<PAGE>
As filed with the Securities and Exchange Commission on April 26, 2000
Registration No._______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
_______________________________
SOUTHBANC SHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware 6035 58-2361245
(State or Other Jurisdiction (Primary Standard Industrial Classification (I.R.S. Employer Identification Number)
of Incorporation or Organization) Code Number)
</TABLE>
907 North Main Street
Anderson, South Carolina 29621-5526
(864) 225-0241
(Address, including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principle Executive Offices)
Robert W. Orr
President
907 North Main Street
Anderson, South Carolina 29621-5526
(864) 225-0241
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
_______________________________
Copies to:
Paul M. Aguggia, Esq. John J. Spidi, Esq.
Aaron M. Kaslow, Esq. Malizia Spidi & Fisch, PC
Muldoon, Murphy & Faucette LLP 1301 K Street, N.W.,
5101 Wisconsin Avenue, N.W. Suite 700 East
Washington, D.C. 20016 Washington, D.C. 20005
(202) 362-0840 (202) 434-4660
_______________________________
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after the effectiveness of this
Registration Statement and the satisfaction or waiver of
all other conditions to the Merger described in the
Proxy Statement/Prospectus.
If the securities being registered on this Form are to be offered
in connection with the formation of a holding company and there
is compliance with General Instruction G, check the
following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number
of the earlier effective registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
_______________________________
Calculation of Registration Fee
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<CAPTION>
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Proposed Proposed
Maximum Maximum
Title of Each Amount Offering Aggregate Amount of
Class of Securities To Be To Be Price Offering Registration
Registered Registered(1) Per Share(2) Price (2) Fee (2)
- ------------------------------------------------------------------------------------------------------
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Common Stock, par
value $0.01 per
share ("Common Stock") 3,124,222 N/A $38,150,157 $10,072
- ------------------------------------------------------------------------------------------------------
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(1) Represents the estimated maximum number of shares of common stock, par value
$.01 per share, issuable by SouthBanc Shares, Inc. ("SouthBanc") upon the
consummation of the merger with Heritage Bancorp, Inc. and computed based on
the estimated maximum number of such shares (4,813,900), including shares
issuable upon the exercise of outstanding stock options, that may be
exchanged for the securities being registered. Pursuant to Rule 416, this
Registration Statement also covers an indeterminate number of shares of
common stock as may become issuable as a result of stock splits, stock
dividends or similar transactions.
(2) Pursuant to Rule 457(f)(1), the registration fee for the SouthBanc common
stock is based on the market value of Heritage Bancorp, Inc. common stock,
par value $.01 per share, on April 19, 2000 ($16.75). Pursuant to Rule
457(f)(3), the cash portion of the merger consideration to be paid by
SouthBanc in connection with the transaction has been deducted from the
value of securities to be received by SouthBanc in the transaction.
_______________________________
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 that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) or
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
<PAGE>
SOUTHBANC LOGO HERITAGE BANCORP LOGO
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of SouthBanc Shares, Inc. and Heritage Bancorp,
Inc. have agreed to a merger of our companies. In the merger, each share of
Heritage common stock will be converted into either $17.65 in cash or shares of
SouthBanc common stock, and each share of SouthBanc common stock will remain
unchanged. The number of shares of SouthBanc common stock to be exchanged for
each share of Heritage common stock will depend on the average closing price of
SouthBanc common stock over a ten day measurement period shortly before the
closing of the merger. The value of the shares of SouthBanc common stock to be
exchanged for each share of Heritage common stock will range between $15.58 and
$20.06. If the average closing price of SouthBanc common stock during the
measurement period is between $15.92 and $20.60, the value of the shares of
SouthBanc common stock to be exchanged for each share of Heritage common stock
will be $17.65. SouthBanc common stock is listed on the Nasdaq National Market
under the symbol SBAN. On ________, 2000, the closing price of SouthBanc common
stock was $_____.
Heritage stockholders will be able to elect whether to receive cash or
SouthBanc common stock for their shares of Heritage common stock. Elections will
be limited by the requirement that 50% of the shares of Heritage common stock be
exchanged for SouthBanc common stock. Therefore the allocation of cash and
SouthBanc common stock that Heritage stockholders will receive will depend on
the elections of other Heritage stockholders. The merger will be a tax-free
transaction for SouthBanc stockholders. The federal income tax consequences of
the merger to Heritage stockholders will depend on whether they receive cash,
stock or a combination of cash and stock in exchange for their shares of
Heritage common stock.
We cannot complete the merger unless we obtain the necessary government
approvals and unless the stockholders of both companies approve the merger
agreement. Each of us will hold a meeting of our stockholders to consider and
vote on this merger proposal. Whether or not you plan to attend your company's
meeting, please take the time to vote by completing and mailing the enclosed
proxy card to us. If you sign, date and mail your proxy card without indicating
how you want to vote, your proxy will be counted as a vote FOR the merger and
the transactions contemplated by the merger agreement. If you do not return your
proxy card, or if you do not instruct your broker how to vote any shares held
for you in "street name," the effect will be a vote against the merger.
The places, dates and times of the stockholders meetings are as follows:
For SouthBanc stockholders: For Heritage stockholders:
__________________, 2000 _________________, 2000
__:00 p.m., local time __:00 p.m., local time
907 North Main Street 201 West Main Street
Anderson, South Carolina Laurens, South Carolina
This document contains a more complete description of the stockholders
meetings, the terms of the merger and the procedures for electing to receive
stock or cash. We urge you to review this entire document carefully. You may
also obtain information about SouthBanc and Heritage from documents each company
has filed with the Securities and Exchange Commission.
We enthusiastically support the merger and join with the other members of
our Boards of Directors in recommending that you vote in favor of the merger.
Robert W. Orr J. Edward Wells
President and Chief Executive Officer President and Chief Executive Officer
SouthBanc Shares, Inc. Heritage Bancorp, Inc.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued under
this joint proxy statement-prospectus or determined if this joint proxy
statement-prospectus is accurate or adequate. Any representation to the
contrary is a criminal offense. The securities we are offering through this
document are not savings or deposit accounts or other obligations of any bank
or non-bank subsidiary of either of our companies, and they are not insured by
the Federal Deposit Insurance Corporation, the Savings Association Insurance
Fund, the Bank Insurance Fund or any other governmental agency.
- --------------------------------------------------------------------------------
Joint Proxy Statement-Prospectus dated __________, 2000
and first mailed to stockholders on or about __________, 2000
<PAGE>
SouthBanc Shares, Inc.
907 North Main Street
Anderson, South Carolina 29621
(864) 225-0241
___________________________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
___________________________________
A special meeting of stockholders of SouthBanc Shares, Inc. will be held at
907 North Main Street, Anderson, South Carolina on _________, ___________, 2000,
at __:00 _.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of February 14, 2000, by and between
SouthBanc Shares, Inc., and Heritage Bancorp, Inc., pursuant to which
Heritage will merge with and into SouthBanc and each share of common
stock, par value $.01 per share, of Heritage will be converted into the
right to receive, at the election of the holder, either shares of common
stock, par value $.01 per share, of SouthBanc or cash, all on and
subject to the terms and conditions contained therein; and
2. To transact any other business as may properly come before the meeting
or any adjournment or postponement.
Only stockholders of record at the close of business on ____________, 2000
will be entitled to notice of and to vote at the meeting and at any adjournment
or postponement.
By Order of the Board of Directors
Sylvia B. Reed
Corporate Secretary
Anderson, South Carolina
__________, 2000
The Board of Directors unanimously recommends that you vote "FOR" the
proposal to approve and adopt the merger agreement. Whether or not you plan to
attend the meeting, please complete, sign, date and return the enclosed proxy in
the accompanying pre-addressed postage-paid envelope.
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Heritage Bancorp, Inc.
201 West Main Street
Laurens, South Carolina 29360
(864) 984-4581
___________________________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
___________________________________
A special meeting of stockholders of Heritage Bancorp, Inc. will be held at
201 West Main Street, Laurens, South Carolina on _________, ___________, 2000,
at _:00 _.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of February 14, 2000, by and between
SouthBanc Shares, Inc., and Heritage Bancorp, Inc., pursuant to which
Heritage will merge with and into SouthBanc and each share of common
stock, par value $.01 per share, of Heritage will be converted into the
right to receive, at the election of the holder, either shares of common
stock, par value $.01 per share, of SouthBanc or cash, all on and
subject to the terms and conditions contained therein; and
2. To transact any other business as may properly come before the meeting
or any adjournment or postponement.
Only stockholders of record at the close of business on _________, 2000
will be entitled to notice of and to vote at the meeting and at any adjournment
or postponement.
Heritage stockholders have the right to dissent from the merger and obtain
payment in cash of the fair value of their shares of Heritage common stock under
applicable provisions of Delaware law. In order to perfect dissenters' rights,
Heritage stockholders must give written demand for appraisal of their shares
before the taking of the vote on the merger at the special meeting and must not
vote in favor of the merger. A copy of the applicable Delaware statutory
provisions is included as Appendix F to the accompanying joint proxy statement-
prospectus and a summary of the provisions can be found under the caption "The
Merger-Rights of Dissenting Stockholders."
By Order of the Board of Directors
J. Edward Wells
President and Chief Executive Officer
Laurens, South Carolina
__________, 2000
The Board of Directors unanimously recommends that you vote "FOR" the proposal
to approve and adopt the merger agreement. Whether or not you plan to attend
the meeting, please complete, sign, date and return the enclosed proxy in the
accompanying pre-addressed postage-paid envelope.
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TABLE OF CONTENTS
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SUMMARY.................................................................................. 1
COMPARATIVE PER SHARE DATA............................................................... 11
SELECTED HISTORICAL FINANCIAL INFORMATION................................................ 12
Selected Historical Financial Information for SouthBanc................................ 13
Selected Historical Financial Information for Heritage................................. 15
SUMMARY SELECTED PRO FORMA COMBINED DATA................................................. 17
MARKET PRICE AND DIVIDEND INFORMATION.................................................... 18
SPECIAL MEETING OF SOUTHBANC STOCKHOLDERS................................................ 20
Place, Date and Time................................................................... 20
Purpose of the Meeting................................................................. 20
Who Can Vote at the Meeting............................................................ 20
Attending the Meeting.................................................................. 20
Vote Required.......................................................................... 20
Voting by Proxy........................................................................ 21
Participants in Perpetual Bank's ESOP or 401(k) Plan................................... 21
SPECIAL MEETING OF HERITAGE STOCKHOLDERS................................................. 22
Place, Date and Time................................................................... 22
Purpose of the Meeting................................................................. 22
Who Can Vote at the Meeting............................................................ 22
Attending the Meeting.................................................................. 22
Vote Required.......................................................................... 22
Voting by Proxy........................................................................ 23
Participants in Heritage Federal's ESOP and 401(k) Plan................................ 23
OWNERSHIP OF SOUTHBANC COMMON STOCK...................................................... 24
OWNERSHIP OF HERITAGE COMMON STOCK....................................................... 26
THE MERGER............................................................................... 27
The Parties to the Merger.............................................................. 27
Form of the Merger..................................................................... 27
Conversion of Heritage Common Stock.................................................... 28
Cash or Stock Election................................................................. 29
Election Procedures; Surrender of Stock Certificates................................... 30
Treatment of Heritage Stock Options.................................................... 32
Tax Consequences for Heritage Stockholders............................................. 32
Background of the Merger............................................................... 34
Recommendation of the SouthBanc Board; SouthBanc's Reasons for the Merger.............. 36
Recommendation of the Heritage Board; Heritage's Reasons for the Merger................ 37
Opinion of SouthBanc's Financial Advisor............................................... 38
Opinion of Heritage's Financial Advisor................................................ 47
Rights of Dissenting Stockholders...................................................... 54
Interests of Our Directors and Officers in the Merger that Differ From Your Interests.. 56
Regulatory Approvals Needed to Complete the Merger..................................... 59
Accounting Treatment of the Merger..................................................... 60
Resale of SouthBanc Common Stock....................................................... 60
THE MERGER AGREEMENT..................................................................... 61
Terms of the Merger.................................................................... 61
When Will the Merger be Completed...................................................... 61
Conditions to Completing the Merger.................................................... 62
Conduct of Business Before the Merger.................................................. 63
Covenants of Heritage and SouthBanc in the Merger Agreement............................ 65
Representations and Warranties Made by SouthBanc and Heritage in the Merger Agreement.. 67
Terminating the Merger Agreement....................................................... 67
SouthBanc and Heritage Option Agreements............................................... 68
Expenses and Termination Fees.......................................................... 71
Changing the Terms of the Merger Agreement............................................. 71
MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER........................................... 72
Board of Directors..................................................................... 72
Management............................................................................. 72
Operations............................................................................. 72
PRO FORMA FINANCIAL INFORMATION.......................................................... 73
A WARNING ABOUT FORWARD-LOOKING STATEMENTS............................................... 81
DESCRIPTION OF SOUTHBANC COMMON STOCK.................................................... 82
General................................................................................ 82
Common Stock........................................................................... 82
Preferred Stock........................................................................ 82
COMPARISON OF RIGHTS OF STOCKHOLDERS..................................................... 83
Authorized Stock....................................................................... 83
Voting Rights.......................................................................... 83
Required Vote for Authorization of Certain Actions..................................... 84
Dividends.............................................................................. 84
Stockholders Meetings.................................................................. 84
Action by Stockholders Without a Meeting............................................... 85
Board of Directors..................................................................... 85
Amendment of the Bylaws................................................................ 86
Amendment of the Certificate of Incorporation.......................................... 86
SELECTED PROVISIONS IN THE CERTIFICATE OF INCORPORATION AND BYLAWS OF SOUTHBANC.......... 87
Business Combinations with Related Persons............................................. 87
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Limitation on Voting Rights............................................................ 88
Board of Directors..................................................................... 88
Special Meetings of Stockholders....................................................... 88
Advance Notice Provisions for Stockholder Nominations and Proposals.................... 88
Preferred Stock........................................................................ 89
Amendment of Certificate of Incorporation.............................................. 89
LEGAL MATTERS............................................................................ 89
EXPERTS.................................................................................. 89
WHERE YOU CAN FIND MORE INFORMATION...................................................... 90
STOCKHOLDER PROPOSALS.................................................................... 91
SouthBanc.............................................................................. 91
Heritage............................................................................... 91
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APPENDIX A Agreement and Plan of Merger, dated as of February 14, 2000, between
SouthBanc Shares, Inc. and Heritage Bancorp, Inc.
APPENDIX B Stock Option Agreement dated February 14, 2000 between SouthBanc
Shares, Inc. and Heritage Bancorp, Inc.
APPENDIX C Stock Option Agreement dated February 14, 2000 between Heritage
Bancorp, Inc. and SouthBanc Shares, Inc.
APPENDIX D Fairness Opinion of Sandler O'Neill & Partners, LP
APPENDIX E Fairness Opinion of Trident Securities
APPENDIX F Section 262 of the Delaware General Corporation Law
APPENDIX G Financial Information for Heritage Bancorp, Inc.
<PAGE>
SUMMARY
This summary does not contain all of the information that is important to
you. You should carefully read this entire document and the other documents
which accompany this document or to which this document refers you to fully
understand the merger. See "Where You Can Find More Information."
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THE COMPANIES
SouthBanc Shares, Inc. SouthBanc is the savings and loan holding company for
907 North Main Street Perpetual Bank, A Federal Savings Bank. Perpetual
Anderson, South Carolina 29621 Bank operates five banking offices in Anderson County
(864) 225-0241 and one banking office in Oconee County, South Carolina.
At December 31, 1999, SouthBanc had total assets of
$373.7 million, deposits of $219.2 million and stockholders'
equity of $51.1 million.
For financial statements and a discussion of
SouthBanc's recent results of operations, see
SouthBanc's 1999 annual report to stockholders and
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1999, both of which accompany this joint
proxy statement-prospectus.
Heritage Bancorp, Inc. Heritage is the savings and loan holding company for
201 West Main Street Heritage Federal Bank. Heritage Federal operates
Laurens, South Carolina 29360 four banking offices in the upstate region of South
(864) 984-4581 Carolina. At December 31, 1999, Heritage had total
assets of $334.1 million, deposits of $202.6 million,
and stockholders' equity of $73.5 million.
For financial statements and a discussion of
Heritage's recent results of operations, see
Appendix G.
THE SOUTHBANC STOCKHOLDERS' SPECIAL MEETING
Place, Date and Time (page __) SouthBanc's special meeting will be held at Perpetual
Bank's main office at 901 North Main Street,
Anderson, South Carolina on ___________, 2000 at
__:00 p.m., local time.
Purpose of the Meeting (page __) At the special meeting, SouthBanc stockholders will
be asked to approve the merger agreement with
Heritage and to transact any other business that may
properly come before the meeting.
Who Can Vote At the Meeting You can vote at the meeting of SouthBanc stockholders
(page __) if you owned SouthBanc common stock at the close of
business on ____________, 2000. You will be able to
cast one vote for each share of SouthBanc common
stock you owned at that time. As of ____________,
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2000, there were _________ shares of SouthBanc common
stock outstanding.
What Vote is Required for Approval of In order to approve the merger agreement, the holders
the Merger Agreement (page __) of a majority of the outstanding shares of SouthBanc
common stock entitled to vote must vote in its favor.
You can vote your shares by attending the meeting and
voting in person or by completing and mailing the
enclosed proxy card.
THE HERITAGE STOCKHOLDERS' SPECIAL MEETING
Place, Date and Time (page __) The special meeting will be held at Heritage
Federal's main office at 201 West Main Street,
Laurens, South Carolina on ___________, 2000 at
__:00 p.m., local time.
Purpose of the Meeting (page __) At the special meeting, Heritage stockholders will be
asked to approve the merger agreement with SouthBanc
and to transact any other business that may properly
come before meeting.
Who Can Vote At the Meeting You can vote at the special meeting of Heritage
(page __) stockholders if you owned Heritage common stock at
the close of business on _________, 2000. You will
be able to cast one vote for each share of Heritage
common stock you owned at that time. As of
_________, 2000, there were ______ shares of Heritage
common stock outstanding.
What Vote is Required for Approval of In order to approve the merger agreement, the holders
the Merger Agreement (page __) of a majority of the outstanding shares of Heritage
common stock entitled to vote must vote in its favor.
You can vote your shares by attending the special
meeting and voting in person or by completing and
mailing the enclosed proxy card.
THE MERGER
Overview of the Transaction We propose a business combination in which
(page __) Heritage will merge with SouthBanc. SouthBanc
will be the surviving corporation in the merger.
Each Heritage Share Will Be SouthBanc stockholders. As a SouthBanc stockholder,
Exchanged for Either Shares of each of your shares of SouthBanc common stock will
SouthBanc or $17.65 in Cash (page remain outstanding and unchanged in the merger. You
__) do not need to surrender your shares or exchange them
for new ones.
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Heritage stockholders. As a Heritage stockholder,
upon the closing of the merger, each of your
shares of Heritage common stock will automatically
be converted into the right to receive either shares
of SouthBanc common stock or $17.65 in cash. You may
elect either of these options and, if you desire, you
may elect to exchange some of your Heritage shares for
cash and some of your Heritage shares for SouthBanc
shares. The number of shares of SouthBanc common
stock to be exchanged for each share of Heritage
common stock will be based on the average closing
price of SouthBanc common stock over a ten day
trading period shortly before the closing of the
merger. The value of the shares of SouthBanc
common stock to be exchanged for each share of
Heritage common stock will range between $15.57
and $20.06. If the average closing price of
SouthBanc common stock during the measurement
period is between $15.92 and $20.60, the value of
the shares of SouthBanc common stock to be
exchanged for each share of Heritage common stock
will be $17.65.
On _______________, 2000, the latest practicable
date before the date of this joint proxy
statement-prospectus, SouthBanc common stock
closed at $_______ per share on The Nasdaq
National Market. If this were the average
closing price of SouthBanc common stock during
the measurement period, then, because the price
is between $15.92 and $20.60, Heritage
stockholders who receive SouthBanc common stock
would receive shares of SouthBanc initially
valued at $17.65 for each share of Heritage
common stock that they own.
The amount of cash and/or stock that you receive
may differ from the amounts that you elect due to
the allocation and proration procedures in the
merger agreement. The merger agreement generally
provides that 50% of the Heritage common stock
will be converted into SouthBanc common stock and
50% of the Heritage common stock will be
converted into cash. Because the tax
consequences of receiving cash will differ from
the tax consequences of receiving stock, you
should carefully read the tax information
beginning on page ___.
How to Elect to Receive Cash or A form for making an election is enclosed with
Stock and Exchange Your Heritage this document. The election form allows you to
Stock Certificates (page ___) elect to receive cash, stock, or a combination of
cash and stock or to make no election.
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For your election to be effective, you must
return your properly completed election form,
along with your Heritage stock certificates or an
appropriate guarantee of delivery to ChaseMellon
Shareholder Services on or before 5:00 p.m.,
Eastern time, on ____________, 2000. ChaseMellon
Shareholder Services will act as exchange agent
in the merger, and in that role will process the
exchange of Heritage stock certificates for
either cash or SouthBanc common stock. Shortly
after the merger, the exchange agent will
allocate cash and stock among Heritage
stockholders, consistent with their elections and
the allocation and proration procedures. If you
do not submit an election form, you will receive
instructions on where to surrender your Heritage
stock certificates from the exchange agent after
the merger is completed. In any event, you
should not forward your Heritage stock
---
certificates with your proxy cards.
If you have a preference for receiving either
SouthBanc stock or cash for your Heritage stock,
you should complete and return the enclosed
election form. If you do not make an election
you will be allocated SouthBanc common stock
and/or cash depending on the elections made by
other stockholders. Please remember, however,
that even if you do make an election, you might
not receive the amount of cash and/or stock that
you elect.
We are not recommending whether you should elect
to receive cash or stock in the merger. You must
make your own decision with respect to your
election.
Tax Consequences of the Merger SouthBanc stockholders. As your shares of
(page ___) SouthBanc common stock will remain unchanged, the
merger will not cause you to recognize any gain
or loss for U.S. federal income tax purposes.
Heritage stockholders. Your federal income tax
treatment will depend primarily on whether you
exchange your Heritage common stock solely for
SouthBanc common stock, solely for cash or for a
combination of SouthBanc common stock and cash.
If you exchange your Heritage shares solely for
SouthBanc common stock, you should not recognize
gain or loss except with respect to the cash you
receive instead of a fractional share. If you
exchange your Heritage shares solely for cash,
you should recognize capital gain or loss on the
exchange. If you exchange your Heritage shares
for a combination of SouthBanc common stock and
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4
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cash, you should recognize capital gain, but not
any loss, on the exchange. The actual federal
income tax consequences to you of electing to
receive cash, SouthBanc common stock or a
combination of cash and stock will not be
ascertainable at the time you make your election
because we will not know at that time if, or to
what extent, the allocation and proration
procedures will apply.
This tax treatment may not apply to all Heritage
stockholders. Determining the actual tax
consequences of the merger to you can be
complicated. You should consult your own tax
advisor for a full understanding of the merger's
tax consequences that are particular to you.
We will not be obligated to complete the merger
unless we receive a legal opinion, dated the
closing date, that the merger will be treated as
a transaction of a type that is generally
tax-free to SouthBanc and Heritage for U.S.
federal income tax purposes. In that case, the
U.S. federal income tax treatment of the merger
will be as we have described it above. This
opinion, however, will not bind the Internal
Revenue Service, which could take a different
view.
We Recommend that Stockholders SouthBanc stockholders. The SouthBanc Board of
Approve the Merger Directors believes that the merger is fair to you
and in your best interests, and unanimously
recommends that you vote "FOR" the proposal to
approve the merger agreement.
For a discussion of the circumstances surrounding
the merger and the factors considered by
SouthBanc's Board of Directors in approving the
merger agreement, see pages __ through __.
Heritage stockholders. The Heritage Board of
Directors believes that the merger is fair to you
and in your best interests, and unanimously
recommends that you vote "FOR" the proposal to
approve the merger agreement.
For a discussion of the circumstances surrounding
the merger and the factors considered by
Heritage's Board of Directors in approving the
merger agreement, see pages __ through __.
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5
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Our Financial Advisors Believe SouthBanc stockholders. Sandler O'Neill &
the Merger Consideration Is Fair Partners, L.P. has delivered to the SouthBanc
to Stockholders (page __) Board of Directors its opinion that, as of the
date of this document, the merger consideration
is fair to the holders of SouthBanc common stock
from a financial point of view. A copy of this
opinion is provided as Appendix D to this
document. You should read it completely to
understand the procedures followed, assumptions
made, matters considered, and qualifications and
limitations on the review made by Sandler O'Neill
in providing this opinion. SouthBanc has agreed
to pay Sandler O'Neill $125,000 for its services
in connection with the merger.
Heritage stockholders. Trident Securities, a
division of McDonald Investments, Inc., has
delivered to the Heritage Board of Directors its
opinion that, as of the date of this document,
the merger consideration is fair to the holders
of Heritage common stock from a financial point
of view. A copy of this opinion is provided as
Appendix E to this document. You should read it
completely to understand the procedures followed,
assumptions made, matters considered, and
qualifications and limitations on the review made
by Trident Securities in providing this opinion.
Heritage has agreed to pay Trident Securities
$450,000 for its services in connection with the
merger.
Only Heritage Stockholders Have SouthBanc stockholders. SouthBanc stockholders
Appraisal Rights in the Merger will not have appraisal rights as a result of the
(page __) merger.
Heritage stockholders. Delaware law provides you
with dissenters' appraisal rights in the merger.
This means that if you are not satisfied with the
amount you are receiving in the merger, you are
legally entitled to have the value of your shares
independently determined and to receive payment in
cash based on that valuation. To exercise your
dissenters' rights you must deliver written demand
for appraisal of your shares to Heritage at or before
the special meeting of Heritage stockholders and you
must not vote in favor of the merger. Notices should
be addressed to Heritage's Corporate Secretary and
sent to Heritage at 201 West Main Street, Laurens,
South Carolina 29360. Your failure to follow exactly
the procedures specified under Delaware law will
result in the loss of your dissenters' rights.
A copy of the dissenters' rights provisions of
Delaware law is a provided as Appendix F to this
document.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Interests of our Directors and Some of our directors and officers have interests
Officers in the Merger that Differ in the merger that are different from, or are in
From Your Interests (page___) addition to, their interests as stockholders in
our companies. The members of our Boards of
Directors knew about these additional interests,
and considered them, when they approved the merger.
These include:
1. employment or severance agreements that
officers of Heritage will enter into upon
completion of the merger;
2. the vesting of Heritage restricted stock awards
as a result of completion of the merger;
3. the vesting of SouthBanc restricted stock
awards and stock options as a result of
completion of the merger;
4. the cancellation of Heritage stock options
for a cash payment equal to $17.65 minus the
exercise price for each option;
5. provisions in the merger agreement relating
to indemnification of directors and officers and
insurance for directors and officers of Heritage
for events occurring before the merger; and
6. the appointment of three directors of Heritage
to the Board of Directors of SouthBanc.
Regulatory Approvals Needed to We cannot complete the merger unless it is first
Complete the Merger (page __) approved by the Office of Thrift Supervision.
SouthBanc has filed the required application with
the Office of Thrift Supervision. As of the date
of this document, we have not received the
approval of the Office of Thrift Supervision.
While we do not know of any reason why we would
not be able to obtain this approval in a timely
manner, we cannot be certain when or if we will
receive it.
Purchase Accounting Treatment We will account for the merger using the purchase
(page __) method accounting. This means that, for
accounting and financial reporting purposes, we
will treat our companies as one company beginning
as of the date we complete the merger. Under
this method of accounting, SouthBanc will record
the fair market value of Heritage's assets and
liabilities on its financial statements. The
difference between the purchase price of the
merger and the fair market value of Heritage's
identifiable assets net of its liabilities will
be recorded
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
on SouthBanc's books as "goodwill." Approximately
$274,000 in goodwill and identifiable assets
will result from accounting for the merger under
the purchase method of accounting. This amount
will be amortized over 15 years as charges to
SouthBanc's earnings.
Shared Responsibility for The present management of our respective
Management and Operations after companies will share the responsibility of
the Merger (page __) managing the combined company. The Board of
Directors of SouthBanc after the merger will be
composed of eight directors and will include five
current directors of SouthBanc and three current
directors of Heritage. J. Edward Wells,
currently President and Chief Executive Officer
of Heritage, will serve as Chairman of the Board
of SouthBanc after the merger. Robert W. Orr,
the current President and Chief Executive Officer
of SouthBanc, will continue in those positions.
</TABLE>
THE MERGER AGREEMENT
A copy of the merger agreement is provided as Appendix A to this joint proxy
statement-prospectus. Please read the entire merger agreement carefully. It is
the legal document that governs the merger.
<TABLE>
<S> <C>
Conditions to Completing the Merger The completion of the merger depends on a number
(page __) of conditions being met. These conditions include:
1. approval of the merger agreement by both
SouthBanc's stockholders and Heritage's
stockholders;
2. approval of the merger by regulatory
authorities;
3. receipt of tax opinions that the merger
qualifies as a tax-free reorganization; and
4. Heritage's stockholders having exercised
dissenters' rights with respect to not more than
10% of the outstanding shares of Heritage common
stock.
Where the law permits, we could decide to complete
the merger even though one or more of these conditions
has not been met. We cannot be certain when or if
the conditions to the merger will be satisfied or
waived, or that the merger will be completed.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Terminating the Merger We can agree at any time not to complete the
Agreement (page __) merger, even if the stockholders of both our
companies have approved it. Also, either of us
can decide, without the consent of the other, to
terminate the merger agreement if:
1. the stockholders of either company do not
approve the merger;
2. a required regulatory approval is denied or a
governmental authority blocks the merger;
3. we do not complete the merger by December 31,
2000;
4. the other party makes a misrepresentation,
breaches a warranty or fails to satisfy or fulfill
a covenant that would have a material adverse
effect on the party seeking to terminate the
merger agreement; or
5. the other party's Board of Directors withdraws
or revises its recommendation to its stockholders
to approve the merger agreement.
In addition, Heritage may terminate the merger
agreement if its Board of Directors determines
that it must accept a superior offer from a third
party in the exercise of its fiduciary duties.
Heritage may also terminate the merger agreement
if the average closing price of SouthBanc common
stock during the period used to determine the
exchange ratio is less than $14.05, unless
SouthBanc elects to increase the exchange ratio to
an amount equal to $15.57 divided by the average
closing price of SouthBanc common stock during the
measurement period.
We May Amend the Terms of the We can agree to amend the merger agreement, and
Merger and Waive Some Conditions each of us can waive our right to require the
(page __) other party to adhere to the terms and conditions
of the merger agreement, where the law allows.
However, after our stockholders approve the merger
agreement, they must approve any amendment or
waiver that reduces or changes the consideration
to be received by them in the merger.
Stock Option Agreements (page __) Heritage, at the request of SouthBanc, entered
into a stock option agreement granting SouthBanc
an option to purchase up to 855,916 shares of
Heritage common stock at a price of $13.25 per
share. SouthBanc, at the request
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
of Heritage, entered into an identical stock
option agreement granting Heritage an option
to purchase up to 614,733 shares of SouthBanc
common stock at a price of $17.50 per share.
We granted these options to increase the
likelihood that the merger would be completed.
The option agreements could discourage other
companies from trying or proposing to combine
with Heritage or SouthBanc before we complete
the merger.
Neither Heritage or SouthBanc can exercise their
options unless specified events occur that
threaten completion of the merger. We do not know
of any event that has occurred as of the date of
this document that would permit either SouthBanc
or Heritage to exercise its option. Copies of the
option agreements are included in this document as
Appendices B and C.
</TABLE>
10
<PAGE>
COMPARATIVE PER SHARE DATA
The following table shows information about our income per common share,
dividends per share and book value per share, and similar information reflecting
the merger (which we refer to as "pro forma" information). In presenting the
comparative pro forma information for certain time periods, we assumed that we
had been merged throughout those periods. We also assumed that Heritage will be
merged with SouthBanc using the purchase method of accounting.
The information listed as "pro forma equivalent" was obtained by multiplying
the pro forma amounts by an exchange ratio of .954. We present this information
to reflect the fact that some Heritage stockholders will receive shares of
SouthBanc common stock for each share of Heritage common stock exchanged in the
merger. Because the exchange ratio will be based on the price of SouthBanc
common stock during a measurement period prior to the completion of the merger,
the actual exchange ratio may be more or less than .954. We also anticipate
that the combined company will derive financial benefits from the merger that
include reduced operating expenses and the opportunity to earn more revenue.
The pro forma information, while helpful in illustrating the financial
characteristics of the new company under one set of assumptions, does not
reflect these benefits and, accordingly, does not attempt to predict or suggest
future results. The pro forma information also does not necessarily reflect
what the historical results of the combined company would have been had our
companies been combined during these periods.
The information in the following table is based on, and should be read
together with, the historical financial information that we have presented in
this document and in our prior filings with the Securities and Exchange
Commission. SouthBanc has incorporated its prior filings into this document by
reference. See "Where You Can Find More Information" on page __.
<TABLE>
<CAPTION>
At December 31, 1999
--------------------
<S> <C>
Book value per share:
SouthBanc historical.................. 16.52
Heritage historical................... 17.08
Pro forma combined/(1)/............... 24.66
Heritage pro forma equivalent/(2)/.... 23.52
</TABLE>
<TABLE>
<CAPTION>
Three
Months Ended Year Ended
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
Cash dividends declared per share:
SouthBanc historical.................. $ .15 $ .54
Heritage historical/(3)/.............. - .30
Pro forma/(4)/........................ .15 .54
Heritage pro forma equivalent/(2)/.... .14 .52
Diluted net income per share:
SouthBanc historical.................. 0.41 1.67
Heritage historical................... 0.26 0.56
Pro forma combined.................... 0.48 1.53
Heritage pro forma equivalent/(2)/.... 0.46 1.46
</TABLE>
_______________________
(1) The pro forma combined book value per share of SouthBanc common stock is
based upon the historical total combined common stockholders' equity for
SouthBanc and Heritage divided by total pro forma common shares of the
combined entities.
(2) The pro forma equivalent amounts are computed by multiplying the pro forma
combined amounts by a factor of .954 to reflect the exchange ratio in the
merger.
(3) Dividends for the year ended September 30, 1999 excludes the special $4.00
per share distribution.
(4) Pro forma dividends per share represent SouthBanc's historical dividends per
share.
11
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The following tables show summarized historical financial data for
SouthBanc and Heritage. The information in the following tables for SouthBanc is
based on historical financial information that either SouthBanc has presented in
its prior filings with the Securities and Exchange Commission or that Perpetual
Bank has presented in its prior filings with the Office of Thrift Supervision.
The information in the following tables for Heritage is based on historical
financial information that Heritage has presented in its prior filings with the
Securities and Exchange Commission. You should read this summary financial
information in connection with SouthBanc's and Heritage's historical financial
information. Financial information for SouthBanc for periods before 1998
reflects Perpetual Bank only, as SouthBanc did not commence operations until
April 14, 1998. Financial information for Heritage for periods before 1998
reflects Heritage Federal only, as Heritage did not commence operations until
April 6, 1998.
The audited financial statements of SouthBanc are included in SouthBanc's
1999 annual report to stockholders and the unaudited financial statements for
SouthBanc for the three months ended December 31, 1999 and 1998 are included in
SouthBanc's Quarterly Report on Form 10-Q, both of which accompany this
document. The audited financial statements of Heritage and the unaudited
financial statements of Heritage for the three months ended December 31, 1999
and 1998 are included in Appendix G.
Unaudited financial statements for SouthBanc and Heritage for the three
months ended December 31, 1999 and 1998 include normal, recurring adjustments
necessary to fairly present the data for those periods. The unaudited data is
not necessarily indicative of expected results of a full year's operation.
12
<PAGE>
Selected Historical Financial Information for SouthBanc
<TABLE>
<CAPTION>
At
December 31, At September 30,
-------------------------------------------------------------------
1999 1999 1998 1997 1996 1995
------------ ---------- ---------- ---------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets............................ $ 373,667 $ 372,151 $ 362,529 $ 256,993 $ 209,827 $ 178,304
Cash and interest-bearing
deposits............................. 16,177 15,546 21,197 13,499 13,585 6,630
Investment in limited
partnership (1)...................... 1,575 1,575 825 5,004 - -
Investment securities, available
for sale............................. 15,233 16,244 23,301 11,326 2,494 800
Mortgage-backed securities available
for sale............................. 47,839 58,385 73,933 35,863 43,125 46,344
Loans receivable, net................... 267,303 255,488 219,896 178,772 140,758 116,539
Deposits................................ 219,198 221,257 207,791 201,002 160,244 148,709
Borrowings.............................. 99,453 93,254 76,174 15,000 16,000 8,000
Stockholders' equity.................... 51,052 52,751 74,407 30,602 29,091 18,232
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
December 31, Year Ended September 30,
-------------------- -----------------------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
-------- -------- --------- -------- -------- -------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Interest income......................... $ 6,663 $ 6,519 $ 26,228 $ 23,937 $ 18,396 $ 14,921 $ 13,543
Interest expense........................ 3,504 3,333 13,438 12,256 9,496 7,425 8,761
------- ------- -------- -------- -------- -------- --------
Net interest income..................... 3,159 3,186 12,790 11,681 8,900 7,496 4,782
Provision for loan losses............... 150 80 481 606 655 349 362
------- ------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses............ 3,009 3,106 12,309 11,075 8,245 7,147 4,420
Other income (expense).................. 1,310 1,505 5,898 (739) 1,855 1,927 3,231
General and administrative
expenses............................. 2,319 2,119 9,318 8,525 7,446 6,894 5,540
------- ------- -------- -------- -------- -------- --------
Income before income taxes.............. 2,000 2,492 8,889 1,811 2,654 2,180 2,111
Income taxes............................ 653 870 2,916 549 926 756 194
------- ------- -------- -------- -------- -------- --------
Net income.............................. $ 1,347 $ 1,622 $ 5,973 $ 1,262 $ 1,728 $ 1,424 $ 1,917
======= ======= ======== ======== ======== ======== ========
Per Share Data:
Basic earnings per share (2)............ $ 0.44 $ 0.40 $ 1.76 $ 0.30 $ 0.41 $ 0.33 $ 0.45
Diluted earnings per share (2).......... 0.41 0.39 1.67 0.29 0.40 0.33 0.45
Dividends per share (3)................. 0.15 0.12 0.54 0.48 0.47 0.42 0.37
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
At or For Three
Months Ended
December 31, At or For the Year Ended September 30,
--------------------- ------------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
--------- -------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Consolidated Financial
Ratios and Other Data:
Return on average assets (net income
divided by average assets)................... 1.45% 1.73% 1.61% 0.39% 0.72% 0.75% 0.92%
Return on average equity (net income
divided by average equity)................... 10.28 9.33 10.18 2.41 5.78 7.40 11.88
Average equity to average assets................ 14.12 18.58 15.78 16.04 12.54 10.16 7.77
Interest rate spread (difference between
yield on interest-earning assets and
average cost of interest-bearing
liabilities for the period) (4).............. 3.37 3.04 3.26 3.35 3.57 3.85 3.61
Net interest margin (net interest income
as a percentage of average interest-
earning assets for the period (4)............ 3.71 3.66 3.72 3.85 3.96 4.16 2.90
Dividend payout ratio (3)....................... 34.56 29.62 29.72 165.58 117.39 126.32 82.68
Non-interest expenses to average assets......... 2.50 2.26 2.51 2.61 3.20 3.72 2.74
Average interest-earning assets to
average interest-bearing liabilities......... 1.08 116.19 111.62 112.57 109.36 107.69 86.56
Asset Quality Ratios:
Allowance for loan losses to total loans
at end of period............................. 1.02 1.03 1.01 1.07 1.04 1.08 1.08
Net charge-offs to average outstanding
loans during the period...................... 0.01 0.01 0.12 0.05 0.18 0.07 0.04
Ratio of non-performing assets to
total assets................................. 0.72 0.37 0.70 0.34 0.20 0.38 0.33
Capital Ratios:
Average equity to average assets................ 14.12 18.58 15.78 16.04 12.54 10.16 7.77
</TABLE>
- ------------------------------------
(1) Represents a 20.625% equity investment in a limited partnership that
invests in mortgage servicing rights.
(2) Per share data has been restated for periods prior to 1999 to reflect the
exchange of 2.85164 shares of common stock of SouthBanc for one share of
Perpetual Bank common stock in connection with the conversion of Perpetual
Bank to the stock holding company form of organization.
(3) Takes into account dividends waived by Perpetual Bank's mutual holding
company for the fiscal years ended September 30, 1997, 1996 and 1995. The
dividend payout ratio is based only on dividends paid to public
stockholders of Perpetual Bank, excluding the shares owned by the Perpetual
Bank's mutual holding company. The dividend payout ratio was 143.4%,
55.19%, 22.40%, 6.53%, and 3.71% for the fiscal years ended September 30,
1998, 1997, 1996 and 1995, respectively.
(4) Excludes income on mutual funds totaling approximately $1.7 million in
fiscal 1995, which was reported as gains on sale and included in other
income.
14
<PAGE>
Selected Historical Financial Information for Heritage
<TABLE>
<CAPTION>
At
December 31, At September 30,
-----------------------------------------------------------------
1999 1999 1998 1997 1996 1995
-------------- ----------- ---------- ------------ ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Balance Sheet Data:
Total assets............................... $ 334,100 $ 313,717 $ 304,921 $ 247,499 $ 244,659 $ 233,780
Investment securities...................... 27,768 29,305 24,010 24,378 37,892 29,823
Mortgage-backed securities................. 9,225 10,147 1,695 6,665 9,726 11,989
Loans receivable, net...................... 268,944 252,014 196,789 192,663 182,950 178,259
Loans held for sale........................ 774 777 849 1,045 - -
Deposit accounts........................... 202,625 206,382 206,104 215,412 209,730 201,473
FHLB advances.............................. 55,000 30,000 - - 5,000 5,000
Total equity............................... 73,454 74,582 95,330 29,235 26,740 25,692
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
December 31, Year Ended September 30,
-------------------- -------------------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
-------- -------- -------- --------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income............................ $ 6,072 $ 5,370 $ 21,588 $ 19,880 $ 17,773 $ 16,974 $16,164
Interest expense........................... 3,163 2,870 11,000 12,010 12,230 12,212 10,431
------- ------- --------- --------- --------- --------- -------
Net interest income........................ 2,909 2,500 10,588 7,870 5,543 4,762 5,733
Provision for loan losses (recovery of
allowance).............................. 149 75 596 (105) 337 (7) 47
------- ------- --------- --------- --------- --------- -------
Net interest income after provision for
loan losses............................. 2,760 2,425 9,992 7,975 5,206 4,769 5,686
------- -------- --------- --------- --------- --------- -------
Other income............................... 50 65 212 246 202 227 218
Other operating expenses................... 1,016 977 5,817 (1) 2,857 2,362 3,877 (2) 2,379
------- -------- --------- --------- --------- --------- -------
Income before income taxes................. 1,794 1,513 4,387 5,364 3,046 1,119 3,525
Provision for income taxes................. 702 548 2,031 1,929 1,094 360 1,546
------- -------- --------- --------- --------- --------- -------
Net income................................. $ 1,092 $ 965 $ 2,356 $ 3,435 $ 1,952 $ 759 $ 1,979
======= ======== ========= ========= ========= ========= =======
Per Share Data:
Basic earnings (3)....................... $ 0.27 $ 0.23 $ 0.56 $ 0.53 N/A N/A N/A
Diluted earnings (3)..................... 0.26 0.23 0.56 0.53 N/A N/A N/A
Cash dividends declared.................. - - 0.30 0.15 N/A N/A N/A
Cash distribution........................ - - 4.00 N/A N/A N/A N/A
</TABLE>
(1) Includes a $1.9 million compensation charge related to the $4.00 per share
cash distribution.
(2) Includes one-time Savings Association Insurance Fund assessment of $1.2
million.
(3) As Heritage's initial public offering closed on April 6, 1998, earnings per
share for all fiscal years prior to September 30, 1998 are not presented.
Earnings per share for the year ended September 30, 1998 have been
calculated based on net income and average outstanding shares for the
period from April 1, 1998 through September 30, 1998.
15
<PAGE>
<TABLE>
<CAPTION>
At or For the
Three Months Ended
December 31, At or For the Years Ended September 30,
-------------------- -----------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
-------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios:
Performance Ratios:
Return on average assets (1)............... 1.35 1.26 0.79% 1.22% 0.80% 0.32% 0.87%
Return on average equity (2)............... 5.83 4.03 2.64 6.82 6.93 2.87 8.08
Average equity as a percent of average
assets.................................. 23.08 31.41 29.71 17.97 11.49 10.99 10.79
Interest rate spread (3)................... 2.55 1.61 2.07 1.96 1.76 1.51 2.09
Net interest margin (4).................... 3.68 3.35 3.62 2.89 2.33 2.04 2.59
Average interest-earning assets to
average interest-bearing liabilities.... 1.28 1.45 1.41 1.21 1.11 1.10 1.10
Other operating expenses as a
percent of average total assets......... 0.31 0.32 1.94 1.02 0.96 1.61 1.05
Dividend payout ratio (5).................. -- -- 53.6 -- -- -- --
Capital Ratios:
Tangible................................... 19.21 19.81 20.3 19.4 11.3 10.6 10.8
Core....................................... 19.21 19.91 20.3 19.4 11.3 10.6 10.8
Risk-based................................. 32.60 39.53 35.5 40.8 23.3 22.2 23.1
Asset Quality Ratios:
Nonperforming loans as a percent of
loans receivable, net (6)............... 0.48 0.54 0.27 0.40 0.48 0.56 0.52
Nonperforming assets as a percent of
total assets (7)........................ 0.38 0.37 0.22 0.26 0.54 0.45 0.44
Allowance for loan losses as a percent
of gross loans receivable............... 0.49 0.36 0.46 0.36 0.44 0.35 0.32
Allowance for loan losses as a percent
of nonperforming loans.................. 117.80 74.75 200.89 96.57 93.58 65.24 63.10
Net charge-offs as a percent of
average outstanding loans............... -- -- -- 0.01 0.07 (0.05) 0.05
</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) Dividends declared per share divided by net income per share.
(6) Nonperforming loans consist of loans accounted for on a nonaccrual basis.
(7) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans, but exclude restructured loans.
16
<PAGE>
SUMMARY SELECTED PRO FORMA COMBINED DATA
The following table shows selected financial information on a pro forma
combined basis giving effect to the merger as if the merger had become effective
at the end of the periods presented, in the case of balance sheet information,
and at the beginning of each period presented, in the case of income statement
information. The pro forma information reflects the purchase method of
accounting.
We anticipate that the merger will provide the combined company with
financial benefits that include reduced operating expenses and opportunity to
earn more revenue. The pro forma information, while helpful in illustrating the
financial characteristics of the new company under one set of assumptions, does
not reflect these benefits and, accordingly, does not attempt to predict or
suggest future results. It also does not necessarily reflect what the historical
results of the new company would have been had our companies been combined
during these periods.
You should read this summary pro forma information in conjunction with the
information under "Pro Forma Information."
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
December 31, September 30,
1999 1999
-------------- ---------------
(In thousands, except per share data)
<S> <C> <C>
Pro forma combined income statement data:
Interest income............................................... $13,156 $49,460
Interest expense.............................................. 6,973 25,835
Net interest income........................................... 6,183 23,625
Provision for loan losses..................................... 299 1,077
Net interest income after provision for loan losses........... 5,884 22,548
Non-interest income........................................... 1,359 6,110
Non-interest expense.......................................... 3,339 15,154
Net income.................................................... 2,512 8,481
Pro forma per share data:
Basic net income.............................................. 0.50 1.59
Diluted net income............................................ 0.48 1.53
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
------------------------------
<S> <C>
Pro forma combined balance sheet data:
Total assets.................................................. $696,939
Loans receivable, net......................................... 534,028
Deposits...................................................... 422,351
Total stockholders' equity.................................... 88,366
</TABLE>
17
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
SouthBanc common stock is listed on the Nasdaq National Market under the
symbol SBAN. Heritage common stock is listed on the Nasdaq National Market under
the symbol HBSC.
The following table lists the high and low prices per share for SouthBanc
common stock and Heritage common stock and the cash dividends declared by
SouthBanc and Heritage for the periods indicated. On April 14, 1998, SouthBanc
became the holding company for Perpetual Bank in connection with Perpetual
Bank's conversion from the mutual holding company to the stock holding company
form of organization. In connection with this conversion, SouthBanc exchanged
2.85164 shares of its common stock for each share of Perpetual Bank common
stock. For periods before April 14, 1998, the following table reflects the price
per share and dividends for Perpetual Bank common stock divided by 2.85164.
<TABLE>
<CAPTION>
SouthBanc Common Stock Heritage Common Stock
------------------------------ --------------------------------
High Low Dividends High Low Dividends (1)
------- ------ ----------- ------- ------- -------------
Fiscal 1998
<S> <C> <C> <C> <C> <C> <C>
Quarter ended December 31, 1997..... $22.97 $17.71 $0.12 $ -- $ -- $ --
Quarter ended March 31, 1998........ 23.40 20.95 0.12 -- -- --
Quarter ended June 30, 1998......... 23.76 18.50 0.12 22.38 19.00 --
Quarter ended September 30, 1998.... 20.75 15.00 0.12 20.00 16.13 0.15
Fiscal 1999
Quarter ended December 31, 1998..... 20.88 15.25 0.12 21.38 12.50 --
Quarter ended March 31, 1999........ 20.63 18.38 0.12 22.50 22.00 0.15
Quarter ended June 30, 1999......... 23.25 18.88 0.15 22.88 16.25 4.00
Quarter ended September 30, 1999.... 25.00 19.25 0.15 17.50 16.75 0.15
Fiscal 2000
Quarter ended December 31, 1999.... 22.25 20.00 0.15 17.25 15.50 --
Quarter ended March 31, 2000....... 20.50 16.00 0.15 16.88 13.25 0.15
Quarter ended June 30, 2000........
</TABLE>
The following table shows the closing price per share of SouthBanc common
stock, the closing price per share of Heritage Common Stock and the equivalent
per share price for Heritage common stock giving effect to the merger on (1)
February 11, 2000, which is the last business day preceding the public
announcement of the proposed merger; and (2) _________, 2000, which is the last
practicable trading day before the mailing of this document. The equivalent per
share price of Heritage common stock was computed by multiplying the price of
SouthBanc common stock by the exchange ratio that would be used if the average
closing price of SouthBanc common stock during the measurement period used to
calculate the exchange ratio were equal to the closing price of SouthBanc common
stock on the date indicated.
<TABLE>
<CAPTION>
Equivalent
Price
SouthBanc Heritage Per Share of
Common Stock Common Stock Heritage Stock
------------ ------------ --------------
<S> <C> <C> <C>
February 11, 2000........... $17.50 $13.25 $17.65
_________, 2000............. $ $ $
</TABLE>
18
<PAGE>
You should obtain current market quotations for SouthBanc common stock as
the market price of SouthBanc common stock will fluctuate between the date of
this document and the date on which the merger is completed, and thereafter.
You can get these quotations from a newspaper, on the Internet or by calling
your broker.
As of ____________, 2000, there were approximately ____ holders of record
of SouthBanc common stock. As of _________, 2000, there were approximately ___
holders of record of Heritage common stock. These numbers do not reflect the
number of persons or entities who may hold their stock in nominee or "street"
name through brokerage firms.
Following the merger, the declaration of dividends will be at the
discretion of the SouthBanc Board of Directors and will be determined after
consideration of various factors, including earnings, cash requirements, the
financial condition of SouthBanc, applicable state law and government
regulations and other factors deemed relevant by the SouthBanc Board of
Directors. Federal law limits the ability of Perpetual Bank and Heritage Federal
to pay dividends to SouthBanc. The merger agreement restricts cash dividends
payable on SouthBanc common stock and Heritage common stock pending consummation
of the merger. See "The Merger Agreement--Conduct of Business Before the
Merger."
19
<PAGE>
SPECIAL MEETING OF SOUTHBANC STOCKHOLDERS
Place, Date and Time
The meeting will be held at Perpetual Bank's main office at 907 North Main
Street, Anderson, South Carolina on _________, ___________, 2000, at __:00 p.m.,
local time.
Purpose of the Meeting
The purpose of the meeting is to consider and vote on a proposal to approve
and adopt the merger agreement and to act on any other matters brought before
the meeting.
Who Can Vote at the Meeting
You are entitled to vote your SouthBanc common stock if the records of
SouthBanc showed that you held your shares as of the close of business on
____________, 2000. As of the close of business on that date, a total of
_________ shares of SouthBanc common stock were outstanding. Each share of
common stock has one vote. As provided in SouthBanc's certificate of
incorporation, record holders of SouthBanc's common stock who beneficially own,
either directly or indirectly, in excess of 10% of SouthBanc's outstanding
shares are not entitled to any vote in respect of the shares held in excess of
the 10% limit.
Attending the Meeting
If you are a beneficial owner of SouthBanc common stock held by a broker,
bank or other nominee (i.e., in "street name"), you will need proof of ownership
to be admitted to the meeting. A recent brokerage statement or letter from a
bank or broker are examples of proof of ownership. If you want to vote your
shares of SouthBanc common stock held in street name in person at the meeting,
you will have to get a written proxy in your name from the broker, bank or other
nominee who holds your shares.
Vote Required
The special meeting will be held if a majority of the outstanding shares of
common stock entitled to vote is represented in person or by proxy at the
meeting. If you return valid proxy instructions or attend the meeting in person,
your shares will be counted for purposes of determining whether there is a
quorum, even if you abstain from voting. Broker non-votes also will be counted
for purposes for determining the existence of a quorum. A broker non-vote occurs
when a broker, bank or other nominee holding shares for a beneficial owner does
not vote on a particular proposal because the nominee does not have
discretionary voting power with respect to that item and has not received voting
instructions from the beneficial owner. Under applicable rules, brokers, banks
and other nominees may not exercise their voting discretion on the proposal to
approve and adopt the merger agreement and, for this reason, may not vote shares
held for beneficial owners without specific instructions from the beneficial
owners.
Approval and adoption of the merger agreement requires the affirmative vote
of the holders of at least a majority of the outstanding shares of common stock
entitled to vote at the meeting. Failure to return a properly executed proxy
card or to vote in person will have the same effect as a vote against the merger
agreement. Abstentions and broker non-votes also will have the same effect as a
vote against the merger agreement.
As of ____________, 2000, directors and executive officers of SouthBanc,
and persons closely associated with them, beneficially owned _______ shares of
SouthBanc common stock, not including shares that may be acquired upon the
exercise of stock options. This equals ____% of the outstanding shares of
20
<PAGE>
SouthBanc common stock. As of the same date, Heritage and its directors and
executive officers beneficially owned ______ shares of SouthBanc common stock.
Voting by Proxy
This document is being sent to you by the Board of Directors of SouthBanc
for the purpose of requesting that you allow your shares of SouthBanc common
stock to be represented at the special meeting by the persons named in the
enclosed proxy card. All shares of SouthBanc common stock represented at the
meeting by properly executed proxies will be voted in accordance with the
instructions indicated on the proxy card. If you sign and return a proxy card
without giving voting instructions, your shares will be voted as recommended by
SouthBanc's Board of Directors. The SouthBanc Board unanimously recommends a
vote "FOR" approval of the merger agreement.
If any matters not described in this document are properly presented at the
special meeting, the persons named in the proxy card will use their own judgment
to determine how to vote your shares. This includes a motion to adjourn or
postpone the meeting in order to solicit additional proxies. However, no proxy
voted against the proposal to approve the merger agreement will be voted in
favor of an adjournment or postponement to solicit additional votes in favor of
the merger agreement. SouthBanc does not know of any other matters to be
presented at the meeting.
You may revoke your proxy at any time before the vote is taken at the
meeting. To revoke your proxy you must either advise the Secretary of SouthBanc
in writing before your common stock has been voted at the special meeting,
deliver proxy instructions with a later date, or attend the meeting and vote
your shares in person. Attendance at the special meeting will not in itself
constitute revocation of your proxy.
If your SouthBanc common stock is held in street name, you will receive
instructions from your broker, bank or other nominee that you must follow in
order to have your shares voted. Your broker or bank may allow you to deliver
your voting instructions via the telephone or the Internet. Please see the
instruction form that accompanies this document.
SouthBanc will pay the cost of this proxy solicitation. In addition to
soliciting proxies by mail, directors, officers and employees of SouthBanc may
solicit proxies personally and by telephone. None of these persons will receive
additional or special compensation for soliciting proxies. SouthBanc will, upon
request, reimburse brokers, banks and other nominees for their expenses in
sending proxy materials to their customers who are beneficial owners and
obtaining their voting instructions. SouthBanc has retained ChaseMellon
Shareholder Services to assist in soliciting proxies for a fee of $_____ plus
reimbursable expenses up to $_____.
Participants in Perpetual Bank's ESOP or 401(k) Plan
If you participate in the Perpetual Bank Employee Stock Ownership Plan or
if you hold shares through Perpetual Bank's 401(k) Plan, the proxy card
represents a voting instruction to the trustees. Each participant in the ESOP
and the 401(k) Plan may direct the trustees as to the manner in which shares of
SouthBanc common stock allocated to the participant's plan account are to be
voted. Unallocated shares of common stock held by the ESOP and allocated shares
for which no voting instructions are received will be voted by the ESOP trustees
in the same proportion as shares for which the trustees have received voting
instructions, subject to the exercise of their fiduciary duties.
21
<PAGE>
SPECIAL MEETING OF HERITAGE STOCKHOLDERS
Place, Date and Time
The meeting will be held at Heritage Federal's main office at 201 West Main
Street, Laurens, South Carolina on _________, ___________, 2000, at __:00 p.m.,
local time.
Purpose of the Meeting
The purpose of the meeting is to consider and vote on a proposal to approve
and adopt the merger agreement and to act on any other matters brought before
the meeting.
Who Can Vote at the Meeting
You are entitled to vote your Heritage common stock if the records of
Heritage showed that you held your shares as of the close of business on
_________, 2000. As of the close of business on that date, a total of
___________ shares of Heritage common stock were outstanding. Each share of
common stock has one vote. As provided in Heritage's certificate of
incorporation, record holders of Heritage's common stock who beneficially own,
either directly or indirectly, in excess of 10% of Heritage's outstanding shares
are not entitled to any vote in respect of the shares held in excess of the 10%
limit.
Attending the Meeting
If you are a beneficial owner of SouthBanc common stock held by a broker,
bank or other nominee (i.e., in "street name"), you will need proof of ownership
to be admitted to the meeting. A recent brokerage statement or letter from a
bank or broker are examples of proof of ownership. If you want to vote your
shares of SouthBanc common stock held in street name in person at the meeting,
you will have to get a written proxy in your name from the broker, bank or other
nominee who holds your shares.
Vote Required
The special meeting will be held if a majority of the outstanding shares of
common stock entitled to vote is represented in person or by proxy at the
meeting. If you return valid proxy instructions or attend the meeting in person,
your shares will be counted for purposes of determining whether there is a
quorum, even if you abstain from voting. Broker non-votes also will be counted
for purposes for determining the existence of a quorum. A broker non-vote occurs
when a broker, bank or other nominee holding shares for a beneficial owner does
not vote on a particular proposal because the nominee does not have
discretionary voting power with respect to that item and has not received voting
instructions from the beneficial owner. Under applicable rules, brokers, banks
and other nominees may not exercise their voting discretion on the proposal to
approve and adopt the merger agreement and, for this reason, may not vote shares
held for beneficial owners without specific instructions from the beneficial
owners.
Approval and adoption of the merger agreement requires the affirmative vote
of the holders of at least a majority of the outstanding shares of Heritage
common stock entitled to vote at the meeting. Failure to return a properly
executed proxy card or to vote in person will have the same effect as a vote
against the merger agreement. Abstentions and broker non-votes will have the
same effect as a vote against the merger agreement.
As of _________, 2000, directors and executive officers of Heritage, and
persons closely associated with them, beneficially owned ______ shares of
Heritage common stock, not including shares that may be acquired upon the
exercise of stock options. This equals ___% of the outstanding shares of
Heritage
22
<PAGE>
common stock. As of the same date, SouthBanc and its directors and executive
officers beneficially owned ______ shares of Heritage common stock.
