
of common stock issued in the conversion, the Plan of Conversion provides for
the following purchase limitations: (i) No Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member, including, in each case, all persons on
a joint account, may purchase shares of common stock with an aggregate purchase
price of more than $330,000, (ii) no person may purchase in the Direct Community
Offering, if any, or in the Syndicated Community Offering, if any, shares of
common stock with an aggregate purchase price of more than $330,000, and (iii)
no person, either alone or together with associates of or persons acting in
concert with such person, may purchase in the aggregate more than the overall
maximum purchase limitation of 1% of the total number of shares of common stock
issued in the conversion (exclusive of any shares issued pursuant to an increase
in the Estimated Valuation Range of up to 15%). For purposes of the Plan of
Conversion, the directors are not deemed to be acting in concert solely by
reason of their Board membership. Pro rata reductions within each subscription
rights category will be made in allocating shares to the extent that the maximum
purchase limitations are exceeded.
The Association's and the Holding Company's Boards of Directors may, in
their sole discretion, increase the maximum purchase limitation set forth above
up to 9.99% of the shares of common stock sold in the conversion, provided that
orders for shares which exceed 5% of the shares of common stock sold in the
conversion may not exceed, in the aggregate, 10% of the shares sold in the
conversion. The Association and the Holding Company do not intend to increase
the maximum purchase limitation unless market conditions are such that an
increase in the maximum purchase limitation is necessary to sell a number of
shares in excess of the minimum of the Estimated Valuation Range. If the Boards
of Directors decide to increase the purchase limitation above, persons who
subscribed for the maximum number of shares of common stock will be, and other
large subscribers in the discretion of the Holding Company and the Association
may be, given the opportunity to increase their subscriptions accordingly,
subject to the rights and preferences of any person who has priority
subscription rights.
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The term "acting in concert" is defined in the Plan of Conversion to mean
(i) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; or (ii) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. In general, a person who acts in concert with another party shall
also be deemed to be acting in concert with any person who is also acting in
concert with that other party.
The term "associate" of a person is defined in the Plan of Conversion to
mean (i) any corporation or organization (other than the Association or a
majority-owned subsidiary of the Association) of which such person is an officer
or partner or is, directly or indirectly, the beneficial owner of 10% or more of
any class of equity securities; (ii) any trust or other estate in which such
person has a substantial beneficial interest or as to which such person serves
as trustee or in a similar fiduciary capacity (excluding tax-qualified employee
plans); and (iii) any relative or spouse of such person, or any relative of such
spouse, who either has the same home as such person or who is a director or
officer of the Association or any of its parents or subsidiaries. For example,
a corporation of which a person serves as an officer would be an associate of
such person and, therefore, all shares purchased by such corporation would be
included with the number of shares which such person could purchase individually
under the above limitations.
The term "officer" is defined in the Plan of Conversion to mean an
executive officer of the Association, including its Chairman of the Board,
President, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents in
charge of principal business functions, Secretary and Treasurer.
Common stock purchased pursuant to the conversion will be freely
transferable, except for shares purchased by directors and officers of the
Association and the Holding Company and by NASD members. See "--Restrictions on
Transferability by Directors and Officers and NASD Members."
Restrictions on Repurchase of Stock
Pursuant to OTS regulations, OTS-regulated savings associations (and their
holding companies) may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock from
any person, except in the event of (i) an offer made to all of its stockholders
to repurchase the common stock on a pro rata basis, approved by the OTS; or (ii)
the repurchase of qualifying shares of a director. Furthermore, repurchases of
any common stock are prohibited if the effect thereof would cause the
association's regulatory capital to be reduced below (a) the amount required for
the liquidation account or (b) the regulatory capital requirements imposed by
the OTS. Repurchases are generally prohibited during the first year following
conversion. Upon ten days' written notice to the OTS, and if the OTS does not
object, an institution may make open market repurchases of its outstanding
common stock during years two and three following the conversion, provided that
certain regulatory conditions are met and that the repurchase would not
adversely affect the financial condition of the institution. Any repurchases of
common stock by the Holding Company would be subject to these regulatory
restrictions unless the OTS would provide otherwise.
Restrictions on Transferability by Directors and Officers and NASD Members
Shares of common stock purchased in the offering by directors and officers
of the Holding Company may not be sold for a period of one year following
consummation of the conversion, except in the event of the death of the
stockholder or in any exchange of the common stock in connection with a merger
or acquisition of the Holding Company. Shares of common stock received by
directors or officers through the ESOP or the MRP or upon exercise of options
issued pursuant to the Stock Option Plan or purchased subsequent to the
conversion are not subject to this restriction. Accordingly, shares of common
stock issued by the Holding Company to directors and officers shall bear a
legend giving appropriate notice of the restriction and, in addition, the
Holding Company will give appropriate instructions to the transfer agent for the
Holding Company's common stock with respect to the restriction on
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transfers. Any shares issued to directors and officers as a stock dividend,
stock split or otherwise with respect to restricted common stock shall be
subject to the same restrictions.
Purchases of outstanding shares of common stock of the Holding Company by
directors, executive officers (or any person who was an executive officer or
director of the Association after adoption of the Plan of Conversion) and their
associates during the three-year period following the conversion may be made
only through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Holding Company's
outstanding common stock or to the purchase of stock pursuant to the Stock
Option Plan.
The Holding Company has filed with the SEC a registration statement under
the Securities Act for the registration of the common stock to be issued
pursuant to the conversion. The registration under the Securities Act of shares
of the common stock to be issued in the conversion does not cover the resale of
such shares. Shares of common stock purchased by persons who are not affiliates
of the Holding Company may be resold without registration. Shares purchased by
an affiliate of the Holding Company will be subject to the resale restrictions
of Rule 144 under the Securities Act. If the Holding Company meets the current
public information requirements of Rule 144 under the Securities Act, each
affiliate of the Holding Company who complies with the other conditions of Rule
144 (including those that require the affiliate's sale to be aggregated with
those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of the Holding Company
or (ii) the average weekly volume of trading in such shares during the preceding
four calendar weeks. Provision may be made in the future by the Holding Company
to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
Under guidelines of the NASD, members of the NASD and their associates are
subject to certain restrictions on the transfer of securities purchased in
accordance with subscription rights and to certain reporting requirements upon
purchase of such securities.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of federal law
and regulations and Delaware corporate law, as well as the Certificate of
Incorporation and Bylaws of the Holding Company, relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations and to the Certificate of Incorporation and Bylaws of the Holding
Company contained in the Registration Statement filed with the SEC. See
"ADDITIONAL INFORMATION" as to how to obtain a copy of these documents.
Conversion Regulations
OTS regulations prohibit any person from making an offer, announcing an
intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, without the prior written approval of the OTS, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the converting institution (or its holding company) for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, that person would become
the beneficial owner of more than 10% of the outstanding stock of the
institution (or its holding company). The OTS has defined "person" to include
any individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association (or its holding company) or an underwriter or
member of a
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selling group acting on the converting institution's (or its holding company's)
behalf for resale to the general public are excepted. The regulation also
provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution (or its holding company) or who controls more than 10% of
the outstanding shares or voting rights of a converting or converted institution
(or its holding company).
Change of Control Regulations
Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings and loan association or its parent holding company
unless the OTS has been given 60 days' prior written notice and has not issued a
notice disapproving the proposed acquisition. In addition, OTS regulations
provide that no company may acquire control of a savings association without the
prior approval of the OTS. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation by the OTS.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations. Such control factors include
the acquiror being one of the two largest stockholders. The determination of
control may be rebutted by submission to the OTS, prior to the acquisition of
stock or the occurrence of any other circumstances giving rise to such
determination, of a statement setting forth facts and circumstances which would
support a finding that no control relationship will exist and containing certain
undertakings. The regulations provide that persons or companies which acquire
beneficial ownership exceeding 10% or more of any class of a savings
association's stock must file with the OTS a certification form that the holder
is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable. There are also rebuttable presumptions in
the regulations concerning whether a group "acting in concert" exists, including
presumed action in concert among members of an "immediate family."
The OTS may prohibit an acquisition of control if it finds, among other
things, that (i) the acquisition would result in a monopoly or substantially
lessen competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the institution, or (iii) the competence,
experience or integrity of the acquiring person indicates that it would not be
in the interest of the depositors or the public to permit the acquisition of
control by such person.
Anti-takeover Provisions in the Holding Company's Certificate of Incorporation
and Bylaws and in Delaware Law
A number of provisions of the Holding Company's Certificate of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of stockholders. The following discussion is a general summary of
certain provisions of the Holding Company's Certificate of Incorporation and
Bylaws and regulatory provisions relating to stock ownership and transfers, the
Board of Directors and business combinations, which might be deemed to have a
potential "anti-takeover" effect. These provisions may have the effect of
discouraging a future takeover attempt which is not approved by the Board of
Directors but which individual Holding Company stockholders may deem to be in
their best interests or in which stockholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the incumbent Board of
Directors or management of the Holding Company more difficult. The following
description of certain of the provisions of the Certificate of Incorporation and
Bylaws of the Holding Company is necessarily general and reference should be
made
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in each case to such Certificate of Incorporation and Bylaws, which are
incorporated herein by reference. See "ADDITIONAL INFORMATION" as to where to
obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of the
Holding Company provides that in no event shall any record owner of any
outstanding common stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns in excess of 10% of the then outstanding shares
of common stock (the "Limit") be entitled or permitted to any vote in respect of
the shares held in excess of the Limit, unless permitted by a resolution adopted
by a majority of the board of directors. Beneficial ownership is determined
pursuant to Rule 13d-3 of the General Rules and Regulations of the Exchange Act
and includes shares beneficially owned by such person or any of his or her
affiliates (as defined in the Certificate of Incorporation), shares which such
person or his or her affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his or her
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by the ESOP or directors, officers and employees of
the Association or Holding Company or shares that are subject to a revocable
proxy and that are not otherwise beneficially, or deemed by the Holding Company
to be beneficially, owned by such person and his or her affiliates.
Board of Directors. The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the whole number of the members of the Board. The members of each class
shall be elected for a term of three years, with the terms of office of all
members of one class expiring each year so that approximately one-third of the
total number of directors are elected each year. The Holding Company's
Certificate of Incorporation provides that the size of the Board shall be as set
forth in the Bylaws. The Bylaws currently set the number of directors at five.
The Certificate of Incorporation provides that any vacancy occurring in the
Board, including a vacancy created by an increase in the number of directors,
shall be filled by a vote of two-thirds of the directors then in office and any
director so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of the class to which the director has been
chosen expires. The classified Board is intended to provide for continuity of
the Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board of
Directors without the consent of the incumbent Board of Directors of the Holding
Company. The Certificate of Incorporation of the Holding Company provides that
a director may be removed from the Board of Directors prior to the expiration of
his or her term only for cause and only upon the vote of 80% of the outstanding
shares of voting stock. In the absence of this provision, the vote of the
holders of a majority of the shares could remove the entire Board, but only with
cause, and replace it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, the Certificate of Incorporation provides that special
meetings of stockholders of the Holding Company may be called only by the Board
of Directors of the Holding Company and that stockholders may take action only
at a meeting and not by written consent.
Authorized Shares. The Certificate of Incorporation authorizes the issuance
of 10,000,000 shares of common stock and 500,000 shares of preferred stock. The
shares of common stock and preferred stock were authorized in an amount greater
than that to be issued in the conversion to provide the Holding Company's Board
of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits,
restricted stock grants and the exercise of stock options. However, these
additional authorized shares may also be used by the Board of Directors,
consistent with fiduciary duties, to deter future attempts to gain control of
the Holding Company. The Board of Directors also has sole authority to determine
the terms of any one or more series of preferred stock, including voting rights,
conversion rates, and liquidation preferences. As a result of the ability to fix
voting rights for a series of preferred stock, the Board has the power, to the
extent consistent with its fiduciary duty, to issue a series of preferred stock
to persons friendly to management in order to attempt to block a tender offer,
merger or other transaction by which a third party seeks control of the Holding
Company, and thereby assist members of management to retain their positions. The
Holding Company's Board currently has no plans for the issuance of additional
shares, other than the issuance of shares of common stock upon exercise of stock
options and in connection with the MRP.
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Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Holding Company's outstanding shares of voting
stock to approve certain "Business Combinations" (as defined therein) involving
a "Related Person" (as defined therein) except in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Holding Company's Board of Directors who are unaffiliated with the Related
Person and were directors prior to the time when the Related Person became a
Related Person. The term "Related Person" is defined to include any individual,
corporation, partnership or other entity (other than the Holding Company or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10% or
more of the outstanding shares of voting stock of the Holding Company or an
affiliate of such person or entity. This provision of the Certificate of
Incorporation applies to any "Business Combination," which is defined to
include: (i) any merger or consolidation of the Holding Company with or into
any Related Person; (ii) any sale, lease, exchange, mortgage, transfer, or other
disposition of 25% or more of the assets of the Holding Company or combined
assets of the Holding Company and its subsidiaries to a Related Person; (iii)
any merger or consolidation of a Related Person with or into the Holding Company
or a subsidiary of the Holding Company; (iv) any sale, lease, exchange,
transfer, or other disposition of 25% or more of the assets of a Related Person
to the Holding Company or a subsidiary of the Holding Company; (v) the issuance
of any securities of the Holding Company or a subsidiary of the Holding Company
to a Related Person; (vi) the acquisition by the Holding Company or a subsidiary
of the Holding Company of any securities of a Related Person; (vii) any
reclassification of common stock of the Holding Company or any recapitalization
involving the common stock of the Holding Company; or (viii) any agreement or
other arrangement providing for any of the foregoing.
Under Delaware law, absent this provision, business combinations, including
mergers, consolidations and sales of substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of a majority of the outstanding shares of common stock of the Holding
Company and any other affected class of stock. One exception under Delaware law
to the majority approval requirement applies to stockholders owning 15% or more
of the common stock of a corporation for a period of less than three years.
Such 15% stockholder, in order to obtain approval of a business combination,
must obtain the approval of two-thirds of the outstanding stock, excluding the
stock owned by such 15% stockholder, or satisfy other requirements under
Delaware law relating to board of director approval of his or her acquisition of
the shares of the Holding Company. The increased stockholder vote required to
approve a business combination may have the effect of foreclosing mergers and
other business combinations which a majority of stockholders deem desirable and
placing the power to prevent such a merger or combination in the hands of a
minority of stockholders.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's Certificate of Incorporation must be approved by a majority
vote of its Board of Directors and also by a majority of the outstanding shares
of its voting stock, provided, however, that an affirmative vote of at least 80%
of the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision limiting
voting rights, the provisions relating to approval of certain business
combinations, calling special meetings, the number and classification of
directors, director and officer indemnification by the Holding Company and
amendment of the Holding Company's Bylaws and Certificate of Incorporation. The
Holding Company's Bylaws may be amended by its Board of Directors, or by a vote
of 80% of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
Stockholder Nominations and Proposals. The Certificate of Incorporation of
the Holding Company requires a stockholder who intends to nominate a candidate
for election to the Board of Directors, or to raise new business at a
stockholder meeting to give not less than 30 nor more than 60 days' advance
notice to the Secretary of the Holding Company. The notice provision requires a
stockholder who desires to raise new business to provide certain information to
the Holding Company concerning the nature of the new business, the stockholder
and the stockholder's interest in the business matter. Similarly, a stockholder
wishing to nominate any person for election as a director must provide the
Holding Company with certain information concerning the nominee and the
proposing stockholder.
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Purpose and Takeover Defensive Effects of the Holding Company's Certificate
of Incorporation and Bylaws. The Board of Directors of the Association believes
that the provisions described above are prudent and will reduce the Holding
Company's vulnerability to takeover attempts and certain other transactions that
have not been negotiated with and approved by its Board of Directors. These
provisions will also assist the Association in the orderly deployment of the
conversion proceeds into productive assets during the initial period after the
conversion. The Board of Directors believes these provisions are in the best
interest of the Association and Holding Company and its stockholders. In the
judgment of the Board of Directors, the Holding Company's Board will be in the
best position to determine the true value of the Holding Company and to
negotiate more effectively for what may be in the best interests of its
stockholders. Accordingly, the Board of Directors believes that it is in the
best interest of the Holding Company and its stockholders to encourage potential
acquirors to negotiate directly with the Board of Directors of the Holding
Company and that these provisions will encourage such negotiations and
discourage hostile takeover attempts. It is also the view of the Board of
Directors that these provisions should not discourage persons from proposing a
merger or other transaction at a price reflective of the true value of the
Holding Company and that is in the best interest of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of the Holding
Company for its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners became less
than 300, thereby allowing for deregistration under the Exchange Act.
Despite the belief of the Association and the Holding Company as to the
benefits to stockholders of these provisions of the Holding Company's
Certificate of Incorporation and Bylaws, these provisions may also have the
effect of discouraging a future takeover attempt that would not be approved by
the Holding Company's Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provisions will also render the removal
of the Holding Company's Board of Directors and of management more difficult.
The Board of Directors of the Association and the Holding Company, however, have
concluded that the potential benefits outweigh the possible disadvantages.
Following the conversion, pursuant to applicable law and, if required,
following the approval by stockholders, the Holding Company may adopt additional
anti-takeover charter provisions or other devices regarding the acquisition of
its equity securities that would be permitted for a Delaware business
corporation.
The cumulative effect of the restriction on acquisition of the Holding
Company contained in the Certificate of Incorporation and Bylaws of the Holding
Company and in Federal and Delaware law may be to discourage potential takeover
attempts and perpetuate incumbent management, even though certain stockholders
of the Holding Company may deem a potential acquisition to be in their best
interests, or deem existing management not to be acting in their best interests.
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DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
General
The Holding Company is authorized to issue 10,000,000 shares of common
stock having a par value of $.01 per share and 500,000 shares of preferred stock
having a par value of $.01 per share. The Holding Company currently expects to
issue up to 4,025,000 shares of common stock and no shares of preferred stock in
the conversion. Each share of the Holding Company's common stock will have the
same relative rights as, and will be identical in all respects with, each other
share of common stock. Upon payment of the purchase price for the common stock,
in accordance with the Plan of Conversion, all such stock will be duly
authorized, fully paid and nonassessable.
The common stock of the Holding Company will represent nonwithdrawable
capital, will not be an account of any type, and will not be insured by the FDIC
or any other government agency.
Common Stock
Dividends. The Holding Company can pay dividends out of statutory surplus
or from certain net profits if, as and when declared by its Board of Directors.
The payment of dividends by the Holding Company is subject to limitations which
are imposed by law and applicable regulation. See "DIVIDEND POLICY" and
"REGULATION." The holders of common stock of the Holding Company will be
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Holding Company out of funds legally available
therefor. If the Holding Company issues preferred stock, the holders thereof
may have a priority over the holders of the common stock with respect to
dividends.
Voting Rights. Upon conversion, the holders of common stock of the Holding
Company will possess exclusive voting rights in the Holding Company. They will
elect the Holding Company's Board of Directors and act on such other matters as
are required to be presented to them under Delaware law or as are otherwise
presented to them by the Board of Directors. Except as discussed in
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY," each holder of common
stock will be entitled to one vote per share and will not have any right to
cumulate votes in the election of directors. If the Holding Company issues
preferred stock, holders of the Holding Company preferred stock may also possess
voting rights. Certain matters require a vote of 80% of the outstanding shares
entitled to vote thereon. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
As a federal mutual savings and loan association, corporate powers and
control of the Association are vested in its Board of Directors, who elect the
officers of the Association and who fill any vacancies on the Board of Directors
as it exists upon conversion. Subsequent to Conversion, voting rights will be
vested exclusively in the owners of the shares of capital stock of the
Association, all of which will be owned by the Holding Company, and voted at the
direction of the Holding Company's Board of Directors. Consequently, the
holders of the common stock will not have direct control of the Association.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Association, the Holding Company, as holder of the Association's capital
stock would be entitled to receive, after payment or provision for payment of
all debts and liabilities of the Association (including all deposit accounts and
accrued interest thereon) and after distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders (see "THE CONVERSION"), all assets of the Association available
for distribution. In the event of liquidation, dissolution or winding up of the
Holding Company, the holders of its common stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of the Holding Company available for distribution. If Holding Company
preferred stock is issued, the holders thereof may have a priority over the
holders of the common stock in the event of liquidation or dissolution.
93
<PAGE>
Preemptive Rights. Holders of the common stock of the Holding Company will
not be entitled to preemptive rights with respect to any shares that may be
issued. The common stock is not subject to redemption.
Preferred Stock
None of the shares of the authorized Holding Company preferred stock will
be issued in the conversion and there are no plans to issue the preferred stock.
Such stock may be issued with such designations, powers, preferences and rights
as the Board of Directors may from time to time determine. The Board of
Directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
Restrictions on Acquisition
Acquisitions of the Holding Company are restricted by provisions in its
Certificate of Incorporation and Bylaws and by the rules and regulations of
various regulatory agencies. See "REGULATION" and "RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY."
REGISTRATION REQUIREMENTS
The Holding Company will register the common stock with the SEC pursuant to
Section 12(g) of the Exchange Act upon the completion of the conversion and will
not deregister its common stock for a period of at least three years following
the completion of the conversion. Upon such registration, the proxy and tender
offer rules, insider trading reporting and restrictions, annual and periodic
reporting and other requirements of the Exchange Act will be applicable.
LEGAL AND TAX OPINIONS
The legality of the common stock has been passed upon for the Holding
Company by Breyer & Aguggia, Washington, D.C. The federal tax consequences of
the offering have been opined upon by Breyer & Aguggia and the South Carolina
tax consequences of the offering have been opined upon by Deloitte & Touche LLP.
Breyer & Aguggia and Deloitte & Touche LLP have consented to the references
herein to their opinions. Certain legal matters will be passed upon for Trident
Securities by Luse Lehman Gorman Pomerenk & Schick, Washington, D.C.
EXPERTS
The financial statements of the Association as of September 30, 1997 and
1996 and for the years ended September 30, 1997, 1996 and 1995 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
RP Financial has consented to the publication herein of the summary of its
report to the Association setting forth its opinion as to the estimated pro
forma market value of the Holding Company and the Association as converted and
its letter with respect to subscription rights and to the use of its name and
statements with respect to it appearing herein.
94
<PAGE>
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on Form
S-1 (File No. 333-______) under the Securities Act with respect to the common
stock offered in the conversion. This prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Such
information may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at its
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies
may be obtained at prescribed rates from the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549. The Registration Statement
also is available through the SEC's World Wide Web site on the Internet
(http://www.sec.gov).
The Association has filed with the OTS an Application for Approval of
Conversion, which includes proxy materials for the Association's Special Meeting
and certain other information. This prospectus omits certain information
contained in such Application. The Application, including the proxy materials,
exhibits and certain other information that are a part thereof, may be
inspected, without charge, at the offices of the OTS, 1700 G Street, N.W.,
Washington, D.C. 20552 and at the office of the Regional Director of the OTS at
the Southeast Regional Office of the OTS, 1475 Peachtree Street, N.E., Atlanta,
Georgia 30309.
95
<PAGE>
Index To Financial Statements
Heritage Federal Savings & Loan Association
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report...................................................... F-1
Balance Sheets as of September 30, 1997 and 1996.................................. F-2
Statements of Income for the
Years Ended September 30, 1997, 1996 and 1995.................................... 24
Statements of Equity for the
Years Ended September 30, 1997, 1996, and 1995................................... F-3
Statements of Cash Flows for the
Years Ended September 30, 1997, 1996 and 1995.................................... F-4
Notes to Financial Statements..................................................... F-6
</TABLE>
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements for the Holding Company have not been
included herein because the Holding Company, which has engaged in only
organizational activities to date, has no significant assets, liabilities
(contingent or otherwise), revenues or expenses.
96
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Heritage Federal Savings and Loan Association:
We have audited the accompanying balance sheets of Heritage Federal Savings and
Loan Association (the "Association") as of September 30, 1997 and 1996, and the
related statements of income, equity and cash flows for each of the three years
in the period ended September 30, 1997, 1996, and 1995. 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, such financial statements present fairly, in all material
respects, the financial position of the Association at September 30, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended September 30, 1997 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Greenville, South Carolina
November 7, 1997
F-1
<PAGE>
HERITAGE FEDERAL SAVINGS AND LOAN ASSOCIATION
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash $ 2,012 $ 1,557
Federal funds sold and overnight interest-bearing deposits 12,647 4,318
---------- ----------
Total cash and cash equivalents 14,659 5,875
Investment securities (Note 2):
Held-to-maturity - at amortized cost (fair value: 1997 - $15,954; 1996 -
$20,778) 15,988 20,993
Available-for-sale - at fair value (amortized cost: 1997 - $6,063; 1996 -
$15,434) 8,390 16,899
Mortgage-backed securities - held to maturity - at amortized cost
(fair value: 1997 - $6,635; 1996 - $9,584) (Note 3) 6,665 9,726
Loans receivable - net (Notes 4 and 8) 192,663 182,950
Loans held-for-sale - at lower of cost or market (market value:
1997 - $1,065) 1,045 -
Office properties and equipment - net (Note 5) 4,278 4,530
Federal Home Loan Bank Stock - at cost (Note 8) 2,042 2,042
Accrued interest receivable 1,242 1,334
Real estate acquired in settlement of loans - net (Note 6) 410 86
Other assets 117 224
---------- ----------
TOTAL $ 247,499 $ 244,659
========== ==========
LIABILITIES AND EQUITY
LIABILITIES:
Deposit accounts (Note 7) $ 215,412 $ 209,730
Advance from Federal Home Loan Bank of Atlanta (Note 8) - 5,000
Accrued interest on deposit accounts 338 358
Other liabilities (Note 9) 2,514 2,831
---------- ----------
Total liabilities 218,264 217,919
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10)
EQUITY:
Retained income - substantially restricted (Notes 9 and 12) 27,769 25,817
Unrealized gain on available-for-sale securities (net of deferred income
taxes of $861 in 1997 and $542 in 1996) 1,466 923
---------- ----------
Total equity 29,235 26,740
---------- ----------
TOTAL $ 247,499 $ 244,659
========== ==========
</TABLE>
See notes to financial statements.
F-2
<PAGE>
HERITAGE FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Unrealized
Gain on
Available-for-Sale Retained
Securities (1) Income Total
<S> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1994 $ 288 $23,079 $23,367
Net income for the year ended September 30, 1995 - 1,979 1,979
Change in net unrealized gain on available-for-sale
securities for the year ended September 30, 1995 346 - 346
------- ------- -------
BALANCE, SEPTEMBER 30, 1995 634 25,058 25,692
Net income for the year ended September 30, 1996 - 759 759
Change in net unrealized gain on available-for-sale
securities for the year ended September 30, 1996 289 - 289
------- ------- -------
BALANCE, SEPTEMBER 30, 1996 923 25,817 26,740
Net income for the year ended September 30, 1997 - 1,952 1,952
Change in net unrealized gain on available-for-sale
securities for the year ended September 30, 1997 543 - 543
------- ------- -------
BALANCE, SEPTEMBER 30, 1997 $ 1,466 $27,769 $29,235
======= ======= =======
</TABLE>
(1) Net of deferred income taxes.
See notes to financial statements.
F-3
<PAGE>
HERITAGE FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(In Thousands of Dollars
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,952 $ 759 $ 1,979
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for deferred income taxes (benefit) 528 (110) 204
Loss (gain) on sale of available-for-sale securities 13 (2) -
Amortization of premium on investment and mortgage-backed
securities 30 59 66
Gain on sale of loans held-for-sale (6) (16) -
Amortization of net deferred income (151) (162) (100)
Provision for loan losses (recovery of allowance) 337 (7) 47
Proceeds from the sale of loans held-for-sale 485 970 -
Purchase of loans held-for-sale (1,051) - -
Depreciation on office properties and equipment 280 242 52
Loss on sale of property - 37 -
Provision for losses (recovery of allowance) on real estate acquired
in settlement of loans 9 (1) 61
Loss (gain) on sales of real estate acquired in settlement of loans (185) (122) 3
(Increase) decrease in accrued interest receivable and other assets 199 (194) (421)
Increase (decrease) in accrued interest payable and other liabilities (1,184) 1,515 865
------- ------- -------
Net cash provided by operating activities 1,256 2,968 2,756
------- ------- -------
INVESTING ACTIVITIES:
Proceeds from maturities and calls of available-for-sale investment
securities 8,100 6,500 3,500
Proceeds from maturities and calls of held-to-maturity investment
securities 8,500 7,100 -
Proceeds from the sale of available-for-sale investment securities 1,737 1,002 -
Purchases of available-for-sale investment securities (500) (2,504) -
Purchases of held-to-maturity investment securities (3,492) (19,750) -
Purchases of mortgage-backed securities - (499) -
Principal repayments on mortgage-backed securities 3,049 2,747 2,087
Purchase of loans receivable (2,465) - -
Net loan originations and principal payments on loans (8,903) (5,568) (18,711)
Proceeds from sales of real estate acquired in settlement of loans 986 232 405
Capitalized costs of real estate acquired in settlement of loans (138) - -
Acquisition of office properties and equipment (28) (663) (3,227)
------- ------- -------
Net cash provided by (used in) investing activities 6,846 (11,403) (15,946)
------- ------- -------
</TABLE>
F-4
<PAGE>
HERITAGE FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1997 1996 1995
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposits $ 5,682 $ 8,257 $ 11,551
Proceeds from Federal Home Loan Bank borrowings - - 18,250
Principal repayments on Federal Home Loan Bank borrowings (5,000) - (13,250)
-------- -------- ---------
Net cash provided by financing activities 682 8,257 16,551
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,784 (178) 3,361
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,875 6,053 2,692
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14,659 $ 5,875 $ 6,053
======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 12,250 $ 12,211 $ 10,310
======== ======== =========
Income taxes $ 553 $ 650 $ 1,246
======== ======== =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Transfers from loans to real estate acquired in settlement of loans $ 996 $ 92 $ 185
======== ======== =========
Increase in net unrealized gain on available-for-sale investment
securities $ 543 $ 289 $ 346
======== ======== =========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
HERITAGE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Customer Concentration - Heritage Federal Savings
and Loan Association (the "Association") is a federally chartered mutual
savings and loan association engaged in the business of accepting savings and
demand deposits and providing mortgage and commercial loans to its members
and others. The Association's business is primarily conducted in Laurens
County and adjacent counties of South Carolina.
Conversion to Capital Stock Form of Ownership - On September 10, 1997, the
Board of Directors of the Association adopted a Plan of Conversion to convert
from a federally chartered mutual savings and loan association to a federally
chartered capital stock savings and loan association with the concurrent
formation of a holding company, subject to approval by regulatory authorities
and depositors of the Association. The conversion is expected to be
accomplished through the adoption of a federal stock charter for the
Association, the sale of all of the Association's stock to the holding
company and the sale of the holding company's common stock to the public. A
subscription offering of the shares of common stock will be offered initially
to eligible account holders, employee benefit plans of the Association,
supplemental eligible account holders, other members and directors, officers
and employees of the Association. Any shares of common stock not sold in the
subscription offering are expected to be offered for sale to the general
public.
At the time of the conversion, the Association will establish a liquidation
account in an amount equal to its retained income as of the date of the
latest balance sheet appearing in the final prospectus. The liquidation
account will be maintained for the benefit of eligible account holders and
supplemental eligible account holders who continue to maintain their accounts
at the Association after the conversion. The liquidation account will be
reduced annually to the extent that eligible account holders and supplemental
eligible account holders have reduced their qualifying deposits as of each
anniversary date. Subsequent increases will not restore an eligible or
supplemental eligible account holder's interest in the liquidation account.
In the event of a complete liquidation of the Association, each eligible
account holder and supplemental eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
Subsequent to the conversion, the Association may not declare or pay cash
dividends on or repurchase any of its share of common stock, if the effect
thereof would cause equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.
Conversion costs will be deferred and reduce the proceeds from the shares
sold in the conversion. If the conversion is not completed, all costs will
be charged as an expense. As of September 30, 1997, no significant
conversion costs have been incurred.
F-6
<PAGE>
The following is a description of the more significant accounting policies
which the Association follows in preparing and presenting its financial
statements.
Basis of Accounting - The accounting and reporting policies of the
Association conform to generally accepted accounting principles and to
general practices within the savings and loan industry.
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 susceptible to change
relate to the determination of the allowance for loan losses and the
valuation of real estate owned.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
cash equivalents includes cash on hand, federal funds sold, overnight
interest-bearing deposits and amounts due from depository institutions.
Investment and Mortgage-Backed Securities - Debt securities that the
Association has the positive intent and ability to hold to maturity are
classified as "held-to-maturity" securities and reported at amortized cost.
Debt and equity securities that are bought and held principally for the
purpose of selling in the near term are classified as "trading" securities
and reported at fair value with unrealized gains and losses included in
earnings. Debt and equity securities not classified as either held-to-
maturity or trading securities are classified as "available-for-sale"
securities and reported at fair value with unrealized gains and losses
excluded from earnings and reported, net of taxes, as a separate component of
equity. Transfers of securities between classifications are accounted for at
fair value. No securities have been classified as trading securities.
In November 1995, the Financial Accounting Standards Board ("FASB") issued a
Special Report, A Guide to Implementation of Statement 115 on Accounting for
Certain Debt and Equity Securities, which included a transition provision
allowing all entities to reassess the appropriateness of the classifications
of all securities held and account for any resulting reclassifications at
fair value. Reclassifications from the held-to-maturity category resulting
from this one-time reassessment did not call into question, or "taint," the
intent of the Association to hold other debt securities to maturity in the
future. In accordance with this Special Report, in December 1995, the
Association transferred securities with a fair value of approximately $10.3
million and amortized cost of approximately $10.4 million from held-to-
maturity to available-for-sale.
Realized gains and losses on investment securities are recognized at the time
of sale based upon the specific identification method.
Loans - Loans held for investment are recorded at cost.
Nonaccrual loans are those loans on which the accrual of interest has ceased.
Loans are placed on nonaccrual status if, generally, in the opinion of
management, principal or interest is not likely to be paid in accordance with
the terms of the loan agreement, or when principal or interest is past due
more than 90 days. Interest accrued but not collected at the date a loan is
placed on nonaccrual status is reversed against interest income in the
current period. Interest income on nonaccrual loans is recognized only to
the extent received in cash.
F-7
<PAGE>
Restructured loans are those for which concessions, such as the reduction of
interest rates or deferral of interest or principal payments, have been
granted due to a deterioration in the borrowers' financial condition. The
difference between interest that would have been recognized under the
original terms of nonaccrual and renegotiated loans and interest actually
recognized on such loans was not a material amount for the years ended
September 30, 1997, 1996 and 1995.
Effective October 1, 1995, the Association adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment
of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan
- Income Recognition and Disclosures. SFAS No. 114 requires that the
carrying value of an impaired loan be based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value
of the collateral, if the loan is collateral-dependent. Under SFAS No. 114,
a loan is considered impaired when, based on current information, it is
probable that the borrower will be unable to pay contractual interest or
principal payments as scheduled in the loan agreement. SFAS No. 114 applies
to all loans except smaller-balance homogenous mortgage and consumer loans,
loans carried at fair value or the lower of cost or fair value, debt
securities, and leases. Generally, the Association applies SFAS No. 114 to
nonaccrual commercial loans and renegotiated loans. The adoption of the
statements did not affect operating results, the level of the overall
allowance or the comparability of credit related data. Income recognition or
charge-off policies were not changed as a result of SFAS No. 114 and SFAS No.
118. The total principal balances of impaired loans at September 30, 1997
was not material.
Effective January 1, 1997, the Association adopted SFAS No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, which requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be
initially measured at fair value, if practicable. It also requires that
servicing assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the assets sold,
if any, and retained interests, if any, based on their relative fair values
at the date of the transfer. Servicing assets and liabilities must be
subsequently measured by amortization in proportion to and over the period of
estimated net servicing income or loss and assessment for asset impairment or
increased obligation based on their fair values. This statement was
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996. The total amount of
servicing assets was considered immaterial as of September 30, 1997.
In December 1996, the FASB issued SFAS No. 127, Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125. SFAS No. 127 defers
for one year the effective date of portions of SFAS No. 125 that address
secured borrowings and collateral for all transactions. Additionally, SFAS
No. 127 defers for one year the effective date of transfers of financial
assets that are part of repurchase agreements, securities lending and similar
transactions.
Allowances for Losses - The Association maintains allowances for loan losses.
Provisions for losses are charged to income when, in the opinion of
management, losses are probable.
The allowance for loan losses is based upon management's evaluation of the
loan portfolio. The evaluation considers such factors as the delinquency
status of loans, current economic conditions, the fair value of the
underlying collateral and prior loan loss experience.
Recovery of the carrying value of loans is dependent to some extent on future
economic, operating and other conditions that may be beyond the Association's
control. Unanticipated future adverse changes in such conditions could
result in material adjustments to allowances (and future results of
operations).
F-8
<PAGE>
Loans Held-for-Sale - Loans intended for sale in the secondary market are
stated at the lower of cost or estimated market value as determined by
outstanding commitments from investors or current investor market yield
requirements calculated on an aggregate basis. Net unrealized losses are
recognized in a valuation allowance by charges to income.
Office Properties and Equipment - Office properties and equipment are carried
at cost less accumulated depreciation. Depreciation is computed over the
estimated useful lives of the related assets using straight-line and
accelerated methods.
Long-Lived Assets - Effective October 1, 1996, the Association adopted SFAS
No. 121, Accounting for the Impairment of Long-lived Assets and for Long-
lived Assets to be Disposed of. SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangible assets and goodwill related to those assets to be held and used
and for long-lived assets to be held and certain intangible assets to be
disposed of. The adoption of SFAS No. 121 did not have a material impact on
financial conditions or results of operations.
Real Estate Acquired in Settlement of Loans - Real estate acquired in
settlement of loans is initially carried at fair value at the date of
foreclosure, establishing a new cost basis. Valuations are periodically
performed by management and allowances for possible losses are established
when the cost of real estate acquired in settlement of loans exceeds fair
value less estimated costs to sell. Revenues, expenses and additions to the
valuation allowance related to real estate acquired in settlement of loans
are charged to operations.
Fair values are based primarily on independent appraisals of market value.
Recovery of estimated fair value is dependent to a great extent on economic,
operating and other conditions that may be beyond the Association's control.
Accordingly, these estimates are particularly susceptible to changes that
could result in material adjustment in the near term.
Deferred Loan Origination Fees - Nonrefundable loan fees and certain direct
loan origination costs are deferred and recognized over the lives of the
loans using the level yield method. Amortization of these deferrals is
recognized as an adjustment to interest income.
SAIF Fund Assessment - On September 30, 1996, legislation was enacted to
recapitalize the Savings Association Insurance Fund. The effect of this
legislation was to require a one-time assessment on all federally insured
savings associations' deposits, payable by November 1996. The $1.2 million
assessment was accrued as a charge to earnings in the quarter ended September
30, 1996 and is included in deposit insurance premiums in the statement of
income. The assessment was paid by the Association in November 1996.
Advertising Costs - The Association expenses advertising costs as incurred.
Income Taxes - Provisions for income taxes are based on amounts reported in
the statements of income (after exclusion of nontaxable income such as
interest on municipal securities) and include changes in deferred income
taxes. Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
F-9
<PAGE>
Recently Issued Accounting Standards - The FASB has recently issued two
new accounting standards that will affect the reporting and disclosure of
financial information by the Company. Management has not determined the
effects of adopting these statements, but their adoptions will not impact
financial condition or results of operations since they deal with
reporting and disclosure. The following is a summary of the standards and
their required implementation dates:
. SFAS No. 130, Reporting Comprehensive Income - This statement
establishes standards for reporting and disclosure of comprehensive
income and its components (revenues, expenses, gains and losses). This
statement requires that all items that are required to be recognized
under accounting standards as components of comprehensive income
(including, for example, unrealized holding gains and losses on
available-for-sale securities) be reported in a financial statement
similar to the statement of income and retained income. The accumulated
balance of other comprehensive income will be disclosed separately from
retained income in the equity section of the balance sheet. This
statement is effective for the Association for the fiscal year
beginning October 1, 1998.
. SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information - This statement establishes standards for the way public
business enterprises report information about operating segments and
establishes standards for related disclosures about products and
services, geographic areas and major customers. Operating segments are
components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Information required to be disclosed includes segment
profit or loss, certain specific revenue and expense items, segment
assets and certain other information. This statement will be effective
for the Association for financial statements issued for the fiscal year
beginning October 1, 1998 if the conversion to a capital stock form of
ownership discussed above is completed.
Reclassifications - Certain 1996 and 1995 amounts have been reclassified
to conform with the 1997 presentation.
2. INVESTMENT SECURITIES
Investment securities at September 30, 1997 and 1996 are summarized as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 1997 Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held-to-maturity - U.S. Government
Agency obligations $ 15,988 $ 19 $ (53) $ 15,954
--------- --------- --------- ---------
Available-for-sale:
U.S. Treasury obligations $ 2,010 $ 6 $ (8) $ 2,008
U.S. Government Agency obligations 3,996 - (20) 3,976
FHLMC common stock 57 2,349 - 2,406
--------- --------- --------- ---------
Total $ 6,063 $ 2,355 $ (28) $ 8,390
========= ========= ========= =========
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 1996 Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held-to-maturity - U.S. Government
Agency obligations $20,993 $ 6 $ (221) $20,778
======= ======= ======= =======
Available-for-sale:
U.S. Treasury obligations $ 7,536 $ 6 $ (70) $ 7,472
U.S. Government Agency obligations 7,841 2 (82) 7,761
FHLMC common stock 57 1,609 - 1,666
------- ------- ------- -------
Total $15,434 $ 1,617 $ (152) $16,899
======= ======= ======= =======
</TABLE>
The amortized cost and fair value of debt securities at September 30, 1997,
by contractual maturity, follow (in thousands of dollars):
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
--------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 2,997 $ 2,984 $ 2,002 $ 1,995
Due after one year through five years 3,009 3,000 13,986 13,959
------- ------- ------- -------
Total $ 6,006 $ 5,984 $15,988 $15,954
======= ======= ======= =======
</TABLE>
Gross realized gains on sales of available-for-sale securities were
approximately $0, $2,000 and $0 in the years ended September 30, 1997, 1996
and 1995, respectively. Gross realized losses on sales of available-for-sale
investment securities were $13,000, $0 and $0 in the years ended September
30, 1997, 1996 and 1995, respectively.
Investment securities totaling $825,000 and $1.7 million at September 30,
1997 and 1996, respectively, were pledged as collateral for public deposits.
3. MORTGAGE-BACKED SECURITIES
Fixed rate mortgage-backed securities are all classified as held to maturity
and consisted of the following (in thousands of dollars):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
September 30, 1997 Cost Gains Losses Value
<S> <C> <C> <C> <C>
FNMA $ 788 $ - $ (7) $ 781
FHLMC 5,877 2 (25) 5,854
------- --- ----- -------
Total $ 6,665 $ 2 $ (32) $ 6,635
======= === ===== =======
</TABLE>
F-11
<PAGE>
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
September 30, 1996 Cost Gains Losses Value
<S> <C> <C> <C> <C>
FNMA $1,142 $ 1 $ (26) $1,117
FHLMC 8,584 5 (122) 8,467
------ ---- ------ ------
Total $9,726 $ 6 $ (148) $9,584
====== ==== ====== ======
</TABLE>
The amortized cost and fair value of mortgage-backed securities at September
30, 1997, by contractual maturity, follow (in thousands of dollars):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $3,574 $3,566
Due after one year through five years 3,091 3,069
------ ------
Total $6,665 $6,635
====== ======
</TABLE>
4. LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands of dollars):
<TABLE>
<CAPTION>
September 30,
---------------------------------
1997 1996
<S> <C> <C>
Mortgage loans:
Residential (1-4 family) $ 180,609 $ 173,925
Builder construction loans 2,601 3,836
Commercial loans 8,136 6,450
Savings account loans 1,419 1,146
Home equity loans 8,124 7,050
--------- ---------
Total loans 200,889 192,407
Less:
Undisbursed portion of loans in process (6,989) (8,375)
Deferred loan origination fees (363) (412)
Allowance for loan losses (874) (670)
--------- ---------
Total $ 192,663 $ 182,950
========= =========
Weighted average interest yield of loans 7.93% 7.88%
---- ----
</TABLE>
Under regulations of the Office of Thrift Supervision ("OTS"), the
Association may not make loans to one borrower in excess of 15% of unimpaired
capital. This limitation does not apply to loans made before August 9, 1989.
At September 30, 1997, the Association had loans outstanding to individual
borrowers ranging up to $1.8 million and is in compliance with this
regulation.
F-12
<PAGE>
The Association sells mortgage loans in the secondary market. Generally such
loans are sold without recourse and servicing is retained. Servicing loans
for others consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payments to investors and foreclosure processing. Loan
servicing income is recorded on the accrual basis and includes servicing fees
received from investors as well as certain charges collected from borrowers,
such as late payment fees. At September 30, 1997 and 1996, the Association
serviced loans for others with a total balance outstanding of $5.4 million
and $6.0 million, respectively, and held borrowers' escrow balances in the
amounts of $41,000 and $53,000, respectively.
The following is a reconciliation of the allowance for loan losses for the
years ended September 30, 1997, 1996 and 1995 (in thousands of dollars):
<TABLE>
<CAPTION>
Year Ended
September 30,
----------------------------------
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 670 $ 590 $ 622
Provision for losses (recovery of allowance) 337 (7) 47
Write-offs (133) (28) (79)
Recoveries - 115 -
----- ----- -----
Balance at end of year $ 874 $ 670 $ 590
===== ===== =====
</TABLE>
Directors and officers of the Association are customers of the institution in
the ordinary course of business. Deposits and loans of directors and
officers have terms consistent with those offered to other customers. At
September 30, 1997 and 1996, loans to officers or directors of the
Association totaled approximately $638,000 and $700,000, respectively.
5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
September 30,
----------------------------
1997 1996
<S> <C> <C>
Land $ 237 $ 237
Land improvements 271 271
Office buildings 3,453 3,442
Furniture, fixtures and equipment 1,157 1,142
------- -------
Total 5,118 5,092
Less accumulated depreciation (840) (562)
------- -------
Office properties and equipment - net $ 4,278 $ 4,530
======= =======
</TABLE>
F-13
<PAGE>
6. REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
Real estate acquired in settlement of loans is summarized as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
September 30,
-----------------------
1997 1996
<S> <C> <C>
Real estate acquired in settlement of loans $ 424 $ 1,009
Less allowance for losses (14) (923)
------- -------
Total $ 410 $ 86
======= =======
</TABLE>
The changes in the allowance for losses on real estate acquired in settlement
of loans consisted of the following (in thousands of dollars):
<TABLE>
<CAPTION>
Year Ended
September 30,
-------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 923 $ 1,074 $ 1,023
Provision for losses (recovery of allowance) 15 (1) 61
Write-offs, net of recoveries (924) (150) (10)
------- ------- -------
Balance at end of year $ 14 $ 923 $ 1,074
======= ======= =======
</TABLE>
7. DEPOSIT ACCOUNTS
Deposit accounts are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
September 30,
-----------------------
Account Type 1997 1996
<S> <C> <C>
Passbook Accounts (1997 - 3.0%; 1996 - 2.5%) $ 11,423 $ 11,867
-------- --------
NOW Accounts (1997 - 2.0%; 1996 - 2.1%) 2,833 2,706
-------- --------
Money Market Deposit Accounts (1997 - 3.0%; 1996 - 2.75%) 939 1,215
-------- --------
Certificates of Deposit:
3.01-4.00% 5,575 6,826
4.01-5.00% 1,218 2,216
5.01-6.00% 95,528 97,960
6.01-7.00% 92,245 81,430
7.01-8.00% 5,651 5,510
-------- --------
Total certificates of deposit 200,217 193,942
-------- --------
Total $215,412 $209,730
======== ========
Weighted average rate:
Savings certificates 5.93% 5.87%
All deposit accounts 5.71% 5.64%
</TABLE>
F-14
<PAGE>
At September 30, 1997, deposit accounts with balances of $100,000 and greater
totaled approximately $40.3 million. Deposits in excess of $100,000 are not
federally insured. The Association does not accept brokered deposits.
Maturities of certificates of deposits (in thousands of dollars):
Year Ending September 30, 1997
<TABLE>
<S> <C>
Maturing:
Within 1 year $148,859
After 1 but within 2 years 41,284
After 2 but within 3 years 7,659
After 3 but within 4 years 1,846
After 4 but within 5 years 569
--------
Total $200,217
========
</TABLE>
Interest expense by type of deposit is summarized as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Demand accounts:
Passbook $ 340 $ 362 $ 393
NOW and Money Market Accounts 89 92 94
Certificate accounts 11,575 11,431 9,454
------- ------- -------
Total $12,004 $11,885 $ 9,941
======= ======= =======
</TABLE>
8. BORROWING ARRANGEMENTS WITH FEDERAL HOME LOAN BANK OF ATLANTA
The Association had outstanding advances of $0 and $5,000,000 from the
Federal Home Loan Bank of Atlanta ("FHLB") at September 30, 1997 and 1996.
The $5,000,000 advance outstanding at September 30, 1996 had a fixed interest
rate of 6.54% and matured May 11, 1997. The maximum amount of outstanding
advances at any month-end during fiscal years 1997, 1996 and 1995 was
$5,000,000, $5,000,000 and $13,250,000, respectively. The average balance
outstanding for such years was approximately $3,082,000, $5,000,000 and
$7,812,000, respectively. The weighted average interest rate during fiscal
years 1997, 1996 and 1995 was 7.33%, 6.54% and 6.27%, respectively.
The Association pledged as collateral for these borrowings its FHLB stock and
has entered into blanket collateral agreements with the FHLB whereby the
Association maintains, free of other encumbrances, qualifying mortgages (as
defined) with unpaid principal balances, when discounted at 75% of the unpaid
principal balances, of at least 100% of total advances.
Additionally, the Association may borrow under various line of credit
programs with the FHLB. Any amounts advanced to the Association under these
programs are secured by the Association's investment securities and bear
interest at an adjustable rate with interest payable monthly. At September
30, 1997 and 1996, the Association had no amounts outstanding.
F-15
<PAGE>
9. INCOME TAXES
The tax effects of significant items comprising the Association's net
deferred tax liability as of September 30, 1997 and 1996 are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
September 30,
---------------------------
1997 1996
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 355
Accrued SAIF assessment - $ 498
Deferred loan fees 4 70
Real estate acquired in settlement of loans - 20
Difference between book and tax basis of fixed assets 7 73
Other 9 --
------ ------
Total 375 661
------ ------
Deferred tax liabilities:
Difference between book and tax basis of Federal Home Loan
Bank stock 336 336
Unrealized gain on investments available for sale 861 542
Tax basis bad debt reserves in excess of book basis bad debt reserves
arising after December 31, 1987 - 54
Tax basis bad debt reserve arising after December 31, 1987 subject
to recapture 326 -
Other - 30
------ ------
Total 1,523 962
------ ------
Net deferred tax liability $1,148 $ 301
====== ======
</TABLE>
The net deferred tax liability at September 30, 1997 and 1996 is included in
"other liabilities" in the balance sheet.
The provision for income taxes is summarized as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Current provision:
Federal $ 553 $ 470 $1,221
State 13 -- 121
------ ------ ------
Total current 566 470 1,342
------ ------ ------
Deferred provision:
Federal 443 (93) 172
State 85 (17) 32
------ ------ ------
Total deferred 528 (110) 204
------ ------ ------
Total provision for income taxes $1,094 $ 360 $1,546
====== ====== ======
</TABLE>
F-16
<PAGE>
No valuation allowance on deferred tax assets has been established as
management believes that the existing deductible temporary differences will
reverse during periods in which the Association generates net taxable income.
In years ended September 30, 1996 and prior, the Association was allowed
under the Internal Revenue Code to deduct, subject to certain conditions, an
annual addition to a reserve for bad debts ("reserve method") in determining
taxable income. Legislation enacted in August 1996 repealed the reserve
method effective for the Association beginning with the fiscal year ended
September 30, 1997. Under the legislation, the Association will be allowed to
deduct actual bad debt charge-offs ("charge-off method") in determining
taxable income. The income tax deduction under the reserve method has been
historically greater than the provision for loan losses recorded for
financial accounting purposes. The income tax deduction under the charge-off
method for the year ended September 30, 1997 was less than the provision for
loan losses recorded for financial accounting purposes.
Deferred income taxes have been provided on differences between the bad debt
reserve for tax purposes determined under the formerly used reserve method
and the loan loss allowance for financial accounting purposes only to the
extent of differences arising subsequent to December 31, 1987. Under the
legislation previously mentioned, the Association will be required to
recapture the post-1987 tax bad debt reserve of approximately $326,000 into
expense over a six-year period beginning with the fiscal year ended no later
than September 30, 1999 (September 30, 1998 if certain conditions are not
met). Since a deferred tax liability has been provided on this difference,
the recapture will have no impact on equity or results of operations.
Retained earnings as of September 30, 1997 includes approximately $4.9
million representing reserve method bad debt reserves originating prior to
December 31, 1987 for which no deferred income taxes are required to be
provided. These reserves may be included in taxable income if the Association
pays dividends in excess of its accumulated earnings and profits (as defined
by the Internal Revenue Code) or in the event of a distribution in partial or
complete liquidation of the Association.
Income taxes differed from amounts computed by applying the statutory federal
rate of 34% to income before income taxes as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Tax at statutory Federal income tax rate (34%) $ 1,036 $ 380 $ 1,199
Increase (decrease) resulting from:
State income taxes 66 (11) 100
Other - net (8) (9) 247
------- ------- -------
Total $ 1,094 $ 360 $ 1,546
======= ======= =======
Effective rate 35.9% 32.1% 43.8%
</TABLE>
F-17
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
Loan Commitments - Loan commitments are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments extend over various periods of time with the majority of such
commitments disbursed within a ninety day period. Commitments generally have
fixed expiration dates or other termination clauses and may require payment
of a fee. Commitments to extend credit at fixed rates exposes the
Association to some degree of interest rate risk. The Association evaluates
each customer's creditworthiness on a case-by-case basis. The type or amount
of collateral obtained varies and is based on management's credit evaluation
of the potential borrower.
At September 30, 1997, the Association had loan commitments, excluding
undisbursed portions of interim construction loans, of approximately $1.4
million.
At September 30, 1997, the Association had approved home equity lines of
credit approximating $14.4 million, of which approximately $8.1 million was
in use and approximately $6.3 million was available for use.
The Association leases various property and equipment. The effect of these
leases on the financial position or results of operations is insignificant.
The Association has no additional financial instruments with off-balance
sheet risk.
Potential Impact of Changes in Interest Rates - The Association's
profitability depends to a large extent on its net interest income, which is
the difference between interest income from loans and investments and
interest expense on deposits. Like most financial institutions, the
Association's short-term interest income and interest expense are
significantly affected by changes in market interest rates and other
economic factors beyond its control. The Association's interest earning
assets consist primarily of long-term, fixed rate and adjustable rate
mortgage loans and investments which adjust more slowly to changes in
interest rates than its interest bearing liabilities which are deposits.
Accordingly, the Association's earnings could be adversely affected during
periods of rising interest rates.
Litigation - The Association is involved in legal actions in the normal
course of business. Management, based on advice of counsel, does not expect
any material losses from current litigation.
Concentrations of Credit Risk - The Association's business activity is
principally with customers located in South Carolina. Except for residential
loans in the Association's market area, the Association has no other
significant concentrations of credit risk.
11. RETIREMENT PLANS
The Association has a noncontributory money purchase pension plan covering
substantially all full-time employees over the age of twenty-one who have
completed six months of continuous employment with the Association at the
anniversary date of the plan. Pension costs are computed by multiplying
eligible participants' annual salaries by ten percent. Amounts credited to
participants' accounts vest (become nonforfeitable) as follows:
. Twenty percent of the account balance after three years of service
. Twenty percent each year thereafter, until fully vested at the completion
of seven years of service.
F-18
<PAGE>
The Association provides additional retirement benefits by means of a 401(k)
plan for substantially all employees over the age of twenty-one who have
completed six months of employment. Under the plan, employees may defer from
1% to 10% of their compensation to be contributed to the plan. The
Association contributes an equal amount of the salary deferral (subject to a
maximum contribution of 4% of a participant's compensation) to the plan.
Participants are 100% vested upon participation in the plan.
Total expense under both retirement plans for the years ended September 30,
1997, 1996 and 1995 was approximately $151,000, $156,000 and $156,000,
respectively.
The Association provides no other post-employment benefits.
12. REGULATORY CAPITAL REQUIREMENTS
The Association is subject to various regulatory capital requirements
administered by the federal financial institution regulatory agencies.
Failure to meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Association's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Association must meet specific
capital guidelines that involve quantitative measures of the Association's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Association's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios. Under
regulations of the Office of Thrift Supervision ("OTS"), the Association
must have: (i) core capital equal to 3.0% of adjusted total assets, (ii)
tangible capital equal to 1.5% of adjusted total assets and (iii) total
capital equal to 8.0% of risk-weighted assets. In measuring compliance with
all three capital standards, institutions must deduct from their capital
(with several exceptions primarily for mortgage banking subsidiaries and
insured depository institution subsidiaries) their investments in, and
advances to, subsidiaries engaged (as principal) in activities not
permissible for national banks, and certain other adjustments. Management
believes, as of September 30, 1997, that the Association meets all capital
adequacy requirements to which it is subject.
The following is a reconciliation of the Association's equity reported in
the financial statements under generally accepted accounting principles to
OTS regulatory capital requirements (in thousands of dollars):
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
<S> <C> <C> <C>
September 30, 1997
Total equity as reported in the financial statements $ 29,235 $ 29,235 $ 29,235
General allowance for loan losses - - 750
Net unrealized loss on available-for-sale securities (1,466) (1,466) (1,466)
-------- -------- --------
Regulatory Capital $ 27,769 $ 27,769 $ 28,519
======== ======== ========
September 30, 1996
Total equity as reported in the financial statements $ 26,740 $ 26,740 $ 26,740
General allowance for loan losses - - 550
Net unrealized gain on available-for-sale securities (923) (923) (923)
-------- -------- --------
Regulatory Capital $ 25,817 $ 25,817 $ 26,367
======== ======== ========
</TABLE>
F-19
<PAGE>
The Association's actual and required capital amounts and ratios are
summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Minimum
Actual Requirement
------------------ ------------------
Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
September 30, 1997
Tangible capital (to total assets) $27,769 11.3% $ 3,690 1.5%
Core capital (to adjusted total assets) $27,769 11.3% $ 7,381 3.0%
Risk-based capital (to risk-based assets) $28,519 23.3% $ 9,796 8.0%
September 30, 1996
Tangible capital (to total assets) $25,817 10.6% $ 3,648 1.5%
Core capital (to adjusted total assets) $25,817 10.6% $ 7,297 3.0%
Risk-based capital (to risk-based assets) $26,367 22.2% $ 9,492 8.0%
</TABLE>
As of September 30, 1997 and 1996, the most recent respective notifications
from the OTS classified the Association as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since the most recent notification that management believes have
changed the Association's category. To be categorized as well capitalized,
the Association must maintain minimum ratios of total capital to risk-based
assets, core capital to risk-based assets and core capital to adjusted total
assets. The Association's actual and minimum capital requirements to be well
capitalized under prompt corrective action provisions are as follows:
<TABLE>
<CAPTION>
Minimum
Actual Requirement
------------------ ------------------
Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
September 30, 1997
Tier I Capital (to adjusted-total assets) $27,769 11.3% $12,302 5.0%
Tier I Capital (to risk-weighted assets) $27,769 22.7% $ 7,346 6.0%
Total Capital (to risk-weighted assets) $28,519 23.3% $12,245 10.0%
September 30, 1996
Tier I Capital (to adjusted-total assets) $25,817 10.6% $12,156 5.0%
Tier I Capital (to risk-weighted assets) $25,817 21.8% $ 7,118 6.0%
Total Capital (to risk-weighted assets) $26,367 22.2% $11,865 10.0%
</TABLE>
F-20
<PAGE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair value information regarding financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate a value. The stated and estimated fair value amounts
of the Association's financial instruments, as of September 30, 1997 and
1996, are summarized below (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996
--------------------------- ----------------------------
Stated Estimated Stated Estimated
Assets Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 14,659 $ 14,659 $ 5,875 $ 5,875
Mortgage-backed securities 6,665 6,635 9,726 9,584
Investment securities 24,378 24,344 37,892 37,677
Loans receivable, net 192,663 196,037 182,950 184,828
Loans held-for-sale 1,045 1,065 -- --
Federal Home Loan Bank stock 2,042 2,042 2,042 2,042
Accrued interest receivable 1,242 1,242 1,334 1,334
-------- -------- -------- --------
$242,694 $246,024 $239,819 $241,340
======== ======== ======== ========
Liabilities
Interest bearing demand deposits $ 11,423 $ 11,423 $ 11,867 $ 11,867
Money market accounts 939 939 1,215 1,215
NOW accounts 2,833 2,833 2,706 2,706
Certificates of deposit 200,217 200,832 193,942 194,143
Accrued interest payable 338 338 358 358
-------- -------- -------- --------
$215,750 $216,365 $210,088 $210,289
======== ======== ======== ========
</TABLE>
The Association had off-balance sheet financial commitments, which include
commitments to originate loans, undisbursed portions of interim construction
loans and unused lines of credit (see Note 10). Since these commitments are
based on current rates, the commitment amount is considered to be a
reasonable estimate of fair value.
Estimated fair values were determined using the following methods and
assumptions:
Cash and Cash Equivalents - Cash and cash equivalents have maturities of
three months or less and, accordingly, the carrying amounts of such
instruments are deemed to be reasonable estimates of fair value.
Mortgage-Backed Securities and Investment Securities - Fair values are based
on quoted market prices where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans Receivable, Net - Fair values for loans are estimated by segregating
the portfolio by type of loan and discounting scheduled cash flows using
current market interest rates for loans with similar terms, reduced by an
estimate of credit losses inherent in the portfolio.
F-21
<PAGE>
Loans Held-for-Sale - Loans held-for-sale are valued at the lower of cost or
market as determined by outstanding commitments from investors or current
investor yield requirements calculated on an aggregate loan basis.
Federal Home Loan Bank Stock - Investment in stock of the FHLB is required
by law for every federally insured savings institution. No ready market
exists for this stock and it has no quoted market value. However, redemption
of this stock has historically been at par value. Accordingly, the carrying
amount is deemed to be a reasonable estimate of fair value.
Deposits - As required by SFAS No. 107, fair values for demand deposits,
money market accounts and savings accounts are the amounts payable on demand
as of the reporting date (i.e., their stated amounts). The fair value of
certificates of deposit is estimated by discounting the contractual cash
flows using current market interest rates for accounts with similar
maturities.
Accrued Interest Receivable and Payable - The stated amounts of accrued
interest receivable and payable approximate the fair value.
Limitations - 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 market exists for
a significant portion of the Association's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, 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.
Fair value estimates are based on existing on-and-off balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments. For example, a significant asset not
considered a financial asset is premises and equipment. In addition, tax
ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
**********
F-22
<PAGE>
GLOSSARY
<TABLE>
<CAPTION>
<S> <C>
ARM loans Adjustable-rate mortgage loans.
Direct Community Offering The offering of shares of the Common Stock to the
general public with preference given to natural
persons and trusts of natural persons who are
residents of the Association's Local Community.
Eligible Account Holders Holders of savings accounts at the Association with
balances of at least $50 as of June 30, 1996.
Exchange Act The Securities Exchange Act of 1934, as amended.
Expiration Date _____________, 1998.
ESOP Employee Stock Ownership Plan to be implemented
by the Association in the conversion.
FASB Financial Accounting Standards Board.
FDIC Federal Deposit Insurance Corporation.
FHLB Federal Home Loan Bank.
Freddie Mac Federal Home Loan Mortgage Corporation.
Fannie Mae Federal National Mortgage Association.
GAAP Generally accepted accounting principles.
IRA Individual Retirement Account.
IRS Internal Revenue Service.
Local Community The counties where the Association's offices are
located: Laurens Anderson, Greenwood and
Greenville Counties, South Carolina.
MRP The Management Recognition Plan, a restricted stock
plan, that the Holding Company intends to adopt
following the conversion.
NASD National Association of Securities Dealers, Inc.
Other Members Depositors of the Association as of ___________,
1998 and borrowers of the Association as of October
21, 1997 whose loans continue to be outstanding as
of ___________, 1998.
OTS Office of Thrift Supervision of the United States
Department of the Treasury.
</TABLE>
G-1
<PAGE>
<TABLE>
<S> <C>
Plan of Conversion The plan of conversion adopted by the Association,
pursuant to which the conversion is being
undertaken.
RP Financial RP Financial, LC., the firm the Association engaged
to prepare the appraisal of its estimated pro forma
market value in the conversion and to advise the
Association about its business plan.
SAIF Savings Association Insurance Fund.
SEC Securities and Exchange Commission.
Securities Act The Securities Act of 1933, as amended.
Severance Plan The Employee Severance Compensation Plan that the
Association intends to adopt in connection with the
conversion.
SFAS Statement of Financial Accounting Standards.
Stock Option Plan The stock option plan that the Holding Company
intends to adopt following the conversion.
Subscription Offering The offering of shares of the Common Stock, in
order to priority, to Eligible Account Holders, the
ESOP, Supplement Eligible Account Holders and
Other Members.
Supplemental Eligible Account Holders Holders of accounts at the Association with balances
of at least $50 as of December 31, 1997.
Syndicated Community Offering The offering of shares of the Common Stock to the
general public by a group of selected dealers.
Trident Securities Trident Securities, Inc., the firm the Association
engaged to advise and assist it in marketing the
Common Stock and conducting the Subscription
Offering and, if any, the Community Offering and/or
Syndicated Offering.
</TABLE>
G-2
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by Heritage Bancorp, Inc. or Heritage Federal Savings & Loan
Association. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person or in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation in such jurisdiction. Neither the delivery of this prospectus
nor any sale hereunder shall under any circumstances create any implication that
there has been no change in the affairs of Heritage Bancorp, Inc. or Heritage
Federal Savings & Loan Association since any of the dates as of which
information is furnished herein or since the date hereof.
[Logo for Heritage Bancorp, Inc.]
(Proposed Holding Company for
Heritage Federal Savings
& Loan Association, to be known
as Heritage Federal Bank)
2,975,000 to 4,025,000 Shares of
Common Stock
----------------
Prospectus
----------------
TRIDENT SECURITIES, INC.
______ __, 1997
Until the later of _______, 1998, or 25 days after commencement of the
Syndicated Community Offering of Common Stock, if any, all dealers that buy,
sell or trade these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the dealers'
obligation 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 13. Other Expenses of Issuance and Distribution
<TABLE>
<CAPTION>
<S> <C>
Legal fees and expenses.................. $185,000
Securities marketing legal fees.......... 27,500
Printing, postage and mailing............ 105,000
Appraisal and business plan preparation.. 42,500
Accounting fees.......................... 100,000
Data processing fees.................... 15,000
SEC registration fee..................... 20,000
Blue Sky filing fees and expenses........ 3,000
OTS filing fees.......................... 8,400
Other expenses........................... 13,600
--------
Total................................ $520,000
========
</TABLE>
Trident Securities, Inc. will receive a fee of 1.5% of the aggregate dollar
amount of stock sold in the Subscription Offering and Community Offering
(excluding shares purchased by the Association's ESOP and by directors, officers
and employees of the Association and associates of such persons) not to exceed
$800,000.
Item 14. Indemnification of Officers and Directors
Article XVII of the Certificate of Incorporation of Heritage Bancorp,
Inc. requires indemnification of directors, officers and employees to
the fullest extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law sets forth
circumstances under which directors, officers, employees and agents
may be insured or indemnified against liability which they may incur
in their capacities:
145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS;
INSURANCE.--(a) A corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been
II-1
<PAGE>
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
incurred by him any such capacity, or arising out of his status as such, whether
or not the corporation would have the power to indemnify him against such
liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agents, so that any
person who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith
II-2
<PAGE>
and in a manner he reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to in
this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Item 15. Recent Sales of Unregistered Securities.
Not Applicable
Item 16. Exhibits and Financial Statement Schedules:
The financial statements and exhibits filed as part of this
Registration Statement are as follows:
(a) List of Exhibits
1.1 -- Form of proposed Agency Agreement among Heritage Bancorp, Inc.,
Heritage Federal Savings & Loan Association and Trident Securities,
Inc. (*)
1.2 -- Engagement Letter between Heritage Federal Savings & Loan Association
and Trident Securities, Inc.
2 -- Plan of Conversion of Heritage Federal Savings & Loan Association
(attached as an exhibit to the Proxy Statement included herein as
Exhibit 99.5)
3.1 -- Certificate of Incorporation of Heritage Bancorp, Inc.
3.2 -- Bylaws of Heritage Bancorp, Inc.
4 -- Form of Certificate for Common Stock
5 -- Opinion of Breyer & Aguggia regarding legality of securities
registered
8.1 -- Form of Federal Tax Opinion of Breyer & Aguggia
8.2 -- Form of State Tax Opinion of Deloitte & Touche LLP
8.3 -- Opinion of RP Financial, LC. as to the value of subscription rights
10.1 -- Proposed Form of Employment Agreement with J. Edward Wells
10.2 -- Proposed Form of Severance Agreement For Certain Senior Officers
10.3 -- Proposed Form of Employee Stock Ownership Plan
10.4 -- Heritage Federal Savings & Loan Association 401(k) Plan (*)
10.5 -- Form of Heritage Federal Savings & Loan Association Employee
Severance Compensation Plan
II-3
<PAGE>
21 -- Subsidiaries of Heritage Bancorp, Inc.
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Breyer & Aguggia (contained in opinion included as
Exhibit 5)
23.3 -- Consent of Breyer & Aguggia as to its Federal Tax Opinion
23.4 -- Consent of RP Financial, LC.
24 -- Power of Attorney (contained in signature page to the Registration
Statement)
27 -- Financial Data Schedule
99.1 -- Order and Acknowledgement Form
99.2 -- Solicitation and Marketing Materials
99.3 -- Agreement with RP Financial, LC.
99.4 -- Appraisal Report of RP Financial, LC. (*)
99.5 -- Proxy Statement for Special Meeting of Members of Heritage Federal
Savings & Loan Association
- ---------------------
(*) To be filed by amendment.
(b) Financial Statements and Schedules
Heritage Federal Savings & Loan Association
Pages
Independent Auditors' Report............................................ F-1
Balance Sheets as of September 30, 1997 and 1996........................ F-2
Statements of Income for the Years Ended
September 30, 1997, 1996 and 1995...................................... 24
Statements of Equity for the Years Ended
September 30, 1997, 1996 and 1995...................................... F-3
Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995...................................... F-4
Notes to Financial Statements........................................... F-6
All schedules are omitted because the required information is either not
applicable or is included in the financial statements or related notes.
II-4
<PAGE>
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933, as amended ("Securities Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high 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) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934, as amended ("Exchange Act") (and, where
applicable, each filing of any employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is therefore, unenforceable. In the event that a claim for
indemnification against liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the questions whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Laurens, South Carolina
on the 10th day of December 1997.
HERITAGE BANCORP, INC.
By: /s/ J. Edward Wells
--------------------------------
J. Edward Wells
President and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Heritage Bancorp, Inc., do
hereby severally constitute and appoint J. Edward Wells, our true and lawful
attorney and agent, to do any and all things and acts in our names in the
capacities indicated below and to execute all instruments for us and in our
names in the capacities indicated below which said J. Edward Wells may deem
necessary or advisable to enable Heritage Bancorp, Inc. to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission, in connection with the Registration
Statement on Form S-1 relating to the offering of Heritage Bancorp, Inc.'s
Common Stock, including specifically but not limited to, power and authority to
sign for us or any of 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 ratify and confirm all that J. Edward Wells
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ J. Edward Wells President, Chief Executive Officer December 10, 1997
- ------------------------ and Director (Principal Executive Officer)
J. Edward Wells
/s/ Edwin I. Shealy Chief Financial Officer December 10, 1997
- ------------------------ (Principal Financial and
Edwin I. Shealy Accounting Officer)
/s/ Aaron H. King Director December 10, 1997
- ------------------------
Aaron H. King
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ J. Riley Bailes Director December 10, 1997
- ------------------------
J. Riley Bailes
/s/ John H. Lake Director December 10, 1997
- ------------------------
John H. Lake
/s/ G. Edwin Owings Director December 10, 1997
- ------------------------
G. Edwin Owings
</TABLE>
<PAGE>
INDEX TO EXHIBITS
1.1 -- Form of proposed Agency Agreement among Heritage Bancorp, Inc.,
Heritage Federal Savings & Loan Association and Trident
Securities, Inc. (a)
1.2 -- Engagement Letter between Heritage Federal Savings & Loan
Association and Trident Securities, Inc.
2 -- Plan of Conversion of Heritage Federal Savings & Loan Association
(attached as an exhibit to the Proxy Statement included
herein as Exhibit 99.5)
3.1 -- Certificate of Incorporation of Heritage Bancorp, Inc.
3.2 -- Bylaws of Heritage Bancorp, Inc.
4 -- Form of Certificate for Common Stock
5 -- Opinion of Breyer & Aguggia regarding legality of securities
registered
8.1 -- Form of Federal Tax Opinion of Breyer & Aguggia
8.2 -- Form of State Tax Opinion of Deloitte & Touche LLP
8.3 -- Opinion of RP Financial, LC. as to the value of subscription rights
10.1 -- Proposed Form of Employment Agreement with J. Edward Wells
10.2 -- Proposed Form of Severance Agreement For Certain Senior Officers
10.3 -- Proposed Form of Employee Stock Ownership Plan
10.4 -- Heritage Federal Savings & Loan Association 401(k) Plan (a)
10.5 -- Form of Heritage Savings & Loan Association Employee Severance
Compensation Plan
21 -- Subsidiaries of Heritage Bancorp, Inc.
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Breyer & Aguggia (contained in opinion included as
Exhibit 5)
23.3 -- Consent of Breyer & Aguggia as to its Federal Tax Opinion
23.4 -- Consent of RP Financial, LC.
24 -- Power of Attorney (contained in signature page to the Registration
Statement)
27 -- Financial Data Schedule
99.1 -- Order and Acknowledgement Form
<PAGE>
99.2 -- Solicitation and Marketing Materials
99.3 -- Agreement with RP Financial, LC.
99.4 -- Appraisal Report of RP Financial, LC. (a)
99.5 -- Proxy Statement for Special Meeting of Members of Heritage Federal
Savings & Loan Association
- --------------------------
(a) To be filed by amendment.
<PAGE>
Exhibit 1.2
[LETTERHEAD OF TRIDENT SECURITIES, INC. APPEARS HERE]
September 8, 1997
Board of Directors
Heritage Federal Savings and Loan Association
201 West Main Street
Laurens, South Carolina 29360
RE: Conversion Stock Marketing Services
Gentlemen:
This letter sets forth the terms of the proposed engagement between TRIDENT
SECURITIES, INC. ("TRIDENT") and Heritage Federal Savings and Loan Association
("Heritage Federal") concerning our investment banking services in connection
with the conversion of Heritage Federal from a mutual to a capital stock form of
organization.
TRIDENT is prepared to assist Heritage Federal in connection with the offering
of its shares of common stock during the subscription offering and community
offering as such terms are defined in Heritage Federal's Plan of Conversion.
The specific terms of the services contemplated hereunder shall be set forth in
a definitive sales agency agreement (the "Agreement") between TRIDENT and
Heritage Federal to be executed on the date the offering circular/prospectus is
declared effective by the appropriate regulatory authorities. The price of the
shares during the subscription offering and community offering will be the price
established by Heritage Federal's Board of Directors, based upon an independent
appraisal as approved by the appropriate regulatory authorities, provided such
price is mutually acceptable to TRIDENT and Heritage Federal.
In connection with the subscription offering and community offering, TRIDENT
will act as financial advisor and exercise its best efforts to assist Heritage
Federal in the sale of its common stock during the subscription offering and
community offering. Additionally, TRIDENT may enter into agreements with other
National Association of Securities Dealers, Inc., ("NASD") member firms to act
as selected dealers, assisting in the sale of the common stock. TRIDENT and
Heritage Federal will determine the selected dealers to assist Heritage Federal
during the community offering. At the appropriate time, TRIDENT in conjunction
with its counsel, will conduct an examination of the relevant documents and
records of Heritage Federal as TRIDENT deems necessary and appropriate.
Heritage Federal will make all documents, records and other information deemed
necessary by TRIDENT or its counsel available to them upon request.
For its services hereunder, TRIDENT will receive the following compensation and
reimbursement from Heritage Federal:
1. A commission equal to one and one half percent (1.5%) of the aggregate
dollar amount of capital stock sold in the subscription and community
offerings, excluding any shares of conversion stock sold to Heritage
Federal's directors, executive officers, employees, and all employee
benefit plans, including the ESOP. Additionally, commissions will be
excluded on those shares sold to "associates" of Heritage Federal's
directors and executive officers. The term "associates" as used
herein shall have the same meaning as that found in Heritage Federal's
Plan of Conversion. However, fees payable to TRIDENT will not exceed
$800,000, unless agreed to by management.
<PAGE>
Board of Directors
September 8, 1997
Page 2
2. For stock sold by other NASD member firms under selected dealer's
agreements, the commission shall not exceed a fee to be agreed upon
jointly by TRIDENT and Heritage Federal to reflect market requirements
at the time of the stock allocation in a Syndicated Community
Offering.
3. The foregoing fees and commissions are to be payable to TRIDENT at
closing as defined in the Agreement to be entered into between
Heritage Federal and TRIDENT.
4. TRIDENT shall be reimbursed for allocable expenses incurred by them,
including legal fees, whether or not the Agreement is consummated.
TRIDENT's out-of-pocket expenses will not exceed $7,500 and its legal
fees will not exceed $27,500. Heritage Federal will forward to
TRIDENT a check in the amount of $7,500 as an advance payment to
defray the allocable expenses of TRIDENT.
It further is understood that Heritage Federal will pay all other expenses of
the conversion including but not limited to its attorneys' fees, NASD filing
fees, and filing and registration fees and fees of either TRIDENT's attorneys or
the attorneys relating to any required state securities law filings, telephone
charges, air freight, rental equipment, supplies, transfer agent charges, fees
relating to auditing and accounting and costs of printing all documents
necessary in connection with the foregoing.
For purposes of TRIDENT's obligation to file certain documents and to make
certain representations to the NASD in connection with the conversion, Heritage
Federal warrants that: (a) Heritage Federal has not privately placed any
securities within the last 18 months; (b) there have been no material dealings
within the last 12 months between Heritage Federal and any NASD member or any
person related to or associated with any such member; (c) none of the officers
or directors of Heritage Federal has any affiliation with the NASD; (d) except
as contemplated by this engagement letter with TRIDENT, Heritage Federal has no
financial or management consulting contracts outstanding with any other person;
(e) Heritage Federal has not granted TRIDENT a right of first refusal with
respect to the underwriting of any future offering of Heritage Federal stock;
and (f) there has been no intermediary between TRIDENT and Heritage Federal in
connection with the public offering of Heritage Federal's shares, and no person
is being compensated in any manner for providing such service.
Heritage Federal agrees to indemnify and hold harmless TRIDENT and each person,
if any, who controls the firm against all losses, claims, damages or
liabilities, joint or several and all legal or other expenses reasonably
incurred by them in connection with the investigation or defense thereof
(collectively, "Losses"), to which they may become subject under the securities
laws or under the common law, that arise out of or are based upon the conversion
or the engagement hereunder of TRIDENT. If the foregoing indemnification is
unavailable for any reason, Heritage Federal agrees to contribute to such Losses
in the proportion that its financial interest in the conversion bears to that of
the indemnified parties. If the Agreement is entered into with respect to the
common stock to be issued in the conversion, the Agreement will provide for
indemnification, which will be in addition to any rights that TRIDENT or any
other indemnified party may have at common law or otherwise. The
indemnification provision of this paragraph will be superseded by the
indemnification provisions of the Agreement entered into by Heritage Federal and
TRIDENT.
<PAGE>
Board of Directors
September 8, 1997
Page 3
This letter is merely a statement of intent and is not a binding legal agreement
except as to paragraph (4) above with regard to the obligation to reimburse
TRIDENT for allocable expenses to be incurred prior to the execution of the
Agreement and the indemnity described in the preceding paragraph. While TRIDENT
and Heritage Federal agree in principle to the contents hereof and propose to
proceed promptly, and in good faith, to work out the arrangements with respect
to the proposed offering, any legal obligations between TRIDENT and Heritage
Federal shall be only as set forth in a duly executed Agreement. Such Agreement
shall be in form and content satisfactory to TRIDENT and Heritage Federal, as
well as their counsel, and TRIDENT's obligations thereunder shall be subject to,
among other things, there being in TRIDENT's opinion no material adverse change
in the condition or obligations of Heritage Federal or no market conditions
which might render the sale of the shares by Heritage Federal hereby
contemplated inadvisable.
Please acknowledge your agreement to the foregoing by signing below and
returning to TRIDENT one copy of this letter along with the advance payment of
$7,500. This proposal is open for your acceptance for a period of thirty (30)
days from the date hereof.
Yours very truly,
TRIDENT SECURITIES, INC.
By:/s/ R. Lee Burrows, Jr.
---------------------------
R. Lee Burrows, Jr.
Managing Director
Agreed and accepted to this 10th day
of Sept, 1997
HERITAGE FEDERAL SAVINGS AND LOAN ASSOCIATION
By: /s/ J. Edward Wells
-----------------------
J. Edward Wells
President
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
HERITAGE BANCORP, INC.
ARTICLE I
Name
The name of the corporation is Heritage Bancorp, Inc. (herein the
"Corporation").
ARTICLE II
Registered Office
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, Corporation Trust Center, in the City of Wilmington,
County of New Castle. The name of the Corporation's registered agent at such
address is The Corporation Trust Company.
ARTICLE III
Powers
The purpose for which the Corporation is organized is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware. The Corporation shall have all the
powers of a corporation organized under the General Corporation Law of the State
of Delaware.
ARTICLE IV
Term
The Corporation is to have perpetual existence.
ARTICLE V
Incorporators
The name and mailing address of the incorporator are:
Name Mailing Address
---- ---------------
J. Edward Wells 201 West Main Street
Laurens, SC 29360
ARTICLE VI
Initial Directors
The number of directors constituting the initial board of directors of the
Corporation is five, and the names and addresses of the persons who are to serve
as the initial directors until their successors are elected and qualified,
together with the classes of directorships to which such persons have been
assigned, are:
<PAGE>
<TABLE>
<CAPTION>
Name Address Class
- ---- ------- -----
<S> <C> <C>
John H. Lake 201 West Main Street I
Laurens, SC 29360
G. Edwin Owings 201 West Main Street I
Laurens, SC 29360
Aaron H. King 201 West Main Street II
Laurens, SC 29360
J. Riley Bailes 201 West Main Street II
Laurens, SC 29360
J. Edward Wells 201 West Main Street III
Laurens, SC 29360
</TABLE>
ARTICLE VII
Capital Stock
A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 10,500,000 consisting of:
1. 500,000 shares of Preferred Stock, par value one cent ($.01) per
share ("Preferred Stock"); and
2. 10,000,000 shares of Common Stock, par value one cent ($.01) per
share ("Common Stock").
B. The board of directors is authorized, subject to any limitations
prescribed by law, to provide for the issuance of the shares of Preferred Stock
in series, and by filing a certificate pursuant to the applicable law of the
State of Delaware (such certificate being hereinafter referred to as a
"Preferred Stock Designation"), to establish from time to time the number of
shares to be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. The number of authorized
shares of Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the Common Stock, without a vote of the holders of the
Preferred Stock, or of any series thereof, unless a vote of any such holders is
required pursuant to the terms of any Preferred Stock Designation.
C. 1. Notwithstanding any other provision of this Certificate, in no
event shall any record owner of any outstanding common stock which is
beneficially owned, directly or indirectly, by a person who, as of any record
date for the determination of stockholders entitled to vote on any matter,
beneficially owns in excess of 10% of the then-outstanding shares of common
stock (the "Limit"), be entitled, or permitted to any vote in respect of the
shares held in excess of the Limit, unless a majority of the Whole Board (as
hereinafter defined) shall have by resolution granted in advance such
entitlement or permission. The number of votes which may be cast by any record
owner by virtue of the provisions hereof in respect of common stock beneficially
owned by such person owning shares in excess of the Limit shall be a number
equal to the total number of votes which a single record owner of all common
stock owned by such person would be entitled to cast, multiplied by a fraction,
the numerator of which is the number of shares of such class or series which are
both beneficially owned by such person and owned of
2
<PAGE>
record by such record owner and the denominator of which is the total number of
shares of common stock beneficially owned by such person owning shares in excess
of the Limit.
2. The following definitions shall apply to this Section C of this
Article VII.
(a) "Affiliate" shall have the meaning ascribed to it in
Rule 12b-2 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as in effect on the date of filing of this Certificate.
(b) "Beneficial ownership" shall be determined pursuant to
Rule 13d-3 of the General Rules and Regulations under the Securities Exchange
Act of 1934 (or any successor rule or statutory provision), or, if said
Rule 13d-3 shall be rescinded and there shall be no successor rule or provision
thereto, pursuant to said Rule 13d-3 as in effect on the date of filing of this
Certificate; provided, however, that a person shall, in any event, also be
-----------------
deemed the "beneficial owner" of any common stock:
(i) which such person or any of its affiliates beneficially
owns, directly or indirectly; or
(ii) which such person or any of its affiliates has (A) the
right to acquire (whether such right is exercisable immediately or only after
the passage of time), pursuant to any agreement, arrangement or understanding
(but shall not be deemed to be the beneficial owner of any voting shares solely
by reason of an agreement, contract, or other arrangement with this Corporation
to effect any transaction which is described in any one or more of
subparagraphs A(1)(a) through (h) of Article XIV or upon the exercise of
conversion rights, exchange rights, warrants, or options or otherwise, or (B)
sole or shared voting or investment power with respect thereto pursuant to any
agreement, arrangement, understanding, relationship or otherwise (but shall not
be deemed to be the beneficial owner of any voting shares solely by reason of a
revocable proxy granted for a particular meeting of stockholders, pursuant to a
public solicitation of proxies for such meeting, with respect to shares of which
neither such person nor any such affiliate is otherwise deemed the beneficial
owner); or
(iii) which are beneficially owned, directly or indirectly,
by any other person with which such first mentioned person or any of its
affiliates acts as a partnership, limited partnership, syndicate or other group
pursuant to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of capital stock of this
Corporation; and provided further, however, that (i) no director or officer of
-------------------------
this Corporation (or any Affiliate of any such director or officer) shall,
solely by reason of any or all of such directors of officers acting in their
capacities as such, be deemed, for any purposes hereof, to beneficially own any
common stock beneficially owned by any other such director or officer (or any
Affiliate thereof), and (ii) neither any employee stock ownership or similar
plan of this Corporation or any subsidiary of this Corporation, nor any trustee
with respect thereto or any Affiliate of such trustee (solely by reason of such
capacity of such trustee), shall be deemed, for any purposes hereof, to
beneficially own any common stock held under any such plan. For purposes of
computing the percentage beneficial ownership of common stock of a person, the
outstanding common stock shall include shares deemed owned by such person
through application of this subsection but shall not include any other common
stock which may be issuable by this Corporation pursuant to any agreement, or
upon exercise of conversion rights, warrants or options, or otherwise. For all
other purposes, the outstanding common stock shall include only common stock
then outstanding and shall not include any common stock which may be issuable by
this Corporation pursuant to any agreement, or upon the exercise of conversion
rights, warrants or options, or otherwise.
(c) A "person" shall mean any individual, firm, corporation, or
other entity.
(d) "Whole Board" shall mean the total number of directors which
the Corporation would have if there were no vacancies on the board of directors.
3
<PAGE>
3. The board of directors shall have the power to construe and apply
the provisions of this Section and to make all determinations necessary or
desirable to implement such provisions, including but not limited to matters
with respect to (i) the number of shares of common stock beneficially owned by
any person, (ii) whether a person is an affiliate of another, (iii) whether a
person has an agreement, arrangement, or understanding with another as to the
matters referred to in the definition of beneficial ownership, (iv) the
application of any other definition or operative provision of this Section to
the given facts, or (v) any other matter relating to the applicability or effect
of this Section.
4. The board of directors shall have the right to demand that any
person who is reasonably believed to beneficially own common stock in excess of
the Limit (or holds of record common stock beneficially owned by any person in
excess of the Limit) supply the Corporation with complete information as to (i)
the record owner(s) of all shares beneficially owned by such person who is
reasonably believed to own shares in excess of the Limit, and (ii) any other
factual matter relating to the applicability or effect of this section as may
reasonably be required of such person.
5. Except as otherwise provided by law or expressly provided in this
Section C, the presence, in person or by proxy, of the holders of record of
shares of capital stock of the Corporation entitling the holders thereof to cast
a majority of the votes (after giving effect, if required, to the provisions of
this Section C) entitled to be cast by the holders of shares of capital stock of
the Corporation entitled to vote shall constitute a quorum at all meetings of
the stockholders, and every reference in this Certificate to a majority or other
proportion of capital stock (or the holders thereof) for purposes of determining
any quorum requirement or any requirement for stockholder consent or approval
shall be deemed to refer to such majority or other proportion of the votes (or
the holders thereof) then entitled to be cast in respect of such capital stock.
6. Any constructions, applications, or determinations made by the
board of directors pursuant to this Section in good faith and on the basis of
such information and assistance as was then reasonably available for such
purpose shall be conclusive and binding upon the Corporation and its
stockholders.
7. In the event any provision (or portion thereof) of this Section C
shall be found to be invalid, prohibited or unenforceable for any reason, the
remaining provisions (or portions thereof) of this Section shall remain in full
force and effect, and shall be construed as if such invalid, prohibited or
unenforceable provision had been stricken herefrom or otherwise rendered
inapplicable, it being the intent of this Corporation and its stockholders that
each such remaining provision (or portion thereof) of this Section C remain, to
the fullest extent permitted by law, applicable and enforceable as to all
stockholders, including stockholders owning an amount of stock over the Limit,
notwithstanding any such finding.
ARTICLE VIII
Preemptive Rights
No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive right
to purchase or subscribe for any unissued stock of any class or series, or any
unissued bonds, certificates of indebtedness, debentures or other securities
convertible into or exchangeable for stock of any class or series or carrying
any right to purchase stock of any class or series; but any such unissued stock,
bonds, certificates of indebtedness, debentures or other securities convertible
into or exchangeable for stock or carrying any right to purchase stock may be
issued pursuant to resolution of the board of directors of the Corporation to
such persons, firms, corporations or associations, whether or not holders
thereof, and upon such terms as may be deemed advisable by the board of
directors in the exercise of its sole discretion.
4
<PAGE>
ARTICLE IX
Repurchase of Shares
The Corporation may from time to time, pursuant to authorization by the
board of directors of the Corporation and without action by the stockholders,
purchase or otherwise acquire shares of any class, bonds, debentures, notes,
scrip, warrants, obligations, evidences of indebtedness, or other securities of
the Corporation in such manner, upon such terms, and in such amounts as the
board of directors shall determine; subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by law.
ARTICLE X
Meetings of Stockholders; Cumulative Voting
A. Notwithstanding any other provision of this Certificate or the Bylaws
of the Corporation, no action required to be taken or which may be taken at any
annual or special meeting of stockholders of the Corporation may be taken
without a meeting, and the power of stockholders to consent in writing, without
a meeting, to the taking of any action is specifically denied.
B. Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the board of directors of the
Corporation, or by a committee of the board of directors which has been duly
designated by the board of directors and whose powers and authorities, as
provided in a resolution of the board of directors or in the Bylaws of the
Corporation, include the power and authority to call such meetings, but such
special meetings may not be called by any other person or persons.
C. There shall be no cumulative voting by stockholders of any class or
series in the election of directors of the Corporation.
D. Meetings of stockholders may be held at such place as the Bylaws may
provide.
ARTICLE XI
Notice for Nominations and Proposals
A. Nominations for the election of directors and proposals for any new
business to be taken up at any annual or special meeting of stockholders may be
made by the board of directors of the Corporation or by any stockholder of the
Corporation entitled to vote generally in the election of directors. In order
for a stockholder of the Corporation to make any such nominations and/or
proposals, he or she shall give notice thereof in writing, delivered or mailed
by first class United States mail, postage prepaid, to the Secretary of the
Corporation not less than thirty days nor more than sixty days prior to any such
meeting; provided, however, that if less than thirty-one days' notice of the
meeting is given to stockholders, such written notice shall be delivered or
mailed, as prescribed, to the Secretary of the Corporation not later than the
close of the tenth day following the day on which notice of the meeting was
mailed to stockholders. Each such notice given by a stockholder with respect to
nominations for election of directors shall set forth (i) the name, age,
business address and, if known, residence address of each nominee proposed in
such notice, (ii) the principal occupation or employment of each such nominees,
(iii) the number of shares of stock of the Corporation which are beneficially
owned by each such nominee, (iv) such other information as would be required to
be included in a proxy statement soliciting proxies for the election of the
proposed nominee pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended, including, without limitation, such person's written consent
to being named in the proxy statement as a nominee and to serving as a director,
if elected, and (v) as to the stockholder giving such notice (a) his name and
address as they appear on the Corporation's books and (b) the class and number
of shares of the Corporation which are beneficially owned by such stockholder.
In addition, the stockholder making such nomination shall promptly provide any
other information reasonably requested by the Corporation.
5
<PAGE>
B. Each such notice given by a stockholder to the Secretary with respect
to business proposals to bring before a meeting shall set forth in writing as to
each matter: (i) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting;
(ii) the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business; (iii) the class and number of shares of the
Corporation which are beneficially owned by the stockholder; and (iv) any
material interest of the stockholder in such business. Notwithstanding anything
in this Certificate to the contrary, no business shall be conducted at the
meeting except in accordance with the procedures set forth in this Article.
C. The Chairman of the annual or special meeting of stockholders may, if
the facts warrant, determine and declare to the meeting that a nomination or
proposal was not made in accordance with the foregoing procedure, and, if the
Chairman should so determine, the Chairman shall so declare to the meeting and
the defective nomination or proposal shall be disregarded and laid over for
action at the next succeeding adjourned, special or annual meeting of the
stockholders taking place thirty days or more thereafter. This provision shall
not require the holding of any adjourned or special meeting of stockholders for
the purpose of considering such defective nomination or proposal.
ARTICLE XII
Directors
A. Number; Vacancies. The number of directors of the Corporation shall
-----------------
be such number, not less than 5 nor more than 15 (exclusive of directors, if
any, to be elected by holders of preferred stock of the Corporation, voting
separately as a class), as shall be provided from time to time in or in
accordance with the Bylaws; provided, however, that no decrease in the number of
directors shall have the effect of shortening the term of any incumbent
director, and provided further, that no action shall be taken to decrease or
increase the number of directors from time to time unless at least two-thirds of
the directors then in office shall concur in said action. Vacancies in the
board of directors of the Corporation, however caused, and newly created
directorships may be filled only by a vote of two-thirds of the directors then
in office, whether or not a quorum, and any director so chosen shall hold office
for a term expiring at the annual meeting of stockholders at which the term of
the class to which the director has been chosen expires and when the director's
successor is elected and qualified.
B. Classified Board. The board of directors of the Corporation shall be
----------------
divided into three classes of directors which shall be designated Class I, Class
II and Class III. The members of each class shall be elected for a term of
three years and until their successors are elected and qualified. Such classes
shall be as nearly equal in number as the then total number of directors
constituting the entire board of directors shall permit, with the terms of
office of all members of one class expiring each year. At the first annual
meeting of stockholders, directors in Class I shall be elected to hold office
for a term expiring at the third succeeding annual meeting thereafter. At the
second annual meeting of stockholders, directors of Class II shall be elected to
hold office for a term expiring at the third succeeding meeting thereafter. At
the third annual meeting of stockholders, directors of Class III shall be
elected to hold office for a term expiring at the third succeeding meeting
thereafter. Thereafter, at each succeeding annual meeting, directors of each
class shall be elected for three year terms. Notwithstanding the foregoing, the
director whose term shall expire at any annual meeting shall continue to serve
until such time as his successor shall have been duly elected and shall have
qualified unless his position on the board of directors shall have been
abolished by action taken to reduce the size of the board of directors prior to
said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as nearly as equal as possible.
The board of directors shall designate, by the name of the incumbent(s), the
position(s) to be abolished. Notwithstanding the foregoing, no decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as nearly as equal
as possible.
6
<PAGE>
Whenever the holders of any one or more series of preferred stock of the
Corporation shall have the right, voting separately as a class, to elect one or
more directors of the Corporation, the board of directors shall consist of said
directors so elected in addition to the number of directors fixed as provided
above in this Article XII. Notwithstanding the foregoing, and except as
otherwise may be required by law, whenever the holders of any one or more series
of preferred stock of the Corporation shall have the right, voting separately as
a class, to elect one or more directors of the Corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of stockholders.
ARTICLE XIII
Removal of Directors
Notwithstanding any other provision of this Certificate or the Bylaws of
the Corporation, any director or the entire board of directors of the
Corporation may be removed, at any time, but only for cause and only by the
affirmative vote of the holders of at least 80% of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose. Notwithstanding the foregoing, whenever
the holders of any one or more series of preferred stock of the Corporation
shall have the right, voting separately as a class, to elect one or more
directors of the Corporation, the preceding provisions of this Article XIII
shall not apply with respect to the director or directors elected by such
holders of preferred stock.
ARTICLE XIV
Approval of Certain Business Combinations
The stockholder vote required to approve Business Combinations (as
hereinafter defined) shall be as set forth in this section.
A. 1. Except as otherwise expressly provided in this Article XIV, the
affirmative vote of the holders of (i) at least 80% of the outstanding shares
entitled to vote thereon (and, if any class or series of shares is entitled to
vote thereon separately, the affirmative vote of the holders of at least 80% of
the outstanding shares of each such class or series), and (ii) at least a
majority of the outstanding shares entitled to vote thereon, not including
shares deemed beneficially owned by a Related Person (as hereinafter defined),
shall be required in order to authorize any of the following:
(a) any merger or consolidation of the Corporation with or into
a Related Person (as hereinafter defined);
(b) any sale, lease, exchange, transfer or other disposition,
including without limitation, a mortgage, or any other security device, of all
or any Substantial Part (as hereinafter defined) of the assets of the
Corporation (including without limitation any voting securities of a subsidiary)
or of a subsidiary, to a Related Person;
(c) any merger or consolidation of a Related Person with or
into the Corporation or a subsidiary of the Corporation;
(d) any sale, lease, exchange, transfer or other disposition of
all or any Substantial Part of the assets of a Related Person to the Corporation
or a subsidiary of the Corporation;
(e) the issuance of any securities of the Corporation or a
subsidiary of the Corporation to a Related Person;
7
<PAGE>
(f) the acquisition by the Corporation or a subsidiary of the
Corporation of any securities of a Related Person;
(g) any reclassification of the common stock of the
Corporation, or any recapitalization involving the common stock of the
Corporation; and
(h) any agreement, contract or other arrangement providing for
any of the transactions described in this Article.
2. Such affirmative vote shall be required notwithstanding any
other provision of this Certificate, any provision of law, or any agreement with
any regulatory agency or national securities exchange which might otherwise
permit a lesser vote or no vote.
3. The term "Business Combination" as used in this Article XIV
shall mean any transaction which is referred to in any one or more of
subparagraphs A(1)(a) through (h) above.
B. The provisions of paragraph A shall not be applicable to any
particular Business Combination, and such Business Combination shall require
only such affirmative vote as is required by any other provision of this
Certificate, any provision of law, or any agreement with any regulatory agency
or national securities exchange, if the Business Combination shall have been
approved by a two-thirds vote of the Continuing Directors (as hereinafter
defined); provided, however, that such approval shall only be effective if
obtained at a meeting at which a Continuing Director Quorum (as hereinafter
defined) is present.
C. For the purposes of this Article XIV the following definitions apply:
1. The term "Related Person" shall mean and include (a) any
individual, corporation, partnership or other person or entity which together
with its "affiliates" (as that term is defined in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as amended),
"beneficially owns" (as that term is defined in Rule 13d-3 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as amended) in the
aggregate 10% or more of the outstanding shares of the common stock of the
Corporation; and (b) any "affiliate" (as that term is defined in Rule 12b-2
under the Securities Exchange Act of 1934, as amended) of any such individual,
corporation, partnership or other person or entity. Without limitation, any
shares of the common stock of the Corporation which any Related Person has the
right to acquire pursuant to any agreement, or upon exercise or conversion
rights, warrants or options, or otherwise, shall be deemed "beneficially owned"
by such Related Person.
2. The term "Substantial Part" shall mean more than 25% of the
total assets of the Corporation, as of the end of its most recent fiscal year
ending prior to the time the determination is made.
3. The term "Continuing Director" shall mean any member of the
board of directors of the Corporation who is unaffiliated with the Related
Person and was a member of the board prior to the time that the Related Person
became a Related Person, and any successor of a Continuing Director who is
unaffiliated with the Related Person and is recommended to succeed a Continuing
Director by a majority of Continuing Directors then on the board.
4. The term "Continuing Director Quorum" shall mean two-thirds of
the Continuing Directors capable of exercising the powers conferred on them.
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ARTICLE XV
Evaluation of Business Combinations
In connection with the exercise of its judgment in determining what is in
the best interests of the Corporation and of the stockholders, when evaluating a
Business Combination (as defined in Article XIV) or a tender or exchange offer,
the board of directors of the Corporation shall, in addition to considering the
adequacy of the amount to be paid in connection with any such transaction,
consider all of the following factors and any other factors which it deems
relevant; (i) the social and economic effects of the transaction on the
Corporation and its subsidiaries, employees, depositors, loan and other
customers, creditors and other elements of the communities in which the
Corporation and its subsidiaries operate or are located; (ii) the business and
financial condition and earnings prospects of the acquiring person or entity,
including, but not limited to, debt service and other existing financial
obligations, financial obligations to be incurred in connection with the
acquisition and other likely financial obligations of the acquiring person or
entity and the possible effect of such conditions upon the Corporation and its
subsidiaries and the other elements of the communities in which the Corporation
and its subsidiaries operate or are located; and (iii) the competence,
experience, and integrity of the acquiring person or entity and its or their
management.
ARTICLE XVI
Indemnification
A. Persons. The Corporation shall indemnify, to the extent provided in
-------
paragraphs B, D or F:
1. any person who is or was a director or officer of the
Corporation; and
2. any person who serves or served at the Corporation's request as
a director, officer, employee, agent, partner or trustee of another corporation,
partnership, joint venture, trust or other enterprise.
B. Extent -- Derivative Suits. In case of a threatened, pending or
--------------------------
completed action or suit by or in the right of the Corporation against a person
named in paragraph A by reason of his holding a position named in paragraph A,
the Corporation shall indemnify such person if such person satisfies the
standard in paragraph C, for expenses (including attorneys' fees but excluding
amounts paid in settlement) actually and reasonably incurred by such person in
connection with the defense or settlement of the action or suit.
C. Standard -- Derivative Suits. In case of a threatened, pending or
----------------------------
completed action or suit by or in the right of the Corporation, a person named
in paragraph A shall be indemnified only if:
1. such person is successful on the merits or otherwise; or
2. such person acted in good faith in the transaction which is the
subject of the suit or action, and in a manner such person reasonably believed
to be in, or not opposed to, the best interest of the Corporation, including,
but not limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of another
party to engage in a Business Combination (as defined in Article XIV) not
approved by the board of directors. However, such person shall not be
indemnified in respect of any claim, issue or matter as to which such person has
been adjudged liable to the Corporation unless (and only to the extent that) the
court in which the suit was brought shall determine, upon application, that
despite the adjudication but in view of all the circumstances, such person is
fairly and reasonably entitled to indemnity for such expenses as the court shall
deem proper.
D. Extent -- Nonderivative Suits. In case of a threatened, pending or
-----------------------------
completed suit, action or proceeding (whether civil, criminal, administrative or
investigative), other than a suit by or in the right of the Corporation,
together hereafter referred to as a nonderivative suit, against a person named
in paragraph A by reason of his holding a position named in paragraph A, the
Corporation shall indemnify such person if such person satisfies
9
<PAGE>
the standard in paragraph E, for amounts actually and reasonably incurred by
such person in connection with the defense or settlement of the nonderivative
suit, including, but not limited to (i) expenses (including attorneys' fees),
(ii) amounts paid in settlement, (iii) judgments, and (iv) fines.
E. Standard -- Nonderivative Suits. In case of a nonderivative suit, a
-------------------------------
person named in paragraph A shall be indemnified only if:
1. such person is successful on the merits or otherwise; or
2. such person acted in good faith in the transaction which is the
subject of the nonderivative suit and in a manner such person reasonably
believed to be in, or not opposed to, the best interests of the Corporation,
including, but not limited to, the taking of any and all actions in connection
with the Corporation's response to any tender offer or any offer or proposal of
another party to engage in a Business Combination (as defined in Article XIV of
this Certificate) not approved by the board of directors and, with respect to
any criminal action or proceeding, such person had no reasonable cause to
believe his conduct was unlawful. The termination of a nonderivative suit by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
---------------
its equivalent shall not, in itself, create a presumption that the person failed
to satisfy the standard of this paragraph E.2.
F. Determination That Standard Has Been Met. A determination that the
----------------------------------------
standard of paragraph C or E has been satisfied may be made by a court or,
except as stated in paragraph C.2 (second sentence), the determination may be
made by:
1. a majority vote of the directors of the Corporation who are not
parties to the action, suit or proceeding, even though less than a quorum; or
2. independent legal counsel (appointed by a majority of the
disinterested directors of the Corporation, whether or not a quorum) in a
written opinion; or
3. the stockholders of the Corporation.
G. Proration. Anyone making a determination under paragraph F may
---------
determine that a person has met the standard as to some matters but not as to
others, and may reasonably prorate amounts to be indemnified.
H. Advance Payment. The Corporation may pay in advance any expenses
---------------
(including attorneys' fees) which may become subject to indemnification under
paragraphs A through G if (i) the board of directors authorizes the specific
payment and (ii) the person receiving the payment undertakes in writing to repay
the same if it is ultimately determined that such person is not entitled to
indemnification by the Corporation under paragraphs A through G.
I. Nonexclusive. The indemnification and advance of expenses provided by
------------
paragraphs A through H shall not be exclusive of any other rights to which a
person may be entitled by law, bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise.
J. Continuation. The indemnification provided by this Article XVI shall
------------
be deemed to be a contract between the Corporation and the persons entitled to
indemnification thereunder, and any repeal or modification of this Article XVI
shall not affect any rights or obligations then existing with respect to any
state of facts then or theretofore existing or any action, suit or proceeding
theretofore or thereafter brought based in whole or in part upon any such state
of facts. The indemnification and advance payment provided by paragraphs A
through H shall continue as to a person who has ceased to hold a position named
in paragraph A and shall inure to such person's heirs, executors and
administrators.
10
<PAGE>
K. Insurance. The Corporation may purchase and maintain insurance on
---------
behalf of any director, officer, employee or agent of the Corporation or
subsidiary or affiliate or another corporation, partnership, joint venture,
trust or other enterprise, against any liability incurred by such person in any
such position, or arising out of such person's status as such, whether or not
the Corporation would have power to indemnify such person against such liability
under paragraphs A through H.
L. Savings Clause. If this Article XVI or any portion hereof shall be
--------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee, and
agent of the Corporation as to costs, charges, and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement with respect
to any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including an action by or in the right of the Corporation to the
full extent permitted by any applicable portion of this Article XVI that shall
not have been invalidated and to the full extent permitted by applicable law.
ARTICLE XVII
Elimination of Directors' Liability
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except: (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
made in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware, or (iv) for any transaction from which a director derived an
improper personal benefit. If the General Corporation Law of the State of
Delaware is amended after the date of filing of this Certificate to further
eliminate or limit the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
ARTICLE XVIII
Amendment of Bylaws
In furtherance and not in limitation of the powers conferred by statute,
the board of directors of the Corporation is expressly authorized to make,
repeal, alter, amend and rescind the Bylaws of the Corporation by a two-thirds
vote of the board. Notwithstanding any other provision of this Certificate or
the Bylaws of the Corporation (and notwithstanding the fact that some lesser
percentage may be specified by law), the Bylaws shall not be adopted, repealed,
altered, amended or rescinded by the stockholders of the Corporation except by
the vote of the holders of not less than 80% of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose (provided that notice of such proposed
adoption, repeal, alteration, amendment or rescission is included in the notice
of such meeting), or, as set forth above, by the board of directors.
ARTICLE XIX
Amendment of Certificate of Incorporation
The Corporation reserves the right to repeal, alter, amend or rescind any
provision contained in this Certificate in the manner now or hereafter
prescribed by law, and all rights conferred on stockholders herein are granted
subject to this reservation. Notwithstanding the foregoing, the provisions set
forth in Articles X, XI, XII,
11
<PAGE>
XIII, XIV, XV, XVI, XVII, XVIII and this Article XIX may not be repealed,
altered, amended or rescinded in any respect unless the same is approved by the
affirmative vote of the holders of not less than 80% of the outstanding shares
of capital stock of the Corporation entitled to vote generally in the election
of directors (considered for this purpose as a single class) cast at a meeting
of the stockholders called for that purpose (provided that notice of such
proposed adoption, repeal, alteration, amendment or rescission is included in
the notice of such meeting).
* * *
12
<PAGE>
THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose
of forming a corporation pursuant to the General Corporation Law of the State of
Delaware, do make this Certificate, hereby declaring and certifying that this is
my act and deed and the facts herein stated are true, and accordingly have
hereunto set my hand this 7th day of November 1997.
/s/ J. Edward Wells
-------------------------------------------
J. Edward Wells
Incorporator
13
<PAGE>
Exhibit 3.2
BYLAWS
OF
HERITAGE BANCORP, INC.
ARTICLE I
Stockholders
SECTION 1. Place of Meetings. All annual and special meetings of
-----------------
stockholders shall be held at such place as the board of directors may determine
and as designated in the notice of such meeting.
SECTION 2. Annual Meeting. A meeting of the stockholders of the
--------------
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at such date and time as the
board of directors may determine.
SECTION 3. Special Meetings. Special meetings of the stockholders for any
----------------
purpose or purposes may be called at any time by the majority of the board of
directors or by a committee of the board of directors in accordance with the
provisions of the Corporation's Certificate of Incorporation.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
-------------------
conducted in accordance with the rules and procedures established by the board
of directors. The board of directors shall designate, when present, either the
chairman of the board or president to preside at such meetings.
SECTION 5. Notice of Meetings. Written notice stating the place, date and
------------------
time of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called shall be given not less than ten nor
more than sixty days before the meeting to each stockholder of record entitled
to vote at such meeting. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail, postage prepaid, addressed to the
stockholder at the address of the stockholder as it appears on the records of
the Corporation. If a stockholder be present at a meeting, or in writing waives
notice thereof before or after the meeting, notice of the meeting to such
stockholder shall be unnecessary. When any stockholders' meeting, either annual
or special, is adjourned for more than thirty days, notice of the adjourned
meeting shall be given as in the case of an original meeting. It shall not be
necessary to give any notice of the time and place of any meeting adjourned for
thirty days or less or of the business to be transacted at such adjourned
meeting, other than an announcement at the meeting at which such adjournment is
taken.
SECTION 6. Voting Lists. A complete list of stockholders entitled to vote
------------
at any meeting of stockholders, arranged in alphabetical order for each class of
stock and showing the address of each such stockholder and the number of shares
registered in his or her name, shall be open to the examination of any such
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 7. Quorum. A majority of the outstanding shares of the
------
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than a majority of
the outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice.
At such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
<PAGE>
SECTION 8. Proxies. At all meetings of stockholders, a stockholder may
-------
vote by proxy executed in writing by the stockholder or by his or her duly
authorized attorney in fact. Proxies solicited on behalf of the management
shall be voted as directed by the stockholder or, in the absence of such
direction, as determined by a majority of the board of directors. No proxy
shall be valid after eleven months from the date of its execution unless
otherwise provided in the proxy.
SECTION 9. Voting. Unless otherwise provided in the Corporation's
------
Certificate of Incorporation, each stockholder shall be entitled to one vote for
each share of stock having voting power held by such stockholder. Directors
shall be elected by a plurality of the votes of the shares present in person or
represented by proxy and entitled to vote at the meeting on the election of
directors. In all matters other than the election of directors, the affirmative
vote of the majority of shares present in person or represented by proxy at the
meeting and entitled to vote and voting thereon shall be the act of the
stockholders, unless the question is one upon which, by express provision of the
applicable statute, the Corporation's Certificate of Incorporation or these
Bylaws, a different vote is required in which case such express provision shall
govern and control the decision of the question.
SECTION 10. Voting of Shares in the Name of Two or More Persons. When
---------------------------------------------------
ownership of stock stands in the name of two or more persons, in the absence of
written directions to the Corporation to the contrary, at any meeting of the
stockholders of the Corporation any one or more of such stockholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose name shares of stock stand, the vote or votes to
which these persons are entitled shall be cast as directed by a majority of
those holding such stock and present in person or by proxy at such meeting, but
no votes shall be cast for such stock if a majority cannot agree.
SECTION 11. Voting of Shares by Certain Holders. Shares standing in the
-----------------------------------
name of another corporation may be voted by any officer, agent or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, either in person or by
proxy, but no trustee shall be entitled to vote shares held by him without a
transfer of such shares into his name. Shares standing in the name of a
receiver may be voted by such receiver, and shares held by or under the control
of a receiver may be voted by such receiver without the transfer thereof into
his name if authority to do so is contained in an appropriate order of the court
or other public authority by which such receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
SECTION 12. Inspectors of Election. In advance of any meeting of
----------------------
stockholders, the board of directors may appoint any persons, other than
nominees for office, as inspectors of election to act at such meeting or any
adjournment thereof. The number of inspectors shall be either one or three. If
the board of directors so appoints either one or three inspectors, that
appointment shall not be altered at the meeting. If inspectors of election are
not so appointed, the chairman of the board or the president may make such
appointment at the meeting. In case any person appointed as inspector fails to
appear or fails or refuses to act, the vacancy may be filled by appointment by
the board of directors in advance of the meeting or at the meeting by the
chairman of the board or the president.
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<PAGE>
The inspectors shall: ascertain the number of shares outstanding and the
voting power of each; determine the shares represented at the meeting and the
validity of proxies and ballots; count all votes and ballots; determine and
retain for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors; and certify their determination of
the number of shares represented at the meeting, and their count of all votes
and ballots.
SECTION 13. Director Nominations. No nominations for directors except
--------------------
those made by the board of directors or an authorized committee thereof shall be
voted upon at the annual meeting unless other nominations by stockholders are
made in writing and delivered to the secretary of the Corporation in accordance
with the provisions of the Corporation's Certificate of Incorporation.
SECTION 14. New Business. Any new business to be taken up at the annual
------------
meeting shall be stated in writing and filed with the secretary of the
Corporation in accordance with the provisions of the Corporation's Certificate
of Incorporation. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors
and committees, but in connection with such reports no new business shall be
acted upon at such annual meeting unless stated and filed as provided in the
Corporation's Certificate of Incorporation.
ARTICLE II
Board of Directors
SECTION 1. General Powers. The business and affairs of the Corporation
--------------
shall be under the direction of its board of directors. The board of directors
shall annually elect a chairman of the board from among its members who shall,
when present, preside at its meetings.
SECTION 2. Number, Term and Election. The board of directors shall
-------------------------
consist of five members and shall be divided into three classes as nearly equal
in number as possible. The members of each class shall be elected for a term of
three years and until their successors are elected or qualified. One class
shall be elected by ballot annually. The board of directors shall be classified
in accordance with the provisions of the Corporation's Certificate of
Incorporation.
SECTION 3. Qualification. Each director shall at all times be the
-------------
beneficial owner of not less than 100 shares of capital stock of the
Corporation.
SECTION 4. Regular Meetings. A regular meeting of the board of directors
----------------
shall be held without other notice than this Bylaw immediately after, and at the
same place as, the annual meeting of stockholders. The board of directors may
provide, by resolution, the time and place for the holding of additional regular
meetings without other notice than such resolution.
SECTION 5. Special Meetings. Special meetings of the board of directors
----------------
may be called by or at the request of the chairman of the board or the
president, or by one-third of the directors. The persons authorized to call
special meetings of the board of directors may fix any place in the State of
South Carolina as the place for holding any special meeting of the board of
directors called by such persons. Written notice of any special meeting shall
be given to each director at least two days previous thereto delivered
personally or by telecopier or telegram or at least five days previous thereto
delivered by mail at the address at which the director is most likely to be
reached. Such notice shall be deemed to be delivered when deposited in the
United States mail so addressed, with postage thereon prepaid if mailed or when
delivered by telecopier. Any director may waive notice of any meeting by a
writing filed with the secretary. The attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except where a director
attends a meeting for the express purpose of objecting to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at,
3
<PAGE>
nor the purpose of, any meeting of the board of directors need be specified in
the notice or waiver of notice of such meeting.
SECTION 6. Participation in Meetings By Conference Telephone. Members of
-------------------------------------------------
the board of directors, or any committee thereof, may participate in a meeting
of such board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Such participation shall constitute presence in
person at such meeting.
SECTION 7. Quorum. A majority of the number of directors fixed by Section
------
2 of this Article III shall constitute a quorum for the transaction of business
at any meeting of the board of directors, but if less than such majority is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time without notice other than announcement at the meeting.
SECTION 8. Manner of Acting. The act of the majority of the directors
----------------
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by these Bylaws, the
Certificate of Incorporation, or the General Corporation Law of the State of
Delaware.
SECTION 9. Action Without a Meeting. Any action required or permitted to
------------------------
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
SECTION 10. Resignation. Any director may resign at any time by sending a
-----------
written notice of such resignation to the administrative office of the
Corporation addressed to the chairman of the board or the president. Unless
otherwise specified herein, such resignation shall take effect upon receipt
thereof by the chairman of the board or the president.
SECTION 11. Vacancies. Any vacancy occurring in the board of directors
---------
shall be filled in accordance with the provisions of the Corporation's
Certificate of Incorporation. The term of such director shall be in accordance
with the provisions of the Corporation's Certificate of Incorporation.
SECTION 12. Removal of Directors. Any director or the entire board of
--------------------
directors may be removed only in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 13. Compensation. Directors, as such, may receive a stated fee for
------------
their services. By resolution of the board of directors, a reasonable fixed
sum, and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the board of directors.
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the board of
directors may determine. Nothing herein shall be construed to preclude any
director from serving the Corporation in any other capacity and receiving
remuneration therefor.
SECTION 14. Presumption of Assent. A director of the Corporation who is
---------------------
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent or abstention shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the Corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to
a director who votes in favor of such action.
SECTION 15. Advisory Directors. The board of directors may by resolution
------------------
appoint advisory directors or directors emeriti to the board, and shall have
such authority and receive such compensation and reimbursement as the board of
directors shall provide. Advisory directors or directors emeriti shall not have
the authority to participate by vote in the transaction of business.
4
<PAGE>
ARTICLE III
Committees of the Board of Directors
SECTION 1. Appointment. The board of directors may, by resolution adopted
-----------
by a majority of the full board, designate one or more committees, each
consisting of two or more directors, to serve at the pleasure of the board of
directors. The board of directors may designate one or more directors as
alternate members of any committee, who may replace any absent member at any
meeting of any such committee.
SECTION 2. Authority. Any such committee shall have all the authority of
---------
the board of directors, except to the extent, if any, that such authority shall
be limited by the resolution appointing the committee; and except also that no
committee shall have the authority of the board of directors with reference to:
the declaration of dividends; the amendment of the charter or bylaws of the
Corporation, or recommending to the shareholders a plan of merger,
consolidation, or conversion; the sale, lease, or other disposition of all or
substantially all of the property and assets of the Corporation otherwise than
in the usual and regular course of its business; a voluntary dissolution of the
Corporation; a revocation of any of the foregoing; the approval of a transaction
in which any member of the committee, directly or indirectly, has any material
beneficial interest; the filling of vacancies on the board of directors or in
any committee; or the appointment of other committees of the board of directors
or members thereof.
SECTION 3. Tenure. Subject to the provisions of Section 8 of this Article
------
III, each member of a committee shall hold office until the next regular annual
meeting of the board of directors following his or her designation and until a
successor is designated as a member of the committee.