Voting by Proxy
This document is being sent to you by the Board of Directors of Heritage
for the purpose of requesting that you allow your shares of Heritage common
stock to be represented at the special meeting by the persons named in the
enclosed proxy card. All shares of Heritage common stock represented at the
meeting by properly executed proxies will be voted in accordance with the
instructions indicated on the proxy card. If you sign and return a proxy card
without giving voting instructions, your shares will be voted as recommended by
Heritage's Board of Directors. The Heritage Board unanimously recommends a vote
"FOR" approval of the merger agreement.
If any matters not described in this document are properly presented at the
special meeting, the persons named in the proxy card will use their own judgment
to determine how to vote your shares. This includes a motion to adjourn or
postpone the meeting in order to solicit additional proxies. However, no proxy
voted against the proposal to approve the merger agreement will be voted in
favor of an adjournment or postponement to solicit additional votes in favor of
the merger agreement. Heritage does not know of any other matters to be
presented at the meeting.
You may revoke your proxy at any time before the vote is taken at the
meeting. To revoke your proxy you must either advise the Secretary of Heritage
in writing before your common stock has been voted at the special meeting,
deliver proxy instructions with a later date, or attend the meeting and vote
your shares in person. Attendance at the special meeting will not in itself
constitute revocation of your proxy.
If your Heritage common stock is held in street name, you will receive
instructions from your broker, bank or other nominee that you must follow in
order to have your shares voted. Your broker or bank may allow you to deliver
your voting instructions via the telephone or the Internet. Please see the
instruction form that accompanies this document.
Heritage will pay the cost of this proxy solicitation. In addition to
soliciting proxies by mail, directors, officers and employees of Heritage may
solicit proxies personally and by telephone. None of these persons will receive
additional or special compensation for soliciting proxies. Heritage will, upon
request, reimburse brokers, banks and other nominees for their expenses in
sending proxy materials to their customers who are beneficial owners and
obtaining their voting instructions. Heritage has retained ChaseMellon
Shareholder Services to assist in soliciting proxies for a fee of $_____ plus
reimbursable expenses up to $_____.
Participants in Heritage Federal's ESOP and 401(k) Plan
If you participate in the Heritage Federal Bank Employee Stock Ownership
Plan or if you hold shares through Heritage Federal's 401(k) Plan, the proxy
card represents a voting instruction to the trustees. Each participant in the
ESOP and 401(k) Plan may direct the trustees as to the manner in which shares of
Heritage common stock allocated to the participant's plan account are to be
voted. Unallocated shares of common stock held by the ESOP and allocated shares
for which no voting instructions are received will be voted by the ESOP trustees
in the same proportion as shares for which the trustees have received voting
instructions, subject to their exercise of their fiduciary duties.
23
<PAGE>
OWNERSHIP OF SOUTHBANC COMMON STOCK
The following table provides information as of ___________, 2000 with
respect to persons known to SouthBanc to be the beneficial owners of more than
5% of SouthBanc's outstanding common stock. A person may be considered to
beneficially own any shares of common stock over which he or she has, directly
or indirectly, sole or shared voting or investing power.
<TABLE>
<CAPTION>
Percent of
Number of Common Stock
Name and Address Shares Owned Outstanding
- ---------------- ---------------- --------------
<S> <C> <C>
Robert W. Orr............................ 168,130/(1)/ 5.5%
907 North Main Street
Anderson, South Carolina 29621
Thomas C. Hall........................... 160,700/(2)/ 5.2
907 North Main Street
Anderson, South Carolina 29621
Barry C. Visioli......................... 155,810/(3)/ 5.1
907 North Main Street
Anderson, South Carolina 29621
</TABLE>
_____________________________
(1) Includes 69,152 shares that may acquired upon the exercise of stock options
within 60 days of ___________, 2000, 32,823 shares of unvested restricted
stock as to which Mr. Orr exercises voting but not investment power, and
4,091 shares allocated to Mr. Orr's account under the Perpetual Bank
employee stock ownership plan over which Mr. Orr exercises voting but not
investment power.
(2) Includes 69,152 shares that may acquired upon the exercise of stock options
within 60 days of ___________, 2000, 32,823 shares of unvested restricted
stock as to which Mr. Hall exercises voting but not investment power, and
3,584 shares allocated to Mr. Hall's account under the Perpetual Bank
employee stock ownership plan over which Mr. Hall exercises voting but not
investment power.
(3) Includes 69,152 shares that may acquired upon the exercise of stock options
within 60 days of ___________, 2000, 32,823 shares of unvested restricted
stock as to which Mr. Visioli exercises voting but not investment power,
and 3,359 shares allocated to Mr. Visioli's account under the Perpetual
Bank employee stock ownership plan over which Mr. Visioli exercises voting
but not investment power.
24
<PAGE>
The following table provides information about the shares of common stock
of SouthBanc that may be considered to be beneficially owned by each director of
SouthBanc, by those officers of SouthBanc whose salary and bonus during the 1999
fiscal year exceeded $100,000, and by all directors and executive officers of
the SouthBanc as a group as of __________, 2000. Unless otherwise indicated,
each of the named individuals has sole voting power and sole investment power
with respect to the shares shown.
<TABLE>
<CAPTION>
Number of Shares
That May be
Number of Acquired Within Percent of
Shares Owned 60 Days by Common Stock
Name (Excluding Options) Exercising Options Outstanding(1)
- ------------------------------- ----------------------- -------------------- ----------------
<S> <C> <C> <C>
Harold A. Pickens, Jr. 50,292 13,527 2.2%
Martha S. Clamp 26,862 16,033 1.3
Jim Gray Watson 9,113 16,033 *
Richard C. Ballenger 9,811 14,778 *
F. Stevon Kay 51,251 14,778 2.2
Robert W. Orr 98,978/(2)/ 69,152 5.5
Thomas C. Hall 91,548/(3)/ 69,152 5.2
Barry C. Visioli 86,658/(4)/ 69,152 5.1
All Directors and Executive
Officers as a group (11 persons) 521,057 317,268 25.6
</TABLE>
- ---------------------------------
*Less than 1% of the shares outstanding
(1) Based on ______________shares of SouthBanc common stock outstanding and
entitled to vote as of __________, 2000, plus the number of shares that may
be acquired within 60 days by each individual (or group of individuals) by
exercising options.
(2) Includes 32,823 shares of unvested restricted stock as to which Mr. Orr
exercises voting, but not investment power, and 4,091 shares allocated to
Mr. Orr's account under the Perpetual Bank employee stock ownership plan
over which Mr. Orr exercises voting, but not investment power.
(3) Includes 32,823 shares of unvested restricted stock as to which Mr. Hall
exercises voting, but not investment power and 3,584 shares allocated to
Mr. Hall's account under the Perpetual Bank employee stock ownership plan
over which Mr. Hall exercises voting, but not investment power.
(4) Includes 32,823 shares of unvested restricted stock as to which Mr. Visioli
exercises voting, but not investment power and 3,359 shares allocated to
Mr. Visioli's account under the Perpetual Bank employee stock ownership
plan over which Mr. Visioli exercises voting, but not investment power.
25
<PAGE>
OWNERSHIP OF HERITAGE COMMON STOCK
The following table provides information as of ___________, 2000 with
respect to persons known to Heritage to be the beneficial owners of more than 5%
of Heritage's outstanding common stock. A person may be considered to
beneficially own any shares of common stock over which he or she has, directly
or indirectly, sole or shared voting or investing power.
<TABLE>
<CAPTION>
Percent of
Number of Common Stock
Name and Address Shares Owned Outstanding
- --------------------------------- ----------------------- -----------------
<S> <C> <C>
Heritage Federal Bank 370,300/(1)/ 8.5%
Employee Stock Ownership Plan
201 West Main Street
Laurens, South Carolina 29360
</TABLE>
- ------------------------
(1) Under the terms of the ESOP, the trustees will vote unallocated shares and
allocated shares for which no voting instructions are received in the same
proportion as shares for which the trustees have received voting
instructions from participants. The trustees of the ESOP are J. Edward
Wells and Edwin I. Shealy, both of whom are executive officers of Heritage.
The following table provides information about the shares of Heritage
common stock that may be considered to be owned by each director and by all
directors and executive officers of Heritage as a group as of ___________, 2000.
Unless otherwise indicated, each of the named individuals has sole voting power
and sole investment power with respect to the shares shown.
<TABLE>
<CAPTION>
Number of Shares
That May Be
Number of Acquired Within 60 Percent of
Shares Owned Days By Exercising Common Stock
Name (Excluding Options) Options Outstanding/(1)/
- ----------------------------------- -------------------- ------------------- ----------------
<S> <C> <C> <C>
Aaron H. King 51,834/(2)/ 41,650 2.1%
J. Riley Bailes 62,384/(3)/ 41,650 2.4
John D. Lake 31,834/(4)/ 41,650 1.7
John C. Owings, II 48,103/(5)/ 41,650 2.0
J. Edward Wells 85,240/(6)/ 104,140 4.3
All directors and executive
officers as a group (9 persons) 437,776 380,588 17.5
</TABLE>
- -------------------------------
(1) Based on __________ shares of Heritage common stock outstanding and
entitled to vote as of ______________, 2000, plus the number of shares that
may be acquired within 60 days by each individual (or group of individuals)
by exercising options.
(2) Includes 13,334 shares owned by Mr. King's spouse and 14,800 shares of
unvested restricted stock as to which Mr. King exercises voting, but not
investment power.
(3) Includes 9,167 shares owned by Mr. Bailes' spouse and 14,800 shares of
unvested restricted stock as to which Mr. Bailes exercises voting, but not
investment power.
(4) Includes 14,800 shares of unvested restricted stock as to which Mr. Lake
exercises voting, but not investment power.
(5) Includes 961 shares owned by Mr. Owings' spouse, 13,340 shares held by a
trust for which Mr. Owings serves as a co-trustee and 14,800 shares of
unvested restricted stock as to which Mr. Owings exercises voting, but not
investment power.
(6) Includes 14,668 shares owned by Mr. Wells' spouse, 2,572 shares allocated
to Mr. Wells' account under the Heritage Federal ESOP over which Mr. Wells
exercises voting, but not investment power, and 36,800 shares of unvested
restricted stock over which Mr. Wells exercises voting, but not investment
power.
26
<PAGE>
THE MERGER
The following discussion of the merger is qualified by reference to the
merger agreement, which is attached to this joint proxy statement-prospectus as
Appendix A. You should read the entire merger agreement carefully. It is the
legal document that governs the merger.
The Parties to the Merger
SouthBanc Shares, Inc. SouthBanc is the savings and loan holding company
for Perpetual Bank. As a savings and loan holding company, SouthBanc is subject
to regulation by the Office of Thrift Supervision. Since its formation,
SouthBanc's principle activity has been to direct and coordinate the business of
Perpetual Bank.
Perpetual Bank is a federally chartered savings bank located in Anderson,
South Carolina. Perpetual Bank is regulated by the Office of Thrift Supervision
and its deposits are insured by the Federal Deposit Insurance Corporation up to
applicable limits. Perpetual Bank currently operates six banking offices in
Anderson County, South Carolina. Perpetual Bank is a community-oriented
financial institution dedicated to serving the financial needs of consumers and
businesses in its market area.
For financial statements of SouthBanc and a discussion of SouthBanc's
recent results of operations, see SouthBanc's 1999 annual report to stockholders
and Quarterly Report on Form 10-Q for the quarter ended December 31, 1999, both
of which accompany this document.
Heritage Bancorp, Inc. Heritage is the savings and loan holding company
for Heritage Federal. As a savings and loan holding company, Heritage is
subject to regulation by the Office of Thrift Supervision. Since its formation,
Heritage's principal activity has been to direct and coordinate the business of
Heritage Federal.
Heritage Federal is a federally chartered savings bank headquartered in
Laurens, South Carolina. Heritage Federal is regulated by the Office of Thrift
Supervision and its deposits are insured by the Federal Deposit Insurance
Corporation up to applicable limits. Heritage Federal operates four banking
offices in the Upstate region of South Carolina. Heritage Federal operates as a
retail financial institution dedicated to financing home ownership and other
consumer needs.
For financial statements of Heritage and a discussion of Heritage's recent
results of operations, see Appendix G.
Form of the Merger
Our Boards of Directors each have unanimously approved a merger agreement
that provides for the combination of SouthBanc and Heritage. The combination
will be accomplished through the merger of Heritage into SouthBanc. SouthBanc
will survive the merger. Upon completion of the merger, each share of Heritage
common stock will be converted into the right to receive, at the election of the
holder, either $17.65 in cash or a number of shares of SouthBanc common stock
established by a formula in the merger agreement. The common stock of SouthBanc
will continue to trade on the Nasdaq National Market under the symbol SBAN after
completion of the merger.
27
<PAGE>
Conversion of Heritage Common Stock
When the merger becomes effective, each share of Heritage common stock
issued and outstanding immediately prior to the completion of the merger will
automatically be converted into the right to receive, at the holder's election,
either (a) $17.65 in cash without interest or (b) shares of SouthBanc common
stock and cash instead of fractional shares. A Heritage stockholder's receipt
of either cash and/or stock, however, is subject to the allocation and proration
procedures as well as other provisions in the merger agreement.
The number of shares of SouthBanc common stock into which each Heritage
share will be exchanged will be based on the price of SouthBanc common stock
over a measurement period prior to the closing. The measurement period will
consist of the ten trading days ending on the day that is eleven days prior to
the effective date of the merger.
If the average closing price of
SouthBanc common stock during
the measurement period is: then you will receive:
. $15.92 or less . 1.109 shares of SouthBanc
common stock
. between $15.92 and $20.60 . a number of shares of
SouthBanc common stock equal
to $17.65 divided by the
average closing price
. $20.60 or more and less than $23.41 . 0.857 of a share of SouthBanc
common stock
. more than $23.41 . a number of shares of
SouthBanc common stock equal
to $20.06 divided by the
average closing price
If the average closing price of SouthBanc common stock during the
measurement period is less than $14.05, Heritage may elect to terminate the
merger agreement unless SouthBanc elects to increase the exchange ratio. In
that case, the exchange ratio will equal $15.57 divided by the average closing
price of SouthBanc common stock during the measurement period. If, prior to
completing the merger, SouthBanc becomes the subject of an acquisition
transaction as defined in the merger agreement and during the measurement period
the average closing price of SouthBanc common stock exceeds $23.41, the exchange
ratio will be 0.857.
28
<PAGE>
The following table illustrates the calculation of the exchange ratio and
the value of the shares of SouthBanc common stock that you may receive in the
merger. On ________, 2000, the closing price of SouthBanc common stock was
$______. We can give you no assurance as to what the market price of SouthBanc
common stock will be if and when the merger is completed, and Heritage
stockholders are advised to obtain current market quotations for SouthBanc
common stock and Heritage common stock. In addition, because the tax
consequences of receiving cash will differ from the tax consequences of
receiving SouthBanc common stock, you should carefully read the information
included below under "-Tax Consequences to Heritage Stockholders."
<TABLE>
<CAPTION>
Average Closing Price
of SouthBanc Resulting Value of SouthBanc
Common Stock During Exchange Ratio Common Stock to be
Measurement Period Received (1)
- ------------------------------- ------------------ --------------------
<S> <C> <C>
$14.05 1.109 $15.58
14.50 1.109 16.08
15.00 1.109 16.64
15.50 1.109 17.19
- -----------------------------------------------------------------------------
15.92 1.109 17.65 Exchange ratio limitation
- -----------------------------------------------------------------------------
16.00 1.103 17.65
16.50 1.070 17.65
17.00 1.038 17.65
17.50 1.009 17.65
18.00 0.981 17.65
18.50 0.954 17.65
19.00 0.929 17.65
19.50 0.905 17.65
20.00 0.883 17.65
20.50 0.861 17.65
- -----------------------------------------------------------------------------
20.60 0.857 17.65 Exchange ratio limitation
- -----------------------------------------------------------------------------
21.00 0.857 18.00
21.50 0.857 18.43
22.00 0.857 18.85
22.50 0.857 19.28
- -----------------------------------------------------------------------------
23.41 0.857 20.06 Exchange ratio limitation
- -----------------------------------------------------------------------------
23.50 0.854 20.06
24.00 0.836 20.06
24.50 0.819 20.06
</TABLE>
______________________
(1) Calculated by multiplying the exchange ratio by the average closing price
of SouthBanc common stock during the measurement period. The actual value
of the shares at the time SouthBanc stock certificates are delivered or the
shares become available may be more or less than the amounts shown due to
fluctuations in the market price of SouthBanc common stock.
Cash or Stock Election
Under the terms of the merger agreement, Heritage stockholders may elect to
convert their shares into cash, SouthBanc common stock or a mixture of cash and
SouthBanc common stock. All elections of Heritage stockholders are further
subject to the allocation and proration procedures described in the merger
agreement. These procedures provide that the number of shares of Heritage common
stock to be converted into SouthBanc common stock in the merger must be 50% of
the total number of shares of Heritage common stock issued and outstanding on
the date of the merger. We are not making any recommendation as to whether
Heritage stockholders should elect to receive cash or SouthBanc common stock in
the merger. Each holder of Heritage common stock must make his or her own
decision with respect to such election.
It is unlikely that elections will be made in the exact proportions
provided for in the merger agreement. As a result, the merger agreement
describes procedures to be followed if Heritage stockholders
29
<PAGE>
in the aggregate elect to receive more or less of the SouthBanc common stock
than SouthBanc has agreed to issue. These procedures are summarized below.
. When Stock Is Oversubscribed: If Heritage stockholders elect to
receive more SouthBanc common stock than SouthBanc has agreed to issue
in the merger, then all Heritage stockholders who have elected to
receive cash or made no election will receive cash for their Heritage
shares and all stockholders who elected to receive SouthBanc common
stock will receive a pro rata portion of the available SouthBanc
shares plus cash for those shares not converted into SouthBanc common
stock.
. When Stock Is Undersubscribed: If Heritage stockholders elect to
receive fewer shares of SouthBanc common stock than SouthBanc has
agreed to issue in the merger, then all Heritage stockholders who have
elected to receive SouthBanc common stock will receive SouthBanc
common stock and those stockholders who have elected cash or have made
no election will be treated in the following manner:
. If the number of shares held by Heritage stockholders who have
made no election is sufficient to make up the shortfall in the
number of SouthBanc shares that SouthBanc is required to issue,
then all Heritage stockholders who elected cash will receive
cash, and those stockholders who made no election will receive
both cash and SouthBanc common stock in whatever proportion is
necessary to make up the shortfall.
. If the number of shares held by Heritage stockholders who have
made no election is insufficient to make up the shortfall, then
all of those shares will be converted into SouthBanc common stock
and those Heritage stockholders who elected to receive cash will
receive cash and SouthBanc common stock in whatever proportion is
necessary to make up the shortfall.
Notwithstanding these rules, in order that the tax opinions described under
"--Tax Consequences for Heritage Stockholders" can be rendered, it may be
necessary for SouthBanc to reduce the number of shares of Heritage common stock
that will be converted into the right to receive cash and correspondingly
increase the number of shares of Heritage common stock that will be converted
into SouthBanc common stock. If this adjustment is necessary, stockholders who
elect to receive cash or a mixture of cash and stock may be required on a pro
rata basis to receive a greater amount of SouthBanc common stock than they have
elected.
No guarantee can be made that you will receive the amounts of cash and/or
stock you elect. As a result of the allocation procedures and other limitations
outlined in this document and in the merger agreement, you may receive SouthBanc
common stock or cash in amounts that vary from the amounts you elect to receive.
Election Procedures; Surrender of Stock Certificates
An election form is being mailed along with this joint proxy statement-
prospectus to holders of shares of Heritage common stock. Each election form
entitles the holder of the Heritage common stock to elect to receive cash,
SouthBanc common stock, or a combination of cash and stock as outlined above.
To make an effective election, you must submit a properly completed
election form to ChaseMellon Shareholder Services, which will be acting as the
exchange agent, on or before 5:00 p.m., Eastern Time, on ______, 2000 (the
"election deadline"). An election form will be deemed properly
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completed only if accompanied by stock certificates representing all shares of
Heritage common stock covered by the election form (or an appropriate guarantee
of delivery). You may change your election at any time prior to the election
deadline by written notice accompanied by a properly completed and signed,
revised election form received by the exchange agent prior to the election
deadline or by withdrawal of your stock certificates prior to the election
deadline. All elections will be revoked automatically if the merger agreement is
terminated.
If certificates for Heritage common stock are not immediately available or
time will not permit the election form and other required documents to reach the
exchange agent prior to the election deadline, Heritage shares may be properly
exchanged provided that (1) such exchanges are made by or through a member firm
of a registered national securities exchange or of the National Association of
Securities Dealers, Inc., or by a commercial bank or trust company having an
office, branch or agency in the United States; (2) the exchange agent receives,
prior to the election deadline, a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided with this joint proxy
statement-prospectus (delivered by hand, mail, telegram, telex or facsimile
transmission); and (3) the exchange agent receives, within three business days
after the election deadline, the certificates for all exchanged Heritage shares,
or confirmation of the delivery of all such certificates into the exchange
agent's account with the Depository Trust Company in accordance with the proper
procedures for such transfer, together with a properly completed and duly
executed election form and any other documents required by the election form.
Heritage stockholders who do not submit a properly completed election form
or revoke their election form prior to the election deadline will have their
shares of Heritage common stock designated as non-election shares. Heritage
stock certificates represented by elections that have been revoked will be
promptly returned without charge to the Heritage stockholder submitting the
election form upon written request. After the completion of the merger, the
exchange agent will allocate cash and SouthBanc common stock among the
stockholders of Heritage common stock according to the allocation procedures
outlined above.
After the completion of the merger, the exchange agent will mail to
Heritage stockholders who do not submit election forms a letter of transmittal,
together with instructions for the exchange of their Heritage common stock
certificates for the merger consideration. Until you surrender your Heritage
stock certificates for exchange after completion of the merger, you will not be
paid dividends or other distributions declared after the merger with respect to
any SouthBanc common stock into which your Heritage shares have been converted.
When you surrender your Heritage stock certificates, SouthBanc will pay any
unpaid dividends or other distributions, without interest. After the completion
of the merger, there will be no further transfers of Heritage common stock.
Heritage stock certificates presented for transfer after the completion of the
merger will be canceled and exchanged for the merger consideration.
If your Heritage stock certificates have been lost, stolen or destroyed,
you will have to prove your ownership of these certificates and that they were
lost, stolen or destroyed before you receive any consideration for your shares.
Upon request, ChaseMellon Shareholder Services will send you instructions on how
to provide evidence of ownership.
Holders of SouthBanc common stock will not be required to exchange
certificates representing their shares of SouthBanc common stock or otherwise
take any action as a result of the completion of the merger. There is no need
for SouthBanc stockholders to submit their SouthBanc common stock certificates
to SouthBanc, ChaseMellon Shareholder Services or to any other person in
connection with the merger.
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Treatment of Heritage Stock Options
Upon completion of the merger, each outstanding option to purchase Heritage
common stock that has been granted under Heritage's stock option plan will be
canceled and converted into the right to receive a cash payment equal to $17.65
minus the exercise price for the option. Heritage's stock option plan will be
terminated upon completion of the merger.
Tax Consequences for Heritage Stockholders
The following is a discussion of the material federal income tax
consequences of the merger to holders of Heritage common stock. The discussion
is based upon the Internal Revenue Code, Treasury regulations, IRS rulings, and
judicial and administrative decisions in effect as of the date of this joint
proxy statement-prospectus. This discussion assumes that the Heritage common
stock is generally held for investment. In addition, this discussion does not
address all of the tax consequences that may be relevant to you in light of your
particular circumstances or to Heritage stockholders subject to special rules,
such as foreign persons, financial institutions, tax-exempt organizations,
dealers in securities or foreign currencies or insurance companies. The
opinions of counsel referred to in this section will be based on facts existing
at the completion of the merger. In rendering their opinions, counsel will
require and rely upon representations contained in certificates of officers of
SouthBanc, Heritage and others.
It is a condition to the obligation of SouthBanc and Heritage to complete
the merger that SouthBanc receive an opinion of Malizia Spidi & Fisch, PC and
that Heritage receive an opinion of Muldoon, Murphy & Faucette LLP, dated as of
the completion of the merger, that the merger will be treated as a
reorganization within the meaning of the Internal Revenue Code. If either of us
waives the requirement of receiving a tax opinion and there is a material change
in tax consequences to SouthBanc stockholders or Heritage stockholders, you will
be notified and given the opportunity to confirm or change your vote. Because
the merger will be treated as a reorganization, neither SouthBanc nor Heritage
will recognize any gain or loss as a result of the merger.
The tax opinions to be delivered to us in connection with the merger are
not binding on the Internal Revenue Service or the courts, and we do not intend
to request a ruling from the Internal Revenue Service with respect to the
merger.
The federal income tax consequences of the merger to Heritage stockholders
will depend primarily on whether the stockholder exchanges its Heritage common
stock for solely SouthBanc common stock (except for cash received instead of a
fractional share of SouthBanc common stock), solely cash or a combination of
stock and cash. Regardless of whether a Heritage stockholder elects to receive
SouthBanc common stock, cash or a combination of stock and cash, the federal
income tax consequences will depend on the actual merger consideration received.
The tax consequences of the merger to you may vary depending upon your
particular circumstances. Therefore, you should consult your tax advisor to
determine the particular tax consequences of the merger to you, including those
relating to state and/or local taxes.
Receipt of SouthBanc Common Stock in Exchange for Heritage Common Stock. No
gain or loss will be recognized by a Heritage stockholder who receives solely
shares of SouthBanc common stock (except for cash received in lieu of fractional
shares, as discussed below) in exchange for all of his or her shares of Heritage
common stock. The tax basis of the shares of SouthBanc common stock received by
a Heritage stockholder in such exchange will be equal (except for the basis
attributable to any fractional shares of
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SouthBanc common stock, as discussed below) to the basis of the Heritage common
stock surrendered in exchange for the SouthBanc common stock. The holding period
of the SouthBanc common stock received will include the holding period of shares
of Heritage common stock surrendered in exchange for the SouthBanc common stock,
provided that such shares were held as capital assets of the Heritage
stockholder at the effective time of the merger.
Receipt of Cash in Exchange for Heritage Common Stock. A Heritage
stockholder who receives solely cash in exchange for all of his or her shares of
Heritage common stock (and is not treated as constructively owning SouthBanc
common stock after the merger under the circumstances referred to below under
"__Possible Dividend Treatment") will recognize gain or loss for federal income
tax purposes equal to the difference between the cash received and such
stockholder's tax basis in the Heritage common stock surrendered in exchange for
the cash. Such gain or loss will be a capital gain or loss, provided that such
shares were held as capital assets of the Heritage stockholder at the effective
time of the merger. Such gain or loss will be long-term capital gain or loss if
the Heritage stockholder's holding period is more than one year. The Internal
Revenue Code contains limitations on the extent to which a taxpayer may deduct
capital losses from ordinary income.
Receipt of SouthBanc Common Stock and Cash in Exchange for Heritage Common
Stock. A Heritage stockholder who receives a combination of SouthBanc common
stock and cash in exchange for his or her Heritage common stock will not be
permitted to recognize any loss for federal income tax purposes. Such a
stockholder will recognize gain, if any, equal to the lesser of (1) the amount
of cash received or (2) the amount of gain "realized" in the transaction. The
amount of gain a Heritage stockholder "realizes" will equal the amount by which
(a) the cash plus the fair market value at the effective time of the merger of
the SouthBanc common stock received exceeds (b) the stockholders' basis in the
Heritage common stock to be surrendered in the exchange for the cash and
SouthBanc common stock. Any recognized gain could be taxed as a capital gain or
a dividend, as described below. The tax basis of the shares of SouthBanc common
stock received by such Heritage stockholder will be the same as the basis of the
shares of Heritage common stock surrendered in exchange for the shares of
SouthBanc common stock, adjusted as provided in Section 358(a) of the Internal
Revenue Code for the cash received in exchange for such shares of Heritage
common stock. The holding period for shares of SouthBanc common stock received
by such Heritage stockholder will include such stockholder's holding period for
the Heritage common stock surrendered in exchange for the SouthBanc common
stock, provided that such shares were held as capital assets of the stockholder
at the effective time of the merger.
A Heritage stockholder's federal income tax consequences will also depend
on whether his or her shares of Heritage common stock were purchased at
different times at different prices. If they were, the Heritage stockholder
could realize gain with respect to some of the shares of Heritage common stock
and loss with respect to other shares. Such Heritage stockholder would have to
recognize such gain to the extent such stockholder receives cash with respect to
those shares in which the stockholder's adjusted tax basis is less than the
amount of cash plus the fair market value at the effective time of the merger of
the SouthBanc common stock received, but could not recognize loss with respect
to those shares in which the Heritage stockholder's adjusted tax basis is
greater than the amount of cash plus the fair market value at the effective time
of the merger of the SouthBanc common stock received. Any disallowed loss would
be included in the adjusted basis of the SouthBanc common stock. Such a Heritage
stockholder is urged to consult his or her own tax advisor respecting the tax
consequences of the merger to that stockholder.
Possible Dividend Treatment. In certain circumstances, a Heritage
stockholder who receives solely cash or a combination of cash and SouthBanc
common stock in the merger may receive ordinary income, rather than capital
gain, treatment on all or a portion of the gain recognized by that stockholder
if the receipt
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of cash "has the effect of the distribution of a dividend." The determination of
whether a cash payment has such effect is based on a comparison of the Heritage
stockholder's proportionate interest in SouthBanc after the merger with the
proportionate interest the stockholder would have had if the stockholder had
received solely SouthBanc common stock in the merger. For purposes of this
comparison, the Heritage stockholder may be deemed to constructively own shares
of SouthBanc common stock held by certain members of the stockholder's family or
certain entities in which the stockholder has an ownership or beneficial
interest and certain stock options may be aggregated with the stockholder's
shares of SouthBanc common stock. The amount of the cash payment that may be
treated as a dividend is limited to the stockholder's ratable share of the
accumulated earnings and profits of Heritage at the effective time of the
merger. Any gain that is not treated as a dividend will be taxed as a capital
gain, provided that the stockholder's shares were held as capital assets at the
effective time of the merger. Because the determination of whether a cash
payment will be treated as having the effect of a dividend depends primarily
upon the facts and circumstances of each Heritage stockholder, stockholders are
urged to consult their own tax advisors regarding the tax treatment of any cash
received in the merger.
Cash in Lieu of Fractional Shares. A Heritage stockholder who holds
Heritage common stock as a capital asset and who receives in the merger, in
exchange for such stock, solely SouthBanc common stock and cash in lieu of a
fractional share interest in SouthBanc common stock will be treated as having
received such cash in full payment for such fractional share of stock and as
capital gain or loss, notwithstanding the dividend rules discussed above.
Background of the Merger
The management of SouthBanc and Heritage have been familiar with each other
for many years and, from time to time, have discussed the possibility of a
business combination. In mid-1997, when Perpetual Bank was organized in the
mutual holding company form of organization and Heritage Federal was a mutual
savings association, the two institutions discussed a possible business
combination. After meeting with the Office of Thrift Supervision and determining
that they were likely to encounter significant delays in receiving regulatory
approval for a merger as a result of the unique nature of the transaction, both
institutions decided to proceed independently.
Perpetual Bank converted to the stock holding company form of organization
in April 1998. Heritage Federal converted from mutual to stock form also in
April 1998. Initially, after their conversions, both SouthBanc and Heritage
focused on deploying the proceeds raised in their stock offerings and managing
their capital levels through stock repurchases and, in the case of Heritage,
making a return of capital. From time to time, SouthBanc considered
acquisitions of or strategic alliances with financial institutions other than
Heritage, but no transaction developed.
Beginning in May 1999, J. Edward Wells, the President and Chief Executive
Officer of Heritage, and Robert W. Orr, the President and Chief Executive
Officer of SouthBanc, resumed informal discussions of a possible business
combination between their companies. These initial discussions focused on
operational issues, including the structure of the Board of Directors and
management and potential areas for cost savings.
Periodically, the Heritage Board of Directors met with Trident Securities
to discuss strategic options for Heritage. On October 7, 1999, Trident
Securities discussed with the Heritage Board a variety of strategies for
increasing stockholder value, the market for mergers and acquisitions and the
identity of those companies that were likely merger partners for Heritage.
Heritage did not request Trident Securities to specifically analyze a
transaction with SouthBanc at this time.
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In mid-November 1999, representatives of Heritage and SouthBanc began a
series of discussions regarding the possibility of a business combination.
Those discussions covered the potential range of prices for a transaction, the
composition of the Board of Directors and management of the combined company,
and various other organizational and corporate issues. In the course of those
discussions, Heritage and SouthBanc conferred with counsel and RP Financial, LC.
regarding legal and financial matters related to a potential transaction.
On December 16, 1999, representatives of SouthBanc and Heritage met in
Greenville, South Carolina, to discuss the terms of a business combination. The
parties discussed the pricing of the transaction, whether the consideration
would be paid in cash or SouthBanc common stock or a combination of cash and
stock, the composition of the Board of Directors of SouthBanc following the
merger and a variety of issues relating to employees and employee benefits
programs. Although the companies did not reach agreement at this meeting as to
the pricing or any other terms of the transaction, they agreed to continue
discussions.
In early January 2000, with the assistance of RP Financial, SouthBanc
prepared a general term sheet that set forth the bases for a business
combination between SouthBanc and Heritage. Over the first half of January,
representatives of SouthBanc and Heritage discussed the term sheet and each
proposed modifications to the terms.
On January 14, 2000, the Heritage Board met to review the term sheet
prepared by SouthBanc and to receive a presentation from Trident Securities. At
that meeting, counsel for Heritage presented a summary of the Board's fiduciary
duties in the context of a merger involving Heritage and SouthBanc. Trident
evaluated the proposal from SouthBanc, analyzed SouthBanc and Heritage on a
combined basis and compared the value of the merger consideration with amounts
paid in similar transactions. Trident also compared the value of the merger
consideration to the projected future value of holding Heritage common stock,
including receipt of dividends, if Heritage was to continue as an independent
company. Trident discussed with the Heritage Board the fact that market prices
for bank and thrift stocks have continued to decline in recent months and that
prices for mergers and acquisitions of financial institutions have declined as a
result. Trident identified the most logical prospective acquirors for Heritage
and discussed Trident's analysis of those companies' willingness and ability to
pay as much as SouthBanc. Trident concluded that several of the logical
acquirors of Heritage were either not making acquisitions at this time, not able
to exceed the price offered by SouthBanc without suffering earnings dilution, or
not likely to be interested for a variety of reasons.
On February 2, 2000, the Heritage Board met to discuss the status of
discussions with SouthBanc, including the pricing parameters as they stood at
that time. Representatives of Trident Securities and legal counsel were present
at the meeting. The Board determined that pursuing a transaction with SouthBanc
would be in the best interests of Heritage stockholders in light of Heritage's
prospects as an independent company and authorized Mr. Wells to conduct a due
diligence review of SouthBanc and to continue discussions with SouthBanc with a
view towards presenting the Board with a definitive merger agreement for its
consideration.
On February 3, the SouthBanc Board met to discuss the status of discussions
with Heritage, including the pricing terms and organizational and operational
benefits of the transaction as they stood on that date. Representatives of RP
Financial participated in those discussions via teleconference. RP Financial
reviewed with the SouthBanc Board the proposed form and amount of merger
consideration, the purchase accounting treatment, the anticipated impact on
SouthBanc's book value and earnings per share, and the strategic benefits of
pursuing a business combination with Heritage at that point in time. The
SouthBanc Board determined that pursuing a transaction with Heritage would be in
the best interests of SouthBanc
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stockholders and authorized Mr. Orr to conduct a due diligence review of
Heritage and to continue discussions with Heritage with a view towards
presenting the Board with a definitive merger agreement for its consideration.
On February 3 and 4, following execution of a joint confidentiality
agreement, representatives of SouthBanc and Heritage each conducted a due
diligence review with respect to the other. Shortly thereafter, representatives
of SouthBanc and Heritage began negotiating the terms of the merger agreement.
A draft of the merger agreement was provided to the Heritage Board on
February 11, 2000. On February 14, the Heritage Board met with legal counsel to
review the contents of the merger agreement. Legal counsel also reviewed with
the Board the course of negotiations and the results of due diligence. Trident
Securities presented its analysis and delivered its opinion that the merger
consideration was fair, from a financial point of view, to the stockholders of
Heritage. The Heritage Board then discussed the terms of the merger agreement
and the presentation by Trident Securities. After conclusion of the review and
discussion, a vote was taken and the Heritage Board unanimously approved the
merger agreement and authorized Mr. Wells to execute the merger agreement and
related documents on behalf of Heritage.
A draft of the merger agreement was provided to the SouthBanc Board on
February 12, 2000. On February 14, the SouthBanc Board met with legal counsel
and Sandler O'Neill. Legal counsel reviewed with the Board the course of
negotiations, the results of due diligence and the terms of the merger
agreement. Sandler O'Neill presented its analysis and delivered its opinion that
the merger consideration was fair, from a financial point of view, to the
stockholders of SouthBanc. The SouthBanc Board then discussed the terms of the
merger agreement and the presentation by Sandler O'Neill. After conclusion of
the review and discussion, a vote was taken and the SouthBanc Board unanimously
approved the merger agreement and authorized Mr. Orr to execute the merger
agreement and related documents on behalf of SouthBanc.
Recommendation of the SouthBanc Board; SouthBanc's Reasons for the Merger
SouthBanc's Board of Directors has unanimously approved the merger
agreement and recommends that SouthBanc stockholders vote "FOR" the approval of
the merger agreement.
SouthBanc's Board of Directors has determined that the merger and the
merger agreement are fair to, and in the best interests of, SouthBanc and its
stockholders. In reaching this determination, the SouthBanc Board consulted
with legal counsel as to its legal duties and the terms of the merger agreement
and with its financial advisors with respect to the financial aspects and
fairness of the transaction from a financial point of view. In arriving at its
determination, the SouthBanc Board also considered a number of factors,
including the following:
. Information concerning the businesses, earnings, operations, financial
condition and prospects of Heritage and SouthBanc, both individually
and as combined. The SouthBanc Board took into account the results of
SouthBanc's due diligence review of Heritage.
. The opinion rendered by Sandler O'Neill, as financial advisor to
SouthBanc, that the merger consideration is fair, from a financial
standpoint, to SouthBanc stockholders (see "--Opinion of SouthBanc's
Financial Advisor").
. The complimentary nature of the businesses and market areas of
SouthBanc and Heritage.
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. The terms of the merger agreement and the structure of the merger,
including the fact that the formula for calculating the exchange ratio
provides a minimum and maximum number of shares of SouthBanc common
stock to be issued in the merger and that the merger is intended to
qualify as a transaction of a type that is generally tax-free for U.S.
federal income tax purposes and as a purchase for accounting purposes.
. The size of the combined company, which would permit SouthBanc to
pursue other acquisitions.
. The proposed management of the combined company, including the fact
that SouthBanc's Board of Directors will be composed of five persons
who are current directors of SouthBanc and three persons who are
current directors of Heritage.
. The historical trading prices for SouthBanc common stock.
. The opportunities for decreasing operating expenses for the combined
company.
. The current and prospective economic, competitive and regulatory
environment facing SouthBanc, Heritage and the financial services
industry.
The discussion of the information and factors considered by the SouthBanc
Board is not intended to be exhaustive, but includes all material factors
considered by the SouthBanc Board. In reaching its determination to approve and
recommend the merger, the SouthBanc Board did not assign any specific or
relative weights to any of the foregoing factors, and individual directors may
have weighed factors differently.
Recommendation of the Heritage Board; Heritage's Reasons for the Merger
Heritage's Board of Directors has unanimously approved the merger agreement
and recommends that Heritage stockholders vote "FOR" the approval of the merger
agreement.
Heritage's Board of Directors has determined that the merger and the merger
agreement are fair to, and in the best interests of, Heritage and its
stockholders. In approving the merger agreement, the Heritage Board consulted
with legal counsel as to its legal duties and the terms of the merger agreement
and with its financial advisor with respect to the financial aspects and
fairness of the transaction from a financial point of view. In arriving at its
determination, the Heritage Board also considered a number of factors, including
the following:
. Information concerning the businesses, earnings, operations, financial
condition and prospects of Heritage and SouthBanc, both individually
and as combined. The Heritage Board took into account the results of
Heritage's due diligence review of SouthBanc.
. The opinion rendered by Trident Securities, as financial advisor to
Heritage, that the merger consideration is fair, from a financial
standpoint, to Heritage stockholders (see "-Opinion of Heritage's
Financial Advisor").
. The terms of the merger agreement and the structure of the merger,
including the fact that the formula for calculating the exchange ratio
provides a minimum and maximum number of shares of SouthBanc common
stock to be issued in the merger and that the merger is intended to
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qualify as a transaction of a type that is generally tax-free for U.S.
federal income tax purposes and as a purchase for accounting purposes.
. The fact that stockholders of Heritage who receive SouthBanc common
stock will own, in the aggregate, approximately 39% of SouthBanc.
. The fact that Heritage Federal will remain in existence as a
subsidiary of SouthBanc and that, as a result, there are no planned
layoffs of Heritage Federal employees.
. The proposed management of the combined company, including the fact
that Mr. Wells will serve as Chairman of SouthBanc.
. The historical trading prices for Heritage common stock.
. Heritage stockholders who receive SouthBanc common stock will
experience an increase in dividends, based on SouthBanc's current
dividend rate.
. The current and prospective economic, competitive and regulatory
environment facing Heritage, SouthBanc and the financial services
industry generally.
. The effect of the merger on Heritage's customers and communities
served by Heritage and its employees.
The discussion of the information and factors considered by the Heritage
Board is not intended to be exhaustive, but includes all material factors
considered by the Heritage Board. In reaching its determination to approve and
recommend the merger, the Heritage Board did not assign any specific or relative
weights to any of the foregoing factors, and individual directors may have
weighed factors differently.
Opinion of SouthBanc's Financial Advisor
By letter agreement dated as of February 2, 2000, SouthBanc retained
Sandler O'Neill as an independent financial advisor to render an opinion as to
the fairness, from a financial point of view, of the merger consideration to the
holders of SouthBanc common stock. Sandler O'Neill is a nationally recognized
investment banking firm whose principal business specialty is financial
institutions. In the ordinary course of its investment banking business,
Sandler O'Neill is regularly engaged in the valuation of financial institutions
and their securities in connection with mergers and acquisitions and other
corporate transactions. Sandler O'Neill did not act as SouthBanc's financial
advisor in connection with its consideration of the merger or in connection with
the negotiation of the merger agreement.
At the request of the SouthBanc Board of Directors, representatives of
Sandler O'Neill attended the February 14, 2000 meeting of the SouthBanc Board of
Directors at which the Board considered and approved the merger agreement. At
the meeting, Sandler O'Neill delivered to the SouthBanc Board of Directors its
oral opinion, subsequently confirmed in writing, that, as of that date, the
merger consideration was fair to SouthBanc's stockholders from a financial point
of view. Sandler O'Neill has also delivered to the SouthBanc board of directors
a written opinion dated the date of this document which is substantially
identical to the February 14, 2000 opinion. The full text of Sandler O'Neill's
opinion is attached as Appendix D to this document and is incorporated by
reference into this description. The opinion outlines the procedures followed,
assumptions made, matters considered and qualifications and
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limitations on the review undertaken by Sandler O'Neill in rendering its
opinion. This description is qualified in its entirety by reference to the
opinion. SouthBanc stockholders are urged to carefully read the opinion in
connection with their consideration of the proposed merger.
Sandler O'Neill's opinion was directed to the SouthBanc Board of Directors
and was provided to the Board of Directors for its information in considering
the merger. The opinion is directed only to the fairness of the merger
consideration to SouthBanc stockholders from a financial point of view. It does
not address the underlying business decision of SouthBanc to engage in the
merger or any other aspect of the merger and is not a recommendation to any
SouthBanc stockholder as to how such stockholder should vote at the special
meeting with respect to the merger or any other related matter.
In rendering its February 14, 2000 opinion, Sandler O'Neill performed a
variety of financial analyses. The following is a summary of the material
analyses performed by Sandler O'Neill, but is not a complete description of all
the analyses underlying Sandler O'Neill's opinion. The preparation of a
fairness opinion is a complex process involving subjective judgements as to the
most appropriate and relevant methods of financial analysis and the application
of those methods to the particular circumstances. The process, therefore, is
not necessarily susceptible to a partial analysis or summary description.
Sandler O'Neill believes that its analyses must be considered as a whole and
that selecting only certain factors and analyses, or attempting to ascribe
relative weights to some or all factors and analyses, could create an incomplete
view of the evaluation process underlying its opinion. Also, no company
included in Sandler O'Neill's comparative analyses described below is identical
to SouthBanc or Heritage and no transaction is identical to the merger.
Accordingly, an analysis of comparable companies or transactions involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the companies and other factors that could affect
the public trading values or merger transaction values, as the case may be, of
SouthBanc and Heritage and the companies to which they are being compared.
The earnings projections for SouthBanc and Heritage relied upon by Sandler
O'Neill in its analyses were reviewed with management and were based upon
internal projections of SouthBanc and Heritage for the year ending September 30,
2000. For periods after 2000, Sandler O'Neill assumed, with the consent of
SouthBanc's management, an annual growth rate on earning assets of 5% in the
case of SouthBanc and 4% in the case of Heritage. The earnings projections
furnished to Sandler O'Neill were prepared by the senior managements of
SouthBanc and Heritage for internal purposes only and not with a view towards
public disclosure. Those projections were based upon numerous variables and
assumptions which are inherently uncertain and, accordingly, actual results
could vary materially from those set forth in such projections.
In performing it analyses, Sandler O'Neill also made numerous assumptions
with respect to industry performance, business and economic conditions and
various other matters, many of which cannot be predicted and are beyond the
control of SouthBanc, Heritage or Sandler O'Neill. Sandler O'Neill prepared its
analyses solely for purposes of rendering its opinion and provided such analyses
to the SouthBanc Board of Directors at the Board's February 14th meeting. The
analyses performed by Sandler O'Neill are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable than
suggested by such analyses. Estimates on the values of companies do not purport
to be appraisals or necessarily reflect the prices at which companies or their
securities may actually be sold. Such estimates are inherently subject to
uncertainty and actual values may be materially different. Accordingly, Sandler
O'Neill's analyses do not necessarily reflect the value of SouthBanc common
stock or Heritage common stock or the prices at which SouthBanc common stock or
Heritage common stock may be sold at any time.
Summary of Proposal. Sandler O'Neill reviewed the financial terms of the
proposed transaction. Based upon the average closing price of SouthBanc common
stock for the ten trading days ending
39
<PAGE>
February 11, 2000 of $18.49 and the resulting exchange ratio of 0.954, Sandler
O'Neill calculated an implied transaction value per share of Heritage common
stock of $17.65. The implied aggregate transaction value was approximately $76.6
million, based upon 4,301,089 actual shares of Heritage common stock outstanding
and 416,588 options outstanding with an average strike price of $15.10. Based
upon Heritage's December 31, 1999 financial information, Sandler O'Neill
calculated the following ratios:
Implied value/ Book value................................ 1.03x
Implied value/ Tangible book value....................... 1.03x
Implied value/ Last twelve months EPS.................... 29.4x
Implied value/ Last twelve months normalized EPS......... 19.2x
Implied value/Last quarter annualized EPS................ 17.0x
For purposes of Sandler O'Neill's analyses, earnings per share were based on
diluted earnings per share. Sandler O'Neill noted that the implied transaction
value represented a 33.2% premium over the February 11, 2000 closing price of
Heritage common stock of $13.25.
Stock Trading History. Sandler O'Neill reviewed the history of the
reported trading prices and volume of SouthBanc common stock and Heritage common
stock, and the relationship between the movements in the prices of each of the
stocks to movements in certain stock indices, including the Standard & Poor's
500 Index, the Nasdaq Bank Index and composite groups of publicly traded
regional savings institutions selected by Sandler O'Neill. In order to
incorporate the effect of the $4 special dividend paid by Heritage on June 22,
1999, $4 was subtracted from reported Heritage stock prices prior to the ex-
dividend date of May 27, 1999. During the one year period ended February 11,
2000, the SouthBanc common stock outperformed the Nasdaq Bank Index and the
composite group to which it was compared but underperformed the Standard &
Poor's 500 Index. During the one year period ended February 11, 2000, the
Heritage common stock underperformed all of the indices to which it was
compared.
<TABLE>
<CAPTION>
Beginning Index Value Ending Index Value
February 11, 1999 February 11, 2000
<S> <C> <C>
SouthBanc.............................................. 100.00% 88.61%
SouthBanc Composite Group.............................. 100.00% 77.9 %
Heritage............................................... 100.00% 75.18%
Heritage Composite Group............................... 100.00% 79.34%
Nasdaq Bank Index...................................... 100.00% 86.09%
S&P 500 Index.......................................... 100.00% 110.61%
</TABLE>
Comparable Company Analysis. Sandler O'Neill used publicly available
information to compare selected financial and market trading information for
SouthBanc and two groups of savings institutions selected by Sandler O'Neill.
The regional group consisted of SouthBanc and the following 15 publicly traded
regional savings institutions:
Cavalry Bancorp, Inc. CENIT Bancorp, Inc.
Community Financial Corp. Cooperative Bankshares, Inc.
Essex Bancorp, Inc. Federal Trust Corp.
FFLC Bancorp, Inc. First Community Financial Corp.
First Federal Bancshares of Arkansas FirstSpartan Financial Corp.
HCB Bancshares, Inc. Heritage Bancorp, Inc.
Pocahontas Bancorp, Inc. Union Financial Bancshares, Inc.
Virginia Capital Bancshares
40
<PAGE>
The highly valued group consisted of the following seven publicly traded savings
institutions that had a return on equity (based on last twelve months' earnings)
of greater than 14.5% and a price to tangible book value of greater than 140%:
American Bank of Connecticut Bancorp Connecticut, Inc.
Coastal Financial Corp. Highland Bancorp, Inc.
Home Federal Bancorp Home Port Bancorp, Inc.
Warren Bancorp, Inc.
The analysis compared publicly available financial information for SouthBanc for
each of the fiscal years ended September 30, 1994 through 1998 and as of and for
the twelve months ended December 31, 1999 and the median data for each of the
regional and highly valued groups as of and for each of the years ended December
31, 1994 through 1999 (or in some cases, for the period ending September 30,
1999). The table below sets forth the comparative data as of and for the twelve
months ended December 31, 1999.
<TABLE>
<CAPTION>
Highly
SouthBanc Regional Group Valued Group
<S> <C> <C> <C>
Total assets......................................... $373,667 $381,577 $654,778
Annual growth rate of total assets................... .81% 8.37% 9.10%
Tangible equity / total assets....................... 13.65% 9.63% 7.36%
Intangible assets / total equity..................... .00% .00% .00%
Net loans / total assets............................. 71.53% 75.17% 71.74%
Cash & securities / total assets..................... 22.27% 19.61% 25.76%
Gross loans / total deposits......................... 123.20% 108.47% 105.59%
Total borrowings / total assets...................... 26.62% 16.07% 22.37%
Non-performing assets / total assets................. .69% .41% .28%
Loan loss reserve / gross loans...................... 1.02% .71% 1.48%
Net interest margin.................................. 3.84% 3.48% 3.61%
Loan loss provision / average assets................. .15% .06% .09%
Non-interest income / average assets................. 1.24% .54% .53%
Non-interest expense / average assets................ 2.26% 2.32% 2.05%
Efficiency ratio..................................... 48.47% 64.64% 46.60%
Return on average assets (1)......................... 1.40% .93% 1.39%
Return on average equity (1)......................... 9.29% 6.53% 16.12%
Price / tangible book value per share................ 109.36% 87.18% 171.11%
Price / earnings per share (1)....................... 11.29x 11.63x 9.72x
Dividend yield....................................... 3.17% 3.06% 3.35%
Dividend payout ratio (1)............................ 34.77% 43.41% 30.91%
</TABLE>
_______________
(1) Based upon net income normalized to exclude the impact of nonrecurring
items.
41
<PAGE>
Similarly, Sandler O'Neill used publicly available information to compare
selected financial and market trading information for Heritage and two groups of
savings institutions selected by Sandler O'Neill. The regional group consisted
of Heritage and the following 15 publicly traded regional savings institutions:
Cavalry Bancorp, Inc. CENIT Bancorp, Inc.
Community Financial Corp. Cooperative Bankshares, Inc.
Essex Bancorp, Inc. Federal Trust Corp.
FFLC Bancorp, Inc. First Community Financial Corp.
FirstSpartan Financial Corp. HCB Bancshares, Inc.
Pocahontas Bancorp, Inc. SouthBanc Shares, Inc.
Texarkana First Financial Corp. Union Financial Bancshares, Inc.
Virginia Capital Bancshares
The highly valued group consisted of the following seven publicly traded savings
institutions that had a return on equity (based on last twelve months' earnings)
of greater than 14.5% and a price to tangible book value of greater than 140%:
American Bank of Connecticut Bancorp Connecticut, Inc.
Coastal Financial Corp. Highland Bancorp, Inc.
Home Federal Bancorp Home Port Bancorp, Inc.
Warren Bancorp, Inc.
The analysis compared publicly available financial information for Heritage for
each of the fiscal years ended September 30, 1994 through 1998 and as of and for
the twelve months ended December 31, 1999 and the median data for each of the
regional and highly valued groups as of and for each of the years ended December
31, 1994 through 1999 (or in some cases, for the period ending September 30,
1999). The table below sets forth the comparative data as of and for the twelve
months ended December 31, 1999.
<TABLE>
<CAPTION>
Heritage Regional Group Highly Valued Group
<S> <C> <C> <C>
Total assets........................................ $334,100 $353,126 $654,778
Annual growth rate of total assets.................. 9.94% 8.37% 9.10%
Tangible equity / total assets...................... 21.99% 9.63% 7.36%
Intangible assets / total equity.................... .00% .00% .00%
Net loans / total assets............................ 80.72% 77.81% 71.74%
Cash & securities / total assets.................... 17.40% 18.67% 25.76%
Gross loans / total deposits........................ 133.84% 110.61% 105.59%
Total borrowings / total assets..................... 16.46% 16.36% 22.37%
Non-performing assets / total assets................ .33% .34% .28%
Loan loss reserve / gross loans..................... .55% .71% 1.48%
Net interest margin................................. 3.61% 3.60% 3.61%
Loan loss provision / average assets................ .19% .06% .09%
Non-interest income / average assets................ .07% .54% .53%
Non-interest expense / average assets............... 1.24% 2.32% 2.05%
Efficiency ratio.................................... 35.38% 64.64% 46.60%
Return on average assets (1)........................ 1.19% .92% 1.39%
Return on average equity (1)........................ 4.57% 6.53% 16.12%
Price / tangible book value per share............... 80.12% 92.66% 171.11%
Price / earnings per share (1)...................... 14.67x 12.65x 9.72x
Dividend yield...................................... 31.85% 3.06% 3.35%
Dividend payout ratio(1)............................ 476.90% 43.41% 30.91%
</TABLE>
_______________
(1) Based upon net income normalized to exclude the impact of nonrecurring
items.
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<PAGE>
Analysis of Selected Merger Transactions. Sandler O'Neill reviewed certain
transactions announced from January 1, 1999 to February 11, 2000 involving
publicly traded savings institutions as acquired institutions with transaction
values greater than $15 million. Sandler O'Neill reviewed 47 transactions
announced nationwide and 13 transactions announced in the Southeast region,
comprised of Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina,
South Carolina, Tennessee, Virginia and West Virginia. Sandler O'Neill reviewed
the multiples of transaction value to last four quarters' earnings, transaction
value to book value, transaction value to tangible book value, tangible book
premium to core deposits, transaction value to total assets and premium to
market price, and computed high, low, mean and median multiples and premiums for
the respective groups of transactions. These multiples were applied to
Heritage's financial information as of and for the twelve months ended December
31, 1999. As illustrated in the following table, Sandler O'Neill derived an
imputed range of values per share of Heritage common stock of $13.55 to $29.68
based upon the median multiples for nationwide transactions and $17.69 to $25.24
based upon the median multiples for Southeast transactions. As calculated by
Sandler O'Neill, the implied transaction value per share of Heritage common
stock as of February 11, 2000 was $17.65, which was within the range of values
for the 47 transactions reviewed.
<TABLE>
<CAPTION>
Implied Value
Range of Median based on Median
Nationwide Transactions Multiples Multiple Multiple
-----------------------
<S> <C> <C> <C>
Deal Price / LTM EPS (1)............................. 47.8x - 12.9x 24.0x $22.02
Deal Price / Book value.............................. 3.72x - 1.02x 1.74x $29.68
Deal Price / tangible book value..................... 3.98x - 1.02x 1.74x $29.68
Tangible book premium / core deposits................ 58.7% - 2.6% 11.5% $23.12
Deal Price / total deposits.......................... 57.4% - 12.0% 27.7% $13.55
Deal Price / total assets............................ 36.8% - 10.9% 19.8% $15.97
Premium to market price.............................. 98.3% - 5.3% 39.1% $18.43
</TABLE>
_______________
(1) Based upon net income normalized to exclude the impact of nonrecurring
items.
<TABLE>
<CAPTION>
Implied Value
Range of Median based on Median
Southeast Transactions Multiples Multiple Multiple
----------------------
<S> <C> <C> <C>
Deal Price / LTM EPS (1)............................. 30.5x - 15.3x 23.4x $21.49
Deal Price / Book value.............................. 3.67x - 1.02x 1.48x $25.24
Deal Price / tangible book value..................... 3.98x - 1.02x 1.48x $25.24
Tangible book premium / core deposits................ 38.3% - 2.9% 14.5% $24.50
Deal Price / total deposits.......................... 57.4% - 16.3% 36.1% $17.69
Deal Price / total assets............................ 36.6% - 14.7% 25.4% $20.53
Premium to market price.............................. 98.3% - 5.3% 50.0% $19.87
</TABLE>
_______________
(1) Based upon net income normalized to exclude the impact of nonrecurring
items.
Discounted Dividend Stream and Terminal Value Analysis. Sandler O'Neill
also performed an analysis which estimated the future stream of after-tax
dividends of Heritage through September 30, 2004 under various circumstances,
assuming Heritage's current dividend payout ratio and that Heritage performed in
accordance with the earnings forecasts reviewed with management. To approximate
the terminal value of Heritage common stock at September 30, 2004, Sandler
O'Neill applied price/earnings multiples ranging from 6.0x to 26.0x and applied
multiples of tangible book value ranging from 40% to 240%. The dividend income
streams and terminal values were then discounted to present values using
different assumptions
43
<PAGE>
regarding required rates of return of holders or prospective buyers of Heritage
common stock. As illustrated in the following table, this analysis indicated an
imputed range of values per share of Heritage common stock of $6.75 to $27.13
when applying the price/earnings multiples and $6.45 to $34.44 when applying
multiples of tangible book value. As calculated by Sandler O'Neill, the implied
transaction value per share of Heritage common stock in the merger as of
February 11, 2000 was $17.65, which was within the range of values as calculated
above.
<TABLE>
<CAPTION>
Price/Earnings Multiples Tangible Book Value Multiples
Discount Rate 6x 26x .4x 2.4x
<S> <C> <C> <C> <C>
9% $8.37 $27.13 $7.99 $34.44
11 7.78 24.98 7.43 31.68
13 7.24 23.04 6.91 29.20
15 6.75 21.29 6.45 26.95
</TABLE>
In connection with its analysis, Sandler O'Neill considered and discussed
with the SouthBanc Board of Directors how the present value analysis would be
affected by changes in the underlying assumptions, including variations with
respect to the growth rate of assets, net interest spread, non-interest income,
non-interest expense and dividend payout ratio. Sandler O'Neill noted that the
discounted dividend stream and terminal value analysis is a widely used
valuation methodology, but the results of such methodology are highly dependent
upon the numerous assumptions that must be made, and the results thereof are not
necessarily indicative of actual values or future results.