SECTION 4. Meetings. Unless the board of directors shall otherwise
--------
provide, regular meetings of any committee appointed pursuant to this Article
III shall be at such times and places as are determined by the board of
directors, or by any such committee. Special meetings of any such committee may
be held at the principal executive office of the Corporation, or at any place
which has been designated from time to time by resolution of such committee or
by written consent of all members thereof, and may be called by any member
thereof upon not less than one day's notice stating the place, date, and hour of
the meeting, which notice shall been given in the manner provided for the giving
of notice to members of the board of directors of the time and place of special
meetings of the board of directors.
SECTION 5. Quorum. A majority of the members of any committee shall
------
constitute a quorum for the transaction of business at any meeting thereof.
SECTION 6. Action Without a Meeting. Any action required or permitted to
------------------------
be taken by any committee at a meeting may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
the members of any such committee.
SECTION 7. Resignations and Removal. Any member of any committee may be
------------------------
removed at any time with or without cause by resolution adopted by a majority of
the full board of directors. Any member of any committee may resign from any
such committee at any time by giving written notice to the president or
secretary of the Corporation. Unless otherwise specified, such resignation
shall take effect upon its receipt; the acceptance of such resignation shall not
be necessary to make it effective.
SECTION 8. Procedure. Unless the board of directors otherwise provides,
---------
each committee shall elect a presiding officer from its members and may fix its
own rules of procedure which shall not be inconsistent with these bylaws. It
shall keep regular minutes of its proceedings and report the same to the board
of directors for its information at the meeting held next after the proceedings
shall have occurred.
5
<PAGE>
ARTICLE IV
Officers
SECTION 1. Positions. The officers of the Corporation shall be a
---------
president, a secretary and a treasurer, each of whom shall be elected by the
board of directors. The board of directors may also designate the chairman of
the board as an officer. The president shall be the chief executive officer
unless the board of directors designates the chairman of the board as chief
executive officer. The president shall be a director of the Corporation. The
offices of the secretary and treasurer may be held by the same person and a vice
president may also be either the secretary or the treasurer. The board of
directors may designate one or more vice presidents as executive vice president
or senior vice president. The board of directors may also elect or authorize
the appointment of such other officers as the business of the Corporation may
require. The officers shall have such authority and perform such duties as the
board of directors may from time to time authorize or determine. In the absence
of action by the board of directors, the officers shall have such powers and
duties as generally pertain to their respective offices.
SECTION 2. Election and Term of Office. The officers of the Corporation
---------------------------
shall be elected annually by the board of directors at the first meeting of the
board of directors held after each annual meeting of the shareholders. If the
election of officers is not held at such meeting, such election shall be held as
soon thereafter as possible. Each officer shall hold office until his successor
shall have been duly elected and qualified or until his death or until he shall
resign or shall have been removed in the manner hereinafter provided. Election
or appointment of an officer, employee or agent shall not of itself create
contract rights. The board of directors may authorize the Corporation to enter
into an employment contract with any officer in accordance with state law; but
no such contract shall impair the right of the board of directors to remove any
officer at any time in accordance with Section 3 of this Article IV.
SECTION 3. Removal. Any officer may be removed by vote of two-thirds of
-------
the board of directors whenever, in its judgment, the best interests of the
Corporation will be served thereby, but such removal, other than for cause,
shall be without prejudice to the contract rights, if any, of the person so
removed.
SECTION 4. Vacancies. A vacancy in any office because of death,
---------
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be fixed
------------
from time to time by the board of directors and no officer shall be prevented
from receiving such salary by reason of the fact that he is also a director of
the Corporation.
ARTICLE V
Contracts, Loans, Checks and Deposits
SECTION 1. Contracts. To the extent permitted by applicable law, and
---------
except as otherwise prescribed by the Corporation's Certificate of Incorporation
or these Bylaws with respect to certificates for shares, the board of directors
may authorize any officer, employee, or agent of the Corporation to enter into
any contract or execute and deliver any instrument in the name of and on behalf
of the Corporation. Such authority may be general or confined to specific
instances.
SECTION 2. Loans. No loans shall be contracted on behalf of the
-----
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for
-------------------
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by one or more
6
<PAGE>
officers, employees or agents of the Corporation in such manner as shall from
time to time be determined by resolution of the board of directors.
SECTION 4. Deposits. All funds of the Corporation not otherwise employed
--------
shall be deposited from time to time to the credit of the Corporation in any of
its duly authorized depositories as the board of directors may select.
ARTICLE VI
Certificates for Shares and Their Transfer, Etc.
SECTION 1. Certificates for Shares. The shares of the Corporation shall
-----------------------
be represented by certificates signed by the chairman of the board of directors
or by the president or a vice president and by the treasurer or by the secretary
of the Corporation, and may be sealed with the seal of the Corporation or a
facsimile thereof. Any or all of the signatures upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent, or
registered by a registrar, other than the Corporation itself or an employee of
the Corporation. If any officer who has signed or whose facsimile signature has
been placed upon such certificate shall have ceased to be such officer before
the certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer at the date of its issue.
SECTION 2. Form of Share Certificates. Stock certificates of the
--------------------------
Corporation shall be in such form as approved by the board of directors.
SECTION 3. Payment for Shares. No certificate shall be issued for any
------------------
shares until such share is fully paid.
SECTION 4. Form of Payment for Shares. The consideration for the issuance
--------------------------
of shares shall be paid in accordance with the provisions of the Corporation's
Certificate of Incorporation.
SECTION 5. Transfer of Shares. Transfer of shares of capital stock of the
------------------
Corporation shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record thereof or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney thereunto authorized by power of attorney duly executed and filed with
the Corporation. Such transfer shall be made only on surrender for cancellation
of the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the Corporation shall be deemed by the Corporation
to be the owner thereof for all purposes.
SECTION 6. Stock Ledger. The stock ledger of the Corporation shall be the
------------
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 6 of Article I or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
SECTION 7. Determination of Stockholders of Record.
---------------------------------------
(a) Meetings of Stockholders. In order that the Corporation may determine
------------------------
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, the board of directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors, and which record date shall
not be more than sixty nor less than ten days before the date of such meeting.
If no record date is fixed by the board of directors, the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next proceeding the day on which the meeting is held. A determination
of stockholders of record entitled to notice of
7
<PAGE>
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting unless the board of directors fixes a new record date for the adjourned
meeting.
(b) Dividends. In order that the Corporation may determine the
---------
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the board of directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty days
prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the board of directors adopts the resolution relating
thereto.
SECTION 8. Lost Certificates. The board of directors may direct a new
-----------------
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate, or his legal representative, to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed.
SECTION 9. Beneficial Owners. The Corporation shall be entitled to
-----------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such shares on
the part of any other person, whether or not the Corporation shall have express
or other notice thereof, except as otherwise provided by law.
ARTICLE VIII
Fiscal Year; Annual Audit
The fiscal year of the Corporation shall end on the 30th day of September
of each year. The Corporation shall be subject to an annual audit as of the end
of its fiscal year by independent public accountants appointed by and
responsible to the board of directors.
ARTICLE IX
Dividends
Subject to the provisions of the Certificate of Incorporation and
applicable law, the board of directors may, at any regular or special meeting,
declare dividends on the Corporation's outstanding capital stock. Dividends may
be paid in cash, in property or in the Corporation's own stock.
ARTICLE X
Corporate Seal
The corporate seal of the Corporation shall be in such form as the board of
directors shall prescribe.
ARTICLE XI
Amendments
In accordance with the Corporation's Certificate of Incorporation, these
Bylaws may be repealed, altered, amended or rescinded by the stockholders of the
Corporation only by vote of not less than 80% of the outstanding
8
<PAGE>
shares of capital stock of the Corporation entitled to vote generally in the
election of directors (considered for this purpose as one class) cast at a
meeting of the stockholders called for that purpose (provided that notice of
such proposed repeal, alteration, amendment or rescission is included in the
notice of such meeting). In addition, the board of directors may repeal, alter,
amend or rescind these Bylaws by vote of two-thirds of the board of directors at
a legal meeting held in accordance with the provisions of these Bylaws.
* * *
9
<PAGE>
EXHIBIT 4
HERITAGE BANCORP, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK CUSIP
See Reverse For
Certain Definitions
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE,
OF
Heritage Bancorp, Inc., a stock corporation incorporated under the laws of the
State of Delaware. The shares represented by this Certificate are transferable
only on the stock transfer books of the Corporation by the holder of record
hereof, or by his duly authorized attorney or legal representative, upon the
surrender of this Certificate properly endorsed. The shares represented by this
certificate are not a deposit or account and are not insured by the Federal
Deposit Insurance Corporation or any other government agency. The Certificate
and shares represented hereby are issued and shall be held subject to all
provisions of the Certificate of Incorporation and Bylaws of the Corporation and
any amendments thereto (copies of which are on file with the Transfer Agent), to
all of which provisions the holder by acceptance hereof, assents.
IN WITNESS WHEREOF, Heritage Bancorp, Inc. has caused this Certificate
to be executed by the facsimile signatures of its duly authorized officers and
has caused a facsimile of its corporate seal to be hereunto affixed.
CORPORATE SECRETARY PRESIDENT
TRANSFER AGENT
[SEAL]
<PAGE>
Heritage Bancorp, Inc.
The shares represented by this Certificate are issued subject to all
the provisions of the Certificate of Incorporation and Bylaws of Heritage
Bancorp, Inc. ("Corporation") as from time to time amended (copies of which are
on file with the Transfer Agent and at the principal executive offices of the
Corporation).
The shares represented by this Certificate are subject to a limitation
contained in the Certificate of Incorporation to the effect that in no event
shall any record owner of any outstanding common stock which is beneficially
owned, directly or indirectly, by a person who beneficially owns in excess of
10% of the outstanding shares of common stock (the "Limit") be entitled or
permitted to vote in respect of the shares held in excess of the Limit, unless a
majority of the whole Board of Directors, as defined, shall have by resolution
granted in advance such entitlement or permission.
The Board of Directors of the Corporation is authorized by
resolution(s), from time to time adopted, to provide for the issuance of
preferred stock in series and to fix and state the 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. The Corporation will furnish to any shareholder upon request and
without charge a full description of each class of stock and any series thereof.
The shares represented by this Certificate may not be cumulatively
voted on any matter. The affirmative vote of the holders of at least 80% of the
voting stock of the Corporation, voting together as a single class, shall be
required to approve certain business combinations and other transactions,
pursuant to the Certificate of Incorporation. The affirmative vote of the
holders of at least 80% of the voting stock of the Corporation, voting together
as a single class, shall be required to amend certain provisions of the
Certificate of Incorporation.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as through they were written out in full
according to applicable laws or regulations.
TEN COM -as tenants in common
TEN ENT -as tenants by the entireties
JT TEN -as joint tenants with right of survivorship and
not as tenants in common
UNIF TRAN MIN ACT - Custodian under Uniform Transfer
------- -------
(Cust) (Minor)
to Minors Act
---------
(State)
Additional abbreviations may also be used though not in the above list
For value received, ___________________________________________ hereby
sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please print or typewrite name and address, including postal zip code, of
assignee
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares
- -------------------------------------------------------------------------
of the Common Stock evidenced by this Certificate, and do hereby irrevocably
constitute and appoint
---------------------------------------------------------
Attorney, to transfer the said shares on the books of the within named
Corporation, with full power of substitution.
Dated
----------------
-----------------------------------------
Signature
-----------------------------------------
Signature
NOTICE: The signature to this assignment
must correspond with the name as written
upon the face of the Certificate in every
particular, without alteration or
enlargement or any change whatever.
<PAGE>
Exhibit 5
1300 I Street, N.W.
Suite 470 East
Washington, D.C. 20005
Telephone (202) 737-7900
Breyer & Aguggia Facsimile (202) 737-7979
================================================================================
December 10, 1997
Board of Directors
Heritage Bancorp, Inc.
201 W. Main Street
Laurens, South Carolina 29360
RE: Heritage Bancorp, Inc.
Registration Statement on Form S-1
Gentlemen:
You have requested our opinion as special counsel for Heritage Bancorp,
Inc., a Delaware corporation, in connection with the above-referenced
registration statement filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended.
In rendering this opinion, we understand that the common stock of Heritage
Bancorp, Inc. will be offered and sold in the manner described in the
Prospectus, which is part of the Registration Statement. We have examined such
records and documents and made such examination as we have deemed relevant in
connection with this opinion.
Based upon the foregoing, it is our opinion that the shares of common stock
of Heritage Bancorp, Inc. will upon issuance be legally issued, fully paid and
nonassessable.
This opinion is furnished for use as an exhibit to the Registration
Statement. We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Legal and
Tax Opinions."
Very truly yours,
/s/ Breyer & Aguggia
BREYER & AGUGGIA
Washington, D.C.
<PAGE>
EXHIBIT 8.1
____________, 1997
Boards of Directors
Heritage Federal Savings &
Loan Association
Heritage Bancorp, Inc.
201 W. Main Street
Laurens, South Carolina 29360
Re: Certain Federal Income Tax Consequences Relating to
Proposed Holding Company Conversion of Heritage Federal
Savings & Loan Association
-------------------------------------------------------
To the Board of Directors:
In accordance with your request, set forth herein is the opinion of this
firm relating to certain federal income tax consequences of (i) the proposed
conversion of Heritage Federal Savings & Loan Association (the "Association")
from a federally-chartered mutual savings and loan association to a federally-
chartered stock savings bank (the "Converted Association") (the "Stock
Conversion") and (ii) the concurrent acquisition of 100% of the outstanding
capital stock of the Converted Association by a parent holding company formed at
the direction of the Board of Directors of the Association and to be known as
Heritage Bancorp, Inc. (the "Holding Company").
For purposes of this opinion, we have examined such documents and questions
of law as we have considered necessary or appropriate, including but not limited
to, the Plan of Conversion as adopted by the Association's Board of Directors on
September 10, 1997, and subsequently amended on November 19, 1997 (the "Plan");
the federal mutual charter and bylaws of the Association; the certificate of
incorporation and bylaws of Holding Company; the Affidavit of Representations
dated ________________, 1997 provided to us by the Association and the Holding
Company (the "Affidavit"), and the Prospectus (the "Prospectus") included in the
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission ("SEC") on _________________, 1997 (the "Registration Statement").
In such examination, we have assumed, and have not independently verified, the
genuineness of all signatures on original documents where due execution and
delivery are requirements to the effectiveness thereof. Terms
<PAGE>
Boards of Directors
Heritage Federal Savings &
Loan Association
Heritage Bancorp, Inc.
____________, 1997
Page 2
used but not defined herein, whether capitalized or not, shall have the same
meaning as defined in the Plan.
BACKGROUND
----------
Based solely upon our review of such documents, and upon such information
as the Association has provided to us (which we have not attempted to verify in
any respect), and in reliance upon such documents and information, we set forth
herein a general summary of the relevant facts and proposed transactions,
qualified in its entirety by reference to the documents cited above.
The Association is a federally-chartered mutual savings and loan
association which is in the process of converting to a federally-chartered stock
savings bank. The Association was initially chartered in 1948, and originally
known as Laurens Federal Savings & Loan Association. In 1977, the Association
changed its name to Heritage Federal Savings & Loan Association. The
Association is also a member of the Federal Home Loan Bank System and its
deposits are federally insured under the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation. The Association operates
out of its main office in Laurens, South Carolina and branch offices in
neighboring communities.
The Association's principal business is attracting retail deposits from the
general public and using those funds to originate residential mortgage loans.
At September 30, 1997, the Association had total assets of $247.5 million,
deposits of $215.4 million and total equity of $29.2 million.
As a federally-chartered mutual savings and loan association, the
Association has no authorized capital stock. Instead, the Association, in
mutual form, has a unique equity structure. A savings depositor of the
Association is entitled to payment of interest on his account balance as
declared and paid by the Association, but has no right to a distribution of any
earnings of the Association except for interest paid on his deposit. Rather,
such earnings become retained earnings of the Association.
However, a savings depositor does have a right to share pro rata, with
--- ----
respect to the withdrawal value of his respective savings account, in any
liquidation proceeds distributed if the Association is ever liquidated. Savings
depositors and certain borrowers are members of the Association and thereby have
voting rights in the Association. Each savings depositor is entitled to cast
votes in proportion to the size of their account balances or fraction thereof
held in a withdrawable deposit account of the Association, and each borrower
member (hereinafter
<PAGE>
Boards of Directors
Heritage Federal Savings &
Loan Association
Heritage Bancorp, Inc.
____________, 1997
Page 3
"borrower") is entitled to one vote in addition to the votes (if any) to which
such person is entitled in such borrower's capacity as a savings depositor of
the Association. All of the interests held by a savings depositor in the
Association cease when such depositor closes his accounts with the Association.
The Holding Company was incorporated in November 1997 under the laws of the
State of Delaware as a general business corporation in order to act as a savings
institution holding company. The Holding Company has an authorized capital
structure of 10 million shares of common stock and 250,000 shares of preferred
stock.
PROPOSED TRANSACTION
--------------------
Management of the Association believes that the Stock Conversion offers a
number of advantages which will be important to the future growth and
performance of the Converted Association in that it is intended to (i) provide
substantially increased capital for investment in its business to expand the
operations of the Converted Association; (ii) provide future access to capital
markets; (iii) enhance the ability to diversify its operations into new business
activities; and (iv) afford depositors and others the opportunity to become
stockholders of the Converted Association and thereby participate more directly
in any future growth of the Converted Association.
Accordingly, pursuant to the Plan, the Association will undergo the Stock
Conversion whereby it will be converted from a federally-chartered mutual
savings and loan association to a federally-chartered stock savings bank. As
part of the Stock Conversion, the Association will amend its existing mutual
savings and loan association charter and bylaws to read in the form of a Federal
Stock Charter and Bylaws. The Converted Association will then issue to the
Holding Company shares of the Converted Association's common stock, representing
all of the shares of capital stock to be issued by the Converted Association in
the Conversion, in exchange for payment by the Holding Company of 50% of the net
proceeds realized by the Holding Company from such sale of its Common Stock,
less amounts necessary to fund the Employee Stock Ownership Plan of the
Association, or such other percentage as the Office of Thrift Supervision
("OTS") may authorize or require.
Also pursuant to the Plan, the Holding Company will offer its shares of
Common Stock for sale in a Subscription Offering and, if necessary, a Direct
Community Offering. The aggregate purchase price at which all shares of Common
Stock will be offered and sold pursuant to the Plan and the total number of
shares of Common Stock to be offered in the Conversion will be determined by the
Boards of Directors of the Association and the Holding Company on the
<PAGE>
Boards of Directors
Heritage Federal Savings &
Loan Association
Heritage Bancorp, Inc.
____________, 1997
Page 4
basis of the estimated pro forma market value of the Converted Association as a
--- -----
subsidiary of the Holding Company. The estimated pro forma market value will be
--- -----
determined by an independent appraiser. Pursuant to the Plan, all such shares
will be issued and sold at a uniform price per share. The Stock Conversion,
including the sale of newly issued shares of the stock of the Converted
Association to the Holding Company, will be deemed effective concurrently with
the closing of the sale of the Common Stock.
Under the Plan and in accordance with regulations of the OTS, the shares of
Common Stock will first be offered through the Subscription Offering pursuant to
nontransferable subscription rights on the basis of preference categories in the
following order of priority:
(1) Eligible Account Holders;
(2) Tax-Qualified Employee Stock Benefit Plans of the Association;
(3) Supplemental Eligible Account Holders; and
(4) Other Members.
Any shares of Common Stock not subscribed for in the Subscription Offering
may be offered in the Direct Community Offering in the following order of
priority:
(a) Natural persons and trust of natural persons who are residing in the
Local Community, consisting of Laurens, Anderson, Greenwood and
Greenville Counties, South Carolina; and
(b) The general public.
Any shares of Common Stock not subscribed for in the Direct Community
Offering may be offered to certain members of the general public on a best
efforts basis by a selling group of broker dealers in a Syndicated Community
Offering.
The Plan also provides for the establishment of a Liquidation Account by
the Converted Association for the benefit of all Eligible Account Holders and
any Supplemental Eligible Account Holders in an amount equal to the net worth of
the Association as of the date of the latest statement of financial condition
contained in the final prospectus issued in connection with the Conversion. The
establishment of the Liquidation Account will not operate to restrict the use or
application of any of the net worth accounts of the Converted Association. The
account holders will have an inchoate interest in a proportionate amount of the
Liquidation Account with
<PAGE>
Boards of Directors
Heritage Federal Savings &
Loan Association
Heritage Bancorp, Inc.
____________, 1997
Page 5
respect to each savings account held and will be paid by the Converted
Association in event of liquidation prior to any liquidation distribution being
made with respect to capital stock.
Following the Stock Conversion, voting rights in the Converted Association
shall be vested in the sole holder of stock in the Converted Association, which
will be the Holding Company. Voting rights in the Holding Company after the
Stock Conversion will be vested in the holders of the Common Stock.
The Stock Conversion will not interrupt the business of the Association.
The Converted Association will continue to engage in the same business as the
Association immediately prior to the Stock Conversion, and the Converted
Association will continue to have its savings accounts insured by the SAIF.
Each depositor will retain a withdrawable savings account or accounts equal in
dollar amount to, and on the same terms and conditions as, the withdrawable
account or accounts at the time of Stock Conversion except to the extent funds
on deposit are used to pay for Common Stock purchased in the Stock Conversion.
All loans of the Association will remain unchanged and retain their same
characteristics in the Converted Association.
The Plan must be approved by the OTS and by an affirmative vote of at least
a majority of the total votes eligible to be cast at a meeting of the
Association's members called to vote on the Plan.
Immediately prior to the Conversion, the Association will have a positive
net worth determined in accordance with generally accepted accounting
principles.
OPINION
-------
Based on the foregoing and in reliance thereon, and subject to the
conditions stated herein, it is our opinion that the following federal income
tax consequences will result from the proposed transaction.
1. The Stock Conversion will constitute a reorganization within the
meaning of 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
either the Association or the Converted Association as a result of the
Stock Conversion (see Rev. Rul. 80-105, 1980-1 C.B. 78).
---
<PAGE>
Boards of Directors
Heritage Federal Savings &
Loan Association
Heritage Bancorp, Inc.
____________, 1997
Page 6
2. The assets of the Association will have the same basis in the hands of
the Converted Association as in the hands of the Association
immediately prior to the Stock Conversion (Section 362(b) of the
Code).
3. The holding period of the assets of the Association to be received by
the Converted Association will include the period during which the
assets were held by the Association prior to the Stock Conversion
(Section 1223(2) of the Code).
4. No gain or loss will be recognized by the Converted Association on the
receipt of money from the Holding Company in exchange for shares of
common stock of the Converted Association (Section 1032(a) of the
Code). The Holding Company will be transferring solely cash to the
Converted Association in exchange for all the outstanding capital
stock of the Converted Association and therefore will not recognize
any gain or loss upon such transfer. (Section 351(a) of the Code; see
---
Rev. Rul. 69-357, 1969-1 C.B. 101).
5. No gain or loss will be recognized by the Holding Company upon receipt
of money from stockholders in exchange for shares of Common Stock
(Section 1032(a) of the Code).
6. No gain or loss will be recognized by the Eligible Account Holders and
Supplemental Eligible Account Holders of the Association upon the
issuance to them of deposit accounts in the Converted Association in
the same dollar amount and on the same terms and conditions in
exchange for their deposit accounts in the Association held
immediately prior to the Stock Conversion (Section 1001(a) of the
Code; Treas. Reg. Section 1.1001-1(a)).
7. The tax basis of the Eligible Account Holders' and Supplemental
Eligible Account Holders' savings accounts in the Converted
Association received as part of the Stock Conversion will equal the
tax basis of such account holders' corresponding deposit accounts in
the Association surrendered in exchange therefor (Section 1012 of the
Code).
8. Gain or loss, if any, will be realized by the deposit account holders
of the Association upon the constructive receipt of their interest in
the liquidation account of the Converted Association and on the
nontransferable subscription rights to purchase stock of the Holding
Company in exchange for their proprietary rights in the Association.
Any such gain will be recognized by the Association deposit
<PAGE>
Boards of Directors
Heritage Federal Savings &
Loan Association
Heritage Bancorp, Inc.
____________, 1997
Page 7
account holders, but only in an amount not in excess of the fair
market value of the liquidation account and subscription rights
received. (Section 1001 of the Code; Paulsen v. Commissioner, 469 U.S.
-----------------------
131 (1985); Rev. Rul. 69-646, 1969-2 C.B. 54.)
9. The basis of each account holder's interest in the Liquidation Account
received in the Stock Conversion and to be established by the
Converted Association pursuant to the Stock Conversion will be equal
to the value, if any, of that interest.
10. No gain or loss will be recognized upon the exercise of a subscription
right in the Stock Conversion. (Rev. Rul. 56-572, 1956-2 C.B. 182).
11. The basis of the Common Stock acquired in the Stock Conversion will be
equal to the purchase price of such stock, increased, in the case of
such stock acquired pursuant to the exercise of subscription rights,
by the fair market value, if any, of the subscription rights exercised
(Section 1012 of the Code).
12. The holding period of the Common Stock acquired in the Stock
Conversion pursuant to the exercise of subscription rights will
commence on the date on which the subscription rights are exercised
(Section 1223(6) of the Code). The holding period of the Common Stock
acquired in the Community Offering will commence on the date following
the date on which such stock is purchased (Rev. Rul. 70-598, 1970-2
C.B. 168; Rev. Rul. 66-97, 1966-1 C.B. 190).
SCOPE OF OPINION
----------------
Our opinion is limited to the federal income tax matters described above
and does not address any other federal income tax considerations or any federal,
state, local, foreign or other tax considerations. If any of the information
upon which we have relied is incorrect, or if changes in the relevant facts
occur after the date hereof, our opinion could be affected thereby. Moreover,
our opinion is based on the case law, Code, Treasury Regulations thereunder and
Internal Revenue Service rulings as they now exist. These authorities are all
subject to change, and such change may be made with retroactive effect. We can
give no assurance that, after such change, our opinion would not be different.
We undertake no responsibility to update or supplement our opinion. This opinion
is not binding on the Internal Revenue Service and there can be no assurance,
and none is hereby given, that the Internal Revenue Service will not take a
position contrary to one or more of the positions reflected in the foregoing
opinion, or that our opinion will be upheld by the courts if challenged by the
Internal Revenue Service.
<PAGE>
Boards of Directors
Heritage Federal Savings &
Loan Association
Heritage Bancorp, Inc.
____________, 1997
Page 8
Regarding the valuation of subscription rights, we understand that the
Association has received the opinion of RP Financial, LC. dated November 21,
1997 to the effect that the subscription rights have no ascertainable market
value. We express no opinion regarding the valuation of the subscription
rights.
CONSENTS
--------
We hereby consent to the filing of this opinion with the OTS as an exhibit
to the Application H-(e)1-S filed by the Holding Company with the OTS in
connection with the Conversion and the reference to our firm in the Application
H-(e)1-S under Item 110.55 therein.
We also hereby consent to the filing of this opinion with the SEC and the
OTS as exhibits to the Registration Statement and the Association's Application
for Conversion on Form AC ("Form AC"), respectively, and the reference on our
firm in the Prospectus, which is a part of both the Registration Statement and
the Form AC, under the headings "THE CONVERSION -- Effect of Conversion to Stock
Form on Depositors and Borrowers of the Association -- Tax Effects" and "LEGAL
AND TAX OPINIONS."
Very truly yours,
BREYER & AGUGGIA
<PAGE>
[LETTERHEAD OF DELOITTE & TOUCHE LLP APPEARS HERE]
Exhibit 8.2
DATE
Boards of Directors
Heritage Federal Savings and
Loan Association
Heritage Bancorp, Inc.
201 W. Main Street
Laurens, South Carolina 29360
Re: State of South Carolina Income Tax Opinion regarding the conversion of
Heritage Federal Savings and Loan Association from a federally-
chartered mutual savings and loan association to a federally-chartered
stock savings and loan association.
Gentlemen:
In accordance with your request, we are providing our opinion regarding the
South Carolina income tax consequences of the conversion (the "Stock
Conversion") of Heritage Federal Savings and Loan Association from a federally-
chartered mutual savings and loan association (the "Association") to a
federally-chartered stock savings and loan association (the "Converted
Association"). Concurrent with the Stock Conversion, all of the Converted
Association's to-be-issued capital stock will be acquired by Heritage Bancorp,
Inc. (the "Holding Company"), a newly-organized Delaware-chartered corporation.
The Holding Company, which has an authorized capital structure of 10 million
shares of common stock and 250,000 shares of preferred stock, will, in
accordance with the Plan of Conversion, offer its shares of common stock for
sale in a Subscription Offering and, if necessary, a Direct Community Offering.
Facts
- -----
For purposes of our opinion, we have relied on: (1) the facts and assumptions
set forth in and the opinion rendered in the Federal Income Tax Opinion relating
to the conversion of Heritage Federal Savings and Loan Association from a
federally-chartered mutual savings and loan association to a federally-chartered
stock savings and loan association under Section 368(a)(1)(F) of the Internal
Revenue Code (the "Code") dated ________, 1997 as prepared by the law firm of
Breyer & Aguggia, Washington, D.C. including the Affidavit of
Deloitte Touche
Tohmatsu
International
<PAGE>
______, 1997
Board of Directors
Page 2
Representation dated , as referenced in the Federal Income Tax Opinion;
(2) the letter of representation from Heritage Federal Savings & Loan
Association and Heritage Bancorp, Inc. dated _______, 1997 (the "Letter of
Representation") attached hereto as Exhibit A; and (3) the Plan of Conversion
as adopted by the Association's Board of Directors on September 10, 1997 and
subsequently amended on November 19, 1997 (the "Plan of Conversion").
Analysis
- --------
Chapter 6 of Title 12 of the Code of Laws of South Carolina imposes an income
tax on corporations. With respect to such taxation, Section 12-6-1110 provides:
"For South Carolina income tax purposes, gross income, adjusted
gross income, and taxable income as calculated under the Internal
Revenue Code are modified as provided in this article and subject
to allocation and apportionment as provided in Article 17 of this
chapter."
Section 12-6-40, entitled "Application of federal Internal Revenue Code to State
tax laws," provides in part:
"(A) 'Internal Revenue Code' means the Internal Revenue Code
of 1986 as amended through December 31, 1996. . . ."
Chapter 13 of Title 12 of the Code of Laws of South Carolina imposes an income
tax on associations which meet the qualified thrift lender test set forth in the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 (P.L. 101-
73), as amended. With respect to such taxation, Section 12-13-20 provides in
part:
"The term 'net income,' as used in this chapter, [Income Tax
on Building and Loan Associations] means taxable income
as determined for a regular corporation in Chapter 7 [now
Chapter 6 as discussed below] of this title after deducting
all earnings accrued, paid, credited, or set aside for the benefit
of holders of savings or investment accounts, any additions to
reserves which are required by law, regulation, or direction
of appropriate supervisory agencies, and a bad debt deduction. . ."
<PAGE>
______, 1997
Board of Directors
Page 3
The South Carolina Income Tax Act (the "Act"), which is codified in Chapter 6 of
Title 12 of the Code of Laws of South Carolina (1976, as amended), is effective
for taxable years
beginning after 1995. Chapter 6 of Title 12 of Code of Laws of South Carolina
replaces Chapter 7 of Title 12. Section 21 of Act 76, Laws of 1995, states in
part:
"Except where inappropriate, or as provided in Section 20 of
this act, a reference in law, regulation, or other document to
Chapters 7, 9, and 19 of Title 12 of the 1976 Code . . . is
considered a reference to the appropriate provisions of Chapters
6, 8, 20, . . . of Title 12 of the 1976 Code."
The Act does not contain specific Sections which are identical to the Internal
Revenue Code but merely adopts the entire Internal Revenue Code with certain
exclusions then makes specific adjustments thereto.
As indicated above, taxable income as determined under Chapter 6 is determined
under the Internal Revenue Code as of December 31, 1996, except to the extent
the Internal Revenue Code as of December 31, 1996 is modified or specifically
not adopted; therefore, taxable income under Chapter 13 is also determined under
the Internal Revenue Code as of December 31, 1996. Since Association and
Holding Company are taxed under Chapter 6 or Chapter 13 of the South Carolina
Code, income tax transactions involving these corporations are taxed based on
the Internal Revenue Code as of December 31, 1996, except to the extent it is
modified or specifically not adopted. The South Carolina General Assembly, as
of 12/2/97, has not adopted the changes in the Internal Revenue Code passed by
Congress under the provisions of the Taxpayer Relief Bill of 1997. We have
reviewed the changes to Sec. 368 of the Internal Revenue Code and have
determined that the changes to this Section, even if adopted by the South
Carolina General Assembly, would not affect this Opinion on the South Carolina
income tax consequences of the Stock Conversion.
None of the Internal Revenue Code sections excluded from South Carolina law by
Section 12-6-50 of the Code of Laws of South Carolina are relied upon in the
opinion below, and none of the Code sections presented is modified by Chapter 6
of Title 12.
<PAGE>
______, 1997
Board of Directors
Page 4
Representations
- ---------------
We have received a signed letter, dated _______, 1997, containing certain
representations of management of the Association and the Holding Company in
connection with this opinion. This letter is attached hereto as Exhibit A and
is incorporated herein by reference and shall be considered an integral part of
this opinion.
Opinion
- -------
Based on the facts and assumptions set forth in and the opinions rendered in the
Breyer & Aguggia Federal Income Tax Opinion letter, all of which are
incorporated herein by reference, and our review and analysis of the Code of
Laws of South Carolina (1976, as amended), the Letter of Representation, and the
Plan of Conversion, it is our opinion that, provided the transaction is
undertaken in accordance with the Plan of Conversion, the following will be the
result for South Carolina income tax purposes:
1. The Stock Conversion will constitute a reorganization within the meaning of
Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the
"Code"). The Association and the Converted Association each will be a party
to the reorganization within the meaning of Section 368(b) of the Code. No
gain or loss will be recognized to either the Association or the Converted
Association as a result of the Stock Conversion.
2. The assets of the Association will have the same basis in the hands of the
Converted Association as in the hands of the Association immediately prior to
the Stock Conversion (Section 362(b) of the Code).
3. The holding period of the assets of the Association to be received by the
Converted Association will include the period during which the assets were
held by the Association prior to the Stock Conversion (Section 1223(2) of the
Code).
4. No gain or loss will be recognized by the Converted Association on the
receipt of money from the Holding Company in exchange for shares of common
stock of the Converted Association. (Section 1032(a) of the Code). The
Holding Company will be transferring solely cash to the Converted Association
in exchange for all the outstanding capital stock of the Converted
Association and therefore will not recognize any gain or loss upon such
transfer (Section 351(a) of the Code).
<PAGE>
______, 1997
Board of Directors
Page 5
5. No gain or loss will be recognized by the Holding Company upon receipt of
money from stockholders in exchange for shares of Common Stock (Section
1032(a) of the Code).
6. No gain or loss will be recognized by Eligible Account Holders and
Supplemental Eligible Account Holders of the Association upon the issuance
to them of deposit accounts in the Converted Association in the same dollar
amount and on the same terms and conditions in exchange for their deposit
accounts in the Association held immediately prior to the Stock Conversion
(Section 1001(a) of the Code).
7. The tax basis of the Eligible Account Holders' and Supplemental Eligible
Account Holders' deposit accounts in the Converted Association received as
part of the Stock Conversion will equal the tax basis of such account
holders' corresponding deposit accounts in the Association surrendered in
exchange therefor (Section 1012 of the Code).
8. The Eligible Account Holders and Supplemental Eligible Account Holders of
the Association will realize gain or loss, if any, upon the constructive
receipt of their interest in the liquidation account of the Converted
Association and on the nontransferable subscription rights to purchase stock
of the Holding Company in exchange for their proprietary rights in the
Association. Any such gain will be recognized by the Association deposit
account holders, but only in an amount not in excess of the fair market
value of the liquidation account and subscription rights received (Section
1001 of the Code).
9. The basis of each account holder's interest in the liquidation account
received in the Stock Conversion and to be established by the Converted
Association pursuant to the Stock Conversion will be equal to the value, if
any, of that interest.
10. No gain or loss will be recognized upon the exercise of a subscription right
in the Stock Conversion.
11. The tax basis to the shareholders of the common stock of the Holding Company
acquired in the Stock Conversion will be equal to the purchase price of such
stock increased, in the case of such stock acquired pursuant to the exercise
of subscription rights, by the adjusted basis, if any, of the subscription
rights exercised (Section 1012 of the Code).
12. A shareholder's holding period of the common stock of the Holding Company
acquired in the Stock Conversion pursuant to the exercise of subscription
rights shall begin on the date on which the subscription rights are
exercised (Section 1223(6) of the Code). The holding
<PAGE>
______, 1997
Board of Directors
Page 6
period of the common stock of the Holding Company acquired in the community
offering will commence on the date following the date on which such stock is
purchased
This opinion is based solely upon:
a) The representations, information, documents, and facts ("representations")
that we have included or referenced in this opinion letter;
b) Our assumptions (without independent investigation or review) that all of
the representations and all of the original, copies, and signatures of
documents are accurate, true and authentic;
c) Our assumption (without independent investigation or review) that there
will be timely execution, delivery, and performance as required by the
representations and documents;
d) The understanding that only the South Carolina income tax issues and tax
consequences opined upon herein are covered by this tax opinion; and
e) The law, regulations, cases, rulings and other tax authority in effect as
of the date of this letter.
If there are any significant changes of the foregoing tax authorities (for which
we have no responsibility to advise you), it may result in our opinion being
rendered invalid, or necessitate (upon your request) a reconsideration of the
opinion.
While this opinion represents our considered judgment as to the proper tax
treatment to the parties involved, it is not binding on South Carolina or the
state or federal courts.
<PAGE>
______, 1997
Board of Directors
Page 7
This opinion letter is solely for your information, for the information of your
shareholders and for inclusion in certain filings with regard to the transaction
described herein as follows: (a) with the OTS as an exhibit to Application H-
(e)1-S filed by the Holding Company; (b) with the SEC as an exhibit to the
Registration Statement; and (c) with the OTS as an exhibit to the Association's
Application for Conversion. Other than the uses indicated in the preceding
sentence, our opinion may not be relied upon, distributed, or disclosed by
anyone without the prior written consent of Deloitte & Touche LLP.
Yours truly,
Deloitte & Touche LLP
<PAGE>
Exhibit 8.3
RP FINANCIAL, LC.
- ---------------------------------------------------
Financial Services Industry Consultants
December 10, 1997
Board of Directors
Heritage Federal Savings and Loan Association
201 West Main Street
Laurens, South Carolina 29360
Re: Plan of Conversion: Subscription Rights
Heritage Federal Savings and Loan Association
---------------------------------------------
Gentlemen:
All capitalized terms not otherwise defined in this letter have the
meanings given such terms in the Plan of Conversion adopted by the Board of
Directors of Heritage Federal Savings and Loan Association ("Heritage Federal"
or the "Association"), whereby the Association will convert from a federal
mutual savings and loan association to a federal stock savings and loan
association and issue all of the Association's outstanding capital stock to
Heritage 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 ESOP; (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 as will be paid
by members of the general public in the Community Offering, but without
undertaking any independent investigation of state or federal law or the
position of the Internal Revenue Service with respect to this issue, we are of
the belief that, as a factual matter:
(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 (such
as natural disasters or significant world events) may occur from time to time,
often with great unpredictability and may materially impact the value of thrift
stocks as a whole or the Holding Company's value alone. Accordingly, no
assurance can be given that persons who subscribe to shares of common stock in
the conversion will thereafter be able to buy or sell such shares at the same
price paid in the Subscription Offering.
Sincerely,
/s/ James J. Oren
James J. Oren
Vice President
- --------------------------------------------------------------------------------
Washington Headquarters
Rosslyn Center
1700 North Moore Street, Suite 2210 Telephone: (703) 528-1700
Arlington, VA 22209 Fax No: (703) 528-1788
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of ________________, 1998, by and
between HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION (the "ASSOCIATION"),
HERITAGE BANCORP, INC. (the "COMPANY"), a Delaware corporation; and J. EDWARD
WELLS ("EXECUTIVE").
WHEREAS, EXECUTIVE serves in a position of substantial responsibility;
WHEREAS, the ASSOCIATION wishes to assure itself of the services of
EXECUTIVE for the period provided in this Agreement; and
WHEREAS, EXECUTIVE is willing to serve in the employ of the ASSOCIATION on
a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, EXECUTIVE agrees to serve as
President and Chief Executive Officer of the ASSOCIATION. During said period,
EXECUTIVE also agrees to serve, if elected, as an officer and director of the
COMPANY or any subsidiary or affiliate of the COMPANY or the ASSOCIATION.
Executive shall render administrative and management duties to the ASSOCIATION
such as are customarily performed by persons situated in a similar executive
capacity.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date, and
continuing at each anniversary date thereafter, the Board of Directors of the
ASSOCIATION (the "Board") may extend the Agreement for an additional year.
Prior to the extension of the Agreement as provided herein, the Board of
Directors of the ASSOCIATION will conduct a formal performance evaluation of
EXECUTIVE for purposes of determining whether to extend the Agreement, and the
results thereof shall be included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, EXECUTIVE shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the ASSOCIATION; provided, however, that, with the
approval of the Board, as evidenced by a resolution of such Board, from time to
time, EXECUTIVE may serve, or continue to serve, on the boards of directors of,
and hold any other offices or positions in, companies or organizations, which,
in such Board's judgment, will not
<PAGE>
present any conflict of interest with the ASSOCIATION, or materially affect the
performance of EXECUTIVE's duties pursuant to this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The
ASSOCIATION shall pay EXECUTIVE as compensation a salary of $________________
per year ("Base Salary"). Such Base Salary shall be payable in accordance with
the customary payroll practices of the ASSOCIATION. During the period of this
Agreement, EXECUTIVE's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by a Committee designated by the
Board, and the Board may increase EXECUTIVE's Base Salary. In addition to the
Base Salary provided in this Section 3(a), the ASSOCIATION shall provide
EXECUTIVE at no cost to EXECUTIVE with all such other benefits as are provided
uniformly to permanent full-time employees of the ASSOCIATION.
(b) The ASSOCIATION will provide EXECUTIVE with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
EXECUTIVE was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the ASSOCIATION will not,
without EXECUTIVE's prior written consent, make any changes in such plans,
arrangements or perquisites which would adversely affect EXECUTIVE's rights or
benefits thereunder. Without limiting the generality of the foregoing
provisions of this Subsection (b), EXECUTIVE will be entitled to participate in
or receive benefits under any employee benefit plans including, but not limited
to, retirement plans, supplemental retirement plans, pension plans, profit-
sharing plans, health-and-accident plan, medical coverage or any other employee
benefit plan or arrangement made available by the ASSOCIATION in the future to
its senior executives and key management employees, subject to, and on a basis
consistent with, the terms, conditions and overall administration of such plans
and arrangements. EXECUTIVE will be entitled to incentive compensation and
bonuses as provided in any plan, or pursuant to any arrangement of the
ASSOCIATION, in which EXECUTIVE is eligible to participate. Nothing paid to
EXECUTIVE under any such plan or arrangement will be deemed to be in lieu of
other compensation to which EXECUTIVE is entitled under this Agreement, except
as provided under Section 5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the ASSOCIATION shall pay or reimburse EXECUTIVE for all reasonable
travel and other obligations under this Agreement and may provide such
additional compensation in such form and such amounts as the Board may from time
to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during EXECUTIVE's term of employment under this Agreement, the provisions of
this Section shall
2
<PAGE>
apply. As used in this Agreement, an "Event of Termination" shall mean and
include any one or more of the following: (i) the termination by the
ASSOCIATION of EXECUTIVE's full-time employment hereunder for any reason other
than a Change in Control, as defined in Section 5(a) hereof; disability, as
defined in Section 6(a) hereof; death; retirement, as defined in Section 7
hereof; or Termination for Cause, as defined in Section 8 hereof; (ii)
EXECUTIVE's resignation from the ASSOCIATION's employ, upon (A) unless consented
to by EXECUTIVE, a material change in EXECUTIVE's function, duties, or
responsibilities, which change would cause EXECUTIVE's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Sections 1 and 2, above (any such material change shall be
deemed a continuing breach of this Agreement), (B) a relocation of EXECUTIVE's
principal place of employment by more than 35 miles from its location at the
effective date of this Agreement, or a material reduction in the benefits and
perquisites to EXECUTIVE from those being provided as of the effective date of
this Agreement, (C) the liquidation or dissolution of the ASSOCIATION, or (D)
any breach of this Agreement by the ASSOCIATION. Upon the occurrence of any
event described in clauses (A), (B), (C) or (D), above, EXECUTIVE shall have the
right to elect to terminate his employment under this Agreement by resignation
upon not less than sixty (60) days prior written notice given within a
reasonable period of time not to exceed, except in case of a continuing breach,
four (4) calendar months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the ASSOCIATION shall
pay EXECUTIVE, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the payments due to EXECUTIVE for the remaining
term of the Agreement, including Base Salary, bonuses, and any other cash or
deferred compensation paid or to be paid (including the value of employer
contributions that would have been made on EXECUTIVE's behalf over the remaining
term of the agreement to any tax-qualified retirement plan sponsored by the
ASSOCIATION as of the Date of Termination), to EXECUTIVE for the term of the
Agreement provided, however, that if the ASSOCIATION is not in compliance with
its minimum capital requirements or if such payments would cause the
ASSOCIATION's capital to be reduced below its minimum capital requirements, such
payments shall be deferred until such time as the ASSOCIATION is in capital
compliance. All payments made pursuant to this Section 4(b) shall be paid in
substantially equal monthly installments over the remaining term of this
Agreement following EXECUTIVE's termination; provided, however, that if the
remaining term of the Agreement is less than one (1) year (determined as of
EXECUTIVE's Date of Termination), such payments and benefits shall be paid to
EXECUTIVE in a lump sum within thirty (30) days of the Date of Termination.
(c) Upon the occurrence of an Event of Termination, the ASSOCIATION will
cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the ASSOCIATION for
EXECUTIVE prior to his termination. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
3
<PAGE>
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall have
occurred a Change in Control of the COMPANY or the ASSOCIATION. For purposes of
this Agreement, a "Change in Control" of the COMPANY or the ASSOCIATION shall be
deemed to occur if and when (a) there occurs a change in control of the
ASSOCIATION or the COMPANY within the meaning of the Home Owners Loan Act of
1933 and 12 C.F.R. Part 574, (b) any person (as such term is used in Sections
13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner,
directly or indirectly, of securities of the COMPANY or the ASSOCIATION
representing twenty-five percent (25%) or more of the combined voting power of
the COMPANY's or the ASSOCIATION's then outstanding securities, (c) the
membership of the board of directors of the COMPANY or the ASSOCIATION changes
as the result of a contested election, such that individuals who were directors
at the beginning of any twenty-four (24) month period (whether commencing before
or after the date of adoption of this Agreement) do not constitute a majority of
the Board at the end of such period, or (d) shareholders of the COMPANY or the
ASSOCIATION approve a merger, consolidation, sale or disposition of all or
substantially all of the COMPANY's or the ASSOCIATION's assets, or a plan of
partial or complete liquidation.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board of the ASSOCIATION or the COMPANY
has reasonably determined that a Change in Control has occurred, EXECUTIVE shall
be entitled to the benefits provided in paragraphs (c), (d) and (e) of this
Section 5 upon his subsequent involuntary termination following the effective
date of a Change in Control (or voluntary termination within twelve (12) months
of the effective date of a Change in Control following any demotion, loss of
title, office or significant authority, reduction in his annual compensation or
benefits (other than a reduction affecting the ASSOCIATION's personnel
generally), or relocation of his principal place of employment by more than 35
miles from its location immediately prior to the Change in Control), unless such
termination is because of his death, retirement as provided in Section 7,
termination for Cause, or termination for Disability.
(c) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the ASSOCIATION shall pay EXECUTIVE, or in the event
of his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, as severance pay or liquidated damages, or both, a sum equal to
2.99 times EXECUTIVE's "base amount," within the meaning of (S)280G(b)(3)
of the Internal Revenue Code of 1986 ("Code"), as amended. Such payment shall
be made in a lump sum paid within ten (10) days of EXECUTIVE's Date of
Termination.
(d) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the ASSOCIATION will cause to be continued life,
medical, dental and disability coverage substantially identical to the coverage
maintained by the ASSOCIATION for EXECUTIVE prior to his severance. In
addition, EXECUTIVE shall be entitled to receive the value of employer
contributions that would have been made on EXECUTIVE's behalf over the remaining
term of the agreement to any tax-qualified retirement plan sponsored by the
4
<PAGE>
ASSOCIATION as of the Date of Termination. Such coverage and payments shall
cease upon the expiration of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, EXECUTIVE shall be entitled
to receive benefits due him under, or contributed by the COMPANY or the
ASSOCIATION on his behalf, pursuant to any retirement, incentive, profit
sharing, bonus, performance, disability or other employee benefit plan
maintained by the ASSOCIATION or the COMPANY on EXECUTIVE's behalf to the extent
that such benefits are not otherwise paid to EXECUTIVE upon a Change in Control.
(f) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to
EXECUTIVE under this Section, together with any other payments or benefits
received or to be received by EXECUTIVE in connection with a Change in Control,
would be deemed to include an "excess parachute payment" under (S)280G of
the Code, then, at the election of EXECUTIVE, (i) such payments or benefits
shall be payable or provided to EXECUTIVE over the minimum period necessary to
reduce the present value of such payments or benefits to an amount which is one
dollar ($1.00) less than three (3) times EXECUTIVE's "base amount" under (S)
280G(b)(3) of the Code or (ii) the payments or benefits to be provided under
this Section 5 shall be reduced to the extent necessary to avoid treatment as an
excess parachute payment with the allocation of the reduction among such
payments and benefits to be determined by EXECUTIVE.
6. TERMINATION FOR DISABILITY.
(a) If EXECUTIVE shall become disabled as defined in the ASSOCIATION's then
current disability plan (or, if no such plan is then in effect, if EXECUTIVE is
permanently and totally disabled within the meaning of Section 22(e)(3) of the
Code as determined by a physician designated by the Board), the ASSOCIATION may
terminate EXECUTIVE's employment for "Disability."
(b) Upon EXECUTIVE's termination of employment for Disability, the
ASSOCIATION will pay EXECUTIVE, as disability pay, a bi-weekly payment equal to
three-quarters (3/4) of EXECUTIVE's bi-weekly rate of Base Salary on the
effective date of such termination. These disability payments shall commence
on the effective date of EXECUTIVE's termination and will end on the earlier of
(i) the date EXECUTIVE returns to the full-time employment of the ASSOCIATION in
the same capacity as he was employed prior to his termination for Disability and
pursuant to an employment agreement between EXECUTIVE and the ASSOCIATION; (ii)
EXECUTIVE's full-time employment by another employer; (iii) EXECUTIVE attaining
the age of sixty-five (65); or (iv) EXECUTIVE's death; or (v) the expiration of
the term of this Agreement. The disability pay shall be reduced by the amount,
if any, paid to EXECUTIVE under any plan of the ASSOCIATION providing disability
benefits to EXECUTIVE.
5
<PAGE>
(c) The ASSOCIATION will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
ASSOCIATION for EXECUTIVE prior to his termination for Disability. This
coverage and payments shall cease upon the earlier of (i) the date EXECUTIVE
returns to the full-time employment of the ASSOCIATION, in the same capacity as
he was employed prior to his termination for Disability and pursuant to an
employment agreement between EXECUTIVE and the ASSOCIATION; (ii) EXECUTIVE's
full-time employment by another employer; (iii) EXECUTIVE's attaining the age of
sixty-five (65); (iv) EXECUTIVE's death; or (v) the expiration of the term of
this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to EXECUTIVE during any period during which
EXECUTIVE is incapable of performing his duties hereunder by reason of temporary
disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE; RESIGNATION
Termination by the ASSOCIATION of EXECUTIVE based on "Retirement" shall
mean retirement at or after attaining age sixty-five (65) or in accordance with
any retirement arrangement established with EXECUTIVE's consent with respect to
him. Upon termination of EXECUTIVE upon Retirement, EXECUTIVE shall be entitled
to all benefits under any retirement plan of the ASSOCIATION or the COMPANY and
other plans to which EXECUTIVE is a party. Upon the death of EXECUTIVE during
the term of this Agreement, the ASSOCIATION shall pay to EXECUTIVE's estate the
compensation due to EXECUTIVE through the last day of the calendar month in
which his death occurred. Upon the voluntary resignation of EXECUTIVE during
the term of this Agreement, other than in connection with an Event of
Termination, the ASSOCIATION shall pay to EXECUTIVE the compensation due to
EXECUTIVE through his Date of Termination.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of EXECUTIVE's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final cease-
and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, EXECUTIVE shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths (3/4) of the members of the Board at a meeting of the Board called
and held for that purpose (after reasonable notice to EXECUTIVE and an
opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, EXECUTIVE was guilty of
conduct justifying termination for Cause and specifying the reasons thereof.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after termination for Cause. Any stock options granted to EXECUTIVE
under any stock option plan or any unvested awards granted under any other stock
benefit plan of the ASSOCIATION, the COMPANY, or any subsidiary or affiliate
thereof, shall become null
6
<PAGE>
and void effective upon EXECUTIVE's receipt of Notice of Termination for Cause
pursuant to Section 10 hereof, and shall not be exercisable by EXECUTIVE at any
time subsequent to such Termination for Cause.
9. REQUIRED PROVISIONS.
(a) The ASSOCIATION may terminate EXECUTIVE's employment at any time, but
any termination by the ASSOCIATION, other than Termination for Cause, shall not
prejudice EXECUTIVE's right to compensation or other benefits under this
Agreement. EXECUTIVE shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined in Section 8
herein.
(b) If EXECUTIVE is suspended and/or temporarily prohibited from
participating in the conduct of the ASSOCIATION's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(3) and (g)(1)), the ASSOCIATION's obligations under the
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
ASSOCIATION may, in its discretion, (i) pay EXECUTIVE all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations that were suspended.
(c) If EXECUTIVE is removed and/or permanently prohibited from
participating in the conduct of the ASSOCIATION's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)),
all obligations of the ASSOCIATION under the Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting parties shall
not be affected.
(d) If the ASSOCIATION is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to the
extent determined that continuation of the Agreement is necessary for the
continued operation of the ASSOCIATION): (i) by the Director of the Office of
Thrift Supervision (the "Director") or his designee at the time the Federal
Deposit Insurance Corporation enters into an agreement to provide assistance to
or on behalf of the ASSOCIATION under the authority contained in Section 13(c)
of the FDIA or (ii) by the Director, or his designee at the time the Director or
such designee approves a supervisory merger to resolve problems related to
operation of the ASSOCIATION or when the ASSOCIATION is determined by the
Director to be in an unsafe or unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by such action.
7
<PAGE>
(f) Any payments made to EXECUTIVE pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C. (S)
1828(k) and any regulations promulgated thereunder.
10. NOTICE.
(a) Any purported termination by the ASSOCIATION or by EXECUTIVE shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of EXECUTIVE's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if EXECUTIVE's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, other than Termination for
Cause, the date specified in the Notice of Termination . In the event of
EXECUTIVE's Termination for Cause, the Date of Termination shall be the same as
the date of the Notice of Termination.
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by EXECUTIVE in which case the Date
of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the ASSOCIATION will continue
to pay EXECUTIVE his full compensation in effect when the notice giving rise to
the dispute was given (including, but not limited to, Base Salary) and continue
him as a participant in all compensation, benefit and insurance plans in which
he was participating when the notice of dispute was given, until the dispute is
finally resolved in accordance with this Agreement. Amounts paid under this
Section are in addition to all other amounts due under this Agreement and shall
not be offset against or reduce any other amounts due under this Agreement.
11. NON-COMPETITION.
(a) Upon any termination of EXECUTIVE's employment hereunder pursuant to an
Event of Termination as provided in Section 4 hereof, EXECUTIVE agrees not to
compete with the ASSOCIATION and/or the COMPANY for a period of one (1) year
following such
8
<PAGE>
termination in any city, town or county in which the ASSOCIATION and/or the
COMPANY has an office or has filed an application for regulatory approval to
establish an office, determined as of the effective date of such termination.
EXECUTIVE agrees that during such period and within said cities, towns and
counties, EXECUTIVE shall not work for or advise, consult or otherwise serve
with, directly or indirectly, any entity whose business materially competes with
the depository, lending or other business activities of the ASSOCIATION and/or
the COMPANY. The parties hereto, recognizing that irreparable injury will
result to the ASSOCIATION and/or the COMPANY, its business and property in the
event of EXECUTIVE's breach of this Subsection 11(a) agree that in the event of
any such breach by EXECUTIVE, the ASSOCIATION and/or the COMPANY will be
entitled, in addition to any other remedies and damages available, to an
injunction to restrain the violation hereof by EXECUTIVE, EXECUTIVE's partners,
agents, servants, employers, employees and all persons acting for or with
EXECUTIVE. EXECUTIVE represents and admits that in the event of the termination
of his employment pursuant to Section 4 hereof, EXECUTIVE's experience and
capabilities are such that EXECUTIVE can obtain employment in a business engaged
in other lines and/or of a different nature than the ASSOCIATION and/or the
COMPANY, and that the enforcement of a remedy by way of injunction will not
prevent EXECUTIVE from earning a livelihood. Nothing herein will be construed
as prohibiting the ASSOCIATION and/or the COMPANY from pursuing any other
remedies available to the ASSOCIATION and/or the COMPANY for such breach or
threatened breach, including the recovery of damages from EXECUTIVE.
(b) EXECUTIVE recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the ASSOCIATION and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the ASSOCIATION. EXECUTIVE will not, during
or after the term of his employment, disclose any knowledge of the past,
present, planned or considered business activities of the ASSOCIATION or
affiliates thereof to any person, firm, corporation, or other entity for any
reason or purpose whatsoever. Notwithstanding the foregoing, EXECUTIVE may
disclose any knowledge of banking, financial and/or economic principles,
concepts or ideas which are not solely and exclusively derived from the business
plans and activities of the ASSOCIATION. In the event of a breach or threatened
breach by EXECUTIVE of the provisions of this Section, the ASSOCIATION will be
entitled to an injunction restraining EXECUTIVE from disclosing, in whole or in
part, the knowledge of the past, present, planned or considered business
activities of the ASSOCIATION or affiliates thereof, or from rendering any
services to any person, firm, corporation, other entity to whom such knowledge,
in whole or in part, has been disclosed or is threatened to be disclosed.
Nothing herein will be construed as prohibiting the ASSOCIATION from pursuing
any other remedies available to the ASSOCIATION for such breach or threatened
breach, including the recovery of damages from EXECUTIVE.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the ASSOCIATION. The COMPANY, however,
guarantees all payments and the provision of all amounts and benefits due
hereunder to EXECUTIVE and, if such payments
9
<PAGE>
are not timely paid or provided by the ASSOCIATION, such amounts and benefits
shall be paid or provided by the COMPANY.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the ASSOCIATION or any
predecessor of the ASSOCIATION and EXECUTIVE, except that this Agreement shall
not affect or operate to reduce any benefit or compensation inuring to EXECUTIVE
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that EXECUTIVE is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
EXECUTIVE, the ASSOCIATION, the COMPANY and their respective successors and
assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
10
<PAGE>
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of South
Carolina, unless otherwise specified herein; provided, however, that in the
event of a conflict between the terms of this Agreement and any applicable
federal or state law or regulation, the provisions of such law or regulation
shall prevail.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
miles from the location of the ASSOCIATION, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
EXECUTIVE shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the ASSOCIATION, if successful pursuant to a legal judgment,
arbitration or settlement.
21. INDEMNIFICATION.
The ASSOCIATION shall provide EXECUTIVE (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
EXECUTIVE (and his heirs, executors and administrators) to the fullest extent
permitted under law against all expenses and liabilities reasonably incurred by
him in connection with or arising out of any action, suit or proceeding in which
he may be involved by reason of his having been a director or officer of the
ASSOCIATION (whether or not he continues to be a directors or officer at the
time of incurring such expenses or liabilities), such expenses and liabilities
to include, but not be limited to, judgment, court costs and attorneys' fees and
the cost of reasonable settlements.