Pro Forma Merger Analysis. Sandler O'Neill analyzed certain pro forma
effects of the merger, based upon (a) a transaction value of $17.65 per share of
Heritage common stock, with the merger consideration being 50% cash and 50%
SouthBanc common stock and assuming that the exchange ratio was 0.954, based
upon the average stock price of SouthBanc for the ten trading days ending on
February 11, 2000, and (b) SouthBanc's and Heritage's current and projected
income statements and balance sheets as reviewed with management, and
assumptions regarding the economic environment, accounting and tax treatment of
the merger, charges associated with the merger, operating efficiencies and other
adjustments discussed with the senior managements of SouthBanc and Heritage. As
illustrated in the following table, this analysis indicated that in the first
full fiscal year following the merger, the merger would be accretive to
SouthBanc's earnings per share and tangible book value per share. The actual
results achieved by SouthBanc and Heritage may vary from projected results and
the variations may be material.
SouthBanc
Year Ending September 30, 2001 Stand-Alone Pro Forma
- ------------------------------
Projected EPS $ 1.96 $ 2.21
Projected tangible book value(1) $17.33 $17.88
Projected leverage capital ratio(1) 13.49% 12.85%
_____________________
(1) Calculated at the beginning of the period.
SouthBanc does not as a matter of course make public projections as to
future revenues, earnings, or other results. However, the management of
SouthBanc has provided certain prospective financial information to Sandler
O'Neill for use in rendering its opinion. This prospective financial information
was not prepared with a view toward public disclosure or with a view toward
complying with the guidelines established by the American Institute of Certified
Public Accountants with respect to prospective financial information, but, in
the view of SouthBanc's management, was prepared on a reasonable basis, reflect
the best currently available estimates and judgments and present, to the best of
management's knowledge and belief, the expected course of action and the
expected future financial performance of SouthBanc. However, this information is
not fact and should not be relied upon as necessarily indicative of future
results, and readers of this joint proxy statement-prospectus are cautioned not
to place undue reliance on the prospective financial information. Neither
SouthBanc's independent auditors, nor any other independent accountants, have
compiled, examined, or performed any procedures with respect to the prospective
financial information contained herein, nor have they expressed any opinion or
any other form of assurance on such information or its achievability, and assume
no responsibility for, and disclaim any association with, the prospective
financial information. SouthBanc does not intend to update these projections.
See "A Warning About Forward--Looking Statements."
In connection with rendering its February 14, 2000 opinion, Sandler O'Neill
reviewed, among other things:
1. the merger agreement and exhibits and schedules thereto;
2. the stock option agreements, dated February 14, 2000, between
SouthBanc and Heritage;
3. certain publicly available financial statements of SouthBanc and
other historical financial information provided by SouthBanc that it deemed
relevant;
44
<PAGE>
4. certain publicly available financial statements of Heritage and
other historical financial information provided by Heritage that it deemed
relevant;
5. certain internal financial analyses and forecasts of SouthBanc
prepared by and/or reviewed with management of SouthBanc and the views of senior
management of SouthBanc, based on limited discussions with certain members of
senior management, regarding SouthBanc's past and current business, financial
condition, results of operations and future prospects;
6. the budget forecast of Heritage for the fiscal year ending September
30, 2000 prepared by and reviewed with management of Heritage and the views of
senior management of Heritage, based on limited discussions with certain members
of senior management, regarding Heritage's past and current business, financial
condition, results of operations and future prospects;
7. the pro forma impact of the merger on SouthBanc;
8. the publicly reported historical price and trading activity for
SouthBanc's and Heritage's common stock, including a comparison of certain
financial and stock market information for SouthBanc and Heritage with similar
publicly available information for certain other companies the securities of
which are publicly traded;
9. the financial terms of recent business combinations in the savings
institution industry, to the extent publicly available;
10. the current market environment generally and the banking
environment in particular; and
11. such other information, financial studies, analyses and
investigations and financial, economic and market criteria as they considered
relevant.
In connection with rendering its updated opinion included as Appendix D of
this document, Sandler O'Neill confirmed the appropriateness of its reliance on
the analyses used to render its February 14, 2000 opinion by performing
procedures to update certain of such analyses and by reviewing the assumptions
upon which such analyses were based and the other factors considered in
rendering its opinion.
In performing its reviews and analyses, Sandler O'Neill relied upon the
accuracy and completeness of all the financial and other information that was
available to them from public sources, that was provided to them by SouthBanc or
Heritage or that was otherwise reviewed by them and they assumed such accuracy
and completeness for purposes of rendering their opinion. Sandler O'Neill was
not asked to and did not undertake an independent verification of any such
information and they do not assume any responsibility or liability for the
accuracy or completeness of any of such information. Sandler O'Neill did not
make an independent evaluation or appraisal of the assets, the collateral
securing assets or the liabilities, contingent or otherwise, of SouthBanc or
Heritage or any of their respective subsidiaries, or the collectibility of any
such assets, nor was it furnished with any such evaluations or appraisals.
Sandler O'Neill is not an expert in the evaluation of allowances for loan losses
and it has not made an independent evaluation of the adequacy of the allowance
for loan losses of SouthBanc or Heritage, nor has it reviewed any individual
credit files relating to SouthBanc or Heritage. With SouthBanc's consent,
Sandler O'Neill has assumed that the respective allowance for loan losses for
both SouthBanc and Heritage are adequate to cover such losses and will be
adequate on a pro forma basis for the combined entity. In addition, Sandler
O'Neill has not conducted any physical inspection of the properties or
facilities of SouthBanc or Heritage. Sandler O'Neill is not an accounting firm
and it has relied, with SouthBanc's consent, on the reports of the independent
45
<PAGE>
accountants of SouthBanc and Heritage for the accuracy and completeness of the
financial statements furnished to them. With respect to all financial
projections reviewed with each company's management and used by Sandler O'Neill
in its analyses, Sandler O'Neill assumed that these projections reflected the
best currently available estimates and judgements of the respective managements
of the respective future financial performances of SouthBanc and Heritage and
that such performances will be achieved. Sandler O'Neill expressed no opinion as
to such financial projections or the assumptions on which they were based.
Sandler O'Neill's opinion was necessarily based upon market, economic and
other conditions as they existed on, and could be evaluated as of, the date of
its opinion. Sandler O'Neill assumed, in all respects material to its analysis,
that all of the representations and warranties contained in the merger agreement
and all related agreements are true and correct, that each party to such
agreements will perform all of the covenants required to be performed by such
party under such agreements and that the conditions precedent in the merger
agreement are not waived. Sandler O'Neill also assumed, with SouthBanc's
consent, that there had been no material change in SouthBanc's or Heritage's
assets, financial condition, results of operations, business or prospects since
the date of the last publicly filed financial statements available to them, that
SouthBanc and Heritage will remain as going concerns for all periods relevant to
its analyses, and that the merger will be accounted for using the purchase
method of accounting and will qualify as a tax-free reorganization for federal
income tax purposes.
SouthBanc has paid Sandler O'Neill a fee of $125,000 for rendering its
fairness opinion. SouthBanc has also agreed to reimburse Sandler O'Neill for
its reasonable out-of-pocket expenses incurred in connection with its engagement
and to indemnify Sandler O'Neill and its affiliates and their respective
partners, directors, officers, employees, agents, and controlling persons
against certain expenses and liabilities, including liabilities under securities
laws.
Sandler O'Neill has in the past provided certain other investment banking
services to SouthBanc and has received compensation for such services. In the
ordinary course of its business as a broker-dealer, Sandler O'Neill may also
purchase securities from and sell securities to SouthBanc and Heritage and may
actively trade the equity securities of SouthBanc and Heritage for its own
account and for the accounts of customers and, accordingly, may at any time hold
a long or short position in such securities.
Opinion of Heritage's Financial Advisor
Heritage retained Trident Securities to act as its financial advisor in
connection with a possible merger and related matters. As part of its
engagement, Trident Securities agreed, if requested by Heritage, to render an
opinion with respect to the fairness, from a financial point of view, to the
holders of Heritage common stock, of the merger consideration as set forth in
the agreement. Trident Securities is a nationally recognized specialist for the
financial services industry, in general, and for thrifts in particular. Trident
Securities is regularly engaged in evaluations of similar businesses and in
advising institutions with regard to mergers and acquisitions, as well as
raising debt and equity capital for such institutions. Heritage selected Trident
Securities as its financial advisor based upon Trident Securities'
qualifications, expertise and reputation in such capacity.
Trident Securities delivered a written opinion dated February 14, 2000 that
the merger consideration was fair to Heritage stockholders, from a financial
point of view, as of that date. Trident Securities updated its February 14, 2000
opinion as of the date of this joint proxy statement-prospectus. No limitations
were imposed by Heritage on Trident Securities with respect to the
investigations made or the procedures followed in rendering its opinion.
46
<PAGE>
The full text of Trident Securities' written opinion to the Heritage Board,
dated as of the date of this joint proxy statement-prospectus, which sets forth
the assumptions made, matters considered and extent of review by Trident
Securities, is attached as Appendix E and is incorporated herein by reference.
You should read carefully the fairness opinion in its entirety. The following
summary of Trident Securities' opinion is qualified in its entirety by reference
to the full text of the opinion. Trident Securities' opinion is addressed to the
Heritage Board and does not constitute a recommendation to any stockholder of
Heritage as to how such stockholder should vote at the Heritage special meeting
described in this document.
Trident Securities, in connection with rendering its opinion:
1. reviewed Heritage's Annual Reports to Stockholders and Annual Reports
on Form 10-K for each of the years ended September 30, 1999 and
September 30, 1998, including the audited financial statements
contained in those reports; and Heritage's Quarterly Report on Form
10-Q for the three month period ended December 31, 1999;
2. reviewed SouthBanc's Annual Reports to Stockholders and Annual Reports
on Form 10-K for each of the years ended September 30, 1999 and
September 31, 1998 including the audited financial statements
contained in those reports, and SouthBanc's Quarterly Report on Form
10-Q for the three month period ended December 31, 1999;
3. reviewed certain other public and non-public information, primarily
financial in nature, relating to the respective businesses, earnings,
assets and prospects of Heritage and SouthBanc provided to Trident
Securities or publicly available;
4. participated in meetings and telephone conferences with members of
senior management of Heritage and SouthBanc concerning the financial
condition, business, assets, financial forecasts and prospects of the
respective companies, as well as other matters Trident Securities
believed relevant to its inquiry;
5. reviewed certain stock market information for Heritage common stock
and SouthBanc common stock and compared it with similar information
for certain companies, the securities of which are publicly traded;
6. compared the results of operations and financial condition of Heritage
and SouthBanc with that of certain companies which Trident Securities
deemed to be relevant for purposes of its opinion;
7. reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions that Trident Securities deemed to be
relevant for purposes of its opinion;
8. reviewed the merger agreement and its schedules and exhibits and
certain related documents; and
9. performed such other reviews and analyses as Trident Securities deemed
appropriate.
The written opinions provided by Trident Securities to Heritage were
necessarily based upon economic, monetary, financial market and other relevant
conditions as of the dates of the opinions.
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<PAGE>
In connection with its review and arriving at its opinion, Trident
Securities relied upon the accuracy and completeness of the financial
information and other pertinent information provided by Heritage and SouthBanc
to Trident Securities for purposes of rendering its opinion. Trident Securities
did not assume any obligation to independently verify any of the provided
information as being complete and accurate. With regard to the financial
forecasts established and developed for Heritage and SouthBanc with the input of
their respective managements, as well as projections of cost savings and
operating synergies, Trident Securities assumed that this information reflects
the best available estimates and judgments of Heritage and SouthBanc as to the
future performance of the separate and combined entities and that the
projections provided a reasonable basis upon which Trident Securities could
formulate its opinion. Neither Heritage nor SouthBanc publicly discloses such
internal management projections of the type utilized by Trident Securities in
connection with Trident Securities' role as financial advisor to Heritage.
Therefore, such projections cannot be assumed to have been prepared with a view
towards public disclosure. The projections were based upon numerous variables
and assumptions that are inherently uncertain, including, among others, factors
relative to the general economic and competitive conditions facing Heritage and
SouthBanc. Accordingly, actual results could vary significantly from those set
forth in the respective projections.
Trident Securities does not claim to be an expert in the evaluation of loan
portfolios or the allowance for loan losses with respect thereto and therefore
assumes that such allowances for Heritage and SouthBanc are adequate to cover
such losses. In addition, Trident Securities does not assume responsibility for
the review of individual credit files and did not make an independent
evaluation, appraisal or physical inspection of the assets or individual
properties of Heritage or SouthBanc, nor was Trident Securities provided with
such appraisals. Furthermore, Trident Securities assumes that the merger will be
consummated in accordance with the terms set forth in the agreement, without any
waiver of any material terms or conditions by Heritage, and that obtaining the
necessary regulatory approvals for the merger will not have an adverse effect on
either separate institution or the combined entity. Moreover, in each analysis
that involves per share data for Heritage, Trident Securities adjusted the data
to reflect full dilution, i.e., the effect of the exercise of all outstanding
stock options. In particular, Trident Securities assumes that the merger will be
recorded as a "purchase" in accordance with generally accepted accounting
principles.
In connection with rendering its opinion to Heritage's Board, Trident
Securities performed a variety of financial and comparative analyses, which are
briefly summarized below. Such summary of analyses does not purport to be a
complete description of the analyses performed by Trident Securities. Moreover,
Trident Securities believes that these analyses must be considered as a whole
and that selecting portions of such analyses and the factors considered by it,
without considering all such analyses and factors, could create an incomplete
understanding of the scope of the process underlying the analyses and, more
importantly, the opinion derived from them. The preparation of a financial
advisor's opinion is a complex process involving subjective judgments and is not
necessarily susceptible to partial analyses or a summary description of such
analyses. In its full analysis, Trident Securities also included assumptions
with respect to general economic, financial market and other financial
conditions. Furthermore, Trident Securities drew from its past experience in
similar transactions, as well as its experience in the valuation of securities
and its general knowledge of the banking industry as a whole. Any estimates in
Trident Securities' analyses were not necessarily indicative of actual future
results or values, which may significantly diverge more or less favorably from
such estimates. Estimates of company valuations do not purport to be appraisals
nor to necessarily reflect the prices at which companies or their respective
securities actually may be sold. None of the analyses performed by Trident
Securities were assigned a greater significance by Trident Securities than any
other in deriving its opinion.
Accretion/Dilution Analysis: On the basis of financial projections
developed with the assistance of management, and estimates of on-going cost
savings accruing to the pro forma company, as well as
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<PAGE>
estimated one-time costs related to the transaction, Trident Securities compared
pro forma equivalent earnings, cash dividends, book value and tangible book
value to the stand-alone projections for Heritage and SouthBanc. No assumptions
were made regarding revenue enhancements and capital management following the
completion of the transaction.
The accretion/dilution analysis demonstrated, among other things, the
merger would result in:
. 64% accretion to earnings for Heritage stockholders in the first
year of combined operations, and increasing over the period of
the analysis;
. 1% accretion to earnings for SouthBanc stockholders in the first
year of combined operations;
. 90% higher cash dividends for Heritage stockholders, assuming
the SouthBanc Board maintained its current dividend policy;
. no change in cash dividends for SouthBanc stockholders;
. 4% dilution to book value and 6% dilution to tangible book value
for Heritage stockholders; and
. 5% accretion to book value and 3% accretion to tangible book
value for SouthBanc stockholders.
Contribution Analysis: Trident Securities compared the contribution of
Heritage to the pro forma company relative to the approximate ownership of the
pro forma company. The analysis indicated that Heritage stockholders would hold
approximately 39.6% of the pro forma shares of SouthBanc. Heritage's approximate
contributions are listed below by category:
<TABLE>
<CAPTION>
Heritage
Contribution
--------------
<S> <C>
Assets............................................ 44.1%
Loans............................................. 50.1%
Deposits.......................................... 48.0%
Equity............................................ 42.6%
Tangible equity................................... 42.6%
Last twelve months reported earnings (1).......... 38.8%
Pro Forma Ownership............................... 39.6%
</TABLE>
________________________
(1) Includes estimated cost savings of 30% of Heritage's 1999 non-
interest expense base attributable to the merger
Comparable Transaction Analysis: Trident Securities reviewed and compared
financial performance and pricing information for groups of comparable pending
and completed thrift merger transactions (through February 7, 2000) it deemed
pertinent to an analysis of the merger. The pricing ratios for the merger were
compared to the average and median ratios of (i) price to last twelve months
earnings, (ii) price to tangible book value,
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<PAGE>
(iii) price to capital-adjusted tangible book value, and (iv) tangible book
value premium to core deposits for each of the following comparable transaction
groups:
. all recent thrift acquisitions in the United States announced within
the preceding 12 months ("All Recent Median");
. all thrift acquisitions in the United States announced within the
preceding 90 days ("Last 90 Days Median");
. all pending thrift acquisitions in the United States that have been
announced but have yet to close ("All Pending Median");
. all Southeast thrift acquisitions announced within the preceding 12
months ("Southeast Recent Median");
. all South Carolina thrift acquisitions announced within the preceding
12 months ("South Carolina Recent Median");
. all thrift acquisitions in the United States announced within the
preceding 12 months involving acquired thrifts with assets of $250-
$500 million ("Assets $250mm-$500mm Median")
. all thrift acquisitions in the United States announced within the
preceding 12 months with a total deal size of $50-$150 million ("Deal
Size $50mm-$150mm Median")
. all thrift acquisitions in the United States announced within the
preceding 12 months involving acquired thrifts with returns on average
assets of 100bp-200bp ("ROAA 100bp-200bp Median")
. all thrift acquisitions in the United States announced within the
preceding 12 months involving acquired thrifts with returns on average
equity of 4%-7% ("ROAE 4%-7% Median")
. all thrift acquisitions in the United States announced within the
preceding 12 months involving acquired thrifts with tangible capital
of 18%-40% ("Tangible Capital 18%-40% Median")
. all thrift acquisitions in the United States announced within the
preceding 12 months involving acquired thrifts with non-performing
assets/assets of 0.50%-0.75% ("NPAs/Assets 0.50%-0.75% Median")
. Guideline thrift acquisitions announced since May 1998 involving
acquired thrifts with capital levels, and returns on average equity
similar to Heritage ("Guideline Median")
50
<PAGE>
The following table represents a summary analysis of the comparable
transactions analyzed by Trident Securities based on the announced transaction
values:
<TABLE>
<CAPTION>
Price/
Capital
Price/ Adjusted Price/ Tangible Book
Tangible Tangible LTM Premium/ Core
Deals Book Value Book (2) Earnings(3) Deposits (4)
--------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
All Recent Median............................ 70 160.4% 202.8% 23.4x 11.0%
Last 90 Days Median.......................... 17 152.1% 175.8% 26.6x 9.1%
All Pending Median........................... 35 157.9% 192.6% 25.6x 10.8%
Southeast Recent Median...................... 14 129.9% 206.1% 23.0x 9.3%
South Carolina Recent Median................. 1 103.8% 118.8% 23.0x 1.9%
Assets $250mm-$500mm Median.................. 9 135.1% 193.8% 23.4x 11.3%
Deal Size $50mm-$150mm Median................ 11 172.6% 194.2% 23.9x 11.2%
ROAA 100bp-200bp Median...................... 15 133.2% 238.7% 20.7x 15.5%
ROAE 4%-7% Median............................ 23 135.1% 177.4% 24.6x 9.3%
Tangible Capital 18%-40% Median.............. 11 117.3% 175.8% 23.7x 7.0%
NPAs/Assets 0.50%-0.75% Median............... 14 156.2% 170.4% 21.8x 7.1%
Guideline Median............................. 10 128.5% 193.8% 24.0x 13.1%
Heritage (1)................................. 104.6% 118.7% 19.2x 2.5%
</TABLE>
________________
1. Heritage pricing data based on per share consideration of $17.65
2. Price and capital adjusted to eliminate the impact of excess capital
(assumes 7% capital is adequate)
3. Last 12 months earnings per share, except for Heritage (last six months
annualized)
4. Tangible book value premium as a percentage of core deposits
The pricing multiples shown in the table above are generally higher than
the corresponding multiples for Heritage represented by the merger
consideration. However, there are two important distinctions between the merger
and the other transactions. First, the trading market for bank and thrift
equities has declined considerably in recent months. Lower trading prices for
banks and thrifts generally result in lower multiples for thrift mergers and
acquisitions, but a change in market conditions may take several months to
become apparent from transactions data. Therefore, the data shown in the table
above may not accurately reflect current thrift merger pricing. Secondly, the
other transactions are mostly acquisitions, whereas the merger is similar to a
merger-of-equals (due to the significant ownership in the combined company for
Heritage stockholders). Mergers-of-equals are typically priced at different
multiples than acquisitions. Based on these factors, Trident Securities placed
less emphasis on the comparable transaction analysis in arriving at its
opinion.
Discounted Cash Flow Analysis: Trident Securities prepared a discounted
cash flow analysis with regard to Heritage's estimated acquisition value through
December 2004. This analysis utilized a discount rate of 15%; assumed asset
growth rates between 2.1% and 2.6%; assumed return on average assets of 1.18% to
1.40%; and assumed an earnings multiple of 19.6x. The analyses resulted in a
range of present values of between $15.53 and $18.07 for acquisition values.
This analysis was based on an estimate by Trident Securities of the
earnings multiple used in projecting Heritage's acquisition value, and is not
necessarily indicative of actual values or actual future results, and does not
purport to reflect the prices at which any securities may trade at the present
or at any time in the future. Trident Securities noted that the discounted cash
flow analysis was included because it is a widely used valuation methodology,
but noted that the results of such methodology are highly dependent upon the
numerous assumptions that must be made, including earnings growth rates,
dividend pay-out rates and discount rates.
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<PAGE>
Due Diligence Examination of SouthBanc: Trident Securities reviewed its on-
site due diligence examination of SouthBanc. Trident Securities examined
SouthBanc's historical balance sheets and income statements, along with recent
operating results and a variety of financial ratios through December 31, 1999.
Trident Securities considered SouthBanc's business strategy, strengths and
weaknesses, profitability, growth, net interest margin, non-interest income,
operating expenses, intangible assets, borrowed funds, market area, capital,
asset quality and reserve coverage, concentrations of credit and loan portfolio
composition, interest-rate risk, year 2000 preparations, subsidiary activities,
culture, use of technology, stock pricing, recent bank analysts' reports, and
other issues.
Comparable Company Analysis: Trident Securities reviewed and compared stock
market data and selected financial information for SouthBanc with corresponding
information for actively-traded thrifts possessing similar financial and
performance characteristics as SouthBanc. The comparison thrifts ("Comparable
Groups") were grouped according to the parameters listed below:
<TABLE>
<CAPTION>
Companies
Comparable Groups in Group
- ----------------- -----------
<S> <C>
Median for All U.S. Thrifts....................................... 338
Median for Southeast Thrifts...................................... 33
Median for South Carolina Thrifts................................. 7
Median for Thrifts with Assets - $250-$500 Million................ 80
Median for Thrifts with Market Capitalization - $50-$80 Million... 47
Median for Thrifts with Return on Average Assets - 130bp-160bp.... 25
Median for Thrifts with Return on Average Equity - 8%-12%......... 77
Median for Thrifts with Tangible Capital Median - 12%-16%......... 60
Median for Guideline Companies*................................... 10
</TABLE>
_________________
* Consists of actively-traded companies of similar asset size, tangible capital
levels, and return on equity.
The table below represents a summary analysis of all of the comparable
groups based on market prices as of February 10, 2000 and the latest publicly
available financial data as of or for the twelve months ended December 31, 1999:
<TABLE>
<CAPTION>
Mean Median SouthBanc
---------- ---------- --------------
<S> <C> <C> <C>
Price to last twelve months reported earnings............. 11.4x 10.8x 10.5x
Price to last twelve months adjusted earnings (1)......... 12.3x 12.3x 11.8x
Price to last twelve months core earnings (2)............. 11.8x 12.0x 11.0x
Price to book value....................................... 95.9% 97.9% 108.9%
Price to tangible book value.............................. 100.2% 101.1% 108.9%
Dividend yield............................................ 3.4% 3.3% 3.3%
Return on average assets.................................. 1.04% 0.97% 1.54%
Return on average equity.................................. 9.7% 10.1% 10.5%
</TABLE>
___________________
(1) Adjusted earnings are defined as pre-tax earnings, minus non-recurring
gains, plus non-recurring losses, taxed at a 35% rate.
(2) Core earnings are defined as pre-tax earnings, minus non-recurring gains,
plus non-recurring losses, plus loan loss provisions, taxed at a 35% rate.
The analysis reveals that SouthBanc trades at a slight discount to thrifts
included in comparable groups based on price to earnings for the last twelve
months but at a slight premium based on price to book value and price to
tangible book value. Despite SouthBanc's higher profitability, in terms of
return on
52
<PAGE>
average assets and return on average equity, SouthBanc's stock price
is not significantly different from the comparable groups.
Based on the aforementioned analyses and Trident Securities' experience
with numerous mergers involving thrift institutions, it is Trident Securities'
opinion that the merger consideration to be received by Heritage stockholders in
the merger is fair from a financial point of view.
No company used as a comparison in the above analyses is identical to
Heritage, SouthBanc or the combined entity and no other transaction is identical
to the merger. Accordingly, an analysis of the results of the foregoing is not
purely mathematical; rather, such analyses involve complex considerations and
judgments concerning differences in financial market and operating
characteristics of the companies and other factors that could affect the public
trading volume of the companies to which Heritage, SouthBanc and the combined
entity are being compared.
In connection with the delivery of its opinion dated as of the date of this
joint proxy statement-prospectus, Trident Securities performed procedures to
update, as necessary, certain of the analyses described above and reviewed the
assumptions on which the analyses described above were based and the factors
considered in connection therewith. Trident Securities did not perform any
analyses in addition to those described above in updating the opinion.
For its financial advisory services provided to Heritage, Trident
Securities will be paid $450,000, of which $125,000 has been paid. In addition,
Heritage has agreed to reimburse Trident Securities for all reasonable out-of-
pocket expenses incurred by it on Heritage's behalf, and to indemnify Trident
Securities against certain liabilities, including any which may arise under the
federal securities laws.
Trident Securities/McDonald Investments is a member of all principal
securities exchanges in the United States and in the conduct of its broker-
dealer activities has from time to time purchased securities from, and sold
securities to, Heritage and/or SouthBanc. As a market maker, Trident Securities
may also have purchased and sold the securities of Heritage and/or SouthBanc for
Trident Securities' own account and for the accounts of its customers.
Additionally, Trident Securities served as Heritage's sales agent in Heritage
Federal's mutual-to-stock conversion in 1998, and received total fees and
commissions of $800,000 for that transaction.
Rights of Dissenting Stockholders
Heritage Stockholders. Under Delaware law, if you do not wish to accept the
merger consideration provided for in the merger agreement you have the right to
dissent from the merger and to receive payment in cash for the fair value of
your Heritage common stock. Heritage stockholders electing to exercise
dissenters' rights must comply with the provisions of Section 262 of the
Delaware General Corporation Law in order to perfect their rights. Heritage will
require strict compliance with the statutory procedures. A copy of Section 262
is attached as Appendix F.
The following is intended as a brief summary of the material provisions of
the Delaware statutory procedures required to be followed by a stockholder in
order to dissent from the merger and perfect the stockholder's dissenters'
rights. This summary, however, is not a complete statement of all applicable
requirements and is qualified in its entirety by reference to Section 262 of the
Delaware General Corporation Law, the full text of which appears in Appendix F
of this joint proxy statement-prospectus.
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<PAGE>
Section 262 requires that stockholders be notified not less than 20 days
before the special meeting to vote on the merger that dissenters' appraisal
rights will be available. A copy of Section 262 must be included with such
notice. This joint proxy statement-prospectus constitutes Heritage's notice to
its stockholders of the availability of dissenters' rights in connection with
the merger in compliance with the requirements of Section 262. If you wish to
consider exercising your dissenters' rights you should carefully review the text
of Section 262 contained in Appendix F because failure to timely and properly
comply with the requirements of Section 262 will result in the loss of your
dissenters' rights under Delaware law.
If you elect to demand appraisal of your shares, you must satisfy each of
the following conditions:
1. You must deliver to Heritage a written demand for appraisal of your
shares before the vote with respect to the merger is taken. This
written demand for appraisal must be in addition to and separate from
any proxy or vote abstaining from or against the merger. Voting
against or failing to vote for the merger by itself does not
constitute a demand for appraisal within the meaning of Section 262.
2. You must not vote in favor of the merger. An abstention or failure to
vote will satisfy this requirement, but a vote in favor of the merger,
by proxy or in person, will constitute a waiver of your dissenters'
rights in respect of the shares so voted and will nullify any
previously filed written demands for appraisal.
If you fail to comply with either of these conditions and the merger is
completed, you will be entitled to receive payment for your shares of Heritage
common stock as provided for in the merger agreement, but you will have no
dissenters' rights with respect to your shares of Heritage common stock.
All demands for appraisal should be addressed to the Corporate Secretary,
Heritage Bancorp, Inc., 201 West Main Street, Laurens, South Carolina 29360,
before the vote on the merger is taken at the special meeting and should be
executed by, or on behalf of, the record holder of the shares of Heritage common
stock. The demand must reasonably inform Heritage of the identity of the
stockholder and the intention of the stockholder to demand appraisal of his or
her shares.
To be effective, a demand for appraisal by a holder of Heritage common
stock must be made by or in the name of such registered stockholder, fully and
correctly, as the stockholder's name appears on his or her stock certificate(s)
and cannot be made by the beneficial owner if he or she does not also hold the
shares of record. The beneficial holder must, in such cases, have the registered
owner submit the required demand in respect of such shares.
If shares are owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, execution of a demand for appraisal should be
made in such capacity; and if the shares are owned of record by more than one
person, as in a joint tenancy or tenancy in common, the demand should be
executed by or for all joint owners. An authorized agent, including one for two
or more joint owners, may execute the demand for appraisal for a stockholder of
record; however, the agent must identify the record owner or owners and
expressly disclose the fact that, in executing the demand, he or she is acting
as agent for the record owner. A record owner, such as a broker, who holds
shares as a nominee for others, may exercise his or her right of appraisal with
respect to the shares held for one or more beneficial owners, while not
exercising this right for other beneficial owners. In such case, the written
demand should state the number of shares as to which appraisal is sought. Where
no number of shares is expressly mentioned, the demand will be presumed to cover
all shares held in the name of such record owner.
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<PAGE>
If you hold your shares of Heritage common stock in a brokerage account or
in other nominee form and you wish to exercise appraisal rights, you should
consult with your broker or such other nominee to determine the appropriate
procedures for the making of a demand for appraisal by such nominee.
Within 10 days after the effective date of the merger, SouthBanc must give
written notice that the merger has become effective to each Heritage stockholder
who has properly filed a written demand for appraisal and who did not vote in
favor of the merger. Within 120 days after the effective date, either SouthBanc
or any stockholder who has complied with the requirements of Section 262 may
file a petition in the Delaware Court of Chancery demanding a determination of
the fair value of the shares held by all stockholders entitled to appraisal.
SouthBanc does not presently intend to file such a petition in the event there
are dissenting stockholders and has no obligation to do so. Accordingly, the
failure of a stockholder to file such a petition within the period specified
could nullify such stockholder's previously written demand for appraisal.
At any time within 60 days after the effective date, any stockholder who
has demanded an appraisal has the right to withdraw the demand and to accept the
payment specified by the merger agreement for his or her shares of Heritage
common stock. If a petition for appraisal is duly filed by a stockholder and a
copy of the petition is delivered to SouthBanc, SouthBanc will then be obligated
within 20 days after receiving service of a copy of the petition to provide the
Chancery Court with a duly verified list containing the names and addresses of
all stockholders who have demanded an appraisal of their shares. After notice to
dissenting stockholders, the Chancery Court is empowered to conduct a hearing
upon the petition, to determine those stockholders who have complied with
Section 262 and who have become entitled to the appraisal rights provided
thereby. The Chancery Court may require the stockholders who have demanded
payment for their shares to submit their stock certificates to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings; and
if any stockholder fails to comply with such direction, the Chancery Court may
dismiss the proceedings as to such stockholder.
After determination of the stockholders entitled to appraisal of their
shares of Heritage common stock, the Chancery Court will appraise the shares,
determining their fair value exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest. When the value is determined, the Chancery Court will direct the
payment of such value, with interest thereon accrued during the pendency of the
proceeding if the Chancery Court so determines, to the stockholders entitled to
receive the same, upon surrender by such holders of the certificates
representing such shares.
In determining fair value, the Chancery Court is required to take into
account all relevant factors. You should be aware that the fair value of your
shares as determined under Section 262 could be more, the same, or less than the
value that you are entitled to receive pursuant to the merger agreement.
Costs of the appraisal proceeding may be imposed upon SouthBanc and the
stockholders participating in the appraisal proceeding by the Chancery Court as
the Chancery Court deems equitable in the circumstances. Upon the application of
a stockholder, the Chancery Court may order all or a portion of the expenses
incurred by any stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorneys' fees and the fees and
expenses of experts, to be charged pro rata against the value of all shares
entitled to appraisal. Any stockholder who had demanded appraisal rights will
not, after the effective date, be entitled to vote shares subject to such demand
for any purpose or to receive payments of dividends or any other distribution
with respect to such shares (other than with respect to payment as of a record
date prior to the effective date); however, if no petition for appraisal is
filed within 120 days after the effective date, or if such stockholder delivers
a written withdrawal of his or her demand for appraisal and
55
<PAGE>
an acceptance of the merger within 60 days after the effective date, then the
right of such stockholder to appraisal will cease and such stockholder will be
entitled to receive the cash payment for shares of his or her Heritage common
stock pursuant to the merger agreement. Any withdrawal of a demand for appraisal
made more than 60 days after the effective date of the merger may only be made
with the written approval of the surviving corporation and must, to be
effective, be made within 120 days after the effective date.
In view of the complexity of Section 262, Heritage stockholders who may
wish to dissent from the merger and pursue appraisal rights should consult their
legal advisors.
SouthBanc Stockholders. SouthBanc stockholders do not have appraisal rights
as a result of the merger.
Interests of Our Directors and Officers in the Merger that Differ From Your
Interests
Some members of our management and Boards of Directors may have interests
in the merger that are in addition to or different from the interests of
Heritage and SouthBanc stockholders. Our Boards of Directors were aware of these
interests and considered them in approving the merger agreement.
Employment Agreement with J. Edward Wells. The merger agreement provides
that J. Edward Wells, the current President and Chief Executive Officer of
Heritage and Heritage Federal, will enter into three-year employment agreements
with SouthBanc and Heritage Federal relating to his employment after the
completion of the merger. These employment agreements will supersede his current
employment agreement with Heritage and Heritage Federal.
The term of the SouthBanc employment agreement will extend on a daily basis
until the SouthBanc Board of Directors gives written notice of non-renewal. The
term of the Heritage Federal employment agreement will be renewable on an annual
basis. The employment agreements provide that Mr. Wells' base salary, which
initially is expected to be $200,000, will be reviewed annually. SouthBanc will
be obligated to make all payments to Mr. Wells under his employment agreement
with Heritage Federal if Heritage Federal does not make them. In addition to the
base salary, the employment agreements provide for, among other things,
participation in stock benefits plans and other fringe benefits applicable to
executive personnel. Under the employment agreements, Heritage Federal or
SouthBanc may terminate Mr. Wells for cause, as defined in the employment
agreements, at any time. If Heritage Federal or SouthBanc chooses to terminate
Mr. Wells' employment for reasons other than for cause, or if Mr. Wells resigns
after specific circumstances set forth in the employment agreements that
constitute constructive termination, Heritage Federal and SouthBanc would be
required to honor the terms of the agreements through the expiration of the then
current term, including payment of current cash compensation and continuation of
employee benefits. If Mr. Wells terminates employment for reasons other than a
change in control, he must adhere to a one year non-competition agreement.
The employment agreements also provide for severance payments to Mr. Wells
if his employment is terminated following a change in control of Heritage
Federal or SouthBanc. These payments will equal three times the average of the
five preceding taxable years' annual compensation. Heritage Federal and
SouthBanc would also continue Mr. Wells' life, health, and disability coverage
for thirty-six months. Even though both employment agreements provide for a
severance payment if a change in control occurs, Mr. Wells would only be
entitled to receive a severance payment under one agreement. Mr. Wells would
also be entitled to receive an additional tax indemnification payment if
payments under the SouthBanc employment agreement or otherwise triggered
liability under the Internal Revenue Code for the excise tax applicable to
"excess parachute payments." Under applicable law, the excise tax would be
triggered by
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<PAGE>
change in control-related payments that equal or exceed three times Mr. Wells
average annual compensation over the five years preceding the change in control.
The excise tax would equal 20% of the amount of the payment in excess of one
times Mr. Wells' average compensation over the preceding five-year period.
Heritage Federal or SouthBanc, as the case may be, will pay all reasonable
costs and legal fees paid or incurred by Mr. Wells under any dispute or question
of interpretation relating to the employment agreements if Mr. Wells is
successful on the merits in a legal judgment, arbitration or settlement. The
employment agreements also provide that Heritage Federal and SouthBanc will
indemnify Mr. Wells to the fullest extent legally allowable for all expenses and
liabilities he may incur in connection with any suit or proceeding in which he
may be involved by reason of his having been a director or officer of SouthBanc
or Heritage Federal.
Severance Agreements with Executive Officers of Heritage. The merger
agreement provides that Will B. Ferguson, John M. Swofford, Edwin I. Shealy and
James H. Wasson, Jr., all of whom are currently executive officers of Heritage
Federal, will enter into agreements with SouthBanc and Heritage Federal that
would provide them with severance benefits if their employment with SouthBanc
and Heritage Federal is terminated after the completion of the merger as a
result of a change in control of SouthBanc or Heritage Federal. The severance
agreements will have a term of two years and may be extended for an additional
year on each anniversary of the agreement.
The severance agreements provide for severance payments and other benefits
in the event of involuntary termination of employment in connection with any
change in control of SouthBanc. Severance payments also will be provided on a
similar basis in connection with a voluntary termination of employment where,
subsequent to a change in control, an executive is assigned duties inconsistent
with his position, duties, responsibilities and status immediately prior to the
change in control, has his compensation reduced, or has his principal place of
employment relocated by more than 35 miles.
The severance payments will equal two times the executive's annual
compensation. However, the maximum value of the severance benefits under the
severance agreements is 2.99 times the executive's average annual compensation
during the five-year period preceding the effective date of the change in
control.
Vesting of Heritage Restricted Stock. Directors, officers and employees of
Heritage received grants of restricted stock under Heritage's Management
Recognition and Development Plan, with vesting of the shares to occur over a
period of five years. Under the terms of the Plan, all unvested restricted
shares of Heritage common stock will become vested upon a change in control of
Heritage. The merger will constitute a change in control of Heritage. The
directors and executive officers of Heritage currently hold a total of 135,320
shares of unvested restricted stock, which will be converted into the right to
receive the same merger
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<PAGE>
consideration as all other shares of Heritage common stock. The following table
reflects the number of shares of unvested restricted stock held by each director
and the value of the merger consideration that each will receive in exchange for
their shares, assuming a merger consideration value of $17.65.
<TABLE>
<CAPTION>
Number of Total Merger
Unvested Shares Consideration Value
of Restricted for Unvested Shares
Name and Title Stock of Restricted Stock
- ---------------------------------------------- ------------------------- ---------------------
<S> <C> <C>
J. Riley Bailes 14,800 $261,220
Director
John D. Lake 14,800 261,220
Director
Aaron H. King 14,800 261,220
Director
John C. Owings, II 14,800 261,220
Director
J. Edward Wells 36,800 640,520
President, Chief Executive Officer and Director
</TABLE>
Heritage Stock Options. Upon completion of the merger, all outstanding
options to purchase Heritage common stock under Heritage's stock option plan
will be canceled and converted into the right to receive an amount of cash equal
to $17.65 minus the exercise price for each option. The directors and executive
officers of Heritage currently hold options to purchase a total of 380,588
shares of Heritage common stock. The following table shows the number of
options, the exercise price of the options and the amounts payable to each
director upon cancellation of his stock options.
<TABLE>
<CAPTION>
Number of
Securities
Underlying
Unexercised Exercise Price Net Proceeds
Name and Title Options Per Share Through Conversion
- ------------------------------------------- ---------------- ----------------- --------------------
<S> <C> <C> <C>
J. Riley Bailes 41,650 $15.10 $106,208
Director
John D. Lake 41,650 15.10 106,208
Director
Aaron H. King 41,650 15.10 106,208
Director
John C. Owings, II 41,650 15.10 106,208
Director
J. Edward Wells 104,140 15.10 265,557
President, Chief Executive Officer and
Director
</TABLE>
Vesting of SouthBanc Restricted Stock and Stock Options. Under the terms of
SouthBanc's stock-based benefit plans, all unvested shares of restricted stock
and unvested stock options will become vested upon completion of the merger. The
directors and executive officers of SouthBanc currently hold 98,469 shares of
unvested restricted stock and 320,932 unvested stock options.
Appointment of Heritage Directors to the SouthBanc Board of Directors.
SouthBanc will appoint three members of Heritage's Board of Directors to the
SouthBanc Board of Directors upon completion of
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<PAGE>
the merger. Those persons will be J. Edward Wells, J. Riley Bailes and John C.
Owings, II. SouthBanc currently does not compensate its directors for service on
its Board of Directors. Messrs. Wells, Bailes and Owings will continue to serve
as directors of Heritage Federal for which Messrs. Bailes and Owings will
continue to receive fees.
Termination of Heritage Federal ESOP. Heritage Federal will terminate its
employee stock ownership plan upon completion of the merger. The plan will repay
its existing loan from Heritage and will allocate any surplus cash and SouthBanc
common stock to the accounts of the plan participants, including Mr. Wells and
the other executive officers of Heritage Federal, in proportion to their account
balances, to the extent allowed under applicable law and the governing documents
of the plan.
Protection of Heritage Directors and Officers Against Claims. SouthBanc has
agreed to indemnify and hold harmless each present and former director and
officer of Heritage for a period of six years from liability and expenses
arising out of matters existing or occurring at or before the consummation of
the merger to the fullest extent allowed under Delaware law as in effect at the
time of closing. This indemnification extends to liability arising out of the
transactions contemplated by the merger agreement. SouthBanc has also agreed to
advance any costs to each of these persons as they are incurred. SouthBanc has
also agreed that it will maintain a policy of directors' and officers' liability
insurance coverage for the benefit of Heritage's directors and officers for
three years following consummation of the merger, subject to certain limitations
on the amount of premiums to be paid.
Regulatory Approvals Needed to Complete the Merger
Completion of the merger is subject to prior approval of the Office of
Thrift Supervision. In reviewing applications for transactions of this type, the
OTS must consider, among other factors, the financial and managerial resources
and future prospects of the existing and resulting institutions, and the
convenience and needs of the communities to be served. In addition, the OTS may
not approve a transaction if it will result in a monopoly or otherwise be
anticompetitive. SouthBanc filed an application with the OTS on ____________,
2000.
Under the Community Reinvestment Act of 1977, the OTS must take into
account the record of performance of Perpetual Bank and Heritage Federal in
meeting the credit needs of the entire community, including low- and moderate-
income neighborhoods, served by each institution. As part of the review process,
bank regulatory agencies frequently receive comments and protests from community
groups and others. Perpetual Bank and Heritage Federal each received a
"Satisfactory" rating during their last federal Community Reinvestment Act
examinations.
In addition, a period of 15 to 30 days must expire following approval by
the OTS is allowed, within which period the United States Department of Justice
may file objections to the merger under the federal antitrust laws. While we
believe that the likelihood of objection by the Department of Justice is remote
in this case, there can be no assurance that the Department of Justice will not
initiate proceedings to block the merger, or that the Attorney General of the
State of South Carolina will not challenge the merger, or if any proceeding is
instituted or challenge is made, as to the result of the challenge.
The merger cannot proceed in the absence of the requisite regulatory
approvals. See "The Merger Agreement--Conditions to Completing the Merger" and
"--Terminating the Merger Agreement." There can be no assurance that the
requisite regulatory approvals will
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be obtained, and if obtained, there can be no assurance as to the date of any
approval. There can also be no assurance that any regulatory approvals will not
contain a condition or requirement that causes the approvals to fail to satisfy
the condition set forth in the merger agreement and described under "The Merger
Agreement--Conditions to Completing the Merger."
SouthBanc has also filed a copy of the application filed with the Office of
Thrift Supervision with the Board of Financial Institutions of the State of
South Carolina for its review. We are not aware of any other regulatory
approvals that are required for completion of the merger, except as described
above. Should any other approvals be required, we presently contemplate that we
would seek those approvals. There can be no assurance that any other approvals,
if required, will be obtained.
The approval of any application merely implies the satisfaction of
regulatory criteria for approval, which does not include review of the merger
from the standpoint of the adequacy of the cash consideration or the exchange
ratio for converting Heritage common stock to SouthBanc common stock.
Furthermore, regulatory approvals do not constitute an endorsement or
recommendation of the merger.
Accounting Treatment of the Merger
SouthBanc will use the purchase method of accounting to account for the
merger. Under the purchase method of accounting, all of the assets and
liabilities of Heritage will be recorded on SouthBanc's consolidated balance
sheet at their estimated fair value at the effective date of the merger. The
amount by which the purchase price paid by SouthBanc exceeds the fair value of
the net tangible and identifiable intangible assets acquired by SouthBanc
through the merger will be recorded as goodwill. SouthBanc currently expects
that, based on preliminary accounting estimates, the merger would result in the
recording of identifiable intangible assets and goodwill of approximately
$274,000. This amount will be amortized over 15 years as charges to SouthBanc's
earnings.
Resale of SouthBanc Common Stock
The shares of SouthBanc common stock to be issued to stockholders of
Heritage in the merger have been registered under the Securities Act of 1933.
Shares of SouthBanc common stock issued in the merger may be traded freely and
without restriction by those stockholders not deemed to be "affiliates" of
Heritage, as that term is defined in the rules under the Securities Act.
SouthBanc common stock received by those stockholders of Heritage who are deemed
to be "affiliates" of Heritage at the time the merger is submitted for vote of
the stockholders of Heritage may be resold without registration under the
Securities Act only to the extent provided for by Rule 145 promulgated under the
Securities Act, which permits limited sales under certain circumstances, or
pursuant to another exemption from registration. An affiliate of Heritage is an
individual or entity that controls, is controlled by or is under common control
with, Heritage, and may include the executive officers and directors of
Heritage, as well as certain principal stockholders of Heritage. The same
restrictions apply to certain relatives or the spouse of those persons and any
trusts, estates, corporations or other entities in which those persons have a
10% or greater beneficial interest.
Heritage has agreed in the merger agreement to use its best efforts to
cause each person who is an affiliate of Heritage for purposes of Rule 145 under
the Securities Act to deliver to SouthBanc a written agreement intended to
ensure compliance with the Securities Act.
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THE MERGER AGREEMENT
The following describes material provisions of the merger agreement. This
description does not purport to be complete and is qualified by reference to the
merger agreement, which is attached as Appendix A and is incorporated by
reference into this joint proxy statement-prospectus.
Terms of the Merger
The merger agreement provides for a business combination in which Heritage
will merge with SouthBanc. SouthBanc will be the surviving corporation in the
merger.
As a result of the merger, except as noted below, each outstanding share of
Heritage common stock will be converted into the right to receive, at the
election of the holder, either shares of SouthBanc common stock or $17.65 in
cash. See "The Merger-Conversion of Heritage Common Stock." SouthBanc will not
issue fractions of shares of SouthBanc common stock, but instead will pay each
holder of Heritage common stock who would otherwise be entitled to a fraction of
a share of SouthBanc common stock an amount in cash determined by multiplying
that fraction by the average closing price of SouthBanc common stock over a
measurement period prior to the completion of the merger. If there is a change
in the number or classification of shares of SouthBanc outstanding as a result
of a stock split, stock dividend, reclassification, recapitalization, or other
similar transaction, the exchange ratio will be equitably adjusted. Shares of
Heritage common stock held directly or indirectly by SouthBanc will be canceled
and retired upon completion of the merger, and no payment will be made for them.
Canceled shares will not include shares held by either Heritage or SouthBanc in
a fiduciary capacity or in satisfaction of a debt previously contracted.
Holders of shares for which dissenters' rights have been exercised will be
entitled only to the rights granted by Delaware law.
When Will the Merger be Completed
The closing of the merger will take place on a date we agree upon that is
no later than 14 days following the date on which the last waiting period under
the required regulatory approvals expires and all of the conditions to the
merger contained in the merger agreement are satisfied or waived, unless we
agree to a later date. See "-Conditions to Completing the Merger." On the
closing date, SouthBanc will file a certificate of merger with the Delaware
Secretary of State merging Heritage into SouthBanc. The merger will become
effective at the time stated in the certificate of merger.
We expect to complete the merger in the third calendar quarter of 2000.
However, we cannot guarantee when or if the required regulatory approvals will
be obtained. See "The Merger-Regulatory Approvals Needed to Complete the
Merger." Furthermore, either company may terminate the merger agreement if,
among other reasons, the merger has not been completed on or before December 31,
2000, unless failure to complete the merger by that time is due to a
misrepresentation, breach of warranty or failure to fulfill a covenant by the
party seeking to terminate the agreement. See "-Terminating the Merger
Agreement."
Conditions to Completing the Merger
Our obligations to consummate the merger are conditioned on the following:
. approval of the merger agreement by our stockholders;
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. receipt of all required regulatory approvals without any materially
adverse conditions and the expiration of all statutory waiting
periods;
. no party to the merger being subject to any legal order that prohibits
consummating any part of the transaction, no governmental entity
having instituted any proceeding for the purpose of blocking the
transaction, and the absence of any statute, rule or regulation that
prohibits completion of any part of the transaction;
. the registration statement of which this joint proxy statement-
prospectus forms a part being declared effective by the Securities and
Exchange Commission, the absence of any pending or threatened
proceeding by the Securities and Exchange Commission to suspend the
effectiveness of the registration statement and the receipt of all
required state "blue sky" approvals;
. receipt by us of all consents and approvals from third parties
required to complete the merger, unless failure to obtain those
consents or approvals would not have a material adverse effect on
SouthBanc after completion of the merger;
. receipt by each of us of opinions from our respective legal counsel to
the effect that the merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code;
. the other party having performed in all material respects its
obligations under the merger agreement, the other party's
representations and warranties being true and correct as of the date
of the merger agreement and as of the closing date, and receipt of a
certificate signed by the other party's chief executive officer and
chief financial officer to that effect; and
. receipt of certificates from appropriate authorities as to the
corporate existence of the other party and other documents and
certificates to evidence fulfillment of the conditions to the merger
as each party may reasonably require.
The obligation of SouthBanc to complete the merger is also conditioned on
the number of shares for which dissenters' rights have been exercised not
exceeding 10% of the outstanding shares of Heritage common stock. The
obligation of Heritage to complete the merger is also conditioned on SouthBanc
having deposited the cash portion of the merger consideration with the exchange
agent.
We cannot guarantee whether all of the conditions to the merger will be
satisfied or waived by the party permitted to do so. If the merger is not
completed on or before December 31, 2000, either party may terminate the merger
agreement by a vote of a majority of its Board of Directors.
Conduct of Business Before the Merger
We have each agreed that, until the completion of the merger, each of us
will use our best efforts to:
. conduct our business in the regular, ordinary and usual course
consistent with past practice;
. maintain and preserve intact our business organization, properties,
leases, employees and advantageous business relationships and retain
the services of our officers and key employees;
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. take no action that would interfere with our ability to perform our
respective covenants and agreements on a timely basis under the merger
agreement; and
. take no action that would interfere with our ability to obtain any
necessary approvals, consents or waivers of any governmental authority
required for the transactions contemplated by the merger agreement or
that would reasonably be expected to result in those approvals,
consents or waivers containing any material condition or restriction.
Further, except as otherwise provided in the merger agreement, until the
completion of the merger, each of us have agreed that, unless permitted to by
the other party, neither of us nor our subsidiaries will:
Indebtedness
. incur any indebtedness or become responsible for the obligations of
any individual, corporation or entity, other than in the ordinary
course of business;
Capital stock
. change our capitalization;
. pay any cash or stock dividends or make any distributions, other than
quarterly cash dividends on SouthBanc common stock not more than $0.15
per share and quarterly cash dividends on Heritage common stock not
more than $0.075 per share;
. grant any stock appreciation rights or issue any securities
convertible or exercisable for any shares of our capital stock;
. issue any shares of our capital stock other than shares issued upon
the exercise of outstanding stock options, pursuant to SouthBanc's
dividend reinvestment plan or pursuant to the stock option agreements
that we entered into in connection with the merger agreement;
Dispositions
. dispose of any of our material assets or cancel or release any
indebtedness, other than in the ordinary course of business or
pursuant to commitments existing as of the date of the merger
agreement;
Investments
. make any equity investment in individual amounts not to exceed
$100,000;
. restructure or materially change our investment portfolios;
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Contracts
. enter into, renew, amend or terminate any contract or agreement, or
make any change in any of our leases or contracts, other than with
respect to those involving the payment of less than $100,000 per year;
Loans
. make, renew, increase, extend or purchase any loans other than in
conformance with written lending policies in effect as of the date of
the merger agreement;
Employees
. increase the compensation or fringe benefits of any of our employees
or directors, except in the ordinary course of business consistent
with past practice;
. pay any pension or retirement allowance not required by any existing
plan or agreement to any employees or directors;
. become a party to, amend or commit to any benefit plan or employment
agreement;
. voluntarily accelerate the vesting of any stock options or other
compensation or benefit;
. elect any new executive officer or director;
. hire any employee with an annual total compensation payment in excess
of $100,000;
Settling claims
. settle any claim against us for more than $25,000 or agree to material
restrictions on our operations;
Governing documents
. amend our articles of incorporation or bylaws;
Capital expenditures
. make any capital expenditures in excess of $100,000 per expenditure
other than pursuant to binding commitments and other than expenditures
necessary to maintain existing assets in good repair or to make
payment of necessary taxes;
Branches
. establish or commit to establish any new branch or other office;
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Accounting
. change our method of accounting, except as required by changes in
generally accepted accounting principles or regulatory guidelines;
Adverse actions
. take any action that would impede the merger from qualifying as a
reorganization within the meaning of Section 368 of the Internal
Revenue Code;
. take or omit to take any action that is intended or expected to result
in any of our representations and warranties contained in the merger
agreement being or becoming untrue, or in any of the conditions to the
merger not being satisfied, or in a violation of any provision of the
merger agreement;
. engage in any transaction that is not in the usual and ordinary course
of business and consistent with past practices; or
Other agreements
. agree to take or make any commitment to take any of the actions listed
above.
Covenants of Heritage and SouthBanc in the Merger Agreement
Agreement Not to Solicit Other Proposals
Heritage has agreed not to initiate, solicit, encourage, facilitate,
obtain or endorse any acquisition proposal with a third party. An acquisition
proposal includes the following:
. any merger, consolidation, share exchange, business combination, or
other similar transaction;
. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 25% or more of the assets of Heritage; and
. any tender offer or exchange offer for 25% or more of the outstanding
shares of capital stock of Heritage.
Despite the agreement of Heritage not to solicit other acquisition
proposals, the Board of Directors of Heritage may generally enter into
discussions or negotiations with anyone who makes an unsolicited, written, bona
fide acquisition proposal that is a financially superior proposal to the merger.
A proposal of this nature is one about which Heritage's financial advisor opines
in writing is superior to this merger from a financial point of view. For
Heritage to enter into negotiations on a superior proposal, it would also have
to first determine that its fiduciary duties obligate it to do so. If Heritage
enters into negotiations with a third party regarding a superior proposal,
Heritage has to notify SouthBanc and provide SouthBanc with information about
the third party and its proposal.
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Employee Matters
Each person who is an employee of Heritage Federal as of the closing of the
merger will continue as an employee of Heritage Federal following the merger.
After the merger, except for Heritage Federal's employee stock ownership plan,
the existing employee benefit plans of Perpetual Bank and Heritage Federal will
remain in place until SouthBanc adopts new benefit plans that cover all of its
employees. For current employees of Heritage Federal who continue as employees
of Heritage Federal after the merger, the new compensation and benefits program
will recognize all service with Heritage Federal as service with the combined
company for all purposes, including eligibility and vesting. Also, all Heritage
and Heritage Federal employees who continue as employees of the combined company
after the merger will be eligible to participate in Perpetual Bank's Employee
Stock Ownership Plan on the earliest date required by law.
Heritage Federal will terminate its employee stock ownership plan upon
completion of the merger. The plan will repay its existing loan from Heritage
and will allocate any surplus cash and SouthBanc common stock to the accounts of
the plan participants in proportion to their account balances, to the extent
allowed under applicable law and the governing documents of the plan.
Indemnification of Heritage Officers and Directors
SouthBanc has agreed to indemnify and hold harmless each present and former
director and officer of Heritage for a period of six years from liability and
expenses arising out of matters existing or occurring at or before the
consummation of the merger to the fullest extent allowed under Delaware law as
in effect at the time of closing. SouthBanc has also agreed that it will
maintain a policy of directors' and officers' liability insurance coverage, or
provide a policy providing comparable coverage and amounts on terms no less
favorable than Heritage's current policy, for the benefit of Heritage's
directors and officers who are currently covered by insurance for three years
following consummation of the merger, subject to a cap on the amount of annual
premiums.
Certain Other Covenants
The merger agreement also contains other agreements relating to our conduct
before consummation of the merger, including the following:
. We will each give the other reasonable access during normal business
hours to our property, books, records and personnel and furnish all
information the other party may reasonably request.
. We will submit all necessary applications, notices, and other filings
with any governmental entity, the approval of which is required to
complete the merger and related transactions.
. We will take any necessary action to exempt each other and this
transaction from any antitakeover provisions contained in our
certificates of incorporation or bylaws or federal or state law.
. We will use all reasonable efforts to take all actions necessary to
consummate the merger.
. We will consult with each other regarding any public statements about
the merger and any filings with any governmental entity or with any
national securities exchange or market.
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. We will take all actions necessary to convene a meeting of our
respective stockholders to vote on the merger agreement. Our Boards of
Directors will each recommend at our respective stockholder meetings
that the stockholders vote to approve the merger and will each use our
reasonable best efforts to solicit stockholder approval, unless it
determines that its actions would not comply with its fiduciary
obligations to its stockholders.
. Prior to completion of the merger, SouthBanc will notify the Nasdaq
National Market of the additional shares of SouthBanc common stock
that SouthBanc will issue in exchange for shares of Heritage.
. Heritage will use its best efforts to cause each person who is an
affiliate of it under Rule 145 of the Securities Act to deliver to
SouthBanc a letter to the effect that such person will comply with
Rule 145.
. We each will notify the other of any contract defaults and any events
that would reasonably be likely to result in a material adverse effect
on us. We also will notify each other of any communication from a
third party regarding the need to obtain that party's consent to the
merger.
. We will coordinate our dividend payments so that Heritage stockholders
do not miss a dividend payment or get two dividend payments in one
quarter.
Representations and Warranties Made by SouthBanc and Heritage in the Merger
Agreement
We have made certain customary representations and warranties to each other
in the merger agreement relating to our businesses. For information on these
representations and warranties, please refer to the merger agreement attached as
Appendix A. The representations and warranties must be true in all material
respects through the completion of the merger unless the change does not have a
material negative impact on our business, financial condition or results of
operations. See "-Conditions to Completing the Merger."
Terminating the Merger Agreement
The merger agreement may be terminated at or prior to the completion of the
merger, either before or after approval of the merger agreement by our
stockholders, by:
. the mutual consent of SouthBanc and Heritage;
. either party if the stockholders of either company fail to approve the
merger agreement;
. either party if a required regulatory approval is denied or any
governmental entity prohibits the merger;
. either party if the merger is not consummated by December 31, 2000;
. either party if the other party makes a misrepresentation, breaches a
warranty or fails to fulfill a covenant that is not cured within a
specified time and that would have a material adverse effect on the
party seeking to terminate;
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. either party if the Board of Directors of the other party does not
recommend approval of the merger in the joint proxy statement-
prospectus or withdraws or revises its recommendation; or
. Heritage if its Board of Directors determines that it must accept a
superior offer from a third party in the exercise of its fiduciary
duties.
In addition, Heritage may terminate the merger agreement if the average
closing price of SouthBanc common stock during the measurement period used to
compute the exchange ratio is less than $14.05. Heritage will have five
calendar days after the end of the measurement period in which to exercise its
right to terminate the merger agreement on this basis. However, no termination
will occur if SouthBanc agrees to increase the exchange ratio to an amount equal
to $15.57 divided by the average closing price of SouthBanc common stock during
the measurement period. SouthBanc will have five calendar days after receiving
notice of termination from Heritage to exercise its right to increase the
exchange ratio. Whether Heritage would exercise its right to terminate the
merger agreement and whether SouthBanc would exercise its right to increase the
exchange ratio will depend on the facts and circumstances as they exist at the
time.
SouthBanc and Heritage Option Agreements
General. Immediately after the execution of the merger agreement, SouthBanc
entered into a stock option agreement pursuant to which SouthBanc granted
Heritage an irrevocable option to purchase from SouthBanc up to 614,733 shares
of SouthBanc common stock or a lesser or greater amount of shares that is 19.9%
of the outstanding SouthBanc common stock at the time the option is exercised,
subject to certain adjustments. The exercise price of the SouthBanc option is
$17.50 per share, subject to certain adjustments. At the same time, Heritage
entered into a stock option agreement, pursuant to which Heritage granted
SouthBanc an irrevocable option to purchase from Heritage up to 855,916 shares
of Heritage common stock or a lesser or greater amount of shares that is 19.9%
of the outstanding Heritage common stock at the time the option is exercised,
subject to certain adjustments. The exercise price of the Heritage option is
$13.25 per share, subject to certain adjustments.
Except as otherwise noted below, the terms and conditions of the SouthBanc
option agreement and the Heritage option agreement are identical in all material
respects. SouthBanc and Heritage are sometimes referred to in this section as
"issuer" of their respective common stock upon the exercise of an option, and as
"optionees" holding an option on the common stock of the other party. Shares
issued pursuant to either of the option agreements are sometimes referred to in
this section as "issuer option shares."
Effect of Stock Option Agreements. We entered into the option agreements
to increase the likelihood that the merger will be completed in accordance with
its terms. The option agreements may have the effect of discouraging persons
who might be interested in acquiring all of or a significant interest in the
issuer, even if such persons were prepared to pay a higher price per share for
issuer common stock than the value per share contemplated by the merger
agreement. The acquisition by a third party of the issuer or a significant
interest in the issuer or a significant portion of its consolidated assets, or
an agreement to do so, could cause the option to become exercisable and
significantly increase the cost to a potential acquiror. Such increased costs
might discourage a potential acquiror from considering or proposing an
acquisition or might result in a potential acquiror proposing to pay a lower per
share price to acquire the issuer than it might otherwise have proposed to pay.
Moreover, the exercise of the option is likely to prohibit any acquiror of the
issuer from accounting for any acquisition of the issuer using the pooling-of-
interests accounting method for a period of two years. This could discourage or
preclude an acquisition by certain other banking organizations.
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Exercise. The options will become exercisable, in whole or in part and
subject to regulatory approval, only if both an "initial triggering event" and a
"subsequent triggering event" occur prior to an "exercise termination event."
For purposes of each option agreement:
(1) an "initial triggering event" will occur if one of the following
events occurs:
(a) the issuer or any of its subsidiaries, without the optionee's
prior written consent, enters into an agreement to engage in an
acquisition transaction, or the issuer's board of directors
recommends that stockholders of the issuer approve or accept an
acquisition transaction;
(b) the issuer, without the optionee's prior written consent,
authorizes, recommends, proposes or publicly announces its
intention to authorize, recommend or propose to engage in an
acquisition transaction, or the issuer's board of directors
publicly withdraws or modifies, or publicly announces its
intention to withdraw or modify, in any manner adverse to the
optionee, its recommendation that its stockholders approve the
merger agreement in anticipation of engaging in an acquisition
transaction;
(c) a third party acquires beneficial ownership, or the right to
acquire beneficial ownership, of 10% or more of the outstanding
shares of issuer common stock;
(d) a third party makes a bona fide proposal to the issuer or its
stockholders by public announcement or written communication that
becomes the subject of public disclosure to engage in an
acquisition transaction;
(e) the issuer breaches any covenant or obligation in the merger
agreement after a proposal is made by a third party to engage in
an acquisition transaction, and following that breach the
optionee would be entitled to terminate the merger agreement; or
(f) any person, other than the optionee or any subsidiary of the
optionee, other than in connection with a transaction to which
the optionee has given its prior written consent, files an
application or notice with the Federal Reserve Board, the Office
of Thrift Supervision or some other U.S. federal or state bank
regulatory authority, for approval to engage in an acquisition
transaction.
(2) As used above in (1), the term "acquisition transaction" means:
(a) a merger or consolidation, or any similar transaction with the
issuer or any of its significant subsidiaries;
(b) a purchase, lease or other acquisition or assumption of all or
substantially all of the assets or deposits of the issuer or any
of its significant subsidiaries;
(c) a purchase or other acquisition of securities representing 10% or
more of the voting power of the issuer; or
(d) any substantially similar transaction.
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(3) A "subsequent triggering event" will occur if either of the following
occurs:
(a) any person acquires beneficial ownership of 25% or more of the
then-outstanding shares of issuer common stock; or
(b) the initial triggering event described above in clause (1)(a)
occurs, except that the percentage referred to in clause (2)(c)
of the definition of "acquisition transaction" set forth above is
25%.
(4) An "exercise termination event" means the earliest of:
(a) the effective time of the merger;
(b) termination of the merger agreement in accordance with its terms
if the termination occurs prior to the occurrence of an initial
triggering event, except in the case of the termination of the
merger agreement by the optionee as a result of a volitional and
material breach by the issuer of any of its representations,
warranties, covenants or agreements; or
(c) the date that is 12 months after the termination of the merger
agreement.
As of the date of this joint proxy statement-prospectus, to our knowledge,
no initial triggering event or subsequent triggering event has occurred.
Repurchase of the Option. Each option agreement permits the optionee to
require that the issuer repurchase the option or any shares issued under the
option for a cash fee equal to a specified surrender price if (a) the issuer
completes a merger, consolidation or similar transaction or any sale of
substantially all of its assets, or (b) any third party acquires beneficial
ownership of 50% or more of the outstanding common stock.
The "surrender price" is
. $1,600,000, plus
. if applicable, the aggregate purchase price previously paid by the
optionee with respect to any issuer option shares, minus
. if applicable, the sum of the excess of (1) the net cash amounts, if
any, received by the optionee pursuant to the arm's-length sale of
issuer option shares, over (2) the aggregate purchase price previously
paid by the optionee with respect to those issuer option shares, and
the net cash amounts, if any, received by the optionee pursuant to an
arm's-length sale of a portion of the option.
Profit Limitation. Each option agreement provides that the aggregate
profit that the optionee may realize from the option is $2,000,000.
Adjustment. Each option agreement provides for adjustment to the number of
shares and the exercise price of the option upon the occurrence of certain
changes to the capital structure of the issuer or certain other events or
transactions.
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Regulatory Matters. Some rights and obligations of SouthBanc and Heritage
as the optionee and the issuer under the option agreements are subject to
receipt of required regulatory approvals. The optionee must obtain the
approval of the Office of Thrift Supervision to acquire more than 5% of the
outstanding shares of issuer common stock.
Expenses and Termination Fees
Each of us will pay our own costs and expenses incurred in connection with
the merger, except that we will share equally the expense of filing, printing
and mailing this joint proxy statement-prospectus.
Changing the Terms of the Merger Agreement
Before the completion of the merger, we may agree to waive, amend or modify
any provision of the merger agreement. However, after the vote by our
stockholders, we can make no amendment or modification that would reduce the
amount or alter the kind of consideration to be received by Heritage's
stockholders under the terms of the merger.
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MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER
Board of Directors
After completion of the merger, the Board of Directors of SouthBanc will
consist of (a) Robert W. Orr, Harold A. Pickens, Jr., Martha C. Clamp, Richard
C. Ballenger, and F. Stevon Kay, all of whom are current directors of SouthBanc
and (b) J. Edward Wells, John C. Owings, II and J. Riley Bailes, all of whom are
current directors of Heritage. Mr. Wells will be Chairman of the Board and Mr.
Pickens will be Vice-Chairman of the Board. In addition, after completion of
the merger, J. Edward Wells will join the Board of Directors of Perpetual Bank
and Robert W. Orr and one other director of Perpetual Bank will join the Board
of Directors of Heritage Federal.
Information regarding the directors of Heritage who will be joining the
SouthBanc Board of Directors is provided below. Unless otherwise stated, each
director has held his current occupation for the past five years. The age
indicated for each individual is as of March 31, 2000. The indicated period for
service as a director includes service as a director of Heritage Federal.
J. Riley Bailes. Mr. Bailes is the retired owner of a retail clothing store
in Laurens, South Carolina. Age 60. Director since 1986.
John C. Owings, II. Mr. Owings is the owner of Laurens Lumber Co. in
Laurens, South Carolina. Age 47. Director since 1998.
J. Edward Wells. Mr. Wells is the President and Chief Executive Officer of
Heritage Federal, positions he has held since 1972, and President and Chief
Executive Officer of Heritage Bancorp, positions he has held since the formation
of the Company in 1997. Mr. Wells joined Heritage Federal in 1967. Age 61.
Director since 1971.
Information regarding the current directors and executive officers of
SouthBanc, executive compensation and relationships and related transactions is
incorporated by reference or set forth in SouthBanc's Annual Report on Form 10-K
for the year ended September 30, 1999, which is incorporated in this document by
reference. Stockholders desiring copies of this document and other documents
may contact SouthBanc at its address or telephone number indicated under "where
You Can Find More Information."
Management
The executive officers of SouthBanc, Perpetual Bank and Heritage Federal
will not change as a result of the merger.
Operations
While there can be no assurance as to the achievement of business and
financial goals, we currently expect to achieve cost savings equal to 13.6% of
our combined general and administrative expenses through the elimination of
employee benefit plan expenses and the elimination of duplicative expenses for
items such as payroll and data processing and legal and accounting fees. We
expect to achieve most of these savings in the first year following the merger.
See "A Warning About Forward-looking Statements."
72
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated condensed combined balance
sheet as of December 31, 1999 and the unaudited pro forma consolidated condensed
combined income statements for three months ended December 31, 1999 and the year
ended September 30, 1999 give effect to the pending merger, accounted for as a
purchase.
The unaudited pro forma consolidated condensed combined financial
information is based on the historical consolidated financial statements of
SouthBanc and Heritage under the assumptions and adjustments set forth in the
accompanying notes. The unaudited pro forma consolidated condensed combined
balance sheet gives effect to the merger as if the merger had been consummated
at the end of the period presented. The unaudited pro forma consolidated
condensed combined income statements give effect to the merger as if the merger
had been consummated on September 30, 1998. The unaudited pro forma consolidated
condensed combined financial statements do not give effect to the anticipated
cost savings in connection with the merger.
You should read the unaudited pro forma consolidated condensed combined
financial statements in conjunction with the consolidated historical financial
statements of SouthBanc and Heritage, including the respective notes to those
statements. The pro forma information is not necessarily indicative of the
combined financial position or the results of operations in the future or of the
combined financial position or the results of operations which would have been
realized had the merger been consummated during the periods or as of the dates
for which the pro forma information is presented.
Pro forma per share amounts for the combined company are based on a .954
exchange ratio.
73
<PAGE>
SouthBanc Shares, Inc. and Heritage
Unaudited Pro Forma Consolidated Condensed Combined Balance Sheet
As of December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Actual(Unaudited) Pro Forma Pro Forma
SouthBanc Heritage Adjustments Combined
---------- ---------- --------------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.............................. $ 16,177 $ 18,393 $(12,089) (a) $ 22,481
Securities available for sale.......................... 63,072 24,769 87,841
Securities held to maturity............................ -- 12,224 386 (b) 12,610
Federal Home Loan Bank stock........................... 3,950 2,750 6,700
Loans receivable, net.................................. 267,303 269,718 (2,993) (b) 534,028
Real estate held for development....................... 2,203 -- 2,203
Premises and equipment, net............................ 5,631 4,132 9,763
Accrued interest receivable............................ 2,483 1,974 4,457
Cash surrender value of life insurance................. 7,961 -- 7,961
Other.................................................. 4,887 140 3,868 (c) 8,895
-------- -------- -------- --------
Total assets...................................... $373,667 $334,100 $(10,828) $696,939
======== ======== ======== ========
LIABILITIES:
Deposits............................................... $219,198 $202,625 $ 528 (b) $422,351
Advances from Federal Home Loan Bank................... 79,000 55,000 (216) (b) 133,784
Securities sold under agreements to repurchase......... 20,453 -- 20,453
Note payable........................................... 25,000 (d) 25,000
Accrued interest payable............................... 1,321 557 1,878
Accrued expenses and other liabilities................. 2,643 2,464 5,107
-------- -------- -------- --------
Total liabilities................................ 322,615 260,646 25,312 608,573
-------- -------- -------- --------
STOCKHOLDERS' EQUITY:
Common stock........................................... 43 46 (25) (e) 64
Additional paid-in capital............................. 57,790 51,221 (14,613) (f) 94,398
Retained earnings, substantially restricted............ 23,233 32,792 (34,182) (g) 21,843
Treasury stock - at cost............................... (25,000) (5,770) 5,770 (h) (25,000)
Accumulated other comprehensive income - net........... (2,339) 1,709 (1,709) (h) (2,339)
Indirect guarantee of ESOP debt........................ (600) -- (600)
Unallocated ESOP shares................................ -- (4,087) 4,087 (i) --
Unearned management recognition development plan
(MRDP and MRP)...................................... (2,075) (2,457) 4,532 (j) --
-------- -------- -------- --------
Total stockholders' equity............................. 51,052 73,454 (36,140) 88,366
-------- -------- -------- --------
Total liabilities and stockholders' equity............. $373,667 $334,100 $(10,828) $696,939
======== ======== ======== ========
</TABLE>
See Notes to the Unaudited Pro Forma Consolidated Condensed Combined
Financial Statements.
(a) To record net cash as follows:
Cash received from note payable (d) $ 25,000
Cash received from Heritage ESOP to repay ESOP note 3,930
Cash paid for Heritage merger related compensation costs (1,062)
Cash paid for Heritage estimated transaction costs (1,500)
Cash paid to Heritage stockholders (38,457)
---------
$ (12,089)
=========
(b) To record purchase accounting mark to market adjustment
(c) To record income tax effect of merger transactions of $3,594 and goodwill
of $274
(d) To record note payable from borrowing of cash paid in merger.
(e) To eliminate common stock of Heritage of $46 and record issuance of $21 of
common stock issued of SouthBanc
(f) To record $873 of merger related compensation costs for Heritage, record
$157 adjustment to remove ESOP receivable, eliminate adjusted Heritage paid
in capital of $51,937 and record paid in capital of $36,608, as part of
common stock issued of SouthBanc
(g) To record a $3,947 of merger related costs to Heritage, to eliminate
Heritage adjusted retained earnings of $28,845 and to record the effect of
merger transactions net of tax on SouthBanc of $1,390
(h) To eliminate Heritage stockholders equity accounts as a result of the
merger
(i) To record effect of payoff of ESOP note receivable and distribution of
unallocated shares
(j) To record termination of MROP and MRP
74
<PAGE>
SouthBanc Shares, Inc. and Heritage
Unaudited Pro Forma Consolidated Condensed Combined Income
Statement For the Three Months Ended December 31, 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
Actual(Unaudited) Pro Forma Pro Forma
SouthBanc Heritage Adjustments Combined
----------- ---------- ----------------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans........................................................ $ 5,224 $ 5,287 $ 440 (a) $ 10,951
Mortgage-backed securities................................... 916 185 (21) (a) 1,080
Other investments............................................ 523 600 2 (a) 1,125
---------- ---------- ------- ----------
Total interest income..................................... 6,663 6,072 421 13,156
INTEREST EXPENSE:
Interest on deposits......................................... 2,179 2,567 (144) (a) 4,602
Interest on borrowings....................................... 1,326 596 449 (b) 2,371
---------- ---------- ------- ----------
Total interest expense.................................... 3,505 3,163 305 6,973
---------- ---------- ------- ----------
Net interest income....................................... 3,158 2,909 116 6,183
Provision for loan losses.................................... 150 149 -- 299
---------- ---------- ------- ----------
Net interest income after provision for loan losses....... 3,008 2,760 116 5,884
NON-INTEREST INCOME:
Loan and deposit account services............................ 998 51 1,049
Other........................................................ 311 (1) 310
---------- ---------- ------- ----------
Total non-interest income................................. 1,309 50 -- 1,359
NON-INTEREST EXPENSES:
Salaries and employee benefits............................... 1,278 685 1,963
Occupancy and equipment expense.............................. 374 105 479
Data processing.............................................. 127 56 183
Office supplies.............................................. 104 24 128
Other........................................................ 436 145 5 (c) 586
---------- ---------- ------- -- ----------
Total non-interest expenses............................... 2,319 1,015 5 3,339
---------- ---------- ------- ----------
Income before income taxes................................... 1,998 1,795 111 3,904
Income taxes................................................. 653 702 37 (d) 1,392
---------- ---------- ------- ----------
Net income .................................................. $ 1,345 $ 1,093 $ 74 $ 2,512
========== ========== ======= ==========
Basic net income per common share............................ $ 0.44 $ 0.27 $ 0.50
========== ========== ==========
Diluted net income per common share.......................... $ 0.41 $ 0.26 $ 0.48
========== ========== ==========
Weighted average number of common shares outstanding:
Basic..................................................... 3,060,241 4,104,507 5,020,725
Diluted................................................... 3,257,956 4,137,060 5,218,440
</TABLE>
See Notes to the Unaudited Pro Forma Consolidated
Condensed Combined Financial Statements.
(a) To record accretion and/or amortization of purchase accounting mark to
market adjustment.
(b) To record amortization of premium of $12 and interest expense of $437 on
fixed rate borrowings at 7% annual interest rate.
(c) To record amortization of goodwill of $5.
(d) To show impact of taxes at 33% tax rate.
75
<PAGE>
SouthBanc Shares, Inc. and Heritage
Unaudited Pro Forma Consolidated Condensed Combined
Income Statement For the Year Ended September 30, 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
Actual (Unaudited) Pro Forma Pro Forma
SouthBanc Heritage Adjustments Combined
--------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans........................................................ $ 19,194 $ 17,833 $ 1,722 (a) $ 38,749
Mortgage-backed securities................................... 4,824 105 (85) (a) 4,844
Other investments............................................ 2,210 3,650 7 (a) 5,867
---------- ---------- ------- ----------
Total interest income..................................... 26,228 21,588 1,644 49,460
INTEREST EXPENSE:
Interest on deposits......................................... 8,920 10,797 (401) (a) 19,316
Interest on borrowings....................................... 4,518 203 1,798 (b) 6,519
---------- ---------- ------- ----------
Total interest expense.................................... 13,438 11,000 1,397 25,835
---------- ---------- ------- ----------
Net interest income....................................... 12,790 10,588 247 23,625
Provision for loan losses.................................... 481 596 -- 1,077
---------- ---------- ------- ----------
Net interest income after provision for loan losses....... 12,309 9,992 247 22,548
NON-INTEREST INCOME:
Loan and deposit account service charges..................... 3,520 188 3,708
Gain on sale of real estate held for development............. 355 355
Earnings on bank owned life insurance........................ 436 436
Other........................................................ 1,587 24 1,611
---------- ---------- ------- ----------
Total non-interest income................................. 5,898 212 -- 6,110
NON-INTEREST EXPENSES:
Salaries and employee benefits............................... 4,753 4,086 8,839
Occupancy and equipment expense.............................. 1,669 427 2,096
Data processing.............................................. 572 202 774
Office supplies.............................................. 310 116 426
Other........................................................ 2,015 986 18 (c) 3,019
---------- ---------- ------- ----------
Total non-interest expenses............................... 9,319 5,817 18 15,154
---------- ---------- ------- ----------
Income before income taxes................................... 8,888 4,387 229 13,504
Income taxes................................................. 2,916 2,031 76 (d) 5,023
---------- ---------- ------- ----------
Net income................................................... $ 5,972 $ 2,356 $ 153 $ 8,481
========== ========== ======= ==========
Basic net income per common share............................ $ 1.76 $ 0.56 $ 1.59
========== ========== ==========
Diluted net income per common share.......................... $ 1.67 $ 0.56 $ 1.53
========== ========== ==========
Weighted average number of common shares outstanding:
Basic..................................................... 3,386,851 4,179,576 5,347,335
Diluted................................................... 3,570,156 4,246,523 5,530,640
</TABLE>
See Notes to the Unaudited Pro Forma Consolidated Condensed Combined
Financial Statements.
(a) To record accretion and/or amortization of purchase accounting mark to
market adjustments.
(b) To record amortization of premium of $48 and interest expense of $1,750 on
fixed rate borrowings at 7% annual interest rate.
(c) To record amortization of goodwill of $18.
(d) To show impact of taxes at 33% tax rate.
76
<PAGE>
Notes to the Unaudited Pro Forma Consolidated
Condensed Combined Financial Statements
Note 1. Basis of Presentation
The pro forma information presented is not necessarily indicative of the
results of operations or the combined financial position that would have
resulted had the merger been consummated at the beginning of each of the periods
indicated, nor is it necessarily indicative of the results of operations in
future periods or the future financial position of the combined company. It is
anticipated that the merger will be completed early in the third quarter of
2000.
Under generally accepted accounting principles, the transaction will be
accounted for using the purchase method of accounting and, as such, the assets
and liabilities of Heritage will be recorded at their estimated fair values. The
allocation of the total purchase cost reflected in the unaudited pro forma
consolidated condensed combined financial information is preliminary. The actual
purchase accounting adjustments to reflect the fair values of the assets
acquired and liabilities assumed will be based upon appraisals that are
currently in process. A preliminary allocation of the purchase cost has been
made to major categories of assets and liabilities in the accompanying unaudited
pro forma consolidated condensed combined financial information based on our
estimates. Accordingly, the adjustments that have been included in the unaudited
pro forma consolidated condensed combined financial information may change based
upon the final allocation of the total purchase cost of the acquisition of
Heritage. The actual allocation of the purchase cost and the resulting effect on
income may differ from the unaudited pro forma amounts included in this
prospectus. However, based on current information, management does not expect
the final allocation of the purchase price to differ materially from that used
in the accompanying income statements.
The unaudited pro forma consolidated condensed combined income statements
give effect to the merger as if the merger occurred on September 30, 1998. The
unaudited pro forma consolidated condensed combined balance sheet assumes the
merger was consummated on December 31, 1999. Certain reclassifications have
been included in the unaudited pro forma consolidated condensed combined
balance sheet and unaudited pro forma consolidated condensed combined income
statements to conform presentation.
Assumptions relating to the pro forma adjustments set forth in the
unaudited pro forma consolidated condensed combined financial statements are
summarized as follows:
Estimated fair values for the assets and liabilities of Heritage were
obtained as follows:
Cash and Cash Equivalents. The carrying amounts of cash and cash
equivalents approximate their fair value.
Investment and Mortgage-Backed Securities. Fair values for
securities are based on quoted market prices.
Federal Home Loan Bank (FHLB) Stock. No ready market exists for this
stock and it has no quoted market value; however, redemption of this stock
has historically been at par value. Accordingly, the carrying amount is
deemed to be a reasonable estimate of fair value.
Loans. Fair values for loans held for investment and other loans are
estimated by segregating the portfolio by type of loan and discounting
scheduled cash flows using interest rates currently being offered for
loans with similar terms. A prepayment assumption is used as an estimate
of the portion of loans that will be repaid prior to their scheduled
maturity. No purchase accounting adjustment has been made to the allowance
for loan losses.
Premises and Equipment. The book value is deemed to be a reasonable
estimate of fair value.
Deposits. The fair values for demand deposits are equal to the
amounts payable on demand at the reporting date (i.e., their stated
amounts). The fair value of certificates of deposit are estimated by
discounting the amounts payable at the certificate rates using the rates
currently offered for deposits of similar remaining maturities.
FHLB Advances. Fair values for advances are estimated by discounting
scheduled cash flows using current interest rates.
77
<PAGE>
Other Assets and Other Liabilities. Because these financial
instruments will typically be received or paid within three months, the
carrying amounts of such instruments are deemed to be a reasonable estimate
of fair value.
The resulting net premium on investments held to maturity, for purposes of
these pro forma financial statements, is being amortized to interest income on a
straight-line basis over 5 years. The resulting net discounts on loans and
deposits are being accreted to interest income and interest expense to produce a
constant yield to maturity. The premium on FHLB advances is being amortized to
interest expense to produce a constant yield to maturity.
Note 2. Calculation of Purchase Price
The preliminary allocation of the cost to acquire Heritage is described in the
table below (in thousands):
<TABLE>
<S> <C>
Estimated value of SouthBanc common stock issued to acquire Heritage common stock. This assumes
that fifty percent (50%) of the 4,301,089 outstanding shares of Heritage common stock will be
exchanged for shares of SouthBanc valued at $17.65 per share................................... $37,957
Cash payment to Heritage stockholders at $17.65 per share for 50% of the 4,301,089 shares of
Heritage common stock outstanding.............................................................. 37,957
3.5% discount on SouthBanc stock due to the volume of shares issued. This discount is based
upon an analysis of the effect on stock prices of mergers involving similar size banks over
the previous year.............................................................................. (1,328)
Estimated transaction costs incurred by SouthBanc.............................................. 500
-------
Total cost..................................................................................... $75,086
=======
</TABLE>
Estimated transaction costs of $500,000 will be incurred upon consummation
of the merger and reflected as part of the purchase price for financial
reporting purposes.
Note 3. Purchase Accounting Adjustments
Purchase accounting adjustments recorded by Heritage due to the merger were
as follows (in thousands):
<TABLE>
<S> <C>
Heritage net assets at December 31, 1999............................................................. $73,454
Adjustments to Heritage's Statement of Financial Condition:
Payoff of ESOP note receivable............................................................... 3,930
Termination of MRP........................................................................... 2,457
Termination of ESOP.......................................................................... 873
Transaction costs incurred by Heritage....................................................... (3,947)
-------
Adjusted net assets acquired...................................................................... $76,767
=======
</TABLE>
A summary of the transaction costs for Heritage, based on preliminary
estimates is as follows (in thousands):
<TABLE>
<CAPTION>
Estimated
Costs/
Type of Cost (Benefit) (Benefits)
------------------------------------------------------------- ---------------
<S> <C>
Transaction costs............................................ $ 1,000
Merger related compensation costs............................ 4,392
Facilities and system costs.................................. 500
-------
Total pre-tax transaction costs........................... 5,892
Less: related tax benefit................................... (1,945)
-------
Total effect of estimated transactions costs,
net of taxes............................................ $ 3,947
=======
</TABLE>
These nonrecurring costs and benefits were not considered in the pro forma
consolidated condensed combined income statements. Charges and credits are
anticipated to take place in the third quarter of 2000.
78
<PAGE>
Transaction costs consist primarily of investment banking, legal fees,
other professional fees and expenses associated with stockholder and customer
notifications. Merger related compensation costs consist primarily of employee
benefit expenses arising from the termination of Heritage Federal's employee
stock ownership plan (ESOP), the vesting of restricted share awards under
Heritage's stock-based benefit plans (MDRP) and the buyback of Heritage stock
options. Facilities and system costs relate to the termination of data
processing contracts and systems. Refinements to the foregoing estimates may
occur subsequent to the completion of the merger.
A summary of the transaction costs for SouthBanc, based on preliminary
estimates is as follows (in thousands):
Compensation costs due to termination of MRP $ 2,075
Less related tax benefit ............................ (685)
-------
Total effect of estimated transaction costs,
net of taxes .................................... $ 1,390
=======
These nonrecurring costs and benefits were not considered in the pro forma
condensed combined consolidated income statements. Charges and credits are
anticipated to take place in the third quarter of 2000.
Note 4. Calculation of Goodwill
Excess of book value over cost of net assets acquired for the merger was
calculated as follows (in thousands):
Total cost........................................ $75,086
Net assets acquired............................... 76,767
-------
Total excess of book value over cost of net assets
acquired generated from the merger.......... $(1,681)
=======
For purposes of the pro forma financial statements, goodwill is being
amortized straight-line over 15 years.
The excess of book value of net assets acquired over cost of $1,681 was
allocated to assets and liabilities on a pro-rata basis after estimating market
value as described in Note 1:
Securities ........................................ $ 386
Loans receivable................................... (2,993)
Deferred taxes asset............................... 964
Goodwill........................................... 274
FHLB advances...................................... 216
Deposits........................................... (528)
-------
$(1,681)
=======
Note 5. Pro Forma Adjustments
Pro forma adjustments were calculated for the merger as follows (in
thousands):
<TABLE>
<CAPTION>
Three
Months
Ended Year Ended
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
Accretion on loans receivable - discount............................................ $ (440) (1,722)
Accretion on deposits - discount.................................................... (144) (401)
Accretion of discount on securities held to maturity................................ (2) (7)
Amortization of premium on mortgage-backed securities
held to maturity................................................................. 21 85
Amortization of goodwill............................................................ 5 18
Amortization of premium on FHLB advances............................................ 12 48
----- -------
Total adjustments............................................................. $(548) $(1,979)
===== =======
</TABLE>
79
<PAGE>
The following table summarizes the estimated future impact of the net
accretion of the purchase accounting adjustments made in connection with the
merger on SouthBanc's results of operations:
Amortized/
Projected Future (Accreted) Amounts
Amounts For and Net (Increase)/Decrease
Fiscal Years In Income
Ending Before Taxes
September 30, (in thousands)
---------------- ----------------
2000 $(1,979)
2001 (603)
2002 2
2003 33
2004 43
2005 and thereafter (141)
Note 6. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding over the period presented.
Diluted earnings per common share is calculated using the same method as basic
earnings per common share, but reflects potential dilution of common stock
equivalents. Pro forma basic and diluted weighted average number of common stock
utilized for the calculation of earnings per share for the periods presented
were calculated using SouthBanc's historical basic and diluted weighted average
common stock less 91,252 of MRP shares plus 2,051,736 shares of common stock
issued in the merger.
80
<PAGE>
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This joint proxy statement-prospectus, including information included or
incorporated by reference in this document, contains certain forward-looking
statements with respect to the financial condition, results of operations,
plans, objectives, future performance and business of each of SouthBanc and
Heritage, as well as certain information relating to the merger, including,
without limitation,
. statements relating to the cost savings and accretion to reported
earnings estimated to result from the merger,
. statements relating to revenues of the combined company after the
merger,
. statements relating to the expenses estimated to be incurred in
connection with the merger, and
. statements preceded by, followed by or that include the words
"believes," "expects," "anticipates," "estimates" or similar
expressions.
These forward-looking statements involve certain risks and uncertainties.
Actual results may differ materially from those contemplated by the forward-
looking statements due to, among others, the following factors:
. expected cost savings from the merger may not be fully realized or
realized within the expected time frame,
. revenues following the merger may be lower than expected,
. competitive pressures among financial services companies may increase
significantly,
. costs or difficulties related to the integration of the business of
SouthBanc and Heritage may be greater than expected,
. changes in the interest rate environment may reduce interest margins,
. general economic conditions, either nationally or in South Carolina,
may be less favorable than expected,
. legislative or regulatory changes may adversely affect the business in
which SouthBanc or Heritage is engaged, and
. changes may occur in the securities markets.
SouthBanc does not intend to update or otherwise revise any forward-looking
statements to reflect circumstances existing since their preparation or to
reflect the occurrence of unanticipated events, even in the event that any or
all of the underlying assumptions are shown to be in error. Furthermore,
SouthBanc does not intend to update or revise the forward-looking statements to
reflect changes in general economic or industry conditions.
See "Where You Can Find More Information."
81
<PAGE>
DESCRIPTION OF SOUTHBANC COMMON STOCK
General
SouthBanc is authorized to issue 7,500,000 shares of common stock having a
par value of $.01 per share and 250,000 shares of preferred stock having a par
value of $.01 per share. Each share of SouthBanc's common stock has the same
relative rights as, and is identical in all respects with, each other share of
common stock.
Common Stock
Dividends. SouthBanc 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 SouthBanc is subject to limitations which are imposed by
law and applicable regulation. The holders of common stock of SouthBanc are
entitled to receive and share equally in any dividends as may be declared by the
Board of Directors of SouthBanc out of funds legally available for the payment
of dividends. If SouthBanc issues preferred stock, the holders of the preferred
stock may have a priority over the holders of the common stock with respect to
dividends.
Voting Rights. The holders of common stock of SouthBanc possess exclusive
voting rights in SouthBanc. They elect SouthBanc's Board of Directors and act
on any other matters as are required to be presented to them under applicable
law or as are otherwise presented to them by the Board of Directors. Each
holder of common stock is entitled to one vote per share and does not have any
right to cumulate votes in the election of directors. SouthBanc's certificate
of incorporation, however, provides that a holder of SouthBanc common stock who
owns in excess of 10% of the then-outstanding shares of common stock cannot vote
any shares in excess of 10% unless permitted by the Board of Directors of
SouthBanc. If SouthBanc issues preferred stock, holders of preferred stock may
also possess voting rights. Certain matters require a vote of 80% of the
outstanding shares entitled to vote thereon.
Liquidation. In the event of liquidation, dissolution or winding up of
SouthBanc, 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 SouthBanc available for distribution. If SouthBanc issues preferred
stock, the holders of the preferred stock may have a priority over the holders
of the common stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the common stock of SouthBanc are not
entitled to preemptive rights with respect to any shares that may be issued.
The common stock is not subject to redemption.
Preferred Stock
SouthBanc may issue preferred stock with such designations, powers,
preferences and rights as the SouthBanc 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. None of the shares of the authorized preferred stock will be issued in
connection with the merger and there are no plans to issue preferred stock.
82
<PAGE>
COMPARISON OF RIGHTS OF STOCKHOLDERS
The rights of stockholders of SouthBanc are currently governed by
SouthBanc's certificate of incorporation, bylaws and applicable provisions of
the Delaware General Corporation Law. The rights of stockholders of Heritage
are currently governed by Heritage's certificate of incorporation, bylaws and
the same provisions of the Delaware General Corporation Law. If we complete the
merger, Heritage stockholders who receive SouthBanc common stock will become
SouthBanc stockholders and their rights will likewise be governed by SouthBanc's
certificate of incorporation and bylaws.
Because SouthBanc and Heritage are both organized under the laws of the
State of Delaware, any differences in your rights as a stockholder of Heritage
and SouthBanc will arise solely from differences in the certificate of
incorporation and bylaws of SouthBanc and Heritage rather than from differences
of law. This summary is not a complete discussion of the SouthBanc and Heritage
certificate of incorporation and bylaws, and it is qualified in its entirety by
reference to those documents. Copies of SouthBanc's and Heritage's certificate
of incorporation and bylaws are on file with the SEC.
<TABLE>
<CAPTION>
Authorized Stock
- ----------------------------------------------------------------------------------------------------
SouthBanc Heritage
- ---------------------------------------------- ------------------------------------------------
<S> <C>
. The SouthBanc certificate of incorporation . The Heritage certificate of incorporation
authorizes 7,750,000 shares of capital authorizes 7,000,000 shares of capital stock,
stock, consisting of 7,500,000 shares of consisting of 6,000,000 common stock, $.01
common stock, $.01 par value, and 250,000 par value and 1,000,000 shares of serial
shares of serial preferred stock, $.01 par preferred stock, $.01 par value.
value.
. As of February 14, 2000, there were . As of February 14, 2000, there were 4,301,089
3,089,113 shares of SouthBanc common stock shares of Heritage common stock issued and
issued and outstanding. outstanding.
. As of February 14, 2000, there were no . Same.
shares of preferred stock issued or
outstanding.
</TABLE>
<TABLE>
<CAPTION>
Voting Rights
- ----------------------------------------------------------------------------------------------------
SouthBanc Heritage
- ---------------------------------------------- ------------------------------------------------
<S> <C>
. The holders of the common stock . Same.
exclusively possess all voting power,
subject to the authority of the Board of
Directors to offer voting rights to the
holders of preferred stock.
. Each share of common stock is entitled to . Same.
one vote. Beneficial owners of 10% or more
of the outstanding stock are subject to
voting limitations.
. Holders of common stock may not cumulate . Same.
their votes for the election of directors.
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
Required Vote for Authorization of Certain Actions
- ----------------------------------------------------------------------------------------------------------
SouthBanc Heritage
- ------------------------------------------------ -------------------------------------------------
<S> <C>
. At least 80% of the outstanding shares of . Same.
voting stock must approve certain "business
combinations" involving a "related person."
In addition, a business combination with a
related person must be approved by at least
a majority of outstanding shares of voting
stock other than shares beneficially owned
by the related person. See "Selected
Provisions In The Certificate of
Incorporation And Bylaws Of SouthBanc--
Business Combinations with Related Persons."
However, if a two-thirds majority of
directors not affiliated with the related
person approves the business combination, a
majority vote of the outstanding shares is
sufficient to approve a business combination.
</TABLE>
<TABLE>
<CAPTION>
Dividends
- ----------------------------------------------------------------------------------------------------------
SouthBanc Heritage
- ------------------------------------------------ -------------------------------------------------
<S> <C>
. Holders of common stock are entitled, when . Same.
declared by the SouthBanc Board, to receive
dividends, subject to the rights of holders
of preferred stock.
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Meetings
- ----------------------------------------------------------------------------------------------------------
SouthBanc Heritage
- ------------------------------------------------ -------------------------------------------------
<S> <C>
. SouthBanc must deliver notice of the . Same.
meeting and a description of its purpose no
fewer than ten days and no more than 60 days
before the meeting to each stockholder
entitled to vote.
. The Chairman of the Board or the president . Same.
will chair the meeting.
. Only the Board of Directors may call a . Same.
special meeting.
. For purposes of determining stockholders . Same.
entitled to vote at a meeting, the Board of
Directors may fix a record date that is not
less than 10 days or more than 60 days
before the meeting.
</TABLE>
84
<PAGE>
<TABLE>
<S> <C>
. The Board of Directors or any stockholder
may nominate directors for election or
propose new business. . Same.
. To nominate a director or propose new . Same.
business, stockholders must give written
notice to the Secretary of SouthBanc not
less than 30 days nor more than 60 days
prior to the meeting. However, if SouthBanc
gives less than 31 days notice of the
meeting to the stockholders, written notice
of the stockholder proposal or nomination
must be delivered to the Secretary within 10
days of the date notice of the meeting was
mailed to stockholders. Each notice given
by a stockholder with respect to a
nomination to the Board of Directors or
proposal for new business must include
certain information regarding the nominee or
proposal and the stockholder making the
nomination or proposal.
</TABLE>
<TABLE>
<CAPTION>
Action by Stockholders Without a Meeting
- ------------------------------------------------------------------------------------------------------
SouthBanc Heritage
- ----------------------------------------------- ------------------------------------------------
<S> <C>
. No action that requires the approval of the . Same.
stockholders may be taken without a meeting
by the written consent of stockholders.
</TABLE>
<TABLE>
<CAPTION>
Board of Directors
- ------------------------------------------------------------------------------------------------------
SouthBanc Heritage
- ----------------------------------------------- ------------------------------------------------
<S> <C>
. The certificate of incorporation provides . The certificate of incorporation provides
that the number of directors shall be no that the number of directors shall be no
fewer than five nor more than 15. The fewer than five nor more than 15. The bylaws
bylaws set the number of directors at six. set the number of directors at five.
. The Board of Directors is divided into . Same.
three classes as equal in number as possible
and approximately one-third of the directors
are elected at each special meeting.
. Vacancies on the Board of Directors will . Same.
be filled by the remaining directors.
. Directors may be removed only for cause by . Same.
the vote of at least 80% of the outstanding
shares entitled to vote for directors.
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
Amendment of the Bylaws
- -----------------------------------------------------------------------------------------------------
SouthBanc Heritage
- ----------------------------------------------- -----------------------------------------------
<S> <C>
. The bylaws may be amended or repealed only . Same.
with the approval of at least two-thirds
of the Board of Directors or by the vote
of at least 80% of the outstanding shares.
</TABLE>
<TABLE>
<CAPTION>
Amendment of the Certificate of Incorporation
- -----------------------------------------------------------------------------------------------------
SouthBanc Heritage
- ----------------------------------------------- -----------------------------------------------
<S> <C>
. The certificate of incorporation may be . Same.
amended or repealed upon approval of at
least a majority of the Board of Directors
and by a majority of shares entitled to vote
on the matter, unless otherwise provided in
the certificate of incorporation or Delaware
law. However, amendments to the certificate
of incorporation that would revise the
provisions relating to the number, terms and
classification, election and removal
procedures for directors, the process for
calling special meetings of stockholders,
voting restrictions applicable to beneficial
owners of 10% or more of the voting stock,
stockholder approval of business
combinations with related persons,
consideration of social and economic factors
when evaluating a proposed business
combination, indemnification of directors,
officers and employees of SouthBanc, and
amendment of the certificate of
incorporation require approval by at least
80% of the outstanding shares.
</TABLE>
86
<PAGE>
SELECTED PROVISIONS IN THE CERTIFICATE OF INCORPORATION
AND BYLAWS OF SOUTHBANC
SouthBanc's certificate of incorporation and bylaws contain certain
provisions that could make more difficult an acquisition of SouthBanc by means
of a tender offer, proxy context or otherwise. Certain provisions will also
render the removal of the incumbent Board of Directors or management of
SouthBanc more difficult. These provisions may have the effect of deterring a
future takeover attempt that is not approved by the SouthBanc Board, but which
SouthBanc 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 the opportunity to do so. The
following description of these provisions is only a summary and does not provide
all of the information contained in SouthBanc's certificate of incorporation and
bylaws. See "Where You Can Find More Information" as to where to obtain a copy
of these documents.
Business Combinations with Related Persons
The certificate of incorporation requires the approval of the holders of at
least 80% of SouthBanc's outstanding shares of voting stock to approve certain
"business combinations" involving a "related person" except in cases where the
proposed transaction has been approved in advance by a two-thirds vote of those
members of SouthBanc'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" includes any individual or entity that owns
beneficially or controls, directly or indirectly, 10% or more of the outstanding
shares of voting stock of SouthBanc or an affiliate of that person or entity.
A "business combination" includes:
. any merger or consolidation of SouthBanc with or into any related
person;
. any sale, lease, exchange, mortgage, transfer, or other disposition of
25% or more of the assets of SouthBanc or combined assets of SouthBanc
and its subsidiaries to a related person;
. any merger or consolidation of a related person with or into SouthBanc
or a subsidiary of SouthBanc;
. any sale, lease, exchange, transfer, or other disposition of 25% or
more of the assets of a related person to SouthBanc or a subsidiary of
SouthBanc;
. the issuance of any securities of SouthBanc or a subsidiary of
SouthBanc to a related person;
. the acquisition by SouthBanc or a subsidiary of SouthBanc of any
securities of a related person;
. any reclassification of common stock of SouthBanc or any
recapitalization involving the common stock of SouthBanc; or
. any agreement or other arrangement providing for any of the foregoing.
87
<PAGE>
Limitation on Voting Rights
SouthBanc's certificate of incorporation provides that no record owner of
any outstanding SouthBanc 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 SouthBanc common stock will be entitled or permitted to
any vote in respect of the shares held in excess of the 10% limit, unless
permitted by a resolution adopted by a majority of the Board of Directors.
Beneficial ownership is determined pursuant to the federal securities laws and
includes shares beneficially owned by that person or any of his or her
affiliates (as defined in the certificate of incorporation), shares which that
person or his or her affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which that person and his or her
affiliates have or share investment or voting power, but does not include shares
beneficially owned by directors, officers and employees of Perpetual Bank or
SouthBanc or shares that are subject to a revocable proxy and that are not
otherwise beneficially, or deemed by SouthBanc to be beneficially, owned by that
person and his or her affiliates.
Board of Directors
Classified Board. The Board of Directors of SouthBanc is divided into
three classes, each of which contains approximately one-third of the number of
directors. The stockholders elect one class of directors each year for a term
of three years. The classified Board makes 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
SouthBanc.
Filling of Vacancies; Removal. The certificate of incorporation provides
that any vacancy occurring in the SouthBanc Board, including a vacancy created
by an increase in the number of directors, may be filled only by a vote of two-
thirds of the directors then in office. The certificate of incorporation of
SouthBanc 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. These provisions make it more
difficult for stockholders to remove directors and replace them with their own
nominees.
Special Meetings of Stockholders
The certificate of incorporation provides that only the Board of Directors
of SouthBanc, or a committee of the Board, may call special meetings of the
stockholders of SouthBanc. Stockholders are not able to call a special meeting
or require that the Board do so. At a special meeting, stockholders may
consider only the business specified in the notice of meeting given by
SouthBanc. This provision prevents stockholders from forcing stockholder
consideration of a proposal between special meetings over the opposition of the
SouthBanc Board by calling a special meeting of stockholders.
Advance Notice Provisions for Stockholder Nominations and Proposals
SouthBanc's certificate of incorporation establishes an advance notice
procedure for stockholders to nominate directors or bring other business before
an annual meeting of stockholders of SouthBanc. A person may not be nominated
for election as a director unless that person is nominated by or at the
direction of the SouthBanc Board or by a stockholder who has given appropriate
notice to SouthBanc before the meeting. Similarly, a stockholder may not bring
business before an annual meeting unless the stockholder has given SouthBanc
appropriate notice of its intention to bring that business before the meeting.
SouthBanc's Secretary must receive notice of the nomination or proposal not less
than 30 nor more than 60 days prior to the annual meeting. A stockholder who
desires to raise new business must provide certain information to SouthBanc
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
88
<PAGE>
director must provide SouthBanc with certain information concerning the nominee
and the proposing stockholder.
Advance notice of nominations or proposed business by stockholders gives
the SouthBanc Board time to consider the qualifications of the proposed
nominees, the merits of the proposals and, to the extent deemed necessary or
desirable by the SouthBanc Board, to inform stockholders and make
recommendations about those matters.
Preferred Stock
The certificate of incorporation authorizes the SouthBanc Board to
establish one or more series of preferred stock and, for any series of preferred
stock, to determine the terms and rights of the series, including voting rights,
conversion rates, and liquidation preferences. Although the SouthBanc Board has
no intention at the present time of doing so, it could issue a series of
preferred stock that could, depending on its terms, impede a merger, tender
offer or other takeover attempt. The SouthBanc Board will make any
determination to issue shares with those terms based on its judgment as to the
best interests of SouthBanc and its stockholders.
Amendment of Certificate of Incorporation
SouthBanc's articles of incorporation require the affirmative vote of at
least 80% of the outstanding voting stock entitled to vote to amend or repeal
certain provisions of the articles of incorporation, including the provision
limiting voting rights, the provisions relating to approval of business
combinations with related persons, calling special meetings, the number and
classification of directors, director and officer indemnification by SouthBanc
and amendment of SouthBanc's bylaws and certificate of incorporation. These
supermajority voting requirements make it more difficult for the stockholders to
amend these provisions of the SouthBanc articles of incorporation.
LEGAL MATTERS
The validity of the shares of SouthBanc common stock to be issued in
connection with the merger will be passed upon for SouthBanc by Malizia Spidi &
Fisch, PC, Washington, D.C.
EXPERTS
The financial statements of SouthBanc as of September 30, 1999 and 1998 and
for the three years ended September 30, 1999 have been incorporated in this
joint proxy statement-prospectus by reference to SouthBanc's 1999 annual report
to stockholders in reliance upon the report of Elliott, Davis & Company LLP,
independent certified public accountants, with respect to those financial
statements, and upon the authority of that firm as experts in accounting and
auditing.
The financial statements of Heritage as of September 30, 1999 and 1998 and
for each of the three years in the period ended September 30, 1999 included in
this joint proxy statement-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.
89
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
SouthBanc has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act that registers the distribution
to Heritage stockholders of the shares of SouthBanc common stock to be issued in
connection with the merger. The Registration Statement, including the exhibits,
contains additional relevant information about SouthBanc and SouthBanc common
stock. The rules and regulations of the SEC allow us to omit certain
information included in the Registration Statement from this joint proxy
statement-prospectus.
SouthBanc and Heritage file annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information that SouthBanc and Heritage file at the
SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. Please
call the SEC at 1-800-SEC-0330 for further information on the SEC's public
reference rooms. SouthBanc's and Heritage's public filings are also available
to the public from commercial document retrieval services and at the Internet
World Wide Website maintained by the SEC at "http://www.sec.gov."
The SEC allows SouthBanc to "incorporate by reference" information into
this joint proxy statement-prospectus. This means that SouthBanc can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed to
be part of this document, except for any information superseded by information
contained directly in this document. This document incorporates by reference
the other documents which are listed below that SouthBanc has previously filed
with the SEC. These documents contain important information about SouthBanc's
financial condition.
SouthBanc SEC Filings (File No. 0-23751)
. Management's discussion and analysis of financial condition and
results of operations on Pages 7 through 22 of SouthBanc's 1999 annual
report to stockholders
. Annual Report on Form 10-K for the year ended September 30, 1999
. Quarterly Report on Form 10-Q for the quarter ended December 31, 1999
. Current Report on Form 8-K filed on February 22, 2000
SouthBanc also incorporates by reference additional documents that it might
file with the SEC between the date of this document and the date of its
stockholder meeting. These include periodic reports, such as Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as
well as proxy statements.
Documents incorporated by reference are available from SouthBanc without
charge (except for exhibits to the documents unless the exhibits are
specifically incorporated in this document by reference). You may obtain
documents incorporated by reference in this document by requesting them in
writing or by telephone from SouthBanc at the following address:
SouthBanc Shares, Inc.
907 North Main Street
Anderson, South Carolina 29621
Attention: Sylvia Reed, Corporate Secretary
Telephone No. (864) 225-0241
If you would like to request documents from SouthBanc, please do so by
___________, 2000 in order to receive them before the special meeting of
stockholders. If you request any incorporated documents from us we will mail
them to you by first-class mail, or other equally prompt means, within one
business day of our receipt of your request.
90
<PAGE>
SouthBanc has supplied all information contained in this joint proxy
statement-prospectus relating to SouthBanc, and Heritage has supplied all
information relating to Heritage.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the meeting. We have not
authorized anyone to provide you with information that is different from what is
contained or incorporated by reference in this document. This document is dated
__________, 2000. You should not assume that the information contained in this
document is accurate as of any date other than that date, and neither the
mailing of this document to stockholders nor the issuance of SouthBanc's
securities in the merger shall create any implication to the contrary.
STOCKHOLDER PROPOSALS
SouthBanc
Proposals that stockholders seek to have included in the proxy statement
for SouthBanc's next annual meeting must be received by SouthBanc no later than
August 19, 2000. If next year's annual meeting is held on a date more than 30
calendar days from January 20, 2001, a stockholder proposal must be received by
a reasonable time before the proxy solicitation for such annual meeting is made.
Any stockholder proposals will be subject to the requirements of the proxy rules
adopted by the Securities and Exchange Commission.
SouthBanc's Certificate of Incorporation provides that in order for a
stockholder to make nominations for the election of directors or proposals for
business to be brought before a meeting of stockholders, a stockholder must
deliver written notice of such nominations and/or proposals to the Secretary not
less than 30 nor more than 60 days before the date of the meeting; provided that
if less than 31 days' notice of the meeting is given to stockholders, such
notice must be delivered not later than the close of the tenth day following the
day on which notice of the meeting was mailed to stockholders.
Heritage
Heritage will hold an annual meeting for the year ending September 30, 2000
only if the merger is not completed. Proposals that stockholders seek to have
included in the proxy statement for Heritage's next annual meeting, if one is
held, must be received by Heritage no later than September 6, 2000. If next
year's annual meeting is held on a date more than 30 calendar days from February
2, 2001, a stockholder proposal must be received by a reasonable time before the
proxy solicitation for such annual meeting is made. Any such proposals will be
subject to the requirements of the proxy rules adopted by the Securities and
Exchange Commission.
Heritage's Certificate of Incorporation provides that in order for a
stockholder to make nominations for the election of directors or proposals for
business to be brought before the annual meeting, a stockholder must deliver
notice of such nominations and/or proposals to the Secretary not less than 30
nor more than 60 days prior to the date of the annual meeting; provided that if
less than 31 days' notice of the annual meeting is given to stockholders, such
notice must be delivered not later than the close of the tenth day following the
day on which notice of the annual meeting was mailed to stockholders.
91
<PAGE>
Appendix A
================================================================================
AGREEMENT AND PLAN OF MERGER
DATED AS OF FEBRUARY 14, 2000
BY AND BETWEEN
SOUTHBANC SHARES, INC.
AND
HERITAGE BANCORP, INC.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page No.
<S> <C>
Introductory Statement.................................................................................. A-4
ARTICLE I
The Merger.............................................................................................. A-5
Section 1.1. Structure of the Merger...................................................... A-5
Section 1.2. Effect on Outstanding Shares of Heritage Common Stock........................ A-5
Section 1.3. Election and Proration Procedures............................................ A-6
Section 1.4. Exchange Procedures.......................................................... A-9
Section 1.5. Effect on Outstanding Shares of SouthBanc Common Stock....................... A-11
Section 1.6. Directors of SouthBanc after Effective Time.................................. A-11
Section 1.7. Certificate of Incorporation and Bylaws of the Surviving Corporation......... A-11
Section 1.8. Heritage Stock Options and Restricted Stock.................................. A-12
Section 1.9. Dissenters' Rights........................................................... A-12
ARTICLE II
Representations and Warranties.......................................................................... A-13
Section 2.1. Representations and Warranties of Heritage................................... A-13
Section 2.2. Representations and Warranties of SouthBanc ................................. A-27
ARTICLE III
Conduct Pending the Merger.............................................................................. A-41
Section 3.1. Conduct of Business Prior to the Effective Time.............................. A-41
Section 3.2. Forbearances................................................................. A-42
ARTICLE IV
Covenants............................................................................................... A-44
Section 4.1. Acquisition Proposals........................................................ A-44
Section 4.2. Access and Information....................................................... A-46
Section 4.3. Applications; Consents....................................................... A-46
Section 4.4. Antitakeover Provisions...................................................... A-47
Section 4.5. Additional Agreements........................................................ A-47
Section 4.6. Publicity.................................................................... A-47
Section 4.7. Stockholders Meetings........................................................ A-47
Section 4.8. Registration of SouthBanc Common Stock....................................... A-48
Section 4.9. Affiliate Letters............................................................ A-49
Section 4.10. Notification of Certain Matters.............................................. A-49
Section 4.11. Employees, Directors and Officers............................................ A-49
Section 4.12. Indemnification.............................................................. A-51
Section 4.13. Dividends.................................................................... A-53
Section 4.14. Section 16 Matters........................................................... A-53
ARTICLE V
Conditions to Consummation.............................................................................. A-53
Section 5.1. Conditions to Each Party's Obligations....................................... A-53
Section 5.2. Conditions to the Obligations of SouthBanc .................................. A-55
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C>
Section 5.3. Conditions to the Obligations of Heritage.................................... A-56
ARTICLE VI
Termination............................................................................................. A-56
Section 6.1. Termination.................................................................. A-56
Section 6.2. Effect of Termination........................................................ A-58
ARTICLE VII
Closing, Effective Date and Effective Time.............................................................. A-58
Section 7.1. Effective Date and Effective Time............................................ A-58
Section 7.2. Deliveries at the Closing.................................................... A-59
ARTICLE VIII
Certain Other Matters................................................................................... A-59
Section 8.1. Certain Definitions; Interpretation.......................................... A-59
Section 8.2. Survival..................................................................... A-63
Section 8.3. Waiver; Amendment............................................................ A-63
Section 8.4. Counterparts................................................................. A-63
Section 8.5. Governing Law................................................................ A-63
Section 8.6. Expenses..................................................................... A-63
Section 8.7. Notices...................................................................... A-63
Section 8.8. Entire Agreement; etc........................................................ A-64
Section 8.9. Successors and Assigns; Assignment........................................... A-65
EXHIBITS
Exhibit A Heritage Stock Option Agreement
Exhibit B SouthBanc Stock Option Agreement
Exhibit C Form of Affiliate Letter
Exhibit D Form of Employment Agreement between SouthBanc and J. Edward Wells
Exhibit E Form of Employment Agreement between Heritage Federal and J. Edward Wells
Exhibit F Form of Change in Control Agreement
SCHEDULES
Schedule 2.1(b) Subsidiaries of Heritage
Schedule 2.1(c) Heritage Stock Options
Schedule 2.1(f) Consents and Approvals of Heritage
Schedule 2.1(l) Material Contracts of Heritage
Schedule 2.1(n) Employee Benefit Plan of Heritage
Schedule 2.1(s) Problem Assets of Heritage
Schedule 2.2(b) Subsidiaries of SouthBanc
Schedule 2.2(f) Consents and Approvals of SouthBanc
Schedule 2.2(l) Material Contracts of SouthBanc
Schedule 2.2(n) Employee Benefit Plans of SouthBanc
Schedule 2.2(s) Problem Assets of SouthBanc
Schedule 3.2 Permitted Activities
</TABLE>
A-3
<PAGE>
Agreement and Plan of Merger
----------------------------
This is an Agreement and Plan of Merger, dated as of the 14th day of
February, 2000 ("Agreement"), by and between SouthBanc Shares, Inc., a Delaware
corporation ("SouthBanc"), and Heritage Bancorp, Inc., a Delaware corporation
("Heritage").
Introductory Statement
----------------------
The Board of Directors of each of SouthBanc and Heritage (i) has
determined that this Agreement and the business combination and related
transactions contemplated hereby are advisable and in the best interests of
SouthBanc and Heritage, respectively, and in the best long-term interests of
their respective stockholders, (ii) has determined that this Agreement and the
transactions contemplated hereby are consistent with, and in furtherance of, its
respective business strategies and (iii) has approved, at meetings of each of
such Boards of Directors, this Agreement.
The parties hereto intend that the Merger as defined herein shall
qualify as a reorganization under the provisions of Section 368(a) of the IRC
(as defined in Section 8.1) for federal income tax purposes, and that the Merger
shall be accounted for as a purchase transaction for accounting purposes.
SouthBanc and Heritage desire to make certain representations,
warranties and agreements in connection with the business combination and
related transactions provided for herein and to prescribe various conditions to
such transactions.
As a condition and inducement to SouthBanc's willingness to enter into
this Agreement and the SouthBanc Stock Option Agreement referred to below,
SouthBanc and Heritage are entering into a Stock Option Agreement dated as of
the date hereof in the form of Exhibit A (the "Heritage Stock Option
---------
Agreement"), pursuant to which Heritage is granting to SouthBanc an option to
purchase shares of Heritage Common Stock (as defined in Section 8.1), and as a
condition and inducement to Heritage's willingness to enter into this Agreement
and the Heritage Stock Option Agreement, Heritage and SouthBanc are entering
into a Stock Option Agreement dated as of the date hereof in the form of Exhibit
-------
B (the "SouthBanc Stock Option Agreement"), pursuant to which SouthBanc is
- -
granting to Heritage an option to purchase shares of SouthBanc Common Stock (as
defined in Section 8.1).
In consideration of their mutual promises and obligations hereunder,
the parties hereto adopt and make this Agreement and prescribe the terms and
conditions hereof and the manner and basis of carrying it into effect, which
shall be as follows:
A-4
<PAGE>
ARTICLE I
The Merger
----------
Section 1.1. Structure of the Merger. On the Effective Date (as
-----------------------
defined in Section 7.1), Heritage will merge with and into SouthBanc ("Merger")
pursuant to the provisions of, and with the effect provided for in, Delaware Law
(as defined in Section 8.1). Upon consummation of the Merger, the separate
corporate existence of Heritage shall cease. SouthBanc shall be the surviving
corporation (hereinafter sometimes referred to in such capacity as the
"Surviving Corporation") in the Merger and shall continue to be governed by the
laws of the State of Delaware and its name and separate corporate existence,
with all of its rights, privileges, immunities, powers and franchises, shall
continue unaffected by the Merger. From and after the Effective Time (as
defined in Section 7.1), SouthBanc shall possess all of the properties and
rights and be subject to all of the liabilities and obligations of Heritage, all
as more fully described under Delaware Law.