11
<PAGE>
22. SUCCESSOR TO THE ASSOCIATION OR THE COMPANY.
The ASSOCIATION and the COMPANY shall require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise, to
all or substantially all the business or assets of the ASSOCIATION or the
COMPANY, expressly and unconditionally to assume and agree to perform the
ASSOCIATION's or the COMPANY's obligations under this Agreement, in the same
manner and to the same extent that the ASSOCIATION or the COMPANY would be
required to perform if no such succession or assignment had taken place.
IN WITNESS WHEREOF, the ASSOCIATION and the COMPANY have caused this
Agreement to be executed and their seal to be affixed hereunto by a duly
authorized officer, and EXECUTIVE has signed this Agreement, all on the ____ day
of _____________, 1998.
ATTEST: HERITAGE FEDERAL SAVINGS
AND LOAN ASSOCIATION
BY:
- -------------------------------- ---------------------------------
[SEAL]
ATTEST: HERITAGE BANCORP, INC.
BY:
- ------------------------------- --------------------------------
[SEAL]
WITNESS:
- ------------------------------- -----------------------------------
J. Edward Wells
12
<PAGE>
Exhibit 10.2
FORM OF SEVERANCE AGREEMENT FOR SENIOR OFFICERS
This AGREEMENT is made effective as of ___________________, 1998 by and
between HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION (the "ASSOCIATION");
HERITAGE BANCORP, INC. ("COMPANY"), a Delaware corporation; and ________________
("EXECUTIVE").
WHEREAS, the ASSOCIATION recognizes the substantial contribution EXECUTIVE
has made to the ASSOCIATION and wishes to protect his position therewith for the
period provided in this Agreement in the event of a Change in Control (as
defined herein); and
WHEREAS, EXECUTIVE serves in the position of ________________________, a
position of substantial responsibility;
NOW, THEREFORE, in consideration of the foregoing and upon the other terms
and conditions hereinafter provided, the parties hereto agree as follows:
1. Term Of Agreement
The term of this Agreement shall be deemed to have commenced as of the date
first above written and shall continue for a period of ____________________ (__)
full calendar months thereafter. Commencing on the first anniversary date of
this Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the ASSOCIATION ("Board") may extend the Agreement for an
additional year. The Board will conduct a performance evaluation of EXECUTIVE
for purposes of determining whether to extend the Agreement, and the results
thereof shall be included in the minutes of the Board's meeting.
2. Payments To EXECUTIVE Upon Change In Control.
(a) Upon the occurrence of a Change in Control (as herein defined) followed
within twelve (12) months of the effective date of the Change in Control by the
voluntary or involuntary termination of EXECUTIVE's employment, other than for
Cause, as defined in Section 2(c) hereof, the provisions of Section 3 shall
apply. For purposes of this Agreement, "voluntary termination" shall be limited
to the circumstances in which EXECUTIVE elects to voluntarily terminate his
employment within twelve (12) months of the effective date of a Change in
Control following any demotion, loss of title, office or significant authority,
reduction in his annual compensation or benefits (other than a reduction
affecting the Bank's personnel generally), or relocation of his principal place
of employment by more than 25 miles from its location immediately prior to the
Change in Control.
(b) A "Change in Control" of the COMPANY or the ASSOCIATION shall be deemed
to occur if and when (a) there occurs a change in control of the ASSOCIATION or
the COMPANY within the meaning of the Home Owners Loan Act of 1933 and 12 C.F.R.
Part 574, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of
the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of
securities of the COMPANY or the ASSOCIATION representing twenty-five percent
(25%) or more of the combined voting power
<PAGE>
of the COMPANY's or the ASSOCIATION's then outstanding securities, (c) the
membership of the board of directors of the COMPANY or the ASSOCIATION changes
as the result of a contested election, such that individuals who were directors
at the beginning of any twenty-four (24) month period (whether commencing before
or after the date of adoption of this Agreement) do not constitute a majority of
the Board at the end of such period, or (d) shareholders of the COMPANY or the
ASSOCIATION approve a merger, consolidation, sale or disposition of all or
substantially all of the COMPANY's or the ASSOCIATION's assets, or a plan of
partial or complete liquidation.
(c) EXECUTIVE shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of EXECUTIVE's intentional failure to
perform stated duties, personal dishonesty, incompetence, willful misconduct,
any breach of fiduciary duty involving personal profit, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease and desist order, or any material breach of any material provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards generally prevailing in the savings institution
industry. Notwithstanding the foregoing, EXECUTIVE shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
him a copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to EXECUTIVE and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, EXECUTIVE was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after Termination for Cause.
3. Termination
(a) Upon the occurrence of a Change in Control, followed within twelve (12)
months of the effective date of a Change in Control by the voluntary or
involuntary termination of EXECUTIVE's employment other than Termination for
Cause, the ASSOCIATION shall be obligated to pay EXECUTIVE, or in the event of
his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, as severance pay, a sum equal to two (2) times Executive's annual
compensation. For purposes of this Agreement, "annual compensation" shall mean
and include all wages, salary, bonus, and other compensation, if any, paid
(including accrued amounts) by the Company or the Bank as consideration for the
Participant's service during the twelve (12) month period ending on the last day
of the month preceding the effective date of a Change in Control, which is or
would be includable in the gross income of the Participant receiving the same
for federal income tax purposes. Such amount shall be paid to EXECUTIVE in a
lump sum no later than thirty (30) days after the date of his termination.
(b) Upon the occurrence of a Change in Control of the ASSOCIATION followed
within twelve (12) months of the effective date of a Change in Control by
EXECUTIVE's voluntary or involuntary termination of employment, other than
Termination for Cause, the
2
<PAGE>
ASSOCIATION shall cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by the ASSOCIATION
for EXECUTIVE prior to his severance. Such coverage and payments shall cease
upon expiration of twenty-four (24) months from the date of EXECUTIVE's
termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that the aggregate payments or benefits to be made or afforded to
EXECUTIVE under this Section, together with any other payments or benefits
received or to be received by EXECUTIVE in connection with a Change in Control,
would be deemed to include an "excess parachute payment" under (S) 280G of
the Code, then, at the election of EXECUTIVE, (i) such payments or benefits
shall be payable or provided to EXECUTIVE over the minimum period necessary to
reduce the present value of such payments or benefits to an amount which is one
dollar ($1.00) less than three (3) times EXECUTIVE's "base amount" under (S)
280G(b)(3) of the Code or (ii) the payments or benefits to be provided under
this Section 3 shall be reduced to the extent necessary to avoid treatment as an
excess parachute payment with the allocation of the reduction among such
payments and benefits to be determined by EXECUTIVE.
(d) Any payments made to EXECUTIVE pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C. (S)
1828(k) and any regulations promulgated thereunder.
4. Effect On Prior Agreements And Existing Benefit Plans
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the ASSOCIATION and EXECUTIVE, except
that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to EXECUTIVE of a kind elsewhere provided. No provision of
this Agreement shall be interpreted to mean that EXECUTIVE is subject to
receiving fewer benefits than those available to him without reference to this
Agreement.
5. No Attachment
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
EXECUTIVE, the COMPANY, the ASSOCIATION and their respective successors and
assigns.
3
<PAGE>
6. Modification And Waiver
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by an estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
7. Required Provisions
(a) The ASSOCIATION may terminate EXECUTIVE's employment at any time, but
any termination by the ASSOCIATION, other than Termination for Cause, shall not
prejudice EXECUTIVE's right to compensation or other benefits under this
Agreement. EXECUTIVE shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined in Section 2(c)
herein.
(b) If EXECUTIVE is suspended and/or temporarily prohibited from
participating in the conduct of the ASSOCIATION's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(3) and (g)(1)), the ASSOCIATION's obligations under the
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
ASSOCIATION may, in its discretion, (i) pay EXECUTIVE all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations that were suspended.
(c) If EXECUTIVE is removed and/or permanently prohibited from
participating in the conduct of the ASSOCIATION's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)),
all obligations of the ASSOCIATION under the Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting parties shall
not be affected.
(d) If the ASSOCIATION is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement may be terminated: (i) by the
Director of the Office of Thrift Supervision (the "Director") or his or her
designee at the time the Federal Deposit Insurance Corporation enters into an
agreement to provide assistance to or on behalf of the ASSOCIATION under the
authority contained in Section 13(c) of the FDIA and (ii) by the Director, or
his or her designee at the time the Director or such designee approves a
supervisory
4
<PAGE>
merger to resolve problems related to operation of the ASSOCIATION or when the
ASSOCIATION is determined by the Director to be in an unsafe or unsound
condition. Any rights of the parties that have already vested, however, shall
not be affected by such action.
8. Severability
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
9. Headings For Reference Only
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
10. Governing Law
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of South Carolina, unless
preempted by Federal law as now or hereafter in effect.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the ASSOCIATION, in accordance with the rules of
the American Arbitration Association then in effect.
11. Source of Payments
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the ASSOCIATION. The COMPANY, however,
guarantees all payments and the provision of all amounts and benefits due
hereunder to EXECUTIVE and, if such payments are not timely paid or provided by
the ASSOCIATION, such amounts and benefits shall be paid or provided by the
COMPANY.
12. Payment Of Legal Fees
All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the ASSOCIATION if EXECUTIVE is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
5
<PAGE>
13. Successor To The ASSOCIATION or the COMPANY
The ASSOCIATION and the COMPANY shall require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise, to
all or substantially all the business or assets of the ASSOCIATION or the
COMPANY, expressly and unconditionally to assume and agree to perform the
ASSOCIATION's or the COMPANY's obligations under this Agreement, in the same
manner and to the same extent that the ASSOCIATION or the COMPANY would be
required to perform if no such succession or assignment had taken place.
14. Signatures
IN WITNESS WHEREOF, the ASSOCIATION and the COMPANY have caused this
Agreement to be executed and their seal to be affixed hereunto by a duly
authorized officer, and EXECUTIVE has signed this Agreement, all on the ____ day
of _____________, 1998.
ATTEST: HERITAGE FEDERAL SAVINGS &
LOAN ASSOCIATION
BY:
- ------------------------------- ---------------------------------
[SEAL]
ATTEST: HERITAGE BANCORP, INC.
BY:
- ------------------------------- ---------------------------------
[SEAL]
WITNESS:
- ------------------------------- ------------------------------------
EXECUTIVE
6
<PAGE>
Exhibit 10.3
HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION
EMPLOYEE STOCK OWNERSHIP PLAN
Effective as of January 1, 1998
<PAGE>
HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION
EMPLOYEE STOCK OWNERSHIP PLAN
TABLE OF CONTENTS
Page
PREAMBLE............................................................ 1
ARTICLE I
DEFINITION OF TERMS AND CONSTRUCTION
1.1 Definitions.................................................... 2
1.2 Plurals and Gender............................................. 7
1.3 Incorporation of Trust Agreement............................... 7
1.4 Headings....................................................... 7
1.5 Severability................................................... 8
1.6 References to Governmental Regulations......................... 8
ARTICLE II
PARTICIPATION
2.1 Commencement of Participation.................................. 9
2.2 Termination of Participation................................... 9
2.3 Resumption of Participation.................................... 9
2.4 Determination of Eligibility................................... 10
ARTICLE III
CREDITED SERVICE
3.1 Service Counted for Eligibility Purposes....................... 11
3.2 Service Counted for Vesting Purposes........................... 11
3.3 Credit for Pre-Break Service................................... 11
3.4 Service Credit During Authorized Leaves........................ 11
3.5 Service Credit During Maternity or Paternity Leave............. 12
3.6 Ineligible Employees........................................... 12
ARTICLE IV
CONTRIBUTIONS
4.1 Employee Stock Ownership Contributions......................... 13
4.2 Time and Manner of Employee Stock Ownership Contributions...... 13
i
<PAGE>
4.3 Records of Contributions....................................... 14
4.4 Erroneous Contributions........................................ 14
ARTICLE V
ACCOUNTS, ALLOCATIONS AND INVESTMENTS
5.1 Establishment of Separate Participant Accounts................. 15
5.2 Establishment of Suspense Account.............................. 15
5.3 Allocation of Earnings, Losses and Expenses.................... 16
5.4 Allocation of Forfeitures...................................... 16
5.5 Allocation of Annual Employee Stock Ownership Contributions.... 16
5.6 Limitation on Annual Additions................................. 17
5.7 Erroneous Allocations.......................................... 20
5.8 Value of Participant's Interest in Fund........................ 21
5.9 Investment of Account Balances................................. 21
ARTICLE VI
RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY
6.1 Normal Retirement.............................................. 22
6.2 Early Retirement............................................... 22
6.3 Disability Retirement.......................................... 22
6.4 Death Benefits................................................. 22
6.5 Designation of Death Beneficiary and Manner of Payment......... 23
ARTICLE VII
VESTING AND FORFEITURES
7.1 Vesting on Death, Disability, Retirement, Change in Control.... 24
7.2 Vesting on Termination of Participation........................ 24
7.3 Disposition of Forfeitures..................................... 25
ARTICLE VIII
EMPLOYEE STOCK OWNERSHIP RULES
8.1 Right to Demand Employer Securities............................ 26
8.2 Voting Rights.................................................. 26
8.3 Nondiscrimination in Employee Stock Ownership Contributions.... 26
8.4 Dividends...................................................... 27
8.5 Exempt Loans................................................... 27
8.6 Exempt Loan Payments........................................... 28
8.7 Put Option..................................................... 29
8.8 Diversification Requirements................................... 30
ii
<PAGE>
8.9 Independent Appraiser......................................... 30
8.10 Limitation on Allocation...................................... 30
ARTICLE IX
PAYMENTS AND DISTRIBUTIONS
9.1 Payments on Termination of Service -- In General.............. 32
9.2 Commencement of Payments...................................... 32
9.3 Mandatory Commencement of Benefits............................ 32
9.4 Required Beginning Date....................................... 35
9.5 Form of Payment............................................... 35
9.6 Payments Upon Termination of Plan............................. 35
9.7 Distribution Pursuant to Qualified Domestic Relations Orders.. 36
9.8 Cash-Out Distributions........................................ 36
9.9 ESOP Distribution Rule........................................ 37
9.10 Withholding................................................... 37
9.11 Waiver of 30-day Notice....................................... 38
ARTICLE X
PROVISIONS RELATING TO TOP-HEAVY PLANS
10.1 Top-Heavy Rules to Control.................................... 39
10.2 Top-Heavy Plan Definitions.................................... 39
10.3 Calculation of Accrued Benefits............................... 41
10.4 Determination of Top-Heavy Status............................. 42
10.5 Determination of Super Top-Heavy Status....................... 43
10.6 Minimum Contribution.......................................... 43
10.7 Maximum Benefit Limitation.................................... 44
ARTICLE XI
ADMINISTRATION
11.1 Appointment of Administrator.................................. 45
11.2 Resignation or Removal of Administrator....................... 45
11.3 Appointment of Successors: Terms of Office, Etc............... 45
11.4 Powers and Duties of Administrator............................ 45
11.5 Action by Administrator....................................... 46
11.6 Participation by Administrators............................... 47
11.7 Agents........................................................ 47
11.8 Allocation of Duties.......................................... 47
11.9 Delegation of Duties.......................................... 47
11.10 Administrator's Action Conclusive............................. 47
11.11 Compensation and Expenses of Administrator.................... 47
11.12 Records and Reports........................................... 48
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11.13 Reports of Fund Open to Participants.......................... 48
11.14 Named Fiduciary............................................... 48
11.15 Information from Employer..................................... 48
11.16 Reservation of Rights by Employer............................. 48
11.17 Liability and Indemnification................................. 49
11.18 Service as Trustee and Administrator.......................... 49
ARTICLE XII
CLAIMS PROCEDURE
12.1 Notice of Denial.............................................. 50
12.2 Right to Reconsideration...................................... 50
12.3 Review of Documents........................................... 50
12.4 Decision by Administrator..................................... 50
12.5 Notice by Administrator....................................... 50
ARTICLE XIII
AMENDMENTS, TERMINATION AND MERGER
13.1 Amendments.................................................... 51
13.2 Consolidation, Merger or Other Transactions of Employer....... 51
13.3 Consolidation or Merger of Trust.............................. 52
13.4 Bankruptcy or Insolvency of Employer.......................... 52
13.5 Voluntary Termination......................................... 53
13.6 Partial Termination of Plan or Permanent Discontinuance of
Contributions................................................. 53
ARTICLE XIV
MISCELLANEOUS
14.1 No Diversion of Funds......................................... 54
14.2 Liability Limited............................................. 54
14.3 Incapacity.................................................... 54
14.4 Spendthrift Clause............................................ 54
14.5 Benefits Limited to Fund...................................... 55
14.6 Cooperation of Parties........................................ 55
14.7 Payments Due Missing Persons.................................. 55
14.8 Governing Law................................................. 55
14.9 Nonguarantee of Employment.................................... 55
14.10 Counsel....................................................... 56
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HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION
EMPLOYEE STOCK OWNERSHIP PLAN
PREAMBLE
Effective as of January 1, 1998, Heritage Federal Savings & Loan
Association (the "Sponsor"), a federally chartered stock savings association
(the "Sponsor"), has adopted the Heritage Federal Savings & Loan Association
Employee Stock Ownership Plan in order to enable Participants to share in the
growth and prosperity of the Sponsor, and to provide Participants with an
opportunity to accumulate capital for their future economic security by
accumulating funds to provide retirement, death and disability benefits. The
Plan is a stock bonus plan designed to meet the requirements of an employee
stock ownership plan as described at Section 4975(e)(7) of the Code and Section
407(d)(6) of ERISA. The primary purpose of the employee stock ownership plan is
to invest in employer securities. The Sponsor intends that the Plan will
qualify under Sections 401(a) and 501(a) of the Code and will comply with the
provisions of ERISA.
The terms of this Plan shall apply only with respect to Employees of the
Employer on and after January 1, 1998.
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ARTICLE I
DEFINITION OF TERMS AND CONSTRUCTION
1.1 Definitions.
Unless a different meaning is plainly implied by the context, the following
terms as used in this Plan shall have the following meanings:
(a) "Act" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, or any successor statute.
(b) "Administrator" shall mean the administrative committee provided for in
Article XI.
(c) "Annual Additions" shall mean, with respect to each Participant, the
sum of those amounts allocated to the Participant's accounts under this Plan and
under any other qualified defined contribution plan to which the Employer
contributes for any Limitation Year, consisting of the following:
(1) Employer contributions;
(2) Forfeitures; and
(3) Voluntary contributions (if any).
(d) "Authorized Leave of Absence" shall mean an absence from Service with
respect to which the Employee may or may not be entitled to Compensation and
which meets any one of the following requirements:
(1) Service in any of the armed forces of the United States for up to
36 months, provided that the Employee resumes Service within 90
days after discharge, or such longer period of time during which
such Employee's employment rights are protected by law; or
(2) Any other absence or leave expressly approved and granted by the
Employer which does not exceed 24 months, provided that the
Employee resumes Service at or before the end of such approved
leave period. In approving such leaves of absence, the Employer
shall treat all Employees on a uniform and nondiscriminatory
basis.
(e) "Beneficiary" shall mean such persons as may be designated by the
Participant to receive benefits after the death of the Participant, or such
persons designated by the Administrator to receive benefits after the death of
the Participant, all as provided in Section 6.5.
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(f) "Board of Directors" shall mean the Board of Directors of the Sponsor.
(g) "Break" shall mean a Plan Year during which an Employee fails to
complete more than 500 Hours of Service.
(h) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute.
(i) "Compensation" shall mean the amount of remuneration paid to an
Employee by the Employer, after the date on which the Employee becomes a
Participant, for services rendered to the Employer during a Plan Year, including
base salary, bonuses, overtime and commissions, and any amount of compensation
contributed pursuant to a salary reduction election under Code Section 401(k)
and any amount of compensation contributed to a cafeteria plan described at
Section 125 of the Code, but excluding amounts paid by the Employer or accrued
with respect to this Plan or any other qualified or non-qualified unfunded plan
of deferred compensation or other employee welfare plan to which the Employer
contributes, payments for group insurance, medical benefits, reimbursement for
expenses, and other forms of extraordinary pay, and excluding amounts accrued
for a prior year.
Notwithstanding the foregoing, for purposes of complying with Code Section
415, a Participant's contributions to a 401(k) Plan and cafeteria plan shall not
be included in the Participant's compensation. Notwithstanding anything herein
to the contrary, the annual Compensation of each Participant taken into account
under the Plan for any Plan Year shall not exceed $150,000, as adjusted from
time to time in accordance with Section 417 of the Code.
(j) "Date of Hire" shall mean the date on which a person shall perform his
first Hour of Service. Notwithstanding the foregoing, in the event a person
incurs one or more consecutive Breaks after his initial Date of Hire which
results in the forfeiture of his pre-Break Service pursuant to Section 3.3, his
"Date of Hire" shall thereafter be the date on which he completes his first Hour
of Service after such Break or Breaks.
(k) "Disability" shall mean a physical or mental impairment which prohibits
a Participant from engaging in any occupation for wages or profit and which has
caused the Social Security Administration to classify the individual as
"disabled" for purposes of Social Security.
(l) "Disability Retirement Date" shall mean the first day of the month
after which a Participant incurs a Disability.
(m) "Early Retirement Date" shall mean the first day of the month
coincident with or next following the date on which a Participant attains age 55
and completes ten Years of Service.
(n) "Effective Date" shall mean January 1, 1998.
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(o) "Eligibility Period" shall mean the period of 12 consecutive months
commencing on an Employee's Date of Hire. Succeeding eligibility computation
periods after the initial eligibility computation period shall be based on Plan
Years which include the first anniversary of an Employee's Date of Hire.
(p) "Employee" shall mean any person employed by the Employer, including
officers but excluding directors in their capacity as such; provided, however,
that the term "Employee" shall not include leased employees, employees regularly
employed outside the employer's own offices in connection with the operation and
maintenance of buildings or other properties acquired through foreclosure or
deed, and any employee included in a unit of employees covered by a collective-
bargaining agreement with the Employer that does not expressly provide for
participation of such employees in this Plan, where there has been good-faith
bargaining between the Employer and employees' representatives on the subject of
retirement benefits.
(q) "Employer" shall mean Heritage Federal Savings & Loan Association, a
federally chartered stock savings association, or any successors to the
aforesaid by merger, consolidation or otherwise, which may agree to continue
this Plan, or any affiliated or subsidiary corporation or business organization
of any Employer which, with the consent of the Sponsor, shall agree to become a
party to this Plan.
(r) "Employer Securities" shall mean the common stock issued by Heritage
Bancorp, Inc., a Delaware corporation, or any employer security within the
meaning of Section 4975(c)(8) of the Code and Section 407(d)(1) of ERISA.
(s) "Entry Date" shall mean January 1, so long as this Plan shall remain in
effect.
(t) "Exempt Loan" shall mean a loan described at Section 4975(d)(1) of the
Code to the Trustee to purchase Employer Securities for the Plan, made or
guaranteed by a disqualified person, as defined at Section 4975(e)(2) of the
Code, including, but not limited to, a direct loan of cash, a purchase money
transaction, an assumption of an obligation of the Trustee, an unsecured
guarantee or the use of assets of such disqualified person as collateral for
such a loan.
(u) "Former Participant" shall mean any previous Participant whose
participation has terminated but who has a vested interest in the Plan which has
not been distributed in full.
(v) "Fund" shall mean the Fund maintained by the Trustee pursuant to the
Trust Agreement in order to provide for the payment of the benefits specified in
the Plan.
(w) "Hour of Service" shall mean each hour for which an Employee is
directly or indirectly paid or entitled to payment by an Employer for the
performance of duties or for reasons other than the performance of duties (such
as vacation time, holidays, sickness, disability, paid lay-offs, jury duty and
similar periods of paid nonworking time). To the extent not otherwise included,
Hours of Service shall also include each hour for which back pay, irrespective
of mitigation of damages, is either awarded or agreed to by the Employer. Hours
of working
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<PAGE>
time shall be credited on the basis of actual hours worked, even though
compensated at a premium rate for overtime or other reasons. In computing and
crediting Hours of Service for an Employee under this Plan, the rules set forth
in Sections 2530.200b-2(b) and (c) of the Department of Labor Regulations shall
apply, said Sections being herein incorporated by reference. Hours of Service
shall be credited to the Plan Year or other relevant period during which the
services were performed or the nonworking time occurred, regardless of the time
when Compensation therefor may be paid. Any Employee for whom no hourly
employment records are kept by the Employer shall be credited with 45 Hours of
Service for each calendar week in which he would have been credited with a least
one Hour or Service under the foregoing provisions, if hourly records were
available. Solely for purposes of determining whether a Break for participation
and vesting purposes has occurred in an Eligibility Period or Plan Year, an
individual who is absent from work for maternity or paternity reasons shall
receive credit for the Hours of Service which would otherwise have been credited
to such individual but for such absence, or in any case in which such hours
cannot be determined, eight Hours of Service per day of such absence. For
purposes of this Section 1.1(w), an absence from work for maternity or paternity
reasons means an absence (1) by reason of the pregnancy of the individual, (2)
by reason of a birth of a child of the individual, (3) by reason of the
placement of a child with the individual in connection with the adoption of such
child by such individual, or (4) for purposes of caring for such child for a
period beginning immediately following such birth or placement. The Hours of
Service credited under this provision shall be credited (1) in the computation
period in which the absence begins if the crediting is necessary to prevent a
Break in that period, or (2) in all other cases, in the following computation
period.
(x) "Investment Adjustments" shall mean the increases and/or decreases in
the value of a Participant's accounts attributable to earnings, gains, losses
and expenses of the Fund, as set forth in Section 5.3.
(y) "Limitation Year" shall mean the Plan Year.
(z) "Normal Retirement Date" shall mean the first day of the month
coincident with or during which a Participant attains age 65.
(aa) "Participant" shall mean an Employee who has met all of the
eligibility requirements of the Plan and who is currently included in the Plan
as provided in Article II hereof.
(bb) "Plan" shall mean the Heritage Federal Savings & Loan Association
Employee Stock Ownership Plan, as described herein or as hereafter amended from
time to time.
(cc) "Plan Year" shall mean any 12 consecutive month period commencing on
January 1 and ending on December 31.
(dd) "Qualified Domestic Relations Order" shall mean any judgment, decree
or order (including approval of a property settlement agreement) that relates to
the provision of child support, alimony, marital property rights to a spouse,
former spouse, child or other dependent of
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<PAGE>
the Participant (all such persons hereinafter termed "alternate payee") and is
made pursuant to a State domestic relations law (including community property
law) and, further, that creates or recognizes the existence of an alternate
payee's right to, or assigns to an alternate payee the right to receive all or a
portion of the benefits payable with respect to a Participant and that clearly
specifies the following:
(1) the name and last known mailing address (if available) of the
Participant and the name and mailing address of each alternate payee
to which the order relates;
(2) the amount or percentage of the Participant's benefits to be paid to
an alternate payee or the manner in which the amount is to be
determined; and
(3) the number of payments or period for which payments are required.
A domestic relations order is not a Qualified Domestic Relations Order if
it:
(1) requires the Plan to provide any type or form of benefit or any option
not otherwise provided under the Plan; or,
(2) requires the Plan to provide increased benefits; or
(3) requires payment of benefits to an alternate payee that is required to
be paid to another alternate payee under a previously existing
Qualified Domestic Relations Order.
(ee) "Retirement" shall mean termination of employment which qualifies as
early, normal or Disability retirement as described in Article VI.
(ff) "Service" shall mean employment with the Employer.
(gg) "Sponsor" shall mean Heritage Federal Savings & Loan Association, a
federally chartered stock savings association.
(hh) "Trust Agreement" shall mean the agreement, the Sponsor and the
Trustee (or any successor Trustee governing the administration of the Trust as
it may be amended from time to time.
(ii) "Trustee" shall mean the Trustee or Trustees by whom the assets of the
Plan are held, as provided in the Trust Agreement, or his or their successors.
(jj) "Valuation Date" shall mean the last day of each Plan Year. The
Trustee may make additional valuations, at the instruction of the Administrator,
but in no event may the
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Administrator request additional valuations by the Trustee more frequently than
quarterly. Whenever such date falls on a Saturday, Sunday or holiday, the
preceding business day shall be the Valuation Date.
(kk) "Year of Service" shall mean any Plan Year during which an Employee
has completed at least 1,000 Hours of Service. Except as otherwise specified in
Article III, in the determination of Years of Service for eligibility and
vesting purposes under this Plan, the term "Year of Service" shall also mean any
Plan Year during which an Employee has completed at least 1,000 Hours of Service
with an entity that is:
(1) a member of a controlled group including the Employer, while it is a
member of such controlled group (within the meaning of Section 414(b)
of the Code);
(2) in a group of trades or businesses under common control with the
Employer, while it is under common control (within the meaning of
Section 414(c) of the Code);
(3) a member of an affiliated service group including the Employer, while
it is a member of such affiliated service group (within the meaning of
Section 414(m) of the Code); or
(4) a leasing organization, under the circumstances described in Section
414(n) of the Code.
1.2 Plurals and Gender.
Where appearing in the Plan and the Trust Agreement, the masculine gender
shall include the feminine and neuter genders, and the singular shall include
the plural, and vice versa, unless the context clearly indicates a different
meaning.
1.3 Incorporation of Trust Agreement.
The Trust Agreement, as the same may be amended from time to time, is
intended to be and hereby is incorporated by reference into this Plan and for
all purposes shall be deemed a part of the Plan.
1.4 Headings.
The headings and sub-headings in this Plan are inserted for the convenience
of reference only and are to be ignored in any construction of the provisions
hereof.
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1.5 Severability.
In case any provision of this Plan shall be held illegal or void, such
illegality or invalidity shall not affect the remaining provisions of this Plan,
but shall be fully severable, and the Plan shall be construed and enforced as if
said illegal or invalid provisions had never been inserted herein.
1.6 References to Governmental Regulations.
References in this Plan to regulations issued by the Internal Revenue
Service, the Department of Labor, or other governmental agencies shall include
all regulations, rulings, procedures, releases and other position statements
issued by any such agency.
8
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ARTICLE II
PARTICIPATION
2.1 Commencement of Participation.
(a) Any Employee who completes at six (6) months of Service after his Date
of Hire and has attained age 21 shall initially become a Participant on the
Entry Date coincident with or next following the date he satisfies such
requirements. For purposes of this Section 2.1(a) , (i) and Employee will be
deemed to have completed six (6) months of Service if he is in the employ of the
Employer at anytime after his Date of Hire and (ii) a "month" of Service shall
mean any calendar month in which an Employee completes an Hour of Service.
(b) Any Employee who had satisfied the requirements set forth in Section
2.1(a) prior to the Effective Date shall become a Participant on the Effective
Date, provided he is still employed by the Employer on the Effective Date.
2.2 Termination of Participation.
After commencement or resumption of his participation, an Employee shall
remain a Participant during each consecutive Plan Year thereafter until the
earliest of the following dates:
(a) His actual Retirement date;
(b) His date of death; or
(c) The last day of a Plan Year during which he incurs a Break.
2.3 Resumption of Participation
(a) Any Participant whose employment terminates and who resumes Service
before he incurs a Break shall resume participation immediately on the date he
is reemployed.
(b) Except as otherwise provided in Section 2.3(c), any Participant who
incurs one or more Breaks and resumes Service shall resume participation
retroactively as of the first day of the first Plan Year in which he completes a
Year of Service after such Break(s).
(c) Any Participant who incurs one or more Breaks and resumes Service, but
whose pre-Break Service is not reinstated to his credit pursuant to Section 3.3,
shall be treated as a new Employee and shall again be required to satisfy the
eligibility requirements contained in Section 2.1 before resuming participation
on the appropriate Entry Date, as specified in Section 2.1.
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2.4 Determination of Eligibility.
The Administrator shall determine the eligibility of Employees in
accordance with the provisions of this Article. For each Plan Year, the Employer
shall furnish the Administrator a list of all Employees, indicating the original
date of their reemployment with the Employer and any Breaks they may have
incurred.
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ARTICLE III
CREDITED SERVICE
3.1 Service Counted for Eligibility Purposes.
Except as provided in Section 3.3, all Service completed by an Employee
shall be counted in determining his eligibility to become a Participant on and
after the Effective Date, whether such Service was completed before or after the
Effective Date.
3.2 Service Counted for Vesting Purposes.
All Years of Service completed by an Employee (including Years of Service
completed prior to the Effective Date) shall be counted in determining his
vested interest in this Plan, except the following:
(a) Service which is disregarded under the provisions of Section 3.3; and
(b) Service prior to the Effective Date of this Plan if such Service would
have been disregarded under the "break in service" rules (within the meaning of
Section 1.411(a)-5(b)(6) of the Treasury Regulations).
3.3 Credit for Pre-Break Service.
Upon his resumption of participation following one or a series of
consecutive Breaks, an Employee's pre-Break Service shall be reinstated to his
credit for all purposes of this Plan only if either:
(a) He was vested in any portion of his accrued benefit at the time the
Break(s) began; or
(b) The number of his consecutive Breaks does not equal or exceed the
greater of five or the number of his Years of Service credited to him before the
Breaks began.
Except as provided in the foregoing, none of an Employee's Service prior to
one or a series of consecutive Breaks shall be counted for any purpose in
connection with his participation in this Plan thereafter.
3.4 Service Credit During Authorized Leaves.
An Employee shall receive no Service credit under Section 3.1 or 3.2 during
any Authorized Leave of Absence. However, solely for the purpose of determining
whether he has incurred a Break during any Plan Year in which he is absent from
Service for one or more Authorized Leaves of Absence, he shall be credited with
45 Hours of Service for each week
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during any such leave period. Notwithstanding the foregoing, if an Employee
fails to return to Service on or before the end of a leave period, he shall be
deemed to have terminated Service as of the first day of such leave period and
his credit for Hours of Service, determined under this Section 3.4, shall be
revoked. Notwithstanding anything contained herein to the contrary, an Employee
who is absent by reason of military service as set forth in Section 1.1(d)(1)
shall be given Service credit under this Plan for such military leave period to
the extent, and for all purposes, required by law.
3.5 Service Credit During Maternity or Paternity Leave.
For purposes of determining whether a Break has occurred for participation
and vesting purposes, an individual who is on maternity or paternity leave as
described in Section 1.1(w), shall be deemed to have completed Hours of Service
during such period of absence, all in accordance with Section 1.1(w).
Notwithstanding the foregoing, no credit shall be given for such Hours of
Service unless the individual furnishes to the Administrator such timely
information as the Administrator may reasonably require to determine:
(a) that the absence from Service was attributable to one of the maternity
or paternity reasons enumerated in Section 1.1(w); and
(b) the number of days for which such absence lasted.
In no event, however, shall any credit be given for such leave other than
for determining whether a Break has occurred.
3.6 Ineligible Employees.
Notwithstanding any provisions of this Plan to the contrary, any person who
is employed by the Employer, but who is ineligible to participate in this Plan,
either because of his failure:
(a) To meet the eligibility requirements contained in Article II; or
(b) To be an Employee, as defined in Section 1.1(p), shall, nevertheless,
earn Service for eligibility and vesting purposes pursuant to the rules
contained in this Article III. However, such a person shall not be entitled to
receive any contributions hereunder unless and until he becomes a Participant in
this Plan, and then, only during his period of participation.
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ARTICLE IV
CONTRIBUTIONS
4.1 Employee Stock Ownership Contributions.
(a) Subject to all of the provisions of this Article IV, for each Plan Year
commencing on or after the Effective Date, the Employer shall make an Employee
Stock Ownership contribution to the Fund, in such amount as may be determined by
the Board of Directors in its discretion. Such contribution shall be in the
form of cash or Employer Securities. In determining the value of Employer
Securities transferred to the Fund as an Employee Stock Ownership contribution,
the Administrator may determine the average of closing prices of such securities
for a period of up to 90 consecutive days immediately preceding the date on
which the securities are contributed to the Fund. In the event that the
Employer Securities are not readily tradable on an established securities
market, the value of the Employer Securities transferred to the Fund shall be
determined by an independent appraiser in accordance with Section 8.9.
(b) In no event shall such contribution by the Employer exceed for any Plan
Year the maximum amount that may be deducted by the Employer under Section 404
of the Code, nor shall such contribution cause the Employer to violate its
regulatory capital requirements. Each Employee Stock Ownership contribution by
the Employer shall be deemed to be made on the express condition that the Plan,
as then in effect, shall be qualified under Sections 401 and 501 of the Code and
that the amount of such contribution shall be deductible from the Employer's
income under Section 404 of the Code.
4.2 Time and Manner of Employee Stock Ownership Contributions.
(a) The Employee Stock Ownership contribution (if any) for each Plan Year
shall be paid to the Trustee in one lump sum or installments at any time on or
before the expiration of the time prescribed by law (including any extensions)
for filing of the Employer's federal income tax return for its fiscal year
ending concurrent with or during such Plan Year. Any portion of the Employee
Stock Ownership contribution for each Plan Year that may be made prior to the
last day of the Plan Year shall be maintained by the Trustee in the Employee
Stock Ownership suspense account described in Section 5.2 until the last day of
such Plan Year.
(b) If an Employee Stock Ownership contribution for a Plan Year is paid
after the close of the Employer's fiscal year which ends concurrent with or
during such Plan Year but on or prior to the due date (including any extensions)
for filing of the Employer's federal income tax return for such fiscal year, it
shall be considered, for allocation purposes, as an Employee Stock Ownership
contribution to the Fund for the Plan Year for which it was computed and
accrued, unless such contribution is accompanied by a statement to the Trustee,
signed by a representative of the Employer, which specifies that the Employee
Stock Ownership contribution is made with respect to the Plan Year in which it
is received by the Trustee. Any Employee Stock Ownership contribution paid by
the Employer during any Plan Year but after the due date (including any
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<PAGE>
extensions) for filing of its federal income tax return for the fiscal year of
the Employer ending on or before the last day of the preceding Plan Year shall
be treated, for allocation purposes, as an Employee Stock Ownership contribution
to the Fund for the Plan Year in which the contribution is paid to the Trustee.
(c) Notwithstanding anything contained herein to the contrary, no Employee
Stock Ownership contribution shall be made for any year during which a
"limitations account" created pursuant to Section 5.6(c)(2) is in existence
until the balance of such limitations account has been reallocated in accordance
with Section 5.6(c)(2).
4.3 Records of Contributions.
The Employer shall deliver at least annually to the Trustee, with respect
to the contributions contemplated in Section 4.1, a certificate of the
Administrator, in such form as the Trustee shall approve, setting forth:
(a) The aggregate amount of contributions, if any, to the Fund for such
Plan Year;
(b) The names, Internal Revenue Service identifying numbers and current
residential addresses of all Participants in the Plan;
(c) The amount and category of contributions to be allocated to each such
Participant; and
(d) Any other information reasonably required for the proper operation of
the Plan.
4.4 Erroneous Contributions.
(a) Notwithstanding anything herein to the contrary, upon the Employer's
request, a contribution which was made by a mistake of fact, or conditioned upon
the initial qualification of the Plan, under Code Section 401, or upon the
deductibility of the contribution under Section 404 of the Code, shall be
returned to the Employer by the Trustee within one year after the payment of the
contribution, the denial of the qualification or the disallowance of the
deduction (to the extent disallowed), whichever is applicable; provided,
however, that in the case of denial of the initial qualification of the Plan, a
contribution shall not be returned unless an Application for Determination has
been timely filed with the Internal Revenue Service. Any portion of a
contribution returned pursuant to this Section 4.4 shall be adjusted to reflect
its proportionate share of the losses of the fund, but shall not be adjusted to
reflect any earnings or gains. Notwithstanding any provisions of this Plan to
the contrary, the right or claim of any Participant or Beneficiary to any asset
of the Fund or any benefit under this Plan shall be subject to and limited by
this Section 4.4.
(b) In no event shall voluntary Employee contributions be accepted. Any
such voluntary Employee contributions (and any earnings attributable thereto)
mistakenly received by the Trustee shall promptly be returned to the
Participant.
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ARTICLE V
ACCOUNTS, ALLOCATIONS AND INVESTMENTS
5.1 Establishment of Separate Participant Accounts.
The Administrator shall establish and maintain separate individual accounts
for Participants in the Plan and for each Former Participant in accordance with
the provisions of this Article V. Such separate accounts shall be for
accounting purposes only and shall not require a segregation of the Fund, and no
Participant, Former Participant or Beneficiary shall acquire any right to or
interest in any specific assets of the Fund as a result of the allocations
provided for under this Plan, except where segregation is expressly provided for
in this Plan.
(a) Employee Stock Ownership Accounts.
The Administrator shall establish a separate Employee Stock Ownership
Account in the Fund for each Participant. The account shall be credited as of
the last day of each Plan Year with the amounts allocated to the Participant
under Sections 5.4 and 5.5. The Administrator may establish subaccounts
hereunder, including an Employer Stock Account reflecting a Participant's
interest in Employer Securities held by the Trust and an Other Investments
Account reflecting the Participant's interest in his Employee Stock Ownership
Account other than Employer Securities.
(b) Distribution Accounts.
In any case where distribution of a terminated Participant's vested
interest in the Plan is to be deferred, the Administrator shall establish a
separate, nonforfeitable account in the Fund to which the balance in his
Employee Stock Ownership Account in the Plan shall be transferred after such
Participant incurs a Break. Unless the Former Participant's distribution
accounts are segregated for investment purposes pursuant to section 9.4, they
shall share in Investment Adjustments.
(c) Other Accounts.
The Administrator shall establish such other separate accounts for each
Participant as may be necessary or desirable for the convenient administration
of the Fund.
5.2 Establishment of Suspense Accounts.
The Administrator shall establish separate accounts to be known as
"suspense accounts." There shall be credited to such appropriate suspense
accounts any Employee Stock Ownership contributions that may be made prior to
the last day of the Plan Year, as provided in Section 4.2. The suspense accounts
shall share proportionately as to time and amount in any Investment Adjustments.
As of the last day of each Plan Year, the balance of the Employee Stock
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<PAGE>
Ownership suspense account shall be added to the Employee Stock Ownership
contribution and allocated to the Employee Stock Ownership Accounts of
Participants as provided in Section 5.5, except as provided herein. In the
event that the Plan takes an Exempt Loan, the Employer Securities purchased
thereby shall be allocated to a separate Exempt Loan Suspense Account, from
which allocations shall be made in accordance with Section 8.5.
5.3 Allocation of Earnings, Losses and Expenses.
As of each Valuation Date, any increase or decrease in the net worth of the
aggregate Employee Stock Ownership Accounts held in the Fund attributable to
earnings, losses, expenses and unrealized appreciation or depreciation in each
such aggregate Account, as determined by the Trustee pursuant to the Trust
Agreement, shall be credited to or deducted from the appropriate suspense
accounts and all Participants' Employee Stock Ownership Accounts (except
segregated distribution accounts described in Section 5.1(b) and the
"limitations account" described in Section 5.6(c)(4)) in the proportion that the
value of each such Account (determined immediately prior to such allocation and
before crediting any Employee Stock Ownership contributions and forfeitures for
the current Plan Year but after adjustment for any transfer to or from such
Accounts and for the time such funds were in such Accounts) bears to the value
of all Employee Stock Ownership Accounts.
5.4 Allocation of Forfeitures.
As of the last day of each Plan Year, all forfeitures attributable to the
Employee Stock Ownership Accounts which are then available for reallocation
shall be, as appropriate, added to the Employee Stock Ownership contribution (if
any) for such year and allocated among the Participants' Employee Stock
Ownership Accounts, as appropriate, in the manner provided in Sections 5.5 and
5.6.
5.5 Allocation of Annual Employee Stock Ownership Contributions.
As of the last day of each Plan Year for which the Employer shall make an
Employee Stock Ownership contribution, the Administrator shall allocate the
Employee Stock Ownership contribution (including reallocable forfeitures) for
such Plan Year to the Employee Stock Ownership account of each Participant who
completed at least 1,000 Hours of Service during that Plan Year, provided that
he is still employed by the Employer on the last day of the Plan Year. Such
allocation shall be made in the same proportion that each such Participant's
Compensation for such Plan Year bears to the total Compensation of all such
Participants for such Plan Year, subject to Section 5.6; provided, however,
that, for purposes of this Section 5.5, a Participant's Compensation shall not
be considered for any part of a Plan Year prior to the date the Participant
commenced participation in the Plan. Notwithstanding the foregoing, if a
Participant attains his Normal Retirement Date and terminates Service prior to
the last day of the Plan Year but after completing 1,000 Hours of Service, or
terminates service by reason of death or Disability, he shall be entitled to an
allocation based on his Compensation earned prior to his termination and during
the Plan Year. Furthermore, if a Participant completes 1,000 Hours of Service
and is on
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<PAGE>
a Leave of Absence on the last day of the Plan Year because of pregnancy or
other medical reason, such a Participant shall be entitled to an allocation
based on his Compensation earned during such Plan Year.
5.6 Limitation on Annual Additions.
(a) Notwithstanding any provisions of this Plan to the contrary, the total
Annual Additions credited to a Participant's accounts under this Plan (and under
any other defined contribution plan to which the Employer contributes) for any
Limitation Year shall not exceed the lesser of:
(1) 25% of the Participant's compensation for such Limitation Year; or
(2) $30,000 (or, if greater, one-fourth of the defined benefit dollar
limitation set forth in Section 415(b)(1)(A) of the Code). Whenever
otherwise allowed by law, the maximum amount of $30,000 shall be
automatically adjusted annually for cost-of-living increases in
accordance with Section 415(d) of the Code and the highest such
increase effective at any time during the Limitation Year shall be
effective for the entire Limitation Year, without any amendment to
this Plan.
(b) Solely for the purpose of this Section 5.6, the term "compensation" is
defined as wages, salaries, and fees for professional services and other amounts
received (without regard to whether or not an amount is paid in cash) for
personal services actually rendered in the course of employment with the
Employer maintaining the Plan to the extent that the amounts are includable in
gross income (including, but not limited to, commissions paid to salesmen,
compensation for services on the basis of a percentage of profits, commissions
on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or
other expense allowances under a nonaccountable plan (as described in Treas.
Regs. Section 1.62-2(c)), and excluding the following:
(1) Employer contributions to a plan of deferred compensation which are
not includable in the Employee's gross income for the taxable year in
which contributed, or Employer contributions under a simplified
employee pension plan to the extent such contributions are deductible
by the Employee, or any distributions from a plan of deferred
compensation;
(2) Amounts realized from the exercise of a non-qualified stock option, or
when restricted stock (or property) held by the employee either
becomes freely transferable or is no longer subject to a substantial
risk of forfeiture;
(3) Amounts realized from the sale, exchange or other disposition of stock
acquired under a qualified stock option; and
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<PAGE>
(4) Other amounts which received special tax benefits, or contributions
made by the employer (whether or not under a salary reduction
agreement) towards the purchase of an annuity contract described in
section 403(b) of the Code (whether or not the contributions are
actually excludable from the gross income of the Employee).
(c) In the event that the limitations on Annual Additions described in this
Section 5.6(a) above are exceeded with respect to any Participant in any
Limitation Year, then the contributions allocable to the Participant for such
year shall be reduced to the minimum extent required by such limitations in the
following order of priority:
(1) If any further reductions in Annual Additions are necessary, then the
Employee Stock Ownership contributions and forfeitures allocated
during such Limitation Year to the Participant's Employee Stock
Ownership Account shall be reduced. The amount of any such reductions
in the Employee Stock Ownership contributions and forfeitures shall be
reallocated to all other Participants in the same manner as set forth
under Sections 5.4 and 5.5.
(2) Any amounts which cannot be reallocated to other Participants in a
current Limitation Year in accordance with Section 5.6(c)(1) above
because of the limitations contained in Sections 5.6(a) and (d) shall
be credited to an account designated as the "limitations account" and
carried forward to the next and subsequent Limitation Years until it
can be reallocated to all Participants as set forth in Sections 5.4,
and 5.5, as appropriate. No Investment Adjustments shall be allocated
to this limitations account. In the next and subsequent Limitation
Years, all amounts in the limitations account must be allocated in the
manner described in Sections 5.4 and 5.5, as appropriate, before any
Employee Stock Ownership contributions may be made to this Plan for
that Limitation Year.
(3) The Administrator shall determine to what extent the Annual Additions
to any Participant's Employee Stock Ownership Account must be reduced
in each Limitation Year. The Administrator shall reduce the Annual
Additions to all other tax-qualified retirement plans maintained by
the Employer in accordance with the terms contained therein for
required reductions or reallocations mandated by Section 415 of the
Code before reducing any Annual Additions in this Plan.
(4) In the event this Plan is voluntarily terminated by the Employer under
Section 13.5, any amounts credited to the limitations account
described in Section 5.6(c)(2) above which have not be reallocated as
set forth herein shall be distributed to the Participants who are
still employed by the
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<PAGE>
Employer on the date of termination, in the proportion that each
Participant's Compensation bears to the Compensation of all
Participants.
(d) The Annual Additions credited to a Participant's accounts for each
Limitation Year are further limited so that in the case of an Employee who is a
Participant in both this Plan and any qualified defined benefit plan
(hereinafter referred to as a "pension plan") of the Employer, the sum of (1)
and (2) below will not exceed 1.0:
(1) (A) The projected annual normal retirement benefit of a Participant
under the pension plan, divided by
(B) The lesser of:
(i) The product of 1.25 multiplied by the dollar limitation
in effect under Section 415(b)(1)(A) of the Code for
such Limitation Year; or
(ii) The product of 1.4 multiplied by the amount of
compensation which may be taken into account under
Section 415(b)(1)(B) of the Code for the Participant
for such Limitation Year; plus
(2) (A) The sum of Annual Additions credited to the Participant under this
Plan for all Limitation Years, divided by:
(B) The sum of the lesser of the following amounts determined for such
Limitation Year and for each prior year of service with the Employer:
(i) The product of 1.25 multiplied by the dollar limitation
in effect under Section 415(b)(1)(A) of the Code for
such Limitation Year, or
(ii) The product of 1.4 multiplied by the amount of
compensation which may be taken into account under
Section 415(b)(1)(B) of the Code for the Participant
for such Limitation Year. The Administrator may, in
calculating the defined contribution plan fraction
described in Section 5.6(d)(2), elect to use the
transitional rule pursuant to
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<PAGE>
Section 415(e)(6) of the Code, if applicable. If the
sum of the fractions produced above will exceed 1.0,
even after the use of the "fresh start" rule contained
in Section 235 of the Tax Equity and Fiscal
Responsibility Act of 1982 ("TEFRA"), if applicable,
then the same provisions as stated in Section 5.6(c)
above shall apply. If, even after the reductions
provided for in Section 5.6(c), the sum of the
fractions still exceed 1.0, then the benefits of the
Participant provided under the pension plan shall be
reduced to the extent necessary, in accordance with
Treasury Regulations issued under the Code. Solely for
the purposes of this Section 5.6(d), the term "years of
service" shall mean all years of service defined by
Treasury Regulations issued under Section 415 of the
Code.
(e) In the event that the Employer is a member of (1) a controlled group of
corporations or a group of trades or businesses under common control (as
described in Section 414(b) or (c) of the Code, as modified by Section 415(h)
thereof), or (2) an affiliated service group (as described in Section 414(m) of
the Code), the Annual Additions credited to any Participant's accounts in any
such Limitation Year shall be further limited by reason of the existence of all
other qualified retirement plans maintained by such affiliated corporations,
other entities under common control or other members of the affiliated service
group, to the extent such reduction is required by Section 415 of the Code and
the regulations promulgated thereunder. The Administrator shall determine if
any such reduction in the Annual Additions to a Participant's accounts is
required for this reason, and if so, the same provisions as stated in 5.6(c) and
(d) above shall apply.
(f) Annual Additions shall not include any Employer contributions which are
used by the Trust to pay interest on an Exempt Loan nor any forfeitures of
Employer Securities purchased with the proceeds of an Exempt Loan, provided that
not more than one-third of the Employer contributions are allocated to
Participants who are among the group of employees deemed "highly compensated
employees" within the meaning of Code Section 414(q).
5.7 Erroneous Allocations.
No Participant shall be entitled to any Annual Additions or other
allocations to his accounts in excess of those permitted under Sections 5.3,
5.4, 5.5, and 5.6. If it is determined at anytime that the Administrator and/or
Trustees have erred in accepting and allocating any contributions or forfeitures
under this Plan, or in allocating Investment Adjustments, or in excluding or
including any person as a Participant, then the Administrator, in a uniform and
20
<PAGE>
nondiscriminatory manner, shall determine the manner in which such error shall
be corrected and shall promptly advise the Trustee in writing of such error and
of the method for correcting such error. The accounts of any or all Participants
may be revised, if necessary, in order to correct such error.
5.8 Value of Participant's Interest in Fund
At any time, the value of a Participant's interest in the Fund shall
consist of the aggregate value of his Employee Stock Ownership Account and his
distribution account, if any, determined as of the next-preceding Valuation
Date. The Administrator shall maintain adequate records of the cost basis of
Employer Securities allocated to each Participant's Employer Stock Ownership
Account.
5.9 Investment of Account Balances.
The Employee Stock Ownership Accounts shall be invested primarily in
Employer Securities. All sales of Employer Securities by the Trustee
attributable to the Employee Stock Ownership Accounts of all Participants shall
be charged pro rata to the Employee Stock Ownership Accounts of all
Participants.
21
<PAGE>
ARTICLE VI
RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY
6.1 Normal Retirement.
A Participant who reaches his Normal Retirement Date and who shall retire
at that time shall thereupon be entitled to retirement benefits based on the
value of his interest in the Fund, payable pursuant to the provisions of Section
9.1. A Participant who remains in Service after his Normal Retirement Date
shall not be entitled to any retirement benefits until his actual termination of
Service thereafter (except as provided in Section 9.3(g)) and he shall meanwhile
continue to participate in this Plan.
6.2 Early Retirement.
A Participant who reaches his Early Retirement Date may retire at such time
(or, at his election, as of the first day of any month thereafter prior to his
Normal Retirement Date) and shall thereupon be entitled to retirement benefits
based on the value of his interest in the Fund, payable pursuant to the
provisions of Section 9.1.
6.3 Disability Retirement.
In the event a Participant incurs a Disability, he may retire on his
Disability Retirement Date and shall thereupon be entitled to retirement
benefits based on the value of his interest in the Fund, payable pursuant to the
provisions of Section 9.1.
6.4 Death Benefits.
(a) Upon the death of a Participant before his Retirement or other
termination of Service, the value of his interest in the Fund shall be payable
pursuant to the provisions of Section 9.1. The Administrator shall direct the
Trustee to distribute his interest in the Fund to any surviving Beneficiary
designated by the Participant or, if none, to such persons designated by the
Administrator pursuant to Section 6.5.
(b) Upon the death of a Former Participant, the Administrator shall direct
the Trustee to distribute any undistributed balance of his interest in the Fund
to any surviving Beneficiary designated by him or, if none, to such persons
designated by the Administrator pursuant to Section 6.5.
(c) The Administrator may require such proper proof of death and such
evidence of the right of any person to receive the interest in the Fund of a
deceased Participant or Former Participant as the Administrator may deem
desirable. The Administrator's determination of death and of the right of any
person to receive payment shall be conclusive.
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<PAGE>
6.5 Designation of Death Beneficiary and Manner of Payment.
(a) Each Participant shall have the right to designate a Beneficiary or
Beneficiaries to receive the sum or sums to which he may be entitled upon his
death. The Participant may also designate the manner in which any death
benefits under this Plan shall be payable to his Beneficiary, provided that such
designation is in accordance with Section 9.4. Such designation of Beneficiary
and manner of payment shall be in writing and delivered to the Administrator,
and shall be effective when received by the Administrator. The Participant
shall have the right to change such designation by notice in writing to the
Administrator. Such change of Beneficiary or the manner of payment shall become
effective upon its receipt by the Administrator. Any such change shall be
deemed to revoke all prior designations.
(b) If a Participant shall fail to designate validly a Beneficiary or if no
designated Beneficiary survives the Participant, his interest in the Fund shall
be paid to the person or persons in the first of the following classes of
successive preference Beneficiaries surviving at the death of the Participant:
the Participant's (1) widow or widower, (2) children, (3) parents, and (4)
estate. The Administrator shall decide what Beneficiaries, if any, shall have
been validly designated, and its decision shall be binding and conclusive on all
persons.
(c) Notwithstanding the foregoing, if a Participant has been married
throughout the 12 month period preceding the date of his death, the sum or sums
to which he may be entitled under this Plan upon his death shall be paid to his
spouse, unless the Participant's spouse shall have consented to the election of
another Beneficiary. Such a spousal consent shall be in writing and shall be
witnessed either by a representative of the Plan or a notary public. If it is
established to the satisfaction of the Administrator that such spousal consent
cannot be obtained because there is no spouse, because the spouse cannot be
located, or other reasons prescribed by governmental regulations, the consent of
the spouse may be waived, and the Participant may designate a Beneficiary or
Beneficiaries other than his spouse.
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<PAGE>
ARTICLE VII
VESTING AND FORFEITURES
7.1 Vesting on Death, Disability, Retirement and Change in Control.
Unless his participation in this Plan shall have terminated prior thereto,
upon a Participant's death, Disability, Early Retirement, or upon his attainment
of Normal Retirement Date (whether or not he actually retires at that time)
while he is still employed by the Employer, the Participant's entire interest in
the Fund shall be fully vested and nonforfeitable. In addition, a Participant's
interest shall be fully vested and nonforfeitable upon a Change in Control. For
purposes of this Plan, a "Change in Control" shall mean an event deemed to occur
if and when (1) an offeror other than the Heritage Bancorp, Inc. purchases
shares of the stock of Heritage Bancorp, Inc. or the Sponsor pursuant to a
tender or exchange offer for such shares, (2) any person (as such term is used
in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial
owner, directly or indirectly, of securities of Heritage Bancorp, Inc. or the
Sponsor representing 25% or more of the combined voting power of Heritage
Bancorp, Inc.'s or the Sponsor's then outstanding securities, (3) the membership
of the board of directors of Heritage Bancorp, Inc. or the Sponsor changes as
the result of a contested election, such that individuals who were directors at
the beginning of any 24 month period (whether commencing before or after the
date of adoption of this Plan) do not constitute a majority of the Board at the
end of such period, or (4) shareholders of Heritage Bancorp, Inc. or the Sponsor
approve a merger, consolidation, sale or disposition of all or substantially all
of Heritage Bancorp, Inc.'s or the Sponsor's assets, or a plan of partial or
complete liquidation.
7.2 Vesting on Termination of Participation.
Upon termination of his participation in this Plan for any reason other
than death, Disability, or Normal Retirement, a Participant shall be vested in a
percentage of his Employee Stock Ownership Account, such vested percentages to
be determined under the following table, based on the Years of Service
(including Years of Service prior to the Effective Date) credited to him for
vesting purposes at the time of his termination of participation:
<TABLE>
<CAPTION>
Years of Service Completed Percentage Vested
<S> <C>
Less than 1 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
</TABLE>
Any portion of the Participant's Employee Stock Ownership Account which is
not vested at the time he incurs a Break shall thereupon be forfeited and
disposed of pursuant to Section 7.3.
24
<PAGE>
Distribution of the vested portion of a terminated Participant's interest in the
Plan may be authorized by the Administrator in any manner permitted under
Section 9.1.
7.3 Disposition of Forfeitures.
(a) In the event a Participant incurs a Break and subsequently resumes both
his Service and his participation in the Plan prior to incurring at least five
Breaks, the forfeitable portion of his Employee Stock Ownership Account shall be
reinstated to the credit of the Participant as of the date he resumes
participation.
(b) In the event a Participant terminates Service and subsequently incurs a
Break and receives a distribution, or in the event a Participant does not
terminate Service, but incurs at least five Breaks, or in the event that a
Participant terminates Service and incurs at least five Breaks but has not
received a distribution, then the forfeitable portion of his Employer Account,
including Investment Adjustments, shall be reallocated to other Participants,
pursuant to Section 5.4 as of the date the Participant incurs such Break or
Breaks, as the case may be.
(c) In the event a former Participant who had received a distribution from
the Plan is rehired, he shall repay the amount of his distribution before the
earlier of five years after the date of his rehire by the Employer, or the close
of the first period of five consecutive Breaks commencing after the withdrawal
in order for any forfeited amounts to be restored to him.