Section 1.2. Effect on Outstanding Shares of Heritage Common Stock.
-----------------------------------------------------
(a) By virtue of the Merger, automatically and without any action on
the part of the holder thereof, each share of Heritage Common Stock issued and
outstanding at the Effective Time, other than Excluded Shares (as defined in
Section 8.1), shall become and be converted into, at the election of the holder
as provided in and subject to the limitations set forth in this Agreement,
either (i) the right to receive $17.65 in cash without interest (the "Cash
Consideration") or (ii) the number of shares of SouthBanc common stock equal to
the Exchange Ratio (as defined below) (the "Stock Consideration"). The Cash
Consideration and the Stock Consideration are sometimes referred to herein
collectively as the "Merger Consideration." The Exchange Ratio shall be equal
(rounded to the nearest one-thousandth) to (w) 1.109 if the SouthBanc Price (as
defined in Section 8.1) is $15.92 or less, (x) the result obtained by dividing
$17.65 by the SouthBanc Price if the SouthBanc Price is greater than $15.92 and
less than $20.60, (y) 0.857 if the SouthBanc Price is $20.60 or more and less
than $23.41 or (z) the result obtained by dividing $20.06 by the SouthBanc Price
if the SouthBanc Price is $23.41 or more; provided, however, that if a
Triggering Event (as defined in Section 8.1) has occurred and the SouthBanc
Price is greater than $23.41, then the Exchange Ratio shall be equal to 0.857.
(b) Notwithstanding any other provision of this Agreement, no
fraction of a share of SouthBanc Common Stock and no certificates or scrip
therefor will be issued in the Merger; instead, SouthBanc shall pay to each
holder of Heritage Common Stock who would otherwise be entitled to a fraction of
a share of SouthBanc Common Stock an amount in cash, rounded to the nearest
cent, determined by multiplying such fraction by the SouthBanc Price.
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(c) If, between the date of this Agreement and the Effective Time
(and as permitted by Section 3.2), the outstanding shares of SouthBanc Common
Stock or the outstanding shares of Heritage Common Stock shall have been changed
into a different number of shares or into a different class by reason of any
stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares, the Merger Consideration shall be adjusted
appropriately to provide the holders of Heritage Common Stock the same economic
effect as contemplated by this Agreement prior to such event.
(d) As of the Effective Time, each Excluded Share, other than
Dissenters' Shares (as defined in Section 1.9), shall be canceled and retired
and shall cease to exist, and no exchange or payment shall be made with respect
thereto. All shares of SouthBanc Common Stock that are held by Heritage, if
any, other than shares held in a fiduciary capacity or in satisfaction of a debt
previously contracted, shall be canceled and shall constitute authorized but
unissued shares. In addition, no Dissenters' Shares shall be converted into the
Merger Consideration pursuant to this Section 1.2 but instead shall be treated
in accordance with the provisions set forth in Section 1.9 of this Agreement.
Section 1.3. Election and Proration Procedures.
---------------------------------
(a) An election form (an "Election Form") and other appropriate and
customary transmittal materials, which shall specify that delivery shall be
effected, and risk of loss and title to the certificates theretofore
representing Heritage Common Stock ("Certificates") shall pass, only upon proper
delivery of such Certificates to a bank or trust company designated by SouthBanc
and reasonably satisfactory to Heritage (the "Exchange Agent") in such form as
Heritage and SouthBanc shall mutually agree shall be mailed on the Mailing Date
(as defined below) to each holder of record of shares of Heritage Common Stock
(other than holders of Dissenters' Shares or shares of Heritage Common Stock to
be canceled as provided in Section 1.2(d)) as of a record date which shall be
the same date as the record date for eligibility to vote on the Merger. The
"Mailing Date" shall be the date on which proxy materials relating to the Merger
are mailed to holders of shares of Heritage Common Stock.
(b) Each Election Form shall entitle the holder of shares of Heritage
Common Stock (or the beneficial owner through appropriate and customary
documentation and instructions) to (i) elect to receive the Cash Consideration
for all of such holder's shares (a "Cash Election"), (ii) elect to receive the
Stock Consideration for all of such holder's shares (a "Stock Election"), (iii)
elect to receive the Cash Consideration with respect to some of such holder's
shares and the Stock Consideration with respect to such holder's remaining
shares (a "Mixed Election"), or (iv) make no election or to indicate that such
holder has no preference as to the receipt of the Cash Consideration or the
Stock Consideration (a "Non-Election"). Holders of record of shares of Heritage
Common Stock who hold such shares as nominees, trustees or in other
representative capacities (a "Representative") may submit multiple Election
Forms, provided that such Representative certifies that each such Election Form
covers all the shares of
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Heritage Common Stock held by that Representative for a particular beneficial
owner. Shares of Heritage Common Stock as to which a Cash Election has been made
(including pursuant to a Mixed Election) are referred to herein as "Cash
Election Shares." Shares of Heritage Common Stock as to which a Stock Election
has been made (including pursuant to a Mixed Election) are referred to herein as
"Stock Election Shares." Shares of Heritage Common Stock as to which no election
has been made are referred to as "Non-Election Shares." The aggregate number of
shares of Heritage Common Stock with respect to which a Stock Election has been
made is referred to herein as the "Stock Election Number."
(c) To be effective, a properly completed Election Form shall be
submitted to the Exchange Agent on or before 5:00 p.m. New York City time on
the 20th calendar day following the Mailing Date (or such other time and date as
Heritage and SouthBanc may mutually agree) (the "Election Deadline"). An
election shall have been properly made only if the Exchange Agent shall have
actually received a properly completed Election Form by the Election Deadline.
An Election Form shall be deemed properly completed only if accompanied by one
or more Certificates (or customary affidavits and, if required by SouthBanc
pursuant to Section 1.4(i), indemnification regarding the loss or destruction of
such Certificates or the guaranteed delivery of such Certificates) representing
all shares of Heritage Common Stock covered by such Election Form, together with
duly executed transmittal materials included with the Election Form. Any
Heritage stockholder may at any time prior to the Election Deadline change his
or her election by written notice received by the Exchange Agent prior to the
Election Deadline accompanied by a properly completed and signed revised
Election Form. Any Heritage stockholder may, at any time prior to the Election
Deadline, revoke his or her election by written notice received by the Exchange
Agent prior to the Election Deadline or by withdrawal prior to the Election
Deadline of his or her Certificates, or of the guarantee of delivery of such
Certificates, previously deposited with the Exchange Agent. All elections shall
be revoked automatically if the Exchange Agent is notified in writing by
SouthBanc and Heritage that this Agreement has been terminated. If a
stockholder either (i) does not submit a properly completed Election Form by the
Election Deadline, or (ii) revokes its Election Form prior to the Election
Deadline, the shares of Heritage Common Stock held by such stockholder shall be
designated Non-Election Shares. SouthBanc shall cause the Certificates
representing Heritage Common Stock described in (ii) to be promptly returned
without charge to the person submitting the Election Form upon written request
to that effect from the person who submitted the Election Form. Subject to the
terms of this Agreement and of the Election Form, the Exchange Agent shall have
reasonable discretion to determine whether any election, revocation or change
has been properly or timely made and to disregard immaterial defects in any
Election Form, and any good faith decisions of the Exchange Agent regarding such
matters shall be binding and conclusive.
(d) Notwithstanding any other provision contained in this Agreement,
50% of the total number of shares of Heritage Common Stock outstanding at the
Effective Time, less 50% of the aggregate number of shares of Heritage Common
Stock acquired by SouthBanc prior to the Effective Time (the "Stock Conversion
Number"), shall be converted into the Stock
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Consideration and the remaining outstanding shares of Heritage Common Stock
shall be converted into the Cash Consideration (in each case, excluding (i)
shares of Heritage Common Stock to be canceled as provided in Section 1.2(d) and
(ii) Dissenters' Shares (the shares remaining outstanding after such exclusion
constituting, for purposes of this Agreement, the "Outstanding Heritage
Shares")); provided, however, that for federal income tax purposes, it is
intended that the Merger will qualify as a reorganization under the provisions
of Section 368(a) of the IRC and, notwithstanding anything to the contrary
contained herein, in order that the Merger will not fail to satisfy continuity
of interest requirements under applicable federal income tax principles relating
to reorganizations under Section 368(a) of the IRC, as reasonably determined by
counsel to SouthBanc and Heritage, SouthBanc shall increase the number of
outstanding Heritage shares that will be converted into the Stock Consideration
and reduce the number of outstanding Heritage shares that will be converted into
the right to receive the Cash Consideration.
(e) Within five business days after the later to occur of the
Election Deadline or the Effective Time, SouthBanc shall cause the Exchange
Agent to effect the allocation among holders of Heritage Common Stock of rights
to receive the Cash Consideration and the Stock Consideration as follows:
(i) If the Stock Election Number exceeds the Stock Conversion
Number, then all Cash Election Shares and all Non-Election Shares shall be
converted into the right to receive the Cash Consideration, and each holder of
Stock Election Shares will be entitled to receive the Stock Consideration in
respect of that number of Stock Election Shares equal to the product obtained by
multiplying (x) the number of Stock Election Shares held by such holder by (y) a
fraction, the numerator of which is the Stock Conversion Number and the
denominator of which is the Stock Election Number, with the remaining number of
such holder's Stock Election Shares being converted into the right to receive
the Cash Consideration;
(ii) If the Stock Election Number is less than the Stock
Conversion Number (the amount by which the Stock Conversion Number exceeds the
Stock Election Number being referred to herein as the "Shortfall Number"), then
all Stock Election Shares shall be converted into the right to receive the Stock
Consideration and the Non-Election Shares and Cash Election Shares shall be
treated in the following manner:
(A) if the Shortfall Number is less than or equal to the
number of Non-Election Shares, then all Cash Election Shares shall be converted
into the right to receive the Cash Consideration and each holder of Non-Election
Shares shall receive the Stock Consideration in respect of that number of Non-
Election Shares equal to the product obtained by multiplying (x) the number of
Non-Election Shares held by such holder by (y) a fraction, the numerator of
which is the Shortfall Number and the denominator of which is the total number
of Non-Election Shares, with the remaining number of such holder's Non-Election
Shares being converted into the right to receive the Cash Consideration; or
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(B) if the Shortfall Number exceeds the number of Non-
Election Shares, then all Non-Election Shares shall be converted into the right
to receive the Stock Consideration, and each holder of Cash Election Shares
shall receive the Stock Consideration in respect of that number of Cash Election
Shares equal to the product obtained by multiplying (x) the number of Cash
Election Shares held by such holder by (y) a fraction, the numerator of which is
the amount by which (1) the Shortfall Number exceeds (2) the total number of
Non-Election Shares and the denominator of which is the total number of Cash
Election Shares, with the remaining number of such holder's Cash Election Shares
being converted into the right to receive the Cash Consideration.
For purposes of this Section 1.3(e), if SouthBanc is obligated to
increase the number of Outstanding Heritage Shares to be converted into shares
of SouthBanc Common Stock as a result of the application of the last clause of
Section 1.3(d) above, then the higher number shall be substituted for the Stock
Conversion Number in the calculations set forth in this Section 1.3(e).
Section 1.4. Exchange Procedures.
-------------------
(a) Appropriate transmittal materials ("Letter of Transmittal") in a
form satisfactory to SouthBanc and Heritage shall be mailed as soon as
practicable after the Effective Time to each holder of record of Heritage Common
Stock as of the Effective Time who did not previously submit a completed
Election Form. A Letter of Transmittal will be deemed properly completed only
if accompanied by certificates representing all shares of Heritage Common Stock
to be converted thereby.
(b) At and after the Effective Time, each Certificate (except as
specifically set forth in Section 1.2) shall represent only the right to receive
the Merger Consideration.
(c) Prior to the Effective Time, SouthBanc shall deposit, or shall
cause to be deposited, with the Exchange Agent, for the benefit of the holders
of shares of Heritage Common Stock, for exchange in accordance with this Section
1.4, an amount of cash sufficient to pay the aggregate Cash Consideration and
the aggregate amount of cash in lieu of fractional shares to be paid pursuant to
Section 1.2, and SouthBanc shall reserve for issuance with its transfer agent
and registrar a sufficient number of shares of SouthBanc Common Stock to provide
for payment of the aggregate Stock Consideration.
(d) The Letter of Transmittal shall (i) specify that delivery shall
be effected, and risk of loss and title to the Certificates shall pass, only
upon delivery of the Certificates to the Exchange Agent, (ii) be in a form and
contain any other provisions as SouthBanc may reasonably determine and (iii)
include instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration. Upon the proper surrender of the
Certificates to the Exchange Agent, together with a properly completed and duly
executed Letter of Transmittal, the holder of such Certificates shall be
entitled to receive in exchange therefor (m) a certificate
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representing that number of whole shares of SouthBanc Common Stock that such
holder has the right to receive pursuant to Section 1.2, if any, and (n) a check
in the amount equal to the cash that such holder has the right to receive
pursuant to Section 1.2, if any, (including any cash in lieu of fractional
shares, if any, that such holder has the right to receive pursuant to Section
1.2) and any dividends or other distributions to which such holder is entitled
pursuant to this Section 1.4. Certificates so surrendered shall forthwith be
canceled. As soon as practicable following receipt of the properly completed
Letter of Transmittal and any necessary accompanying documentation, the Exchange
Agent shall distribute SouthBanc Common Stock and cash as provided herein. The
Exchange Agent shall not be entitled to vote or exercise any rights of ownership
with respect to the shares of SouthBanc Common Stock held by it from time to
time hereunder, except that it shall receive and hold all dividends or other
distributions paid or distributed with respect to such shares for the account of
the persons entitled thereto. If there is a transfer of ownership of any shares
of Heritage Common Stock not registered in the transfer records of Heritage, the
Merger Consideration shall be issued to the transferee thereof if the
Certificates representing such Heritage Common Stock are presented to the
Exchange Agent, accompanied by all documents required, in the reasonable
judgment of SouthBanc and the Exchange Agent, (x) to evidence and effect such
transfer and (y) to evidence that any applicable stock transfer taxes have been
paid.
(e) No dividends or other distributions declared or made after the
Effective Time with respect to SouthBanc Common Stock shall be remitted to any
person entitled to receive shares of SouthBanc Common Stock hereunder until such
person surrenders his or her Certificates in accordance with this Section 1.4.
Upon the surrender of such person's Certificates, such person shall be entitled
to receive any dividends or other distributions, without interest thereon, which
theretofore had become payable with respect to shares of SouthBanc Common Stock
represented by such person's Certificates.
(f) The stock transfer books of Heritage shall be closed immediately
upon the Effective Time and from and after the Effective Time there shall be no
transfers on the stock transfer records of Heritage of any shares of Heritage
Common Stock. If, after the Effective Time, Certificates are presented to
SouthBanc, they shall be canceled and exchanged for the Merger Consideration
deliverable in respect thereof pursuant to this Agreement in accordance with the
procedures set forth in this Section 1.4.
(g) Any portion of the aggregate amount of cash to be paid pursuant
to Section 1.2, any dividends or other distributions to be paid pursuant to this
Section 1.4 or any proceeds from any investments thereof that remains unclaimed
by the stockholders of Heritage for six months after the Effective Time shall be
repaid by the Exchange Agent to SouthBanc upon the written request of SouthBanc.
After such request is made, any stockholders of Heritage who have not
theretofore complied with this Section 1.4 shall look only to SouthBanc for the
Merger Consideration deliverable in respect of each share of Heritage Common
Stock such stockholder holds, as determined pursuant to Section 1.2 of this
Agreement, without any interest thereon. If outstanding Certificates are not
surrendered prior to the date on which such payments would
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otherwise escheat to or become the property of any governmental unit or agency,
the unclaimed items shall, to the extent permitted by any abandoned property,
escheat or other applicable laws, become the property of SouthBanc (and, to the
extent not in its possession, shall be paid over to it), free and clear of all
claims or interest of any person previously entitled to such claims.
Notwithstanding the foregoing, neither the Exchange Agent nor any party to this
Agreement (or any affiliate thereof) shall be liable to any former holder of
Heritage Common Stock for any amount delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(h) SouthBanc and the Exchange Agent shall be entitled to rely upon
Heritage's stock transfer books to establish the identity of those persons
entitled to receive the Merger Consideration, which books shall be conclusive
with respect thereto. In the event of a dispute with respect to ownership of
stock represented by any Certificate, SouthBanc and the Exchange Agent shall be
entitled to deposit any Merger Consideration represented thereby in escrow with
an independent third party and thereafter be relieved with respect to any claims
thereto.
(i) If any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by the Exchange
Agent, the posting by such person of a bond in such amount as the Exchange Agent
may direct as indemnity against any claim that may be made against it with
respect to such Certificate, the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Certificate the Merger Consideration deliverable in
respect thereof pursuant to Section 1.2.
Section 1.5. Effect on Outstanding Shares of SouthBanc Common Stock.
------------------------------------------------------
At and after the Effective Time, each share of SouthBanc Common Stock issued
and outstanding immediately prior to the Effective Time shall remain an issued
and outstanding share of common stock of the Surviving Corporation and shall not
be affected by the Merger.
Section 1.6. Directors of SouthBanc after Effective Time. From and
-------------------------------------------
after the Effective Time, until duly changed in compliance with applicable law,
the Board of Directors of SouthBanc shall consist of (i) Robert W. Orr and four
directors designated by SouthBanc and (ii) J. Edward Wells and two directors
designated by Heritage.
Section 1.7. Certificate of Incorporation and Bylaws of the Surviving
--------------------------------------------------------
Corporation. The certificate of incorporation and bylaws of SouthBanc in effect
- -----------
immediately prior to the Effective Time shall be the certificate of
incorporation and bylaws of the Surviving Corporation until thereafter amended
in accordance with applicable law.
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Section 1.8. Heritage Stock Options and Restricted Stock.
-------------------------------------------
(a) At the Effective Time, each option to acquire shares of Heritage
Common Stock ("Heritage Option") granted pursuant to Heritage's 1998 Stock
Option Plan (the "Heritage Option Plan") that is then outstanding and
unexercised, whether or not vested, shall be canceled, and in lieu thereof the
holders of such options shall be paid in cash an amount equal to the product of
(i) the number of shares of Heritage Common Stock subject to such option at the
Effective Time and (ii) an amount by which the $17.65 exceeds the exercise price
per share of such option, net of any cash which must be withheld under federal
and state income and employment tax requirements. In the event that the
exercise price of a Heritage Option is greater than $17.65, then at the
Effective Time such Heritage Option shall be canceled without any payment made
in exchange therefor. At the Effective Time the Heritage Option Plan shall be
deemed terminated.
(b) Each restricted share of Heritage Common Stock granted pursuant
to the Heritage Bancorp, Inc. Management Recognition and Development Plan (each
such share, a "Heritage Restricted Share") that is outstanding immediately prior
to the Effective Time shall vest and become free of restrictions to the extent
provided by the terms thereof. Each award of Heritage Restricted Shares shall be
converted, as of the Effective Time, into the Merger Consideration and the
aggregate Merger Consideration, net of any cash which must be withheld under
federal and state income and employment tax requirements, shall be delivered to
the respective holders of Heritage Restricted Shares as soon as practicable
following the Effective Time.
Section 1.9. Dissenters' Rights. Notwithstanding any other provision
------------------
of this Agreement to the contrary, shares of Heritage Common Stock that are
outstanding immediately prior to the Effective Time and which are held by
stockholders who shall have not voted in favor of the Merger or consented
thereto in writing and who properly shall have demanded appraisal for such
shares in accordance with Delaware Law (collectively, the "Dissenters' Shares")
shall not be converted into or represent the right to receive the Merger
Consideration. Such stockholders instead shall be entitled to receive payment of
the appraised value of such shares held by them in accordance with the
provisions of Delaware Law, except that all Dissenters' Shares held by
stockholders who shall have failed to perfect or who effectively shall have
withdrawn or otherwise lost their rights to appraisal of such shares under
Delaware Law shall thereupon be deemed to have been converted into and to have
become exchangeable, as of the Effective Time, for the right to receive, without
any interest thereon, the Merger Consideration upon surrender in the manner
provided in Section 1.4 of the Heritage Certificate or Heritage Certificates
that, immediately prior to the Effective Time, evidenced such shares. Heritage
shall give SouthBanc (i) prompt notice of any written demands for appraisal of
any shares of Heritage Common Stock, attempted withdrawals of such demands and
any other instruments served pursuant to Delaware Law and received by Heritage
relating to stockholders' rights of appraisal, and (ii) the opportunity to
participate in all negotiations and proceedings with respect to demands under
Delaware Law consistent with the obligations of Heritage thereunder. Heritage
shall not,
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except with the prior written consent of SouthBanc, (x) make any payment with
respect to such demand, (y) offer to settle or settle any demand for appraisal
or (z) waive any failure to timely deliver a written demand for appraisal or
timely take any other action to perfect appraisal rights in accordance with
Delaware Law.
ARTICLE II
Representations and Warranties
------------------------------
Section 2.1. Representations and Warranties of Heritage. Heritage
------------------------------------------
represents and warrants to SouthBanc that:
(a) Organization.
------------
(i) Heritage is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and is registered
as a savings and loan holding company.
(ii) Heritage Federal Bank ("Heritage Federal") is a federally
chartered savings bank duly organized and validly existing under the laws of the
United States of America. The deposits of Heritage Federal are insured by the
Savings Association Insurance Fund of the FDIC (as defined in Section 8.1) to
the extent provided in the FDIA (as defined in Section 8.1).
(iii) Heritage and Heritage Federal each has all requisite
corporate power and authority to own, lease and operate its properties and to
conduct the business currently being conducted by it. Heritage and Heritage
Federal are each duly qualified or licensed as a foreign corporation to transact
business and are in good standing in each jurisdiction in which the character of
the properties owned or leased by it or the nature of the business conducted by
it makes such qualification or licensing necessary, except where the failure to
be so qualified or licensed and in good standing would not have a Material
Adverse Effect (as defined in Section 8.1) on Heritage.
(b) Subsidiaries.
------------
(i) Schedule 2.1(b) sets forth (A) the name, percentage
---------------
ownership and number of shares of stock owned or controlled by Heritage of each
Subsidiary (as defined in Section 8.1); and (B) the jurisdiction of
incorporation, capitalization and ownership of each Subsidiary. All such
Subsidiaries and ownership interests are in compliance with all applicable laws,
rules and regulations relating to investments in equity ownership interests by
savings and loan holding companies or federally chartered savings associations.
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(ii) Heritage owns of record and beneficially all the capital
stock of each of its Subsidiaries free and clear of any claims, liens,
encumbrances or restrictions and there are no agreements or understandings with
respect to the voting or disposition of any such shares. The outstanding shares
of capital stock of each Subsidiary have been validly authorized and are validly
issued, fully paid and nonassessable. Each of Heritage's Subsidiaries is a
corporation duly organized and validly existing under the laws of its
jurisdiction of incorporation, has all requisite corporate power and authority
to own, lease and operate its properties and to conduct the business currently
being conducted by it and is duly qualified or licensed as a foreign corporation
to transact business and is in good standing in each jurisdiction in which the
character of the properties owned or leased by it or the nature of the business
conducted by it makes such qualification or licensing necessary, except where
the failure to be so qualified or licensed and in good standing would not have a
Material Adverse Effect on Heritage.
(iii) None of Heritage's Subsidiaries holds shares of its capital
stock in its treasury, and there are not, and on the Closing Date there will not
be, outstanding (A) any options, warrants or other rights with respect to the
capital stock of any Subsidiary, (B) any securities convertible into or
exchangeable for shares of such capital stock or any other debt or equity
security of any Subsidiary or (C) any other commitments of any kind for the
issuance of additional shares of capital stock or other debt or equity security
of any Subsidiary or options, warrants or other rights with respect to such
securities.
(iv) No Subsidiary of Heritage other than Heritage Federal is
an "insured depository institution" as defined in the FDIA and the applicable
regulations thereunder.
(c) Capital Structure.
-----------------
(i) The authorized capital stock of Heritage consists of:
(A) 10,000,000 shares of Heritage Common Stock; and
(B) 500,000 shares of preferred stock, par value $.01 per
share.
(ii) As of the date of this Agreement:
(A) 4,301,089 shares of Heritage Common Stock are issued
and outstanding, all of which are validly issued,
fully paid and nonassessable;
(B) no shares of Heritage preferred stock are issued and
outstanding or held in Heritage's treasury;
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(C) 416,588 shares of Heritage Common Stock are reserved
for issuance pursuant to outstanding Heritage Options
under the Heritage Option Plan; and
(D) 512,811 shares of Heritage Common Stock are held by
Heritage in its treasury or by its Subsidiaries.
(iii) Set forth on Schedule 2.1(c) is a complete and accurate
---------------
list of all outstanding Heritage Options, including the names of the optionees,
dates of grant, exercise prices, dates of vesting, dates of termination and
shares subject to each grant. Following the Effective Time, no holder of
Heritage Options will have any right to receive shares of SouthBanc Common Stock
upon the exercise of Heritage Options.
(iv) No bonds, debentures, notes or other indebtedness having
the right to vote on any matters on which stockholders of Heritage may vote are
issued or outstanding.
(v) Except as set forth in this Section 2.1(c) or on Schedule
--------
2.1(c), as of the date of this Agreement, (A) no shares of capital stock or
- ------
other voting securities of Heritage are issued, reserved for issuance or
outstanding and (B) neither Heritage nor any of its Subsidiaries has or is bound
by any outstanding subscriptions, options, warrants, calls, rights, convertible
securities, commitments or agreements of any character obligating Heritage or
any of its Subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, any additional shares of capital stock of Heritage or
obligating Heritage or any of its Subsidiaries to grant, extend or enter into
any such option, warrant, call, right, convertible security, commitment or
agreement. As of the date hereof, there are no outstanding contractual
obligations of Heritage or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of Heritage or any of its
Subsidiaries.
(d) Authority. Heritage has all requisite corporate power and
---------
authority to enter into this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated by this Agreement. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate actions on the part of Heritage's Board of Directors, and no other
corporate proceedings on the part of Heritage are necessary to authorize this
Agreement or to consummate the transactions contemplated by this Agreement other
than the approval and adoption of this Agreement by the affirmative vote of the
holders of a majority of the outstanding shares of Heritage Common Stock. This
Agreement has been duly and validly executed and delivered by Heritage and
constitutes a valid and binding obligation of Heritage, enforceable in
accordance with its terms, subject to applicable bankruptcy, insolvency and
similar laws affecting creditors' rights and remedies generally and subject, as
to enforceability, to general principles of equity, whether applied in a court
of law or a court of equity.
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(e) Fairness Opinion. Heritage has received the opinion of Trident
----------------
Securities to the effect that, as of the date hereof, the Merger Consideration
to be received by Heritage's stockholders is fair, from a financial point of
view, to such stockholders.
(f) No Violations; Consents.
-----------------------
(i) The execution, delivery and performance of this Agreement by
Heritage do not, and the consummation of the transactions contemplated by this
Agreement will not, (A) assuming that the consents and approvals referred to in
Section 2.1(f)(ii) are obtained, violate of any law, rule or regulation or any
judgment, decree, order, governmental permit or license to which Heritage or any
of its Subsidiaries (or any of their respective properties) is subject, (B)
violate the certificate of incorporation or bylaws of Heritage or the similar
organizational documents of any of its Subsidiaries or (C) constitute a breach
or violation of, or a default under (or an event which, with due notice or lapse
of time or both, would constitute a default under), or result in the termination
of, accelerate the performance required by, or result in the creation of any
lien, pledge, security interest, charge or other encumbrance upon any of the
properties or assets of Heritage or any of its Subsidiaries under, any of the
terms, conditions or provisions of any note, bond, indenture, deed of trust,
loan agreement or other agreement, instrument or obligation to which Heritage or
any of its Subsidiaries is a party, or to which any of their respective
properties or assets may be subject, except, in the case of (C), for any such
breaches, violations or defaults that would not, individually or in the
aggregate, have a Material Adverse Effect on Heritage.
(ii) Except for (A) the filing of an application with the OTS (as
defined in Section 8.1) under the HOLA (as defined in Section 8.1) and approval
of such application, (B) the filing of a certificate of merger with the Delaware
Secretary of State pursuant to Delaware Law, (C) the registration under the
Securities Act (as defined in Section 8.1) of the shares of SouthBanc Common
Stock to be issued in exchange for shares of Heritage Common Stock, (D) the
registration or qualification of the shares of SouthBanc Common Stock to be
issued in exchange for shares of Heritage Common Stock under state securities or
"blue sky" laws, and (E) such filings, authorizations or approvals as may be set
forth in Schedule 2.1(f), no consents or approvals of or filings or
---------------
registrations with any Governmental Entity (as defined in Section 8.1) or with
any third party are necessary in connection with the execution and delivery by
Heritage of this Agreement or the consummation by Heritage of the Merger and the
other transactions contemplated by this Agreement. As of the date hereof,
Heritage knows of no reason pertaining to Heritage why any of the approvals
referred to in this Section 2.1(f) should not be obtained without the imposition
of any material condition or restriction described in Section 5.1(b).
A-16
<PAGE>
(g) Reports and Financial Statements.
--------------------------------
(i) Heritage and each of its Subsidiaries have each timely filed
all material reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file since
December 31, 1997 with (A) the FDIC, (B) the OTS, (C) the NASD (as defined in
Section 8.1) and (D) the SEC (as defined in Section 8.1) (collectively,
"Heritage's Reports") and have paid all fees and assessments due and payable in
connection therewith. As of their respective dates, none of Heritage's Reports
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading. All of Heritage's Reports filed with the SEC complied in all
material respects with the applicable requirements of the Exchange Act (as
defined in Section 8.1) and the rules and regulations of the SEC promulgated
thereunder.
(ii) Each of the financial statements of Heritage included in
Heritage's Reports filed with the SEC complied as to form, as of their
respective dates of filing with the SEC, in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto. The financial statements included in Heritage's
Reports were prepared from the books and records of Heritage and its
Subsidiaries, fairly present the consolidated financial position of Heritage and
its Subsidiaries in each case at and as of the dates indicated and the
consolidated results of operations, retained earnings and cash flows of Heritage
and its Subsidiaries for the periods indicated, and, except as otherwise set
forth in the notes thereto, were prepared in accordance with GAAP (as defined in
Section 8.1) consistently applied throughout the periods covered thereby;
provided, however, that the unaudited financial statements for interim periods
are subject to normal year-end adjustments (which will not be material
individually or in the aggregate) and lack a statement of cash flows and
footnotes.
(h) Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
Heritage's Reports filed with the SEC prior to the date of this Agreement, since
September 30, 1999, (i) Heritage and its Subsidiaries have not incurred any
liability, except in the ordinary course of their business consistent with past
practice, (ii) Heritage and its Subsidiaries have conducted their respective
businesses only in the ordinary and usual course of such businesses consistent
with their past practices, (iii) there has not been any Material Adverse Effect
with respect to Heritage, (iv) there has been no increase in the salary,
compensation, pension or other benefits payable or to become payable by Heritage
or any of its Subsidiaries to any of their respective directors, officers or
employees, other than in conformity with the policies and practices of such
entity in the usual and ordinary course of its business, (v) neither Heritage
nor any of its Subsidiaries has paid or made any accrual or arrangement for
payment of bonuses or special compensation of any kind or any severance or
termination pay to any of their directors, officers or employees, and (vi) there
has been no change in any accounting principles, practices or methods of
Heritage or any of its Subsidiaries other than as required by GAAP.
A-17
<PAGE>
(i) Absence of Claims. There are no suits, actions or proceedings
-----------------
pending or, to the knowledge of Heritage, threatened against or affecting
Heritage or any of its Subsidiaries or any property or asset of Heritage or any
of its Subsidiaries which, individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect on Heritage, nor are there any
judgments, decrees, injunctions, rules or orders of any Governmental Entity or
arbitrator outstanding against Heritage which, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect on Heritage.
(j) Absence of Regulatory Actions. Since December 31, 1997, neither
-----------------------------
Heritage nor any of its Subsidiaries has been a party to any cease and desist
order, written agreement or memorandum of understanding with, or any commitment
letter or similar undertaking to, or has been subject to any action, proceeding,
order or directive by, or has been a recipient of any extraordinary supervisory
letter from any Government Regulator (as defined in Section 8.1), or has adopted
any board resolutions at the request of any Government Regulator, or has been
advised by any Government Regulator that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such action, proceeding, order, directive, written agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter, board
resolutions or similar undertaking.
(k) Taxes. All federal, state, local and foreign tax returns required
-----
to be filed by or on behalf of Heritage or any of its Subsidiaries have been
timely filed or requests for extensions have been timely filed and any such
extension shall have been granted and not have expired, and all such filed
returns are complete and accurate in all material respects. All taxes shown on
such returns, all taxes required to be shown on returns for which extensions
have been granted and all other taxes required to be paid by Heritage or any of
its Subsidiaries have been paid in full or adequate provision has been made for
any such taxes on Heritage's balance sheet (in accordance with GAAP). As of the
date of this Agreement, there is no audit examination, deficiency assessment,
tax investigation or refund litigation with respect to any taxes of Heritage or
any of its Subsidiaries, and no claim has been made by any authority in a
jurisdiction where Heritage or any of its Subsidiaries do not file tax returns
that Heritage or any such Subsidiary is subject to taxation in that
jurisdiction. All taxes, interest, additions and penalties due with respect to
completed and settled examinations or concluded litigation relating to Heritage
or any of its Subsidiaries have been paid in full or adequate provision has been
made for any such taxes on Heritage's balance sheet (in accordance with GAAP).
Heritage and its Subsidiaries have not executed an extension or waiver of any
statute of limitations on the assessment or collection of any material tax due
that is currently in effect. Heritage and each of its Subsidiaries has withheld
and paid all taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder or other third party, and Heritage and each of its Subsidiaries has
timely complied with all applicable information reporting requirements under
Part III, Subchapter A of Chapter 61 of the IRC and similar applicable state and
local information reporting requirements.
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<PAGE>
(l) Agreements.
----------
(i) Heritage and its Subsidiaries are not bound by any material
contract (as defined in Item 601(b)(10) of Regulation S-K promulgated by the
SEC), to be performed after the date hereof that has not been filed with or
incorporated by reference in Heritage's Reports.
(ii) Schedule 2.1(l) lists any contract, arrangement, commitment
---------------
or understanding (whether written or oral) to which Heritage or any of its
Subsidiaries is a party or is bound:
(A) with any executive officer or other key employee of
Heritage or any of its Subsidiaries the benefits of which are contingent, or the
terms of which are materially altered, upon the occurrence of a transaction
involving Heritage or any of its Subsidiaries of the nature contemplated by this
Agreement;
(B) with respect to the employment of any directors,
officers employees or consultants;
(C) (including any stock option plan, phantom stock or
stock appreciation rights plan, restricted stock plan or stock purchase plan)
any of the benefits of which will be increased, or the vesting or payment of the
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the benefits
of which will be calculated on the basis of any of the transactions contemplated
by this Agreement;
(D) containing covenants that limit the ability of Heritage
or any of its Subsidiaries to compete in any line of business or with any
person, or that involve any restriction on the geographic area in which, or
method by which, Heritage (including any successor thereof) or any of its
Subsidiaries may carry on its business (other than as may be required by law or
any regulatory agency);
(E) pursuant to which Heritage or any of its Subsidiaries
may become obligated to invest in or contribute capital to any entity;
(F) not fully disclosed in Heritage's Reports that relates
to borrowings of money (or guarantees thereof) by Heritage or any of its
Subsidiaries, other than in the ordinary course of business; or
(G) which is a lease or license with respect to any
property, real or personal, whether as landlord, tenant, licensor or licensee,
involving a liability or obligation as obligor in excess of $25,000 on an annual
basis.
A-19
<PAGE>
To the knowledge of Heritage, each of the agreements and other documents
referenced in Schedule 2.1(l) is a valid, binding and enforceable obligation of
---------------
the parties sought to be bound thereby, subject to applicable bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally
and subject, as to enforceability, to general principles of equity, whether
applied in a court of law or a court of equity. Heritage has previously
delivered to SouthBanc true and complete copies of each agreement and other
documents referenced in Schedule 2.1(l).
--------------
(iii) Neither Heritage nor any of its Subsidiaries is in default
under (and no event has occurred which, with due notice or lapse of time or
both, would constitute a default under) or is in violation of any provision of
any note, bond, indenture, mortgage, deed of trust, loan agreement, lease or
other agreement to which it is a party or by which it is bound or to which any
of its respective properties or assets is subject and, to the knowledge of
Heritage, no other party to any such agreement (excluding any loan or extension
of credit made by Heritage or any of its Subsidiaries) is in default in any
respect thereunder, except for such defaults or violations that would not,
individually or in the aggregate, have a Material Adverse Effect on Heritage.
(iv) Heritage and each of its Subsidiaries owns or possesses
valid and binding licenses and other rights to use without payment all patents,
copyrights, trade secrets, trade names, service marks and trademarks used in its
businesses, and neither Heritage nor any of its Subsidiaries has received any
notice of conflict with respect thereto that asserts the right of others. Each
of Heritage and its Subsidiaries has performed all the obligations required to
be performed by it and are not in default under any contact, agreement,
arrangement or commitment relating to any of the foregoing.
(m) Labor Matters. Heritage and its Subsidiaries are in material
-------------
compliance with all applicable laws respecting employment, retention of
independent contractors and employment practices, terms and conditions of
employment and wages and hours. Neither Heritage nor any of its Subsidiaries is
or has ever been a party to, or is or has ever been bound by, any collective
bargaining agreement, contract or other agreement or understanding with a labor
union or labor organization with respect to its employees, nor is Heritage or
any of its Subsidiaries the subject of any proceeding asserting that it has
committed an unfair labor practice or seeking to compel it or any such
Subsidiary to bargain with any labor organization as to wages and conditions of
employment nor has any such proceeding been threatened, nor is there any strike,
other labor dispute or organizational effort involving Heritage or any of its
Subsidiaries pending or threatened.
(n) Employee Benefit Plans.
----------------------
(i) Schedule 2.1(n) contains a complete and accurate list of
---------------
all pension, retirement, stock option, stock purchase, stock ownership, savings,
stock appreciation right, profit sharing, deferred compensation, consulting,
bonus, group insurance, severance and other benefit plans, contracts, agreements
and arrangements, including, but not limited to,
A-20
<PAGE>
"employee benefit plans," as defined in Section 3(3) of ERISA (as defined in
Section 8.1), incentive and welfare policies, contracts, plans and arrangements
and all trust agreements related thereto with respect to any present or former
directors, officers or other employees of Heritage or any of its Subsidiaries
(hereinafter referred to collectively as the "Heritage Employee Plans").
Heritage has previously delivered or made available to SouthBanc true and
complete copies of each agreement, plan and other documents referenced in
Schedule 2.1(n). There has been no announcement or commitment by Heritage or any
- ---------------
of its Subsidiaries to create an additional Heritage Employee Plan, or to amend
any Heritage Employee Plan, except for amendments required by applicable law
which do not materially increase the cost of such Heritage Employee Plan.
(ii) There is no pending or threatened litigation,
administrative action or proceeding relating to any Heritage Employee Plan. All
of the Heritage Employee Plans comply in all material respects with all
applicable requirements of ERISA, the IRC and other applicable laws. There has
occurred no "prohibited transaction" (as defined in Section 406 of ERISA or
Section 4975 of the IRC) with respect to the Heritage Employee Plans which is
likely to result in the imposition of any penalties or taxes upon Heritage or
any of its Subsidiaries under Section 502(i) of ERISA or Section 4975 of the
IRC.
(iii) No liability to the Pension Benefit Guarantee Corporation
has been or is expected by Heritage or any of its Subsidiaries to be incurred
with respect to any Heritage Employee Plan which is subject to Title IV of ERISA
("Heritage Pension Plan"), or with respect to any "single-employer plan" (as
defined in Section 4001(a) of ERISA) currently or formerly maintained by
Heritage or any ERISA Affiliate (as defined in Section 8.1). No Heritage Pension
Plan had an "accumulated funding deficiency" (as defined in Section 302 of
ERISA), whether or not waived, as of the last day of the end of the most recent
plan year ending prior to the date hereof; the fair market value of the assets
of each Heritage Pension Plan exceeds the present value of the "benefit
liabilities" (as defined in Section 4001(a)(16) of ERISA) under such Heritage
Pension Plan as of the end of the most recent plan year with respect to the
respective Heritage Pension Plan ending prior to the date hereof, calculated on
the basis of the actuarial assumptions used in the most recent actuarial
valuation for such Heritage Pension Plan as of the date hereof; and no notice of
a "reportable event" (as defined in Section 4043 of ERISA) for which the 30-day
reporting requirement has not been waived has been required to be filed for any
Heritage Pension Plan within the 12-month period ending on the date hereof.
Neither Heritage nor any of its Subsidiaries has provided, or is required to
provide, security to any Heritage Pension Plan or to any single-employer plan of
an ERISA Affiliate pursuant to Section 401(a)(29) of the IRC. Neither Heritage,
its Subsidiaries, nor any ERISA Affiliate has contributed to any "multiemployer
plan," as defined in Section 3(37) of ERISA, on or after September 26, 1980.
(iv) Except as disclosed on Schedule 2.1(n), each Heritage
---------------
Employee Plan that is an "employee pension benefit plan" (as defined in Section
3(2) of ERISA) and which is intended to be qualified under Section 401(a) of the
IRC (a "Heritage Qualified Plan") has
A-21
<PAGE>
received a favorable determination letter from the IRS (as defined in Section
8.1), and Heritage and its Subsidiaries are not aware of any circumstances
likely to result in revocation of any such favorable determination letter. Each
Heritage Qualified Plan that is an "employee stock ownership plan" (as defined
in Section 4975(e)(7) of the IRC) has satisfied all of the applicable
requirements of Sections 409 and 4975(e)(7) of the IRC and the regulations
thereunder in all respects and any assets of any such Heritage Qualified Plan
that, as of the end of the plan year, are not allocated to participants'
individual accounts are pledged as security for, and may be applied to satisfy,
any securities acquisition indebtedness.
(v) Heritage and its Subsidiaries do not have any obligations
for post-retirement or post-employment benefits under any Heritage Employee Plan
that cannot be amended or terminated upon 60 days' notice or less without
incurring any liability thereunder, except for coverage required by Part 6 of
Title I of ERISA or Section 4980B of the IRC, or similar state laws, the cost of
which is borne by the insured individuals. With respect to Heritage or any of
its Subsidiaries, for the Heritage Employee Plans listed in Schedule 2.1(n), the
---------------
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not result in any payment or series of
payments by Heritage or any of its Subsidiaries to any person which is an
"excess parachute payment" (as defined in Section 280G of the IRC) or is a
nondeductible payment under Section 162(m) of the IRC, increase or secure (by
way of a trust or other vehicle) any benefits payable under any Heritage
Employee Plan or accelerate the time of payment or vesting of any such benefit.
(o) Title to Assets. Heritage and each of its Subsidiaries has good
---------------
and insurable title to its properties and assets (including any intellectual
property asset such as any trademark, service mark, trade name or copyright) and
property acquired in a judicial foreclosure proceeding or by way of a deed in
lieu of foreclosure or similar transfer whether real or personal, tangible or
intangible, in each case free and clear of any liens, security interests,
encumbrances, mortgages, pledges, restrictions, charges or rights or interests
of others, except pledges to secure deposits and other liens incurred in the
ordinary course of business. Each lease pursuant to which Heritage or any of
its Subsidiaries is lessee or lessor is valid and in full force and effect and
neither Heritage nor any of its Subsidiaries, nor any other party to any such
lease is in default or in violation of any provisions of any such lease. All
material tangible properties of Heritage and each of its Subsidiaries are in a
good state of maintenance and repair, conform with all applicable ordinances,
regulations and zoning laws and are considered by Heritage to be adequate for
the current business of Heritage and its Subsidiaries. To the knowledge of
Heritage, none of the buildings, structures or other improvements located on its
real property encroaches upon or over any adjoining parcel or real estate or any
easement or right-of-way.
(p) Compliance with Laws. Heritage and each of its Subsidiaries has
--------------------
all permits, licenses, certificates of authority, orders and approvals of, and
has made all filings, applications and registrations with, all Governmental
Entities that are required in order to permit it to carry on its business as it
is presently conducted; all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect, and no suspension or
cancellation of
A-22
<PAGE>
any of them is threatened. Neither Heritage nor any of its Subsidiaries is in
violation of, and Heritage and its Subsidiaries have not been given notice or
been charged with any violation of, any law, ordinance, regulation, order, writ,
rule, decree or condition to approval of any Governmental Entity which,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect on Heritage.
(q) Fees. Other than financial advisory services performed for
----
Heritage by Trident Securities pursuant to an agreement dated February 9, 2000,
a true and complete copy of which has been previously delivered to SouthBanc,
neither Heritage nor any of its Subsidiaries, nor any of their respective
officers, directors, employees or agents, has employed any broker or finder or
incurred any liability for any financial advisory fees, brokerage fees,
commissions or finder's fees, and no broker or finder has acted directly or
indirectly for Heritage or any of its Subsidiaries in connection with this
Agreement or the transactions contemplated hereby.
(r) Environmental Matters. There is no suit, claim, action, demand,
---------------------
executive or administrative order, directive, investigation or proceeding
pending or, to the knowledge of Heritage, threatened before any court,
governmental agency or board or other forum against Heritage or any of its
Subsidiaries for alleged noncompliance (including by any predecessor) with, or
liability under, any Environmental Law (as defined in Section 8.1) or relating
to the presence of or release into the environment of any Hazardous Material (as
defined in Section 8.1), whether or not occurring at or on a site owned, leased
or operated by it or any of its Subsidiaries. To Heritage's knowledge, the
properties currently owned or operated by Heritage or any of its Subsidiaries
(including, without limitation, soil, groundwater or surface water on, under or
adjacent to the properties, and buildings thereon) are not contaminated with and
do not otherwise contain any Hazardous Material other than as permitted under
applicable Environmental Law. Neither Heritage nor any of its Subsidiaries has
received any notice, demand letter, executive or administrative order,
directive, request or other communication (written or oral) for information
from any federal, state, local or foreign governmental entity or any third party
indicating that it may be in violation of, or liable under, any Environmental
Law. To Heritage's knowledge, there are no underground storage tanks on, in or
under any properties owned or operated by Heritage or any of its Subsidiaries
and no underground storage tanks have been closed or removed from any properties
owned or operated by Heritage or any of its Subsidiaries. To Heritage's
knowledge, during the period of Heritage's or any of its Subsidiaries' ownership
or operation of any of their respective current properties, there has been no
contamination by or release of Hazardous Materials in, on, under or affecting
such properties. To Heritage's knowledge, prior to the period of Heritage's or
any of its Subsidiaries' ownership or operation of any of their respective
current properties, there was no contamination by or release of Hazardous
Material in, on, under or affecting such properties.
A-23
<PAGE>
(s) Loan Portfolio; Allowance; Asset Quality.
----------------------------------------
(i) With respect to each Loan (as defined in Section 8.1) owned
by Heritage or its Subsidiaries in whole or in part:
(A) to the knowledge of Heritage, the note and the related
security documents are each legal, valid and binding obligations of the maker or
obligor thereof, enforceable against such maker or obligor in accordance with
their terms;
(B) neither Heritage nor any of its Subsidiaries, nor any
prior holder of a loan, has modified the note or any of the related security
documents in any material respect or satisfied, canceled or subordinated the
note or any of the related security documents except as otherwise disclosed by
documents in the applicable loan file;
(C) Heritage or a Subsidiary of Heritage is the sole holder
of legal and beneficial title to each loan (or Heritage's or its Subsidiary's
applicable participation interest, as applicable), except as otherwise
referenced on the books and records of Heritage or a Subsidiary of Heritage;
(D) the note and the related security documents, copies of
which are included in the loan files, are true and correct copies of the
documents they purport to be and have not been suspended, amended, modified,
canceled or otherwise changed except as otherwise disclosed by documents in the
applicable loan file;
(E) there is no pending or threatened condemnation
proceeding or similar proceeding affecting the property that serves as security
for a loan, except as otherwise referenced on the books and records of Heritage;
(F) to the knowledge of Heritage, there is no litigation or
proceeding pending or threatened relating to the property that serves as
security for a loan that would have a Material Adverse Effect upon the related
loan; and
(G) with respect to a loan held in the form of a
participation, the participation documentation is legal, valid, binding and
enforceable in accordance with its terms.
(ii) The allowance for possible loan losses reflected in
Heritage's audited balance sheet at September 30, 1999 was, and the allowance
for possible losses shown on the balance sheets in Heritage's Reports for
periods ending after September 30, 1999, in the opinion of management, was or
will be adequate, as of the dates thereof, under GAAP.
A-24
<PAGE>
(iii) Schedule 2.1(s) sets forth a true and complete listing, as
---------------
of December 31, 1999, of:
(A) all Loans that have been classified (whether regulatory
or internal) as "Special Mention," "Substandard," "Doubtful," "Loss" or words of
similar import listed by category, including the amounts thereof; and
(B) Loans (1) that are contractually past due 90 days or
more in the payment of principal and/or interest, (2) that are on a non-accrual
status, (3) where the interest rate terms have been reduced and/or the maturity
dates have been extended subsequent to the agreement under which the Loan was
originally created due to concerns regarding the borrower's ability to pay in
accordance with such initial terms, or (4) where a specific reserve allocation
exists in connection therewith, listed by category, including the amounts
thereof.
(iv) To the knowledge of Heritage, neither Heritage nor any of
its Subsidiaries is a party to any Loan that is in violation of any law,
regulation or rule of any Governmental Entity. Any asset of Heritage or any of
its Subsidiaries that is classified as "Real Estate Owned" or words of similar
import that is included in any non-performing assets of Heritage or any of its
Subsidiaries is listed on Schedule 2.1(s) and is carried net of reserves at the
---------------
lower of cost or fair value, less estimated selling costs, based on current
independent appraisals or evaluations or current management appraisals or
evaluations; provided, however, that "current" shall mean within the past 12
months.
(t) Deposits. None of the deposits of Heritage or any of its
--------
Subsidiaries is a "brokered" deposit.
(u) Anti-takeover Provisions Inapplicable. Heritage and its
-------------------------------------
Subsidiaries have taken all actions required to exempt SouthBanc, the Agreement,
and the Merger from any provisions of an antitakeover nature contained in their
organizational documents, and the provisions of any federal or state "anti-
takeover," "fair price," "moratorium," "control share acquisition" or similar
laws or regulations.
(v) Insurance. In the opinion of management, Heritage and its
---------
Subsidiaries are presently insured for amounts deemed reasonable by management
against such risks as companies engaged in a similar business would, in
accordance with good business practice, customarily be insured. All of the
insurance policies and bonds maintained by Heritage and its Subsidiaries are in
full force and effect, Heritage and its Subsidiaries are not in default
thereunder and all material claims thereunder have been filed in due and timely
fashion.
(w) Investment Securities; Derivatives.
----------------------------------
(i) Except for restrictions that exist for securities to be
classified as "held to maturity," none of the investment securities held by
Heritage or any of its Subsidiaries,
A-25
<PAGE>
is subject to any restriction (contractual or statutory) that would materially
impair the ability of the entity holding such investment freely to dispose of
such investment at any time.
(ii) Neither Heritage nor any of its Subsidiaries is a party to
or has agreed to enter into an exchange-traded or over-the-counter equity,
interest rate, foreign exchange or other swap, forward, future, option, cap,
floor or collar or any other contract that is a derivative contract (including
various combinations thereof) or owns securities that (A) are referred to
generically as "structured notes," "high risk mortgage derivatives," "capped
floating rate notes" or "capped floating rate mortgage derivatives" or (B) are
likely to have changes in value as a result of interest or exchange rate changes
that significantly exceed normal changes in value attributable to interest or
exchange rate changes.
(x) Indemnification. Except as provided in the certificate of
---------------
incorporation or bylaws of Heritage and the similar organizational documents of
its Subsidiaries, neither Heritage nor any Subsidiary is a party to any
agreement that provides for the indemnification of any of its present or former
directors, officers or employees, or other persons who serve or served as a
director, officer or employee of another corporation, partnership or other
enterprise at the request of Heritage and, to the knowledge of Heritage, there
are no claims for which any such person would be entitled to indemnification
under the certificate of incorporation or bylaws of Heritage or the similar
organizational documents of any of its Subsidiaries, under any applicable law or
regulation or under any indemnification agreement.
(y) Books and Records. The books and records of Heritage and its
-----------------
Subsidiaries on a consolidated basis have been, and are being, maintained in
accordance with applicable legal and accounting requirements and reflect in all
material respects the substance of events and transactions that should be
included therein.
(z) Corporate Documents. Heritage has previously furnished or made
-------------------
available to SouthBanc a complete and correct copy of the certificate of
incorporation, bylaws and similar organizational documents of Heritage and each
of Heritage's Subsidiaries, as in effect as of the date of this Agreement.
Neither Heritage nor any of Heritage's Subsidiaries is in violation of its
certificate of incorporation, bylaws or similar organizational documents. The
minute books of Heritage and each of Heritage's Subsidiaries constitute a
complete and correct record of all actions taken by their respective boards of
directors (and each committee thereof) and their stockholders.
(aa) Registration Statement. The information regarding Heritage and
----------------------
its Subsidiaries to be supplied by Heritage for inclusion in the Registration
Statement (as defined in Section 4.8) will not, at the time the Registration
Statement becomes effective, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
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<PAGE>
(bb) Community Reinvestment Act Compliance. Heritage Federal is in
-------------------------------------
material compliance with the applicable provisions of the CRA (as defined in
Section 8.1) and the regulations promulgated thereunder, and Heritage Federal
currently has a CRA rating of satisfactory or better. To the knowledge of
Heritage, there is no fact or circumstance or set of facts or circumstances that
would cause Heritage Federal to fail to comply with such provisions or cause the
CRA rating of Heritage Federal to fall below satisfactory.
(cc) Undisclosed Liabilities. As of the date hereof, Heritage and its
-----------------------
Subsidiaries have not incurred any debt, liability or obligation of any nature
whatsoever (whether accrued, contingent, absolute or otherwise and whether due
or to become due) except for (i) liabilities reflected on or reserved against in
the consolidated financial statements of Heritage as of September 30, 1999, (ii)
liabilities incurred since September 30, 1999 in the ordinary course of business
consistent with past practice that, either alone or when combined with all
similar liabilities, have not had, and would not reasonably be expected to have,
a Material Adverse Effect on Heritage and (iii) liabilities incurred for legal,
accounting, financial advising fees and out-of-pocket expenses in connection
with the transactions contemplated by this Agreement.
(dd) Year 2000 Matters. Heritage and its Subsidiaries have not
-----------------
experienced any data processing or other computer malfunctions related to
processing date information on and after January 1, 2000 and none of the third
party service providers or customers of Heritage or its Subsidiaries have
reported year 2000 data processing problems to Heritage that, individually or in
the aggregate, would have a Material Adverse Effect on Heritage.
(ee) Tax Treatment of the Merger. Heritage has no knowledge of any
---------------------------
fact or circumstance relating to it that would prevent the transactions
contemplated by this Agreement from qualifying as a reorganization under the
IRC.
Section 2.2. Representations and Warranties of SouthBanc. SouthBanc
-------------------------------------------
represents and warrants to Heritage that:
(a) Organization.
------------
(i) SouthBanc is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and is registered
as a savings and loan holding company.
(ii) Perpetual Bank, a Federal Savings Bank ("Perpetual Bank")
is a federally chartered savings bank duly organized and validly existing under
the laws of the United States of America. The deposits of Perpetual Bank are
insured by the Savings Association Insurance Fund of FDIC to the extent provided
in the FDIA.
(iii) SouthBanc and Perpetual Bank each has all requisite
corporate power and authority to own, lease and operate its properties and to
conduct the business currently
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<PAGE>
being conducted by it. SouthBanc and Perpetual Bank are each duly qualified or
licensed as a foreign corporation to transact business and are in good standing
in each jurisdiction in which the character of the properties owned or leased by
it or the nature of the business conducted by it makes such qualification or
licensing necessary, except where the failure to be so qualified or licensed and
in good standing would not have a Material Adverse Effect on SouthBanc.
(b) Subsidiaries.
------------
(i) Schedule 2.2(b) sets forth (A) the name, percentage
---------------
ownership and number of shares of stock owned or controlled by SouthBanc of each
Subsidiary; and (B) the jurisdiction of incorporation, capitalization and
ownership of each Subsidiary. All such Subsidiaries and ownership interests are
in compliance with all applicable laws, rules and regulations relating to
investments in equity ownership interests by savings and loan holding companies
or federally chartered savings associations.
(ii) SouthBanc owns of record and beneficially all the capital
stock of each of its Subsidiaries free and clear of any claims, liens,
encumbrances or restrictions and there are no agreements or understandings with
respect to the voting or disposition of any such shares. The outstanding shares
of capital stock of each Subsidiary have been validly authorized and are validly
issued, fully paid and nonassessable. Each of SouthBanc's Subsidiaries is a
corporation duly organized and validly existing under the laws of its
jurisdiction of incorporation, has all requisite corporate power and authority
to own, lease and operate its properties and to conduct the business currently
being conducted by it and is duly qualified or licensed as a foreign corporation
to transact business and is in good standing in each jurisdiction in which the
character of the properties owned or leased by it or the nature of the business
conducted by it makes such qualification or licensing necessary, except where
the failure to be so qualified or licensed and in good standing would not have a
Material Adverse Effect on SouthBanc.
(iii) None of SouthBanc's Subsidiaries holds shares of its
capital stock in its treasury, and there are not, and on the Closing Date there
will not be, outstanding (A) any options, warrants or other rights with respect
to the capital stock of any Subsidiary, (B) any securities convertible into or
exchangeable for shares of such capital stock or any other debt or equity
security of any Subsidiary or (C) any other commitments of any kind for the
issuance of additional shares of capital stock or other debt or equity security
of any Subsidiary or options, warrants or other rights with respect to such
securities.
(iv) No Subsidiary of SouthBanc other than Perpetual Bank is an
"insured depository institution" as defined in the FDIA and the applicable
regulations thereunder.
(c) Capital Structure.
-----------------
(i) The authorized capital stock of SouthBanc consists of:
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<PAGE>
(A) 7,500,000 shares of SouthBanc Common Stock; and
(B) 250,000 of preferred stock, par value $.01 per share.
(ii) As of the date of this Agreement:
(A) 3,089,113 shares of SouthBanc Common Stock are issued
and outstanding, all of which are validly issued,
fully paid and nonassessable;
(B) no shares of SouthBanc preferred stock are issued and
outstanding or held in SouthBanc's treasury;
(C) 388,701 shares of SouthBanc Common Stock are reserved
for issuance pursuant to outstanding grants or awards
under SouthBanc's stock option plans;
(D) 250,000 shares of SouthBanc Common Stock are reserved
for issuance pursuant to SouthBanc's Dividend
Reinvestment Plan; and
(E) 1,232,917 shares of SouthBanc Common Stock are held by
SouthBanc in its treasury or by its Subsidiaries.
(iii) No bonds, debentures, notes or other indebtedness having
the right to vote on any matters on which stockholders of SouthBanc may vote are
issued or outstanding.
(iv) Except as set forth in this Section 2.2(c), as of the date
of this Agreement, (A) no shares of capital stock or other voting securities of
SouthBanc are issued, reserved for issuance or outstanding and (B) neither
SouthBanc nor any of its Subsidiaries has or is bound by any outstanding
subscriptions, options, warrants, calls, rights, convertible securities,
commitments or agreements of any character obligating SouthBanc or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, any additional shares of capital stock of SouthBanc or obligating
SouthBanc or any of its Subsidiaries to grant, extend or enter into any such
option, warrant, call, right, convertible security, commitment or agreement. As
of the date hereof, there are no outstanding contractual obligations of
SouthBanc or any of its Subsidiaries to repurchase, redeem or otherwise acquire
any shares of capital stock of SouthBanc or any of its Subsidiaries.