25
<PAGE>
ARTICLE VIII
EMPLOYEE STOCK OWNERSHIP PROVISIONS
8.1 Right to Demand Employer Securities.
A Participant entitled to a distribution from his Employee Stock Ownership
Account shall be entitled to demand that his interest in the Account be
distributed to him in the form of Employer Securities, all subject to Section
9.9. In the event that the Employer Securities are not readily tradable on an
established market, the Participant shall be entitled to require that the
Employer repurchase the Employer Securities under a fair valuation formula, as
provided by governmental regulations. The Participant or Beneficiary shall be
entitled to exercise the put option described in the preceding sentence for a
period of not more than 60 days following the date of distribution of Employer
Securities to him. If the put option is not exercised within such 60-day period,
the Participant or Beneficiary may exercise the put option during an additional
period of not more than 60 days after the beginning of the first day of the
first Plan Year following the Plan Year in which the first put option period
occurred, all as provided in regulations promulgated by the Secretary of the
Treasury.
8.2 Voting Rights.
Each Participant with an Employee Stock Ownership Account shall be entitled
to direct the Trustee as to the manner in which the Employer Securities in such
Account are to be voted. Employer Securities held in the Employee Stock
Ownership Suspense Account or the Exempt Loan Suspense Account shall be voted by
the Trustee on each issue with respect to which shareholders are entitled to
vote in the manner directed by the majority of the Participants who directed the
Trustee as to the manner of voting their shares in the Employee Stock Ownership
Accounts with respect to such issue. Prior to the initial allocation of shares,
the Trustee shall be entitled to vote the shares in the Suspense Account without
prior direction from the Participants or the Administrator. In the event that a
Participant fails to give timely voting instructions to the Trustee with respect
to the voting of his allocated Employer Securities, the Trustee shall be
entitled to vote such shares in its discretion.
8.3 Nondiscrimination in Employee Stock Ownership Contributions.
In the event that the amount of the Employee Stock Ownership contributions
that would be required in any Plan Year to make the scheduled payments on an
Exempt Loan would exceed the amount that would otherwise be deductible by the
Employer for such Plan Year under Code Section 404, then no more than one-third
of the Employee Stock Ownership contributions for the Plan Year, which is also
the Employer's taxable year, shall be allocated to the group of Employees who
during the Plan Year or the preceding Plan Year:
(a) During the Plan Year or the preceding Plan Year was at any time a 5%
owner of the Employer; or
26
<PAGE>
(b) During the preceding Plan Year, received compensation from the
Employer in excess of $80,000, as adjusted under Code Section 414(q) and, if
elected by the Employer, was in the top paid group of Employees for such Plan
Year.
8.4 Dividends.
Any cash dividends or other cash contributions received by the Trustee of
Employer Securities allocated to the Employee Stock Account of Participants
shall be credited to the applicable Participants' Ownership Accounts unless the
Sponsor, in its sole discretion, elects to pay the cash dividends directly to
the applicable Participants or directs the Trustee to pay the cash dividends to
the Participants (or, if applicable, their Beneficiaries) within 90 calendar
days of the close of the Plan Year in which the cash dividend were paid to the
Fund. Notwithstanding anything contained in this Section to the contrary, the
Sponsor may direct cash dividends, including dividends on non-allocated shares,
be applied to repay an Exempt Loan, but only to the extent shares of Employer
Securities with an aggregate fair market value equal to the amount of dividends
so applied are allocated to the Employee Stock Ownership Account of the
applicable Participants and to the extent the cash dividends are deductible
under Section 404(k) of the Code. To the extent cash dividends on allocated
shares are applied to repay an Exempt Loan, shares released from encumbrance the
value equal to the amount of the dividends which, but for the repayment of the
Exempt Loan, would have been allocated to Participants' Employee Stock Ownership
Accounts shall be allocated to the Employee Stock Ownership Accounts of the
affected Participants, and the remaining shares to be allocated shall be
allocated among the Participants in accordance with Section 5.5. Dividends on
Employer Securities obtained pursuant to an Exempt Loan and not yet allocated
may be used to make payments on an Exempt Loan, as described in Section 8.5.
8.5 Exempt Loans.
(a) The Sponsor may direct the Trustee to obtain Exempt Loans. The Exempt
Loan may take the form of (i) a loan from a bank or other commercial lender to
purchase Employer Securities (ii) a loan from the Employer or affiliated
corporation, to the Plan; or (iii) an installment sale of Employer Securities to
the Plan. The proceeds of any such Exempt Loan shall be used, within a
reasonable time after the Exempt Loan is obtained, only to purchase Employer
Securities, repay the Exempt Loan, or repay any prior Exempt Loan. Any such
Exempt Loan shall provide for no more than a reasonable rate of interest and
shall be without recourse against the Plan. The number of years to maturity
under the Exempt Loan must be definitely ascertainable at all times. The only
assets of the Plan that may be given as collateral for an Exempt Loan are
Employer Securities acquired with the proceeds of the Exempt Loan and Employer
Securities that were used as collateral for a prior Exempt Loan repaid with the
proceeds of the current Exempt Loan. Such Employer Securities so pledged shall
be placed in an Exempt Loan Suspense Account. No person or institution entitled
to payment under an Exempt Loan shall have recourse against Trust assets other
than the aforesaid collateral, Employer Stock Ownership contributions (other
than contributions of Employer Securities) that are available under the Plan to
meet obligations under the Exempt Loan and earnings attributable to such
27
<PAGE>
collateral and the investment of such contributions. All Employee Stock
Ownership contributions paid during the Plan Year in which an Exempt Loan is
made (whether before or after the date the proceeds of the Exempt Loan are
received), all Employee Stock Ownership contributions paid thereafter until the
Exempt Loan has been repaid in full, and all earnings from investment of such
Employee Stock Ownership contributions, without regard to whether any such
Employee Stock Ownership contributions and earnings have been allocated to
Participants' Employee Stock Ownership Accounts, shall be available to meet
obligations under the Exempt Loan as such obligations accrue, or prior to the
time such obligations accrue, unless otherwise provided by the Employer at the
time any such contribution is made. Any pledge of Employer Securities shall
provide for the release of shares so pledged upon the payment of any portion of
the Exempt Loan.
(b) For each Plan Year during the duration of the Exempt Loan, the number
of shares of Employer Securities released from such pledge shall equal the
number of encumbered shares held immediately before release for the current Plan
Year multiplied by a fraction. The numerator of the fraction is the sum of
principal and interest paid in such Plan Year. The denominator of the fraction
is the sum of the numerator plus the principal and interest to be paid for all
future years. Such years will be determined without taking into account any
possible extension or renewal periods. If interest on any Exempt Loan is
variable, the interest to be paid in future years under the Exempt Loan shall be
computed by using the interest rate applicable as of the end of the Plan Year.
(c) Notwithstanding the foregoing, the Trustee may obtain an Exempt Loan
pursuant to the terms of which the number of Employer Securities to be released
from encumbrance shall be determined solely with reference to principal
payments. In the event that such an Exempt Loan is obtained, annual payments of
principal and interest shall be at a cumulative rate that is not less rapid at
any time than level payments of such amounts for not more than 10 years. The
amount of interest in any such annual loan repayment shall be disregarded only
to the extent that it would be determined to be interest under standard loan
amortization tables. The requirement set forth in the preceding sentence shall
not be applicable from the time that, by reason of a renewal, extension, or
refinancing, the sum of the expired duration of the Exempt Loan, the renewal
period, the extension period, and the duration of a new Exempt Loan exceeds 10
years.
8.6 Exempt Loan Payments.
(a) Payments of principal and interest on any Exempt Loan during a Plan
Year shall be made by the Trustee (as directed by the Administrator) only from
(1) Employee Stock Ownership contributions to the Trust made to meet the Plan's
obligation under an Exempt Loan (other than contributions of Employer
Securities) and from any earnings attributable to Employer Securities held as
collateral for an Exempt Loan and investments of such contributions (both
received during or prior to the Plan Year); (2) the proceeds of a subsequent
Exempt Loan made to repay a prior Exempt Loan; and (3) the proceeds of the sale
of any Employer Securities held as collateral for an Exempt Loan. Such
contribution and earnings shall be accounted for separately by the Plan until
the Exempt Loan is repaid.
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(b) Employer Securities released by reason of the payment of principal or
interest on an Exempt Loan from amounts allocated to Participants' Employee
Stock Ownership Accounts shall be allocated as set forth in Section 5.5.
(c) The Employer shall contribute to the Trust sufficient amounts to
enable the Trust to pay principal and interest on any such Exempt Loans as they
are due, provided however that no such contribution shall exceed the limitations
in Section 5.6. In the event that such contributions by reason of the
limitations in Section 5.6 are insufficient to enable the Trust to pay principal
and interest on such Exempt Loan as it is due, then upon the Trustee's request
the Employer or an affiliated corporation shall:
(1) Make an Exempt Loan to the Trust in sufficient amounts to meet such
principal and interest payments. Such new Exempt Loan shall be
subordinated to the prior Exempt Loan. Securities released from the
pledge of the prior Exempt Loan shall be pledged as collateral to
secure the new Exempt Loan. Such Employer Securities will be released
from this new pledge and allocated to the Employee Stock Ownership
Accounts of the Participants in accordance with applicable provisions
of the Plan;
(2) Purchase any Employer Securities pledged as collateral in an amount
necessary to provide the Trustee with sufficient funds to meet the
principal and interest repayments. Any such sale by the Plan shall
meet the requirements of Section 408(e) of ERISA; or
(3) Any combination of the foregoing. However, the Employer shall not,
pursuant to the provisions of this subsection, do, fail to do or
cause to be done any act or thing which would result in a
disqualification of the Plan as an Employee Stock Ownership Plan
under the Code.
(d) Except as provided in Section 8.1 above and notwithstanding any
amendment to or termination of the Plan which causes it to cease to qualify as
an Employee Stock Ownership plan within the meaning of Section 4975(e)(7) of the
Code, or any repayment of an Exempt Loan, no shares of Employer Securities
acquired with the proceeds of an Exempt Loan obtained by the Trust to purchase
Employer Securities may be subject to a put, call or other option, or buy-sell
or similar arrangement while such shares are held by the Plan or when such
Shares are distributed from the Plan.
8.7 Put Option.
If a Participant exercises a put option (as set forth in Section 8.1) with
respect to Employer Securities that were distributed as part of a total
distribution pursuant to which a Participant's Employee Stock Ownership Account
is distributed to him in a single taxable year, the Employer or the Plan may
elect to pay the purchase price of the Employer Securities over a period not to
exceed five years. Such payments shall be made in substantially equal
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installments not less frequently than annually over a period beginning not later
than 30 days after the exercise of the put option. Reasonable interest shall be
paid to the Participant with respect to the unpaid balance of the purchase price
and adequate security shall be provided with respect thereto. In the event that
a Participant exercises a put option with respect to Employer Securities that
are distributed as part of an installment distribution, the amount to be paid
for such securities shall be paid not later than 30 days after the exercise of
the put option.
8.8 Diversification Requirements
Each Participant who has completed at least 10 years of participation in
the Plan and has attained age 55 may elect within 90 days after the close of
each Plan Year during his "qualified election period" to direct the Plan as to
the investment of at least 25% of his Employee Stock Ownership Account (to the
extent such percentage exceeds the amount to which a prior election under this
Section 8.8 had been made). For purposes of this Section 8.8, the term
"qualified election period" shall mean the five-Plan Year period beginning with
the Plan Year after the Plan Year in which the Participant attains age 55 (or,
if later, beginning with the Plan Year after the first Plan Year in which the
Employee first completes at least 10 years of participation in the Plan). In the
case of the Employee who has attained age 60 and completed 10 years of
participation in the prior Plan Year and in the case of the election year in
which any other Participant who has met the minimum age and service requirements
for diversification can make his last election hereunder, he shall be entitled
to direct the Plan as to the investment of at least 50% of his Employee Stock
Ownership Account (to the extent such percentage exceeds the amount to which a
prior election under this Section 8.8 had been made). The Plan shall make
available at least three investment options (not inconsistent with regulations
prescribed by the Department of Treasury) to each Participant making an election
hereunder. The Plan shall be deemed to have met the requirements of this Section
if the portion of the Participant's Employee Stock Ownership Account covered by
the election hereunder is distributed to the Participant or his designated
Beneficiary within 90 days after the period during which the election may be
made. In the absence of such a distribution, the Trustee shall implement the
Participant's election within 90 days following the expiration of the qualified
election period.
8.9 Independent Appraiser.
An independent appraiser meeting the requirements of Code 170(a)(1) shall
value the Employer Securities in those Plan Years when such securities are not
readily tradable on an established securities market.
8.10 Limitation on Allocations.
In the event that the Trustee acquires shares of Employer Securities in a
transaction to which section 1042 of the Code applies, such Shares shall not be
allocated, directly or indirectly, to any Participant described in Section
409(n)(1) of the Code for the duration of the "nonallocation period" (as defined
in Section 409(n)(3)(C) of the Code). Where any shares of Employer Securities
are prevented from being allocated due to the prohibition contained in this
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section the allocation of contributions otherwise provided under Section 5.5
shall be adjusted to reflect such result.
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ARTICLE IX
PAYMENTS AND DISTRIBUTIONS
9.1 Payments on Termination of Service -- In General.
All benefits provided under this Plan shall be funded by the value of a
Participant's vested interest in the Fund. As soon as practicable after a
Participant's Retirement, death or termination of Service, the Administrator
shall ascertain the value of his vested interest in the Fund, as provided in
Article V, and the Administrator shall hold or dispose of the same in accordance
with the following provisions of this Article IX.
9.2 Commencement of Payments.
(a) Distributions upon Retirement or Death. Upon a Participant's
Retirement or Death, payment of benefits under this Plan shall, unless the
Participant otherwise elects (in accordance with Section 9.3), commence no later
than six months after the close of the Plan Year in which occurs the date of the
Participant's Retirement or death.
(b) Distribution following Termination of Service. Unless a Participant
elects otherwise, if a Participant terminates Service prior to Retirement or
death, he shall be accorded an opportunity to commence receipt of distributions
from his Accounts within six months after the Valuation Date next following the
date of his termination of service. A Participant who terminates Service with a
deferred vested benefit shall be entitled to receive from the Administrator a
statement of his benefits. In the event that a Participant elects not to
commence receipt of distributions from his Accounts in accordance with this
Section 9.2(b), after the Participant incurs a Break, the Administrator shall
transfer his deferred vested interest to a distribution account. If a
Participant's vested Employer Account does not exceed (or at the time of any
prior distribution did not exceed) $3,500, the Plan Administrator may distribute
the vested portion of his Employer Account as soon as administratively feasible
without the consent of the Participant or his spouse.
(c) Distribution of Accounts Greater Than $3,500. If the value of a
Participant's vested Account balance exceeds (or at the time of any prior
distribution exceeded) $3,500, and the Account balance is immediately
distributable, the Participant must consent to any distribution of such Account
balance. The Plan Administrator shall notify the Participant of the right to
defer any distribution until the Participant's Account balance is no longer
immediately distributable. The consent of the Participant shall not be required
to the extent that a distribution is required to satisfy Code Section 401(a)(9)
or Code Section 415.
9.3 Mandatory Commencement of Benefits.
(a) Unless a Participant elects otherwise, in writing, distribution of
benefits will begin no later than the 60th day after the latest of the close of
the Plan Year in which (i) the Participant
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attains age 65, (ii) occurs the tenth anniversary of the year in which the
Participant commenced participation in the Plan Year, or (iii) the Participant
terminates Service with the Employer.
(b) In the event that the Plan shall be subsequently amended to provide
for a form of distribution other than a lump sum, as of the first distribution
calendar year, distributions, if not made in a lump sum, may be made only over
one of the following periods (or a combination thereof):
(i) the life of the Participant,
(ii) the life of the Participant and the designated beneficiary,
(iii) a period certain not extending beyond the life expectancy of the
Participant, or
(iv) a period certain not extending beyond the joint and last survivor
expectancy of the Participant and a designated beneficiary.
(c) In the event that the Plan shall be subsequently amended to provide
for a form of distribution other than a lump sum, if the participant's interest
is to be distributed in other than a lump sum, the following minimum
distribution rules shall apply on or after the required beginning date:
(i) If a Participant's benefit is to be distributed over (1) a period not
extending beyond the life expectancy of the Participant or the joint
life and last survivor expectancy of the Participant and the
Participant's designated beneficiary or (2) a period not extending
beyond the life expectancy of the designated beneficiary, the amount
required to be distributed for each calendar year, beginning with
distributions for the first distribution calendar year, must at least
equal the quotient obtained by dividing the Participant's benefit by
the applicable life expectancy.
(ii) The amount to be distributed each year, beginning with distributions
for the first distribution calendar year shall not be less than the
quotient obtained by dividing the Participant's benefit by the lesser
of (1) the applicable life expectancy or (2) if the Participant's
spouse is not the designated beneficiary, the applicable divisor
determined from the table set forth in Q&A-4 of section 1.401(a)(9)-2
of the Proposed Regulations. Distributions after the death of the
participant shall be distributed using the applicable life expectancy
in sub-section (iii) above as the relevant divisor without regard to
Proposed Regulations 1.401(a)(9)-2.
(iii) The minimum distribution required for the Participant's first
distribution calendar year must be made on or before the
Participant's required
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beginning date. The minimum distribution for other calendar years,
including the minimum distribution for the distribution calendar year
in which the employee's required beginning date occurs, must be made
on or before December 31 of the distribution calendar year.
(d) If a Participant dies after a distribution has commenced in
accordance with Section 8.3(b) but before his entire interest has been
distributed to him, the remaining portion of such interest shall be distributed
to his Beneficiary at least as rapidly as under the method of distribution in
effect as of the date of his death.
(e) If a Participant shall die before the distribution of his interest in
the Plan has begun, the entire interest of the Participant shall be distributed
by December 31 of the calendar year containing the fifth anniversary of the
death of the Participant, except in the following events:
(i) If any portion of the Participant's interest is payable to (or for
the benefit of) a designated beneficiary over a period not extending
beyond the life expectancy of such beneficiary and such distributions
begin not later than December 31 of the calendar year immediately
following the calendar year in which the Participant died.
(ii) If any portion of the Participant's interest is payable to (or for
the benefit of) the Participant's spouse over a period not extending
beyond the life expectancy of such spouse and such distributions
begin no later than December 31 of the calendar year in which the
Participant would have attained age 70-1/2.
If the Participant has not made a distribution election by the time
of his death, the Participant's designated beneficiary shall elect
the method of distribution no later than the earlier of (1) December
31 of the calendar year in which distributions would be required to
begin under this Article or (2) December 31 of the calendar year
which contains the fifth anniversary of the date of death of the
Participant. If the Participant has no designated beneficiary, or if
the designated beneficiary does not elect a method of distribution,
distribution of the Participant's entire interest shall be completed
by December 31 of the calendar year containing the fifth anniversary
of the Participant's death.
(f) For purposes of this Article, the life expectancy of a Participant
and his spouse may be redetermined but not more frequently than annually. The
life expectancy (or joint and last survivor expectancy) shall be calculated
using the attained age of the Participant (or designated beneficiary) as of the
Participant's (or designated beneficiary's) birthday in the applicable calendar
year reduced by one for each calendar year which has elapsed since the date life
expectancy was first calculated. If life expectancy is being recalculated, the
applicable life expectancy shall be the life expectancy as so recalculated. The
applicable calendar year shall be
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the first distribution calendar year, and if life expectancy is being
recalculated, such succeeding calendar year. Unless otherwise elected by the
Participant (or his spouse, if applicable) by the time distributions are
required to begin, life expectancies shall be recalculated annually. Any such
election not to recalculate shall be irrevocable and shall apply to all
subsequent years. The life expectancy of a nonspouse beneficiary may not be
recalculated.
(g) For purposes of Section 9.3(b) and 9.3(e), any amount paid to a child
shall be treated as if it had been paid to a surviving spouse if such amount
will become payable to the surviving spouse upon such child reaching majority
(or other designated event permitted under regulations).
(h) For distributions beginning before the Participant's death, the first
distribution calendar year is the calendar year immediately preceding the
calendar year which contains the Participant's required beginning date. For
distributions beginning after the Participant's death, the first distribution
calendar year is the calendar year in which distributions are required to begin
pursuant to this Article.
9.4 Required Beginning Dates.
The required beginning date of a Participant is the first day of April of
the calendar year following the later of (1) calendar year in which the
participant attains age 70-1/2 or (2) the calendar year in which the Participant
terminated his employment, unless he is a 5% owner (as defined in Section 416)
with respect to the Plan Year ending in the calendar year in which he attains
age 70-1/2, in which case clause (2) shall not apply.
9.5 Form of Payment.
Each Participant's vested interest shall be distributed in a lump sum
payment. Notwithstanding the preceding sentence, but subject to Section 9.3, the
Administrator may not distribute a lump sum when the present value of a
Participant's total Account balances is in excess of $3,500 without the
Participant's consent. This form of payment shall be the normal form of
distribution provided, however, that in the event that the Administrator must
commence distributions with respect to an Employee who has attained age 70-1/2
and is still employed by the Employer, if the Employee does not elect a lump sum
distribution, payments shall be made in installments in such amounts as shall
satisfy the minimum distribution rules of Section 9.3.
9.6 Payments Upon Termination of Plan.
Upon termination of this Plan pursuant to Sections 13.2, 13.4, 13.5 or
13.6, the Administrator shall continue to perform its duties and the Trustee
shall make all payments upon the following terms, conditions and provisions: All
interests of Participants shall immediately become fully vested; the value of
the interests of all Participants shall be determined within 60 days after such
termination, and the Administrator shall have the same powers to direct the
Trustee in making payments as contained in Sections 9.1 and 13.5.
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9.7 Distributions Pursuant to Qualified Domestic Relations Orders.
Upon receipt of a domestic relations order, the Administrator shall notify
promptly the Participant and any alternate payee of receipt of the order and the
Plan's procedure for determining whether the order is a Qualified Domestic
Relations Order. While the issue of whether a domestic relations order is a
Qualified Domestic Relations Order is being determined, if the benefits would
otherwise be paid, the Administrator shall segregate in a separate account in
the Plan the amounts that would be payable to the alternate payee during such
period if the order were a Qualified Domestic Relations Order. If within 18
months the order is determined to be a Qualified Domestic Relations Order, the
amounts so segregated, along with the interest or investment earnings
attributable thereto shall be paid to the alternate payee. Alternatively, if
within 18 months, it is determined that the order is not a Qualified Domestic
Relations Order or if the issue is still unresolved, the amounts segregated
under this Section 9.6, with the earnings attributable thereto, shall be paid to
the Participant or Beneficiary who would have been entitled to such amounts if
there had been no order. The determination as to whether the order is qualified
shall be applied prospectively. Thus, if the Administrator determines that the
order is a Qualified Domestic Relations Order after the 18-month period, the
Plan shall not be liable for payments to the alternative payee for the period
before the order is determined to be a Qualified Domestic Relations Order.
9.8 Cash-Out Distributions
If a Participant receives a distribution of the entire present value of his
vested Account balances under this Plan because of the termination of his
participation in the Plan, the Plan shall disregard a Participant's Service with
respect to which such cash-out distribution shall have been made, in computing
his accrued benefit under the Plan in the event that a Former Participant shall
again become an Employee and become eligible to participate in the Plan. Such a
distribution shall be deemed to be made on termination of participation in the
Plan if it is made not later than the close of the second Plan Year following
the Plan Year in which such termination occurs. The forfeitable portion of a
Participant's accrued benefit shall be restored upon repayment to the Plan by
such former Participant of the full amount of the cash-out distribution,
provided that the former Participant again becomes an Employee. Such repayment
must be made by the Employee not later than the end of the five-year period
beginning with the date of the distribution. Forfeitures required to be restored
by virtue of such repayment shall be restored from the following sources in the
following order of preference: (i) current forfeitures; (ii) additional employee
stock ownership contributions, as appropriate and as subject to Section 5.6; and
(iii) investment earnings of the Fund. In the event that a Participant's
interest in the Plan is totally forfeitable, a Participant shall be deemed to
have received a distribution of zero upon his termination of Service. In the
event of a return to Service within five years of the date of his deemed
distribution, the Participant shall be deemed to have repaid his distribution in
accordance with the rules of this Section 9.8.
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9.9 ESOP Distribution Rules.
Notwithstanding any provision of this Article IX to the contrary, the
distribution of a Participant's Employee Stock Ownership Account (unless the
Participant elects otherwise in writing), shall commence as soon as
administratively feasible as of the first Valuation Date coincident with or next
following his death, disability or termination of Service, but not later than
one year after the close of the Plan Year in which the Participant separates
from Service by reason of the attainment of his Normal Retirement Date,
disability, death or separation from Service. In addition, all distributions
hereunder shall, to the extent that the Participant's Account is invested in
Employer Securities, be made in the form of Employer Securities. Fractional
shares, however, may be distributed in the form of cash.
9.10 Withholding.
(a) Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a distributee's election under this Article IX, a distributee
may elect, at the time and in the manner prescribed by the Plan Administrator,
to have any portion of an "eligible rollover distribution" paid directly to an
"eligible retirement plan" specified by the distributee in a "direct rollover."
(b) For purposes of this Section 9.10, an "eligible rollover
distribution" is any distribution of all or any portion of the balance to the
credit of the distributee, except that an "eligible rollover distribution" does
not include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life expectancies)
of the distributee and the distributee's designated beneficiary, or for a
specified period of 10 years or more; any distribution to the extent such
distribution is required under section 401(a)(9) of the Code; and the portion of
any distribution that is not includable in gross income (determined without
regard to the exclusion for net unrealized appreciation with respect to Employer
Securities).
(c) For purposes of this Section 9.10, an "eligible retirement plan" is
an individual retirement account described in section 408(a) of the Code, an
individual retirement annuity described in section 408(b) of the Code, an
annuity plan described in section 403(a) of the Code, or a qualified trust
described in section 401(a) of the Code, that accepts the distributee's eligible
rollover distribution. However, in the case of an "eligible rollover
distribution" to the surviving spouse, an "eligible retirement plan" is an
individual retirement account or individual retirement annuity.
(d) For purposes of this Section 9.10, a distributee includes a
Participant or former Participant. In addition, the Participant's or former
Participant's surviving spouse and the Participant's or former Participant's
spouse or former spouse who is the alternate payee under a qualified domestic
relations order, as defined in section 414(p) of the Code, are "distributees"
with regard to the interest of the spouse or former spouse.
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(e) For purposes of this Section 9.10, a "direct rollover" is a payment
by the Plan to the "eligible retirement plan" specified by the distributee.
9.11 Waiver of 30-day Notice.
If a distribution is one to which sections 401(a)(11) and 417 of the Code
do not apply, such distribution may commence less than 30 days after the notice
required under Section 1.411(a)-11(c) of the Income Tax Regulations is given,
provided that: (1) the Plan Administrator clearly informs the Participant that
the Participant has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a distribution (and,
if applicable, a particular distribution option), and (2) the Participant, after
receiving the notice, affirmatively elects a distribution.
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ARTICLE X
PROVISIONS RELATING TO TOP-HEAVY PLANS
10.1 Top-Heavy Rules to Control.
Anything contained in this Plan to the contrary notwithstanding, if for any
Plan Year the Plan is a top-heavy plan, as determined pursuant to Section 416 of
the Code, then the Plan must meet the requirements of this Article X for such
Plan Year.
10.2 Top-Heavy Plan Definitions.
Unless a different meaning is plainly implied by the context, the following
terms as used in this Article X shall have the following meanings:
(a) "Accrued Benefit" shall mean the account balances or accrued benefits
of an Employee, calculated pursuant to Section 10.3.
(b) "Determination Date" shall mean, with respect to any particular Plan
Year of this Plan, the last day of the preceding Plan Year (or, in the case of
the first Plan Year of the Plan, the last day of the first Plan Year). In
addition, the term "Determination Date" shall mean, with respect to any
particular plan year of any plan (other than this Plan) in a Required
Aggregation Group or a Permissive Aggregation Group, the last day of the plan
year of such plan which falls within the same calendar year as the Determination
Date for this Plan.
(c) "Employer" shall mean the Employer (as defined in Section 1.1(q)) and
any entity which is (1) a member of a controlled group including such Employer,
while it is a member of such controlled group (within the meaning of Section
414(b) of the Code), (2) in a group of trades or businesses under common control
with such Employer, while it is under common control (within the meaning of
Section 414(c) of the Code), and (3) a member of an affiliated service group
including such Employer, while it is a member of such affiliated service group
(within the meaning of Section 414(m) of the Code).
(d) "Key Employee" shall mean any Employee or former Employee (or any
Beneficiary of such Employee or former Employee, as the case may be) who, at any
time during the Plan Year or during the four immediately preceding Plan Years is
one of the following:
(1) An officer of the Employer who has compensation greater than 50% of
the amount in effect under Code 415(b)(1)(A) for the Plan Year;
provided, however, that no more than 50 Employees (or, if lesser, the
greater of three or 10% of the Employees) shall be deemed officers;
(2) One of the 10 Employees having annual compensation (as defined in
Section 415 of the Code) in excess of the limitation in effect under
Section
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415(c)(1)(A) of the Code, and owning (or considered as owning, within
the meaning of Section 318 of the Code) the largest interests in the
Employer;
(3) Any Employee owning (or considered as owning, within the meaning of
Section 318 of the Code) more than 5% of the outstanding stock of the
Employer or stock possessing more than 5% of the total combined voting
power of all stock of the Employer; or
(4) Any Employee having annual compensation (as defined in Section 415 of
the Code) of more than $150,000 and who would be described in Section
10.2(d)(3) if "1%" were substituted for "5%" wherever the latter
percentage appears.
For purposes of applying Section 318 of the Code to the provisions of
this Section 10.2(d), Section 318(a)(2)(C) of the Code shall be
applied by substituting "5%" for "50%" wherever the latter percentage
appears. In addition, for purposes of this Section 10.2(d), the
provisions of Section 414(b), (c) and (m) shall not apply in
determining ownership interests in the Employer. However, for
purposes of determining whether an individual has compensation in
excess of $150,000, or whether an individual is a Key Employee under
Section 10.2(d)(1) and (2), compensation from each entity required to
be aggregated under Sections 414(b), (c) and (m) of the Code shall be
taken into account. Notwithstanding anything contained herein to the
contrary, all determinations as to whether a person is or is not a Key
Employee shall be resolved by reference to Section 416 of the Code and
any rules and regulations promulgated thereunder.
(e) "Non-Key Employee" shall mean any Employee or former Employee (or any
Beneficiary of such Employee or former Employee, as the case may be) who is not
considered to be a Key Employee with respect to this Plan.
(f) "Permissive Aggregation Group" shall mean all plans in the Required
Aggregation Group and any other plans maintained by the Employer which satisfy
Sections 401(a)(4) and 410 of the Code when considered together with the
Required Aggregation Group.
(g) "Required Aggregation Group" shall mean each plan (including any
terminated plan) of the Employer in which a Key Employee is (or in the case of a
terminated plan, had been) a Participant in the Plan Year containing the
Determination Date or any of the four preceding Plan Years, and each other plan
of the Employer which enables any plan of the Employer in which a Key Employee
is a Participant to meet the requirement of Sections 401(a)(4) and 410 of the
Code.
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10.3 Calculation of Accrued Benefits.
(a) An Employee's Accrued Benefit shall be equal to:
(1) With respect to this Plan or any other defined contribution plan
(other than a defined contribution pension plan) in a Required
Aggregation Group or a Permissive Aggregation Group, the Employee's
account balances under the respective plan, determined as of the most
recent plan valuation date within a 12-month period ending on the
Determination Date, including contributions actually made after the
valuation date but before the Determination Date (and, in the first
plan year of a plan, also including any contributions made after the
Determination Date which are allocated as of a date in the first plan
year).
(2) With respect to any defined contribution pension plan in a Required
Aggregation Group or a Permissive Aggregation Group, the Employee's
account balances under the plan, determined as of the most recent plan
valuation date within a 12-month period ending on the Determination
Date, including contributions which have not actually been made, but
which are due to be made as of the Determination Date.
(3) With respect to any defined benefit plan in a Required Aggregation
Group or a Permissive Aggregation Group, the present value of the
Employee's accrued benefits under the plan, determined as of the most
recent plan valuation date within a 12-month period ending on the
Determination Date, pursuant to the actuarial assumptions used by such
plan, and calculated as if the Employee terminated Service under such
plan as of the valuation date (except that, in the first plan year of
a plan, a current Participant's estimated Accrued Benefit Plan as of
the Determination Date shall be taken into account).
(4) If any individual has not performed services for the Employer
maintaining the Plan at any time during the five-year period ending on
the Determination Date, any Accrued Benefit for such individual shall
not be taken into account.
(b) The Accrued Benefit of any Employee shall be further adjusted as
follows:
(1) The Accrued Benefit shall be calculated to include all amounts
attributable to both Employer and Employee contributions, but shall
exclude amounts attributable to voluntary deductible Employee
contributions, if any.
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(2) The Accrued Benefit shall be increased by the aggregate distributions
made with respect to an Employee under the plan or plans, as the case
may be, during the five-year period ending on the Determination Date.
(3) Rollover and direct plan-to-plan transfers shall be taken into account
as follows:
(A) If the transfer is initiated by the Employee and made from a plan
maintained by one employer to a plan maintained by another
unrelated employer, the transferring plan shall continue to count
the amount transferred; the receiving plan shall not count the
amount transferred.
(B) If the transfer is not initiated by the Employee or is made
between plans maintained by related employers, the transferring
plan shall no longer count the amount transferred; the receiving
plan shall count the amount transferred.
(c) If any individual has not performed services for the Employer at any
time during the five-year period ending on the Determination Date, any accrued
benefit for such individual (and the account of such individual) shall not be
taken into account.
10.4 Determination of Top-Heavy Status.
This Plan shall be considered to be a top-heavy plan for any Plan Year if,
as of the Determination Date, the value of the Accrued Benefits of Key Employees
exceeds 60% of the value of the Accrued Benefits of all eligible Employees under
the Plan. Notwithstanding the foregoing, if the Employer maintains any other
qualified plan, the determination of whether this Plan is top-heavy shall be
made after aggregating all other plans of the Employer in the Required
Aggregation Group and, if desired by the Employer as a means of avoiding top-
heavy status, after aggregating any other plan of the Employer in the Permissive
Aggregation Group. If the required Aggregation Group is top-heavy, then each
plan contained in such group shall be deemed to be top-heavy, notwithstanding
that any particular plan in such group would not otherwise be deemed to be top-
heavy. Conversely, if the Permissive Aggregation Group is not top-heavy, then
no plan contained in such group shall be deemed to be top-heavy, notwithstanding
that any particular plan in such group would otherwise be deemed to be top-
heavy. In no event shall a plan included in a top-heavy Permissive Aggregation
Group be deemed a top-heavy plan unless such plan is also included in a top-
heavy Required Aggregation Group.
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10.5 Determination of Super Top-Heavy Status.
The Plan shall be considered to be a super top-heavy plan if, as of the
Determination Date, the Plan would meet the test specified in Section 10.4 above
for classification as a top-heavy plan, except that "90%" shall be substituted
for "60%" whenever the latter percentage appears.
10.6 Minimum Contribution.
(a) For any year in which the Plan is top-heavy, each Non-Key Employee who
has met the age and service requirements, if any, contained in the Plan, shall
be entitled to a minimum contribution (which may include forfeitures otherwise
allocable) equal to a percentage of such Non-Key Employee's compensation (as
defined in Section 415 of the Code) as follows:
(1) If the Non-Key Employee is not covered by a defined benefit plan
maintained by the Employer, then the minimum contribution under this
Plan shall be 3% of such Non-Key Employee's compensation.
(2) If the Non-Key Employee is covered by a defined benefit plan
maintained by the Employer, then the minimum contribution under this
Plan shall be 5% of such Non-Key Employee's compensation.
(b) Notwithstanding the foregoing, the minimum contribution otherwise
allocable to a Non-Key Employee under this Plan shall be reduced in the
following circumstances:
(1) The percentage minimum contribution required under this Plan shall in
no event exceed the percentage contribution made for the Key Employee
for whom such percentage is the highest for the Plan Year after taking
into account contributions under other defined contribution plans in
this Plan's Required Aggregation Group; provided, however, that this
Section 10.7(b)(1) shall not apply if this Plan is included in a
Required Aggregation Group and this Plan enables a defined benefit
plan in such Required Aggregation Group to meet the requirements of
Section 401(a)(4) or 410 of the Code.
(2) No minimum contribution shall be required (or the minimum contribution
shall be reduced, as the case may be) for a Non-Key Employee under
this Plan for any Plan Year if the Employer maintains another
qualified plan under which a minimum benefit or contribution is being
accrued or made on account of such Plan Year, in whole or in part, on
behalf of the Non-Key Employee, in accordance with Section 416(c) of
the Code.
(c) For purposes of this Section 10.6, there shall be disregarded (1) any
Employer contributions attributable to a salary reduction or similar
arrangement, or (2) any Employer
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contributions to or any benefits under Chapter 21 of the Code (relating to the
Federal Insurance Contributions Act), Title II of the Social Security Act, or
any other federal or state law.
(d) For purposes of this Section 10.6, minimum contributions shall be
required to be made on behalf of only those Non-Key Employees, as described in
Section 10.7(a), who have not terminated Service as of the last day of the Plan
Year. If a Non-Key Employee is otherwise entitled to receive a minimum
contribution pursuant to this Section 10.6(d), the fact that such Non-Key
Employee failed to complete 1,000 Hours of Service or failed to make any
mandatory or elective contributions under this Plan, if any are so required,
shall not preclude him from receiving such minimum contribution.
10.7 Maximum Benefit Limitation.
For any Plan Year in which the Plan is a top-heavy plan, Section
5.6(d)(1)(B)(i) and Section 5.6(d)(2)(B)(i)shall be read by substituting "1.0"
for "1.25" wherever the latter figure appears; provided, however, that such
substitution shall not have the effect of reducing any benefit accrued under a
defined benefit plan prior to the first day of the plan year in which this
Section 10.8 becomes applicable.
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ARTICLE XI
ADMINISTRATION
11.1 Appointment of Administrator.
This Plan shall be administered by a committee consisting of up to five
persons, whether or not Employees or Participants, who shall be appointed from
time to time by the Board of Directors to serve at its pleasure. The Sponsor
may require that each person appointed as an Administrator shall signify his
acceptance by filing an acceptance with the Sponsor. The term "Administrator"
as used in this Plan shall refer to the members of the committee, either
individually or collectively, as appropriate. In the event that the Sponsor
shall elect not to appoint any individuals to constitute a committee to
administer the Plan, the Sponsor shall serve as the Administrator hereunder.
11.2 Resignation or Removal of Administrator.
An Administrator shall have the right to resign at any time by giving
notice in writing, mailed or delivered to the Employer and to the Trustee. Any
Administrator who was an employee of the Employer at the time of his appointment
shall be deemed to have resigned as an Administrator upon his termination of
Service. The Board of Directors may, in its discretion, remove any
Administrator with or without cause, by giving notice in writing, mailed or
delivered to the Administrator and to the Trustee.
11.3 Appointment of Successors: Terms of Office, Etc.
Upon the death, resignation or removal of an Administrator, the Employer
may appoint, by Board of Directors' resolution, a successor or successors.
Notice of termination of an Administrator and notice of appointment of a
successor shall be made by the Employer in writing, with copies mailed or
delivered to the Trustee, and the successor shall have all the rights and
privileges and all of the duties and obligations of the predecessor.
11.4 Powers and Duties of Administrator.
The Administrator shall have the following duties and responsibilities in
connection with the administration of this Plan:
(a) To promulgate and enforce such rules, regulations and procedures as
shall be proper for the efficient administration of the Plan, such rules,
regulations and procedures to apply uniformly to all Employees, Participants and
Beneficiaries;
(b) To determine all questions arising in the administration,
interpretation and application of the Plan, including questions of eligibility
and of the status and rights of Participants, Beneficiaries and any other
persons hereunder;
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(c) To decide any dispute arising hereunder strictly in accordance with the
terms of the Plan; provided, however, that no Administrator shall participate in
any matter involving any questions relating solely to his own participation or
benefits under this Plan;
(d) To advise the Employer and the Trustee regarding the known future needs
for funds to be available for distribution in order that the Trustee may
establish investments accordingly;
(e) To correct defects, supply omissions and reconcile inconsistencies to
the extent necessary to effectuate the Plan;
(f) To advise the Employer of the maximum deductible contribution to the
Plan for each fiscal year;
(g) To direct the Trustee concerning all payments which shall be made out
of the Fund pursuant to the provisions of this Plan;
(h) To advise the Trustee on all terminations of Service by Participants,
unless the Employer has so notified the Trustee;
(i) To confer with the Trustee on the settling of any claims against the
Fund;
(j) To make recommendations to the Board of Directors with respect to
proposed amendments to the Plan and the Trust Agreement;
(k) To file all reports with government agencies, Employees and other
parties as may be required by law, whether such reports are initially the
obligation of the Employer, the Plan or the Trustee; and
(l) To have all such other powers as may be necessary to discharge its
duties hereunder.
Reasonable discretion is granted to the Administrator to affect the
benefits, rights and privileges of Participants, Beneficiaries or other persons
affected by this Plan. The Administrator shall exercise reasonable discretion
under the terms of this Plan and shall administer the Plan strictly in
accordance with its terms, such administration to be exercised uniformly so that
all persons similarly situated shall be similarly treated.
11.5 Action by Administrator.
The Administrator may elect a Chairman and Secretary from among its members
and may adopt rules for the conduct of its business. A majority of the members
then serving shall constitute a quorum for the transaction of business. All
resolutions or other action taken by the Administrator shall be by vote of a
majority of those present at such meeting and entitled to vote. Resolutions may
be adopted or other action taken without a meeting upon written consent signed
by at least a majority of the members. All documents, instruments, orders,
requests, directions,
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instructions and other papers shall be executed on behalf of the Administrator
by either the Chairman or the Secretary of the Administrator, if any, or by any
member or agent of the Administrator duly authorized to act on the
Administrator's behalf.
11.6 Participation by Administrators.
No Administrator shall be precluded from becoming a Participant in the Plan
if he would be otherwise eligible, but he shall not be entitled to vote or act
upon matters or to sign any documents relating specifically to his own
participation under the Plan, except when such matters or documents relate to
benefits generally. If this disqualification results in the lack of a quorum,
then the Board of Directors shall appoint a sufficient number of temporary
Administrators who shall serve for the sole purpose of determining such a
question.
11.7 Agents.
The Administrator may employ agents and provide for such clerical, legal,
actuarial, accounting, medical, advisory or other services as it deems necessary
to perform its duties under this Plan. The cost of such services and all other
expenses incurred by the Administrator in connection with the administration of
the Plan shall be paid from the Fund, unless paid by the Employer.
11.8 Allocation of Duties.
The duties, powers and responsibilities reserved to the Administrator may
be allocated among its members so long as such allocation is pursuant to written
procedures adopted by the Administrator, in which case, except as may be
required by the Act, no Administrator shall have any liability, with respect to
any duties, powers or responsibilities not allocated to him, for the acts of
omissions of any other Administrator.
11.9 Delegation of Duties.
The Administrator may delegate any of its duties to other employees of the
Employer, to the Trustee with its consent, or to any other person or firm,
provided that the Administrator shall prudently choose such agents and rely in
good faith on their actions.
11.10 Administrator's Action Conclusive.
Any action on matters within the authority of the Administrator shall be
final and conclusive except as provided in Article XII.
11.11 Compensation and Expenses of Administrator.
No Administrator who is receiving compensation from the Employer as a full-
time employee, as a director or agent, shall be entitled to receive any
compensation or fee for his
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services hereunder. Any other Administrator shall be entitled to receive such
reasonable compensation for his services as an Administrator hereunder as may be
mutually agreed upon between the Employer and such Administrator. Any such
compensation shall be paid from the Fund, unless paid by the Employer. Each
Administrator shall be entitled to reimbursement by the Employer for any
reasonable and necessary expenditures incurred in the discharge of his duties.
11.12 Records and Reports.
The Administrator shall maintain adequate records of its actions and
proceedings in administering this Plan and shall file all reports and take all
other actions as it deems appropriate in order to comply with the Act, the Code
and governmental regulations issued thereunder.
11.13 Reports of Fund Open to Participants.
The Administrator shall keep on file, in such form as it shall deem
convenient and proper, all annual reports of the Fund received by the
Administrator from the Trustee, and a statement of each Participant's interest
in the Fund as from time to time determined. The annual reports of the Fund and
the statement of his own interest in the Fund, as well as a complete copy of the
Plan and the Trust Agreement and copies of annual reports to the Internal
Revenue Service, shall be made available by the Administrator to the Employer
for examination by each Participant during reasonable hours at the office of the
Employer, provided, however, that the statement of a Participant's interest
shall not be made available for examination by any other Participant.
11.14 Named Fiduciary.
The Administrator is the named fiduciary for purposes of the Act and shall
be the designated agent for receipt of service of process on behalf of the Plan.
It shall use ordinary care and diligence in the performance of its duties under
this Plan. Nothing in this Plan shall preclude the Employer from indemnifying
the Administrator for all actions under this Plan, or from purchasing liability
insurance to protect it with respect to its duties under this Plan.
11.15 Information from Employer.
The Employer shall promptly furnish all necessary information to the
Administrator to permit it to perform its duties under this Plan. The
Administrator shall be entitled to rely upon the accuracy and completeness of
all information furnished to it by the Employer, unless it knows or should have
known that such information is erroneous.
11.16 Reservation of Rights by Employer.
Where rights are reserved in this Plan to the Employer, such rights shall
be exercised only by action of the Board of Directors, except where the Board of
Directors, by written resolution, delegates any such rights to one or more
officers of the Employer or to the Administrator.
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Subject to the rights reserved to the Board of Directors acting on behalf of the
Employer as set forth in this Plan, no member of the Board of Directors shall
have any duties or responsibilities under this Plan, except to the extent he
shall be acting in the capacity of an Administrator or Trustee.
11.17 Liability and Indemnification.
(a) The Administrator shall perform all duties required of it under this
Plan in a prudent manner. To the extent not prohibited by the Act, the
Administrator shall not be responsible in any way for any action or omission of
the Employer, the Trustee or any other fiduciaries in the performance of their
duties and obligations set forth in this Plan and in the Trust Agreement. To
the extent not prohibited by the Act, the Administrator shall also not be
responsible for any act or omission of any of its agents, or with respect to
reliance upon advice of its counsel (whether or not such counsel is also counsel
to the Employer or the Trustee), provided that such agents or counsel were
prudently chosen by the Administrator and that the Administrator relied in good
faith upon the action of such agent or the advice of such counsel.
(b) The Administrator shall not be relieved from responsibility or
liability for any responsibility, obligation or duty imposed upon it under this
Plan or under the Act. Except for its own gross negligence, willful misconduct
or willful breach of the terms of this Plan, the Administrator shall be
indemnified and held harmless by the Employer against liability or losses
occurring by reason of any act or omission of the Administrator to the extent
that such indemnification does not violate the Act or any other federal or state
laws.
11.18 Service as Trustee and Administrator.
Nothing in this Plan shall prevent one or more Trustees from serving as
Administrator under this Plan.
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ARTICLE XII
CLAIMS PROCEDURE
12.1 Notice of Denial.
If a Participant or his Beneficiary is denied any benefits under this Plan,
either in whole or in part, the Administrator shall advise the claimant in
writing of the amount of his benefit, if any, and the specific reasons for the
denial. The Administrator shall also furnish the claimant at that time with a
written notice containing:
(a) A specific reference to pertinent Plan provisions;
(b) A description of any additional material or information necessary for
the claimant to perfect his claim, if possible, and an explanation of why such
material or information is needed; and
(c) An explanation of the Plan's claim review procedure.
12.2 Right to Reconsideration.
Within 60 days of receipt of the information described in 12.1 above, the
claimant shall, if he desires further review, file a written request for
reconsideration with the Administrator.
12.3 Review of Documents.
So long as the claimant's request for review is pending (including the 60-
day period described in Section 12.2 above), the claimant or his duly authorized
representative may review pertinent Plan documents and the Trust Agreement (and
any pertinent related documents) and may submit issues and comments in writing
to the Administrator.
12.4 Decision by Administrator.
A final and binding decision shall be made by the Administrator within 60
days of the filing by the claimant of his request for reconsideration; provided,
however, that if the Administrator feels that a hearing with the claimant or his
representative present is necessary or desirable, this period shall be extended
an additional 60 days.
12.5 Notice by Administrator.
The Administrator's decision shall be conveyed to the claimant in
writing and shall include specific reasons for the decision, written in a manner
calculated to be understood by the claimant, with specific references to the
pertinent Plan provisions on which the decision is based.
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ARTICLE XIII
AMENDMENTS, TERMINATION AND MERGER
13.1 Amendments.
The Employer reserves the right at any time and from time to time, and
retroactively if deemed necessary or appropriate by it, to the extent
permissible under law, to conform with governmental regulations or other
policies, to amend in whole or in part any or all of the provisions of this
Plan, provided that:
(a) No amendment shall make it possible for any part of the Fund to be used
for, or diverted to, purposes other than for the exclusive benefit of
Participants or their Beneficiaries under the Trust Agreement, except to the
extent provided in Section 4.4;
(b) No amendment may, directly or indirectly, reduce the vested portion of
any Participant's interest as of the effective date of the amendment or change
the vesting schedule with respect to the future accrual of Employer
contributions for any Participants unless each Participant with three or more
Years of Service with the Employer is permitted to elect to have the vesting
schedule in effect before the amendment used to determine his vested benefit;
(c) No amendment may eliminate an optional form of benefit;
(d) No amendment may increase the duties of the Trustee without its
consent; and
(e) No amendment that shall change any of the following types of provisions
shall be made more than once every six months, other than to comport with
changes in the Code, the Act or the regulations thereunder: (i) any provision
stating the amount and price of Employer Securities to be awarded to designated
officers and directors or categories of officers and directors; (ii) any
provisions specifying the timing of awards or allocations to officers and
directors; (iii) any provision setting forth a formula that determines the
amount, price and timing of allocations or awards, using objective criteria such
as earnings of the issuer, value of the Employer Securities, Years of Service,
job classification and Compensation levels.
Amendments may be made in the form of Board of Directors' resolutions or
separate written document. Copies of all amendments shall be delivered to the
Trustee.
13.2 Consolidation, Merger or Other Transactions of Employer.
Nothing in this Plan shall prevent the consolidation, merger,
reorganization or liquidation of the Employer, or prevent the sale by Employer
of any or all of its property. Any successor corporation or other entity formed
and resulting from any such transaction shall have the right to become a party
to this Plan by adopting the same by resolution and by appointing a new Trustee
as though the Trustee had resigned in accordance with the Trust Agreement, and
by
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executing a proper supplemental agreement with the Trustee. If, within 180 days
from the effective date of such transaction, such new entity does not become a
party to this Plan as above provided, this Plan shall automatically be
terminated and the Trustee shall make payments to the persons entitled thereto
in accordance with Section 9.5.
13.3 Consolidation or Merger of Trust.
In the event of any merger or consolidation of the Fund with, or transfer
in whole or in part of the assets and liabilities of the Fund to, another trust
fund held under any other plan of deferred compensation maintained or to be
established for the benefit of all or some of the Participants of this Plan, the
assets of the Fund applicable to such Participants shall be transferred to the
other trust fund only if:
(a) Each Participant would receive a benefit under such successor trust
fund immediately after the merger, consolidation or transfer which is equal to
or greater than the benefit he would have been entitled to receive immediately
before the merger, consolidation or transfer (determined as if this Plan and
such transferee trust fund had then terminated);
(b) Resolutions of the Board of Directors under this Plan, or of any new or
successor employer of the affected Participants, shall authorize such transfer
of assets, and, in the case of the new or successor employer of the affected
Participants, its resolutions shall include an assumption of liabilities with
respect to such Participants' inclusion in the new employer's plan; and
(c) Such other plan and trust are qualified under Sections 401(a) and
501(a) of the Code.
13.4 Bankruptcy or Insolvency of Employer.
In the event of (a) the Employer's legal dissolution or liquidation by any
procedure other than a consolidation or merger, (b) the Employer's receivership,
insolvency, or cessation of its business as a going concern, or (c) the
commencement of any proceeding by or against the Employer under the federal
bankruptcy laws, and similar federal or state statute, or any federal or state
statute or rule providing for the relief of debtors, compensation of creditors,
arrangement, receivership, liquidation or any similar event which is not
dismissed within 30 days, this Plan shall terminate automatically on such date
(provided, however, that if a proceeding is brought against the Employer for
reorganization under Chapter 11 of the United States Bankruptcy Code or any
similar federal or state statute, then this Plan shall terminate automatically
if and when said proceeding results in a liquidation of the Employer, or the
approval of any Plan providing therefor, or the proceeding is converted to a
case under Chapter 7 of the Bankruptcy Code or any similar conversion to a
liquidation proceeding under federal or state law including, but not limited to,
a receivership proceeding). In the event of any such termination as provided in
the foregoing sentence, the Trustee shall make payments to the persons entitled
thereto in accordance with Section 9.5 hereof.
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13.5 Voluntary Termination.
The Board of Directors reserves the right to terminate this Plan at any time by
giving to the Trustee and the Administrator notice in writing of such desire to
terminate. The Plan shall terminate upon the date of receipt of such notice,
the interests of all Participants shall become fully vested, and the Trustee
shall make payments to each Participant or Beneficiary in accordance with
Section 9.5. Alternatively, the Employer, in its discretion, may determine to
continue the Trust Agreement and to continue the maintenance of the Fund, in
which event distributions shall be made upon the contingencies and in all the
circumstances which would have been entitled such distributions on a fully
vested basis, had there been no termination of the Plan.
13.6 Partial Termination of Plan or Permanent Discontinuance of
Contributions.
In the event that a partial termination of the Plan shall be deemed to have
occurred, or if the Employer shall discontinue completely its contributions
hereunder, the right of each affected Participant to his interest in the Fund
shall be fully vested. The Employer, in its discretion, shall decide whether to
direct the Trustee to make immediate distribution of such portion of the Fund
assets to the persons entitled thereto or to make distribution in the
circumstances and contingencies which would have controlled such distributions
if there had been no partial termination or discontinuance of contributions.
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ARTICLE XIV
MISCELLANEOUS
14.1 No Diversion of Funds.
It is the intention of the Employer that it shall be impossible for any
part of the corpus or income of the Fund to be used for, or diverted to,
purposes other than for the exclusive benefit of the Participants or their
Beneficiaries, except to extent that a return of the Employer's contribution is
permitted under Section 4.4.
14.2 Liability Limited.
Neither the Employer nor the Administrator, nor any agents, employees,
officers, directors or shareholders of any of them, nor the Trustee, nor any
other person shall have any liability or responsibility with respect to this
Plan, except as expressly provided herein.
14.3 Incapacity.
If the Administrator shall receive evidence satisfactory to it that a
Participant or Beneficiary entitled to receive any benefit under the Plan is, at
the time when such benefit becomes payable, a minor, or is physically or
mentally incompetent to receive such benefit and to give a valid release
therefor, and that another person or an institution is then maintaining or has
custody of such Participant or Beneficiary, and that no guardian, committee or
other representative of the estate of such Participant or Beneficiary shall have
been duly appointed, the Administrator may direct the Trustee to make payment of
such benefit otherwise payable to such Participant or Beneficiary, to such other
person or institution, including a custodian under a Uniform Gifts to Minor Act,
or corresponding legislation (who shall be an adult, a guardian of the minor or
a trust company), and the release of such other person or institution shall be a
valid and complete discharge for the payment of such benefit.
14.4 Spendthrift Clause.
Except as permitted by the Act or the Code, no benefits or other amounts
payable under the Plan shall be subject in any manner to anticipation, sale,
transfer, assignment, pledge, encumbrance, charge or alienation. If the
Administrator determines that any person entitled to any payments under the Plan
has become insolvent or bankrupt or has attempted to anticipate, sell, transfer,
assign, pledge, encumber, charge or otherwise in any manner alienate any benefit
or other amount payable to him under the Plan or that there is any danger of any
levy or attachment or other court process or encumbrance on the part of any
creditor of such person entitled to payments under the Plan against any benefit
or other accounts payable to such person, the Administrator may, at any time, in
its discretion, direct the Trustee to withhold any or all payments to such
person under the Plan and apply the same for the benefit of such person, in such
manner and in such proportion as the Administrator may deem proper.
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14.5 Benefits Limited to Fund.
All contributions by the Employer to the Fund shall be voluntary, and the
Employer shall be under no legal liability to make any such contributions. The
benefits of this Plan shall be only as can be provided by the assets of the
Fund, and no liability for the payment of benefits under the Plan or for any
loss of assets due to any action or inaction of the Trustee shall be imposed
upon the Employer.
14.6 Cooperation of Parties.
All parties to this Plan and any party claiming interest hereunder agree to
perform any and all acts and execute any and all documents and papers which are
necessary and desirable for carrying out this Plan or any of its provisions.
14.7 Payments Due Missing Persons.
The Administrator shall direct the Trustee to make a reasonable effort to
locate all persons entitled to benefits under the Plan; however, notwithstanding
any provision in the Plan to the contrary, if, after a period of five years from
the date such benefit shall be due, any such persons entitled to benefits have
not been located, their rights under the Plan shall stand suspended. Before
this provision becomes operative, the Trustee shall send a certified letter to
all such persons at their last known address advising them that their interest
in benefits under the Plan shall be suspended. Any such suspended amounts shall
be held by the Trustee for a period of three additional years (or a total of
eight years from the time the benefits first became payable), and thereafter
such amounts shall be reallocated among current Participants in the same manner
that a current contribution would be allocated. However, if a person
subsequently makes a valid claim with respect to such reallocated amounts and
any earnings thereon, the Plan earnings or the Employer's contribution to be
allocated for the year in which the claim shall be paid shall be reduced by the
amount of such payment. Any such suspended amounts shall be handled in a manner
not inconsistent with regulations issued by the Internal Revenue Service and
Department of Labor.
14.8 Governing Law.
This Plan has been executed in the State of South Carolina and all
questions pertaining to its validity, construction and administration shall be
determined in accordance with the laws of that State, except to the extent
superseded by the Act.
14.9 Nonguarantee of Employment.
Nothing contained in this Plan shall be construed as a contract of
employment between the Employer and any Employee, or as a right of any Employee
to be continued in the employment of the Employer, or as a limitation of the
right of the Employer to discharge any of its Employees, with or without cause.
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14.10 Counsel.
The Trustee and the Administrator may consult with legal counsel, who may
be counsel for the Employer and for the Administrator or the Trustee (as the
case may be), with respect to the meaning or construction of this Plan and the
Trust Agreement, their respective obligations or duties hereunder or with
respect to any action or proceeding or any question of law, and they shall be
fully protected with respect to any action taken or omitted by them in good
faith pursuant to the advice of legal counsel.
IN WITNESS WHEREOF, the Sponsor has caused these presents to be executed by
its duly authorized officers and its corporate seal to be affixed on this ____
day of ________, 1998.
Attest: HERITAGE FEDERAL SAVINGS &
LOAN ASSOCIATION
By:
- ---------------------------- -------------------------------
Secretary J. Edward Wells
President
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EXHIBIT 10.5
FORM OF
HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION
EMPLOYEE SEVERANCE COMPENSATION PLAN
PLAN PURPOSE
The purpose of this Heritage Federal Savings & Loan Association Employee
Severance Compensation Plan is to assure the services of employees of the
Association in the event of a Change in Control. The benefits contemplated by
the Plan recognize the value to the Association of the services and
contributions of the employees of the Association and the effect upon the
Association resulting from the uncertainties of continued employment, reduced
employee benefits, management changes and relocations that may arise in the
event of a Change in Control. The Board believes that the Plan will also aid
the Association in attracting and retaining the highly qualified individuals who
are essential to its success and that the Plan's assurance of fair treatment of
the Association's employees will reduce the distractions and other adverse
effects on employees' performance in the event of a Change in Control.
ARTICLE I
ESTABLISHMENT OF PLAN
1.1 Establishment of Plan
---------------------
As of the Effective Date of the Plan as defined herein, the Association
hereby establishes an employee severance compensation plan to be known as the
Heritage Federal Savings & Loan Association Employee Severance Compensation
Plan." The purposes of the Plan are as set forth above.
1.2 Application of Plan
-------------------
The benefits provided by this Plan shall be available to all employees of
the Association, who, at or after the Effective Date, meet the eligibility
requirements of Article III, except for those officers of the Association who
have entered into, or who enter into in the future, and continue to be subject
to, an employment or change in control agreement with the Employer.
1.3 Contractual Right to Benefits
-----------------------------
This plan establishes and vests in each Participant a contractual right to
the benefits to which each Participant is entitled hereunder in the event of a
Change in Control, enforceable by the Participant against the Employer, the
Association, or both. The Plan does not provide, and should not be construed as
providing, benefits of any kind to any employee, except in the event of a Change
in Control and, in the event of a Change in Control, only upon the involuntary
or voluntary termination of an employee in the manner contemplated herein.
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ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1 Definitions
-----------
Whenever used in the Plan, the following terms shall have the meanings set
forth below.
"Annual Compensation" of a Participant means and includes all wages,
salary, bonus, and cash compensation, if any, paid (including accrued amounts)
by an Employer as consideration for the Participant's service during the 12-
month period ending on the last day of the month preceding the date of a
Participant's termination pursuant to Section 4.2. For purposes of this Plan, a
Participant's "Monthly Compensation" shall equal one-twelfth of a Participant's
Annual Compensation as determined in accordance with this paragraph.
"Association" means Heritage Federal Savings & Loan Association or any
successor as provided for in Article VII hereof.
"Board" means the Board of Directors of the Association.
"Change in Control" shall mean an event deemed to occur if and when (a)
there occurs a change in control of the Association or the Company within the
meaning of the Home Owners Loan Act of 1933 and 12 C.F.R. Part 574, (b) any
person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act)
is or becomes the beneficial owner, directly or indirectly, of securities of the
Company or the Association representing twenty-five percent (25%) or more of the
combined voting power of the Company's or the Association's then outstanding
securities, (c) the membership of the board of directors of the Company or the
Association changes as the result of a contested election, such that individuals
who were directors at the beginning of any twenty-four (24) month period
(whether commencing before or after the date of adoption of this Plan) do not
constitute a majority of the Board at the end of such period, or (d)
shareholders of the Company or the Association approve a merger, consolidation,
sale or disposition of all or substantially all of the Company's or the
Association's assets, or a plan of partial or complete liquidation. If any of
the events enumerated in clauses (a) - (d) occur, the Board shall determine the
effective date of the change in control resulting therefrom, for purposes of the
Plan.
"Company" means Heritage Bancorp, Inc., a Delaware corporation, the holding
company of the Association.
"Disability" means the permanent and total inability by reason of mental or
physical infirmity, or both, of an employee to perform the work customarily
assigned to him. Additionally, a medical doctor selected or approved by the
Board must advise the Board that it is either not possible to determine if or
when such Disability will terminate or that it appears probable that such
Disability will be permanent during the remainder of said employee's lifetime.
2
<PAGE>
"Effective Date" means the date the Plan is approved by the Board of the
Association, or such other date as the Board shall designate in its resolution
approving the Plan.
"Employer" means (i) the Association or (ii) a subsidiary of the
Association or a parent company of the Association which has adopted the plan
pursuant to Article VI hereof.
"Expiration Date" means a date ten (10) years from the Effective Date
unless earlier terminated pursuant to Section 8.2 or extended pursuant to
Section 8.1.
"Just Cause" shall means termination because of Participant's personal
dishonesty, incompetence, willful misconduct, any breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic violations or other
similar offenses) or any final cease-and desist order.
"Participant" means an employee who meets the eligibility requirements of
Article III.
"Payment" means the payment of severance compensation as provided in
Article IV hereof.
"Plan" means this Heritage Federal Savings & Loan Association Employee
Severance Compensation Plan.
2.2 Applicable Law
--------------
The laws of the State of South Carolina shall be controlling law in all
matters relating to the Plan to the extent not preempted by Federal law.
2.3 Severability
------------
If a provision of this Plan shall be held illegal or invalid, the
illegality or invalidity shall not affect the remaining parts of the Plan and
the Plan shall be construed and enforced as if the illegal or invalid provision
had not been included.
ARTICLE III
ELIGIBILITY
3.1 Participation
-------------
The term "Participant" shall include an employee of an Employer who has
completed at least three (3) years of service with the Employer at the time of
any termination pursuant to Section 4.2 herein. Notwithstanding the foregoing,
persons who have entered into and continue
3
<PAGE>
to be covered by an individual employment contract or change in control
agreement with an Employer shall not be entitled to participate in this Plan.
3.2 Duration of Participation
-------------------------
A Participant shall cease to be a Participant in the Plan when the
Participant ceases to be an employee of an Employer, unless such Participant is
entitled to a Payment as provided in the Plan. A Participant entitled to
receipt of a Payment shall remain a Participant in this Plan until the full
amount of such Payment has been paid to the Participant.
ARTICLE IV
PAYMENTS
4.1 Right to Payment
----------------
A Participant shall be entitled to receive from his or her Employer a
Payment in the amount provided in Section 4.3 if a Change in Control occurs and
if, within one (1) year thereafter, the Participant's employment by an Employer
shall terminate for any reason specified in Section 4.2. A Participant shall
not be entitled to a Payment if termination occurs by reason of death, voluntary
retirement, voluntary termination other than for the reasons specified in
Section 4.2, Disability or for Just Cause.
4.2 Reasons for Termination
-----------------------
Following a Change in Control, a Participant shall be entitled to a Payment
in accordance with Section 4.3 if employment by an Employer is terminated,
voluntary or involuntary, for any one or more of the following reasons:
(a) The Employer reduces the Participant's base salary or rate of
compensation as in effect immediately prior to the Change in Control, or as the
same may have been increased thereafter.
(b) The Employer materially changes the Participant's function, duties
or responsibilities which would cause the Participant's position to be one of
lesser responsibility, importance or scope with the Employer than immediately
prior to the Change in Control.
(c) The Employer requires the Participant to change the location of
the Participant's job or office, so that such Participant will be based at a
location more than thirty-five (35) miles from the location of the Participant's
job or office immediately prior to the Change in Control provided that such new
location is not closer to Participant's home.
(d) The Employer materially reduces the benefits and perquisites
available to the Participant immediately prior to the Change in Control;
provided, however, that a material
4
<PAGE>
reduction in benefits and perquisites generally provided to all employees of the
Association on a nondiscriminatory basis shall not trigger a Payment pursuant to
this Plan.
(e) A successor to the Employer fails or refuses to assume the
Employer's obligations under this Plan, as required by Article VII.
(f) The Employer, or any successor to the Employer, breaches any other
provisions of this Plan.
(g) The Employer terminates the employment of a Participant at or
after a Change in Control other than for Just Cause.
4.3 Amount of Payment
-----------------
Each Participant entitled to a Payment under this Plan shall receive
from the Employer a lump sum cash payment equal to the product of the
Participant's Monthly Compensation and the Participant's years of service
(including partial years rounded up to the nearest full month) from the
employee's date of hire through the date of termination. Notwithstanding
anything herein to the contrary, (i) the maximum payment to a Participant under
the Plan shall not exceed one hundred percent (100%) of Annual Compensation and
(ii) each employee of an Employer who is not a Participant (other than employees
who have entered into and continue to be covered by an individual employment
contract or change in control agreement with an Employer) shall receive a
payment equal to fifty percent of their Monthly Compensation if such employee
would otherwise have been entitled to a Payment had they qualified as a
Participant.
A Participant shall not be required to mitigate damages on the amount of
the Payment by seeking other employment or otherwise, nor shall the amount of
such Payment be reduced by any compensation earned by the Participant as a
result of employment after termination of employment hereunder.
4.4 Time of Payment
---------------
The Payment to which a Participant is entitled shall be paid to the
Participant by the Employer or the successor to the Employer, in cash and in
full, not later than thirty (30) business days after the termination of the
Participant's employment. If any Participant should die after termination of
the employment but before all amounts have been paid, such unpaid amounts shall
be paid to the Participant's named beneficiary, if living, otherwise to the
personal representative of behalf of or for the benefit of the Participant's
estate.
4.5 Suspension of Payment
---------------------
Notwithstanding the foregoing, no payments or portions thereof shall be
made under this Plan, if such payment or portion would result in the Association
failing to meet its minimum
5
<PAGE>
regulatory capital requirements as required by 12 C.F.R. (S) 567.2. Any
payments or portions thereof not paid shall be suspended until such time as
their payment would not result in a failure to meet the Association's minimum
regulatory capital requirements. Any portion of benefit payments which have not
been suspended will be paid on an equitable basis, pro rata based upon amounts
due each Participant, among all eligible Participants.
ARTICLE V
OTHER RIGHTS AND BENEFITS NOT AFFECTED
5.1 Other Benefits
--------------
Neither the provisions of this Plan nor the Payment provided for hereunder
shall reduce any amounts otherwise payable, or in any way diminish the
Participant's rights as an employee of an Employer, whether existing now or
hereafter, under any benefit, incentive, retirement, stock option, stock bonus,
stock ownership or any employment agreement or other plan or arrangement.
5.2 Employment Status
-----------------
This Plan does not constitute a contract of employment or impose on the
Participant's Employer any obligation to retain the Participant, to maintain the
status of the Participant's employment, or to change the Employer's policies
regarding termination of employment.
ARTICLE VI
PARTICIPATING EMPLOYERS
6.1 Upon approval by the Board of the Association, this Plan may be
adopted by any subsidiary of the Association or by the Company. Upon such
adoption, the subsidiary or the Company shall become an Employer hereunder and
the provisions of the Plan shall be fully applicable to the employees of that
subsidiary or the Company. The term "subsidiary" means any corporation in which
the Association, directly or indirectly, holds a majority of the voting power of
its outstanding shares of capital stock.
ARTICLE VII
SUCCESSOR TO THE ASSOCIATION
7.1 The Association shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Association, expressly and
unconditionally to assume and agree to perform the Association's obligations
under this plan, in the same manner and to the same extent that the Association
would be required to perform if no such succession or assignment had taken
place.
6
<PAGE>
ARTICLE VIII
DURATION, AMENDMENT AND TERMINATION
8.1 Duration
--------
If a Change in Control has not occurred, this Plan shall expire as of the
Expiration Date, unless sooner terminated as provided in Section 8.2, or unless
extended for an additional period or periods by resolution adopted by the Board.
Notwithstanding the foregoing, if a Change in Control occurs this Plan
shall continue in full force and effect, and shall not terminate or expire until
such date as all Participants who become entitled to Payments hereunder shall
have received such Payments in full.
8.2 Amendment and Termination
-------------------------
The Plan may be terminated or amended in any respect by resolution adopted
by a majority of the Board of the Association, unless a Change in Control has
previously occurred. If a Change in Control occurs, the Plan no longer shall be
subject to amendment, change, substitution, deletion, revocation or termination
in any respect whatsoever.
8.3 Form of Amendment
-----------------
The form of any proper amendment or termination of the Plan shall be a
written instrument signed by a duly authorized officer or officers of the
Association, certifying that the amendment or termination has been approved by
the Board. A proper termination of the Plan automatically shall effect a
termination of all Participants' rights and benefits hereunder.
8.4 No Attachment
-------------
(a) Except as required by law, no right to receive payments under this Plan
shall be subject to anticipation, commutation, alienation, sale, assignment,
encumbrance, charge, pledge, or hypothecation, or to execution, attachment,
levy, or similar process or assignment by operation of law, and any attempt,
voluntary or involuntary, to affect such action shall be null, void, and of no
effect.
(b) This Plan shall be binding upon, and inure to the benefit of, each
employee, the Employer and their respective successors and assigns.
ARTICLE IX
LEGAL FEES AND EXPENSES
9.1 All reasonable legal fees and other expenses paid or incurred by a
party hereto pursuant to any dispute or question of interpretation relating to
this Plan shall be paid or reimbursed by the prevailing party in any legal
judgment, arbitration or settlement.
7
<PAGE>
ARTICLE X
REQUIRED PROVISIONS
10.1 The Association may terminate the employee's employment at any time,
but any termination by the Association, other than Termination for Cause, shall
not prejudice employee's right to compensation or other benefits under this
Agreement if the employee is otherwise entitled to a benefit. The employee shall
not have the right to receive compensation or other benefits for any period
after termination for Just Cause as defined in Section 2.1 hereinabove.
10.2 If the employee is suspended and/or temporarily prohibited from
participating in the conduct of the Association's affairs by a notice served
under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(3) or (g)(1), the Association's obligations under this Plan to
such employee shall be suspended as of the date of service, unless stated by
appropriate proceedings. If the charges in the notice are dismissed, the
Association may in its discretion (i) pay the employee all or part of the
compensation withheld while their contract obligations were suspended and (ii)
reinstate (in whole or in part) any of the obligation which were suspended.
10.3 If the employee is removed and/or permanently prohibited from
participating in the conduct of the Association's affairs by an order issued
under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(4) or (g)(1), all obligations of the Association under this Plan
to the employee shall terminate as of the effective date of the order, but
vested rights of the contracting parties shall not be affected.
10.4 If the Association is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. (S)1818(x)(1), all obligations of
the Association under this Plan shall terminate as of the date of default, but
this paragraph shall not affect any vested rights of the contracting parties.
10.5 All obligations of the Association under this contract shall be
terminated, except to the extent determined that continuation of the contract is
necessary for the continued operation of the institution, (i) by the Director of
the OTS (or his designee) or (ii) the Federal Deposit Insurance Corporation
("FDIC") at the time FDIC enters into an agreement to provide assistance to or
on behalf of the Association under the authority contained in Section 13(c) of
the Federal Deposits Insurance Act, 12 U.S.C. (S)1823(c); or (ii) by the
Director of the OTS (or his designee) at the time the Director (or his designee)
approves a supervisory merger to resolve problems related to the operations of
the Association or when the Association is determined by the Director to be in
an unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
10.6 Any payments made to an employee pursuant to this Plan or otherwise
shall be conditioned upon compliance under 12 U.S.C. (S)1828(k) and any
regulations promulgated thereunder.
8
<PAGE>
ARTICLE XI
ADMINISTRATION OF THE PLAN
11.1 The Plan shall be administered by the Board (or, by a committee of
non-employee directors designated by the Board). Subject to the other provisions
of the Plan, the Board shall have authority to adopt, amend, alter and repeal
such administrative rules, guidelines and practices governing the operation of
the Plan as it shall from time to time consider advisable, to interpret the
provisions of the Plan and to decide all disputes arising in connection with the
Plan. The Board may correct any defect or supply any omission or reconcile any
inconsistency in the Plan in the manner and to the extent it shall deem
appropriate to carry the Plan into effect, in its sole and absolute discretion.
The Board's decision and interpretations shall be final and binding. Any action
of the Board with respect to the administration of the Plan shall be taken
pursuant to a majority vote or by the unanimous written consent of its members.
Having been adopted by its Board on _______________, 1998, this Plan is
executed by duly authorized officer of the Association this ___ day of
____________________, 1998.
Attest
- ---------------------- -------------------------------------
Secretary J. Edward Wells
President and Chief Executive Officer
9
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
Heritage Bancorp, Inc.
<TABLE>
<CAPTION>
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
<S> <C> <C>
Heritage Federal Savings & (1) 100% United States
Loan Association
</TABLE>
- ------------------
(1) Upon consummation of the Conversion, Heritage Federal Savings & Loan
Association will become a wholly-owned subsidiary of the Registrant.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Heritage Bancorp. Inc.
on Form S-1 of our report dated November 7, 1997, appearing in the Prospectus,
which is part of this Registration Statement.
We also consent to the reference to us under the headings "Heritage Federal
Savings & Loan Association Statements of Income," "Legal and Tax Opinions" and
"Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Greenville, South Carolina
December 10, 1997
<PAGE>
Exhibit 23.3
1300 I Street, N.W.
Suite 470 East
Washington, D.C. 20005
Telephone (202) 737-7900
Breyer & Aguggia Facsimile (202) 737-7979
================================================================================
ATTORNEYS AT LAW
December 10, 1997
Board of Directors
Heritage Bancorp, Inc.
201 W. Main Street
Laurens, South Carolina 29360
RE: Heritage Bancorp, Inc.
Registration Statement on Form S-1
To the Board of Directors:
We hereby consent to the filing of the form of our federal tax opinion as
an exhibit to the Registration Statement and to the reference to us in the
Prospectus included therein under the headings "THE CONVERSION -- Effects of
Conversion to Stock Form on Depositors and Borrowers of the Association" and
"LEGAL AND TAX OPINIONS."
Sincerely,
/s/ Breyer & Aguggia
BREYER & AGUGGIA
Washington, D.C.
<PAGE>
Exhibit 23.4
RP FINANCIAL, LC.
- ---------------------------------------------------
Financial Services Industry Consultants
December 10, 1997
Board of Directors
Heritage Federal Savings and Loan Association
201 West Main Street
Laurens, South Carolina 29360
Gentlemen:
We hereby consent to the use of our firm's name incorporated by reference
in the Form S-1 Registration Statement for Heritage Bancorp, Inc. and any
amendments thereto. We also hereby consent to the inclusion of, summary of and
references to our Appraisal Report and our statement concerning subscription
rights incorporated by reference in such filing.
Very truly yours,
RP FINANCIAL, LC.
/s/ James J. Oren
James J. Oren
Vice President
- --------------------------------------------------------------------------------
Washington Headquarters
Rosslyn Center
1700 North Moore Street, Suite 2210 Telephone: (703) 528-1700
Arlington, VA 22209 Fax No: (703) 528-1788
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of Heritage Bancorp, Inc. for the year ended September 30,
1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,012
<INT-BEARING-DEPOSITS> 12,647
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,390
<INVESTMENTS-CARRYING> 22,653
<INVESTMENTS-MARKET> 22,589
<LOANS> 194,582
<ALLOWANCE> 874
<TOTAL-ASSETS> 247,499
<DEPOSITS> 215,412
<SHORT-TERM> 2,852
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 29,235
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 247,499
<INTEREST-LOAN> 15,034
<INTEREST-INVEST> 2,739
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 17,773
<INTEREST-DEPOSIT> 12,004
<INTEREST-EXPENSE> 12,230
<INTEREST-INCOME-NET> 5,543
<LOAN-LOSSES> 337
<SECURITIES-GAINS> 13
<EXPENSE-OTHER> 2,362
<INCOME-PRETAX> 3,046
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,952
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 2.33
<LOANS-NON> 934
<LOANS-PAST> 0
<LOANS-TROUBLED> 732
<LOANS-PROBLEM> 1,072
<ALLOWANCE-OPEN> 670
<CHARGE-OFFS> 133
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 874
<ALLOWANCE-DOMESTIC> 874
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
HERITAGE BANCORP, INC.
STOCK ORDER FORM
===============================================================================
NUMBER OF SHARES
Fill in the number of shares you wish to purchase and the total amount due. No
fractional shares will be issued. The minimum purchase is 25 shares. No Eligible
Account Holder, Supplemental Eligible Account Holder, or Other Member (including
all persons on a joint account) may purchase in their capacity as such in the
Subscription Offering more than 22,000 shares (or $330,000) of the Common Stock
offered in the Conversion; no person, together with associates of an persons
acting in concert with such person may purchase in the Direct Community Offering
and the Syndicated Community Offering, in the aggregate, more than 22,000 shares
(or $330,000) of Common Stock issued in the Conversion, whichever is less; and
no person (including all persons on a joint account), together with associates
of or persons acting in concert with such person, may purchase in the aggregate
more than 1% of the shares of Common Stock issued in the Conversion.
METHOD OF PAYMENT
Check the appropriate boxes that show how you wish to pay for the stock. If
paying by check or money order, make it payable to Heritage Bancorp, Inc. Your
funds will earn interest at Heritage Federal's passbook rate until the Offering
is completed. If paying by withdrawal from a Heritage Federal deposit account,
write in the account number(s) and the amount(s) you wish to withdraw. If
payment is made from a CD account, it will continue to earn interest at the same
CD account rate.
STOCK REGISTRATION
Print the name(s) in which you want the stock registered. If you are a depositor
or member, to protect your rights over other purchasers as described in the
Prospectus, you must take ownership in at least one of the account holders'
---------------------------------------------------------------
names. Subscription rights are nontransferable. Enter the Social Security Number
- -----
(or Tax ID Number) of one registered owner; only one number is required. See the
reverse side of this form for registration guidelines.
NASD AFFILIATION
The NASD's Interpretation with respect to Free Riding and Withholding restricts
the sale of certain initial public offerings to certain NASD members, affiliates
and family members. For an exemption from these restrictions, such persons must
comply with the following conditions: (i) to not sell or transfer the shares for
a period of 150 days following issuance and (ii) to report this subscription in
writing to the applicable NASD member within one day of payment therefor. By
signing this Stock Order Form, you are certifying that you will comply with
applicable NASD regulations.
TELEPHONE INFORMATION
Please enter the daytime telephone number where you may be contacted in the
event we cannot execute your offer as given.
ACCOUNT VERIFICATION
If you were a depositor on June 30, 1996, December 31, 1997 or ___________ __,
1998, you must list full title and account numbers of all accounts you had at
that date in order to insure proper identification of your purchase right or
preference.
ACKNOWLEDGMENT
Please read the acknowledgement statement carefully and sign on the signature
line. When purchasing as a custodian, corporate officer, etc., add your full
title to your signature. Enter the Social Security number (or Tax ID number) of
the registered owner and date the form; only one number is required.
Subscription priority rights for members as described in the Prospectus will
expire at 12:00 Noon, Eastern Time, on _________, __, 1998. The Direct Community
Offering may end as early as 12:00 Noon, Eastern Time, on _______ __, 1998, or
any time thereafter when orders for all available shares have been received, but
in no event later than ________ __, 1998. This order form must be properly
completed and received with payment at the above address or at any Heritage
Federal office prior to the expiration date.
<TABLE>
<CAPTION>
Number Purchase Total
of Shares Price Amount
<S> <C> <C>
X $15.00 = $
-------------- -----------
</TABLE>
[_] Enclosed is check or money order payable to Heritage Bancorp, Inc.
[_] I authorize withdrawal from the following account(s):
<TABLE>
<CAPTION>
<S> <C>
Account Number(s) Amount
$
- ----------------------------------------- -------------------------
$
- ----------------------------------------- -------------------------
$
- ----------------------------------------- -------------------------
Total Withdrawn $
-------------------------
</TABLE>
No penalty for early withdrawal
- --------------------------------------------------------------------------------
Name(s) in which your stock is to be registered
- --------------------------------------------------------------------------------
Name(s) in which your stock is to be registered
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City State Zip Code
[_] Individual [_] Joint Tenants
[_] Tenants in Common [_] Uniform Gifts to Minors
[_] Other
-----------------------------------------------------------------------
Are you an officer, director, general partner, employee or agent of a National
Association of Securities Dealers, Inc. ("NASD") member firm or related to such
person?
[_] Yes [_] No
Daytime Phone ( )
------------------------------------------------------------------
Were you a member of Heritage Federal as of
June 30, 1996 December 31, 1997
[_] Yes [_] No [_] Yes [_] No
I acknowledge receipt of the Prospectus and the provisions therein and
understand that after delivery of this order form to Heritage Bancorp, Inc.,
this order may not be modified or revoked. I certify that this order is for the
above account only and under penalties of perjury, I certify that the Social
Security or Taxpayer ID number given below is correct. I further certify that
this order does not violate purchase limitations set forth more fully in the
Prospectus.
I acknowledge that the common stock offered is not a savings or deposit account
and is not insured or guaranteed by the Savings Association Insurance Fund, the
FDIC or any other government agency.
- --------------------------------------------------------------------------------
Signature Date
- --------------------------------------------------------------------------------
Additional Signature (if required) Date
- --------------------------------------------------------------------------------
Social Security No. or Tax ID No.
================================================================================
THE ADDITION TO AN ORDER OF A NAME WHICH DOES NOT APPEAR ON THE
QUALIFYING ACCOUNT WILL RESULT IN THE LOSS OF SUBSCRIPTION
RIGHTS. FOR ASSISTANCE PLEASE CALL THE HERITAGE FEDERAL
SAVINGS AND LOAN ASSOCIATION STOCK INFORMATION CENTER AT
(___) ___-____
<PAGE>
GUIDELINES FOR REGISTERING STOCK
For reasons of clarity and standardization, the stock transfer industry has
developed uniform stockholder registrations which we will utilize in the
issuance of your Stock Certificates(s). If you have any questions, please
consult your legal advisor.
Stock ownership must be registered in one of the following manners:
- --------------------------------------------------------------------------------
INDIVIDUAL: Avoid the use of two initials. Include the first given name,
middle initial and last name of the stockholder. Omit words of
limitation that do not affect ownership rights such as "special
account", "single man", "personal property", etc.
- --------------------------------------------------------------------------------
JOINT: Joint ownership of stock by two or more persons shall be
inscribed on the certificate with one of the following types of
joint ownership. Names should be joined by "and"; do not connect
with "or". Omit titles such as "Mrs.", "Dr.", etc.
JOINT TENANTS--Joint Tenancy with Right of Survivorship and not
as Tenants in Common may be specified to identify two or more
owners where ownership is intended to pass automatically to the
surviving tenant(s).
TENANTS IN COMMON--Tenants in Common may be specified to identify
two or more owners. When stock is held as tenancy in common, upon
the death of one co-tenant, ownership of the stock will be held
by the surviving co-tenant(s) and by the heirs of the deceased
co-tenant. All parties must agree to the transfer or sale of
shares held in this form of ownership.
- --------------------------------------------------------------------------------
UNIFORM GIFT Stock may be held in the name of a custodian for a minor under
the Uniform TO MINORS: Gifts to Minors laws of the individual
states. There may be only one custodian and one minor designated
on a stock certificate. The standard abbreviation of custodian is
"CUST", while the description "Uniform Gifts to Minors Act" is
abbreviated "UNIF GIFT MIN ACT." Standard U.S. Postal Service
state abbreviations should be used to describe the appropriate
state. For example, stock held by John P. Jones under the
Delaware Uniform Gift to Minors Act will be abbreviated:
JOHN P. JONES CUST SUSAN A. JONES
UNIF GIFT MIN ACT SC
- --------------------------------------------------------------------------------
FIDUCIARIES: Stock held in a fiduciary capacity must contain the following:
1. The name(s) of the fiduciary--
. If an individual, list the first given name, middle
initial, and last name
. If a corporation, list the corporate title.
. If an individual and a corporation, list the
corporation's title before the individual.
2. The fiduciary capacity--
. Administrator . Conservator
. Committee . Executor
. Trustee . Personal Representative
. Custodian
3. The type of document governing the fiduciary relationship.
Generally, such relationships are either under a form of
living trust agreement or pursuant to a court order.
Without a document establishing a fiduciary relationship,
your stock may not be registered in a fiduciary capacity.
4. The date of the document governing the relationship. The
date of the document need not be used in the description of
a trust created by a will.
5. Either of the following:
The name of the maker, donor or
testator or The name of the beneficiary
Example of Fiduciary Ownership
JOHN D. SMITH, TRUSTEE FOR TOM A.
SMITH UNDER AGREEMENT DATED (Date)
<PAGE>
Exhibit 99.2
Heritage Bancorp, Inc.
(Proposed Holding Company for Heritage Federal Savings & Loan Association )
Laurens, South Carolina
Proposed Marketing Materials
<PAGE>
Marketing Materials for
Heritage Federal Savings & Loan Association
Table of Contents
-----------------
I. Press Release
A. Explanation
B. Schedule
C. Distribution List
D. Examples
II. Question and Answer Brochure
A. Explanation
B. Method of Distribution
C. Example
III. Officer and Director Brochure
A. Explanation
B. Method of Distribution
C. Example
IV. Counter Cards, Lobby Posters and a Tombstone Announcement
A. Explanation
B. Quantity
C. Examples
V. Community Meeting Invitation and Prospect Letters
Explanation
Examples
IRA Mailing
Explanation
A. Example
Letters
Explanation
A. Example
VIII. Proxygram
A. Explanation
B. Example
<PAGE>
I. Press Releases
A. Explanation
In an effort to ensure that all customers, community members, and other
interested investors receive prompt accurate information in a simultaneous
manner, Trident Securities, Inc. advises Heritage Federal Savings & Loan
Association to forward press releases to national and regional
publications, newspapers, radio stations, etc., at various points during
the conversion process.
Only press releases approved by Conversion Counsel will be forwarded for
publication in any manner.
B. Press Releases
1. Approval of Conversion by the Office of Thrift Supervision and the
Securities and Exchange Commission
2. Close of Stock Offering
C. Distribution Lists (see attached)
D. Examples (see attached)
<PAGE>
National Media Distribution List
--------------------------------
American Banker
- ---------------
One State Street Plaza
New York, New York 10004
Michael Weinstein
Business Wire
- -------------
212 South Tryon
Suite 1460
Charlotte, South Carolina 28281
Wall Street Journal
- -------------------
World Financial Center
200 Liberty
New York, New York 10004
SNL Securities
- --------------
Post Office Box 2124
Charlottesville, Virginia 22902
Barrons
- -------
Dow Jones & Company
Barron's Statistical Information
200 Burnett Road
Chicopee, Massachusetts 01020
Investors Business Daily
- ------------------------
12655 Beatrice Street
Post Office Box 661750
Los Angeles, California 90066
Local Media List
----------------
(Forthcoming)
<PAGE>
D. Press Release
FOR IMMEDIATE RELEASE
---------------------
For More Information Contact:
J. Edward Wells, President
Telephone: (864) 984-4581
HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION
--------------------------------------------
STOCK SALE APPROVED
-------------------
Laurens, South Carolina, February __, 1998 - J. Edward Wells, President of
Heritage Federal Savings & Loan Association, Laurens, South Carolina, announced
today that Heritage Federal has received approval from the Office of Thrift
Supervision to convert from a federally chartered mutual savings institution to
a federally chartered stock savings institution. In connection with the
conversion, Heritage Federal Savings & Loan Association has formed a holding
company, Heritage Bancorp, Inc. to hold all of the outstanding capital stock of
Heritage Federal.
A Prospectus and Proxy Statement describing the Plan of Conversion will be
mailed to certain members of Heritage Federal Savings & Loan Association on or
about February __, 1998. Under the Plan of Conversion, Heritage Bancorp, Inc. is
offering an estimated ________ shares of common stock at $15.00 per share.
Certain Heritage Federal's past and present depositors and borrowers will have
the opportunity to purchase stock through a Subscription Offering that closes on
March __, 1998. Shares that are not subscribed for during the Subscription
Offering, if any, will be offered to the general public in a direct community
offering, with preference given to natural persons and trusts of natural persons
who are permanent residents of the Association's local community. The offerings
are being managed by Trident Securities, Inc., of Raleigh, North Carolina.
As a result of the Conversion, Heritage Federal Savings & Loan Association
will be structured in the stock form, just like all commercial banks and an
increasing number of savings institutions, and will become a subsidiary of
Heritage Bancorp, Inc.
<PAGE>
According to Mr. Wells, "Our day to day operations will not change as a
result of the conversion, and deposits will continue to be insured by the FDIC
up to the applicable legal limits".
Heritage Federal is headquartered in Laurens, South Carolina. The Bank was
chartered in 1948. At September 30, 1997, Heritage Federal had total assets of
$247.5 million and total equity of $29.2 million. Customers or interested
members of the community with questions concerning the stock offering should
call the institution at (864) _________ or visit Heritage Federal's main office.
<PAGE>
D. Press Release FOR IMMEDIATE RELEASE
---------------------
Contact: J. Edward Wells, President
Telephone: (864) 984-4581
HERITAGE BANCORP, INC., HOLDING COMPANY FOR
-------------------------------------------
HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION,
--------------------------------------------
COMPLETES INITIAL STOCK OFFERING
--------------------------------
Laurens, South Carolina March __, 1998 - J. Edward Wells, President of
Heritage Federal Savings & Loan Association, Laurens, South Carolina, announced
today that Heritage Bancorp, Inc., the proposed holding company for Heritage
Federal, has completed its initial common stock offering. It is anticipated that
the common stock of Heritage Bancorp, Inc. will begin trading on the Nasdaq
National Market on _________, 1998 under the symbol "____". Trident Securities,
Inc., the manager of the offering, will be a market maker in the stock. Heritage
Bancorp, Inc. will issue __________ shares of its common stock. In connection
with the completion of the conversion, Heritage Federal changed its name to
Heritage Federal Bank.
The net proceeds contributed to Heritage Federal upon conversion will
substantially increase its capital. Heritage Federal will use the funds
contributed to it for general corporate purposes, including, initially, local
lending and investment in short-term U.S. Government and agency obligations.
On March __, 1998, Heritage Federal's Plan of Conversion was approved by
Heritage Federal's depositor and borrower members at a Special Meeting that was
held at the main office of the institution.
Mr. Wells stated, "The Officers and Board of Directors of Heritage Federal
express their thanks for the response by customers and the community to the
stock offering. Heritage Federal Bank looks forward to serving the needs of its
customers as a stock institution."
<PAGE>
II. Question and Answer Brochure
A. Explanation
The Question and Answer brochure is an essential marketing piece in any
conversion. It serves to answer some of the most commonly asked questions
in "plain, everyday language." Although most of the answers are taken
verbatim from the Prospectus and Proxy Statement, it assists the individual
in finding answers to simple questions.
Conversion Counsel approves the language for each Question and Answer.
Trident Securities, Inc. and Heritage Federal Savings & Loan Association
will be responsible for any introductory or concluding remarks, design,
layout, color, and paper stock. This will be coordinated through Trident
Securities, Inc. in conjunction with the financial printer.
B. Method of Distribution
There are three primary methods of distribution of the Question and Answer
brochure. However, regardless of the method, the brochure is always
accompanied by a Prospectus.
1. A Question and Answer brochure is sent out in the initial mailing to
all members of Heritage Federal.
2. Question and Answer brochures are available in Heritage Federal
Savings & Loan Association's offices.
3. Question and Answer brochures are sent out in a standard information
packet to all interested investors who phone the Stock Information
Center requesting information.
C. Example
<PAGE>
C. Example
HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION
Laurens, South Carolina
Questions and Answers Regarding the Subscription and Community Offering
MUTUAL TO STOCK CONVERSION
--------------------------
HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION'S Board of Directors has unanimously
voted to convert HERITAGE FEDERAL from its present mutual form to a stock
institution, subject to approval of the conversion by HERITAGE FEDERAL SAVINGS &
LOAN ASSOCIATION'S members and regulatory authorities. Complete details on the
conversion, including reasons for conversion, are contained in the Prospectus
and Proxy Statement. We urge you to read them carefully.
This brochure is provided to answer basic questions you might have about the
conversion. Remember, the conversion will not affect the rate on any of your
savings accounts, deposit certificates, or loans.
1. Q. What is a "Conversion"?
A. Conversion is a change in the legal form of organization. HERITAGE
FEDERAL SAVINGS & LOAN ASSOCIATION currently operates as a federally-
chartered mutual savings institution with no shareholders. Through
the conversion, HERITAGE FEDERAL will form a holding company, HERITAGE
BANCORP, INC., which will ultimately own all of the outstanding stock
of HERITAGE FEDERAL. HERITAGE BANCORP, INC. will issue common stock
in the conversion, as described below, and will be a publicly-owned
company.
2. Q. Why is HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION converting?
A. As a federally-chartered mutual savings institution, HERITAGE FEDERAL
SAVINGS & LOAN ASSOCIATION does not have stock holders and has no
authority to issue stock. By converting to the stock form of
organization, HERITAGE FEDERAL will be structured in the form used by
all commercial banks, most business entities and a growing number of
savings institutions. The Conversion will be important to the future
growth and performance of HERITAGE FEDERAL by providing a larger
capital base from which it may operate, enhance future access to
capital markets and, if desired, enhance HERITAGE FEDERAL'S ability to
diversify and expand it's financial service-related activities.
Currently, HERITAGE FEDERAL has no specific plans, agreements,
arrangements or understandings regarding such diversification.
<PAGE>
3. Q. Will the conversion have any effect on savings accounts,
certificates of deposit or loans with HERITAGE FEDERAL?
A. No. The conversion will not change the amount, interest rate or
withdrawal rights of any savings and checking accounts or certificates
of deposit. The rights and obligations of borrowers under their loan
agreements will not be affected. However, upon consummation of the
conversion, HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION'S deposit
account holders will no longer have voting rights in Heritage Federal,
and will not have voting rights in HERITAGE BANCORP, INC. unless they
purchase common stock of HERITAGE BANCORP, INC.
4. Q. Will the conversion cause any changes in personnel or management?
A. No. The conversion will not cause any changes in personnel or
management. The normal day-to-day operations will continue as before.
5. Q. Did the Board of Directors of HERITAGE FEDERAL SAVINGS & LOAN
ASSOCIATION approve the conversion?
A. Yes. The Board of Directors unanimously adopted the Plan of Conversion
on September 10, 1997.
THE SUBSCRIPTION AND COMMUNITY OFFERING
---------------------------------------
6. Q. Who is entitled to subscribe HERITAGE BANCORP, INC. common stock?
A. Rights to subscribe for common stock will be given in order of
priority to (i) depositors of HERITAGE FEDERAL SAVINGS & LOAN
ASSOCIATION with a $50.00 minimum deposit as of June 30, 1996 (the
"Eligible Account Holders"); (ii) HERITAGE FEDERAL'S employee stock
ownership plan (the "ESOP"), a tax qualified employee stock benefit
plan; (iii) depositors of HERITAGE FEDERAL, who are not Eligible
Account Holders, with $50.00 or more on deposit as of December 31,
1997 (the "Supplemental Eligible Account Holders"); and (iv)
depositors of HERITAGE FEDERAL as of ___________, 1998 and borrowers
of HERITAGE FEDERAL who had loans outstanding as of October 21, 1997,
which continue to be outstanding as of _____, 1998. ("Other
Members"), subject to the purchase limitations set forth in the Plan
of Conversion.
It is the responsibility of each subscriber qualifying as an Eligible
Account Holder, Supplemental Eligible Account Holder or Other Member
to list completely all account numbers for qualifying savings accounts
as of the qualifying date on the stock order form.
<PAGE>
Shares that are not subscribed for during the Subscription Offering,
if any, may be offered to the general public through a Community
Offering with preference given to natural persons and trusts of
natural persons who are permanent residents of the Association's local
community. It is anticipated that any shares not subscribed for in
the Subscription and Community Offerings will be offered to certain
members of the general public through a syndicate of registered broker
dealers pursuant to selected dealers agreements in a Syndicated
Community Offering.
7. Q. How do I subscribe for shares of stock?
A. Eligible subscribers wishing to exercise their subscription rights
must return the enclosed Stock Order Form to HERITAGE FEDERAL
SAVINGS & LOAN ASSOCIATION. The Stock Order Form must be completed and
returned along with full payment or appropriate instructions
authorizing a withdrawal from a deposit account at HERITAGE FEDERAL
SAVINGS & LOAN ASSOCIATION on or prior to the close of the
Subscription Offering which will be 12:00 noon, Eastern time, on
March __, 1998, unless extended.
8. Q. How can I pay for my subscription stock order?
A. First, you may pay for your order in cash (if delivered in person to
HERITAGE FEDERAL) or by check or money order. Subscription funds
will earn interest at HERITAGE FEDERAL'S passbook rate from the day
the funds are received until the completion or termination of the
conversion.
Second, you may authorize us to withdraw funds from your HERITAGE
FEDERAL SAVINGS & LOAN ASSOCIATION savings account or certificate of
deposit without early withdrawal penalty. These funds will continue
to earn interest at the contractual rate for your account until
completion of the offering at which time your funds will be withdrawn
for your purchase. Funds remaining in this account (if any) will
continue at the contractual rate unless the withdrawal reduces the
account balance below the applicable minimum in which case you will
receive interest at the passbook rate. A hold will be placed on your
account for the amount you specify for stock payment. You will not
have access to these funds from the day we receive your order until
the completion or termination of the conversion.
If you want to use funds in your Individual Retirement Account held at
HERITAGE FEDERAL to subscribe for stock, call our Stock Information
Center at (864) ____________ for assistance. There will be no early
withdrawal or IRS penalties incurred by these transactions. It takes
several days to process the necessary IRA forms and, therefore, it is
necessary that you make arrangements by ___________, 1998, to
accommodate your order.
9. Q. When must I place my order for shares of stock?
<PAGE>
A. To exercise subscription rights in the Subscription Offering, a Stock
Order Form must be received by HERITAGE FEDERAL SAVINGS & LOAN
ASSOCIATION with full payment for all shares subscribed for not later
than 12:00 noon, Eastern time, on ___________, 1998, unless extended.
Non-customers desiring to order shares through the Community Offering,
if any, must order shares before the close of the Community Offering,
if any, which will be no sooner than 12:00 noon, Eastern time on
___________, 1998, unless extended.
10. Q. How many shares of stock are being offered?
A. HERITAGE BANCORP, INC. is offering up to _________ shares of common
stock at a price of $15.00 per share. The number of shares may be
increased to _________ in response to the independent appraiser's
final determination of the consolidated pro forma market value of
---------
HERITAGE BANCORP, INC. and HERITAGE FEDERAL SAVINGS & LOAN
ASSOCIATION, as converted.
11. Q. What is the minimum and maximum number of shares that I can purchase
during the offering period?
A. The minimum number of shares that may be purchased is 25 shares. No
Stock Order Form will be accepted for less than $375. The maximum
purchase in the Subscription Offering for any person is 22,000 shares
or $330,000. The maximum purchase for any person, together with
associates or persons acting in concert, is 1% of the shares issued in
the conversion (excluding any increase in the number of shares as a
result of the increase in the appraisal of Heritage Bancorp, Inc. and
Heritage Federal).
12. Q. How was it determined that between _________ shares and _________
shares of stock would be issued at $15.00 per share?
A. The share range was determined through an appraisal of HERITAGE
BANCORP, INC. and HERITAGE FEDERAL, as converted, by RP Financial,
LC., an independent appraisal firm specializing in the thrift
industry.
13. Q. Must I pay a commission on the stock for which I subscribe?
A. No. You will not pay a commission on stock purchased in the
Subscription Offering, the Community Offering, if any, or Syndicated
Community Offering, if any.
14. Q. Will I receive interest on funds I submit for stock purchases?
A. Yes. HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION will pay its current
passbook rate from the date funds are received (with a completed Stock
<PAGE>
Order Form) during the Subscription and Community Offerings until
completion of the conversion.
15. Q. If I have misplaced my Stock Order Form, what should I do?
A. HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION will mail you another
order form, or you may obtain one from HERITAGE FEDERAL'S main office.
If you need assistance in obtaining or completing a Stock Order Form,
please call or visit the Stock Information Center.
16. Q. Will there be any dividends paid on the stock?
A. Subject to regulatory and other considerations, the Company intends to
adopt a policy of paying regular cash dividends at an annual rate of
$0.30 per share. (2.0)% based on $15.00 per share initial offering
price). No assurance can be given that any dividends will be paid on
the Common Stock or that, if paid, such dividends will not be reduced
or eliminated in future periods.
17. Q. How much stock do the directors and officers of HERITAGE FEDERAL
SAVINGS & LOAN ASSOCIATION intend to purchase through the Subscription
Offering?
A. Directors and executive officers intend to purchase approximately
$2,525,040 million of the stock to be offered in the conversion
(approximately __% if _________ shares are sold in the offering). The
purchase price paid by directors and officers will be the same as that
paid by customers and the general public.
18. Q. Are the subscription rights transferable to another party?
A. No. Pursuant to federal regulations, subscription rights granted to
Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members may be exercised only by the person(s) to whom they are
granted. Any person found to be transferring or selling subscription
rights will be subject to forfeiture of such rights and other
penalties.
19. Q. I closed my account several months ago. Someone told me that I am
still eligible to buy stock. Is that true?
A. If you were an account holder on the Eligibility Record Date (June 30,
1996) the Supplemental Eligibility Record Date (December 31,1997) or
the Voting Record Date (________, 1998) you are entitled to purchase
stock regardless of whether or not you continue to hold your HERITAGE
FEDERAL SAVINGS & LOAN ASSOCIATION account.
20. Q. May I obtain a loan from HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION
using stock as collateral to pay for my shares?
<PAGE>
A. No. Federal regulations do not allow HERITAGE FEDERAL SAVINGS & LOAN
ASSOCIATION to make loans for this purpose, but another financial
institution may make a loan for this purpose.
21. Q. Will the FDIC (Federal Deposit Insurance Corporation) insure the
shares of stock?
A. No. The shares will not be insured by the FDIC. However, the Savings
Association Insurance Fund of the FDIC will continue to insure savings
accounts and certificates of deposit up to the applicable limits
allowed by law.
22. Q. Will there be a market for the stock following the conversion?
A. HERITAGE BANCORP, INC. has never issued stock before, and consequently
there is no established market for its common stock. HERITAGE BANCORP,
INC. has received preliminary approval to have the common stock listed
on the Nasdaq National Market under the symbol "____". Trident
Securities, Inc. intends to make a market in the common stock.
However, purchasers of common stock should recognize that no assurance
can be given that an active and liquid trading market will develop or,
if developed, will be maintained.
23. Q. Can I purchase stock using funds in a HERITAGE FEDERAL SAVINGS & LOAN
ASSOCIATION IRA account?
A. Yes. Contact the Stock Information Center for additional information.
It takes several days to process the necessary IRA forms and,
therefore, it is necessary that you make arrangements by ________,
1998, to accommodate your order.
ABOUT VOTING "FOR" THE PLAN OF CONVERSION
-----------------------------------------
24. Q. Am I eligible to vote at the Special Meeting of Members to be held to
consider the Plan of Conversion?
A. At the Special Meeting of Members to be held on ________, 1998, you
are eligible to vote if you are one of the "Voting Members," who are
holders of HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION'S deposits or
other authorized accounts as of ________, 1998, the "Voting Record
Date" for the Special Meeting or if you are a borrower of HERITAGE
FEDERAL with a loan outstanding as of October 21, 1997, which
continues to be outstanding as of the Voting Record Date. However,
members of record as of the close of business on the Voting Record
Date who cease to be depositors prior to the date of the Special
Meeting are no longer members and will not be entitled to vote at the
Special Meeting. If you are a Voting Member, you should have received
a proxy statement and proxy card with which to vote.
25. Q. How many votes do I have as a Voting Member?
<PAGE>
A. HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION's charter provides that
each account holder is entitled to one vote for each $100, or fraction
thereof, on deposit in such account. Borrowers of HERITAGE FEDERAL
are entitled to one vote for each loan outstanding as of October 21,
1997, which continues to be outstanding as of ________, 1998. No
member may cast more than 1,000 votes.
26. Q. If I vote "against" the Plan of Conversion and it is approved, will I
be prohibited from buying stock during the Subscription Offering?
A. No. Voting against the Plan of Conversion in no way restricts you
from purchasing stock in either the Subscription Offering or the
Community Offering.
27. Q. What happens if HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION does not
get enough votes to approve the Plan of Conversion?
A. The Conversion would not take place and HERITAGE FEDERAL SAVINGS &
LOAN ASSOCIATION would remain a mutual savings institution.
28. Q. As a qualifying depositor of HERITAGE FEDERAL SAVINGS & LOAN
ASSOCIATION, am I required to vote?
A. No. However, failure to return your proxy card will have the same
effect as a vote "Against" the Plan of Conversion.
29. Q. What is a Proxy Card?
A. A Proxy Card gives you the ability to vote without attending the
Special Meeting in person. However, you may attend the meeting and
vote in person, even if you have previously returned your proxy card.
30. Q. How does the conversion affect me?
A. The conversion is intended, among other things, to assist HERITAGE
FEDERAL SAVINGS & LOAN ASSOCIATION in maintaining and expanding its
many services to HERITAGE FEDERAL'S customers and community. By
purchasing stock, you will also have the opportunity to invest in
HERITAGE BANCORP, INC., the proposed holding company for HERITAGE
FEDERAL. However, there is no obligation to purchase stock. The
purchase of stock is strictly optional.
31. Q. How can I get further information concerning the stock offering?
A. You may call the Stock Information Center, at (864) ___________ for
further information or a copy of the Prospectus, Stock Order Form,
Proxy Statement and Proxy Card.
<PAGE>
This brochure is neither an offer to sell nor a solicitation of an offer to buy
common stock. The offer is made only by the Prospectus. A Prospectus can be
obtained at a HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION office or by calling
the Stock Information Center. There shall be no solicitation of an offer or
sale of stock in any jurisdiction in which any offer, solicitation of an offer
or sale of stock would be unlawful.
The common stock is not a deposit or account and is not federally insured
or guaranteed.
FOR YOUR CONVENIENCE
In order to assist you during the stock offering period, we have established a
Stock Information Center to answer your questions. Please call:
(864) __________
<PAGE>
III. Officer and Director Brochure
A. Explanation
An Officer and Director Brochure merely highlights the intended stock
purchases shown in the Prospectus.
B. Method of Distribution
There are three primary methods of distribution of Officer and Director
Brochures. However, regardless of the method, they are always accompanied
by a Prospectus.
1. An Officer and Director Brochure is sent out in the initial mailing to
all members of the Heritage Federal.
2. Officer and Director Brochures will be available in any of Heritage
Federal Savings & Loan Association's offices.
3. Officer and Director Brochures are sent out in a standard information
packet to all interested investors who telephone the Stock Information
Center requesting information.
<PAGE>
OFFICER AND DIRECTOR STOCK PURCHASE COMMITMENTS
<TABLE>
<CAPTION>
Anticipated Anticipated Percent of
Number of Dollar Shares at
Shares Purchased Amount Maximum of
Name and Position ---------------- Purchased Valuation Range
- ------------------------------ ----------- ---------------
<S> <C> <C> <C>
Edward Wells 33,334 $ 500,010
President, Chief Executive
Officer and Director
Aaron H. King 20,000 300,000
Director
Riley Bailes 28,000 420,000
Director
John H. Lake 13,334 200,010
Director
Edwin Owings 6,667 100,005
Director
Edwin I. Shealy 20,000 300,000
Chief Financial Officer
James H. Wasson, Jr. 16,667 250,005
Vice President
John M. Swofford 8,334 125,010
Vice President
Will B. Ferguson 22,000 330,000
Vice President ------ -------
Total 168,336 $2,525,040
======= ==========
</TABLE>
This brochure is neither an offer to sell nor a solicitation of an offer to buy
common stock. The offer is made only by the Prospectus. There shall be no
solicitation of an offer or sale of stock in any jurisdiction in which any
offer, solicitation of an offer or sale of stock would be unlawful.
The common stock is not a deposit or account and is not federally insured or
guaranteed.
<PAGE>
IV. Counter Cards, Lobby Posters and the Tombstone Announcement
A. Explanation
Counter cards, lobby posters and the tombstone announcement serve three
-----
purposes: (1) As a notice to Heritage Federal Savings & Loan Association's
customers and members of the local community that the stock sale is
underway; (2) to remind the customers of the end of the Subscription
Offering; and (3) to invite members of the community to an informational
meeting, if applicable. Trident has learned in the past that many people
need reminding of the deadline for subscribing and therefore we suggest the
use of these simple reminders.
B. Quantity
Approximately 3 - 4 counter cards may be used at each of Heritage Federal
Savings & Loan Association's offices, at teller windows and on customer
service representatives' desks. These counter cards will be exact
duplicates of the lobby poster and will be no larger than 8-1/2" x 11".
Approximately 1 - 2 lobby posters may be used at each of the offices of
Heritage Federal. These posters will be approximately 2' x 3'.
Tombstone announcements may be used for placement in local newspapers. The
advertisements will run no more than twice each in the local newspaper.
The ads will be no larger than 8-1/2" x 11".
C. Examples enclosed
<PAGE>
POSTER
Heritage Federal Savings & Loan Association
STOCK OFFERING MATERIALS
AVAILABLE HERE
Customer and Community Priority Rights, if any, for the Stock Offering
by Heritage Bancorp, Inc.
Expire on ________, 1998
<PAGE>
- --------------------------------------------------------------------------------
This announcement is neither an offer to sell nor a solicitation of an offer
to buy these securities. The offer is made only by the Prospectus . These shares
have not been approved or disapproved by the Securities and Exchange Commission,
the Office of Thrift Supervision or the Federal Deposit Insurance Corporation,
nor has such Commission, Office or Corporation passed upon the accuracy or
adequacy of the Prospectus . Any representation to the contrary is a criminal
offense.
New Issue February __, 1998
- ---------
Up to _________ Shares
These shares are being offered pursuant
to a Plan of Conversion whereby
Heritage Federal Savings & Loan Association
of Laurens, South Carolina will convert
from a federal mutual savings institution
to a federal stock savings institution
and become the wholly-owned subsidiary of
Heritage Bancorp, Inc.
Common Stock
_______________
Price $15.00 per share
_______________
Copies of the Prospectus may be obtained in any State in which this announcement
is circulated from such of the undersigned or other brokers and dealers
as may legally offer these securities in such state.
Trident Securities, Inc.
For a copy of the Prospectus call (864) ________.
- --------------------------------------------------------------------------------
<PAGE>
V. Community Meeting Materials
A. Explanation
In order to educate the public about the stock offering, Trident may
suggest holding Community meetings in various locations. In an effort to
target a group of interested investors, Trident requests that each Director
of Heritage Federal Savings & Loan Association submit a list of
acquaintances that he or she would like to invite to a Community meeting.
B. Method of Distribution of Invitations and Prospect Letters
Each Director submits his list of prospects.
Invitations are sent to each Director's prospects through the mail. All
invitations are preceded by a Prospectus and all attendees are given a
Prospectus at the meeting.
Prospect Letters are sent to prospects when appropriate.
C. Seminars for Customers
Advertisements will be run in the newspaper inviting customers to a brief
presentation and question and answer time.
D. Examples enclosed
<PAGE>
PROSPECT INVITATION
================================================================================
The Directors and Officers
of
Heritage Federal Savings & Loan Association
cordially invite you to attend a brief
presentation regarding the stock offering of
Heritage Bancorp, Inc., our proposed holding company.
Please join us at one of the following meetings:
Place Place Place
Address Address Address
Date Date Date
at ____ p.m. at ____ p.m. at ____ p.m.
Hors d'oeuvres will be served.
Seating is limited, so please call (864) _______ if you plan to attend.
================================================================================
<PAGE>
NEWSPAPER ADVERTISEMENT
================================================================================
(Heritage Federal Savings and Loan Association Logo)
Questions about Heritage Federal Savings and Loan Association's
Stock Offering?
The Directors, Management and Employees
of Heritage Federal Savings and Loan Association
invite all customers to attend
a brief presentation and
question and answer time regarding our
initial public stock offering.
Please join us at one of the following meetings:
Place Place Place
Address Address Address
Date Date Date
at ____ p.m. at ____ p.m. at ____ p.m.
Seating is limited, so please call
(864) ________, if you plan to attend.
================================================================================
<PAGE>
Example Prospect Letter
(Introductory Letter)
(Heritage Federal Savings & Loan Association Letterhead)
_______, 1998
Name
Address
City, State, Zip
Dear ______________:
You have probably read recently in the newspaper that Heritage Federal
Savings & Loan Association is converting from mutual to stock form. This
conversion is the biggest step in the history of Heritage Federal in that it
allows customers, community members, employees and directors the opportunity to
subscribe for common stock in our new holding company, Heritage Bancorp, Inc.
I have enclosed a Prospectus and a stock order form which will allow you to
subscribe for shares and possibly become a charter stockholder of Heritage
Bancorp, Inc. In addition, we will be holding several presentations for friends
of Heritage Federal in order to explain the conversion and review the merits of
possibly becoming a charter stockholder of Heritage Bancorp, Inc. You will
receive an invitation shortly.
I hope that if you have any questions you will feel free to call Heritage
Federal's Stock Information Center at (864) ___________. I look forward to
seeing you at our presentation.
Sincerely,
Director
The shares of common stock offered in the conversion are not savings accounts or
deposits and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy stock. The
offer is made only by the Prospectus. There shall be no sale of stock in
any state in which any offer, solicitation of an offer or sale of
stock would be unlawful.
<PAGE>
Example
(Thank You Letter)
(Heritage Federal Savings & Loan Association Letterhead)
___________, 1998
Name
Address
City, State, Zip
Dear ______________:
On behalf of the Board of Directors and management of Heritage Federal
Savings & Loan Association, I would like to thank you for attending our recent
presentation regarding the stock offering of Heritage Bancorp, Inc. We are
enthusiastic about the stock offering and look forward to completing the
Subscription Offering on _______, 1998.
I hope that you will join me in the opportunity to become a charter
stockholder, and once again thank you for your interest.
Sincerely,
J. Edward Wells
President
The shares of common stock offered in the conversion are not savings accounts or
deposits and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy stock. The
offer is made only by the Prospectus. There shall be no sale of stock in
any state in which any offer, solicitation of an offer or sale of
stock would be unlawful.
<PAGE>
Example
(Sorry You Were Unable to Attend)
(Heritage Federal Savings & Loan Association Letterhead)
____________, 1998
Name
Address
City, State, Zip
Dear ____________:
I am sorry you were unable to attend our recent presentation regarding
Heritage Federal Savings & Loan Association's mutual to stock conversion. The
Board of Directors and management as a group intend to invest $2,525,040 of our
own funds in the common stock of Heritage Bancorp, Inc. We are enthusiastic
about the stock offering and look forward to completing the Subscription
Offering on _______, 1998.
We have established a Stock Information Center to answer any questions
regarding the stock offering. Should you require any assistance between now and
___________, 1998, I encourage you either to stop by or call our Stock
Information Center at (864) _______________.
I hope you will join me in the opportunity to become a charter stockholder
of Heritage Bancorp, Inc.
Sincerely,
J. Edward Wells
President
The shares of common stock offered in the conversion are not savings accounts or
deposits and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy stock. The
offer is made only by the Prospectus. There shall be no sale of stock
in any state in which any offer, solicitation of an offer or sale of
stock would be unlawful.
<PAGE>
Example
(Final Reminder Letter)
(Heritage Federal Savings & Loan Association Letterhead)
________, 1998
Name
Address
City, State, Zip
Dear ________________:
Just a quick note to remind you that the deadline is quickly approaching
for purchasing stock in Heritage Bancorp, Inc., the proposed holding company for
Heritage Federal Savings & Loan Association. I hope you will join me in
becoming a charter stockholder in what will be South Carolina's newest publicly
owned financial institution holding company.
The deadline for subscribing for shares in the Subscription Offering is
_______, 1998. If you have any questions, I hope you will call our Stock
Information Center at (864) _______________.
Once again, I hope you will join me in the opportunity to become a
stockholder of Heritage Bancorp, Inc.
Sincerely,
J. Edward Wells
President
The shares of common stock offered in the conversion are not savings accounts or
deposits and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy stock. The
offer is made only by the Prospectus. There shall be no sale of stock
in any state in which any offer, solicitation of an offer or sale
of stock would be unlawful.
<PAGE>
VI. IRA Mailing
A. Explanation
A special IRA mailing is proposed to be sent to all IRA customers of the
Bank in order to alert the customers that funds held in an IRA can be used
to purchase stock. Since this transaction is not as simple as designating
funds from a certificate of deposit like a normal stock purchase, this
letter informs the customer that this process is slightly more detailed and
involves contact with the Stock Information Center.
B. Quantity
One IRA letter is proposed to be mailed to each IRA customer of Heritage
Federal Savings & Loan Association. These letters would be mailed
following OTS approval for the conversion and after each customer has
received the initial mailing containing a Proxy Statement and a Prospectus.
C. Example - Enclosed
<PAGE>
Heritage Federal Savings & Loan Association Letterhead
________, 1998
Dear Individual Retirement Account Participant:
As you know, Heritage Federal Savings & Loan Association is in the process
of converting from a federally chartered mutual savings institution to a
federally chartered stock savings institution and has formed Heritage Bancorp,
Inc. to hold all of the stock of Heritage Federal (the "Conversion"). Through
the Conversion, certain current and former depositors of Heritage Federal
Savings & Loan Association have the opportunity to purchase shares of common
stock of Heritage Bancorp, Inc. in a Subscription Offering. Heritage Bancorp,
Inc. currently is offering up to _________ shares of common stock, subject to
adjustment, at a price of $15.00 per share.
As the holder of an individual retirement account ("IRA") at Heritage
Federal, you may use your IRA funds to subscribe for stock. If you desire to
purchase shares of common stock of Heritage Bancorp, Inc. through your IRA,
Heritage Federal can assist you in self-directing those funds. This process can
be done without an early withdrawal penalty and generally without a negative tax
consequence to your IRA.