(v) The shares of SouthBanc Common Stock to be issued in
exchange for shares of Heritage Common Stock upon consummation of the Merger in
accordance with this Agreement have been duly authorized and, when issued in
accordance with the terms of this
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<PAGE>
Agreement, will be validly issued, fully paid and nonassessable and subject to
no preemptive rights.
(d) Authority. SouthBanc has all requisite corporate power and
---------
authority to enter into this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated by this Agreement. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate actions on the part of SouthBanc's Board of Directors, and no other
corporate proceedings on the part of SouthBanc are necessary to authorize this
Agreement or to consummate the transactions contemplated by this Agreement other
than the approval and adoption of this Agreement by the affirmative vote of the
holders of a majority of the outstanding shares of SouthBanc Common Stock. This
Agreement has been duly and validly executed and delivered by SouthBanc and
constitutes a valid and binding obligation of SouthBanc, enforceable in
accordance with its terms, subject to applicable bankruptcy, insolvency and
similar laws affecting creditors' rights and remedies generally and subject, as
to enforceability, to general principles of equity, whether applied in a court
of law or a court of equity.
(e) Fairness Opinion. SouthBanc has received the opinion of Sandler
----------------
O'Neill & Partners, L.P. to the effect that, as of the date hereof, the Merger
Consideration is fair, from a financial point of view, to SouthBanc's
stockholders.
(f) No Violations; Consents.
-----------------------
(i) The execution, delivery and performance of this Agreement by
SouthBanc do not, and the consummation of the transactions contemplated by this
Agreement will not, (A) assuming that the consents and approvals referred to in
Section 2.2(f)(ii) are obtained, violate any law, rule or regulation or any
judgment, decree, order, governmental permit or license to which SouthBanc or
any of its Subsidiaries (or any of their respective properties) is subject, (B)
violate the certificate of incorporation or bylaws of SouthBanc or the similar
organizational documents of any of its Subsidiaries or (C) constitute a breach
or violation of, or a default under (or an event which, with due notice or lapse
of time or both, would constitute a default under), or result in the termination
of, accelerate the performance required by, or result in the creation of any
lien, pledge, security interest, charge or other encumbrance upon any of the
properties or assets of SouthBanc or any of its Subsidiaries under, any of the
terms, conditions or provisions of any note, bond, indenture, deed of trust,
loan agreement or other agreement, instrument or obligation to which SouthBanc
or any of its Subsidiaries is a party, or to which any of their respective
properties or assets may be subject, except, in the case of (C), for any such
breaches, violations or defaults that would not, individually or in the
aggregate, have a Material Adverse Effect on SouthBanc.
(ii) Except for (A) the filing of an application with the OTS
under the HOLA and approval of such application, (B) the filing of a certificate
of merger with the Delaware Secretary of State pursuant to Delaware Law, (C) the
registration under the Securities
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<PAGE>
Act of the shares of SouthBanc Common Stock to be issued in exchange for shares
of Heritage Common Stock, (D) the registration or qualification of the shares of
SouthBanc Common Stock to be issued in exchange for shares of Heritage Common
Stock under state securities or "blue sky" laws, and (E) such filings,
authorizations or approvals as may be set forth in Schedule 2.2(f), no consents
---------------
or approvals of or filings or registrations with any Governmental Entity or with
any third party are necessary in connection with the execution and delivery by
SouthBanc of this Agreement or the consummation by SouthBanc of the Merger and
the other transactions contemplated by this Agreement. As of the date hereof,
SouthBanc knows of no reason pertaining to SouthBanc why any of the approvals
referred to in this Section 2.2(f) should not be obtained without the imposition
of any material condition or restriction described in Section 5.1(b).
(g) Reports and Financial Statements.
--------------------------------
(i) SouthBanc and each of its Subsidiaries have each timely
filed all material reports, registrations and statements, together with any
amendments required to be made with respect thereto, that they were required to
file since December 31, 1997 with (A) the FDIC, (B) the OTS, (C) the NASD and
(D) the SEC (collectively, "SouthBanc's Reports") and have paid all fees and
assessments due and payable in connection therewith. As of their respective
dates, none of SouthBanc's Reports contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading. All of SouthBanc's Reports filed
with the SEC complied in all material respects with the applicable requirements
of the Exchange Act and the rules and regulations of the SEC promulgated
thereunder.
(ii) Each of the financial statements of SouthBanc included in
SouthBanc's Reports filed with the SEC complied as to form, as of their
respective dates of filing with the SEC, in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto. The financial statements included in
SouthBanc's Reports were prepared from the books and records of SouthBanc and
its Subsidiaries, fairly present the consolidated financial position of
SouthBanc and its Subsidiaries in each case at and as of the dates indicated and
the consolidated results of operations, retained earnings and cash flows of
SouthBanc and its Subsidiaries for the periods indicated, and, except as
otherwise set forth in the notes thereto, were prepared in accordance with GAAP
consistently applied throughout the periods covered thereby; provided, however,
that the unaudited financial statements for interim periods are subject to
normal year-end adjustments (which will not be material individually or in the
aggregate) and lack a statement of cash flows and footnotes.
(h) Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
SouthBanc's Reports filed with the SEC prior to the date of this Agreement,
since September 30, 1999, (i) SouthBanc and its Subsidiaries have not incurred
any liability, except in the ordinary course of their business consistent with
past practice, (ii) SouthBanc and its Subsidiaries have conducted their
respective businesses only in the ordinary and usual course of such businesses
A-31
<PAGE>
consistent with their past practices, (iii) there has not been any Material
Adverse Effect with respect to SouthBanc, (iv) there has been no increase in the
salary, compensation, pension or other benefits payable or to become payable by
SouthBanc or any of its Subsidiaries to any of their respective directors,
officers or employees, other than in conformity with the policies and practices
of such entity in the usual and ordinary course of its business, (v) neither
SouthBanc nor any of its Subsidiaries has paid or made any accrual or
arrangement for payment of bonuses or special compensation of any kind or any
severance or termination pay to any of their directors, officers or employees,
and (vi) there has been no change in any accounting principles, practices or
methods of SouthBanc or any of its Subsidiaries other than as required by GAAP.
(i) Absence of Claims. There are no suits, actions or proceedings
-----------------
pending or, to the knowledge of SouthBanc, threatened against or affecting
SouthBanc or any of its Subsidiaries or any property or asset of SouthBanc or
any of its Subsidiaries which, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect on SouthBanc, nor are
there any judgments, decrees, injunctions, rules or orders of any Governmental
Entity or arbitrator outstanding against SouthBanc which, individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect on
SouthBanc.
(j) Absence of Regulatory Actions. Since December 31, 1997, neither
-----------------------------
SouthBanc nor any of its Subsidiaries has been a party to any cease and desist
order, written agreement or memorandum of understanding with, or any commitment
letter or similar undertaking to, or has been subject to any action, proceeding,
order or directive by, or has been a recipient of any extraordinary supervisory
letter from Government Regulator, or has adopted any board resolutions at the
request of any Government Regulator, or has been advised by any Government
Regulator that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such action, proceeding, order,
directive, written agreement, memorandum of understanding, extraordinary
supervisory letter, commitment letter, board resolutions or similar undertaking.
(k) Taxes. All federal, state, local and foreign tax returns required
-----
to be filed by or on behalf of SouthBanc or any of its Subsidiaries have been
timely filed or requests for extensions have been timely filed and any such
extension shall have been granted and not have expired, and all such filed
returns are complete and accurate in all material respects. All taxes shown on
such returns, all taxes required to be shown on returns for which extensions
have been granted and all other taxes required to be paid by SouthBanc or any of
its Subsidiaries have been paid in full or adequate provision has been made for
any such taxes on SouthBanc's balance sheet (in accordance with GAAP). As of the
date of this Agreement, there is no audit examination, deficiency assessment,
tax investigation or refund litigation with respect to any taxes of SouthBanc or
any of its Subsidiaries, and no claim has been made by any authority in a
jurisdiction where SouthBanc or any of its Subsidiaries do not file tax returns
that SouthBanc or any such Subsidiary is subject to taxation in that
jurisdiction. All taxes, interest, additions and penalties due with respect to
completed and settled examinations or concluded litigation relating to SouthBanc
or any of its Subsidiaries have been paid in full or adequate provision has been
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<PAGE>
made for any such taxes on SouthBanc's balance sheet (in accordance with GAAP).
SouthBanc and its Subsidiaries have not executed an extension or waiver of any
statute of limitations on the assessment or collection of any material tax due
that is currently in effect. SouthBanc and each of its Subsidiaries has withheld
and paid all taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder or other third party, and SouthBanc and each of its Subsidiaries has
timely complied with all applicable information reporting requirements under
Part III, Subchapter A of Chapter 61 of the IRC and similar applicable state and
local information reporting requirements.
(l) Agreements.
----------
(i) SouthBanc and its Subsidiaries are not bound by any material
contract (as defined in Item 601(b)(10) of Regulation S-K promulgated by the
SEC), to be performed after the date hereof that has not been filed with or
incorporated by reference in SouthBanc's Reports.
(ii) Schedule 2.2(l) lists any contract, arrangement, commitment
---------------
or understanding (whether written or oral) to which SouthBanc or any of its
Subsidiaries is a party or is bound:
(A) with any executive officer or other key employee of
SouthBanc or any of its Subsidiaries the benefits of which are contingent, or
the terms of which are materially altered, upon the occurrence of a transaction
involving SouthBanc or any of its Subsidiaries of the nature contemplated by
this Agreement;
(B) with respect to the employment of any directors,
officers employees or consultants;
(C) (including any stock option plan, phantom stock or
stock appreciation rights plan, restricted stock plan or stock purchase plan)
any of the benefits of which will be increased, or the vesting or payment of the
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the benefits
of which will be calculated on the basis of any of the transactions contemplated
by this Agreement;
(D) containing covenants that limit the ability of
SouthBanc or any of its Subsidiaries to compete in any line of business or with
any person, or that involve any restriction on the geographic area in which, or
method by which, SouthBanc (including any successor thereof) or any of its
Subsidiaries may carry on its business (other than as may be required by law or
any regulatory agency);
(E) pursuant to which SouthBanc or any of its Subsidiaries
may become obligated to invest in or contribute capital to any entity;
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<PAGE>
(F) not fully disclosed in SouthBanc's Reports that relates
to borrowings of money (or guarantees thereof) by SouthBanc or any of its
Subsidiaries, other than in the ordinary course of business; or
(G) which is a lease or license with respect to any
property, real or personal, whether as landlord, tenant, licensor or licensee,
involving a liability or obligation as obligor in excess of $25,000 on an annual
basis.
To the knowledge of SouthBanc, each of the agreements and other documents
referenced in Schedule 2.2(l) is a valid, binding and enforceable obligation of
---------------
the parties sought to be bound thereby, subject to applicable bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally
and subject, as to enforceability, to general principles of equity, whether
applied in a court of law or a court of equity. SouthBanc has previously
delivered to Heritage true and complete copies of each agreement and other
documents referenced in Schedule 2.2(l).
--------------
(iii) Neither SouthBanc nor any of its Subsidiaries is in default
under (and no event has occurred which, with due notice or lapse of time or
both, would constitute a default under) or is in violation of any provision of
any note, bond, indenture, mortgage, deed of trust, loan agreement, lease or
other agreement to which it is a party or by which it is bound or to which any
of its respective properties or assets is subject and, to the knowledge of
SouthBanc, no other party to any such agreement (excluding any loan or extension
of credit made by SouthBanc or any of its Subsidiaries) is in default in any
respect thereunder, except for such defaults or violations that would not,
individually or in the aggregate, have a Material Adverse Effect on SouthBanc.
(iv) SouthBanc and each of its Subsidiaries owns or possesses
valid and binding licenses and other rights to use without payment all patents,
copyrights, trade secrets, trade names, service marks and trademarks used in its
businesses, and neither SouthBanc nor any of its Subsidiaries has received any
notice of conflict with respect thereto that asserts the right of others. Each
of SouthBanc and its Subsidiaries has performed all the obligations required to
be performed by it and are not in default under any contact, agreement,
arrangement or commitment relating to any of the foregoing.
(m) Labor Matters. SouthBanc and its Subsidiaries are in material
-------------
compliance with all applicable laws respecting employment, retention of
independent contractors and employment practices, terms and conditions of
employment and wages and hours. Neither SouthBanc nor any of its Subsidiaries
is or has ever been a party to, or is or has ever been bound by, any collective
bargaining agreement, contract or other agreement or understanding with a labor
union or labor organization with respect to its employees, nor is SouthBanc or
any of its Subsidiaries the subject of any proceeding asserting that it has
committed an unfair labor practice or seeking to compel it or any such
Subsidiary to bargain with any labor organization as to wages and conditions of
employment nor has any such proceeding been threatened, nor is there any
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<PAGE>
strike, other labor dispute or organizational effort involving SouthBanc or any
of its Subsidiaries pending or threatened.
(n) Employee Benefit Plans.
----------------------
(i) Schedule 2.2(n) contains a complete and accurate list of
---------------
all pension, retirement, stock option, stock purchase, stock ownership, savings,
stock appreciation right, profit sharing, deferred compensation, consulting,
bonus, group insurance, severance and other benefit plans, contracts, agreements
and arrangements, including, but not limited to, "employee benefit plans," as
defined in Section 3(3) of ERISA, incentive and welfare policies, contracts,
plans and arrangements and all trust agreements related thereto with respect to
any present or former directors, officers or other employees of SouthBanc or any
of its Subsidiaries (hereinafter referred to collectively as the "SouthBanc
Employee Plans"). SouthBanc has previously delivered or made available to
Heritage true and complete copies of each agreement, plan and other agreements
referenced in Schedule 2.2(n). There has been no announcement or commitment by
---------------
SouthBanc or any of its Subsidiaries to create an additional SouthBanc Employee
Plan, or to amend any SouthBanc Employee Plan, except for amendments required by
applicable law which do not materially increase the cost of such SouthBanc
Employee Plan.
(ii) There is no pending or threatened litigation,
administrative action or proceeding relating to any SouthBanc Employee Plan. All
of the SouthBanc Employee Plans comply in all material respects with all
applicable requirements of ERISA, the IRC and other applicable laws. There has
occurred no "prohibited transaction" (as defined in Section 406 of ERISA or
Section 4975 of the IRC) with respect to the SouthBanc Employee Plans which is
likely to result in the imposition of any penalties or taxes upon SouthBanc or
any of its Subsidiaries under Section 502(i) of ERISA or Section 4975 of the
IRC.
(iii) No liability to the Pension Benefit Guarantee Corporation
has been or is expected by SouthBanc or any of its Subsidiaries to be incurred
with respect to any SouthBanc Employee Plan which is subject to Title IV of
ERISA ("SouthBanc Pension Plan"), or with respect to any "single-employer plan"
(as defined in Section 4001(a) of ERISA) currently or formerly maintained by
SouthBanc or any ERISA Affiliate. No SouthBanc Pension Plan had an "accumulated
funding deficiency" (as defined in Section 302 of ERISA), whether or not waived,
as of the last day of the end of the most recent plan year ending prior to the
date hereof; the fair market value of the assets of each SouthBanc Pension Plan
exceeds the present value of the "benefit liabilities" (as defined in Section
4001(a)(16) of ERISA) under such SouthBanc Pension Plan as of the end of the
most recent plan year with respect to the respective SouthBanc Pension Plan
ending prior to the date hereof, calculated on the basis of the actuarial
assumptions used in the most recent actuarial valuation for such SouthBanc
Pension Plan as of the date hereof; and no notice of a "reportable event" (as
defined in Section 4043 of ERISA) for which the 30-day reporting requirement has
not been waived has been required to be filed for any SouthBanc Pension Plan
within the 12-month period ending on the date hereof. Neither SouthBanc nor any
of its Subsidiaries has provided, or is required to provide, security to any
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<PAGE>
SouthBanc Pension Plan or to any single-employer plan of an ERISA Affiliate
pursuant to Section 401(a)(29) of the IRC. Neither SouthBanc, its Subsidiaries,
nor any ERISA Affiliate has contributed to any "multiemployer plan," as defined
in Section 3(37) of ERISA, on or after September 26, 1980.
(iv) Each SouthBanc Employee Plan that is an "employee pension
benefit plan" (as defined in Section 3(2) of ERISA) and which is intended to be
qualified under Section 401(a) of the IRC (a "SouthBanc Qualified Plan") has
received a favorable determination letter from the IRS, and SouthBanc and its
Subsidiaries are not aware of any circumstances likely to result in revocation
of any such favorable determination letter. Each SouthBanc Qualified Plan that
is an "employee stock ownership plan" (as defined in Section 4975(e)(7) of the
IRC) has satisfied all of the applicable requirements of Sections 409 and
4975(e)(7) of the IRC and the regulations thereunder in all respects and any
assets of any such SouthBanc Qualified Plan that, as of the end of the plan
year, are not allocated to participants' individual accounts are pledged as
security for, and may be applied to satisfy, any securities acquisition
indebtedness.
(v) SouthBanc and its Subsidiaries do not have any obligations
for post-retirement or post-employment benefits under any SouthBanc Employee
Plan that cannot be amended or terminated upon 60 days' notice or less without
incurring any liability thereunder, except for coverage required by Part 6 of
Title I of ERISA or Section 4980B of the IRC, or similar state laws, the cost of
which is borne by the insured individuals. With respect to SouthBanc or any of
its Subsidiaries, for the SouthBanc Employee Plans listed in Schedule 2.2(n),
---------------
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not result in any payment or series of
payments by SouthBanc or any of its Subsidiaries to any person which is an
"excess parachute payment" (as defined in Section 280G of the IRC) or is a
nondeductible payment under Section 162(m) of the IRC, increase or secure (by
way of a trust or other vehicle) any benefits payable under any SouthBanc
Employee Plan or accelerate the time of payment or vesting of any such benefit.
(o) Title to Assets. SouthBanc and each of its Subsidiaries has good
---------------
and insurable title to its properties and assets (including any intellectual
property asset such as any trademark, service mark, trade name or copyright) and
property acquired in a judicial foreclosure proceeding or by way of a deed in
lieu of foreclosure or similar transfer whether real or personal, tangible or
intangible, in each case free and clear of any liens, security interests,
encumbrances, mortgages, pledges, restrictions, charges or rights or interests
of others, except pledges to secure deposits and other liens incurred in the
ordinary course of business. Each lease pursuant to which SouthBanc or any of
its Subsidiaries is lessee or lessor is valid and in full force and effect and
neither SouthBanc nor any of its Subsidiaries, nor any other party to any such
lease is in default or in violation of any provisions of any such lease. All
material tangible properties of SouthBanc and each of its Subsidiaries are in a
good state of maintenance and repair, conform with all applicable ordinances,
regulations and zoning laws and are considered by SouthBanc to be adequate for
the current business of SouthBanc and its Subsidiaries. To the knowledge of
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<PAGE>
SouthBanc, none of the buildings, structures or other improvements located on
its real property encroaches upon or over any adjoining parcel or real estate or
any easement or right-of-way.
(p) Compliance with Laws. SouthBanc and each of its Subsidiaries has
--------------------
all permits, licenses, certificates of authority, orders and approvals of, and
has made all filings, applications and registrations with, all Governmental
Entities that are required in order to permit it to carry on its business as it
is presently conducted; all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect, and no suspension or
cancellation of any of them is threatened. Neither SouthBanc nor any of its
Subsidiaries is in violation of, and SouthBanc and its Subsidiaries have not
been given notice or been charged with any violation of, any law, ordinance,
regulation, order, writ, rule, decree or condition to approval of any
Governmental Entity which, individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect on SouthBanc.
(q) Fees. Other than financial advisory services performed for
----
SouthBanc by RP Financial, LC. pursuant to an agreement dated January 11, 2000
and Sandler O'Neill & Partners, L.P. pursuant to an agreement dated February 2,
2000, true and complete copies of which have been previously delivered to
Heritage, neither SouthBanc nor any of its Subsidiaries, nor any of their
respective officers, directors, employees or agents, has employed any broker or
finder or incurred any liability for any financial advisory fees, brokerage
fees, commissions or finder's fees, and no broker or finder has acted directly
or indirectly for SouthBanc or any of its Subsidiaries in connection with this
Agreement or the transactions contemplated hereby.
(r) Environmental Matters. There is no suit, claim, action, demand,
---------------------
executive or administrative order, directive, investigation or proceeding
pending or, to the knowledge of SouthBanc, threatened before any court,
governmental agency or board or other forum against SouthBanc or any of its
Subsidiaries for alleged noncompliance (including by any predecessor) with, or
liability under, any Environmental Law or relating to the presence of or release
into the environment of any Hazardous Material, whether or not occurring at or
on a site owned, leased or operated by it or any of its Subsidiaries. To
SouthBanc's knowledge, the properties currently owned or operated by SouthBanc
or any of its Subsidiaries (including, without limitation, soil, groundwater or
surface water on, under or adjacent to the properties, and buildings thereon)
are not contaminated with and do not otherwise contain any Hazardous Material
other than as permitted under applicable Environmental Law. Neither SouthBanc
nor any of its Subsidiaries has received any notice, demand letter, executive or
administrative order, directive, request or other communication (written or
oral) for information from any federal, state, local or foreign governmental
entity or any third party indicating that it may be in violation of, or liable
under, any Environmental Law. To SouthBanc's knowledge, there are no
underground storage tanks on, in or under any properties owned or operated by
SouthBanc or any of its Subsidiaries and no underground storage tanks have been
closed or removed from any properties owned or operated by SouthBanc or any of
its Subsidiaries. To SouthBanc's knowledge, during the period of SouthBanc's or
any of its Subsidiaries' ownership or operation of any of their respective
current properties, there has been no contamination by or release of Hazardous
Materials in, on, under or
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affecting such properties. To SouthBanc's knowledge, prior to the period of
SouthBanc's or any of its Subsidiaries' ownership or operation of any of their
respective current properties, there was no contamination by or release of
Hazardous Material in, on, under or affecting such properties.
(s) Loan Portfolio; Allowance; Asset Quality.
----------------------------------------
(i) With respect to each Loan owned by SouthBanc or its
Subsidiaries in whole or in part:
(A) to the knowledge of SouthBanc, the note and the related
security documents are each legal, valid and binding obligations of the maker or
obligor thereof, enforceable against such maker or obligor in accordance with
their terms;
(B) neither SouthBanc nor any of its Subsidiaries, nor any
prior holder of a loan, has modified the note or any of the related security
documents in any material respect or satisfied, canceled or subordinated the
note or any of the related security documents except as otherwise disclosed by
documents in the applicable loan file;
(C) SouthBanc or a Subsidiary of SouthBanc is the sole
holder of legal and beneficial title to each loan (or SouthBanc's or its
Subsidiary's applicable participation interest, as applicable), except as
otherwise referenced on the books and records of SouthBanc or a Subsidiary of
SouthBanc;
(D) the note and the related security documents, copies of
which are included in the loan files, are true and correct copies of the
documents they purport to be and have not been suspended, amended, modified,
canceled or otherwise changed except as otherwise disclosed by documents in the
applicable loan file;
(E) there is no pending or threatened condemnation
proceeding or similar proceeding affecting the property that serves as security
for a loan, except as otherwise referenced on the books and records of
SouthBanc;
(F) to the knowledge of SouthBanc, there is no litigation
or proceeding pending or threatened relating to the property that serves as
security for a loan that would have a Material Adverse Effect upon the related
loan; and
(G) with respect to a loan held in the form of a
participation, the participation documentation is legal, valid, binding and
enforceable in accordance with its terms.
(ii) The allowance for possible loan losses reflected in
SouthBanc's audited balance sheet at September 30, 1999 was, and the allowance
for possible losses shown on the balance sheets in SouthBanc's Reports for
periods ending after September 30, 1999, in the opinion of management, was or
will be adequate, as of the dates thereof, under GAAP.
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(iii) Schedule 2.2(s) sets forth a true and complete listing, as
---------------
of December 31, 1999, of:
(A) all Loans that have been classified (whether regulatory
or internal) as "Special Mention," "Substandard," "Doubtful," "Loss" or words of
similar import listed by category, including the amounts thereof; and
(B) Loans (1) that are contractually past due 90 days or
more in the payment of principal and/or interest, (2) that are on a non-accrual
status, (3) where the interest rate terms have been reduced and/or the maturity
dates have been extended subsequent to the agreement under which the Loan was
originally created due to concerns regarding the borrower's ability to pay in
accordance with such initial terms, or (4) where a specific reserve allocation
exists in connection therewith, listed by category, including the amounts
thereof.
(iv) To the knowledge of SouthBanc, neither SouthBanc nor any of
its Subsidiaries is a party to any Loan that is in violation of any law,
regulation or rule of any Governmental Entity. Any asset of SouthBanc or any of
its Subsidiaries that is classified as "Real Estate Owned" or words of similar
import that is included in any non-performing assets of SouthBanc or any of its
Subsidiaries is listed on Schedule 2.2(s) and is carried net of reserves at the
---------------
lower of cost or fair value, less estimated selling costs, based on current
independent appraisals or evaluations or current management appraisals or
evaluations; provided, however, that "current" shall mean within the past 12
months.
(t) Deposits. None of the deposits of SouthBanc or any of its
--------
Subsidiaries is a "brokered" deposit.
(u) Anti-takeover Provisions Inapplicable. SouthBanc and its
-------------------------------------
Subsidiaries have taken all actions required to exempt Heritage, the Agreement,
and the Merger from any provisions of an antitakeover nature contained in their
organizational documents, and the provisions of any federal or state "anti-
takeover," "fair price," "moratorium," "control share acquisition" or similar
laws or regulations.
(v) Insurance. In the opinion of management, SouthBanc and its
---------
Subsidiaries are presently insured for amounts deemed reasonable by management
against such risks as companies engaged in a similar business would, in
accordance with good business practice, customarily be insured. All of the
insurance policies and bonds maintained by SouthBanc and its Subsidiaries are in
full force and effect, SouthBanc and its Subsidiaries are not in default
thereunder and all material claims thereunder have been filed in due and timely
fashion.
(w) Investment Securities; Derivatives.
----------------------------------
(i) Except for restrictions that exist for securities to be
classified as "held to maturity," none of the investment securities held by
SouthBanc or any of its
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<PAGE>
Subsidiaries, is subject to any restriction (contractual or statutory) that
would materially impair the ability of the entity holding such investment freely
to dispose of such investment at any time.
(ii) Neither SouthBanc nor any of its Subsidiaries is a party to
or has agreed to enter into an exchange-traded or over-the-counter equity,
interest rate, foreign exchange or other swap, forward, future, option, cap,
floor or collar or any other contract that is a derivative contract (including
various combinations thereof) or owns securities that (A) are referred to
generically as "structured notes," "high risk mortgage derivatives," "capped
floating rate notes" or "capped floating rate mortgage derivatives" or (B) are
likely to have changes in value as a result of interest or exchange rate changes
that significantly exceed normal changes in value attributable to interest or
exchange rate changes.
(x) Indemnification. Except as provided in the certificate of
---------------
incorporation or bylaws of SouthBanc and the similar organizational documents of
its Subsidiaries, neither SouthBanc nor any Subsidiary is a party to any
agreement that provides for the indemnification of any of its present or former
directors, officers or employees or other persons who serve or served as a
director, officer or employee of another corporation, partnership or other
enterprise at the request of SouthBanc and, to the knowledge of SouthBanc, there
are no claims for which any such person would be entitled to indemnification
under the certificate of incorporation or bylaws of SouthBanc or the similar
organizational documents of any of its Subsidiaries, under any applicable law or
regulation or under any indemnification agreement.
(y) Books and Records. The books and records of SouthBanc and its
-----------------
Subsidiaries on a consolidated basis have been, and are being, maintained in
accordance with applicable legal and accounting requirements and reflect in all
material respects the substance of events and transactions that should be
included therein.
(z) Corporate Documents. SouthBanc has previously furnished or made
-------------------
available to Heritage a complete and correct copy of the certificate of
incorporation, bylaws and similar organizational documents of SouthBanc and each
of SouthBanc's Subsidiaries, as in effect as of the date of this Agreement.
Neither SouthBanc nor any of SouthBanc's Subsidiaries is in violation of its
certificate of incorporation, bylaws or similar organizational documents. The
minute books of SouthBanc and each of SouthBanc's Subsidiaries constitute a
complete and correct record of all actions taken by their respective boards of
directors (and each committee thereof) and their stockholders.
(aa) Registration Statement. The information regarding SouthBanc and
----------------------
its Subsidiaries to be supplied by SouthBanc for inclusion in the Registration
Statement will not, at the time the Registration Statement becomes effective,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
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(bb) Community Reinvestment Act Compliance. Perpetual Bank is in
-------------------------------------
material compliance with the applicable provisions of the CRA and the
regulations promulgated thereunder, and Perpetual Bank currently has a CRA
rating of satisfactory or better. To the knowledge of SouthBanc, there is no
fact or circumstance or set of facts or circumstances that would cause Perpetual
Bank to fail to comply with such provisions or cause the CRA rating of Perpetual
Bank to fall below satisfactory.
(cc) Undisclosed Liabilities. As of the date hereof, SouthBanc and
-----------------------
its Subsidiaries have not incurred any debt, liability or obligation of any
nature whatsoever (whether accrued, contingent, absolute or otherwise and
whether due or to become due) except for (i) liabilities reflected on or
reserved against in the consolidated financial statements of SouthBanc as of
September 30, 1999, (ii) liabilities incurred since September 30, 1999 in the
ordinary course of business consistent with past practice that, either alone or
when combined with all similar liabilities, have not had, and would not
reasonably be expected to have, a Material Adverse Effect on SouthBanc and (iii)
liabilities incurred for legal, accounting, financial advising fees and out-of-
pocket expenses in connection with the transactions contemplated by this
Agreement.
(dd) Year 2000 Matters. SouthBanc and its Subsidiaries have not
-----------------
experienced any data processing or other computer malfunctions related to
processing date information on and after January 1, 2000 and none of the third
party service providers or customers of SouthBanc or its Subsidiaries have
reported year 2000 data processing problems to SouthBanc that, individually or
in the aggregate, would have a Material Adverse Effect on SouthBanc.
(ee) Tax Treatment of the Merger. SouthBanc has no knowledge of any
---------------------------
fact or circumstance relating to it that would prevent the transactions
contemplated by this Agreement from qualifying as a reorganization under the
IRC.
ARTICLE III
Conduct Pending the Merger
--------------------------
Section 3.1. Conduct of Business Prior to the Effective Time. Except
-----------------------------------------------
as expressly provided in this Agreement, during the period from the date of this
Agreement to the Effective Time, each of SouthBanc and Heritage shall, and shall
cause each of their respective Subsidiaries to, use commercially reasonable
efforts to (i) conduct its business in the regular, ordinary and usual course
consistent with past practice, (ii) maintain and preserve intact its business
organization, properties, leases, employees and advantageous business
relationships and retain the services of its officers and key employees, (iii)
take no action that would adversely affect or delay the ability of Heritage or
SouthBanc to perform their respective covenants and agreements on a timely basis
under this Agreement and (iv) take no action that would adversely affect or
delay the ability of Heritage or SouthBanc to obtain any necessary approvals,
consents or waivers of any governmental authority required for the transactions
contemplated hereby or
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which would reasonably be expected to result in any such approvals, consents or
waivers containing any material condition or restriction.
Section 3.2. Forbearances. Without limiting the covenants set forth
------------
in Section 3.1 hereof, except as expressly contemplated or permitted by this
Agreement or as set forth on Schedule 3.2 and except to the extent required by
law or regulation or any Governmental Entity, during the period from the date of
this Agreement to the Effective Time, neither SouthBanc nor Heritage shall, and
neither SouthBanc nor Heritage shall permit any of their respective Subsidiaries
to, without the prior written consent of the other party:
(a) other than in the ordinary course of business, incur any
indebtedness for borrowed money, assume, guarantee, endorse or otherwise as an
accommodation become responsible for the obligations of any other individual,
corporation or other entity, or make any loan or advance (it being understood
and agreed that incurrence of indebtedness in the ordinary course of business
shall include, without limitation, the creation of deposit liabilities,
borrowings from the Federal Home Loan Bank, sales of certificates of deposit and
entering into repurchase agreements);
(b) (i) adjust, split, combine or reclassify any capital stock;
(ii) make, declare or pay any dividend, or make any other
distribution on its capital stock (except (A) in the case
of SouthBanc, for regular quarterly cash dividends at a
rate not in excess of $.15 per share of SouthBanc Common
Stock, (B) in the case of Heritage, for regular quarterly
cash dividends at a rate not in excess of $.075 per share
of Heritage Common Stock and (C) dividends paid by any of
the Subsidiaries of each of SouthBanc and Heritage for the
purpose of enabling SouthBanc or Heritage to pay the
dividends specified in (A) and (B));
(iii) grant any stock appreciation rights or grant any
individual, corporation or other entity any right to
acquire any shares of its capital stock; or
(iv) issue any additional shares of capital stock or any
securities or obligations convertible or exercisable for
any shares of its capital stock except pursuant to (A) the
exercise of stock options, outstanding as of the date
hereof, (B) in the case of SouthBanc, its Dividend
Reinvestment Plan or (C) the Heritage Stock Option
Agreement or the SouthBanc Stock Option Agreement;
(c) sell, transfer, mortgage, encumber or otherwise dispose of any of
its material properties or assets to any individual, corporation or other entity
other than a Subsidiary,
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or cancel, release or assign any indebtedness to any such person or any claims
held by any such person, except in the ordinary course of business or pursuant
to contracts or agreements in force at the date of this Agreement;
(d) except pursuant to contracts or agreements in force at the date
of or permitted by this Agreement, make any equity investment in excess of
$100,000, either by purchase of stock or securities, contributions to capital,
property transfers, or purchase of any property or assets of any other
individual, corporation or other entity;
(e) enter into, renew, amend or terminate any contract or agreement,
or make any change in any of its leases or contracts, other than with respect to
those involving aggregate payments of less than, or the provision of goods or
services with a market value of less than, $100,000 per annum and other than
contracts or agreements covered by Section 3.2(f);
(f) make, renegotiate, renew, increase, extend, modify or purchase
any loan, lease (credit equivalent), advance, credit enhancement or other
extension of credit, or make any commitment in respect of any of the foregoing,
except in conformity with existing lending practices;
(g) (i) increase in any manner the compensation or fringe benefits
of any of its employees or directors except in the ordinary
course of business consistent with past practices, or pay
any pension, retirement allowance or contribution not
required by any existing plan or agreement to any such
employees or directors;
(ii) become a party to, amend or commit itself to any pension,
retirement, profit-sharing or welfare benefit plan or
agreement or employment agreement with or for the benefit
of any employee or director;
(iii) accelerate the vesting of, or the lapsing of restrictions
with respect to, any stock options or other stock-based
compensation; or
(iv) elect to any senior executive office any person who is not
a member of its senior executive officer team as of the
date of this Agreement or elect to its Board of Directors
any person who is not a member of its Board of Directors as
of the date of this Agreement, or hire any employee with an
annual total compensation payment in excess of $100,000;
(h) settle any claim, action or proceeding involving payment by it of
money damages in excess of $25,000 or impose any material restriction on its
operations or the operations of any of its Subsidiaries;
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<PAGE>
(i) amend its certificate of incorporation or its bylaws;
(j) restructure or materially change its investment securities
portfolio or its gap position, through purchases, sales or otherwise, or the
manner in which the portfolio is classified or reported;
(k) make any capital expenditures in excess of $100,000 per
expenditure other than pursuant to binding commitments existing on the date
hereof and other than expenditures necessary to maintain existing assets in good
repair or to make payment of necessary taxes;
(l) establish or commit to the establishment of any new branch or
other office facilities or file any application to relocate or terminate the
operation of any banking office;
(m) take any action that is intended or expected to result in any of
its representations and warranties set forth in this Agreement being or becoming
untrue in any material respect at any time prior to the Effective Time, or in
any of the conditions to the Merger set forth in Article V not being satisfied
or in a violation of any provision of this Agreement;
(n) engage in any transaction that is not in the usual and ordinary
course of business and consistent with past practices;
(o) implement or adopt any change in its accounting principles,
practices or methods, other than as may be required by GAAP or regulatory
guidelines;
(p) knowingly take any action that would prevent or impede the Merger
from qualifying as a reorganization within the meaning of Section 368 of the
IRC; or
(q) agree to take, make any commitment to take, or adopt any
resolutions of its board of directors in support of, any of the actions
prohibited by this Section 3.2.
Any request by either party or response thereto by the other party shall be
made in accordance with the notice provisions of Section 8.7 and shall note that
it is a request pursuant to this Section 3.2.
ARTICLE IV
Covenants
---------
Section 4.1. Acquisition Proposals. From and after the date hereof
---------------------
until the termination of this Agreement, Heritage agrees that neither it nor any
of its Subsidiaries nor any of the officers and directors of it or its
Subsidiaries shall, and that it shall use its reasonable best efforts to cause
its and its Subsidiaries' employees, representatives, agents or affiliates
(including, without limitation, any investment banker, attorney or accountant
retained by it or any of its Subsidiaries) not to, directly or indirectly,
initiate, solicit or knowingly encourage
A-44
<PAGE>
(including by way of furnishing non-public information or assistance), or
facilitate knowingly, any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any Acquisition Proposal
(as defined in Section 8.1), or enter into or maintain or continue discussions
or negotiate with any person or entity in furtherance of such inquiries or to
obtain an Acquisition Proposal or agree to or endorse any Acquisition Proposal,
or authorize or permit any of its officers, directors or employees or any of its
Subsidiaries or any investment banker, financial advisor, attorney, accountant
or other representative retained by any of its Subsidiaries to take any such
action, and that it shall notify the other party orally (within 1 business day)
and in writing (as promptly as practicable, but in no event later than 2
calendar days) of such inquiries and proposals which it or any of its
Subsidiaries or any such officer, director, employee, investment banker,
financial advisor, attorney, accountant or other representative may receive
relating to any of such matters and, if such inquiry or proposal is in writing,
it shall deliver to the other party a copy of such inquiry or proposal promptly;
provided, however, that nothing contained in this Section 4.1 shall prohibit the
Board of Directors of Heritage from:
(i) furnishing information to, or entering into discussions or
negotiations with any person or entity that makes an unsolicited
written, bona fide proposal to acquire Heritage pursuant to a
merger, consolidation, share exchange, business combination,
tender or exchange offer or other similar transaction, if, and
only to the extent that:
(A) the Board of Directors receives a written opinion from its
independent financial advisor that such proposal may be
superior to the Merger from a financial point-of-view to
Heritage's stockholders;
(B) the Board of Directors determines in good faith that such
action is necessary for the Board of Directors to comply
with its fiduciary duties to stockholders under applicable
law (such proposal that satisfies (A) and (B) being referred
to herein as a "Superior Proposal"); and
(C) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity, it:
(1) provides reasonable notice to SouthBanc to the effect
that it is furnishing information to, or entering into
discussions or negotiations with, another party; and
(2) receives from such person or entity an executed
confidentiality agreement in reasonably customary form;
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(ii) complying with Rule 14e-2 promulgated under the Exchange Act
with regard to a tender or exchange offer; or
(iii) failing to make or withdrawing or modifying its recommendation
and entering into a Superior Proposal if there exists a Superior
Proposal and the Board of Directors determines in good faith
that such action is necessary for the Board of Directors to
comply with its fiduciary duties to stockholders under
applicable law.
Section 4.2. Access and Information. Upon reasonable notice, Heritage
----------------------
and SouthBanc shall (and shall cause their respective Subsidiaries to) afford to
the other and their respective representatives (including, without limitation,
directors, officers and employees of such party and its affiliates and counsel,
accountants and other professionals retained by such party) such reasonable
access during normal business hours throughout the period prior to the Effective
Time to the books, records (including, without limitation, tax returns and work
papers of independent auditors), properties, personnel and to such other
information as either party may reasonably request and during such period, each
of Heritage and SouthBanc shall, and shall cause their respective Subsidiaries
to, make available to the other party a copy of each report, schedule,
registration statement and other document filed or received by it during such
period pursuant to the requirements of federal securities laws or federal or
state banking laws; provided, however, that no investigation pursuant to this
Section 4.2 shall affect or be deemed to modify any representation or warranty
made herein. SouthBanc and Heritage will not, and will use their best efforts to
cause their respective representatives not to, use any information obtained
pursuant to this Section 4.2 for any purpose unrelated to the consummation of
the transactions contemplated by this Agreement. Subject to the requirements of
applicable law, each of SouthBanc and Heritage will keep confidential, and will
use their best efforts to cause their respective representatives to keep
confidential, all information and documents obtained pursuant to this Section
4.2 unless such information (i) was already known to such party or an affiliate
of such party, other than pursuant to a confidentiality agreement or other
confidential relationship, (ii) becomes available to such party or an affiliate
of such party from other sources not known by such party to be bound by a
confidentiality agreement or other obligation of secrecy, (iii) is disclosed
with the prior written approval of the other party or (iv) is or becomes readily
ascertainable from published information or trade sources. In the event that
this Agreement is terminated or the transactions contemplated by this Agreement
shall otherwise fail to be consummated, each party shall promptly cause all
copies of documents or extracts thereof containing information and data as to
the other party hereto (or an affiliate of any party hereto) to be returned to
the party that furnished the same.
Section 4.3. Applications; Consents. As soon as practicable after the
----------------------
date hereof, SouthBanc and Heritage shall cooperate with each other and use
their reasonable best efforts to prepare and file all necessary applications,
notices and filings to obtain all permits, consents, approvals and
authorizations of all third parties and Governmental Entities that are necessary
or advisable to consummate the transactions contemplated by this Agreement.
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SouthBanc and Heritage shall have the right to review in advance, and will
consult with each other on, all the information relating to Heritage and
SouthBanc, as the case may be, and any of their respective Subsidiaries, which
appear in any filing made with, or written materials submitted to, any third
party or Governmental Entity in connection with the transactions contemplated by
this Agreement. The parties hereto agree that they will consult with each other
with respect to the obtaining of all permits, consents, approvals and
authorizations of all third parties and Governmental Entities necessary or
advisable to consummate the transactions contemplated by this Agreement and each
party will keep the other apprised of the status of matters relating to
completion of the transactions contemplated herein.
Section 4.4. Antitakeover Provisions. SouthBanc, Heritage and their
-----------------------
respective Subsidiaries shall take all steps required by any relevant federal or
state law or regulation or under any relevant agreement or other document to
exempt or continue to exempt the other party, the Agreement and the Merger from
any provisions of an antitakeover nature in SouthBanc's, Heritage's or their
respective Subsidiaries' certificates of incorporation and bylaws, or similar
organizational documents, and the provisions of any federal or state
antitakeover laws.
Section 4.5. Additional Agreements. Subject to the terms and
---------------------
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take promptly, or cause to be taken promptly, all actions
and to do promptly, or cause to be done promptly, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement as expeditiously as
possible, including using efforts to obtain all necessary actions or non-
actions, extensions, waivers, consents and approvals from all applicable
Governmental Entities, effecting all necessary registrations, applications and
filings (including, without limitation, filings under any applicable state
securities laws) and obtaining any required contractual consents and regulatory
approvals.
Section 4.6. Publicity. The initial press release announcing this
---------
Agreement shall be a joint press release and thereafter Heritage and SouthBanc
shall consult with each other prior to issuing any press releases or otherwise
making public statements with respect to the Merger and any other transaction
contemplated hereby and in making any filings with any Governmental Entity or
with any national securities exchange or market with respect thereto.
Section 4.7. Stockholders Meetings. SouthBanc and Heritage each shall
---------------------
take all action necessary, in accordance with applicable law and its respective
certificate of incorporation and bylaws, to convene a meeting of its respective
stockholders (each, a "Stockholder Meeting") as promptly as practicable for the
purpose of considering and voting on approval and adoption of the transactions
provided for in this Agreement. Except to the extent legally required for the
discharge by the Board of Directors of its fiduciary duties, the Board of
Directors of each of SouthBanc and Heritage shall (i) recommend at its
Stockholder Meeting that the stockholders vote in favor of and approve the
transactions provided for in this Agreement and (ii) use its reasonable best
efforts to solicit such approvals. SouthBanc and Heritage shall coordinate and
cooperate with respect to the timing of their respective Stockholder Meetings.
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<PAGE>
Section 4.8. Registration of SouthBanc Common Stock.
--------------------------------------
(a) As promptly as reasonably practicable following the date hereof,
SouthBanc and Heritage shall cooperate in preparing and each shall cause to be
filed with the SEC mutually acceptable proxy materials which shall constitute
the Joint Proxy Statement-Prospectus relating to the matters to be submitted to
the SouthBanc stockholders at the SouthBanc Stockholders Meeting and the matters
to be submitted to the Heritage stockholders at the Heritage Stockholders
Meeting (such proxy statement/prospectus, and any amendments or supplements
thereto, the "Joint Proxy Statement-Prospectus") and SouthBanc shall prepare and
file with the SEC a registration statement on Form S-4 with respect to the
issuance of SouthBanc Common Stock in the Merger (such Form S-4, and any
amendments or supplements thereto, the "Registration Statement"). The Joint
Proxy Statement-Prospectus will be included as a prospectus in and will
constitute a part of the Registration Statement as SouthBanc's prospectus. Each
of SouthBanc and Heritage shall use reasonable best efforts to have the Joint
Proxy Statement-Prospectus cleared by the SEC and the Registration Statement
declared effective by the SEC and to keep the Registration Statement effective
as long as is necessary to consummate the Merger and the transactions
contemplated thereby. SouthBanc and Heritage shall, as promptly as practicable
after receipt thereof, provide the other party copies of any written comments
and advise the other party of any oral comments, with respect to the Joint Proxy
Statement-Prospectus or Registration Statement received from the SEC. The
parties shall cooperate and provide the other with a reasonable opportunity to
review and comment on any amendment or supplement to the Joint Proxy Statement-
Prospectus and the Registration Statement prior to filing such with the SEC, and
will provide each other with a copy of all such filings made with the SEC.
Notwithstanding any other provision herein to the contrary, no amendment or
supplement (including by incorporation by reference) to the Joint Proxy
Statement-Prospectus or the Registration Statement shall be made without the
approval of both parties, which approval shall not be unreasonably withheld or
delayed; provided that with respect to documents filed by a party which are
incorporated by reference in the Registration Statement or Joint Proxy
Statement-Prospectus, this right of approval shall apply only with respect to
information relating to the other party or its business, financial condition or
results of operations. SouthBanc will use reasonable best efforts to cause the
Joint Proxy Statement-Prospectus to be mailed to SouthBanc stockholders, and
Heritage will use reasonable best efforts to cause the Joint Proxy Statement-
Prospectus to be mailed to Heritage's stockholders, in each case as promptly as
practicable after the Registration Statement is declared effective under the
Securities Act. Each party will advise the other party, promptly after it
receives notice thereof, of the time when the Registration Statement has become
effective, the issuance of any stop order, the suspension of the qualification
of the SouthBanc Common Stock issuable in connection with the Merger for
offering or sale in any jurisdiction, or any request by the SEC for amendment of
the Joint Proxy Statement-Prospectus or the Registration Statement. If at any
time prior to the Effective Time any information relating to SouthBanc or
Heritage, or any of their respective affiliates, officers or directors, should
be discovered by SouthBanc or Heritage which should be set forth in an amendment
or supplement to any of the Registration Statement or the Joint Proxy Statement-
Prospectus so that any of such documents would not include any misstatement of a
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material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, the party which discovers such information shall promptly notify
the other party hereto and, to the extent required by law, rules or regulations,
an appropriate amendment or supplement describing such information shall be
promptly filed with the SEC and disseminated to the stockholders of SouthBanc
and Heritage.
(b) SouthBanc shall also take any action (other than qualifying to do
business in any jurisdiction in which it is not now so qualified or to file a
general consent to service of process) required to be taken under any applicable
state securities laws in connection with the Merger and each of Heritage and
SouthBanc shall furnish all information concerning it and the holders of its
Common Stock as may be reasonably requested in connection with any such action.
(c) Prior to the Effective Time, SouthBanc shall notify the Nasdaq
National Market of the additional shares of SouthBanc Common Stock to be issued
by SouthBanc in exchange for the shares of Heritage Common Stock.
Section 4.9. Affiliate Letters. Heritage shall use its best efforts
-----------------
to cause each director, executive officer and other person who is an "affiliate"
of Heritage under Rule 145 of the Securities Act to deliver to SouthBanc as soon
as practicable and prior to the mailing of the Joint Proxy Statement-Prospectus
executed letter agreements, each substantially in the form attached hereto as
Exhibit C, providing that such person will comply with Rule 145.
- ---------
Section 4.10 Notification of Certain Matters. Each party shall give
-------------------------------
prompt notice to the other of: (i) any event or notice of, or other
communication relating to, a default or event that, with notice or lapse of time
or both, would become a default, received by it or any of its Subsidiaries
subsequent to the date of this Agreement and prior to the Effective Time, under
any contract material to the financial condition, properties, businesses or
results of operations of each party and its Subsidiaries taken as a whole to
which each party or any Subsidiary is a party or is subject; and (ii) any event,
condition, change or occurrence which individually or in the aggregate has, or
which, so far as reasonably can be foreseen at the time of its occurrence, is
reasonably likely to result in a Material Adverse Effect. Each of Heritage and
SouthBanc shall give prompt notice to the other party of any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with any of the transactions contemplated by
this Agreement.
Section 4.11. Employees, Directors and Officers.
---------------------------------
(a) All persons who are employees of Heritage Federal immediately
prior to the Effective Time ("Heritage's Employees") shall, at the Effective
Time, continue as employees of Heritage Federal ("Continuing Employees").
Subject to paragraph (f) of this Section 4.11, all Continuing Employees shall be
employed at the will of Heritage Federal and no contractual right to employment
shall inure to such employees because of this Agreement.
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(b) Except as provided in Section 4.11(e), from and after the
Effective Time, unless otherwise mutually determined, the SouthBanc Employee
Plans and the Heritage Employee Plans in effect as of the date of this Agreement
shall remain in effect with respect to employees of SouthBanc and Heritage and
their respective Subsidiaries covered by such plans and arrangements at the
Effective Time until such time as SouthBanc shall, subject to applicable law,
the terms of this Agreement and the terms of such plans, adopt new benefit plans
and arrangements with respect to the employees of SouthBanc and its Subsidiaries
("New Benefit Plans"), including all Continuing Employees. Prior to the
Effective Time, SouthBanc and Heritage shall cooperate in reviewing, evaluating
and analyzing the SouthBanc Employee Plans and the Heritage Employee Plans with
a view toward developing appropriate New Benefit Plans.
(c) The foregoing subparagraph (b) notwithstanding, SouthBanc agrees
to honor in accordance with their terms all benefits vested as of the Effective
Time under the SouthBanc Employee Plans and the Heritage Employee Plans and all
vested benefits or other vested amounts earned or accrued through such time
under contracts, arrangement commitments or understandings described in Schedule
--------
2.1(n) and Schedule 2.2(n), including benefits which vest or are otherwise
- ------ ---------------
accrued as a result of the consummation of the transactions contemplated by this
Agreement.
(d) With respect to all New Benefit Plans, SouthBanc agrees that
Continuing Employees shall receive (i) full credit for prior service with
Heritage and Heritage Federal for purposes of eligibility for participation and
vesting, (ii) a waiver of all waiting periods and preexisting condition
exclusions or penalties and (iii) credit for deductibles, copayments or similar
out-of-pocket expenses incurred under any Heritage Employee Plan with respect to
the plan year in which the Effective Time occurs. Notwithstanding anything
herein to the contrary, with respect to participation in Perpetual Bank's
Employee Stock Ownership Plan, Continuing Employees will be eligible to
participate in such plan on the earliest date required by ERISA and the IRC and
with Continuing Employees receiving credit for years of service with Heritage or
any of its Subsidiaries for the purpose of vesting, but not for the purpose of
accrual of benefits or allocation of employer contributions.
(e) Notwithstanding anything in this Agreement to the contrary, the
Heritage Federal Bank Employee Stock Ownership Plan (the "Heritage ESOP") shall
be terminated as of the Effective Time. In connection with the termination of
the Heritage ESOP, Heritage shall promptly apply to the IRS for a determination
letter on the Heritage ESOP's tax-qualified status upon termination under Code
Sections 401(a) and 4975. Prior to any distributions to any Heritage ESOP
participants, the trustees for the Heritage ESOP shall have received a favorable
letter from the IRS related to the tax qualified status of the Heritage ESOP
upon termination. The parties acknowledge that the existing loan between
Heritage and the Heritage ESOP (the "ESOP Loan") shall be repaid in full by the
Heritage ESOP upon such termination or as soon thereafter as practicable. The
parties further acknowledge that, as of the date hereof, the Heritage ESOP has
unallocated assets with a current fair market value exceeding the outstanding
balance (principal and accrued interest) of the ESOP Loan. The parties agree
that, pursuant to the
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applicable provisions of the Heritage ESOP, participants in the Heritage ESOP
shall benefit from these assets as an allocation of earnings in the manner and
to the extent provided under the Heritage ESOP upon termination of the Heritage
ESOP. Heritage may take such actions as it deems necessary or appropriate to
effectuate this intent. In addition, Heritage may take such other actions,
including the making of other amendments to the plan, that it deems necessary or
appropriate to preserve the tax-qualified status of the Heritage ESOP or the
exempt status of the ESOP Loan. From and after the Effective Time, the
administrative and other authority previously exercised solely by a committee
appointed by the Board of Directors of Heritage Federal shall be exercised by a
committee appointed by the Board of Directors of Heritage in consultation with
SouthBanc. The committee shall advise and consult with SouthBanc regarding all
actions taken with respect to the Heritage ESOP following the Effective Time.
On or before the Effective Time, Heritage may make such contributions
to the Heritage ESOP as may be necessary to permit the Heritage ESOP to make
scheduled principal and interest payments on any outstanding exempt loan in
accordance with past practice.
(f) From and after the Effective Time, J. Edward Wells shall serve as
Chairman of SouthBanc, H.A. Pickens, Jr. shall serve as Vice Chairman of
SouthBanc and Robert W. Orr shall serve as President and Chief Executive Officer
of SouthBanc. At the Effective Time, SouthBanc and Heritage Federal shall enter
into employment agreements with J. Edward Wells substantially in the form
attached hereto as Exhibits D and E, respectively. At the Effective Time,
---------- -
SouthBanc and Heritage Federal shall enter into Change in Control Agreements
with Edwin I. Shealy, Will B. Ferguson, John M. Swofford and James H. Wasson,
Jr. substantially in the form attached hereto as Exhibit F.
---------
(g) SouthBanc shall cause Perpetual Bank to appoint J. Edward Wells to
the Board of Directors of Perpetual Bank as of the Effective Time. Heritage
shall cause Heritage Federal to appoint Robert W. Orr and one other member of
the Board of Directors of SouthBanc, who shall be designated by SouthBanc, to
the Board of Directors of Heritage Federal as of the Effective Time.
Section 4.12. Indemnification.
---------------
(a) From and after the Effective Time through the sixth anniversary of
the Effective Date, SouthBanc agrees to indemnify and hold harmless each present
and former director and officer of Heritage and its Subsidiaries and each
officer or employee of Heritage and its Subsidiaries that is serving or has
served as a director or trustee of another entity expressly at Heritage's
request or direction (each, an "Indemnified Party"), against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, amounts paid
in settlement, losses, claims, damages or liabilities (collectively, "Costs")
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of matters existing or occurring at or prior to the Effective Time
(including the transactions contemplated by this Agreement), whether asserted or
claimed prior to, at or after
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the Effective Time, and to advance any such Costs to each Indemnified Party as
they are from time to time incurred, in each case to the fullest extent such
Indemnified Party would have been indemnified as a director, officer or employee
of Heritage and its Subsidiaries and as then permitted under applicable law.
(b) Any Indemnified Party wishing to claim indemnification under
Section 4.12(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify SouthBanc thereof, but the failure to so
notify shall not relieve SouthBanc of any liability it may have hereunder to
such Indemnified Party if such failure does not materially and substantially
prejudice SouthBanc. In the event of any such claim, action, suit, proceeding
or investigation, (i) SouthBanc shall have the right to assume the defense
thereof with counsel reasonably acceptable to the Indemnified Party and
SouthBanc shall not be liable to such Indemnified Party for any legal expenses
of other counsel subsequently incurred by such Indemnified Party in connection
with the defense thereof, except that if SouthBanc does not elect to assume such
defense within a reasonable time or counsel for the Indemnified Party at any
time advises that there are issues which raise conflicts of interest between
SouthBanc and the Indemnified Party (and counsel for SouthBanc does not
disagree), the Indemnified Party may retain counsel satisfactory to such
Indemnified Party, and SouthBanc shall remain responsible for the reasonable
fees and expenses of such counsel as set forth above, to be paid promptly as
statements therefor are received; provided, however, that SouthBanc shall be
obligated pursuant to this paragraph (b) to pay for only one firm of counsel for
all Indemnified Parties in any one jurisdiction with respect to any given claim,
action, suit, proceeding or investigation unless the use of one counsel for such
Indemnified Parties would present such counsel with a conflict of interest; (ii)
the Indemnified Party will reasonably cooperate in the defense of any such
matter; and (iii) SouthBanc shall not be liable for any settlement effected by
an Indemnified Party without its prior written consent, which consent may not be
withheld unless such settlement is unreasonable in light of such claims,
actions, suits, proceedings or investigations against, or defenses available to,
such Indemnified Party.
(c) SouthBanc shall pay all reasonable Costs, including attorneys'
fees, that may be incurred by any Indemnified Party in successfully enforcing
the indemnity and other obligations provided for in this Section 4.12 to the
fullest extent permitted under applicable law. The rights of each Indemnified
Party hereunder shall be in addition to any other rights such Indemnified Party
may have under applicable law.
(d) SouthBanc shall maintain Heritage's existing directors' and
officers' liability insurance policy (or provide a policy providing comparable
coverage and amounts on terms no less favorable to the persons currently covered
by Heritage's existing policy, including SouthBanc's existing policy if it meets
the foregoing standard) covering persons who are currently covered by such
insurance for a period of three years after the Effective Time; provided,
however, that in no event shall SouthBanc be obligated to expend, in order to
maintain or provide insurance coverage pursuant to this Section 4.12(d), an
amount per annum in excess of 200% of the amount of the annual premiums paid by
Heritage as of the date hereof for such
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<PAGE>
insurance ("Maximum Insurance Amount"); provided further, that if the amount of
the annual premiums necessary to maintain or procure such insurance coverage
exceeds the Maximum Insurance Amount, SouthBanc shall obtain the most
advantageous coverage obtainable for an annual premium equal to the Maximum
Insurance Amount.
(e) In the event SouthBanc or any of its successors or assigns (i)
consolidates with or merges into any other person or entity and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of its properties and
assets to any person or entity, then, and in each such case, to the extent
necessary, proper provision shall be made so that the successors and assigns of
SouthBanc assume the obligations set forth in this Section 4.12.
(f) The provisions of this Section 4.12 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or her
representatives.
Section 4.13. Dividends. After the date of this Agreement, each of
---------
Heritage and SouthBanc shall coordinate with the other the declaration of any
dividends in respect of Heritage Common Stock and SouthBanc Common Stock and the
record dates and payment dates relating thereto, it being the intention of the
parties hereto that holders of Heritage Common Stock shall not receive two
dividends, or fail to receive one dividend, for any quarter with respect to
their shares of Heritage Common Stock and any shares of SouthBanc Common Stock
any such holder receives in exchange therefor in the Merger.
Section 4.14 Section 16 Matters. Prior to the Effective Time,
------------------
Heritage and SouthBanc shall take all such steps as may be required to cause any
dispositions of Heritage Common Stock (including derivative securities with
respect to Heritage Common Stock) or acquisitions of SouthBanc Common Stock
resulting from the transactions contemplated by this Agreement by each
individual who is subject to the reporting requirements of Section 16(a) of the
Exchange Act with respect to Heritage to be exempt under Rule 16b-3 promulgated
under the Exchange Act.
ARTICLE V
Conditions to Consummation
--------------------------
Section 5.1. Conditions to Each Party's Obligations. The respective
-------------------------------------- -
obligations of each party to effect the Merger shall be subject to the
satisfaction of the following conditions:
(a) Stockholder Approvals. This Agreement shall have been approved by
---------------------
the requisite vote of Heritage's and SouthBanc's stockholders in accordance with
applicable laws and regulations.