If you are interested in receiving more information on self-directing your
IRA, please contact our Stock Information Center at (864) __________. Because
it takes several days to process the necessary IRA forms, a response must be
received by _______, 1998 to accommodate your interest.
Sincerely,
J. Edward Wells
President
The shares of common stock offered in the conversion are not savings accounts or
deposits and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy stock. The
offer is made only by the Prospectus. There shall be no sale of stock
in any state in which any offer, solicitation of an offer or
sale of stock would be unlawful.
<PAGE>
VII. Letters
A. Explanation
Cover letters to accompany offering materials.
B. Method of Distribution
Enclosed with the initial mailing.
C. Examples
<PAGE>
(Trident Letterhead)
___________, 1998
To Members and Friends of Heritage Federal:
Trident Securities, Inc., a member of the National Association of
Securities Dealers, Inc., is assisting Heritage Federal Savings & Loan
Association in its conversion to a capital stock savings institution and the
concurrent offering of shares of common stock by Heritage Bancorp, Inc. a
Delaware corporation recently formed for the purpose of acquiring all of the
stock of Heritage Federal.
At the request of Heritage Federal, we are enclosing materials explaining
the conversion process and your right to subscribe for common shares of the
Heritage Bancorp. Please read the enclosed offering materials carefully before
subscribing for stock.
If you have any questions, please call the Stock Information Center at
(864) ________.
Sincerely,
TRIDENT SECURITIES, INC.
Enclosures
The shares of common stock offered in the conversion are not savings accounts or
deposits and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy stock. The
offer is made only by the Prospectus. There shall be no sale of
stock in any state in which any offer, solicitation of an offer
or sale of stock would be unlawful.
<PAGE>
(Heritage Federal Savings & Loan Association Letterhead)
___________, 1998
Dear Valued Customer:
Heritage Federal Savings & Loan Association is pleased to announce that we
have received regulatory approval to proceed with our plan to convert to a
federally chartered stock savings institution, conditioned upon receipt of
approval by Heritage Federal's members, among other things. This stock
conversion is the most significant event in the history of Heritage Federal in
that it allows customers, community members, directors and employees an
opportunity to subscribe for stock in Heritage Bancorp, Inc., the proposed
holding company for Heritage Federal Savings & Loan Association.
We want to assure you that the Conversion will not affect the terms,
balances, interest rates or existing FDIC insurance coverage on deposits at
Heritage Federal, or the terms or conditions of any loans to existing borrowers
under their individual contract arrangements with Heritage Federal. Let us also
assure you that the stock Conversion will not result in any changes in the
management, personnel or the Board of Directors of Heritage Federal.
A special meeting of the members of Heritage Federal will be held on
___________, 1998 at _______, Eastern Time, at Heritage Federal's main office to
consider and vote upon Heritage Federal's Plan of Conversion. Enclosed is a
proxy card. Your Board of Directors solicits your vote "FOR" Heritage Federal's
Plan of Conversion. A vote in favor of the Plan of Conversion does not obligate
you to purchase stock. If you do not plan to attend the special meeting, please
sign and return your proxy card promptly. Your vote is important to us.
As one of our valued members, you have the opportunity to invest in
Heritage Federal's future by purchasing stock in Heritage Bancorp, Inc. during
the Subscription Offering, without paying a sales commission.
If you decide to exercise your subscription rights to purchase shares, you
must return a properly completed stock order form together with full payment for
the subscribed shares so that it is received by Heritage Federal not later than
12:00 Noon, Eastern Time on _________, 1998.
We also have enclosed a Prospectus and Proxy Statement which fully
describes the conversion and provides financial and other information about
Heritage Bancorp, Inc. and Heritage Federal. Please review these materials
carefully before you vote or invest. For your convenience we have established a
Stock Information Center. If you have any questions, please call the Stock
Information Center at (864) ________.
<PAGE>
We look forward to continuing to provide quality financial services to you
in the future.
Sincerely,
J. Edward Wells
President
Enclosures
The shares of common stock offered in the conversion are not savings accounts or
deposits and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy stock. The
offer is made only by the Prospectus. There shall be no sale of
stock in any state in which any offer, solicitation of an offer
or sale of stock would be unlawful.
<PAGE>
(Heritage Federal Savings & Loan Association Letterhead)
____________, 1998
Dear Interested Investor:
Heritage Federal Savings & Loan Association is pleased to announce that we
have received regulatory approval to proceed with our plan to convert to a
federally chartered stock savings institution, conditioned upon receipt of
approval by Heritage Federal's members, among other things. This stock
conversion is the most significant event in the history of Heritage Federal in
that it allows customers, community members, directors and employees an
opportunity to subscribe stock in Heritage Bancorp, Inc., the proposed holding
company for Heritage Federal.
We want to assure you that the Conversion will not result in any changes in
the management, personnel or the Board of Directors of Heritage Federal.
Enclosed is a Prospectus which fully describes Heritage Federal, its
management, board and financial condition. Please review it carefully before
you make an investment decision. If you decide to invest, please return to
Heritage Federal a properly completed stock order form together with full
payment for shares at your earliest convenience. For your convenience we have
established a Stock Information Center. If you have any questions, please call
the Stock Information Center at (864) ________.
Sincerely,
J. Edward Wells
President
Enclosures
The shares of common stock offered in the conversion are not savings accounts or
deposits and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy stock. The
offer is made only by the Prospectus. There shall be no sale of stock
in any state in which any offer, solicitation of an offer
or sale of stock would be unlawful.
<PAGE>
(Heritage Federal Savings & Loan Association Letterhead)
____________, 1998
Dear Friend:
Heritage Federal Savings & Loan Association is pleased to announce that we
have received regulatory approval to proceed with our plan to convert to a
federally chartered stock savings institution, conditioned upon receipt of
approval by Heritage Federal's members, among other things. This stock
conversion is the most significant event in the history of Heritage Federal in
that it allows customers, community members, directors and employees an
opportunity to subscribe stock in Heritage Bancorp, Inc., the proposed holding
company for Heritage Federal.
We want to assure you that the Conversion will not affect the terms,
balances, interest rates or existing FDIC insurance coverage on deposits at
Heritage Federal, or the terms or conditions of any loans to existing borrowers
under their individual contract arrangements with Heritage Federal. Let us also
assure you that the Conversion will not result in any changes in the management,
personnel or the Board of Directors of Heritage Federal.
Our records indicate that you were a depositor of Heritage Federal on June
30, 1996. Therefore, under applicable law, you are entitled to subscribe for
Common Stock in Heritage Federal's Subscription Offering. Orders submitted by
you and others in the Subscription Offering are contingent upon the current
members' approval of the Plan of Conversion at a special meeting of members to
be held on __________, 1998 and upon receipt of all required regulatory
approvals.
If you decide to exercise your subscription rights to purchase shares, you
must return a properly completed stock order form together with full payment for
the subscribed shares so that it is received at Heritage Federal Savings & Loan
Association not later than 12:00 Noon, Eastern Time on __________, 1998.
Enclosed is a Prospectus which fully describes Heritage Federal, its
management, board and financial condition. Please review it carefully before
you invest. For your convenience, we have established a Stock Information
Center. If you have any questions, please call the Stock Information Center at
(864) ________.
Sincerely,
J. Edward Wells
President
Enclosures
The shares of common stock offered in the conversion are not savings accounts or
deposits and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency.
<PAGE>
This is not an offer to sell or a solicitation of an offer to buy stock. The
offer is made only by the Prospectus. There shall be no sale of
stock in any state in which any offer, solicitation of an offer
or sale of stock would be unlawful.
<PAGE>
VIII. Proxy Reminder
A. Explanation
A proxygram is used when the majority of votes needed to adopt the Plan of
Conversion is still outstanding. The proxygram is mailed to those "target
vote" depositors who have not previously returned their signed proxy.
The target vote depositors are determined by the conversion agent.
B. Example enclosed
<PAGE>
B. Example
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
P R O X Y G R A M
(LOGO)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOUR VOTE ON OUR PLAN OF CONVERSION HAS NOT BEEN RECEIVED.
---- --------
YOUR VOTE IS VERY IMPORTANT, PARTICULARLY SINCE FAILURE TO VOTE IS EQUIVALENT TO
- ---------------------------
VOTING AGAINST THE PLAN OF CONVERSION.
VOTING FOR THE PLAN OF CONVERSION WILL NOT AFFECT THE INSURANCE COVERAGE OF YOUR
ACCOUNT. IT WILL CONTINUE TO BE INSURED UP TO THE LEGAL LIMIT ($100,000 PER
----------------------
ACCOUNT AS DEFINED BY LAW) BY THE SAVINGS ASSOCIATION INSURANCE FUND OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION, AN AGENCY OF THE U.S. GOVERNMENT.
REMEMBER, VOTING FOR THE PLAN OF CONVERSION DOES NOT OBLIGATE YOU TO BUY ANY
--------
STOCK.
PLEASE ACT PROMPTLY! SIGN THE ENCLOSED PROXY CARD AND MAIL OR DELIVER IT TO A
----------
HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION OFFICE.
WE RECOMMEND THAT YOU VOTE "FOR" THE PLAN OF CONVERSION.
-----
THANK YOU!
THE BOARD OF DIRECTORS OF HERITAGE FEDERAL
SAVINGS & LOAN ASSOCIATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
RP FINANCIAL, LC.
- --------------------------------------------------------
Financial Services Industry Consultants
EXHIBIT 99.3
September 17, 1997
Mr. J. Edward Wells
Chairman, President and Chief Executive Officer
Heritage Federal Savings & Loan Association
201 West Main Street
Laurens, South Carolina 29360-2940
Dear Mr. Wells:
This letter sets forth the agreement between Heritage Federal Savings &
Loan Association, Laurens, South Carolina ("Heritage Federal" or the
"Association"), and RP Financial, LC. ("RP Financial") for certain conversion
appraisal services pertaining to the Association's mutual-to-stock conversion
and simultaneous holding company formation. The specific appraisal services to
be rendered by RP Financial are described below. These appraisal services will
be rendered by a team of one to two senior consultants on staff and will be
directed by the undersigned.
Description of Conversion Appraisal Services
- --------------------------------------------
Prior to preparing the valuation report, RP Financial will conduct a
financial due diligence, including on-site interviews of senior management and
reviews of financial and other documents and records, to gain insight into the
Association's operations, financial condition, profitability, market area, risks
and various internal and external factors which impact the pro forma value of
the Association. RP Financial will prepare a written detailed valuation report
of Heritage Federal which will be fully consistent with applicable regulatory
guidelines and standard pro forma valuation practices. The appraisal report
will include an in-depth analysis of the Association's financial condition and
operating results, as well as an assessment of the Association's interest rate
risk, credit risk and liquidity risk. The appraisal report will describe the
Association's business strategies, market area, prospects for the future and the
intended use of proceeds both in the short term and over the longer term. A
peer group analysis relative to publicly-traded savings institutions will be
conducted for the purpose of determining appropriate valuation adjustments
relative to the group. We will review pertinent sections of the prospectus to
obtain necessary data and information for the appraisal, including the impact of
key deal elements on the appraised value, such as dividend policy, use of
proceeds and reinvestment rate, tax rate, conversion expenses and
characteristics of stock plans. The appraisal report will establish a midpoint
pro forma value as well as the range of value. The appraisal report may be
periodically updated throughout the conversion process and there will be at
least one updated valuation prepared at the time of the closing of the stock
offering.
RP Financial agrees to deliver the valuation appraisal and subsequent
updates, in writing, to Heritage Federal at the above address in conjunction
with the filing of the regulatory application. Subsequent updates will be filed
promptly as certain events occur which would warrant the preparation and filing
of such valuation updates. Further, RP Financial agrees to perform such other
services as are necessary or required in connection with the regulatory review
of the appraisal and respond to the regulatory comments, if any, regarding the
valuation appraisal and subsequent updates.
- --------------------------------------------------------------------------------
Washington Headquarters
Rosslyn Center
1700 North Moore Street, Suite 2210 Telephone: (703) 528-1700
Arlington, VA 22209 Fax No: (703) 528-1788
<PAGE>
RP Financial, L.C.
Mr. J. Edward Wells
September 17, 1997
Page 2
Fee Structure and Payment Schedule
- ----------------------------------
Heritage Federal agrees to pay RP Financial a fixed fee of $35,000 for
these services, plus reimbursable expenses. Payment of these fees shall be made
according to the following schedule:
o $5,000 upon execution of the letter of agreement engaging RP
Financial's appraisal services;
o $25,000 upon delivery of the completed original appraisal report; and
o $5,000 upon completion of the conversion to cover all subsequent
valuation updates that may be required.
The Association will reimburse RP Financial for out-of-pocket expenses
incurred in preparation of the valuation. Such out-of-pocket expenses will
likely include travel, printing, telephone, facsimile, shipping, computer and
data services. RP Financial will agree to limit reimbursable expenses to a
reasonable cap, subject to written authorization from the Association to exceed
such level.
In the event Heritage Federal shall, for any reason, discontinue the
proposed conversion prior to delivery of the completed documents set forth above
and payment of the respective progress payment fees, Heritage Federal agrees to
compensate RP Financial according to RP Financial's standard billing rates for
consulting services based on accumulated and verifiable time expenses, not to
exceed the respective fee caps noted above, after giving full credit to the
initial retainer fee. RP Financial's standard billing rates range from $75 per
hour for research associates to $250 per hour for managing directors.
If during the course of the proposed transaction, unforeseen events occur
so as to materially change the nature or the work content of the services
described in this contract, the terms of said contract shall be subject to
renegotiation by Heritage Federal and RP Financial. Such unforeseen events
shall include, but not be limited to, major changes in the conversion
regulations, appraisal guidelines or processing procedures as they relate to
conversion appraisals, major changes in management or procedures, operating
policies or philosophies, and excessive delays or suspension of processing of
conversion applications by the regulators such that completion of the conversion
transaction requires the preparation by RP Financial of a new appraisal or
financial projections.
Representations and Warranties
- ------------------------------
Heritage Federal and RP Financial agree to the following:
1. The Association agrees to make available or to supply to RP Financial
such information with respect to its business and financial condition as RP
Financial may reasonably request in order to provide the aforesaid valuation.
Such information heretofore or hereafter supplied or made available to RP
Financial shall include: annual financial statements, periodic regulatory
filings and material agreements, debt instruments, off balance sheet assets or
liabilities, commitments and contingencies, unrealized gains or losses and
corporate books and records. All information provided by the Association to RP
Financial shall remain strictly confidential (unless such information is
otherwise made available to the public), and if conversion is not consummated or
the services of RP Financial are terminated hereunder, RP Financial shall upon
request promptly return to the Association the original and any copies of such
information.
2. The Association hereby represents and warrants to RP Financial that
any information provided to RP Financial does not and will not, to the best of
the Association's knowledge, at the times it is provided to RP
<PAGE>
RP Financial, L.C.
Mr. J. Edward Wells
September 17, 1997
Page 3
Financial, contain any untrue statement of a material fact or fail to state a
material fact necessary to make the statements therein not false or misleading
in light of the circumstances under which they were made.
3. (a) The Association agrees that it will indemnify and hold harmless
RP Financial, any affiliates of RP Financial, the respective directors,
officers, agents and employees of RP Financial or their successors and assigns
who act for or on behalf of RP Financial in connection with the services called
for under this agreement (hereinafter referred to as "RP Financial"), from and
against any and all losses, claims, damages and liabilities (including, but not
limited to, all losses and expenses in connection with claims under the federal
securities laws) attributable to (i) any untrue statement or alleged untrue
statement of a material fact contained in the financial statements or other
information furnished or otherwise provided by the Association to RP Financial,
either orally or in writing; (ii) the omission or alleged omission of a material
fact from the financial statements or other information furnished or otherwise
made available by the Association to RP Financial; or (iii) any action or
omission to act by the Association, or the Association's respective officers,
directors, employees or agents which action or omission is willful or negligent.
The Association will be under no obligation to indemnify RP Financial hereunder
if a court determines that RP Financial was negligent or acted in bad faith with
respect to any actions or omissions of RP Financial related to a matter for
which indemnification is sought hereunder. Any time devoted by employees of RP
Financial to situations for which indemnification is provided hereunder, shall
be an indemnifiable cost payable by the Association at the normal hourly
professional rate chargeable by such employee.
(b) RP Financial shall give written notice to the Association of such
claim or facts within thirty days of the assertion of any claim or discovery of
material facts upon which the RP Financial intends to base a claim for
indemnification hereunder. In the event the Association elects, within seven
days of the receipt of the original notice thereof, to contest such claim by
written notice to RP Financial, RP Financial will be entitled to be paid any
amounts payable by the Association hereunder, together with interest on such
costs from the date incurred at the annual rate of prime plus two percent within
five days after the final determination of such contest either by written
acknowledgement of the Association or a final judgment of a court of competent
jurisdiction. If the Association does not so elect, RP Financial shall be paid
promptly and in any event within thirty days after receipt by the Association of
the notice of the claim.
(c) The Association shall pay for or reimburse the reasonable
expenses, including attorneys' fees, incurred by RP Financial in advance of the
final disposition of any proceeding within thirty days of the receipt of such
request if RP Financial furnishes the Association: (1) a written statement of
RP Financial's good faith belief that it is entitled to indemnification
hereunder; and (2) a written undertaking to repay the advance if it ultimately
is determined in a final adjudication of such proceeding that it or he is not
entitled to such indemnification.
(d) In the event the Association does not pay any indemnified loss or
make advance reimbursements of expenses in accordance with the terms of this
agreement, RP Financial shall have all remedies available at law or in equity to
enforce such obligation.
It is understood that, in connection with RP Financial's above-mentioned
engagement, RP Financial may also be engaged to act for the Association in one
or more additional capacities, and that the terms of the original engagement may
be embodied in one or more separate agreements. The provisions of Paragraph 3
herein shall apply to the original engagement, any such additional engagement,
any modification of the original engagement or such additional engagement and
shall remain in full force and effect following the completion or termination of
RP Financial's engagement(s). This agreement constitutes the entire
understanding of the Association and RP Financial concerning the subject matter
addressed herein, and such contract shall be governed and construed in
accordance with the laws of the Commonwealth of Virginia. This agreement may
not be modified, supplemented or amended except by written agreement executed by
both parties.
<PAGE>
RP Financial, L.C.
Mr. J. Edward Wells
September 17, 1997
Page 4
Heritage Federal and RP Financial are not affiliated, and neither Heritage
Federal nor RP Financial has an economic interest in, or is held in common with,
the other and has not derived a significant portion of its gross revenues,
receipts or net income for any period from transactions with the other.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as indicated
below and returning to RP Financial a signed copy of this letter, together with
the initial retainer fee of $5,000.
Sincerely,
/s/ William E. Pommerening
William E. Pommerening
Chief Executive Officer
and Managing Director
Agreed To and Accepted By: J. Edward Wells /s/ J. Edward Wells
------------------------------------
Chairman, President and Chief Executive Officer
Upon Authorization by the Board of Directors For: Heritage Federal Savings &
Loan Association Laurens,
South Carolina
Date Executed: 9-18-97
---------------
<PAGE>
RP FINANCIAL, LC.
- --------------------------------------------------------
Financial Services Industry Consultants
September 17, 1997
Mr. J. Edward Wells
Chairman, President and Chief Executive Officer
Heritage Federal Savings & Loan Association
201 West Main Street
Laurens, South Carolina 29360-2940
Dear Mr. Wells:
This letter sets forth the agreement between Heritage Federal Savings &
Loan Association, Laurens, South Carolina ("Heritage Federal" or the
"Association"), and RP Financial, LC. ("RP Financial"), whereby the Association
has engaged RP Financial to prepare the regulatory business plan and financial
projection to be adopted by the Association's Board of Directors in conjunction
with the concurrent formation of a holding company and the Association's mutual-
to-stock conversion. These services are described in greater detail below.
Description of Proposed Services
- --------------------------------
RP Financial's business planning services will include the following areas:
(1) evaluating Heritage Federal's current financial and operating condition,
business strategies and anticipated strategies in the future; (2) analyzing and
quantifying the impact of business strategies, incorporating the use of net
conversion proceeds both in the short and long term; (3) preparing detailed
financial projections on a quarterly basis for a period of at least three fiscal
years to reflect the impact of Board approved business strategies and use of
proceeds; (4) preparing the written business plan document which conforms with
applicable regulatory guidelines including a description of the use of proceeds
and how the convenience and needs of the community will be addressed; and (5)
preparing the detailed schedules of the capitalization of the holding company
and the cash flows between the holding company and the Association.
Contents of the business plan will include: Philosophy/Goals; Economic
Environment and Background; Lending, Leasing and Investment Activities; Deposit,
Savings and Borrowing Activity; Asset and Liability Management; Operations;
Records, Systems and Controls; Growth, Profitability and Capital; Responsibility
for Monitoring this Plan.
RP Financial agrees to prepare the business plan and accompanying financial
projections in writing such that the business plan can be filed with the
appropriate regulatory agencies prior to filing the conversion application.
Fee Structure and Payment Schedule
- ----------------------------------
The Association agrees to compensate RP Financial for preparation of the
business plan on a fixed fee basis of $7,500. Payment of the professional fees
shall be made upon delivery of the completed business plan.
- --------------------------------------------------------------------------------
Washington Headquarters
Rosslyn Center
1700 North Moore Street, Suite 2210 Telephone: (703) 528-1700
Arlington, VA 22209 Fax No: (703) 528-1788
<PAGE>
RP Financial, L.C.
Mr. J. Edward Wells
September 17, 1997
Page 2
The Association also agrees to reimburse RP Financial for those director
out-of-pocket expenses necessary and incidental to providing the business
planning services. Reimbursable expenses will likely include shipping,
telephone/facsimile printing, computer and data services, and shall be paid to
RP Financial as incurred and billed. RP Financial will agree to limit
reimbursable expenses to a reasonable cap, subject to written authorization from
the Association to exceed such level.
In the event the Association shall, for any reason, discontinue this
planning engagement prior to delivery of the completed business plan and payment
of the progress payment fee, the Association agrees to compensate RP Financial
according to RP Financial's standard billing rates for consulting services based
on accumulated and verifiable time expenses, not to exceed the fixed fee
described above, plus reimbursable expenses incurred.
If during the course of the planning engagement, unforeseen events occur so
as to materially change the nature or the work content of the business planning
services described in this contract, the terms of said contract shall be subject
to renegotiation by the Association and RP Financial. Such unforeseen events
may include changes in regulatory requirements as it specifically relates to
Heritage Federal or potential transactions which will dramatically impact the
Association such as a pending acquisition or branch transaction.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as indicated
below and returning to RP Financial a signed copy of this letter.
Sincerely,
/s/ William E. Pommerening
William E. Pommerening
Chief Executive Officer
and Managing Director
Agreed To and Accepted By: J. Edward Wells /s/ J. Edward Wells
-------------------------------------
Chairman, President and Chief Executive Officer
Upon Authorization by the Board of Directors For: Heritage Federal Savings &
Loan Association Laurens,
South Carolina
Date Executed: 9-18-97
-------------------
<PAGE>
Exhibit 99.5
HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION
201 West Main Street
Laurens, South Carolina 29360
(864) 984-4581
NOTICE OF SPECIAL MEETING OF MEMBERS
To be Held on March __, 1998
Notice is hereby given that a special meeting ("Special Meeting") of
members of Heritage Federal Savings & Loan Association ("Association") will be
held at the Association's main office at 201 West Main Street, Laurens, South
Carolina, on _________, March __, 1998, at __:00 p.m., Eastern Time. Business to
be taken up at the Special Meeting shall be:
(1) To approve a Plan of Conversion adopted by the Board of Directors on
September 10, 1997, and subsequently amended on November 19, 1997, to convert
the Association from a federally chartered mutual savings and loan association
to a federally chartered capital stock savings bank, to be held as a wholly-
owned subsidiary of a new holding company, Heritage Bancorp, Inc., including the
adoption of a Federal Stock Charter and Bylaws for the Association, pursuant to
the laws of the United States and the rules and regulations of the Office of
Thrift Supervision; and
(2) To consider and vote upon any other matters that may lawfully come
before the Special Meeting.
Note: As of the date of mailing of this Notice, the Board of Directors is
not aware of any other matters that may come before the Special Meeting.
The members entitled to vote at the Special Meeting shall be those members
of the Association at the close of business on ______, 1998, and who continue as
members until the Special Meeting, and should the Special Meeting be, from time
to time, adjourned to a later time, until the final adjournment thereof.
BY ORDER OF THE BOARD OF DIRECTORS
JAMES H. WASSON
SECRETARY
Laurens, South Carolina
February __, 1997
PLEASE SIGN AND RETURN PROMPTLY EACH PROXY CARD YOU RECEIVE IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. THIS WILL ASSURE NECESSARY REPRESENTATION AT THE SPECIAL
MEETING, BUT WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU SO DESIRE. THE
PROXY IS SOLICITED ONLY FOR THIS SPECIAL MEETING (AND ANY ADJOURNMENTS THEREOF)
AND WILL NOT BE USED FOR ANY OTHER MEETING. YOU MAY REVOKE YOUR WRITTEN PROXY
BY WRITTEN INSTRUMENT DELIVERED TO JAMES H. WASSON, SECRETARY, HERITAGE FEDERAL
SAVINGS & LOAN ASSOCIATION, AT THE ABOVE ADDRESS AT ANY TIME PRIOR TO OR AT THE
SPECIAL MEETING.
<PAGE>
HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION
201 West Main Street
Laurens, South Carolina 29360
(864) 984-4581
PROXY STATEMENT
March __, 1998
Your proxy, in the form enclosed, is solicited by the Board of
Directors of Heritage Federal Savings & Loan Association for use at a special
meeting of members to be held on _______day, March ___, 1998, and any
adjournment of that meeting, for the purposes set forth in the foregoing notice
of special meeting. Your Board of Directors and management urge you to vote for
the Plan of Conversion.
PURPOSE OF MEETING -- SUMMARY
A special meeting of members ("Special Meeting") of Heritage Federal
Savings & Loan Association ("Association") will be held at the Association's
main office at 201 West Main Street, Laurens, South Carolina, on __________,
March __, 1998, at __:00 p.m., Eastern Time, for the purpose of considering and
voting upon a Plan of Conversion from Federal Mutual Savings and Loan
Association to Federal Stock Savings Bank and Formation of a Holding Company
("Plan of Conversion"), which, if approved by a majority of the total votes of
the members eligible to be cast, will permit the Association to convert from a
federally chartered mutual savings and loan association to a federally chartered
capital stock savings bank to be held as a subsidiary of Heritage Bancorp, Inc.
("Holding Company"), a newly organized Delaware corporation formed by the
Association. The conversion of the Association and the acquisition of control of
the Association by the Holding Company are collectively referred to herein as
the "Conversion."
Members entitled to vote on the Plan of Conversion are members of the
Association as of ________, 1998 ("Voting Record Date") who continue as members
until the Special Meeting, and should the Special Meeting be, from time to time,
adjourned to a later time, until the final adjournment thereof. The Conversion
requires the approval of not less than a majority of the total votes eligible to
be cast at the Special Meeting.
The Plan of Conversion provides, among other things, that, after receiving
final authorization from the Office of Thrift Supervision ("OTS"), the
Association will offer for sale shares of common stock of the Holding Company
("Common Stock"), through the issuance of nontransferable subscription rights
("Subscription Rights"), first to depositors of the Association with $50.00 or
more on deposit as of June 30, 1996 ("Eligible Account Holders"), then to the
Association's employee stock ownership plan ("ESOP"), then to depositors of the
Association with $50.00 or more on deposit as of December 31, 1997
("Supplemental Eligible Account Holders"), then to depositors of the Association
as the Voting Record Date and borrowers with loans outstanding as of October 21,
1997, which continue to be outstanding as of the Voting Record Date ("Other
Members"), in a subscription offering ("Subscription Offering"), and then, if
necessary, to certain members of the general public in a direct community
offering ("Direct Community Offering"). The Subscription and Direct Community
Offerings are referred to herein as the "Subscription and Direct Community
Offerings." It is anticipated that shares of Common Stock not subscribed for in
the Subscription and Direct Community Offerings will be offered to the general
public with the assistance of Trident Securities, Inc. ("Trident Securities")
and, if necessary, a syndicate of registered broker-dealers to be managed by
Trident Securities pursuant to selected dealers' agreements in a syndicated
offering ("Syndicated Community Offering"). The Subscription, Direct Community
and Syndicated Community Offerings are referred to herein as the "Offerings."
Adoption of a Federal Stock Charter and Bylaws of the Association is an
integral part of the Plan of Conversion. Copies of the Plan of Conversion and
the proposed Federal Stock Charter and Bylaws for the
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Association are attached to this Proxy Statement as exhibits. They provide,
among other things, for the termination of voting rights of members and of their
rights to receive any surplus remaining after liquidation of the Association.
These rights, except for the rights of Eligible Account Holders and Supplemental
Eligible Account Holders in the liquidation account, will vest exclusively in
the holders of the stock in the Holding Company and the Association. For
further information, see "THE CONVERSION -- Effects of Conversion to Stock Form
on Depositors and Borrowers of the Association."
HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION
Chartered in 1948, the Association is a federal mutual savings and loan
association. The Association was originally known as Laurens Federal Savings &
Loan Association. In 1977, the Association changed its name to Heritage Federal
Savings & Loan Association. In connection with the Conversion, the Association
will change its name to Heritage Federal Bank.
The Association is regulated by the OTS and the Federal Deposit Insurance
Corporation. The Association's deposits have been federally-insured by the FDIC
since 1948 and are currently insured by the FDIC under the Savings Association
Insurance Fund. The Association has been a member of the Federal Home Loan Bank
System since 1948.
The Association is a community oriented financial institution that operates
out of four offices in the Upstate region of South Carolina. The Association's
principal business is attracting deposits from the general public and using
those funds to originate residential mortgage loans. At September 30, 1997, the
Association had total assets of $247.5 million, deposits of $215.4 million and
total equity of $29.2 million. At that date, $180.6 million, or 73.0%, of the
Association's assets were residential mortgage loans and $200.2 million, or
91.7%, of the Association's liabilities were certificates of deposit. The
Association emphasizes the origination of adjustable-rate mortgage loans and
generally holds its loans for long-term investment purposes. For a discussion
of the Association's business strategy and recent results of operations, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" in the Prospectus. For a discussion of the Association's business
activities, see "BUSINESS OF THE ASSOCIATION" in the Prospectus.
VOTING RIGHTS AND VOTE REQUIRED FOR APPROVAL
The Association's Board of Directors has fixed the close of business on
__________, 1998 as the record date for the determination of members entitled to
notice of and to vote at the Special Meeting. All holders of the Association's
savings or other authorized accounts are members of the Association under its
current charter. All members of record as of the close of business on the
Voting Record Date who continue to be members on the date of the Special Meeting
or any adjournment thereof will be entitled to vote at the Special Meeting or
such adjournment.
Each eligible depositor member 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 the depositor's savings accounts in the Association as of the
Voting Record Date. Borrowers with loans outstanding as of October 21, 1997
which continue to be outstanding as of the Voting Record Date will be entitled
to cast one vote for the period of time such borrowings remain in existence. No
member is entitled to cast more than 1,000 votes. Any number of members present
and voting, represented in person or by proxy, at the Special Meeting will
constitute a quorum.
Approval of the Plan of Conversion will require 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 the Voting Record Date for the Special
Meeting, there were approximately ______________ votes eligible to be cast, of
which _________ votes may be cast by depositor members and _______ votes may be
cast by borrower members.
2
<PAGE>
PROXIES
Members may vote at the Special Meeting or any adjournment thereof in
person or by proxy. Enclosed is a proxy which may be used by any eligible member
to vote on the Plan of Conversion. All properly executed proxies received by
management 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. If any other matters are
properly presented at the Special Meeting and may properly be voted on, all
proxies will be voted on such matters in accordance with the best judgment of
the proxy holders named therein. If the enclosed proxy is returned, it may be
revoked at any time before it is voted by written notice to the Secretary of the
Association, by submitting a later dated proxy, or by attending and voting in
person at the Special Meeting. The proxies being solicited are only for use at
the Special Meeting and at any and all adjournments thereof and will not be used
for any other meeting. Management is not aware of any other business to be
presented at the Special Meeting.
The Association, as trustee for individual retirement accounts at the
Association, will vote in favor of the Plan of Conversion, unless the beneficial
owner executes and returns the enclosed proxy for the Special Meeting or attends
the Special Meeting and votes in person.
To the extent necessary to permit approval of the Plan of Conversion,
proxies may be solicited by representatives of Trident Securities and by
officers, directors or regular employees of the Association, in person, by
telephone or through other forms of communication. Such persons will be
reimbursed by the Association for their reasonable out-of-pocket expenses
incurred in connection with such solicitation. If necessary, the Special
Meeting may be adjourned to an alternative date.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors unanimously recommends that you vote "FOR" the Plan
of Conversion. Voting in favor of the Plan of Conversion will not obligate any
voter to purchase any stock.
THE CONVERSION
The OTS has approved the Plan of Conversion subject to its approval by the
members of the Association entitled to vote thereon and to the satisfaction of
certain other conditions imposed by the OTS in its approval. OTS approval does
not constitute a recommendation or endorsement of the Plan of Conversion.
General
On September 10, 1997, the Board of Directors of the Association
unanimously adopted the Plan of Conversion, which was subsequently amended on
November 19, 1997, pursuant to which the Association will be converted from a
federally chartered mutual savings and loan association to a federally chartered
stock savings bank to be held as a wholly-owned subsidiary of the Holding
Company, a newly formed Delaware corporation. The following discussion of the
Plan of Conversion is qualified in its entirety by reference to the Plan of
Conversion, which is attached as Exhibit A hereto.
The Conversion will be accomplished through adoption of a Federal Stock
Charter and Bylaws to authorize the issuance of capital stock by the
Association. As part of the Conversion, the Association will issue all of its
newly issued common stock (1,000 shares) to the Holding Company in exchange for
50% of the net proceeds from the sale of common stock by the Holding Company.
The Plan of Conversion provides generally that: (i) the Association will
convert from a federally chartered mutual savings and loan association to a
federally chartered stock savings bank; (ii) the common stock will be offered by
the Holding Company in the Subscription Offering to persons having subscription
rights; (iii) if necessary, shares
3
<PAGE>
of common stock not subscribed for in the Subscription Offering will be offered
in a Direct Community Offering to certain members of the general public, with
preference given to natural persons and trusts of natural persons residing in
the Local Community, and then to certain members of the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
pursuant to selected dealers agreements; and (iv) the Holding Company will
purchase all of the capital stock of the Association to be issued in connection
with the Conversion. The Conversion will be effected only upon completion of the
sale of at least $44,625,000 of common stock to be issued pursuant to the Plan
of Conversion.
As part of the Conversion, the Holding Company is making a Subscription
Offering of its common stock to holders of subscription rights in the following
order of priority: (i) Eligible Account Holders (depositors with $50.00 or more
on deposit as of June 30, 1996); (ii) the Association's ESOP; (iii) Supplemental
Eligible Account Holders (depositors with $50.00 or more on deposit as of
December 31, 1997); and (iv) Other Members (depositors of the Association as of
____ __, 1998 and borrowers of the Association with loans outstanding as of
October 21, 1997 which continue to be outstanding as of ____ __, 1998).
Shares of common stock not subscribed for in the Subscription Offering may
be offered for sale in the Direct Community Offering. The Direct Community
Offering, if one is held, is expected to begin immediately after the expiration
of the Subscription Offering, but may begin at any time during the Subscription
Offering. Shares of common stock not sold in the Subscription and Direct
Community Offerings may be offered in the Syndicated Community Offering.
Regulations require that the Direct Community and Syndicated Community Offerings
be completed within 45 days after completion of the fully extended Subscription
Offering unless extended by the Association or the Holding Company with the
approval of the regulatory authorities. If the Syndicated Community Offering is
determined not to be feasible, the Board of Directors of the Association will
consult with the regulatory authorities to determine an appropriate alternative
method for selling the unsubscribed shares of common stock. The Plan of
Conversion provides that the Conversion must be completed within 24 months after
the date of the approval of the Plan of Conversion by the members of the
Association.
No sales of common stock may be completed, either in the Subscription
Offering, Direct Community Offering or Syndicated Community Offering unless the
Plan of Conversion is approved by the members of the Association.
The completion of the offering, however, is subject to market conditions
and other factors beyond the Association's control. No assurance can be given
as to the length of time after approval of the Plan of Conversion at the Special
Meeting that will be required to complete the Direct Community or Syndicated
Community Offerings or other sale of the common stock. If delays are
experienced, significant changes may occur in the estimated pro forma market
value of the Holding Company and the Association as converted, together with
corresponding changes in the net proceeds realized by the Holding Company from
the sale of the common stock. In the event the Conversion is terminated, the
Association would be required to charge all Conversion expenses against current
income.
Orders for shares of common stock will not be filled until at least
2,975,000 shares of common stock have been subscribed for or sold and the OTS
approves the final valuation and the Conversion closes. If the Conversion is
not completed within 45 days after the last day of the fully extended
Subscription Offering and the OTS consents to an extension of time to complete
the Conversion, subscribers will be given the right to increase, decrease or
rescind their subscriptions. Unless an affirmative indication is received from
subscribers that they wish to continue to subscribe for shares, the funds will
be returned promptly, together with accrued interest at the Association's
passbook rate from the date payment is received until the funds are returned to
the subscriber. If such period is not extended, or, in any event, if the
Conversion is not completed, all withdrawal authorizations will be terminated
and all funds held will be promptly returned together with accrued interest at
the Association's passbook rate from the date payment is received until the
Conversion is terminated.
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Reasons for the Conversion
The Board of Directors and management believe that the Conversion is in the
best interests of the Association, its members and the communities it serves.
The Association's Board of Directors has formed the Holding Company to serve as
a holding company, with the Association as its subsidiary, upon the consummation
of the Conversion. By converting to the stock form of organization, the Holding
Company and the Association will be structured in the form used by holding
companies of commercial banks, most business entities and by a growing number of
savings institutions. Management of the Association believes that the Conversion
offers a number of advantages which will be important to the future growth and
performance of the Association. The capital raised in the Conversion is intended
to support the Association's current lending and investment activities and may
also support possible future expansion and diversification of operations,
although there are no current specific plans, arrangements or understandings,
written or oral, regarding any such expansion or diversification. The Conversion
is also expected to afford the Association's management, members and others the
opportunity to become stockholders of the Holding Company and participate more
directly in, and contribute to, any future growth of the Holding Company and the
Association. The Conversion will also enable the Holding Company and the
Association to raise additional capital in the public equity or debt markets
should the need arise, although there are no current specific plans,
arrangements or understandings, written or oral, regarding any such financing
activities. The Association, as a mutual savings and loan association, does not
have the authority to issue capital stock or debt instruments, other than by
accepting deposits.
Effects of Conversion to Stock Form on Depositors and Borrowers of the
Association
Voting Rights. Savings members and borrowers will have no voting rights in
the converted Association or the Holding Company and therefore will not be able
to elect directors of the Association or the Holding Company or to control their
affairs. Currently, these rights are accorded to savings members of the
Association. Subsequent to the Conversion, voting rights will be vested
exclusively in the Holding Company with respect to the Association and the
holders of the common stock as to matters pertaining to the Holding Company.
Each holder of common stock shall be entitled to vote on any matter to be
considered by the stockholders of the Holding Company. A stockholder will be
entitled to one vote for each share of common stock owned.
Savings Accounts and Loans. The Association's savings accounts, account
balances and existing FDIC insurance coverage of savings accounts will not be
affected by the Conversion. Furthermore, the Conversion will not affect the
loan accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with the Association.
Tax Effects. The Association has received an opinion from Breyer &
Aguggia, Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that:
(i) no gain or loss will be recognized to the Association in its mutual or
stock form by reason of the Conversion;
(ii) no gain or loss will be recognized to its account holders upon the
issuance to them of accounts in the Association immediately after the
Conversion, in the same dollar amounts and on the same terms and conditions
as their accounts at the Association in its mutual form plus interest in
the liquidation account;
(iii) the tax basis of account holders' accounts in the Association
immediately after the Conversion will be the same as the tax basis of their
accounts immediately prior to conversion;
(iv) the tax basis of each account holder's interest in the liquidation
account will be equal to the value, if any, of that interest;
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(v) the tax basis of the common stock purchased in the Conversion will be
the amount paid and the holding period for such stock will commence at the
date of purchase; and
(vi) no gain or loss will be recognized to account holders upon the receipt
or exercise of subscription rights in the Conversion, except to the extent
subscription rights are deemed to have value as discussed below.
Unlike a private letter ruling issued by the IRS, an opinion of counsel is
not binding on the IRS and the IRS could disagree with the conclusions reached
therein. In the event of such disagreement, no assurance can be given that the
conclusions reached in an opinion of counsel would be sustained by a court if
contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that the
receipt of subscription rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan of Conversion will be
taxable to the extent, if any, that the subscription rights are deemed to have a
fair market value. RP Financial, a financial consulting firm retained by the
Association, whose findings are not binding on the IRS, has issued a letter
indicating that the subscription rights do not have any value, based on the fact
that such rights are acquired by the recipients without cost, are
nontransferable and of short duration and afford the recipients the right only
to purchase shares of the common stock at a price equal to its estimated fair
market value, which will be the same price paid by purchasers in the Direct
Community Offering for unsubscribed shares of common stock. If the subscription
rights are deemed to have a fair market value, the receipt of such rights may
only be taxable to those Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members who exercise their subscription rights. The
Association could also recognize a gain on the distribution of such subscription
rights. Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members are encouraged to consult with their own tax advisors as to the
tax consequences in the event the subscription rights are deemed to have a fair
market value.
The Association has also received an opinion from Deloitte & Touche LLP,
Greenville, South Carolina, that, assuming the Conversion does not result in any
federal income tax liability to the Association, its account holders, or the
Holding Company, implementation of the Plan of Conversion will not result in any
South Carolina income tax liability to such entities or persons.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
Liquidation Account. In the unlikely event of a complete liquidation of
the Association in its present mutual form, each depositor in the Association
would receive a pro rata share of any assets of the Association remaining after
payment of claims of all creditors (including the claims of all depositors up to
the withdrawal value of their accounts). Each depositor's pro rata share of
such remaining assets would be in the same proportion as the value of his or her
deposit account to the total value of all deposit accounts in the Association at
the time of liquidation.
After the Conversion, holders of withdrawable deposit(s) in the
Association, including certificates of deposit ("Savings Account(s)"), shall not
be entitled to share in any residual assets in the event of liquidation of the
Association. However, pursuant to OTS regulations, the Association shall, at
the time of the Conversion, establish a liquidation account in an amount equal
to its total equity as of the date of the latest statement of financial
condition contained herein.
The liquidation account shall be maintained by the Association subsequent
to the Conversion for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who retain their Savings Accounts in the Association.
Each Eligible Account Holder and Supplemental Eligible Account Holder shall,
with respect to each Savings Account held, have a related inchoate interest in a
portion of the liquidation account balance ("subaccount").
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The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or a Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's "qualifying deposit" in the
Savings Account and the denominator is the total amount of the "qualifying
deposits" of all such holders. Such initial subaccount balance shall not be
increased, and it shall be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing day of the Association subsequent to June 30, 1996, or December 31, 1997
is less than the lesser of (i) the deposit balance in such Savings Account at
the close of business on any other annual closing date subsequent to June 30,
1996 or December 31, 1997 or (ii) the amount of the "qualifying deposit" in such
Savings Account on June 30, 1996 or December 31, 1997, then the subaccount
balance for such Savings Account shall be adjusted by reducing such subaccount
balance in an amount proportionate to the reduction in such deposit balance. In
the event of a downward adjustment, such subaccount balance shall not be
subsequently increased, notwithstanding any increase in the deposit balance of
the related Savings Account. If any such Savings Account is closed, the related
subaccount balance shall be reduced to zero.
In the event of a complete liquidation of the Association (and only in such
event) each Eligible Account Holder and Supplemental Eligible Account Holder
shall be entitled to receive a liquidation distribution from the liquidation
account in the amount of the then current adjusted subaccount balance(s) for
Savings Account(s) then held by such holder before any liquidation distribution
may be made to stockholders. No merger, consolidation, bulk purchase of assets
with assumptions of Savings Accounts and other liabilities or similar
transactions with another federally insured institution in which the Association
is not the surviving institution shall be considered to be a complete
liquidation. In any such transaction the liquidation account shall be assumed
by the surviving institution.
In the unlikely event the Association is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to the Holding Company as the sole stockholder of the
Association.
REVIEW OF OTS ACTION
Any person aggrieved by a final action of the OTS which approves, with or
without conditions, or disapproves a plan of conversion pursuant to this part
may obtain review of such action by filing in the court of appeals of the United
States 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, a written petition praying that the final action of the OTS be
modified, terminated or set aside. Such petition must be filed within 30 days
after the publication of notice of such final action in the Federal Register, or
----------------
30 days after the mailing by the applicant of the notice to members as provided
for in 12 C.F.R. (S)563b.6(c), whichever is later. The further procedure for
review is as follows: A copy of the petition is forthwith transmitted to the
OTS by the clerk of the court and thereupon the OTS files in the court the
record in the proceeding, as provided in Section 2112 of Title 28 of the United
States Code. Upon the filing of the petition, the court has jurisdiction, which
upon the filing of the record is exclusive, to affirm, modify, terminate, or set
aside in whole or in part, the final action of the OTS. Review of such
proceedings is as provided in Chapter 7 of Title 5 of the United States Code.
The judgment and decree of the court is final, except that they are subject to
review by the United States Supreme Court upon certiorari as provided in Section
1254 of Title 28 of the United States Code.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on Form
S-1 (File No. 333-______) under the Securities Act of 1933, as amended, with
respect to the Common Stock offered in the Conversion. The accompanying
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts
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of which are omitted in accordance with the rules and regulations of the SEC.
Such information may be inspected at the public reference facilities maintained
by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 500
West Madison Street, Suite 1400, Room 1100, Chicago, Illinois 60661; and 75 Park
Place, New York, New York 10007. Copies may be obtained at prescribed rates from
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. The Registration Statement also is available through the SEC's World
Wide Web site on the Internet (http://www.sec.gov).
The Association has filed with the OTS an Application for Approval of
Conversion. The accompanying Prospectus omits certain information contained in
such Application. The Application, including exhibits and certain other
information that are a part thereof, may be inspected, without charge, at the
offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552 and at the
office of the Regional Director of the OTS at the OTS Southeast Regional Office,
1475 Peachtree Street, N.E., Atlanta, Georgia 30309.
Copies of the Holding Company's Certificate of Incorporation and Bylaws may
be obtained by written request to the Association.
All persons eligible to vote at the Special Meeting should review both this
Proxy Statement and the accompanying Prospectus carefully. However, no person
is obligated to purchase any Common Stock. For additional information, you may
call the Stock Information Center at (864) _____________.
BY ORDER OF THE BOARD OF DIRECTORS
JAMES H. WASSON
SECRETARY
Laurens, South Carolina
February __, 1997
Your Board of Directors urges you to consider carefully the information
contained in this proxy statement and the prospectus and, whether or not you
plan to be present in person at the special meeting, to fill in, date, sign and
return the enclosed proxy card(s) as soon as possible to assure that your votes
will be counted. This will not prevent you from voting in person if you attend
the Special Meeting. You may revoke your proxy by written instrument delivered
to the secretary of the Association at any time prior to or at the Special
Meeting or by attending the Special Meeting and voting in person.
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 IN THOSE
JURISDICTIONS IN WHICH IT IS LAWFUL TO MAKE SUCH OFFER.
8
<PAGE>
EXHIBIT A
HERITAGE FEDERAL SAVINGS & LOAN ASSOCIATION
LAURENS, SOUTH CAROLINA
AMENDED PLAN OF CONVERSION
FROM FEDERAL MUTUAL SAVINGS AND LOAN ASSOCIATION
TO FEDERAL STOCK SAVINGS BANK
AND FORMATION OF A HOLDING COMPANY
INTRODUCTION
------------
I. General
-------
The Board of Directors of Heritage Federal Savings & Loan Association
("Association") desires to attract new capital to the Association to increase
its net worth, to support future growth, to increase the amount of funds
available for other lending and investment, to provide greater resources for the
expansion of customer services and to facilitate future expansion by the
Association. In addition, the Board of Directors intends to implement stock
option plans and other stock benefit plans as part of the Conversion in order to
attract and retain qualified directors and officers. It is the further desire
of the Board of Directors to reorganize the Association as the wholly owned
subsidiary of a holding company to enhance flexibility of operations,
diversification of business opportunities and financial capability for business
and regulatory purposes and to enable the Association to compete more
effectively with other financial service organizations. Accordingly, on
September 10, 1997, the Board of Directors, after careful study and
consideration, adopted by unanimous vote this Plan of Conversion From Federal
Mutual Savings and Loan Association To Federal Stock Savings Bank And Formation
Of A Holding Company ("Plan"), which was subsequently amended on November 19,
1997, which provides for the conversion of the Association from a federally
chartered mutual savings and loan association to a federally chartered stock
savings bank and the concurrent formation of a holding company for the
Association ("Holding Company").
All capitalized terms contained in the Plan shall have the meanings
ascribed to them in Section II hereof.
Pursuant to this Plan, shares of Conversion Stock will be offered as part
of the Conversion in a Subscription Offering pursuant to nontransferable
Subscription Rights at a predetermined and uniform price first to the
Association's Eligible Account Holders, second to the Tax-Qualified Employee
Stock Benefit Plans, third to the Association's Supplemental Eligible Account
Holders, and fourth to Other Members of the Association. Shares not subscribed
for in the Subscription Offering will be offered as part of the Conversion to
the general public in a Direct Community Offering. Shares still remaining may
then be offered to the general public in a Syndicated Community Offering, an
underwritten public offering, or otherwise. The aggregate Purchase Price of the
Conversion Stock will be based upon an independent appraisal of the Association
and will reflect the estimated pro forma market value of the Association as a
subsidiary of the Holding Company.
The Conversion is subject to the regulations of the Director of the OTS
(Part 563b of the Rules and Regulations Applicable to All Savings Associations)
as promulgated pursuant to Section 5(i) of the Home Owners' Loan Act.
Consummation of the Conversion is subject to the approval of this Plan and
the Conversion by the OTS and by the affirmative vote of Members of the
Association holding not less than a majority of the total votes eligible to be
cast at a special meeting of the Members to be called to consider the
Conversion.
No change will be made in the Board of Directors or management of the
Association as a result of the Conversion.
<PAGE>
II. Definitions
-----------
As used in this Plan, the terms set forth below have the following
meanings:
A. Acting in Concert: (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. A Person (as defined herein) who acts in concert
with another Person ("other party") shall also be deemed to be acting in concert
with any Person who is also acting in concert with that other party, except that
any Tax-Qualified Employee Stock Benefit Plan will not be deemed to be acting in
concert with its trustee or a Person who serves in a similar capacity solely for
the purpose of determining whether stock held by the trustee and stock held by
the Tax-Qualified Employee Benefit Plan will be aggregated.
B. Associate: When used to indicate a relationship with any Person,
---------
means (i) any corporation or organization (other than the Association or a
majority-owned subsidiary of the Association, or 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, except that it does not include a Tax-Qualified Employee Stock Benefit
Plan 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 Association, any of its subsidiaries, or the Holding Company.
C. Association: Heritage Federal Savings & Loan Association, in its
-----------
present form as a federally chartered mutual savings and loan association.
D. Capital Stock: Any and all authorized capital stock in the Converted
-------------
Association.
E. Common Stock: Any and all authorized common stock in the Holding
------------
Company subsequent to the Conversion.
F. Conversion: (i) Amendment of the Association's Charter and Bylaws to
----------
authorize issuance of shares of Capital Stock by the Converted Association and
to conform to the requirements of a Federal stock savings bank under the laws
of the United States and rules and regulations of the OTS; (ii) issuance
and sale of Conversion Stock by the Holding Company in the Subscription Offering
and Direct Community Offering; and (iii) purchase by the Holding Company of all
of the issued and outstanding shares of Capital Stock of the Converted
Association to be issued in the Conversion immediately following or concurrently
with the close of the sale of all Conversion Stock.
G. Conversion Stock: Holding Company common stock to be issued and sold
----------------
by the Holding Company pursuant to the Plan.
H. Converted Association: Heritage Federal Savings & Loan Association,
---------------------
in its converted form as a federally chartered stock savings bank.
I. Direct Community Offering: The offering for sale of Conversion Stock
-------------------------
to the public.
J. Eligibility Record Date: June 30, 1996.
-----------------------
K. Eligible Account Holder: Holder of a Qualifying Deposit in the
-----------------------
Association on the Eligibility Record Date.
2
<PAGE>
L. FDIC: Federal Deposit Insurance Corporation.
----
M. Form AC Application: The application submitted to the OTS on OTS Form
-------------------
AC for approval of the Conversion.
N. H-(e)1 Application: The application submitted to the OTS on OTS Form
------------------
H-(e)1 or, if applicable, Form H-(e)1-S for approval of the Holding Company's
acquisition of all of the Capital Stock of the Converted Association.
O. Holding Company: A corporation to be formed by the Association under
---------------
state law for the purpose of becoming a holding company through the issuance and
sale of its stock under the Plan, and concurrent acquisition of 100% of the
Capital Stock of the Converted Association to be issued pursuant to the Plan.
P. Holding Company Stock: Any and all authorized capital stock of the
---------------------
Holding Company.
Q. Local Community: Laurens, Anderson, Greenville and Greenwood
---------------
Counties, South Carolina.
R. 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 furnishes bona fide competitive bid and offer quotations on request
and (ii) is ready, willing and able to effect transactions in reasonable
quantities at his quoted prices with other brokers or dealers.
S. Members: All Persons or entities who qualify as members of the
-------
Association pursuant to its Charter and Bylaws prior to the Conversion.
T. Officer: An executive officer of the Association, which includes the
-------
Chairman of the Board, President, Vice President, Secretary, Treasurer or
Principal Financial Officer, Comptroller or Principal Accounting Officer, and
Senior Vice Presidents, Vice Presidents in charge of principal business
functions, the Secretary and the Treasurer as well as any other person
performing similar functions.
U. Order Forms: Forms to be used for the purchase of Conversion Stock
-----------
sent to Eligible Account Holders and other parties eligible to purchase
Conversion Stock in the Subscription Offering pursuant to the Plan.
V. Other Member: Holder of a Savings Account (other than Eligible
------------
Account Holders and Supplemental Eligible Account Holders) as of the Record
Date, and borrowers from the Association as provided in the Association's
Federal Mutual Charter who continue as borrowers from the Association as of the
Record Date.
W. OTS: Office of Thrift Supervision of the United States Department of
---
the Treasury.
X. Person: An individual, corporation, partnership, association, joint
------
stock company, trusts of natural Persons, unincorporated organization or a
government or any political subdivision thereof.
Y. Plan: This Plan of Conversion, which provides for the conversion of
----
the Association from a federally chartered mutual savings and loan association
to a federally chartered capital stock savings bank as a wholly owned subsidiary
of the Holding Company, as originally adopted by the Board of Directors or as
amended in accordance with the terms hereof.
Z. Qualifying Deposit: The deposit balance in any Savings Account, and
------------------
any certificate of deposit, any demand deposit account and any noninterest-
bearing deposit account, as of the close of business on the Eligibility
3
<PAGE>
Record Date or the Supplemental Eligibility Record Date, as applicable;
provided, however, that no account with a deposit balance of less than $50.00 on
such date shall constitute a Qualifying Deposit.
AA. Record Date: Date which determines which Members are entitled to vote
-----------
at the Special Meeting.
BB. Registration Statement: The registration statement on SEC Form S-1 or
----------------------
other applicable form filed by the Holding Company with the SEC for the purpose
of registering the Conversion Stock under the Securities Act of 1933, as
amended.
CC. Savings Account(s): Withdrawable deposit(s) in the Association or the
------------------
Converted Association.
DD. SEC: Securities and Exchange Commission.
---
EE. Special Meeting: The special meeting of Members called for the
---------------
purpose of considering the Plan for approval.
FF. Subscription Offering: The offering of Conversion Stock to Eligible
---------------------
Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental
Eligible Account Holders and Other Members under the Plan.
GG. Subscription Rights: Nontransferable, non-negotiable, personal rights
-------------------
of Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans,
Supplemental Eligible Account Holders and Other Members to purchase Conversion
Stock.
HH. Supplemental Eligibility Record Date: The last day of the calendar
------------------------------------
quarter preceding the approval of the Plan by the OTS.
II. Supplemental Eligible Account Holder: Holder of a Qualifying Deposit
------------------------------------
in the Association (other than an Officer or director of the Association or
their Associates) on the Supplemental Eligibility Record Date.
JJ. Syndicated Community Offering: The offering for sale by a syndicate
-----------------------------
of broker-dealers to the general public of shares of Conversion Stock not
purchased in the Subscription Offering and the Direct Community Offering.
KK. Tax-Qualified Employee Stock Benefit Plan: Any defined benefit plan or
-----------------------------------------
defined contribution plan of the Association or Holding Company, such as an
employee stock ownership plan, 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. A "non-tax-qualified employee stock
benefit plan" is any defined benefit plan or defined contribution plan that is
not so qualified.
III. Steps Prior to Submission of the Plan to the Members for Approval
-----------------------------------------------------------------
Prior to submission of the Plan to the Members for approval, the
Association must receive approval from the OTS of the Form AC Application.
Prior to such regulatory approval:
A. The Board of Directors shall adopt the Plan by a vote of not less than
two-thirds of its entire membership.
B. The Association shall notify the Members of the adoption of the Plan
by publishing legal notice in a newspaper having a general circulation in each
community in which the Association maintains an office.
C. A press release relating to the proposed Conversion may be submitted
to the local media.
4
<PAGE>
D. Copies of the Plan as adopted by the Board of Directors shall be made
available for inspection at each office of the Association.
E. The Association shall cause the Holding Company to be incorporated
under state law and the Board of Directors of the Holding Company shall concur
in the Plan by at least a two-thirds vote.
F. As soon as practicable following the adoption of this Plan, the
Association shall file the Form AC Application, and the Holding Company shall
file the Registration Statement and the H-(e)1 Application. Upon filing the
Form AC Application, the Association shall publish legal notice of the filing of
the Form AC Application in a newspaper having a general circulation in each
community in which the Association maintains an office and/or by mailing a
letter to each of its Members, and shall publish such other notices of the
Conversion as may be required in connection with the H-(e)1 Application and by
the regulations and policies of the OTS.
G. The Association shall obtain an opinion of its tax advisors or a
favorable ruling from the United States Internal Revenue Service which shall
state that the Conversion will not result in any gain or loss for Federal income
tax purposes to the Association or its Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members. Receipt of a favorable opinion or
ruling is a condition precedent to completion of the Conversion.
IV. Meeting of Members
------------------
Subsequent to the approval of the Plan by the OTS, the Special Meeting
shall be scheduled in accordance with the Association's Bylaws. Promptly after
receipt of approval and at least 20 days but not more than 45 days prior to the
Special Meeting, the Association shall distribute proxy solicitation materials
to all Members and beneficial owners of accounts held in fiduciary capacities
where the beneficial owners possess voting rights, as of the Record Date. The
proxy solicitation materials shall include a copy of the proxy statement to be
used in connection with such solicitation ("Proxy Statement") and other
documents authorized for use by the regulatory authorities and may also include
a copy of the Plan and/or a prospectus ("Prospectus") as provided in Paragraph V
below. The Association shall also advise each Eligible Account Holder and
Supplemental Eligible Account Holder not entitled to vote at the Special Meeting
of the proposed Conversion and the scheduled Special Meeting, and provide a
postage prepaid card on which to indicate whether he wishes to receive the
Prospectus, if the Subscription Offering is not held concurrently with the proxy
solicitation.
Pursuant to OTS regulations, an affirmative vote of not less than a
majority of the total outstanding votes of the Members is required for approval
of the Plan. Voting may be in person or by proxy. The OTS shall be notified
promptly of the actions of the Members.
V. Summary Proxy Statement
-----------------------
The Proxy Statement furnished to Members may be in summary form, provided
that a statement is made in bold-face type that a more detailed description of
the proposed transaction may be obtained by returning an enclosed postage
prepaid card or other written communication requesting supplemental information.
Without prior approval of the OTS, the Special Meeting shall not be held less
than 20 days after the last day on which the supple mental information statement
is mailed to requesting Members. The supplemental information statement may be
combined with the Prospectus if the Subscription Offering is commenced
concurrently with or during the proxy solicitation of Members for the Special
Meeting.
VI. Offering Documents
------------------
The Holding Company may commence the Subscription Offering and, provided
that the Subscription Offering has commenced, may commence the Direct Community
Offering concurrently with or during the proxy solicitation of Members. The
Holding Company may close the Subscription Offering before the Special Meeting,
provided that the offer and sale of the Conversion Stock shall be conditioned
upon approval of the Plan by the
5
<PAGE>
Members at the Special Meeting. The Association's proxy solicitation materials
may require Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members to return to the Association by a reasonable certain date a
postage prepaid card or other written communication requesting receipt of a
Prospectus with respect to the Subscription Offering, provided that if the
Prospectus is not mailed concurrently with the proxy solicitation materials, the
Subscription Offering shall not be closed until the expiration of 30 days after
the mailing of the proxy solicitation materials. If the Subscription Offering is
not commenced within 45 days after the Special Meeting, the Association may
transmit, not more than 30 days prior to the commencement of the Subscription
Offering, to each Eligible Account Holder, Supplemental Eligible Account Holder
and other eligible subscribers who had been furnished with proxy solicitation
materials a notice which shall state that the Association is not required to
furnish a Prospectus to them unless they return by a reasonable date certain a
postage prepaid card or other written communication requesting the receipt of
the Prospectus.
Prior to commencement of the Subscription Offering, the Direct Community
Offering and the Syndicated Community Offering, the Holding Company shall file
the Registration Statement. The Holding Company shall not distribute the final
Prospectus until the Registration Statement containing same has been declared
effective by the SEC and the Prospectus has been declared effective by the OTS.
VII. Combined Subscription and Direct Community Offering
---------------------------------------------------
Instead of a separate Subscription Offering, all Subscription Rights may
be exercised by delivery of properly completed and executed Order Forms to the
Association or selling group utilized in connection with the Direct Community
Offering and the Syndicated Community Offering. If a separate Subscription
Offering is not held, orders for Conversion Stock in the Direct Community
Offering shall first be filled pursuant to the priorities and limitations stated
in Paragraph IX.C., below.
VIII. Consummation of the Conversion
------------------------------
After receipt of all orders for Conversion Stock, the amendment of the
Association's Federal Mutual Charter and Bylaws to authorize the issuance of
shares of Capital Stock and to conform to the requirements of a federal stock
savings bank, as approved by the Members at the Special Meeting will be declared
effective by the OTS. At such time, the Conversion Stock will be issued and sold
by the Holding Company, the Capital Stock to be issued in the Conversion will be
issued and sold to the Holding Company, and the Converted Association will
become a wholly owned subsidiary of the Holding Company. The Converted
Association will issue to the Holding Company 1,000 shares of its common stock,
representing all of the shares of Capital Stock to be issued by the Converted
Association, and the Holding Company will make payment to the Converted
Association of that portion of the aggregate net proceeds realized by the
Holding Company from the sale of the Conversion Stock under the Plan as may be
authorized or required by the OTS.
IX. Stock Offering
--------------
A. Number of Shares
----------------
The number of shares of Conversion Stock to be offered pursuant to the
Plan shall be determined initially by the Board of Directors of the Association
and the Board of Directors of the Holding Company in conjunction with the
determination of the Purchase Price (as that term is defined in Paragraph IX.B.
below). The number of shares to be offered may be subsequently adjusted by the
Board of Directors prior to completion of the offering.
B. Independent Evaluation and Purchase Price of Shares
---------------------------------------------------
All shares of Conversion Stock sold in the Conversion, including shares
sold in any Direct Community Offering, shall be sold at a uniform price per
share, referred to herein as the "Purchase Price." The Purchase Price shall be
determined by the Board of Directors of the Association and the Board of
Directors of the Holding Company
6
<PAGE>
immediately prior to the simultaneous completion of all such sales contemplated
by this Plan on the basis of the estimated pro forma market value of the
Converted Association and the Holding Company at such time. The estimated pro
forma market value of the Converted Association and the Holding Company shall be
determined for such purpose by an independent appraiser on the basis of such
appropriate factors not inconsistent with the regulations of the OTS.
Immediately prior to the Subscription Offering, a subscription price range shall
be estab lished which shall vary from 15% above to 15% below the average of the
minimum and maximum of the estimated price range. The maximum subscription price
(i.e., the per share amount to be remitted when subscribing for shares of
Conversion Stock) shall then be determined within the subscription price range
by the Board of Directors of the Association. The subscription price range and
the number of shares to be offered may be revised after the completion of the
Subscription Offering with OTS approval without a resolicitation of proxies or
Order Forms or both.
C. Method of Offering Shares
-------------------------
Subscription Rights shall be issued at no cost to Eligible Account Holders,
Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account
Holders and Other Members pursuant to priorities established by this Plan and
the regulations of the OTS. In order to effect the Conversion, all shares of
Conversion Stock proposed to be issued in connection with the Conversion must be
sold and, to the extent that shares are available, no subscriber shall be
allowed to purchase less than 25 shares; provided, however, that if the purchase
price is greater than $20.00 per share, the minimum number of shares which must
be subscribed for shall be adjusted so that the aggregate actual purchase price
required to be paid for such minimum number of shares does not exceed $500.00.
The priorities established for the purchase of shares are as follows:
1. Category 1: Eligible Account Holders
-------------------------------------
a. Each Eligible Account Holder shall receive, without payment,
Subscription Rights entitling such Eligible Account Holder to purchase
that number of shares of Conversion Stock which is equal to the
greater of the maximum purchase limitation established for the Direct
Community Offering, one-tenth of one percent of the total offering or
15 times the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of Conversion 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. If the allocation made in this paragraph results in an
oversubscription, shares of Conversion Stock shall be allocated among
subscribing Eligible Account Holders so as to permit each such account
holder, to the extent possible, to purchase a number of shares of
Conversion Stock sufficient to make his total allocation equal to 100
shares of Conversion Stock or the total amount of his subscription,
whichever is less. Any shares of Conversion Stock not so allocated
shall be allocated among the subscribing Eligible Account Holders on
an equitable basis, related to the amounts of their respective
Qualifying Deposits as compared to the total Qualifying Deposits of
all subscribing Eligible Account Holders.
b. Subscription Rights received by Officers and directors of the
Association and their Associates, as Eligible Account Holders, based
on their increased deposits in the Association in the one-year period
preceding the Eligibility Record Date shall be subordinated to all
other subscriptions involving the exercise of Subscription Rights
pursuant to this Category.
2. Category 2: Tax-Qualified Employee Stock Benefit Plans
------------------------------------------------------
a. Tax-Qualified Employee Stock Benefit Plans shall receive,
without payment, nontransferable Subscription Rights to purchase in
the aggregate up to 8% of the Conversion Stock, including shares of
Conversion Stock to be issued in the Conversion as result of an
increase in the estimated price range after commencement of the
Subscription Offering and prior to the completion
7
<PAGE>
of the Conversion. The Subscription Rights granted to Tax-Qualified
Stock Benefit Plans shall be subject to the availability of shares of
Conversion Stock after taking into account the shares of Conversion
Stock purchased by Eligible Account Holders; provided, however, that
in the event the number of shares offered in the Conversion is
increased to an amount greater than the maximum of the estimated price
range as set forth in the Prospectus ("Maximum Shares"), the Tax-
Qualified Employee Stock Benefit Plans shall have a priority right to
purchase any such shares exceeding the Maximum Shares up to an
aggregate of 8% of the Conversion Stock. Tax-Qualified Employee Stock
Benefit Plans may use funds contributed or borrowed by the Holding
Company or the Association and/or borrowed from an independent
financial institution to exercise such Subscription Rights, and the
Holding Company and the Association may make scheduled discretionary
contributions thereto, provided that such contributions do not cause
the Holding Company or the Association to fail to meet any applicable
capital requirements.
3. Category 3: Supplemental Eligible Account Holders
--------------------------------------------------
a. In the event that the Eligibility Record Date is more than 15
months prior to the date of the latest amendment to the Form AC
Application filed prior to OTS approval, then, and only in that event,
each Supplemental Eligible Account Holder shall receive, without
payment, Subscription Rights entitling such Supplemental Eligible
Account Holder to purchase that number of shares of Conversion Stock
which is equal to the greater of the maximum purchase limitation
established for the Direct Community Offering, one-tenth of one
percent of the total offering or 15 times the product (rounded down to
the next whole number) obtained by multiplying the total number of
shares of Conversion Stock to be issued by a fraction of which the
numerator is the amount of the Qualifying Deposit of the Supplemental
Eligible Account Holder and the denominator is the total amount of the
Qualifying Deposits of all Subscribing Supplemental Eligible Account
Holders.
b. Subscription Rights received pursuant to this category shall
be subordinated to Subscription Rights granted to Eligible Account
Holders and Tax-Qualified Employee Stock Benefit Plans.
c. Any Subscription Rights to purchase shares of Conversion
Stock received by an Eligible Account Holder in accordance with
Category Number 1 shall reduce to the extent thereof the Subscription
Rights to be distributed pursuant to this Category.
d. In the event of an oversubscription for shares of Conversion
Stock pursuant to this Category, shares of Conversion Stock shall be
allocated among the subscribing Supplemental Eligible Account Holders
as follows:
(1) Shares of Conversion Stock shall be allocated so as to
permit each such Supplemental Eligible Account Holder, to the
extent possible, to purchase a number of shares of Conversion
Stock sufficient to make his total allocation (including the
number of shares of Conversion Stock, if any, allocated in
accordance with Category Number 1) equal to 100 shares of
Conversion Stock or the total amount of his subscription,
whichever is less.
(2) Any shares of Conversion Stock not allocated in
accordance with subparagraph (1) above shall be allocated among
the subscribing Supplemental Eligible Account Holders on an
equitable basis, related to the amounts of their respective
Qualifying Deposits as compared to the total Qualifying Deposits
of all subscribing Supplemental Eligible Account Holders.
8
<PAGE>
4. Category 4: Other Members
--------------------------
a. Other Members shall receive, without payment, Subscription
Rights to purchase shares of Conversion Stock, after satisfying the
subscriptions of Eligible Account Holders, Tax-Qualified Employee
Stock Benefit Plans and Supplemental Eligible Account Holders pursuant
to Category Nos. l, 2 and 3 above, subject to the following
conditions:
(1) Each such Other Member shall be entitled to subscribe
for the greater of the maximum purchase limitation established for the
Direct Community Offering or one-tenth of one percent of the total
offering.
(2) In the event of an oversubscription for shares of
Conversion Stock pursuant to Category No. 4, the shares of Conversion
Stock available shall be allocated among the subscribing Other Members
pro rata on the basis of the amounts of their respective
subscriptions.
D. Direct Community Offering and Syndicated Community Offering
-----------------------------------------------------------
1. Any shares of Conversion Stock not purchased through the exercise
of Subscription Rights set forth in Category Nos. 1 through 4 above may be
sold by the Holding Company to Persons under such terms and conditions as
may be established by the Association's Board of Directors with the
concurrence of the OTS. The Direct Community Offering may commence
concurrently with or as soon as possible after the completion of the
Subscription Offering and must be completed within 45 days after completion
of the Subscription Offering, unless extended with the approval of the OTS.
No Person may purchase shares of Conversion Stock in the Direct Community
Offering having an aggregate purchase price of more than $330,000. The
right to purchase shares of Conversion Stock under this Category is subject
to the right of the Association or the Holding Company to accept or reject
such subscriptions in whole or in part. In the event of an oversubscription
for shares in this Category, the shares available shall be allocated among
prospective purchasers pro rata on the basis of the amounts of their
respective orders. The offering price for which such shares are sold to the
general public in the Direct Community Offering shall be the Purchase
Price.
2. Orders received in the Direct Community Offering first shall be
filled up to a maximum of 2% of the Conversion Stock and thereafter
remaining shares shall be allocated on an equal number of shares basis per
order until all orders have been filled.
3. The Conversion Stock offered in the Direct Community Offering
shall be offered and sold in a manner that will achieve the widest
distribution thereof. Preference shall be given in the Direct Community
Offering to natural Persons and trusts of natural Persons residing in the
Local Community.
4. Subject to such terms, conditions and procedures as may be
determined by the Association and the Holding Company, all shares of
Conversion Stock not subscribed for in the Subscription Offering or ordered
in the Direct Community Offering may be sold by a syndicate of broker-
dealers to the general public in a Syndicated Community Offering. No
Person may purchase shares of Conversion Stock in the Syndicated Community
Offering having an aggregate purchase price of more than $330,000. Each
order for Conversion Stock in the Syndicated Community Offering shall be
subject to the absolute right of the Association and the Holding Company to
accept or reject any such order in whole or in part either at the time of
receipt of an order or as soon as practicable after completion of the
Syndicated Community Offering. The Association and the Holding Company may
commence the Syndicated Community Offering concurrently with, at any time
during, or as soon as practicable after the end of the Subscription
Offering and/or Direct Community Offering, provided that the Syndicated
Community Offering must be completed
9
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within 45 days after the completion of the Subscription Offering, unless
extended by the Association and the Holding Company with the approval of
the OTS.
5. If for any reason a Syndicated Community Offering of shares of
Conversion Stock not sold in the Subscription Offering and the Direct
Community Offering cannot be effected, or in the event that any
insignificant residue of shares of Conversion Stock is not sold in the
Subscription Offering, Direct Community Offering or Syndicated Community
Offering, the Association and the Holding Company shall use their best
efforts to obtain other purchasers for such shares in such manner and upon
such conditions as may be satisfactory to the OTS.
6. In the event a Direct Community Offering or Syndicated Community
Offering do not appear feasible, the Association will immediately consult
with the OTS to determine the most viable alternative available to effect
the completion of the Conversion. Should no viable alternative exist, the
Association may terminate the Conversion with the concurrence of the OTS.
E. Limitations Upon Purchases
--------------------------
The following additional limitations and exceptions shall be imposed upon
purchases of shares of Conversion Stock:
1. No Person, together with Associates of or Persons Acting in
Concert with such Person, may purchase in the aggregate more than the
overall maximum purchase limitation of 1% of the total number of shares of
Conversion Stock issued in the Conversion (exclusive of any shares issued
pursuant to an increase in the range of minimum and maximum aggregate
values within which the aggregate amount of Conversion Stock issued in the
Conversion will fall), except that Tax-Qualified Employee Stock Benefit
Plans may purchase up to 8% of the total Conversion Stock issued and shares
held or to be held by the Tax-Qualified Employee Stock Benefit Plans and
attributable to a Person shall not be aggregated with other shares
purchased directly by or otherwise attributable to such Person.
2. Officers and directors of the Association and Associates thereof
may not purchase in the aggregate more than 29% of the shares issued in the
Conversion.
3. The Association's and Holding Company's Boards of Directors will
not be deemed to be Associates or a group of Persons Acting in Concert with
other directors or trustees solely as a result of membership on the Board
of Directors.
4. The Association's Board of Directors, with the approval of the
OTS and without further approval of Members, may, as a result of market
conditions and other factors, increase or decrease the purchase limitation
in paragraphs 1 and 4 above or the number of shares of Conversion Stock to
be sold in the Conversion. If the Association or the Holding Company, as
the case may be, increases the maximum purchase limitations or the number
of shares of Conversion Stock to be sold in the Conversion, the Association
or the Holding Company, as the case may be, is only required to resolicit
Persons who subscribed for the maximum purchase amount and may, in the sole
discretion of the Association or the Holding Company, as the case may be,
resolicit certain other large subscribers. If the Association or the
Holding Company, as the case may be, decreases the maximum purchase
limitations or the number of shares of Conversion Stock to be sold in the
Conversion, the orders of any Person who subscribed for the maximum
purchase amount shall be decreased by the minimum amount necessary so that
such Person shall be in compliance with the then maximum number of shares
permitted to be subscribed for by such Person.
Each Person purchasing Conversion Stock in the Conversion shall be deemed
to confirm that such purchase does not conflict with the purchase limitations
under the Plan or otherwise imposed by law, rule or regulation. In the event
that such purchase limitations are violated by any Person (including any
Associate or group of Persons
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affiliated or otherwise Acting in Concert with such Person), the Holding Company
shall have the right to purchase from such Person at the actual Purchase Price
per share all shares acquired by such Person in excess of such purchase
limitations or, if such excess shares have been sold by such Person, to receive
from such Person the difference between the actual Purchase Price per share paid
for such excess shares and the price at which such excess shares were sold by
such Person. This right of the Holding Company to purchase such excess shares
shall be assignable by the Holding Company.
F. Restrictions On and Other Characteristics of the Conversion Stock
-----------------------------------------------------------------
1. Transferability. Conversion Stock purchased by Officers and
---------------
directors of the Association and officers and directors of the Holding
Company 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 (i)
following the death of the original purchaser or (ii) resulting from an
exchange of securities in a merger or acquisition approved by the
regulatory authorities having jurisdiction.
The Conversion Stock issued by the Holding Company to such Officers
and directors shall bear a legend giving appropriate notice of the one-year
holding period restriction. Said legend shall state as follows:
"The shares evidenced by this certificate are restricted as to
transfer for a period of one year from the date of this certificate
pursuant to Part 563b of the Rules and Regulations of the Office of
Thrift Supervision. These shares may not be transferred prior thereto
without a legal opinion of counsel that said transfer is permissible
under the provisions of applicable laws and regulations."
In addition, the Holding Company shall give appropriate instructions
to the transfer agent of the Holding Company Stock with respect to the
foregoing restrictions. Any shares of Holding Company Stock 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 such Persons as may be then applicable to such restricted
stock.
2. Subsequent Purchases by Officers and Directors. Without prior
----------------------------------------------
approval of the OTS, if applicable, Officers and directors of the
Association and officers and directors of the Holding Company, and their
Associates, shall be prohibited for a period of three years following
completion of the Conversion from purchasing outstanding shares of Holding
Company Stock, except from a broker or dealer registered with the SEC.
Notwithstanding this restriction, purchases involving more than 1% of the
total outstanding shares of Holding Company Stock and purchases made and
shares held by a Tax-Qualified or non-Tax-Qualified Employee Stock Benefit
Plan which may be attributable to such directors and Officers may be made
in negotiated transactions without OTS permission or the use of a broker or
dealer.
3. Repurchase and Dividend Rights. For a period of three years
------------------------------
following the consummation of the Conversion, any repurchases of Holding
Company Stock by the Holding Company from any Person shall be subject to
the then applicable rules and regulations and policies of the OTS. The
Converted Association may not declare or pay a cash dividend on or
repurchase any of its Capital Stock if the result thereof would be to
reduce the regulatory capital of the Converted Association below the amount
required for the liquidation account described in Paragraph XIII. Further,
any dividend declared or paid on the Capital Stock shall comply with the
then applicable rules and regulations of the OTS.
4. Voting Rights. After the Conversion, holders of Savings Accounts
-------------
in and obligors on loans of the Converted Association will not have voting
rights in the Converted Association. Exclusive voting rights with respect
to the Holding Company shall be vested in the holders of Holding Company
Stock; holders of Savings Accounts in and obligors on loans of the
Converted Association will not have any
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voting rights in the Holding Company except and to the extent that such
Persons become stockholders of the Holding Company, and the Holding Company
will have exclusive voting rights with respect to the Converted
Association's Capital Stock.
G. Mailing of Offering Materials and Collation of Subscriptions
------------------------------------------------------------
The sale of all shares of Conversion Stock offered pursuant to the Plan
must be completed within 24 months after approval of the Plan at the Special
Meeting. After approval of the Plan by the OTS and the declaration of the
effectiveness of the Prospectus, the Holding Company shall distribute
Prospectuses and Order Forms for the purchase of shares of Conversion Stock in
accordance with the terms of the Plan.
The recipient of an Order Form shall be provided not less than 20 days nor
more than 45 days from the date of mailing, unless extended, properly to
complete, execute and return the Order Form to the Holding Company or the
Association. Self-addressed, postage prepaid, return envelopes shall accompany
all Order Forms when they are mailed. Failure of any eligible subscriber to
return a properly completed and executed Order Form within the prescribed time
limits shall be deemed a waiver and a release by such eligible subscriber of any
rights to purchase shares of Conversion Stock under the Plan.
The sale of all shares of Conversion Stock proposed to be issued in
connection with the Conversion must be completed within 45 days after the last
day of the Subscription Offering, unless extended by the Holding Company with
the approval of the OTS.
H. Method of Payment
-----------------
Payment for all shares of Conversion Stock may be made in cash, by check or
by money order, or if a subscriber has a Savings Account(s) in the Association,
such subscriber may authorize the Association to charge the subscriber's Savings
Account(s). The Association shall pay interest at not less than the passbook
rate on all amounts paid in cash or by check or money order to purchase shares
of Conversion Stock in the Subscription Offering from the date payment is
received until the Conversion is completed or terminated. The Association is not
permitted knowingly to loan funds or otherwise extend any credit to any Person
for the purpose of purchasing Conversion Stock.
If a subscriber authorizes the Association to charge the subscriber's
Savings Account(s), the funds shall remain in the subscriber's Savings
Account(s) and shall continue to earn interest, but may not be used by such
subscriber until the Conversion is completed or terminated, whichever is
earlier. The withdrawal shall be given effect only concurrently with the sale
of all shares of Conversion Stock proposed to be sold in the Conversion and only
to the extent necessary to satisfy the subscription at a price equal to the
aggregate Purchase Price. The Association shall allow subscribers to purchase
shares of Conversion Stock by withdrawing funds from certificate accounts held
with the Association without the assessment of early withdrawal penalties,
subject to the approval, if necessary, of the applicable regulatory authorities.
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 that
event, the remaining balance shall 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 Conversion Stock under the Plan.
Tax-Qualified Employee Stock Benefit Plans may subscribe for shares by
submitting an Order Form, along with evidence of a loan commitment from a
financial institution for the purchase of shares, if applicable, during the
Subscription Offering and by making payment for the shares on the date of the
closing of the Conversion.
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I. Undelivered, Defective or Late Order Forms; Insufficient Payment
----------------------------------------------------------------
If an Order Form (i) is not delivered and is returned to the Holding
Company or the Association by the United States Postal Service (or the Holding
Company or Association is unable to locate the addressee); (ii) is not returned
to the Holding Company or Association, or is returned to the Holding Company or
Association after ex piration of the date specified thereon; (iii) is
defectively completed or executed; or (iv) is not accompanied by the total
required payment for the shares of Conversion Stock subscribed for (including
cases in which the subscribers' Savings Accounts are insufficient to cover the
authorized withdrawal for the required payment), the Subscription Rights of the
Person to whom such rights have been granted shall not be honored and shall be
treated as though such Person failed to return the completed Order Form within
the time period specified therein. Alternatively, the Holding Company or
Association may, but shall not be required to, waive any irregularity relating
to any Order Form or require the submission of a corrected Order Form or the
remittance of full payment for the shares of Conversion Stock subscribed for by
such date as the Holding Company or Association may specify. Subscription
orders, once tendered, shall not be revocable. The Holding Company's and
Association's interpretation of the terms and conditions of the Plan and of the
Order Forms shall be final.
J. Members in Non-Qualified States or in Foreign Countries
-------------------------------------------------------
The Holding Company and the Association will make reasonable efforts to
comply with the securities laws of all states in the United States in which
persons entitled to subscribe for stock pursuant to the Plan reside. However,
the Holding Company and the Association are not required to offer stock in the
Subscription Offering to any person who resides in a foreign country or resides
in a state of the United States with respect to which (i) a small number of
persons otherwise eligible to subscribe for shares of Common Stock reside in
such state; or (ii) the Holding Company or the Association determines that
compliance with the securities laws of such state would be impracticable for
reasons of cost or otherwise, including but not limited to a request or
requirement that the Holding Company and the Association or their officers,
directors or trustees register as a broker, dealer, salesman or selling agent,
under the securities laws of such state, or a request or requirement to register
or otherwise qualify the Subscription Rights or Common Stock for sale or submit
any filing with respect thereto in such state. Where the number of persons
eligible to subscribe for shares in one state is small relative to other states,
the Holding Company and the Association will base their decision as to whether
or not to offer the Common Stock in such state on a number of factors, including
the size of accounts held by account holders in the state, the cost of reviewing
the registration and qualification requirements of the state (and of actually
registering or qualifying the shares) or the need to register the Holding
Company, its officers, directors or employees as brokers, dealers or salesmen.
X. Federal Stock Charter and Bylaws
--------------------------------
As part of the Conversion, a Federal Stock Charter and Bylaws will be
adopted to authorize the Converted Association to operate as a federal stock
savings and loan association. By approving the Plan, the Members of the
Association will thereby approve the Federal Stock Charter and Bylaws. Prior to
completion of the Conversion, the Federal Stock Charter and Bylaws may be
amended in accordance with the provisions and limitations for amending the Plan
under Paragraph XVII below. The effective date of the adoption of the Federal
Stock Charter and Bylaws shall be the date of the issuance of the Conversion
Stock, which shall be the date of consummation of the Conversion.
XI. Post Conversion Filing and Market Making
----------------------------------------
In connection with the Conversion, the Holding Company shall register the
Conversion Stock with the SEC pursuant to the Securities Exchange Act of 1934,
as amended, and shall undertake not to deregister such Conversion Stock for a
period of three years thereafter.
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The Holding Company shall use its best efforts to encourage and assist
various Market Makers to establish and maintain a market for the shares of its
stock. The Holding Company shall also use its best efforts to list its stock
through The Nasdaq Stock Market or on a national or regional securities
exchange.
XII. Status of Savings Accounts and Loans Subsequent to Conversion
-------------------------------------------------------------
All Savings Accounts shall retain the same status after Conversion as
these accounts had prior to Conversion. Each Savings Account holder shall
retain, without payment, a withdrawable Savings Account(s) after the Conversion,
equal in amount to the withdrawable value of such holder's Savings Account(s)
prior to Conversion. All Savings Accounts will continue to be insured by the
Savings Association Insurance Fund of the FDIC up to the applicable limits of
insurance coverage. All loans shall retain the same status after the Conversion
as they had prior to the Conversion. See Paragraph IX.F.4. with respect to the
termination of voting rights of Members.
XIII. Liquidation Account
-------------------
After the Conversion, holders of Savings Accounts shall not be entitled to
share in any residual assets in the event of liquidation of the Converted
Association. However, the Association shall, at the time of the Conversion,
establish a liquidation account in an amount equal to its total net worth as of
the date of the latest statement of financial condition contained in the final
Prospectus. The function of the liquidation account shall be to establish a
priority on liquidation and, except as provided in Paragraph IX.F.3 above, the
existence of the liquidation account shall not operate to restrict the use or
application of any of the net worth accounts of the Converted Association.
The liquidation account shall be maintained by the Converted Association
subsequent to the Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who retain their Savings Accounts in the
Converted Association. Each Eligible Account Holder and Supplemental Eligible
Account Holder shall, with respect to each Savings Account held, have a related
inchoate interest in a portion of the liquidation account balance
("subaccount").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder and/or a Supplemental Eligible Account Holder shall be determined
by multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's Qualifying Deposit in the
Savings Account and the denominator is the total amount of the Qualifying
Deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders. Such initial subaccount balance shall not be increased, and it shall
be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account
Holder or Supplemental Eligible Account Holder at the close of business on any
annual closing date subsequent to the Eligibility Record Date is less than the
lesser of (i) the deposit balance in such Savings Account at the close of
business on any other annual closing date subsequent to the Eligibility Record
Date or the Supplemental Eligibility Record Date or (ii) the amount of the
Qualifying Deposit in such Savings Account on the Eligibility Record Date or the
Supplemental Eligibility Record Date, then the subaccount balance for such
Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of a
downward adjustment, such subaccount balance shall not be subsequently
increased, notwithstanding any increase in the deposit balance of the related
Savings Account. If any such Savings Account is closed, the related subaccount
balance shall be reduced to zero.
In the event of a complete liquidation of the Converted Association, each
Eligible Account Holder and Sup plemental Eligible Account Holder shall be
entitled to receive a liquidation distribution from the liquidation account in
the amount of the then current adjusted subaccount balance(s) for Savings
Account(s) then held by such holder before any liquidation distribution may be
made to stockholders. No merger, consolidation, bulk purchase of assets with
assumptions of Savings Accounts and other liabilities or similar transactions
with another Federally-insured
14
<PAGE>
institution in which the Converted Association is not the surviving institution
shall be considered to be a complete liquidation. In any such transaction, the
liquidation account shall be assumed by the surviving institution.
XIV. Regulatory Restrictions on Acquisition of Holding Company
---------------------------------------------------------
A. OTS regulations provide that for a period of three years following
completion of the Conversion, no Person (i.e, individual, a group Acting in
Concert, a corporation, a partnership, an association, a joint stock company, a
trust, or any unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of
securities of an insured institution or its holding company) shall directly, or
indirectly, offer to purchase or actually acquire the beneficial ownership of
more than 10% of any class of equity security of the Holding Company without the
prior approval of the OTS. However, approval is not required for purchases
directly from the Holding Company or the underwriters or selling group acting on
its behalf with a view towards public resale, or for purchases not exceeding 1%
per annum of the shares outstanding. Civil penalties may be imposed by the OTS
for willful violation or assistance of any violation. Where any Person,
directly or indirectly, acquires beneficial ownership of more than 10% of any
class of equity security of the Holding Company within such three-year period,
without the prior approval of the OTS, stock of the Holding Company 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 the stockholders for a vote. The
provisions of this regulation shall not apply to the acquisition of securities
by Tax-Qualified Employee Stock Benefit Plans provided that such plans do not
have beneficial ownership of more than 25% of any class of equity security of
the Holding Company.
B. The Holding Company may provide in its articles/certificate of
incorporation, or similar document, a provision that, for a specified period of
up to five years following the date of the completion of the Conversion, no
Person shall directly or indirectly offer to acquire or actually acquire the
beneficial ownership of more than 10% of any class of equity security of the
Holding Company. Such provisions would not apply to acquisition of securities
by Tax-Qualified Employee Stock Benefit Plans provided that such plans do not
have beneficial ownership of more than 25% of any class of equity security of
the Holding Company. The Holding Company may provide in its articles/certificate
of incorporation, or similar document, for such other provisions affecting the
acquisition of its stock as shall be determined by its Board of Directors.
XV. Directors and Officers of the Converted Association
---------------------------------------------------
The Conversion is not intended to result in any change in the directors or
Officers. Each Person serving as a director of the Association at the time of
Conversion shall continue to serve as a member of the Converted Association's
Board of Directors, subject to the Converted Association's Federal Stock Charter
and Bylaws. The Persons serving as Officers immediately prior to the Conversion
will continue to serve at the discretion of the Board of Directors in their
respective capacities as Officers of the Converted Association. In connection
with the Conversion, the Association and the Holding Company may enter into
employment agreements on such terms and with such officers as shall be
determined by the Boards of Directors of the Association and the Holding
Company.
XVI. Executive Compensation
----------------------
The Association and the Holding Company may adopt, subject to any required
approvals, executive compensation or other benefit programs, including but not
limited to compensation plans involving stock options, stock appreciation
rights, restricted stock grants, employee recognition programs and the like.
XVII. Amendment or Termination of Plan
--------------------------------
If necessary or desirable, the Plan may be amended by a two-thirds vote of
the Association's Board of Directors, at any time prior to submission of the
Plan and proxy materials to the Members. At any time after submission of the
Plan and proxy materials to the Members, the Plan may be amended by a two-thirds
vote of the
15
<PAGE>
Board of Directors only with the concurrence of the OTS. The Plan may be
terminated by a two-thirds vote of the Board of Directors at any time prior to
the Special Meeting, and at any time following such Special Meeting with the
concurrence of the OTS. In its discretion, the Board of Directors may modify or
terminate the Plan upon the order of the regulatory authorities without a
resolicitation of proxies or another meeting of the Members.
In the event that mandatory new regulations pertaining to conversions are
adopted by the OTS prior to the completion of the Conversion, the Plan shall be
amended to conform to the new mandatory regulations without a resolicitation of
proxies or another meeting of Members. In the event that new conversion
regulations adopted by the OTS prior to completion of the Conversion contain
optional provisions, the Plan may be amended to utilize such optional provisions
at the discretion of the Board of Directors without a resolicitation of proxies
or another meeting of Members.
By adoption of the Plan, the Members authorize the Board of Directors to
amend and/or terminate the Plan under the circumstances set forth above.
XVIII. Expenses of the Conversion
--------------------------
The Holding Company and the Association shall use their best efforts to
assure that expenses incurred in connection with the Conversion shall be
reasonable.
XIX. Contributions to Tax-Qualified Plans
------------------------------------
The Holding Company and/or the Association may make discretionary
contributions to the Tax-Qualified Employee Stock Benefit Plans, provided such
contributions do not cause the Association to fail to meet its regulatory
capital requirements.
* * *
16
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EXHIBIT B
FEDERAL STOCK CHARTER
HERITAGE FEDERAL BANK
Section 1. Corporate title. The full corporate title of the association
is Heritage Federal Bank ("Savings Bank").
Section 2. Office. The home office shall be located in Laurens, South
Carolina.
Section 3. Duration. The duration of the Savings Bank is perpetual.
Section 4. Purpose and powers. The purpose of the Savings Bank is to
pursue any or all of the lawful objectives of a Federal savings and loan
association chartered under section 5 of the Home Owners' Loan Act and to
exercise all of the express, implied, and incidental powers conferred thereby
and by all acts amendatory thereof and supplemental thereto, subject to the
Constitution and laws of the United States as they are now in effect, or as they
may hereafter be amended, and subject to all lawful and applicable rules,
regulations, and orders of the Office of Thrift Supervision ("Office").
Section 5. Capital stock. The total number of shares of all classes of
capital stock that the Savings Bank has the authority to issue is 10,000, of
which 1,000 shares shall be common stock of par value of $1.00 per share and of
which 9,000 shares shall be serial preferred stock, having no par value. The
shares may be issued from time to time as authorized by the board of directors
without further approval of shareholders, except as otherwise provided in this
Section 5 or to the extent that such approval is required by governing law,
rule, or regulation. The consideration for the issuance of the shares shall be
paid in full before their issuance and shall not be less than the par value.
Neither promissory notes nor future services shall constitute payment or part
payment for the issuance of shares of the Savings Bank. The consideration for
the shares shall be cash, tangible or intangible property (to the extent direct
investment in such property would be permitted), labor, or services actually
performed for the Savings Bank, or any combination of the foregoing. In the
absence of actual fraud in the transaction, the value of such property, labor,
or services, as determined by the board of directors of the Savings Bank, shall
be conclusive. In the case of a stock dividend, that part of the retained
earnings of the Savings Bank that is transferred to common stock or paid-in
capital accounts upon the issuance of shares as a stock dividend shall be deemed
to be the consideration for their issuance.
Except for shares issued in the initial organization of the Savings Bank or
in connection with the conversion of the Savings Bank from the mutual to stock
form of capitalization, no shares of capital stock (including shares issuable
upon conversion, exchange or exercise of other securities) shall be issued,
directly or indirectly, to officers, directors, or controlling persons of the
Savings Bank other than as part of a general public offering or as qualifying
shares to a director, unless their issuance or the plan under which they would
be issued has been approved by a majority of the total votes eligible to be cast
at a legal meeting.
Nothing contained in this section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share, except as
to the cumulation of votes for the election of directors, unless the charter
otherwise provides that there shall be no such cumulative voting: Provided,
that this restriction on voting separately by class or series shall not apply:
(i) To any provision which would authorize the holders of preferred
stock, voting as a class or series, to elect some members of the board of
directors, less than a majority thereof, in the event of default in the
payment of dividends on any class or series of preferred stock;
(ii) To any provision which would require the holders of preferred
stock, voting as a class or series, to approve the merger or consolidation
of the Savings Bank with another corporation or the sale, lease, or
conveyance (other than by mortgage or pledge) of properties or business in
exchange for securities of a corporation other than the Savings Bank if the
preferred
1
<PAGE>
stock is exchanged for securities of such other corporation: Provided,
that no provision may require such approval for transactions undertaken
with the assistance or pursuant to the direction of the Office of the
Federal Deposit Insurance Corporation;
(iii) To any amendment which would adversely change the specific terms
of any class or series of capital stock as set forth in this Section 5 (or
in any supplementary sections hereto), including any amendment which would
create or enlarge any class or series ranking prior thereto in rights and
preferences. An amendment which increases the number of authorized shares
of any class or series of capital stock, or substitutes the surviving
Savings Bank in a merger or consolidation for the Savings Bank, shall not
be considered to be such an adverse change.
A description of the different classes and series (if any) of the Savings
Bank's capital stock and a statement of the designations, and the relative
rights, preferences, and limitations of the shares of each class of and series
(if any) of capital stock are as follows:
A. Common stock. Except as provided in this Section 5 (or in any
supplementary sections thereto) the holders of common stock shall exclusively
possess all voting power. Each holder of shares of common stock shall be
entitled to one vote for each share held by each holder, except as to the
cumulation of votes for the election of directors, unless the charter otherwise
provides that there shall be no such cumulative voting.
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to the payment of dividends, the full amount of
dividends and of sinking fund, retirement fund, or other retirement payments, if
any, to which such holders are respectively entitled in preference to the common
stock, then dividends may be paid on the common stock and on any class or series
of stock entitled to participate therewith as to dividends out of any assets
legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the Savings
Bank, the holders of the common stock (and the holders of any class or series of
stock entitled to participate with the common stock in the distribution of
assets) shall be entitled to receive, in cash or in kind, the assets of the
Savings Bank available for distribution remaining after: (i) payment or
provision for payment of the Savings Bank's debts and liabilities; (ii)
distributions or provision for distributions in settlement of its liquidation
account; and (iii) distributions or provisions for distributions to holders of
any class or series of stock having preference over the common stock in the
liquidation, dissolution, or winding up of the Savings Bank. Each share of
common stock shall have the same relative rights as and be identical in all
respects with all the other shares of common stock.
B. Preferred stock. The Savings Bank may provide in supplementary
sections to its charter for one or more classes of preferred stock, which shall
be separately identified. The shares of any class may be divided into and
issued in series, with each series separately designated so as to distinguish
the shares thereof from the shares of all other series and classes. The terms
of each series shall be set forth in a supplementary section to the charter.
All shares of the same class shall be identical except as to the following
relative rights and preferences, as to which there may be variations between
different series:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the shares
of such series, whether dividends shall be cumulative and, if so, from which
date(s) the payment date(s) for dividends, and the participating or other
special rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of shares of such series;
(d) Whether the shares of such series shall be redeemable and, if so, the
price(s) at which, and the terms and conditions on which such shares may be
redeemed;
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(e) The amount(s) payable upon the shares of such series in the event of
voluntary or involuntary liquidation, dissolution, or winding up of the Savings
Bank;
(f) Whether the shares of such series shall be entitled to the benefit of
a sinking or retirement fund to be applied to the purchase or redemption of such
shares, and if so entitled, the amount of such fund and the manner of its
application, including the price(s) at which such shares may be redeemed or
purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock of the Savings
Bank and, if so, the conversion price(s) or the rate(s) of exchange, and the
adjustments thereof, if any, at which such conversion or exchange may be made,
and any other terms and conditions of such conversion or exchange;
(h) The price or other consideration for which the shares of such series
shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any other
series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
The board of directors shall have authority to divide, by the adoption of
supplementary charter sections, any authorized class of preferred stock into
series, and, within the limitations set forth in this section and the remainder
of this charter, fix and determine the relative rights and preferences of the
shares of any series so established.
Prior to the issuance of any preferred shares of a series established by a
supplementary charter section adopted by the board of directors, the Savings
Bank shall file with the Secretary to the Office a dated copy of that
supplementary section of this charter establishing and designating the series
and fixing and determining the relative rights and preferences thereof.
Section 6. Preemptive rights. Holders of the capital stock of the Savings
Bank shall not be entitled to preemptive rights with respect to any shares of
the Savings Bank which may be issued.
Section 7. Liquidation account. Pursuant to the requirements of the
Office's Regulations (12 CFR Subchapter D), the Savings Bank shall establish and
maintain a liquidation account for the benefit of its savings account holders as
of June 30, 1996 and December 31, 1997. In the event of a complete liquidation
of the Savings Bank, it shall comply with such regulations with respect to the
amount and the priorities on liquidation of each of the Savings Bank's eligible
savers' inchoate interest in the liquidation account, to the extent it is still
in existence: Provided, that an eligible savers' inchoate interest in the
liquidation account shall not entitle such eligible saver to any voting rights
at meetings of the Savings Bank's stockholders.
Section 8. Directors. The Savings Bank shall be under the direction of a
Board of Directors. The authorized number of directors, as stated in the
Savings Bank's bylaws, shall not be fewer than five nor more than fifteen except
when a greater or lesser number is approved by the Director of the Office, or
his or her delegate.
Section 9. Amendment of charter. Except as provided in Section 5, no
amendment, addition, alteration, change, or repeal of this charter shall be
made, unless such is proposed by the Board of Directors of the Savings Bank,
approved by the shareholders by a majority of the votes eligible to be cast at a
legal meeting, unless a higher vote is otherwise required, and approved or
preapproved by the Office.
* * *
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Attest: By:
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James H. Wasson, Jr. J. Edward Wells
Secretary of the Savings Bank President and Chief Executive
Officer of the Savings Bank
By: By:
------------------------------ -----------------------------
Secretary of the Director of the
Office of Thrift Supervision Office of Thrift Supervision
Effective Date: , 1998
------------------------------
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EXHIBIT C
BYLAWS
HERITAGE FEDERAL BANK
ARTICLE I - Home Office
The home office of Heritage Federal Bank ("Savings Bank") shall be
located at 201 W. Main Street, in the City of Laurens, in the County of Laurens,
in the State of South Carolina.
ARTICLE II - Shareholders
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the Savings Bank or at such
other place as the Board of Directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the Savings
Bank for the election of directors and for the transaction of any other business
of the Savings Bank shall be held annually within 150 days after the end of the
Savings Bank's fiscal year on the third Wednesday of January, if not a legal
holiday, and if a legal holiday, then on the next day following which is not a
legal holiday, at 2:00 p.m., Eastern Time, or at such other date and time within
such 150-day period as the Board of Directors may determine.
Section 3. Special Meetings. Special meetings of the shareholders for
any purpose or purposes, unless otherwise prescribed by the regulations of the
Office of Thrift Supervision ("Office"), may be called at any time by the
Chairman of the Board, the President, or a majority of the Board of Directors,
and shall be called by the Chairman of the Board, the President, or the
Secretary upon the written request of the holders of not less than one-tenth of
all of the outstanding capital stock of the Savings Bank entitled to vote at the
meeting. Such written request shall state the purpose or purposes of the
meeting and shall be delivered to the home office of the Savings Bank addressed
to the Chairman of the Board, the President, or the Secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the most current edition of Robert's Rules of Order
unless otherwise prescribed by regulations of the Office or these bylaws or the
Board of Directors adopts another written procedure for conduct of meetings.
The Board of Directors shall designate, when present, either the Chairman of the
Board or President to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day,
and hour of the meeting and the purpose(s) for which the meeting is called shall
be delivered not fewer than 20 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the Chairman of
the Board, the President, or the Secretary, or the directors calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the mail,
addressed to the shareholder at the address as it appears on the stock transfer
books or records of the Savings Bank as of the record date prescribed in Section
6 of this Article II with postage prepaid. When any shareholders' meeting,
either annual or special, is adjourned for 30 days or more, notice of the
adjourned meeting shall be given as in the case of an original meeting. It
shall not be necessary to give any notice of the time and place of any meeting
adjourned for less than 30 days or of the business to be transacted at the
meeting, other than an announcement at the meeting at which such adjourn ment is
taken.
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the Board of Directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more
than 60 days and, in case of a meeting of shareholders, not fewer than 10 days
prior to the date on which the particular action requiring such determination of
shareholders is to be taken. When a determination of
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shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer books for
shares of the Savings Bank shall make a complete list of the shareholders
entitled to vote at such meeting, or any adjournment thereof, arranged in
alphabetical order, with the address and the number of shares held by each.
This list of shareholders shall be kept on file at the home office of the
Savings Bank and shall be subject to inspection by any shareholder of record or
the shareholder's agent at any time during usual business hours for a period of
20 days prior to such meeting. Such list shall also be produced and kept open
at the time and place of the meeting and shall be subject to inspection by any
shareholder of record or the shareholder's agent during the entire time of the
meeting. The original stock transfer book shall constitute prima facie evidence
of the shareholders entitled to examine such list or transfer books or to vote
at any meeting of shareholders. In lieu of making the shareholder list
available for inspection by shareholders as provided in the preceding paragraph,
the Board of Directors may elect to follow procedures prescribed in Section
552.6(d) of the Office's regulations as now or hereafter in effect.
Section 8. Quorum. A majority of the outstanding shares of the Savings
Bank entitled to vote, represented in person or by proxy, shall constitute a
quorum at a meeting of shareholders. If less than a majority of the outstanding
shares is represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or repre sented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum. If a quorum is present, the
affirmative vote of the majority of the shares represented at the meeting and
entitled to vote on the subject matter shall be the act of the shareholders,
unless the vote of a greater number of shareholders voting together or voting by
classes is required by law or the charter. Directors, however, are elected by a
plurality of the votes cast at an election of directors.
Section 9. Proxies. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his or her duly
authorized attorney in fact. Proxies may be given telephonically or
electronically as long as the holder uses a procedure for verifying the identity
of the shareholder. Proxies solicited on behalf of the management shall be
voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the Board of Directors. No proxy shall be valid
more than eleven months from the date of its execution except for a proxy
coupled with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When
ownership stands in the name of two or more persons, in the absence of written
directions to the Savings Bank to the contrary, at any meeting of the
shareholders of the Savings Bank any one or more of such shareholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose names shares of stock stand, the vote or votes to
which those persons are entitled shall be cast as directed by a majority of
those holding such and present in person or by proxy at such meeting, but no
votes shall be cast for such stock if a majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the Board of Directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him or her,
either in person or by proxy, without a transfer of such shares into his or her
name. Shares standing in the name of a trustee may be voted by him or her,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him or her without a transfer of such shares into his or her name.
Shares held in trust in an IRA or Keogh Account, however, may be voted by the
Savings Bank if no other instructions are received. Shares standing in the name
of a receiver may be voted by such receiver, and
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shares held by or under the control of a receiver may be voted by such receiver
without the transfer into his or her name if authority to do so is contained in
an appropriate order of the court or other public authority by which such
receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Savings Bank nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the Savings
Bank, shall be voted at any meeting or counted in determining the total number
of outstanding shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. Every shareholder entitled to vote at an
election for directors shall have the right to vote, in person or by proxy, the
number of shares owned by the shareholder for as many persons as there are
directors to be elected and for whose election the shareholder has a right to
vote, or to cumulate the votes by giving one candidate as many votes as the
number of such directors to be elected multiplied by the number of shares shall
equal or by distributing such votes on the same principle among any number of
candidates.
Section 13. Inspectors of Election. In advance of any meeting of
shareholders, the Board of Directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the Chairman of the Board or the President may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails
or refuses to act, the vacancy may be filled by appointment by the Board of
Directors in advance of the meeting or at the meeting by the Chairman of the
Board or the President.
Unless otherwise prescribed by regulations of the Office, the duties of
such inspectors shall include: determining the number of shares and the voting
power of each share, the shares represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies; receiving votes,
ballots, or consents; hearing and determining all challenges and questions in
any way arising in connection with the rights to vote; counting and tabulating
all votes or consents; determining the result; and such acts as may be proper to
conduct the election or vote with fairness to all shareholders.
Section 14. Nominating Committee. The Board of Directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the Savings Bank. No nominations for
directors except those made by the nominating committee shall be voted upon at
the annual meeting unless other nominations by shareholders are made in writing
and delivered to the Secretary of the Savings Bank at least five days prior to
the date of the annual meeting. Upon delivery, such nominations shall be posted
in a conspicuous place in each office of the Savings Bank. Ballots bearing the
names of all persons nominated by the nominating committee and by shareholders
shall be provided for use at the annual meeting. However, if the nominating
committee shall fail or refuse to act at least 20 days prior to the annual
meeting, nominations for directors may be made at the annual meeting by any
shareholder entitled to vote and shall be voted upon.
Section 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the Secretary of the Savings
Bank at least five days before the date of the annual meeting, and all business
so stated, proposed, and filed shall be considered at the annual meeting; but no
other proposal shall be acted upon at the annual meeting. Any shareholder may
make any other proposal at the annual meeting and the
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same may be discussed and considered, but unless stated in writing and filed
with the Secretary at least five days before the meeting, such proposal shall be
laid over for action at an adjourned, special, or annual meeting of the
shareholders taking place 30 days or more thereafter. This provision shall not
prevent the consideration and approval or disapproval at the annual meeting of
reports of officers, directors, and committees; but in connection with such
reports, no new business shall be acted upon at such annual meeting unless
stated and filed as herein provided.
Section 16. Informal Action by Shareholders. Any action required to be
taken at a meeting of the shareholders, or any other action which may be taken
at a meeting of shareholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.
ARTICLE III - Board of Directors
Section 1. General Powers. The business and affairs of the Savings Bank
shall be under the direction of its Board of Directors. The Board of Directors
shall annually elect a Chairman of the Board and a President from among its
members and shall designate, when present, either the Chairman of the Board or
the President to preside at its meetings.
Section 2. Number and Term. The Board of Directors shall consist of
five members and shall be divided into three classes as nearly equal in number
as possible. The members of each class shall be elected for a term of three
years and until their successors are elected and qualified. One class shall be
elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the Board of
Directors shall be held without other notice than this bylaw following the
annual meeting of shareholders. The Board of Directors may provide, by
resolution, the time and place for the holding of additional regular meetings
without other notice than such resolution. Directors may participate in a
meeting by means of a conference telephone or similar communications device
through which all persons participating can hear each other at the same time.
Participation by such means shall constitute presence in person for all
purposes.
Section 4. Qualification. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the Savings
Bank unless the Savings Bank is a wholly owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board, the President,
or one-third of the directors. The persons authorized to call special meetings
of the Board of Directors may fix any place, within the Savings Bank's normal
lending territory, as the place for holding any special meeting of the Board of
Directors called by such persons.
Members of the Board of Directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other. Such participation
shall constitute presence in person for all purposes.
Section 6. Notice. Written notice of any special meeting shall be given
to each director at least 24 hours prior thereto when delivered personally or by
telegram or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall
be deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if mailed, when delivered to the telegraph company if sent by telegram,
or when the Savings Bank receives notice of delivery if electronically
transmitted. Any director may waive notice of any meeting by a writing filed
with the Secretary. The attendance of a director at a meeting shall constitute
a waiver of notice of such meeting, except where a director attends a meeting
for the express purpose of objecting to the transaction of any business because
the meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the Board of Directors need be
specified in the notice of waiver of notice of such meeting.
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Section 7. Quorum. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors; but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by Section 6 of this Article III.
Section 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, unless a greater number is prescribed by regulation of the Office
or by these bylaws.
Section 9. Action Without a Meeting. Any action required or permitted
to be taken by the Board of Directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors.
Section 10. Resignation. Any director may resign at any time by sending
a written notice of such resignation to the home office of the Savings Bank
addressed to the Chairman of the Board or the President. Unless otherwise
specified, such resignation shall take effect upon receipt by the Chairman of
the Board or the President. More than three consecutive absences from regular
meetings of the Board of Directors, unless excused by resolution of the Board of
Directors, shall automatically constitute a resignation, effective when such
resignation is accepted by the Board of Directors.
Section 11. Vacancies. Any vacancy occurring on the Board of Directors
may be filled by the affirmative vote of a majority of the remaining directors
although less than a quorum of the Board of Directors. A director elected to
fill a vacancy shall be elected to serve only until the next election of
directors by the shareholders. Any directorship to be filled by reason of an
increase in the number of directors may be filled by election by the Board of
Directors for a term of office continuing only until the next election of
directors by the shareholders.
Section 12. Compensation. Directors, as such, may receive a stated
salary for their services. By resolution of the Board of Directors, a
reasonable fixed sum, and reasonable expenses of attendance, if any, may be
allowed for attendance at each regular or special meeting of the Board of
Directors. Members of either standing or special committees may be allowed such
compensation for attendance at committee meetings as the Board of Directors may
determine.
Section 13. Presumption of Assent. A director of the Savings Bank who
is present at a meeting of the Board of Directors at which action on any Savings
Bank matter is taken shall be presumed to have assented to the action taken
unless his or her dissent or abstention shall be entered in the minutes of the
meeting or unless he or she shall file a written dissent to such action with the
person acting as the secretary of the meeting before the adjournment thereof or
shall forward such dissent by registered mail to the Secretary of the Savings
Bank within five days after the date a copy of the minutes of the meeting is
received. Such right to dissent shall not apply to a director who voted in
favor of such action.
Section 14. Removal of Directors. At a meeting of shareholders called
expressly for that purpose, any director may be removed only for cause by a vote
of the holders of a majority of the shares then entitled to vote at an election
of directors. If less than the entire board is to be removed, no one of the
directors may be removed if the votes cast against the removal would be
sufficient to elect a director if then cumulatively voted at an election of the
class of directors of which such director is a part. Whenever the holders of
the shares of any class are entitled to elect one or more directors by the
provisions of the charter or supplemental sections thereto, the provisions of
this section shall apply, in respect to the removal of a director or directors
so elected, to the vote of the holders of the outstanding shares of that class
and not to the vote of the outstanding shares as a whole.
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ARTICLE IV - Executive And Other Committees
Section 1. Appointment. The Board of Directors, by resolution adopted
by a majority of the full board, may designate the chief executive officer and
two or more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the Board of Directors, or any director,
of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the Board of
Directors is not in session, shall have and may exercise all of the authority of
the Board of Directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the Board of
Directors with reference to: the declaration of dividends; the amendment of the
charter or bylaws of the Savings Bank, or recommending to the shareholders a
plan of merger, consolidation, or conversion; the sale, lease, or other
disposition of all or substantially all of the property and assets of the
Savings Bank otherwise than in the usual and regular course of its business; a
voluntary dissolution of the Savings Bank; a revocation of any of the foregoing;
or the approval of a transaction in which any member of the executive committee,
directly or indirectly, has any material beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this
Article IV, each member of the executive committee shall hold office until the
next regular annual meeting of the Board of Directors following his or her
designation and until a successor is designated as a member of the executive
committee.
Section 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee
may be called by any member thereof upon not less than one day's notice stating
the place, date, and hour of the meeting, which notice may be written or oral.
Any member of the executive committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in person.
The notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted
to be taken by the executive committee at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full Board of Directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full Board of Directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the President or Secretary of the Savings Bank. Unless otherwise
specified, such resignation shall take effect upon its receipt; the acceptance
of such resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the Board of Directors for its information at
the meeting held next after the proceedings shall have occurred.
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Section 10. Other Committees. The Board of Directors may by resolution
establish an audit, loan, or other committee composed of directors as they may
determine to be necessary or appropriate for the conduct of the business of the
Savings Bank and may prescribe the duties, constitution, and procedures thereof.
ARTICLE V - Officers
Section 1. Positions. The officers of the Savings Bank shall be a
President, one or more Vice Presidents, a Secretary, and a Treasurer or
Comptroller, each of whom shall be elected by the Board of Directors. The Board
of Directors may also designate the Chairman of the Board as an officer. The
offices of the Secretary and Treasurer or Comptroller may be held by the same
person and a Vice President may also be either the Secretary or the Treasurer or
Comptroller. The Board of Directors may designate one or more vice presidents
as Executive Vice President or Senior Vice President. The Board of Directors
may also elect or authorize the appointment of such other officers as the
business of the Savings Bank may require. The officers shall have such
authority and perform such duties as the Board of Directors may from time to
time authorize or determine. In the absence of action by the Board of
Directors, the officers shall have such powers and duties as generally pertain
to their respective offices.
Section 2. Election and Term of Office. The officers of the Savings
Bank shall be elected annually at the first meeting of the Board of Directors
held after each annual meeting of the shareholders. If the election of officers
is not held at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until a successor has been duly
elected and qualified or until the officer's death, resignation, or removal in
the manner hereinafter provided. Election or appointment of an officer,
employee, or agent shall not of itself create contractual rights. The Board of
Directors may authorize the Savings Bank to enter into an employment contract
with any officer in accordance with regulations of the Office; but no such
contract shall impair the right of the Board of Directors to remove any officer
at any time in accordance with Section 3 of this Article V.
Section 3. Removal. Any officer may be removed by the Board of
Directors whenever in its judgment the best interests of the Savings Bank will
be served thereby, but such removal, other than for cause, shall be without
prejudice to any contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by the Board
of Directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be
fixed from time to time by the Board of Directors.
ARTICLE VI - Contracts, Loans, Checks, and Deposits
Section 1. Contracts. To the extent permitted by regulations of the
Office, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the Board of Directors may authorize any officer,
employee, or agent of the Savings Bank to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Savings Bank. Such
authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the Savings
Bank and no evidence of indebtedness shall be issued in its name unless
authorized by the Board of Directors. Such authority may be general or confined
to specific instances.
Section 3. Checks, Drafts, etc. All checks, drafts, or other orders for
the payment of money, notes, or other evidences of indebtedness issued in the
name of the Savings Bank shall be signed by one or more officers, employees, or
agents of the Savings Bank in such manner as shall from time to time be
determined by the Board of Directors.
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Section 4. Deposits. All funds of the Savings Bank not otherwise
employed shall be deposited from time to time to the credit of the Savings Bank
in any duly authorized depositories as the Board of Directors may select.
ARTICLE VII - Certificates for Shares and Their Transfer
Section 1. Certificates for Shares. Certificates representing shares of
capital stock of the Savings Bank shall be in such form as shall be determined
by the Board of Directors and approved by the Office. Such certificates shall
be signed by the Chief Executive Officer or by any other officer of the Savings
Bank authorized by the Board of Directors, attested by the Secretary or an
Assistant Secretary, and sealed with the corporate seal or a facsimile thereof.
The signatures of such officers upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or a registrar
other than the Savings Bank itself or one of its employees. Each certificate
for shares of capital stock shall be consecutively numbered or otherwise
identified. The name and address of the person to whom the shares are issued,
with the number of shares and date of issue, shall be entered on the stock
transfer books of the Savings Bank. All certificates surrendered to the Savings
Bank for transfer shall be canceled and no new certificate shall be issued until
the former certificate for a like number of shares has been surrendered and
canceled, except that in the case of a lost or destroyed certificate, a new
certificate may be issued upon such terms and indemnity to the Savings Bank as
the Board of Directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of
the Savings Bank shall be made only on its stock transfer books. Authority for
such transfer shall be given only by the holder of record or by his or her legal
representative, who shall furnish proper evidence of such authority, or by his
or her attorney authorized by a duly executed power of attorney and filed with
the Savings Bank. Such transfer shall be made only on surrender for
cancellation of the certificate for such shares. The person in whose name
shares of capital stock stand on the books of the Savings Bank shall be deemed
by the Savings Bank to be the owner for all purposes.
ARTICLE VIII - Fiscal Year
The fiscal year of the Savings Bank shall end on the 30th day of
September of each year. The appointment of accountants shall be subject to
annual ratification by the shareholders.
ARTICLE IX - Dividends
Subject to the terms of the Savings Bank's charter and the regulations
and orders of the Office, the Board of Directors may, from time to time,
declare, and the Savings Bank may pay, dividends on its outstanding shares of
capital stock.
ARTICLE X - Corporate Seal
The Board of Directors shall provide an Savings Bank seal, which shall be
two concentric circles between which shall be the name of the Savings Bank. The
year of incorporation or an emblem may appear in the center.
ARTICLE XI - Amendments
These bylaws may be amended in a manner consistent with regulations of
the Office and shall be effective after: (i) approval of the amendment by a
majority vote of the authorized Board of Directors, or by a majority vote of the
votes cast by the shareholders of the Savings Bank at any legal meeting, and
(ii) receipt of any applicable regulatory approval. When an Savings Bank fails
to meet its quorum requirements, solely due to vacancies on the Board, then the
affirmative vote of a majority of the sitting Board will be required to amend
the bylaws.
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