(b) Regulatory Approvals. All approvals, consents or waivers of any
--------------------
Governmental Entity required to permit consummation of the transactions
contemplated by this
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<PAGE>
Agreement shall have been obtained and shall remain in full force and effect,
and all statutory waiting periods shall have expired; provided, however, that
none of such approvals, consents or waivers shall contain any condition or
requirement that would so materially and adversely impact the economic or
business benefits to SouthBanc or Heritage of the transactions contemplated
hereby that, had such condition or requirement been known, such party would not,
in its reasonable judgment, have entered into this Agreement.
(c) No Injunctions or Restraints; Illegality. No party hereto shall
----------------------------------------
be subject to any order, decree or injunction of a court or agency of competent
jurisdiction that enjoins or prohibits the consummation of the Merger and no
Governmental Entity shall have instituted any proceeding for the purpose of
enjoining or prohibiting the consummation of the Merger or any transactions
contemplated by this Agreement. No statute, rule or regulation shall have been
enacted, entered, promulgated or enforced by any Governmental Entity which
prohibits, restricts or makes illegal consummation of the Merger.
(d) Registration Statement; Blue Sky Laws. The Registration Statement
-------------------------------------
shall have been declared effective by the SEC and no proceedings shall be
pending or threatened by the SEC to suspend the effectiveness of the
Registration Statement, and SouthBanc shall have received all required approvals
by state securities or "blue sky" authorities with respect to the transactions
contemplated by this Agreement.
(e) Third Party Consents. SouthBanc and Heritage shall have obtained
--------------------
the consent or approval of each person (other than the governmental approvals or
consents referred to in Section 5.1(b)) whose consent or approval shall be
required to consummate the transactions contemplated by this Agreement, except
those for which failure to obtain such consents and approvals would not,
individually or in the aggregate, have a Material Adverse Effect on SouthBanc
(after giving effect to the consummation of the transactions contemplated
hereby) or upon the consummation of the transactions contemplated hereby.
(f) Tax Opinion. SouthBanc and Heritage shall have received opinions
-----------
of Malizia, Spidi, & Fisch, P.C. and Muldoon, Murphy & Faucette LLP,
respectively, dated as of the Effective Date, in form and substance customary in
transactions of the type contemplated hereby, and reasonably satisfactory to
SouthBanc and Heritage, as the case may be, substantially to the effect that on
the basis of the facts, representations and assumptions set forth in such
opinions which are consistent with the state of facts existing at the Effective
Time, the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the IRC and that
accordingly:
(i) No gain or loss will be recognized by SouthBanc or Heritage
as a result of the Merger;
(ii) Except to the extent of any cash received as part of the
Merger Consideration or in lieu of a fractional share interest in SouthBanc
Common Stock, no gain or
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<PAGE>
loss will be recognized by the stockholders of Heritage who exchange their
Heritage Common Stock for SouthBanc Common Stock pursuant to the Merger;
(iii) The tax basis of SouthBanc Common Stock received by
stockholders who exchange their Heritage Common Stock for SouthBanc Common Stock
in the Merger will be the same as the tax basis of Heritage Common Stock
surrendered pursuant to the Merger, reduced by any amount allocable to a
fractional share interest for which cash is received and increased by any gain
recognized on the exchange; and
(iv) The holding period of SouthBanc Common Stock received by
each stockholder in the Merger will include the holding period of Heritage
Common Stock exchanged therefor, provided that such stockholder held such
Heritage Common Stock as a capital asset on the Effective Date.
Such opinions may be based on, in addition to the review of such
matters of fact and law as counsel considers appropriate, representations
contained in certificates of officers of SouthBanc, Heritage and others.
Section 5.2. Conditions to the Obligations of SouthBanc. The
------------------------------------------
obligations of SouthBanc to effect the Merger shall be further subject to the
satisfaction of the following additional conditions, any one or more of which
may be waived by SouthBanc:
(a) Representations and Warranties; Performance of Obligations. Each
----------------------------------------------------------
of the obligations of Heritage required to be performed by it at or prior to the
Closing pursuant to the terms of this Agreement shall have been duly performed
and complied with in all material respects and the representations and
warranties of Heritage contained in this Agreement shall be true and correct as
of the date of this Agreement and as of the Effective Time as though made at and
as of the Effective Time (except as to any representation or warranty that
specifically relates to an earlier date), and SouthBanc shall have received a
certificate to the foregoing effect signed by the chief executive officer and
the chief financial or principal accounting officer of Heritage; provided,
however, that for purposes of this paragraph, such representations and
warranties shall be deemed to be true and correct unless the failure or failures
of such representations and warranties to be so true and correct, either
individually or in the aggregate, and without giving effect to any qualification
as to materiality set forth in such representations and warranties, will have a
Material Adverse Effect on Heritage.
(b) Dissenters' Shares. Dissenters' rights shall not have been
------------------
exercised with respect to more than 10% of the outstanding shares of Heritage
Common Stock.
(c) Good Standing and Other Certificates. SouthBanc shall have
------------------------------------
received certificates (such certificates to be dated as of a day as close as
practicable to the Closing Date) from appropriate authorities as to the
corporate existence of Heritage and its Subsidiaries and
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<PAGE>
such other documents and certificates to evidence fulfillment of the conditions
set forth in Sections 5.1 and 5.2 as SouthBanc may reasonably require.
Section 5.3. Conditions to the Obligations of Heritage. The
-----------------------------------------
obligations of Heritage to effect the Merger shall be further subject to the
satisfaction of the following additional conditions, any one or more of which
may be waived by Heritage:
(a) Representations and Warranties; Performance of Obligations. Each
----------------------------------------------------------
of the obligations of SouthBanc required to be performed by it at or prior to
the Closing pursuant to the terms of this Agreement shall have been duly
performed and complied with in all material respects and the representations and
warranties of SouthBanc contained in this Agreement shall be true and correct as
of the date of this Agreement and as of the Effective Time as though made at and
as of the Effective Time (except as to any representation or warranty which
specifically relates to an earlier date), and Heritage shall have received a
certificate to the foregoing effect signed by the chief executive officer and
the chief financial or principal accounting officer of SouthBanc; provided,
however, that for purposes of this paragraph, such representations and
warranties shall be deemed to be true and correct unless the failure or failures
of such representations and warranties to be so true and correct, either
individually or in the aggregate, and without giving effect to any qualification
as to materiality set forth in such representations and warranties, will have a
Material Adverse Effect on SouthBanc.
(b) Deposit of Merger Consideration. SouthBanc shall have deposited
-------------------------------
with the Exchange Agent sufficient cash to pay the aggregate Cash Consideration
and Heritage shall have received a certificate from the Exchange Agent to such
effect.
(c) Good Standing and Other Certificates. Heritage shall have
------------------------------------
received certificates (such certificates to be dated as of a day as close as
practicable to the Closing Date) from appropriate authorities as to the
corporate existence of SouthBanc and its Subsidiaries and such other documents
and certificates to evidence fulfillment of the conditions set forth in Sections
5.1 and 5.3 as Heritage may reasonably require.
ARTICLE VI
Termination
-----------
Section 6.1. Termination. This Agreement may be terminated, and the
-----------
Merger abandoned, at any time prior to the Effective Time, either before or
after any requisite stockholder approval:
(a) by the mutual consent of SouthBanc and Heritage in a written
instrument, if the Board of Directors of each so determines by vote of a
majority of the members of its entire Board; or
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<PAGE>
(b) by either the Board of Directors of SouthBanc or Heritage, in the
event of the failure of the stockholders of Heritage or SouthBanc to approve the
Agreement at its Stockholder Meeting called to consider such approval; provided,
however, that Heritage or SouthBanc, as the case may be, shall only be entitled
to terminate the Agreement pursuant to this clause if it has complied in all
material respects with its obligations under Section 4.7; or
(c) by either the Board of Directors of SouthBanc or Heritage, if
either (i) any approval, consent or waiver of a Governmental Entity required to
permit consummation of the transactions contemplated by this Agreement shall
have been denied or (ii) any Governmental Entity of competent jurisdiction shall
have issued a final, unappealable order enjoining or otherwise prohibiting
consummation of the transactions contemplated by this Agreement; or
(d) by either the Board of Directors of SouthBanc or Heritage, in the
event that the Merger is not consummated by December 31, 2000, unless the
failure to so consummate by such time is due to the breach of any
representation, warranty or covenant contained in this Agreement by the party
seeking to terminate; or
(e) by either the Board of Directors of SouthBanc or Heritage
(provided that the party seeking termination is not then in material breach of
any representation, warranty, covenant or other agreement contained herein), in
the event of (i) a failure to perform or comply by the other party with any
covenant or agreement of such other party contained in this Agreement, which
failure or non-compliance is material in the context of the transactions
contemplated by this Agreement, or (ii) any inaccuracies, omissions or breach in
the representations, warranties, covenants or agreements of the other party
contained in this Agreement the circumstances as to which either individually or
in the aggregate have, or reasonably could be expected to have, a Material
Adverse Effect on such other party; in either case which has not been or cannot
be cured within 30 calendar days after written notice thereof is given by the
party seeking to terminate to such other party; or
(f) by either the Board of Directors of SouthBanc or Heritage, if the
Board of Directors of the other party does not publicly recommend in the Joint
Proxy Statement-Prospectus that stockholders approve and adopt this Agreement or
if, after recommending in the Joint Proxy Statement-Prospectus that stockholders
approve and adopt this Agreement, the Board of Directors of the other party
shall have withdrawn, qualified or revised such recommendation in any respect
materially adverse to the party seeking to terminate this Agreement; or
(g) by Heritage, if the Board of Directors of Heritage reasonably
determines that a proposal made by a third party to acquire, directly or
indirectly, including pursuant to a tender offer, exchange offer, merger,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction, for consideration consisting of cash and/or securities,
more than 50% of the combined voting power of the shares of Heritage Common
Stock then outstanding or all or substantially all of the assets of Heritage
constitutes a Superior
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<PAGE>
Proposal and that such proposal must be accepted in order for the Board of
Directors to comply with its fiduciary duties to stockholders under applicable
law; or
(h) by the Board of Directors of Heritage, within five business days
after the end of the Measurement Period (as defined in Section 8.1), if the
SouthBanc Price is less than $14.05; provided, however, that if within five
calendar days after receipt of notice of termination pursuant to this paragraph
(i), SouthBanc provides written notice to Heritage that it shall increase the
Exchange Ratio to an amount equal (rounded to the nearest one-thousandth) to
$15.57 divided by the SouthBanc Price, in which case no termination shall be
deemed to have occurred pursuant to this Section 6.1(i) and this Agreement shall
remain in full force and effect in accordance with its terms (except the
Exchange Ratio shall have been so modified).
Section 6.2. Effect of Termination. In the event of termination of
---------------------
this Agreement by either SouthBanc or Heritage as provided in Section 6.1, this
Agreement shall forthwith become void and have no effect, and there shall be no
liability on the part of any party hereto or their respective officers and
directors, except (i) the last two sentences of Section 4.2, and Sections 8.6
and 8.7, shall survive any termination of this Agreement, and (ii) that
notwithstanding anything to the contrary contained in this Agreement, no party
shall be relieved or released from any liabilities or damages arising out of its
willful breach of any provision of this Agreement.
ARTICLE VII
Closing, Effective Date and Effective Time
------------------------------------------
Section 7.1. Effective Date and Effective Time. The closing of the
---------------------------------
transactions contemplated hereby ("Closing") shall take place at the offices of
Muldoon, Murphy & Faucette LLP, 5101 Wisconsin Avenue, N.W., Washington, D.C.
20016, unless another place is agreed to by SouthBanc and Heritage, on a date
specified by the parties ("Closing Date") that is no later than 14 days
following the date on which the expiration of the last applicable waiting period
in connection with notices to and approvals of Governmental Entities shall occur
and all conditions to the consummation of this Agreement are satisfied or waived
(excluding conditions that, by their nature, cannot be satisfied until the
Closing Date) unless extended by mutual agreement of the parties. Prior to the
Closing Date, SouthBanc and Heritage shall execute a certificate of merger in
accordance with all appropriate legal requirements, which shall be filed as
required by law on the Closing Date, and the Merger provided for therein shall
become effective upon such filing or on such date as may be specified in such
certificate of merger. The date of such filing or such later effective date as
specified in the certificate of merger is herein referred to as the "Effective
Date." The "Effective Time" of the Merger shall be as set forth in the
certificate of merger.
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Section 7.2. Deliveries at the Closing. Subject to the provisions of
-------------------------
Articles V and VI, on the Closing Date there shall be delivered to SouthBanc and
Heritage the documents and instruments required to be delivered under Article V.
ARTICLE VIII
Certain Other Matters
---------------------
Section 8.1. Certain Definitions; Interpretation. For purposes of
-----------------------------------
this Agreement:
"Acquisition Proposal" means any proposal or offer with respect to any
of the following (other than the transactions contemplated hereunder) involving
Heritage or any of its Subsidiaries: (i) any merger, consolidation, share
exchange, business combination, or other similar transaction; (ii) any sale,
lease, exchange, mortgage, pledge, transfer or other disposition of 25% or more
of its consolidated assets in a single transaction or series of transactions;
(iii) any tender offer or exchange offer for 25% or more of the outstanding
shares of its capital stock or the filing of a registration statement under the
Securities Act in connection therewith; or (iv) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing;
"Acquisition Transaction" means any of the following (other than the
transactions contemplated hereunder) involving SouthBanc or any of its
Subsidiaries: (i) any merger, consolidation, share exchange, business
combination, or other similar transaction; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 25% or more of its
consolidated assets in a single transaction or series of transactions; or (iii)
any tender offer or exchange offer for 25% or more of the outstanding shares of
its capital stock or the filing of a registration statement under the Securities
Act in connection therewith;
"CRA" means the Community Reinvestment Act;
"Delaware Law" means the Delaware General Corporation Law;
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, directive, executive or administrative order, judgment, decree
or injunction relating to (i) the protection, preservation or restoration of the
environment (which includes, without limitation, air, water vapor, surface
water, groundwater, drinking water supply, structures, soil, surface land,
subsurface land, plant and animal life or any other natural resource), or to
human health or safety as it relates to Hazardous Materials, or (ii) the
exposure to, or the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or disposal
of, Hazardous Materials, in each case as amended and as now in effect. The term
Environmental Law includes all federal, state and local laws, rules, regulations
or requirements
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relating to the protection of the environment or health and safety, including,
without limitation, the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Water Pollution Control Act of 1972,
the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including, but not limited to, the
Hazardous and Solid Waste Amendments thereto and Subtitle I relating to
underground storage tanks), the Federal Solid Waste Disposal and the Federal
Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide
Act, the Federal Occupational Safety and Health Act of 1970 as it relates to
Hazardous Materials, the Federal Hazardous Substances Transportation Act, the
Emergency Planning and Community Right-To-Know Act, the Safe Drinking Water Act,
the Endangered Species Act, the National Environmental Policy Act, the Rivers
and Harbors Appropriation Act or any so-called "Superfund" or "Superlien" law,
each as amended and as now or hereafter in effect;
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended;
"ERISA Affiliate" means any entity that is considered one employer
with SouthBanc or Heritage, as the case may be, under Section 4001(b)(1) of
ERISA or Section 414 of the IRC;
"Exchange Act" means the Securities Exchange Act of 1934, as amended;
"Excluded Shares" shall consist of (i) Dissenters' Shares and (ii)
shares held directly or indirectly by SouthBanc (other than shares held in a
fiduciary capacity or in satisfaction of a debt previously contracted);
"FDIA" means the Federal Deposit Insurance Act, as amended;
"FDIC" means the Federal Deposit Insurance Corporation;
"GAAP" means generally accepted accounting principles;
"Government Regulators" means any federal or state governmental
authority charged with the supervision or regulation of depository institutions
or depository institution holding companies or engaged in the insurance of bank
deposits;
"Governmental Entity" means any court, administrative agency or
commission or other governmental authority or instrumentality;
"Hazardous Material" means any substance (whether solid, liquid or
gas) which is or could be detrimental to human health or safety or to the
environment, currently or hereafter listed, defined, designated or classified as
hazardous, toxic, radioactive or dangerous, or
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<PAGE>
otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any substance containing any such substance as a component.
Hazardous Material includes, without limitation, any toxic waste, pollutant,
contaminant, hazardous substance, toxic substance, hazardous waste, special
waste, industrial substance, oil or petroleum, or any derivative or by-product
thereof, radon, radioactive material, asbestos, asbestos-containing material,
urea formaldehyde foam insulation, lead and polychlorinated biphenyl;
"Heritage Common Stock" means the common stock, par value $.01 per
share, of Heritage;
"HOLA" means the Home Owners' Loan Act, as amended;
"IRC" means the Internal Revenue Code of 1986, as amended;
"IRS" means the Internal Revenue Service;
"knowledge" means, with respect to a party hereto, actual knowledge of
the members of the Board of Directors of that party or any officer of that party
with the title ranking not less than senior vice president;
"Loan" means a loan, lease, advance, credit enhancement, guarantee or
other extension of credit;
"Material Adverse Effect" means an effect which is material and
adverse to the business, financial condition or results of operations of
Heritage or SouthBanc, as the context may dictate, and its Subsidiaries taken as
a whole; provided, however, that any such effect resulting from any (i) changes
in laws, rules or regulations or generally accepted accounting principles or
regulatory accounting requirements or interpretations thereof that apply to both
SouthBanc and Perpetual Bank and Heritage and Heritage Federal, as the case may
be, or to similarly situated financial and/or depository institutions or (ii)
changes in economic conditions affecting financial institutions generally,
including but not limited to, changes in the general level of market interest
rates shall not be considered in determining if a Material Adverse Effect has
occurred;
"Measurement Period" means the ten consecutive trading days
immediately preceding the eleventh calendar day prior to the Closing Date;
"NASD" means the National Association of Securities Dealers, Inc.;
"OTS" means the Office of Thrift Supervision;
"person" means an individual, corporation, limited liability company,
partnership, association, trust, unincorporated organization or other entity;
A-61
<PAGE>
"SEC" means the Securities and Exchange Commission;
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder;
"SouthBanc Common Stock" means the common stock, par value $0.01 per
share, of SouthBanc;
"SouthBanc Price" means the average of the closing sales price of
SouthBanc Common Stock, as reported on the Nasdaq National Market, for the
Measurement Period; provided, however, that in the event SouthBanc Common Stock
does not trade on one or more of the trading days in the Measurement Period, any
such date shall be disregarded in computing the average closing sales price and
the average shall be based upon the closing sales price and number of days on
which SouthBanc Common Stock actually traded during the Measurement Period;
"Subsidiary" means a corporation, partnership, joint venture or other
entity in which Heritage or SouthBanc, as the case may be, has, directly or
indirectly, an equity interest representing 5% or more of any class of the
capital stock thereof or other equity interests therein;
"taxes" means all income, franchise, gross receipts, real and personal
property, real property transfer and gains, wage and employment taxes; and
"Triggering Event" means any one or more of the following events:
(i) SouthBanc shall have authorized, recommended, publicly
proposed or publicly announced an intention to authorize,
recommend or propose, or entered into an agreement with any
person to effect an Acquisition Transaction;
(ii) Any person shall have made, in the reasonable opinion of
the Board of Directors of SouthBanc, a bona fide proposal
to SouthBanc or its stockholders by public announcement, or
by written communication that is or becomes the subject of
public disclosure, to engage in an Acquisition Transaction;
and
(iii) Any person shall have commenced (as such term is defined in
Rule 14d-2 under the Exchange Act) or shall have filed a
registration statement under the Securities Act with
respect to, a tender offer or exchange offer to purchase
any shares of SouthBanc Common Stock such that, upon
consummation of such offer, such person would own or
control 25% or more of the then outstanding shares of
SouthBanc Common Stock.
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<PAGE>
When a reference is made in this Agreement to Sections, Exhibits or
Schedules, such reference shall be to a Section of, Exhibit or Schedule to, this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for ease of reference only and shall not affect
the meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation." Any singular term in this Agreement
shall be deemed to include the plural, and any plural term the singular. Any
reference to gender in this Agreement shall be deemed to include any other
gender.
Section 8.2. Survival. Only those agreements and covenants of the
--------
parties that are by their terms applicable in whole or in part after the
Effective Time, including the last two sentences of Section 4.2 and Sections
4.11, 4.12, and 8.6 of this Agreement, shall survive the Effective Time. All
other representations, warranties, agreements and covenants shall be deemed to
be conditions of the Agreement and shall not survive the Effective Time.
Section 8.3. Waiver; Amendment. Prior to the Effective Time, any
-----------------
provision of this Agreement may be: (i) waived in writing by the party
benefitted by the provision or (ii) amended or modified at any time (including
the structure of the transaction) by an agreement in writing between the parties
hereto except that, after the vote by the stockholders of Heritage or SouthBanc,
no amendment or modification may be made that would reduce the amount or alter
or change the kind of consideration to be received by holders of Heritage Common
Stock or contravene any provision of Delaware Law or the federal banking laws,
rules and regulations.
Section 8.4. Counterparts. This Agreement may be executed in
------------
counterparts each of which shall be deemed to constitute an original, but all of
which together shall constitute one and the same instrument.
Section 8.5. Governing Law. This Agreement shall be governed by, and
-------------
interpreted in accordance with, the laws of the State of Delaware, without
regard to conflicts of laws principles.
Section 8.6. Expenses. Each party hereto will bear all expenses
--------
incurred by it in connection with this Agreement and the transactions
contemplated hereby, except that expenses incurred in connection with the
filing, printing and mailing of the Joint Proxy Statement-Prospectus and
Registration Statement shall be shared equally by SouthBanc and Heritage.
Section 8.7. Notices. All notices, requests, acknowledgments and
-------
other communications hereunder to a party shall be in writing and shall be
deemed to have been duly given when delivered by hand, overnight courier or
facsimile transmission (confirmed in writing) to such party at its address or
facsimile number set forth below or such other address or facsimile transmission
as such party may specify by notice (in accordance with this provision) to the
other party hereto.
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<PAGE>
If to Heritage, to:
Heritage Bancorp, Inc.
201 W. Main Street
Laurens, South Carolina 29360
Facsimile: (864) 984-2293
Attention: J. Edward Wells
President and Chief Executive Officer
With copies to:
Paul M. Aguggia, Esq.
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Ave., NW
Washington, DC 20016
Facsimile: (202) 966-9409
If to SouthBanc, to:
SouthBanc Shares, Inc.
907 Main Street
Anderson, South Carolina 29621
Facsimile: (864) 260-3662
Attention: Robert W. Orr
President and Chief Executive Officer
With copies to:
John J. Spidi, Esq.
Malizia Spidi & Fisch, PC
1301 K Street, N.W.
Suite 700 East
Washington, D.C. 20005
Facsimile: (202) 434-4661
Section 8.8. Entire Agreement; etc. This Agreement, together with the
---------------------
Stock Option Agreements and the Schedules, represents the entire understanding
of the parties hereto with reference to the transactions contemplated hereby and
supersedes any and all other oral or written agreements heretofore made. All
terms and provisions of this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and assigns.
Except for Section 4.11 and 4.12, which confer rights on the parties described
therein, nothing in this Agreement is intended to confer upon any other person
any rights or remedies of any nature whatsoever under or by reason of this
Agreement.
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<PAGE>
Section 8.9. Successors and Assigns; Assignment. This Agreement shall
----------------------------------
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that this Agreement may
not be assigned by either party hereto without the written consent of the other
party.
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<PAGE>
In Witness Whereof, the parties hereto have caused this Agreement to
be executed by their duly authorized officers as of the 14th day of February,
2000.
SouthBanc Shares, Inc.
By: /s/ Robert W. Orr
----------------------------------------
Robert W. Orr
President and Chief Executive Officer
Heritage Bancorp, Inc.
By: /s/ J. Edward Wells
----------------------------------------
J. Edward Wells
President and Chief Executive Officer
A-66
<PAGE>
Appendix B
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND TO
RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated February 14, 2000, between SouthBanc
Shares, Inc., a Delaware corporation ("Issuer"), and Heritage Bancorp, Inc., a
Delaware corporation ("Grantee").
W I T N E S S E T H:
-------------------
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger of even date herewith (the "Merger Agreement"), which agreement has been
executed by the parties hereto immediately prior to this Stock Option Agreement
(this "Agreement");
WHEREAS, as a condition to Grantee's entering into the Merger
Agreement and in consideration therefor, Issuer has agreed to grant Grantee the
Option (as hereinafter defined); and
WHEREAS, as a condition and inducement to Issuer's willingness to
enter into the Merger Agreement and this Agreement, Issuer has requested that
Grantee agree and Grantee has agreed, to grant Issuer an option to purchase
shares of Grantee's Common Stock on substantially the same terms as the Option
(as hereinafter defined).
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Merger Agreement, the
parties hereto agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms hereof, up
to 614,733 fully paid and nonassessable shares of Issuer's Common Stock, par
value $0.01 per share ("Common Stock"), at a price of $17.50 per share (the
"Option Price"); provided, however, that in no event shall the number of shares
-------- --------
of Common Stock for which this Option is exercisable exceed 19.9% of the
Issuer's issued and outstanding shares of Common Stock without giving effect to
any shares subject to or issued pursuant to the Option. The number of shares of
Common Stock that may be received upon the exercise of the Option and the Option
Price are subject to adjustment as herein set forth.
(b) In the event that any additional shares of Common Stock are
either (i) issued or otherwise become outstanding after the date of this
Agreement (other than pursuant to this Agreement) or (ii) redeemed, repurchased,
retired or otherwise cease to be outstanding after the date of this Agreement,
the number of shares of Common Stock subject to the Option
<PAGE>
shall be increased or decreased, as appropriate, so that, after such issuance,
such number equals 19.9% of the number of shares of Common Stock then issued and
outstanding without giving effect to any shares subject or issued pursuant to
the Option. Nothing contained in this Section 1(b) or elsewhere in this
Agreement shall be deemed to authorize Issuer or Grantee to breach any provision
of the Merger Agreement.
2. (a) The Holder (as hereinafter defined) may exercise the Option,
in whole or part, and from time to time, if, but only if, both an Initial
Triggering Event (as hereinafter defined) and a Subsequent Triggering Event (as
hereinafter defined) shall have occurred prior to the occurrence of an Exercise
Termination Event (as hereinafter defined) and the Holder is not in material
beach of the agreements or covenants contained in this Agreement or the Merger
Agreement, provided that the Holder shall have sent the written notice of such
exercise (as provided in subsection (e) of this Section 2) within 90 days
--------
following such Subsequent Triggering Event (or such longer period as provided in
Section 10), provided further, however, that if the Option cannot be exercised
-------- ------- -------
on any day because of any injunction, order or similar restraint issued by a
court of competent jurisdiction, the period during which the Option may be
exercised shall be extended so that the Option shall expire no earlier than on
the tenth business day after such injunction, order or restraint shall have been
dissolved or when such injunction, order or restraint shall have become
permanent and no longer subject to appeal, as the case may be. Each of the
following shall be an "Exercise Termination Event": (i) the Effective Time (as
defined in the Merger Agreement) of the Merger; (ii) termination of the Merger
Agreement in accordance with the provisions thereof if such termination occurs
prior to the occurrence of an Initial Triggering Event except a termination by
Grantee pursuant to Section 6.1(e) of the Merger Agreement (unless the breach by
Issuer giving rise to such right of termination is non-volitional); or (iii) the
passage of 12 months after termination of the Merger Agreement if such
termination follows the occurrence of an Initial Triggering Event or is a
termination by Grantee pursuant to Section 6.1(e) of the Merger Agreement
(unless the breach by Issuer giving rise to such right of termination is non-
volitional). Notwithstanding any other provision of this Agreement, in no event
shall any of Issuer's obligations under this Agreement continue six months
beyond an Exercise Termination Event. The term "Holder" shall mean the holder
or holders of the Option.
(b) The term "Initial Triggering Event" shall mean any of the
following events or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (each an "Issuer
Subsidiary"), without having received Grantee's prior written consent,
shall have entered into an agreement to engage in an Acquisition
Transaction (as hereinafter defined) with any person (the term "person" for
purposes of this Agreement having the meaning assigned thereto in Sections
3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), and the rules and regulations thereunder) other than
Grantee or any of its Subsidiaries (each a "Grantee Subsidiary") or the
Board of Directors of Issuer shall have recommended that the stockholders
of Issuer approve or accept any Acquisition Transaction with any person
other than Grantee or a Subsidiary of Grantee.
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<PAGE>
For purposes of this Agreement, "Acquisition Transaction" shall mean (A) a
merger or consolidation, or any similar transaction, involving Issuer or
any Significant Subsidiary (as defined in Rule 1-02 of Regulation S-X
promulgated by the Securities and Exchange Commission (the "SEC")) of
Issuer, (B) a purchase, lease or other acquisition or assumption of all or
a substantial portion of the assets or deposits of Issuer or any
Significant Subsidiary of Issuer, (C) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or otherwise) of
securities representing 10% or more of the voting power of Issuer, or (D)
any substantially similar transaction; provided, however, that in no event
-------- -------
shall any merger, consolidation, purchase or similar transaction involving
only the Issuer and one or more of its Subsidiaries or involving only two
or more of such Subsidiaries, be deemed to be an Acquisition Transaction,
provided that any such transaction is not entered into in violation of the
terms of the Merger Agreement;
(ii) Issuer or any Issuer Subsidiary, without having received
Grantee's prior written consent, shall have authorized, recommended,
proposed or publicly announced its intention to authorize, recommend or
propose, an Acquisition Transaction with any person other than Grantee or a
Grantee Subsidiary, or the Board of Directors of Issuer shall have publicly
withdrawn or modified, or publicly announced its intent to withdraw or
modify, in any manner adverse to Grantee, its recommendation that the
stockholders of Issuer approve the transactions contemplated by the Merger
Agreement in anticipation of engaging in an Acquisition Transaction;
(iii) Any person, other than Grantee, any Grantee Subsidiary or
any Issuer Subsidiary acting in a fiduciary capacity in the ordinary course
of its business, shall have acquired beneficial ownership or the right to
acquire beneficial ownership of 10% or more of the outstanding shares of
Common Stock (the term "beneficial ownership" for purposes of this
Agreement having the meaning assigned thereto in Section 13(d) of the 1934
Act, and the rules and regulations thereunder);
(iv) Any person other than Grantee or any Grantee Subsidiary
shall have made a bona fide proposal to Issuer or its stockholders by
public announcement or written communication that is or becomes the subject
of public disclosure to engage in an Acquisition Transaction;
(v) After a proposal is made by a third party to Issuer or its
stockholders to engage in an Acquisition Transaction, Issuer shall have
breached any covenant or obligation contained in the Merger Agreement and
such breach (x) would entitle Grantee to terminate the Merger Agreement and
(y) shall not have been cured prior to the Notice Date (as defined below);
or
(vi) Any person other than Grantee or any Grantee Subsidiary,
other than in connection with a transaction to which Grantee has given its
prior written consent, shall have filed an application or notice with the
Federal Reserve Board, the
B-3
<PAGE>
Office of Thrift Supervision ("OTS") or any other federal or state bank
regulatory authority for approval to engage in an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean either of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person of beneficial ownership of 25%
or more of the then outstanding shares of Common Stock; or
(ii) The occurrence of the Initial Triggering Event described in
paragraph (i) of subsection (b) of this Section 2, except that the
percentage referred to in clause (c) shall be 25%.
(d) Issuer shall notify Grantee promptly in writing of the occurrence
of any Initial Triggering Event or Subsequent Triggering Event of which it has
notice (together, a "Triggering Event"), it being understood that the giving of
such notice by Issuer shall not be a condition to the right of the Holder to
exercise the Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which being herein
referred to as the "Notice Date") specifying (i) the total number of shares it
will purchase pursuant to such exercise and (ii) a place and date not earlier
than three business days nor later than 60 business days from the Notice Date
for the closing of such purchase (the "Closing Date"); provided that if prior
--------
notification to or approval of the Federal Reserve Board, the OTS or any other
regulatory agency is required in connection with such purchase, the Holder shall
promptly file the required notice or application for approval and shall
expeditiously process the same and the period of time that otherwise would run
pursuant to this sentence shall run instead from the date on which any required
notification periods have expired or been terminated or such approvals have been
obtained and any requisite waiting period or periods shall have passed. Any
exercise of the Option shall be deemed to occur on the Notice Date relating
thereto.
(f) At the closing referred to in subsection (e) of this Section 2,
the Holder shall pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a bank account designated by Issuer,
provided that failure or refusal of Issuer to designate such a bank account
- --------
shall not preclude the Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the Holder and, if the Option should be
exercised in part only, a new Option evidencing the rights of the Holder thereof
to purchase the balance of the shares purchasable hereunder, and the Holder
shall deliver to Issuer this Agreement and a letter agreeing that the Holder
will not offer to sell or
B-4
<PAGE>
otherwise dispose of such shares in violation of applicable law or the
provisions of this Agreement.
(h) Certificates for Common Stock delivered at a closing
hereunder may be endorsed with a restrictive legend that shall read
substantially as follows:
"The transfer of the shares represented by this certificate is subject
to certain provisions of an agreement between the registered holder
hereof and Issuer and to resale restrictions arising under the
Securities Act of 1933, as amended. A copy of such agreement is on
file at the principal office of Issuer and will be provided to the
holder hereof without charge upon receipt by Issuer of a written
request therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act of 1933, as amended (the "1933 Act"), in the above legend
shall be removed by delivery of substitute certificate(s) without such reference
if the Holder shall have delivered to Issuer a copy of a letter from the staff
of the SEC, or an opinion of counsel, in form and substance reasonably
satisfactory to Issuer, to the effect that such legend is not required for
purposes of the 1933 Act; (ii) the reference to the provisions to this Agreement
in the above legend shall be removed by delivery of substitute certificate(s)
without such reference if the shares have been sold or transferred in compliance
with the provisions of this Agreement and under circumstances that do not
require the retention of such reference; and (iii) the legend shall be removed
in its entirety if the conditions in the preceding clauses (i) and (ii) are both
satisfied. In addition, such certificates shall bear any other legend as may be
required by law.
(i) Upon the giving by the Holder to Issuer of the written
notice of exercise of the Option provided for under subsection (e) of this
Section 2 and the tender of the applicable purchase price in immediately
available funds, the Holder shall be deemed to be the holder of record of the
shares of Common Stock issuable upon such exercise, notwithstanding that the
stock transfer books of Issuer shall then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered to
the Holder. Issuer shall pay all expenses, and any and all United States
federal, state and local taxes and other charges that may be payable in
connection with the preparation, issue and delivery of stock certificates under
this Section 2 in the name of the Holder or its assignee, transferee or
designee.
3. Issuer agrees: (i) that it shall at all times maintain, free
from preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Common Stock; (ii)
that it will not, by charter amendment or through reorganization, consolidation,
merger, dissolution or sale of assets, or by any other voluntary act, avoid or
seek to avoid the observance or performance of any of the covenants,
stipulations or conditions to be observed or performed hereunder by Issuer;
(iii) promptly to take all action as may from time to time be required
B-5
<PAGE>
(including (x) complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. (S) 18a and regulations promulgated
thereunder and (y) in the event, under the Bank Holding Company Act of 1956, as
amended, the Change in Bank Control Act of 1978, as amended, or any other
federal or state banking law, prior approval of or notice to the Federal Reserve
Board, the OTS or to any state regulatory authority is necessary before the
Option may be exercised, cooperating fully with the Holder in preparing such
applications or notices and providing such information to the Federal Reserve
Board, the OTS or such state regulatory authority as they may require) in order
to permit the Holder to exercise the Option and Issuer duly and effectively to
issue shares of Common Stock pursuant hereto; and (iv) promptly to take all
action provided herein to protect the rights of the Holder against dilution.
4. This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of the Holder, upon presentation and surrender of
this Agreement at the principal office of Issuer, for other Agreements providing
for Options of different denominations entitling the holder thereof to purchase,
on the same terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Common Stock purchasable hereunder.
The terms "Agreement" and "Option" as used herein include any Stock Option
Agreements and related Options for which this Agreement (and the Option granted
hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
5. In addition to the adjustment in the number of shares of Common
Stock that are purchasable upon exercise of the Option pursuant to Section 1 of
this Agreement, the number of shares of Common Stock purchasable upon the
exercise of the Option and the Option Price shall be subject to adjustment from
time to time as provided in this Section 5. In the event of any change in, or
distributions in respect of, the Common Stock by reason of stock dividends,
split-ups, mergers, recapitalizations, combinations, subdivisions, conversions,
exchanges of shares, distributions on or in respect of the Common Stock that
would be prohibited under the terms of the Merger Agreement, or the like, the
type and number of shares of Common Stock purchasable upon exercise hereof and
the Option Price shall be appropriately adjusted in such manner as shall fully
preserve the economic benefits provided hereunder and proper provision shall be
made in any agreement governing any such transaction to provide for such proper
adjustment and the full satisfaction of the Issuer's obligations hereunder.
6. Upon the occurrence of a Subsequent Triggering Event that occurs
prior to an Exercise Termination Event, Issuer shall, at the request of Grantee
(whether on its own behalf or on behalf of any subsequent holder of this Option
(or part thereof) or any of the shares of Common Stock issued pursuant hereto)
delivered within 90 days of such Subsequent Triggering
B-6
<PAGE>
Event (or such longer period as provided in Section 10), promptly prepare, file
and keep current a shelf registration statement under the 1933 Act covering this
Option and any shares issued and issuable pursuant to this Option and shall use
its reasonable best efforts to cause such registration statement to become
effective and remain current in order to permit the sale or other disposition of
this Option and any shares of Common Stock issued upon total or partial exercise
of this Option ("Option Shares") in accordance with any plan of disposition
requested by Grantee. Issuer will use its reasonable best efforts to cause such
registration statement first to become effective and then to remain effective
for such period not in excess of 180 days from the day such registration
statement first becomes effective or such shorter time as may be reasonably
necessary to effect such sales or other dispositions. Grantee shall have the
right to demand two such registrations. The foregoing notwithstanding, if, at
the time of any request by Grantee for registration of the Option or Option
Shares as provided above, Issuer is in registration with respect to an
underwritten public offering of shares of Common Stock, and if in the good faith
judgment of the managing underwriter or managing underwriters, or, if none, the
sole underwriter or underwriters, of such offering the inclusion of the Holder's
Option or Option Shares would interfere with the successful marketing of the
shares of Common Stock offered by Issuer, the number of Option Shares otherwise
to be covered in the registration statement contemplated hereby may be reduced;
provided, however, that after any such required reduction the number of Option
- -------- -------
Shares to be included in such offering for the account of the Holder shall
constitute at least 25% of the total number of shares to be sold by the Holder
and Issuer in the aggregate; and provided further, however, that if such
-------- ------- -------
reduction occurs, then the Issuer shall file a registration statement for the
balance as promptly as practicable and no reduction shall thereafter occur. Each
such Holder shall provide all information reasonably requested by Issuer for
inclusion in any registration statement to be filed hereunder. If requested by
any such Holder in connection with such registration, Issuer shall become a
party to any underwriting agreement relating to the sale of such shares, but
only to the extent of obligating itself in respect of representations,
warranties, indemnities and other agreements customarily included in secondary
offering underwriting agreements for the Issuer. Upon receiving any request
under this Section 6 from any Holder, Issuer agrees to send a copy thereof to
any other person known to Issuer to be entitled to registration rights under
this Section 6, in each case by promptly mailing the same, postage prepaid, to
the address of record of the persons entitled to receive such copies.
Notwithstanding anything to the contrary contained herein, in no event shall
Issuer be obligated to effect more than two registrations pursuant to this
Section 6 by reason of the fact that there shall be more than one Grantee as a
result of any assignment or division of this Agreement.
7. (a) Immediately prior to the occurrence of a Repurchase Event
(as defined below) and prior to twelve months thereafter, (i) following a
request of the Holder, delivered prior to an Exercise Termination Event, Issuer
(or any successor thereto) shall repurchase the Option from the Holder at a
price (the "Option Repurchase Price") equal to the amount by which (A) the
Market/Offer Price (as defined below) exceeds (B) the Option Price, multiplied
by the number of shares for which this Option may then be exercised and (ii) at
the request of the owner of Option Shares from time to time (the "Owner"),
delivered within 90 days of such occurrence (or such longer period as provided
in Section 10), Issuer shall repurchase such number
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of the Option Shares from the Owner as the Owner shall designate at a price (the
"Option Share Repurchase Price") equal to the Market/Offer Price multiplied by
the number of Option Shares so designated. The term "Market/Offer Price" shall
mean the highest of (i) the price per share of Common Stock at which a tender
offer or exchange offer therefor has been made, (ii) the price per share of
Common Stock to be paid by any third party pursuant to an agreement with Issuer,
(iii) the highest closing price for shares of Common Stock within the six-month
period immediately preceding the date the Holder gives notice of the required
repurchase of this Option or the Owner gives notice of the required repurchase
of Option Shares, as the case may be, or (iv) in the event of a sale of all or a
substantial portion of Issuer's assets, the sum of the price paid in such sale
for such assets and the current market value of the remaining assets of Issuer
as determined by a nationally recognized investment banking firm selected by the
Holder or the Owner, as the case may be, and reasonably acceptable to Issuer,
divided by the number of shares of Common Stock of Issuer outstanding at the
time of such sale. In determining the Market/Offer Price, the value of
consideration other than cash shall be determined by a nationally recognized
investment banking firm selected by the Holder or Owner, as the case may be, and
reasonably acceptable to Issuer.
(b) The Holder and the Owner, as the case may be, may exercise its
right to require Issuer to repurchase the Option and any Option Shares pursuant
to this Section 7 by surrendering for such purpose to Issuer, at its principal
office, this Agreement or certificates for Option Shares, as applicable,
accompanied by a written notice or notices stating that the Holder or the Owner,
as the case may be, elects to require Issuer to repurchase this Option and/or
the Option Shares in accordance with the provisions of this Section 7. Within
the latter to occur of (i) five business days after the surrender of the Option
and/or certificates representing Option Shares and the receipt of such notice or
notices relating thereto and (ii) the time that is immediately prior to the
occurrence of a Repurchase Event, Issuer shall deliver or cause to be delivered
to the Holder the Option Repurchase Price and/or to the Owner the Option Share
Repurchase Price therefor or the portion thereof that Issuer is not then
prohibited under applicable law and regulation from so delivering.
(c) To the extent that Issuer is prohibited under applicable law or
regulation from repurchasing the Option and/or the Option Shares in full, Issuer
shall immediately so notify the Holder and/or the Owner and thereafter deliver
or cause to be delivered, from time to time, to the Holder and/or the Owner, as
appropriate, the portion of the Option Repurchase Price and the Option Share
Repurchase Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer at any time after delivery of a
-------- -------
notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited
under applicable law or regulation from delivering to the Holder and/or the
Owner, as appropriate, the Option Repurchase Price and the Option Share
Repurchase Price, respectively, in full (and Issuer hereby undertakes to use its
best efforts to obtain all required regulatory and legal approvals and to file
any required notices as promptly as practicable in order to accomplish such
repurchase), the Holder or Owner may revoke its notice of repurchase of the
Option or the Option Shares either in whole or to the
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<PAGE>
extent of the prohibition, whereupon, in the latter case, Issuer shall promptly
(i) deliver to the Holder and/or the Owner, as appropriate, that portion of the
Option Repurchase Price or the Option Share Repurchase Price that Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Holder, a new Stock Option Agreement evidencing the right of the Holder to
purchase that number of shares of Common Stock obtained by multiplying the
number of shares of Common Stock for which the surrendered Stock Option
Agreement was exercisable at the time of delivery of the notice of repurchase by
a fraction, the numerator of which is the Option Repurchase Price less the
portion thereof theretofore delivered to the Holder and the denominator of which
is the Option Repurchase Price, or (B) to the Owner, a certificate for the
Option Shares it is then so prohibited from repurchasing.
(d) For purposes of this Section 7, a Repurchase Event shall be
deemed to have occurred (i) upon the consummation of any merger, consolidation
or similar transaction involving Issuer or any purchase, lease or other
acquisition of all or a substantial portion of the assets of Issuer, other than
any such transaction which would not constitute an Acquisition Transaction
pursuant to the provisos to Section 2(b)(i) hereof or (ii) upon the acquisition
by any person of beneficial ownership of 50% or more of the then outstanding
shares of Common Stock, provided that no such event shall constitute a
Repurchase Event unless a Subsequent Triggering Event shall have occurred prior
to an Exercise Termination Event. The parties hereto agree that Issuer's
obligations to repurchase the Option or Option Shares under this Section 7 shall
not terminate upon the occurrence of an Exercise Termination Event unless no
Subsequent Triggering Event shall have occurred prior to the occurrence of an
Exercise Termination Event.
8. (a) In the event that prior to an Exercise Termination Event,
Issuer shall enter into an agreement (i) to consolidate with or merge into any
person, other than Grantee or one of its Subsidiaries, and shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) to
permit any person, other than Grantee or one of its Subsidiaries, to merge into
Issuer and Issuer shall be the continuing or surviving corporation, but, in
connection with such merger, the then outstanding shares of Common Stock shall
be changed into or exchanged for stock or other securities of any other person
or cash or any other property or the then outstanding shares of Common Stock
shall after such merger represent less than 50% of the outstanding voting shares
and voting share equivalents of the merged company, or (iii) to sell or
otherwise transfer all or substantially all of its assets to any person, other
than Grantee or one of its Subsidiaries, then, and in each such case, the
agreement governing such transaction shall make proper provision so that the
Option shall, upon the consummation of any such transaction and upon the terms
and conditions set forth herein, be converted into, or exchanged for, an option
(the "Substitute Option"), at the election of the Holder, of either (x) the
Acquiring Corporation (as hereinafter defined) or (y) any person that controls
the Acquiring Corporation.
(b) The following terms have the meanings indicated:
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<PAGE>
(1) "Acquiring Corporation" shall mean (i) the continuing
or surviving corporation of a consolidation or merger with Issuer (if other
than Issuer), (ii) Issuer in a merger in which Issuer is the continuing or
surviving person, and (iii) the transferee of all or substantially all of
Issuer's assets.
(2) "Substitute Common Stock" shall mean the common stock
issued by the issuer of the Substitute Option upon exercise of the
Substitute Option.
(3) "Assigned Value" shall mean the Market/Offer Price, as
defined in Section 7.
(4) "Average Price" shall mean the average closing price of
a share of the Substitute Common Stock for the one year immediately
preceding the consolidation, merger or sale in question, but in no event
higher than the closing price of the shares of Substitute Common Stock on
the day preceding such consolidation, merger or sale; provided that if
--------
Issuer is the issuer of the Substitute Option, the Average Price shall be
computed with respect to a share of common stock issued by the person
merging into Issuer or by any company which controls or is controlled by
such person, as the Holder may elect.
(c) The Substitute Option shall have the same terms as the
Option, provided, that if terms of the Substitute Option cannot, for legal
--------
reasons, be the same as the Option, such terms shall be as similar as possible
and in no event less advantageous to the Holder. The issuer of the Substitute
Option shall also enter into an agreement with the then Holder or Holders of the
Substitute Option in substantially the same form as this Agreement, which shall
be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number
of shares of Substitute Common Stock as is equal to the Assigned Value
multiplied by the number of shares of Common Stock for which the Option is then
exercisable, divided by the Average Price. The exercise price of the Substitute
Option per share of Substitute Common Stock shall then be equal to the Option
Price multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock for which the Option is then exercisable and the
denominator of which shall be the number of shares of Substitute Common Stock
for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs,
shall the Substitute Option be exercisable for more than 19.9% of the shares of
Substitute Common Stock outstanding prior to exercise of the Substitute Option.
In the event that the Substitute Option would be exercisable for more than 19.9%
of the shares of Substitute Common Stock outstanding prior to exercise but for
this clause (e), the issuer of the Substitute Option (the "Substitute Option
Issuer") shall make a cash payment to Holder equal to the excess of (i) the
value of the Substitute Option without giving effect to the limitation in this
clause (e) over (ii) the value of the Substi-
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<PAGE>
tute Option after giving effect to the limitation in this clause (e). This
difference in value shall be determined by a nationally recognized investment
banking firm selected by the Holder or the Owner, as the case may be, and
reasonably acceptable to the Acquiring Corporation.
(f) Issuer shall not enter into any transaction described in
subsection (a) of this Section 8 unless the Acquiring Corporation and any person
that controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. (a) At the request of the holder of the Substitute Option (the
"Substitute Option Holder"), the Substitute Option Issuer shall repurchase the
Substitute Option from the Substitute Option Holder at a price (the "Substitute
Option Repurchase Price") equal to the amount by which (i) the Highest Closing
Price (as hereinafter defined) exceeds (ii) the exercise price of the Substitute
Option, multiplied by the number of shares of Substitute Common Stock for which
the Substitute Option may then be exercised, and at the request of the owner
(the "Substitute Share Owner") of shares of Substitute Common Stock (the
"Substitute Shares"), the Substitute Option Issuer shall repurchase the
Substitute Shares at a price (the "Substitute Share Repurchase Price") equal to
the Highest Closing Price multiplied by the number of Substitute Shares so
designated. The term "Highest Closing Price" shall mean the highest closing
price for shares of Substitute Common Stock within the six-month period
immediately preceding the date the Substitute Option Holder gives notice of the
required repurchase of the Substitute Option or the Substitute Share Owner gives
notice of the required repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share Owner,
as the case may be, may exercise its respective right to require the Substitute
Option Issuer to repurchase the Substitute Option and the Substitute Shares
pursuant to this Section 9 by surrendering for such purpose to the Substitute
Option Issuer, at its principal office, the agreement for such Substitute Option
(or, in the absence of such an agreement, a copy of this Agreement) and
certificates for Substitute Shares accompanied by a written notice or notices
stating that the Substitute Option Holder or the Substitute Share Owner, as the
case may be, elects to require the Substitute Option Issuer to repurchase the
Substitute Option and/or the Substitute Shares in accordance with the provisions
of this Section 9. As promptly as practicable, and in any event within five
business days after the surrender of the Substitute Option and/or certificates
representing Substitute Shares and the receipt of such notice or notices
relating thereto, the Substitute Option Issuer shall deliver or cause to be
delivered to the Substitute Option Holder the Substitute Option Repurchase Price
and/or to the Substitute Share Owner the Substitute Share Repurchase Price
therefor or, in either case, the portion thereof which the Substitute Option
Issuer is not then prohibited under applicable law and regulation from so
delivering.
(c) To the extent that the Substitute Option Issuer is
prohibited under applicable law or regulation from repurchasing the Substitute
Option and/or the Substitute Shares in part or in full, the Substitute Option
Issuer following a request for repurchase pursuant to this
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<PAGE>
Section 9 shall immediately so notify the Substitute Option Holder and/or the
Substitute Share Owner and thereafter deliver or cause to be delivered, from
time to time, to the Substitute Option Holder and/or the Substitute Share Owner,
as appropriate, the portion of the Substitute Share Repurchase Price,
respectively, which it is no longer prohibited from delivering, within five
business days after the date on which the Substitute Option Issuer is no longer
so prohibited; provided, however, that if the Substitute Option Issuer is at any
-------- -------
time after delivery of a notice of repurchase pursuant to subsection (b) of this
Section 9 prohibited under applicable law or regulation from delivering to the
Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the
Substitute Option Repurchase Price and the Substitute Share Repurchase Price,
respectively, in full (and the Substitute Option Issuer shall use its best
efforts to receive all required regulatory and legal approvals as promptly as
practicable in order to accomplish such repurchase), the Substitute Option
Holder or Substitute Share Owner may revoke its notice of repurchase of the
Substitute Option or the Substitute Shares either in whole or to the extent of
the prohibition, whereupon, in the latter case, the Substitute Option Issuer
shall promptly (i) deliver to the Substitute Option Holder or Substitute Share
Owner, as appropriate, that portion of the Substitute Option Repurchase Price or
the Substitute Share Repurchase Price that the Substitute Option Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Substitute Option Holder, a new Substitute Option evidencing the right of the
Substitute Option Holder to purchase that number of shares of the Substitute
Common Stock obtained by multiplying the number of shares of the Substitute
Common Stock for which the surrendered Substitute Option was exercisable at the
time of delivery of the notice of repurchase by a fraction, the numerator of
which is the Substitute Option Repurchase Price less the portion thereof
theretofore delivered to the Substitute Option Holder and the denominator of
which is the Substitute Option Repurchase Price, or (B) to the Substitute Share
Owner, a certificate for the Substitute Common Shares it is then so prohibited
from repurchasing.
10. The 90-day period for exercise of certain rights under Sections
2, 6, 7 and 14 shall be extended: (i) to the extent necessary to obtain all
regulatory approvals for the exercise of such rights, and for the expiration of
all statutory waiting periods; and (ii) to the extent necessary to avoid
liability under Section 16(b) of the 1934 Act by reason of such exercise.
11. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Issuer and no other corporate proceedings on the part of
Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Issuer.
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<PAGE>
(b) Issuer has taken all necessary corporate action to authorize
and reserve and to permit it to issue, and at all times from the date hereof
through the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
12. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to
enter into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Grantee. This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common Stock or
other securities acquired by Grantee upon exercise of the Option will not be,
acquired with a view to the public distribution thereof and will not be
transferred or otherwise disposed of except in a transaction registered or
exempt from registration under the 1933 Act.
13. (a) Grantee may, at any time following a Repurchase Event and
prior to the occurrence of an Exercise Termination Event (or such later period
as provided in Section 10), relinquish the Option (together with any Option
Shares issued to and then owned by Grantee) to Issuer in exchange for a cash fee
equal to the Surrender Price (as defined below); provided, however, that Grantee
-------- -------
may not exercise its rights pursuant to this Section 13 if Issuer has
repurchased the Option (or any portion thereof) or any Option Shares pursuant to
Section 7. The "Surrender Price" shall be equal to $1,600,000 (i) plus, if
applicable, Grantee's purchase price with respect to any Option Shares and (ii)
minus, if applicable, the sum of (A) the excess of (1) the net cash amounts, if
any, received by Grantee pursuant to the arms' length sale of Option Shares (or
any other securities into which such Option Shares were converted or exchanged)
to any unaffiliated party, over (2) Grantee's purchase price of such Option
Shares and (B) the net cash amounts, if any, received by Grantee pursuant to an
arms' length sale of a portion of the Option to any unaffiliated party.
(b) Grantee may exercise its right to relinquish the Option and
any Option Shares pursuant to this Section 13 by surrendering to Issuer, at its
principal office, this Agreement together with certificates for Option Shares,
if any, accompanied by a written notice stating (i) that Grantee elects to
relinquish the Option and Option Shares, if any, in accordance with the
provisions of this Section 13 and (ii) the Surrender Price. The Surrender Price
shall be
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<PAGE>
payable in immediately available funds on or before the second business day
following receipt of such notice by Issuer.
(c) To the extent that Issuer is prohibited under applicable law
or regulation, or as a consequence of administrative policy, from paying the
Surrender Price to Grantee in full, Issuer shall immediately so notify Grantee
and thereafter deliver or cause to be delivered, from time to time, to Grantee,
the portion of the Surrender Price that it is no longer prohibited from paying,
within five business days after the date on which Issuer is no longer so
prohibited, provided, however, that if Issuer at any time after delivery of a
-------- -------
notice of surrender pursuant to paragraph (b) of this Section 13 is prohibited
under applicable law or regulation, or as a consequence of administrative
policy, from paying to Grantee the Surrender Price in full, (i) Issuer shall (A)
use its reasonable best efforts to obtain all required regulatory and legal
approvals and to file any required notices as promptly as practicable in order
to make such payments, (B) within five days of the submission or receipt of any
documents relating to any such regulatory and legal approvals, provide Grantee
with copies of the same, and (C) keep Grantee advised of both the status of any
such request for regulatory and legal approvals, as well as any discussions with
any relevant regulatory or other third party reasonably related to the same and
(ii) Grantee may revoke such notice of surrender by delivery of a notice of
revocation to Issuer and, upon delivery of such notice of revocation, the
Exercise Termination Date shall be extended to a date six months from the date
on which the Exercise Termination Date would have occurred if not for the
provisions of this Section 13(c) (during which period Grantee may exercise any
of its rights hereunder, including any and all rights pursuant to this Section
13).
14. Neither of the parties hereto may assign any of its rights or
obligations under this Agreement or the Option created hereunder to any other
person, without the express written consent of the other party, except that in
the event a Subsequent Triggering Event shall have occurred prior to an Exercise
Termination Event, Grantee, subject to the express provisions hereof, may assign
in whole or in part its rights and obligations hereunder within 90 days
following such Subsequent Triggering Event (or such longer period as provided in
Section 10); provided, however, that until the date 15 days following the date
-------- -------
on which the Federal Reserve Board or the OTS, as applicable, approves an
application by Grantee to acquire the shares of Common Stock subject to the
Option, Grantee may not assign its rights under the Option except in (i) a
widely dispersed public distribution, (ii) a private placement in which no one
party acquires the right to purchase in excess of 2% of the voting shares of
Issuer, (iii) an assignment to a single party (e.g., a broker or investment
----
banker) for the purpose of conducting a widely dispersed public distribution on
Grantee's behalf, or (iv) any other manner approved by the Federal Reserve Board
or the OTS, as applicable.
15. Each of Grantee and Issuer will use its best efforts to make all
filings with, and to obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions contemplated by
this Agreement, including without limitation making application to list the
shares of Common Stock issuable hereunder on the Nasdaq National Market upon
official notice of issuance and applying to the Federal Reserve Board
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<PAGE>
and/or the OTS, as applicable, for approval to acquire the shares issuable
hereunder, but Grantee shall not be obligated to apply to state banking
authorities for approval to acquire the shares of Common Stock issuable
hereunder until such time, if ever, as it deems appropriate to do so.
16. (a) Notwithstanding any other provision of this Agreement, in no
event shall the Grantee's Total Profit (as hereinafter defined) exceed
$2,000,000 and, if it otherwise would exceed such amount, the Grantee, at its
sole election, shall either (i) reduce the number of shares of Common Stock
subject to this Option, (ii) deliver to the Issuer for cancellation Option
Shares previously purchased by Grantee, (iii) pay cash to the Issuer, or (iv)
any combination thereof, so that Grantee's actually realized Total Profit shall
not exceed $2,000,000 after taking into account the foregoing actions.
(b) Notwithstanding any other provision of this Agreement, this
Option may not be exercised for a number of shares as would, as of the date of
exercise, result in a Notional Total Profit (as defined below) of more than
$2,000,000; provided, that nothing in this sentence shall restrict any exercise
--------
of the Option permitted hereby on any subsequent date.
(c) As used herein, the term "Total Profit" shall mean the
aggregate amount (before taxes) of the following: (i) the amount received by
Grantee pursuant to Issuer's repurchase of the Option (or any portion thereof)
pursuant to Section 7 of this Agreement, (ii)(x) the amount received by Grantee
pursuant to Issuer's repurchase of Option Shares pursuant to Section 7, less (y)
the Grantee's purchase price for such Option Shares, (iii)(x) the net cash
amounts received by Grantee pursuant to the sale of Option Shares (or any other
securities into which such Option Shares are converted or exchanged) to any
unaffiliated party, less (y) the Grantee's purchase price of such Option Shares,
(iv) any amounts received by Grantee on the transfer of the Option (or any
portion thereof) to any unaffiliated party, and (v) any equivalent amount with
respect to the Substitute Option.
(d) As used herein, the term "Notional Total Profit" with
respect to any number of shares as to which Grantee may propose to exercise this
Option shall be the Total Profit determined as of the date of such proposed
exercise assuming that this Option were exercised on such date for such number
of shares and assuming that such shares, together with all other Option Shares
held by Grantee and its affiliates as of such date, were sold for cash at the
closing market price for the Common Stock as of the close of business on the
preceding trading day (less customary brokerage commissions).
17. The parties hereto acknowledge that damages would be an
inadequate remedy for a breach of this Agreement by either party hereto and that
the obligations of the parties hereto shall be enforceable by either party
hereto through injunctive or other equitable relief.
18. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions
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<PAGE>
contained in this Agreement shall remain in full force and effect, and shall in
no way be affected, impaired or invalidated. If for any reason such court or
regulatory agency determines that the Holder is not permitted to acquire, or
Issuer is not permitted to repurchase pursuant to Section 7, the full number of
shares of Common Stock provided in Section 1(a) hereof (as adjusted pursuant to
Section 1(b) or 5 hereof), it is the express intention of Issuer to allow the
Holder to acquire or to require Issuer to repurchase such lesser number of
shares as may be permissible, without any amendment or modification hereof.
19. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Merger Agreement.
20. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, regardless of the laws that might
otherwise govern under applicable principles of conflicts of laws thereof.
21. This Agreement may be executed in two counterparts, each of which
shall be deemed to be an original, but all of which shall constitute one and the
same agreement.
22. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
23. Except as otherwise expressly provided herein or in the Merger
Agreement, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors and
permitted assigns, any rights, remedies, obligations or liabilities under or by
reason of this Agreement, except as expressly provided herein.
24. Capitalized terms used in this Agreement and not defined herein
shall have the meanings assigned thereto in the Merger Agreement.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, all as of
the date first above written.
HERITAGE BANCORP, INC.
By: /s/ J. Edward Wells
---------------------------------------
J. Edward Wells
President and Chief Executive Officer
SOUTHBANC SHARES, INC.
By: /s/ Robert W. Orr
---------------------------------------
Robert W. Orr
President and Chief Executive Officer
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Appendix C
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND TO
RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated February 14, 2000, between Heritage
Bancorp, Inc., a Delaware corporation ("Issuer"), and SouthBanc Shares, Inc., a
Delaware corporation ("Grantee").
W I T N E S S E T H:
-------------------
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger of even date herewith (the "Merger Agreement"), which agreement has been
executed by the parties hereto immediately prior to this Stock Option Agreement
(this "Agreement");
WHEREAS, as a condition to Grantee's entering into the Merger
Agreement and in consideration therefor, Issuer has agreed to grant Grantee the
Option (as hereinafter defined); and
WHEREAS, as a condition and inducement to Issuer's willingness to
enter into the Merger Agreement and this Agreement, Issuer has requested that
Grantee agree and Grantee has agreed, to grant Issuer an option to purchase
shares of Grantee's Common Stock on substantially the same terms as the Option
(as hereinafter defined).
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Merger Agreement, the
parties hereto agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms hereof, up
to 855,916 fully paid and nonassessable shares of Issuer's Common Stock, par
value $0.01 per share ("Common Stock"), at a price of $13.25 per share (the
"Option Price"); provided, however, that in no event shall the number of shares
-------- --------
of Common Stock for which this Option is exercisable exceed 19.9% of the
Issuer's issued and outstanding shares of Common Stock without giving effect to
any shares subject to or issued pursuant to the Option. The number of shares of
Common Stock that may be received upon the exercise of the Option and the Option
Price are subject to adjustment as herein set forth.
(b) In the event that any additional shares of Common Stock are
either (i) issued or otherwise become outstanding after the date of this
Agreement (other than pursuant to this Agreement) or (ii) redeemed, repurchased,
retired or otherwise cease to be outstanding after the date of this Agreement,
the number of shares of Common Stock subject to the Option
<PAGE>
shall be increased or decreased, as appropriate, so that, after such issuance,
such number equals 19.9% of the number of shares of Common Stock then issued and
outstanding without giving effect to any shares subject or issued pursuant to
the Option. Nothing contained in this Section 1(b) or elsewhere in this
Agreement shall be deemed to authorize Issuer or Grantee to breach any provision
of the Merger Agreement.
2. (a) The Holder (as hereinafter defined) may exercise the Option,
in whole or part, and from time to time, if, but only if, both an Initial
Triggering Event (as hereinafter defined) and a Subsequent Triggering Event (as
hereinafter defined) shall have occurred prior to the occurrence of an Exercise
Termination Event (as hereinafter defined) and the Holder is not in material
beach of the agreements or covenants contained in this Agreement or the Merger
Agreement, provided that the Holder shall have sent the written notice of such
--------
exercise (as provided in subsection (e) of this Section 2) within 90 days
following such Subsequent Triggering Event (or such longer period as provided in
Section 10), provided further, however, that if the Option cannot be exercised
-------- ------- -------
on any day because of any injunction, order or similar restraint issued by a
court of competent jurisdiction, the period during which the Option may be
exercised shall be extended so that the Option shall expire no earlier than on
the tenth business day after such injunction, order or restraint shall have been
dissolved or when such injunction, order or restraint shall have become
permanent and no longer subject to appeal, as the case may be. Each of the
following shall be an "Exercise Termination Event": (i) the Effective Time (as
defined in the Merger Agreement) of the Merger; (ii) termination of the Merger
Agreement in accordance with the provisions thereof if such termination occurs
prior to the occurrence of an Initial Triggering Event except a termination by
Grantee pursuant to Section 6.1(e) of the Merger Agreement (unless the breach by
Issuer giving rise to such right of termination is non-volitional); or (iii) the
passage of 12 months after termination of the Merger Agreement if such
termination follows the occurrence of an Initial Triggering Event or is a
termination by Grantee pursuant to Section 6.1(e) of the Merger Agreement
(unless the breach by Issuer giving rise to such right of termination is non-
volitional). Notwithstanding any other provision of this Agreement, in no event
shall any of Issuer's obligations under this Agreement continue six months
beyond an Exercise Termination Event. The term "Holder" shall mean the holder
or holders of the Option.
(b) The term "Initial Triggering Event" shall mean any of the
following events or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (each an "Issuer
Subsidiary"), without having received Grantee's prior written consent,
shall have entered into an agreement to engage in an Acquisition
Transaction (as hereinafter defined) with any person (the term "person" for
purposes of this Agreement having the meaning assigned thereto in Sections
3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), and the rules and regulations thereunder) other than
Grantee or any of its Subsidiaries (each a "Grantee Subsidiary") or the
Board of Directors of Issuer shall have recommended that the stockholders
of Issuer approve or accept any Acquisition Transaction with any person
other than Grantee or a Subsidiary of Grantee.
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For purposes of this Agreement, "Acquisition Transaction" shall mean (A) a
merger or consolidation, or any similar transaction, involving Issuer or
any Significant Subsidiary (as defined in Rule 1-02 of Regulation S-X
promulgated by the Securities and Exchange Commission (the "SEC")) of
Issuer, (B) a purchase, lease or other acquisition or assumption of all or
a substantial portion of the assets or deposits of Issuer or any
Significant Subsidiary of Issuer, (C) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or otherwise) of
securities representing 10% or more of the voting power of Issuer, or (D)
any substantially similar transaction; provided, however, that in no event
-------- -------
shall any merger, consolidation, purchase or similar transaction involving
only the Issuer and one or more of its Subsidiaries or involving only two
or more of such Subsidiaries, be deemed to be an Acquisition Transaction,
provided that any such transaction is not entered into in violation of the
terms of the Merger Agreement;
(ii) Issuer or any Issuer Subsidiary, without having received
Grantee's prior written consent, shall have authorized, recommended,
proposed or publicly announced its intention to authorize, recommend or
propose, an Acquisition Transaction with any person other than Grantee or a
Grantee Subsidiary, or the Board of Directors of Issuer shall have publicly
withdrawn or modified, or publicly announced its intent to withdraw or
modify, in any manner adverse to Grantee, its recommendation that the
stockholders of Issuer approve the transactions contemplated by the Merger
Agreement in anticipation of engaging in an Acquisition Transaction;
(iii) Any person, other than Grantee, any Grantee Subsidiary or
any Issuer Subsidiary acting in a fiduciary capacity in the ordinary course
of its business, shall have acquired beneficial ownership or the right to
acquire beneficial ownership of 10% or more of the outstanding shares of
Common Stock (the term "beneficial ownership" for purposes of this
Agreement having the meaning assigned thereto in Section 13(d) of the 1934
Act, and the rules and regulations thereunder);
(iv) Any person other than Grantee or any Grantee Subsidiary
shall have made a bona fide proposal to Issuer or its stockholders by
public announcement or written communication that is or becomes the subject
of public disclosure to engage in an Acquisition Transaction;
(v) After a proposal is made by a third party to Issuer or its
stockholders to engage in an Acquisition Transaction, Issuer shall have
breached any covenant or obligation contained in the Merger Agreement and
such breach (x) would entitle Grantee to terminate the Merger Agreement and
(y) shall not have been cured prior to the Notice Date (as defined below);
or
(vi) Any person other than Grantee or any Grantee Subsidiary,
other than in connection with a transaction to which Grantee has given its
prior written consent, shall have filed an application or notice with the
Federal Reserve Board, the
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<PAGE>
Office of Thrift Supervision ("OTS") or any other federal or state bank
regulatory authority for approval to engage in an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean either of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person of beneficial ownership of 25%
or more of the then outstanding shares of Common Stock; or
(ii) The occurrence of the Initial Triggering Event described in
paragraph (i) of subsection (b) of this Section 2, except that the
percentage referred to in clause (c) shall be 25%.
(d) Issuer shall notify Grantee promptly in writing of the
occurrence of any Initial Triggering Event or Subsequent Triggering Event of
which it has notice (together, a "Triggering Event"), it being understood that
the giving of such notice by Issuer shall not be a condition to the right of the
Holder to exercise the Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which being herein
referred to as the "Notice Date") specifying (i) the total number of shares it
will purchase pursuant to such exercise and (ii) a place and date not earlier
than three business days nor later than 60 business days from the Notice Date
for the closing of such purchase (the "Closing Date"); provided that if prior
--------
notification to or approval of the Federal Reserve Board, the OTS or any other
regulatory agency is required in connection with such purchase, the Holder shall
promptly file the required notice or application for approval and shall
expeditiously process the same and the period of time that otherwise would run
pursuant to this sentence shall run instead from the date on which any required
notification periods have expired or been terminated or such approvals have been
obtained and any requisite waiting period or periods shall have passed. Any
exercise of the Option shall be deemed to occur on the Notice Date relating
thereto.
(f) At the closing referred to in subsection (e) of this Section 2,
the Holder shall pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a bank account designated by Issuer,
provided that failure or refusal of Issuer to designate such a bank account
- --------
shall not preclude the Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the Holder and, if the Option should be
exercised in part only, a new Option evidencing the rights of the Holder thereof
to purchase the balance of the shares purchasable hereunder, and the Holder
shall deliver to Issuer this Agreement and a letter agreeing that the Holder
will not offer to sell or
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otherwise dispose of such shares in violation of applicable law or the
provisions of this Agreement.
(h) Certificates for Common Stock delivered at a closing
hereunder may be endorsed with a restrictive legend that shall read
substantially as follows:
"The transfer of the shares represented by this certificate is subject
to certain provisions of an agreement between the registered holder
hereof and Issuer and to resale restrictions arising under the
Securities Act of 1933, as amended. A copy of such agreement is on
file at the principal office of Issuer and will be provided to the
holder hereof without charge upon receipt by Issuer of a written
request therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act of 1933, as amended (the "1933 Act"), in the above legend
shall be removed by delivery of substitute certificate(s) without such reference
if the Holder shall have delivered to Issuer a copy of a letter from the staff
of the SEC, or an opinion of counsel, in form and substance reasonably
satisfactory to Issuer, to the effect that such legend is not required for
purposes of the 1933 Act; (ii) the reference to the provisions to this Agreement
in the above legend shall be removed by delivery of substitute certificate(s)
without such reference if the shares have been sold or transferred in compliance
with the provisions of this Agreement and under circumstances that do not
require the retention of such reference; and (iii) the legend shall be removed
in its entirety if the conditions in the preceding clauses (i) and (ii) are both
satisfied. In addition, such certificates shall bear any other legend as may be
required by law.
(i) Upon the giving by the Holder to Issuer of the written
notice of exercise of the Option provided for under subsection (e) of this
Section 2 and the tender of the applicable purchase price in immediately
available funds, the Holder shall be deemed to be the holder of record of the
shares of Common Stock issuable upon such exercise, notwithstanding that the
stock transfer books of Issuer shall then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered to
the Holder. Issuer shall pay all expenses, and any and all United States
federal, state and local taxes and other charges that may be payable in
connection with the preparation, issue and delivery of stock certificates under
this Section 2 in the name of the Holder or its assignee, transferee or
designee.
3. Issuer agrees: (i) that it shall at all times maintain, free
from preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Common Stock; (ii)
that it will not, by charter amendment or through reorganization, consolidation,
merger, dissolution or sale of assets, or by any other voluntary act, avoid or
seek to avoid the observance or performance of any of the covenants,
stipulations or conditions to be observed or performed hereunder by Issuer;
(iii) promptly to take all action as may from time to time be required
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<PAGE>
(including (x) complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. (S) 18a and regulations promulgated
thereunder and (y) in the event, under the Bank Holding Company Act of 1956, as
amended, the Change in Bank Control Act of 1978, as amended, or any other
federal or state banking law, prior approval of or notice to the Federal Reserve
Board, the OTS or to any state regulatory authority is necessary before the
Option may be exercised, cooperating fully with the Holder in preparing such
applications or notices and providing such information to the Federal Reserve
Board, the OTS or such state regulatory authority as they may require) in order
to permit the Holder to exercise the Option and Issuer duly and effectively to
issue shares of Common Stock pursuant hereto; and (iv) promptly to take all
action provided herein to protect the rights of the Holder against dilution.
4. This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of the Holder, upon presentation and surrender of
this Agreement at the principal office of Issuer, for other Agreements providing
for Options of different denominations entitling the holder thereof to purchase,
on the same terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Common Stock purchasable hereunder.
The terms "Agreement" and "Option" as used herein include any Stock Option
Agreements and related Options for which this Agreement (and the Option granted
hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
5. In addition to the adjustment in the number of shares of Common
Stock that are purchasable upon exercise of the Option pursuant to Section 1 of
this Agreement, the number of shares of Common Stock purchasable upon the
exercise of the Option and the Option Price shall be subject to adjustment from
time to time as provided in this Section 5. In the event of any change in, or
distributions in respect of, the Common Stock by reason of stock dividends,
split-ups, mergers, recapitalizations, combinations, subdivisions, conversions,
exchanges of shares, distributions on or in respect of the Common Stock that
would be prohibited under the terms of the Merger Agreement, or the like, the
type and number of shares of Common Stock purchasable upon exercise hereof and
the Option Price shall be appropriately adjusted in such manner as shall fully
preserve the economic benefits provided hereunder and proper provision shall be
made in any agreement governing any such transaction to provide for such proper
adjustment and the full satisfaction of the Issuer's obligations hereunder.
6. Upon the occurrence of a Subsequent Triggering Event that occurs
prior to an Exercise Termination Event, Issuer shall, at the request of Grantee
(whether on its own behalf or on behalf of any subsequent holder of this Option
(or part thereof) or any of the shares of Common Stock issued pursuant hereto)
delivered within 90 days of such Subsequent Triggering
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<PAGE>
Event (or such longer period as provided in Section 10), promptly prepare, file
and keep current a shelf registration statement under the 1933 Act covering this
Option and any shares issued and issuable pursuant to this Option and shall use
its reasonable best efforts to cause such registration statement to become
effective and remain current in order to permit the sale or other disposition of
this Option and any shares of Common Stock issued upon total or partial exercise
of this Option ("Option Shares") in accordance with any plan of disposition
requested by Grantee. Issuer will use its reasonable best efforts to cause such
registration statement first to become effective and then to remain effective
for such period not in excess of 180 days from the day such registration
statement first becomes effective or such shorter time as may be reasonably
necessary to effect such sales or other dispositions. Grantee shall have the
right to demand two such registrations. The foregoing notwithstanding, if, at
the time of any request by Grantee for registration of the Option or Option
Shares as provided above, Issuer is in registration with respect to an
underwritten public offering of shares of Common Stock, and if in the good faith
judgment of the managing underwriter or managing underwriters, or, if none, the
sole underwriter or underwriters, of such offering the inclusion of the Holder's
Option or Option Shares would interfere with the successful marketing of the
shares of Common Stock offered by Issuer, the number of Option Shares otherwise
to be covered in the registration statement contemplated hereby may be reduced;
provided, however, that after any such required reduction the number of Option
- -------- -------
Shares to be included in such offering for the account of the Holder shall
constitute at least 25% of the total number of shares to be sold by the Holder
and Issuer in the aggregate; and provided further, however, that if such
-------- ------- -------
reduction occurs, then the Issuer shall file a registration statement for the
balance as promptly as practicable and no reduction shall thereafter occur. Each
such Holder shall provide all information reasonably requested by Issuer for
inclusion in any registration statement to be filed hereunder. If requested by
any such Holder in connection with such registration, Issuer shall become a
party to any underwriting agreement relating to the sale of such shares, but
only to the extent of obligating itself in respect of representations,
warranties, indemnities and other agreements customarily included in secondary
offering underwriting agreements for the Issuer. Upon receiving any request
under this Section 6 from any Holder, Issuer agrees to send a copy thereof to
any other person known to Issuer to be entitled to registration rights under
this Section 6, in each case by promptly mailing the same, postage prepaid, to
the address of record of the persons entitled to receive such copies.
Notwithstanding anything to the contrary contained herein, in no event shall
Issuer be obligated to effect more than two registrations pursuant to this
Section 6 by reason of the fact that there shall be more than one Grantee as a
result of any assignment or division of this Agreement.
7. (a) Immediately prior to the occurrence of a Repurchase Event
(as defined below) and prior to twelve months thereafter, (i) following a
request of the Holder, delivered prior to an Exercise Termination Event, Issuer
(or any successor thereto) shall repurchase the Option from the Holder at a
price (the "Option Repurchase Price") equal to the amount by which (A) the
Market/Offer Price (as defined below) exceeds (B) the Option Price, multiplied
by the number of shares for which this Option may then be exercised and (ii) at
the request of the owner of Option Shares from time to time (the "Owner"),
delivered within 90 days of such occurrence (or such longer period as provided
in Section 10), Issuer shall repurchase such number
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<PAGE>
of the Option Shares from the Owner as the Owner shall designate at a price (the
"Option Share Repurchase Price") equal to the Market/Offer Price multiplied by
the number of Option Shares so designated. The term "Market/Offer Price" shall
mean the highest of (i) the price per share of Common Stock at which a tender
offer or exchange offer therefor has been made, (ii) the price per share of
Common Stock to be paid by any third party pursuant to an agreement with Issuer,
(iii) the highest closing price for shares of Common Stock within the six-month
period immediately preceding the date the Holder gives notice of the required
repurchase of this Option or the Owner gives notice of the required repurchase
of Option Shares, as the case may be, or (iv) in the event of a sale of all or a
substantial portion of Issuer's assets, the sum of the price paid in such sale
for such assets and the current market value of the remaining assets of Issuer
as determined by a nationally recognized investment banking firm selected by the
Holder or the Owner, as the case may be, and reasonably acceptable to Issuer,
divided by the number of shares of Common Stock of Issuer outstanding at the
time of such sale. In determining the Market/Offer Price, the value of
consideration other than cash shall be determined by a nationally recognized
investment banking firm selected by the Holder or Owner, as the case may be, and
reasonably acceptable to Issuer.
(b) The Holder and the Owner, as the case may be, may exercise its
right to require Issuer to repurchase the Option and any Option Shares pursuant
to this Section 7 by surrendering for such purpose to Issuer, at its principal
office, this Agreement or certificates for Option Shares, as applicable,
accompanied by a written notice or notices stating that the Holder or the Owner,
as the case may be, elects to require Issuer to repurchase this Option and/or
the Option Shares in accordance with the provisions of this Section 7. Within
the latter to occur of (i) five business days after the surrender of the Option
and/or certificates representing Option Shares and the receipt of such notice or
notices relating thereto and (ii) the time that is immediately prior to the
occurrence of a Repurchase Event, Issuer shall deliver or cause to be delivered
to the Holder the Option Repurchase Price and/or to the Owner the Option Share
Repurchase Price therefor or the portion thereof that Issuer is not then
prohibited under applicable law and regulation from so delivering.
(c) To the extent that Issuer is prohibited under applicable law or
regulation from repurchasing the Option and/or the Option Shares in full, Issuer
shall immediately so notify the Holder and/or the Owner and thereafter deliver
or cause to be delivered, from time to time, to the Holder and/or the Owner, as
appropriate, the portion of the Option Repurchase Price and the Option Share
Repurchase Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer at any time after delivery of a
-------- -------
notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited
under applicable law or regulation from delivering to the Holder and/or the
Owner, as appropriate, the Option Repurchase Price and the Option Share
Repurchase Price, respectively, in full (and Issuer hereby undertakes to use its
best efforts to obtain all required regulatory and legal approvals and to file
any required notices as promptly as practicable in order to accomplish such
repurchase), the Holder or Owner may revoke its notice of repurchase of the
Option or the Option Shares either in whole or to the
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<PAGE>
extent of the prohibition, whereupon, in the latter case, Issuer shall promptly
(i) deliver to the Holder and/or the Owner, as appropriate, that portion of the
Option Repurchase Price or the Option Share Repurchase Price that Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Holder, a new Stock Option Agreement evidencing the right of the Holder to
purchase that number of shares of Common Stock obtained by multiplying the
number of shares of Common Stock for which the surrendered Stock Option
Agreement was exercisable at the time of delivery of the notice of repurchase by
a fraction, the numerator of which is the Option Repurchase Price less the
portion thereof theretofore delivered to the Holder and the denominator of which
is the Option Repurchase Price, or (B) to the Owner, a certificate for the
Option Shares it is then so prohibited from repurchasing.
(d) For purposes of this Section 7, a Repurchase Event shall be
deemed to have occurred (i) upon the consummation of any merger, consolidation
or similar transaction involving Issuer or any purchase, lease or other
acquisition of all or a substantial portion of the assets of Issuer, other than
any such transaction which would not constitute an Acquisition Transaction
pursuant to the provisos to Section 2(b)(i) hereof or (ii) upon the acquisition
by any person of beneficial ownership of 50% or more of the then outstanding
shares of Common Stock, provided that no such event shall constitute a
Repurchase Event unless a Subsequent Triggering Event shall have occurred prior
to an Exercise Termination Event. The parties hereto agree that Issuer's
obligations to repurchase the Option or Option Shares under this Section 7 shall
not terminate upon the occurrence of an Exercise Termination Event unless no
Subsequent Triggering Event shall have occurred prior to the occurrence of an
Exercise Termination Event.
8. (a) In the event that prior to an Exercise Termination Event,
Issuer shall enter into an agreement (i) to consolidate with or merge into any
person, other than Grantee or one of its Subsidiaries, and shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) to
permit any person, other than Grantee or one of its Subsidiaries, to merge into
Issuer and Issuer shall be the continuing or surviving corporation, but, in
connection with such merger, the then outstanding shares of Common Stock shall
be changed into or exchanged for stock or other securities of any other person
or cash or any other property or the then outstanding shares of Common Stock
shall after such merger represent less than 50% of the outstanding voting shares
and voting share equivalents of the merged company, or (iii) to sell or
otherwise transfer all or substantially all of its assets to any person, other
than Grantee or one of its Subsidiaries, then, and in each such case, the
agreement governing such transaction shall make proper provision so that the
Option shall, upon the consummation of any such transaction and upon the terms
and conditions set forth herein, be converted into, or exchanged for, an option
(the "Substitute Option"), at the election of the Holder, of either (x) the
Acquiring Corporation (as hereinafter defined) or (y) any person that controls
the Acquiring Corporation.
(b) The following terms have the meanings indicated:
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(1) "Acquiring Corporation" shall mean (i) the continuing
or surviving corporation of a consolidation or merger with Issuer (if other
than Issuer), (ii) Issuer in a merger in which Issuer is the continuing or
surviving person, and (iii) the transferee of all or substantially all of
Issuer's assets.
(2) "Substitute Common Stock" shall mean the common stock
issued by the issuer of the Substitute Option upon exercise of the
Substitute Option.
(3) "Assigned Value" shall mean the Market/Offer Price, as
defined in Section 7.
(4) "Average Price" shall mean the average closing price of
a share of the Substitute Common Stock for the one year immediately
preceding the consolidation, merger or sale in question, but in no event
higher than the closing price of the shares of Substitute Common Stock on
the day preceding such consolidation, merger or sale; provided that if
--------
Issuer is the issuer of the Substitute Option, the Average Price shall be
computed with respect to a share of common stock issued by the person
merging into Issuer or by any company which controls or is controlled by
such person, as the Holder may elect.
(c) The Substitute Option shall have the same terms as the
Option, provided, that if the terms of the Substitute Option cannot, for legal
--------
reasons, be the same as the Option, such terms shall be as similar as possible
and in no event less advantageous to the Holder. The issuer of the Substitute
Option shall also enter into an agreement with the then Holder or Holders of the
Substitute Option in substantially the same form as this Agreement, which shall
be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number
of shares of Substitute Common Stock as is equal to the Assigned Value
multiplied by the number of shares of Common Stock for which the Option is then
exercisable, divided by the Average Price. The exercise price of the Substitute
Option per share of Substitute Common Stock shall then be equal to the Option
Price multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock for which the Option is then exercisable and the
denominator of which shall be the number of shares of Substitute Common Stock
for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs,
shall the Substitute Option be exercisable for more than 19.9% of the shares of
Substitute Common Stock outstanding prior to exercise of the Substitute Option.
In the event that the Substitute Option would be exercisable for more than 19.9%
of the shares of Substitute Common Stock outstanding prior to exercise but for
this clause (e), the issuer of the Substitute Option (the "Substitute Option
Issuer") shall make a cash payment to Holder equal to the excess of (i) the
value of the Substitute Option without giving effect to the limitation in this
clause (e) over (ii) the value of the Substi-
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tute Option after giving effect to the limitation in this clause (e). This
difference in value shall be determined by a nationally recognized investment
banking firm selected by the Holder or the Owner, as the case may be, and
reasonably acceptable to the Acquiring Corporation.
(f) Issuer shall not enter into any transaction described in
subsection (a) of this Section 8 unless the Acquiring Corporation and any person
that controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. (a) At the request of the holder of the Substitute Option
(the "Substitute Option Holder"), the Substitute Option Issuer shall repurchase
the Substitute Option from the Substitute Option Holder at a price (the
"Substitute Option Repurchase Price") equal to the amount by which (i) the
Highest Closing Price (as hereinafter defined) exceeds (ii) the exercise price
of the Substitute Option, multiplied by the number of shares of Substitute
Common Stock for which the Substitute Option may then be exercised, and at the
request of the owner (the "Substitute Share Owner") of shares of Substitute
Common Stock (the "Substitute Shares"), the Substitute Option Issuer shall
repurchase the Substitute Shares at a price (the "Substitute Share Repurchase
Price") equal to the Highest Closing Price multiplied by the number of
Substitute Shares so designated. The term "Highest Closing Price" shall mean
the highest closing price for shares of Substitute Common Stock within the six-
month period immediately preceding the date the Substitute Option Holder gives
notice of the required repurchase of the Substitute Option or the Substitute
Share Owner gives notice of the required repurchase of the Substitute Shares, as
applicable.
(b) The Substitute Option Holder and the Substitute Share Owner,
as the case may be, may exercise its respective right to require the Substitute
Option Issuer to repurchase the Substitute Option and the Substitute Shares
pursuant to this Section 9 by surrendering for such purpose to the Substitute
Option Issuer, at its principal office, the agreement for such Substitute Option
(or, in the absence of such an agreement, a copy of this Agreement) and
certificates for Substitute Shares accompanied by a written notice or notices
stating that the Substitute Option Holder or the Substitute Share Owner, as the
case may be, elects to require the Substitute Option Issuer to repurchase the
Substitute Option and/or the Substitute Shares in accordance with the provisions
of this Section 9. As promptly as practicable, and in any event within five
business days after the surrender of the Substitute Option and/or certificates
representing Substitute Shares and the receipt of such notice or notices
relating thereto, the Substitute Option Issuer shall deliver or cause to be
delivered to the Substitute Option Holder the Substitute Option Repurchase Price
and/or to the Substitute Share Owner the Substitute Share Repurchase Price
therefor or, in either case, the portion thereof which the Substitute Option
Issuer is not then prohibited under applicable law and regulation from so
delivering.
(c) To the extent that the Substitute Option Issuer is
prohibited under applicable law or regulation from repurchasing the Substitute
Option and/or the Substitute Shares in part or in full, the Substitute Option
Issuer following a request for repurchase pursuant to this
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Section 9 shall immediately so notify the Substitute Option Holder and/or the
Substitute Share Owner and thereafter deliver or cause to be delivered, from
time to time, to the Substitute Option Holder and/or the Substitute Share Owner,
as appropriate, the portion of the Substitute Share Repurchase Price,
respectively, which it is no longer prohibited from delivering, within five
business days after the date on which the Substitute Option Issuer is no longer
so prohibited; provided, however, that if the Substitute Option Issuer is at any
-------- -------
time after delivery of a notice of repurchase pursuant to subsection (b) of this
Section 9 prohibited under applicable law or regulation from delivering to the
Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the
Substitute Option Repurchase Price and the Substitute Share Repurchase Price,
respectively, in full (and the Substitute Option Issuer shall use its best
efforts to receive all required regulatory and legal approvals as promptly as
practicable in order to accomplish such repurchase), the Substitute Option
Holder or Substitute Share Owner may revoke its notice of repurchase of the
Substitute Option or the Substitute Shares either in whole or to the extent of
the prohibition, whereupon, in the latter case, the Substitute Option Issuer
shall promptly (i) deliver to the Substitute Option Holder or Substitute Share
Owner, as appropriate, that portion of the Substitute Option Repurchase Price or
the Substitute Share Repurchase Price that the Substitute Option Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Substitute Option Holder, a new Substitute Option evidencing the right of the
Substitute Option Holder to purchase that number of shares of the Substitute
Common Stock obtained by multiplying the number of shares of the Substitute
Common Stock for which the surrendered Substitute Option was exercisable at the
time of delivery of the notice of repurchase by a fraction, the numerator of
which is the Substitute Option Repurchase Price less the portion thereof
theretofore delivered to the Substitute Option Holder and the denominator of
which is the Substitute Option Repurchase Price, or (B) to the Substitute Share
Owner, a certificate for the Substitute Common Shares it is then so prohibited
from repurchasing.
10. The 90-day period for exercise of certain rights under Sections
2, 6, 7 and 14 shall be extended: (i) to the extent necessary to obtain all
regulatory approvals for the exercise of such rights, and for the expiration of
all statutory waiting periods; and (ii) to the extent necessary to avoid
liability under Section 16(b) of the 1934 Act by reason of such exercise.
11. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Issuer and no other corporate proceedings on the part of
Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Issuer.
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(b) Issuer has taken all necessary corporate action to authorize
and reserve and to permit it to issue, and at all times from the date hereof
through the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
12. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to
enter into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Grantee. This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common Stock or
other securities acquired by Grantee upon exercise of the Option will not be,
acquired with a view to the public distribution thereof and will not be
transferred or otherwise disposed of except in a transaction registered or
exempt from registration under the 1933 Act.
13. (a) Grantee may, at any time following a Repurchase Event and
prior to the occurrence of an Exercise Termination Event (or such later period
as provided in Section 10), relinquish the Option (together with any Option
Shares issued to and then owned by Grantee) to Issuer in exchange for a cash fee
equal to the Surrender Price (as defined below); provided, however, that Grantee
-------- -------
may not exercise its rights pursuant to this Section 13 if Issuer has
repurchased the Option (or any portion thereof) or any Option Shares pursuant to
Section 7. The "Surrender Price" shall be equal to $1,600,000 (i) plus, if
applicable, Grantee's purchase price with respect to any Option Shares and (ii)
minus, if applicable, the sum of (A) the excess of (1) the net cash amounts, if
any, received by Grantee pursuant to the arms' length sale of Option Shares (or
any other securities into which such Option Shares were converted or exchanged)
to any unaffiliated party, over (2) Grantee's purchase price of such Option
Shares and (B) the net cash amounts, if any, received by Grantee pursuant to an
arms' length sale of a portion of the Option to any unaffiliated party.
(b) Grantee may exercise its right to relinquish the Option and
any Option Shares pursuant to this Section 13 by surrendering to Issuer, at its
principal office, this Agreement together with certificates for Option Shares,
if any, accompanied by a written notice stating (i) that Grantee elects to
relinquish the Option and Option Shares, if any, in accordance with the
provisions of this Section 13 and (ii) the Surrender Price. The Surrender Price
shall be
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<PAGE>
payable in immediately available funds on or before the second business day
following receipt of such notice by Issuer.
(c) To the extent that Issuer is prohibited under applicable law
or regulation, or as a consequence of administrative policy, from paying the
Surrender Price to Grantee in full, Issuer shall immediately so notify Grantee
and thereafter deliver or cause to be delivered, from time to time, to Grantee,
the portion of the Surrender Price that it is no longer prohibited from paying,
within five business days after the date on which Issuer is no longer so
prohibited, provided, however, that if Issuer at any time after delivery of a
-------- -------
notice of surrender pursuant to paragraph (b) of this Section 13 is prohibited
under applicable law or regulation, or as a consequence of administrative
policy, from paying to Grantee the Surrender Price in full, (i) Issuer shall (A)
use its reasonable best efforts to obtain all required regulatory and legal
approvals and to file any required notices as promptly as practicable in order
to make such payments, (B) within five days of the submission or receipt of any
documents relating to any such regulatory and legal approvals, provide Grantee
with copies of the same, and (C) keep Grantee advised of both the status of any
such request for regulatory and legal approvals, as well as any discussions with
any relevant regulatory or other third party reasonably related to the same and
(ii) Grantee may revoke such notice of surrender by delivery of a notice of
revocation to Issuer and, upon delivery of such notice of revocation, the
Exercise Termination Date shall be extended to a date six months from the date
on which the Exercise Termination Date would have occurred if not for the
provisions of this Section 13(c) (during which period Grantee may exercise any
of its rights hereunder, including any and all rights pursuant to this Section
13).
14. Neither of the parties hereto may assign any of its rights or
obligations under this Agreement or the Option created hereunder to any other
person, without the express written consent of the other party, except that in
the event a Subsequent Triggering Event shall have occurred prior to an Exercise
Termination Event, Grantee, subject to the express provisions hereof, may assign
in whole or in part its rights and obligations hereunder within 90 days
following such Subsequent Triggering Event (or such longer period as provided in
Section 10); provided, however, that until the date 15 days following the date
-------- -------
on which the Federal Reserve Board or the OTS, as applicable, approves an
application by Grantee to acquire the shares of Common Stock subject to the
Option, Grantee may not assign its rights under the Option except in (i) a
widely dispersed public distribution, (ii) a private placement in which no one
party acquires the right to purchase in excess of 2% of the voting shares of
Issuer, (iii) an assignment to a single party (e.g., a broker or investment
----
banker) for the purpose of conducting a widely dispersed public distribution on
Grantee's behalf, or (iv) any other manner approved by the Federal Reserve Board
or the OTS, as applicable.
15. Each of Grantee and Issuer will use its best efforts to make all
filings with, and to obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions contemplated by
this Agreement, including without limitation making application to list the
shares of Common Stock issuable hereunder on the Nasdaq National Market upon
official notice of issuance and applying to the Federal Reserve Board
C-14
<PAGE>
and/or the OTS, as applicable, for approval to acquire the shares issuable
hereunder, but Grantee shall not be obligated to apply to state banking
authorities for approval to acquire the shares of Common Stock issuable
hereunder until such time, if ever, as it deems appropriate to do so.
16. (a) Notwithstanding any other provision of this Agreement, in no
event shall the Grantee's Total Profit (as hereinafter defined) exceed
$2,000,000 and, if it otherwise would exceed such amount, the Grantee, at its
sole election, shall either (i) reduce the number of shares of Common Stock
subject to this Option, (ii) deliver to the Issuer for cancellation Option
Shares previously purchased by Grantee, (iii) pay cash to the Issuer, or (iv)
any combination thereof, so that Grantee's actually realized Total Profit shall
not exceed $2,000,000 after taking into account the foregoing actions.
(b) Notwithstanding any other provision of this Agreement, this
Option may not be exercised for a number of shares as would, as of the date of
exercise, result in a Notional Total Profit (as defined below) of more than
$2,000,000; provided, that nothing in this sentence shall restrict any exercise
--------
of the Option permitted hereby on any subsequent date.
(c) As used herein, the term "Total Profit" shall mean the
aggregate amount (before taxes) of the following: (i) the amount received by
Grantee pursuant to Issuer's repurchase of the Option (or any portion thereof)
pursuant to Section 7 of this Agreement, (ii)(x) the amount received by Grantee
pursuant to Issuer's repurchase of Option Shares pursuant to Section 7, less (y)
the Grantee's purchase price for such Option Shares, (iii)(x) the net cash
amounts received by Grantee pursuant to the sale of Option Shares (or any other
securities into which such Option Shares are converted or exchanged) to any
unaffiliated party, less (y) the Grantee's purchase price of such Option Shares,
(iv) any amounts received by Grantee on the transfer of the Option (or any
portion thereof) to any unaffiliated party, and (v) any equivalent amount with
respect to the Substitute Option.
(d) As used herein, the term "Notional Total Profit" with
respect to any number of shares as to which Grantee may propose to exercise this
Option shall be the Total Profit determined as of the date of such proposed
exercise assuming that this Option were exercised on such date for such number
of shares and assuming that such shares, together with all other Option Shares
held by Grantee and its affiliates as of such date, were sold for cash at the
closing market price for the Common Stock as of the close of business on the
preceding trading day (less customary brokerage commissions).
17. The parties hereto acknowledge that damages would be an
inadequate remedy for a breach of this Agreement by either party hereto and that
the obligations of the parties hereto shall be enforceable by either party
hereto through injunctive or other equitable relief.
18. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions
C-15
<PAGE>
contained in this Agreement shall remain in full force and effect, and shall in
no way be affected, impaired or invalidated. If for any reason such court or
regulatory agency determines that the Holder is not permitted to acquire, or
Issuer is not permitted to repurchase pursuant to Section 7, the full number of
shares of Common Stock provided in Section 1(a) hereof (as adjusted pursuant to
Section 1(b) or 5 hereof), it is the express intention of Issuer to allow the
Holder to acquire or to require Issuer to repurchase such lesser number of
shares as may be permissible, without any amendment or modification hereof.
19. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Merger Agreement.
20. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, regardless of the laws that might
otherwise govern under applicable principles of conflicts of laws thereof.
21. This Agreement may be executed in two counterparts, each of which
shall be deemed to be an original, but all of which shall constitute one and the
same agreement.
22. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
23. Except as otherwise expressly provided herein or in the Merger
Agreement, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors and
permitted assigns, any rights, remedies, obligations or liabilities under or by
reason of this Agreement, except as expressly provided herein.
24. Capitalized terms used in this Agreement and not defined herein
shall have the meanings assigned thereto in the Merger Agreement.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, all as of
the date first above written.
HERITAGE BANCORP, INC.
By: /s/ J. Edward Wells
---------------------------------------
J. Edward Wells
President and Chief Executive Officer
SOUTHBANC SHARES, INC.
By: /s/ Robert W. Orr
---------------------------------------
Robert W. Orr
President and Chief Executive Officer
C-17
<PAGE>
Appendix D
__________________, 2000
Board of Directors
SouthBanc Shares, Inc.
907 Main Street
Anderson, SC 29621
Ladies and Gentlemen:
SouthBanc Shares, Inc. ("SouthBanc") and Heritage Bancorp, Inc.
("Heritage") have entered into an Agreement and Plan of Merger, dated as of
February 14, 2000 (the "Agreement"), pursuant to which Heritage will be merged
with and into SouthBanc (the "Merger"). Upon consummation of the Merger, each
share of Heritage common stock, par value $.01 per share, issued and outstanding
immediately prior to the Merger (the "Heritage Shares"), other than certain
shares specified in the Agreement, will be converted into the right to receive
at the election of the holder thereof, either (a) $17.65 in cash without
interest, or (b) that number of shares of SouthBanc common stock, par value $.01
per share, as shall be equal to the Exchange Ratio (as defined below), subject
to the election and proration procedures set forth in the Agreement which
provide generally, among other things, that approximately 50% of the total
number of Heritage Shares shall be converted into SouthBanc common stock and
approximately 50% shall be converted into cash (the "Merger Consideration").
The Exchange Ratio shall be equal to (i) 1.109 if the SouthBanc Price (as
defined in the Agreement) is $15.92 or less; (ii) the quotient obtained by
dividing $17.65 by the SouthBanc Price if the SouthBanc Price is greater than
$15.92 and less than $20.60; (iii) 0.857 if the SouthBanc Price is $20.60 or
more and less than $23.41; or (iv) the quotient of $20.06 divided by the
SouthBanc Price if the SouthBanc Price is $23.41 or more, provided, however,
that if a Triggering Event (as defined in the Agreement) has occurred and the
SouthBanc Price is greater than $23.41, then the Exchange Ratio shall be 0.857.
The terms and conditions of the Merger are more fully set forth in the
Agreement. You have requested our opinion as to the fairness, from a financial
point of view, of the Merger Consideration to the holders of shares of SouthBanc
common stock.
Sandler O'Neill & Partners, L.P., as part of its investment banking
business, is regularly engaged in the valuation of financial institutions and
their securities in connection with mergers and acquisitions and other corporate
transactions. In connection with this opinion, we have reviewed, among other
things: (i) the Agreement and exhibits and schedules thereto; (ii) the Stock
Option Agreements, dated as of February 14, 2000, by and between SouthBanc and
Heritage; (iii) certain publicly available financial statements of SouthBanc and
other historical financial information provided by SouthBanc that we deemed
relevant; (iv) certain publicly available financial statements
D-1
<PAGE>
of Heritage and other historical financial information provided by Heritage that
we deemed relevant; (v) certain internal financial analyses and forecasts of
SouthBanc prepared by and/or reviewed with management of SouthBanc and the views
of senior management of SouthBanc, based on limited discussions with certain
members of senior management, regarding SouthBanc's past and current business,
financial condition, results of operations and future prospects; (vi) the budget
forecast of Heritage for the fiscal year ending September 30, 2000 prepared by
and reviewed with management of Heritage and the views of senior management of
Heritage, based on limited discussions with certain members of senior
management, regarding Heritage's past and current business, financial condition,
results of operations and future prospects; (vii) the pro forma impact of the
Merger on SouthBanc; (viii) the publicly reported historical price and trading
activity for SouthBanc's and Heritage's common stock, including a comparison of
certain financial and stock market information for SouthBanc and Heritage with
similar publicly available information for certain other companies the
securities of which are publicly traded; (ix) the financial terms of recent
business combinations in the savings institution industry, to the extent
publicly available; (x) the current market environment generally and the banking
environment in particular; and (xi) such other information, financial studies,
analyses and investigations and financial, economic and market criteria as we
considered relevant. We did not act as SouthBanc's financial advisor in
connection with its consideration of the Merger or in connection with the
negotiation of the Agreement.
In performing our review, we have relied upon the accuracy and completeness
of all of the financial and other information that was available to us from
public sources, that was provided to us by the SouthBanc or Heritage or their
respective representatives or that was otherwise reviewed by us and have assumed
such accuracy and completeness for purposes of rendering this opinion. We have
not been asked to and have not undertaken an independent verification of any of
such information and we do not assume any responsibility or liability for the
accuracy or completeness thereof. We did not make an independent evaluation or
appraisal of the specific assets, the collateral securing assets or the
liabilities (contingent or otherwise) of SouthBanc or Heritage or any of their
subsidiaries, or the collectibility of any such assets, nor have we been
furnished with any such evaluations or appraisals. We did not make an
independent evaluation of the adequacy of the allowance for loan losses of
SouthBanc or Heritage nor have we reviewed any individual credit files relating
to SouthBanc or Heritage. We have assumed that the respective aggregate
allowances for loan losses for both SouthBanc and Heritage are adequate to cover
such losses and will be adequate on a pro forma basis for the combined entity.
We are not accountants and have relied upon the reports of the independent
accountants for each of SouthBanc and Heritage for the accuracy and completeness
of the financial statements furnished to us. With respect to the financial
projections prepared by and reviewed with management, we have assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the respective
D-2
<PAGE>
managements of the respective future financial performances of SouthBanc and
Heritage and that such performances will be achieved, and we express no opinion
as to such financial projections or the assumptions on which they are based. We
have also assumed that there has been no material change in SouthBanc's or
Heritage's assets, financial condition, results of operations, business or
prospects since the date of the most recent financial statements made available
to us. We have assumed in all respects material to our analysis that SouthBanc
and Heritage will remain as going concerns for all periods relevant to our
analyses, that all of the representations and warranties contained in the
Agreement and all related agreements are true and correct, that each party to
such agreements will perform all of the covenants required to be performed by
such party under such agreements, that the conditions precedent in the Agreement
are not waived and that the Merger will be accounted for using the purchase
method and will qualify as a tax-free reorganization for federal income tax
purposes.
Our opinion is necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. Events occurring after the date hereof could materially affect this
opinion. We have not undertaken to update, revise, reaffirm or withdraw this
opinion or otherwise comment upon events occurring after the date hereof. We are
expressing no opinion herein as to what the value of SouthBanc common stock will
be when issued to Heritage's shareholders pursuant to the Agreement or the
prices at which SouthBanc's or Heritage's common stock will trade at any time.
We have been retained by you to render this opinion and have received a fee
for our services. In the past, we have also provided certain other investment
banking services for Southbanc and have received compensation for such services.
In the ordinary course of our business as a broker-dealer, we may purchase
securities from and sell securities to SouthBanc and Heritage. We may also
actively trade the debt and equity securities of SouthBanc and Heritage for our
own account and for the accounts of our customers and, accordingly, may at any
time hold a long or short position in such securities.
Our opinion is directed to the Board of Directors of SouthBanc in
connection with its consideration of the Merger and does not constitute a
recommendation to any shareholder of SouthBanc as to how such shareholder should
vote at any meeting of shareholders called to consider and vote upon the Merger.
Our opinion is not to be quoted or referred to, in whole or in part, in a
registration statement, prospectus, proxy statement or in any other document,
nor shall this opinion be used for any other purposes, without Sandler O'Neill's
prior written consent; provided, however, that we hereby consent to the
inclusion of this opinion as an appendix to SouthBanc's and Heritage's Joint
Proxy Statement/Prospectus dated the date hereof and to the references to this
opinion therein.
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<PAGE>
Based upon and subject to the foregoing, it is our opinion, as of the date
hereof, that the Merger Consideration is fair, from a financial point of view,
to the holders of shares of SouthBanc common stock.
Very truly yours,
D-4
<PAGE>
Appendix E
[FORM OF FAIRNESS OPINION]
Board of Directors
Heritage Bancorp, Inc.
201 West Main Street
Laurens, South Carolina 29360
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of shares of common stock (the "Heritage Common Stock"),
of Heritage Bancorp, Inc. ("Heritage") of the Merger Consideration (as defined
below) to be received by such holders in a merger (the "Merger") of Heritage
with SouthBanc Shares, Inc. ("SouthBanc") pursuant to the Agreement and Plan of
Merger (the "Agreement") dated as of February 14, 2000. Unless otherwise noted,
all terms used herein shall have the same meaning as defined in the Agreement.
As more specifically set forth in the Agreement, and subject to a number of
conditions and procedures described in the Agreement, in the Merger, each share
of Heritage Common Stock issued and outstanding at the Effective Time shall be
converted into the right to receive, at the election of the holder, either cash
or shares of SouthBanc Common Stock (the "Merger Consideration"). To the extent
that Heritage shareholders receive cash, each share of Heritage Common Stock so
exchanged will be converted into $17.65 of cash. To the extent Heritage
shareholders receive SouthBanc Common Stock, each share so exchanged will be
converted into $17.65 of SouthBanc Common Stock, provided the SouthBanc Price
(as defined below) is between $15.92 and $20.60. The Exchange Ratio will be
determined by dividing $17.65 by the average closing price for SouthBanc Common
Stock during the ten trading days ending eleven business days prior to the
Effective Time (the "SouthBanc Price"). In the event the SouthBanc Price is
$15.92 or less, the Exchange Ratio will be 1.109. In the event the SouthBanc
Price is $20.60 or more and less than $23.41, the Exchange Ratio will be .857.
In the event the SouthBanc price is $23.41 or more, the Exchange Ratio will be
determined by dividing $20.06 by the SouthBanc Price. Heritage will have the
right to terminate the transaction in the event that the SouthBanc Price is less
than $14.05, unless SouthBanc agrees to increase the Exchange Ratio such that
the product of the Exchange Ratio and the SouthBanc Price is $15.57. Heritage
Shareholders will have the right to elect to receive cash or SouthBanc Common
Stock for each of their shares of Heritage Common Stock, subject to the
condition that 50% of the shares of Heritage Common Stock outstanding as of the
Effective Time will be exchanged for cash and 50% of the shares of Heritage
Common Stock will be exchanged for SouthBanc Common Stock. Each option for the
purchase of Heritage Common Stock will be exchanged for $2.55 of cash.
<PAGE>
Board of Directors
Heritage Bancorp, Inc.
_______ __, 2000
Page 2
Trident Securities, a Division of McDonald Investments, Inc., ("Trident")
is a financial consulting and investment banking firm experienced in the
valuation of business enterprises with considerable experience in the valuation
of thrift institutions. In the ordinary course of our business we may actively
trade the securities of Heritage and SouthBanc for our own account and for the
accounts of our customers and, accordingly, may at any one time hold a long or
short position in such securities. Trident is not affiliated with Heritage or
SouthBanc.
In connection with rendering our opinion, we have reviewed and analyzed,
among other things, the following: (i) the Agreement, including the exhibits and
schedules thereto; (ii) certain publicly available information concerning
Heritage, including Heritage's annual reports on Form 10-K for each of the two
years ended September 30, 1999 and unaudited financial statements for the six
months ended March 31, 1999; (iii) certain publicly available information
concerning SouthBanc, including its annual report on Form 10-K for each of the
three years ended September 30, 1999 and unaudited financial statements for the
six months ended March 31, 1999; (iv) certain other internal information,
primarily financial in nature, concerning the business and operations of
Heritage and SouthBanc furnished to us by Heritage and SouthBanc for purposes of
our analysis; (v) certain publicly available information concerning the trading
of, and trading markets for, Heritage and SouthBanc common stock; (vi) certain
publicly available information with respect to other companies that we believe
to be comparable to Heritage and SouthBanc; and (vii) certain publicly available
information concerning the nature and terms of other transactions that we
consider relevant. We have also spoken with certain officers and employees of
Heritage and SouthBanc, to discuss the foregoing as well as other matters we
believe relevant to our inquiry.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us or publicly available and have assumed and relied
upon the representations and warranties of Heritage and SouthBanc contained in
the Agreement. We have not been engaged to, and have not independently attempted
to, verify any of such information. We have also relied upon the management of
Heritage as to the reasonableness and achievability of the financial and
operating projections (and the assumptions and bases therefor) provided to us
and, with your consent, we have assumed that such projections reflect the best
currently available estimates and judgments of management. We did not perform a
review of the loan portfolios of Heritage or SouthBanc, and we did not assess
the adequacy of Heritage's or SouthBanc's loan loss reserves. We have not
conducted a physical inspection of the properties or facilities of Heritage or
SouthBanc, nor have we made or obtained any independent evaluations or
appraisals of any of such properties or facilities. We have also assumed that
the conditions to the Merger as set forth in the Agreement would be satisfied
and that the Merger would be consummated on a timely basis in the manner
contemplated by the Agreement.
<PAGE>
Board of Directors
Heritage Bancorp, Inc.
_______ __, 2000
Page 3
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current financial condition and results of operations of
Heritage and SouthBanc, including interest income, interest expense, net
interest income, net interest margin, interest sensitivity, non-interest income
and expense, earnings, dividends, book value, return on assets, return on
equity, capitalization, the amount and type of non-performing assets and the
reserve for loan losses; (ii) the business prospects of Heritage and SouthBanc;
(iii) the economy of Heritage's and SouthBanc's market areas, and (iv) the
nature and terms of certain other merger transactions that we believe to be
relevant. We have also taken into account our assessment of general economic,
market, financial and regulatory conditions and trends, as well as our knowledge
of the financial services industry, our experience in connection with similar
transactions, and our knowledge of securities valuation generally. Our opinion
necessarily is based upon conditions as they exist and can be evaluated on the
date hereof. Our opinion is, in any event, limited to the fairness, from a
financial point of view, of the Merger Consideration to be received by Heritage
shareholders in the Merger and does not address Heritage's underlying business
decision to effect the Merger or any of the other terms thereof.
We have provided investment banking services to Heritage in the past, for
which we have received customary compensation. We have acted as financial
advisor to Heritage in connection with the Merger and will receive from Heritage
a fee for our services, a significant portion of which is contingent upon the
consummation of the Merger, as well as Heritage's agreement to indemnify us
under certain circumstances.
It is understood that this opinion was prepared for the confidential use of
the Board of Directors and senior management of Heritage and may not be
disclosed, summarized, excerpted from or otherwise publicly referred to without
our prior written consent. Our opinion does not constitute a recommendation to
any shareholder of Heritage as to how such shareholder should vote at the
shareholders' meeting held in connection with the Merger.
Based upon and subject to the foregoing, we are of the opinion that the
Merger Consideration to be received by the shareholders of Heritage in the
Merger is fair, as of the date hereof, from a financial point of view, to the
shareholders of Heritage.
<PAGE>
Board of Directors
Heritage Bancorp, Inc.
_______ __, 2000
Page 4
This opinion is being delivered to the Board of Directors of Heritage for
its use and is not to be reproduced, disseminated or delivered to any third
party without the express written consent of Trident, except as required by law.
Our opinion is as of the date set forth above, and events or circumstances
occurring after this date may adversely impact the validity of the basis of our
opinion and/or such opinion.
Very truly yours,
TRIDENT SECURITIES
A Division of McDonald Investments, Inc.
<PAGE>
Appendix F
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant
to Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
therof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
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<PAGE>
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in
F-2
<PAGE>
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders
on or within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such
holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such notice has
been given shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may fix, in advance,
a record date that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation
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<PAGE>
published in the City of Wilmington, Delaware or such publication as the Court
deems advisable. The forms of the notices by mail and by publication shall be
approved by the Court, and the costs thereof shall be borne by the surviving or
resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the
F-4
<PAGE>
merger or consolidation); provided, however, that if no petition for an
appraisal shall be filed within the time provided in subsection (e) of this
section, or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of such stockholder's demand for an appraisal
and an acceptance of the merger or consolidation, either within 60 days after
the effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation, then
the right of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such approval may
be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
F-5
<PAGE>
Appendix G
This appendix contains certain "forward-looking statements" concerning the
future operations of Heritage Bancorp, Inc. We have used forward-looking
statements to describe future plans and strategies, including our expectations
of our future financial results. Management's ability to predict results or the
effect of future plans or strategies is inherently uncertain. Factors which
could affect actual results include interest rate trends, the general economic
climate in our market area and the country as a whole, our ability to control
costs and expenses, competitive products and pricing, loan delinquency rates,
and changes in federal and state regulation. These factors should be considered
in evaluating the forward-looking statements contained in this appendix and
undue reliance should not be placed on such statements.
BUSINESS OF HERITAGE BANCORP, INC.
General
Heritage Bancorp, Inc. ("Company"), a Delaware corporation, was organized
in November 1997 for the purpose of becoming the holding company for Heritage
Federal Savings and Loan Association, which changed its name to Heritage Federal
Bank ("Bank") upon its conversion from a federal mutual savings and loan
association to a federal stock savings bank. The Bank's conversion was
completed on April 6, 1998 through the sale of 4,628,750 shares of common stock
by the Company at a price of $15.00 per share.
The Bank, chartered in 1948, is a federally chartered savings bank located
in Laurens, South Carolina. The Bank is regulated by the Office of Thrift
Supervision ("OTS"), its primary federal regulator, and by the Federal Deposit
Insurance Corporation ("FDIC"), the insurer of its deposits. The Bank's
deposits are insured by the FDIC's Savings Association Insurance Fund ("SAIF").
The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since
1948.
The Bank is a community oriented financial institution that operates out of
four offices in the Upstate region of South Carolina. The Bank's principal
business is attracting deposits from the general public and using those funds to
originate residential mortgage loans. The Bank emphasizes the origination of
adjustable rate mortgage ("ARM") loans and generally holds its loans for long-
term investment purposes.
Market Area and Competition
The Company conducts operations out of its main office in Laurens, South
Carolina (in Laurens County) and three branch offices in Upstate South Carolina:
in Belton (in Anderson County), Ware Shoals (in Greenwood County) and
Simpsonville (in Greenville County). Most of the Company's depositors live in
the areas surrounding the Company's offices and most of the Company'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 Company'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 Company's market areas have reported increases in population, households and
income in recent years.
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<PAGE>
The Bank 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 Bank has faced
additional significant competition for investors' funds from short-term money
market securities and other corporate and government securities. The Bank'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 Bank's growth in the future.
Lending Activities
General. At September 30, 1999, the Company's total loans receivable
portfolio amounted to $295.4 million, or 94.1% of total assets at that date.
The Company has traditionally concentrated its lending activities on mortgage
loans, with such loans amounting to $280.9 million, or 95.1% of total loans
receivable at September 30, 1999. At that date, $186.5 million, or 63.2%, of
the Company's total loans receivable had adjustable interest rates. In addition
to one- to four-family mortgage loans, the Company originates construction
loans, commercial real estate loans, home equity loans, savings account loans,
commercial business loans and consumer loans. All of the Company's mortgage
loan portfolio is secured by real estate, either as primary or secondary
collateral, located in North Carolina or South Carolina.
Loan Portfolio Analysis. The following table sets forth the composition of
the Company's loan portfolio (excluding loans held-for-sale) at the dates
indicated. The Company had no concentration of loans exceeding 10% of total
loans receivable other than as disclosed below.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------- ------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.................... $186,525 63.1% $173,891 81.9% $180,609 90.0%
Builder construction................... 61,428 20.8 11,261 5.3 2,601 1.3
Commercial............................. 32,981 11.2 14,484 6.8 8,136 4.0
-------- ----- -------- ----- -------- -----
Total mortgage loans............... 280,934 95.1 199,636 94.0 191,346 95.3
Savings account loans...................... 1,127 0.4 1,077 0.5 1,419 0.7
Home equity loans.......................... 9,424 3.2 8,925 4.2 8,124 4.0
Commercial loans........................... 3,679 1.2 2,785 1.3 -- --
Consumer loans............................. 187 0.1 -- -- -- --
-------- ----- -------- ----- -------- -----
Total loans receivable............. 295,351 100.0% 212,423 100.0% 200,889 100.0%
===== ===== =====
Less:
Undisbursed loan funds................. 41,608 14,514 6,989
Deferred loan origination fees......... 373 360 363
Allowance for loan losses.............. 1,356 760 874
-------- -------- --------
Loans receivable, net.............. $252,014 $196,789 $192,663
======== ======== ========
<CAPTION>
--------------------------------------------
1996 1995
-------------------- --------------------
Amount Percent Amount Percent
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.................... $173,925 90.4% $167,092 90.2%
Builder construction................... 3,836 2.0 2,735 1.5
Commercial............................. 6,450 3.3 7,573 4.1
-------- ------ -------- -----
Total mortgage loans............... 184,211 95.7 177,400 95.8
Savings account loans...................... 1,146 0.6 1,439 0.8
Home equity loans.......................... 7,050 3.7 6,429 3.4
Commercial loans........................... -- -- -- --
Consumer loans............................. -- -- -- --
-------- ------ -------- -----
Total loans receivable............. 192,407 100.0% 185,268 100.0%
===== =====
Less:
Undisbursed loan funds................. 8,375 5,995
Deferred loan origination fees......... 412 424
Allowance for loan losses.............. 670 590
-------- --------
Loans receivable, net.............. $182,950 $178,259
======== ========
</TABLE>
G-2
<PAGE>
The following table sets forth certain information at September 30, 1999
regarding the dollar amount of loans maturing in the Company'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....... $ 131 $1,763 $2,926 $16,108 $165,597 $186,525
Builder construction...... 61,428 -- -- -- -- 61,428
Commercial................ 3,897 2,699 1,915 3,451 21,019 32,981
Savings account loans......... 1,127 -- -- -- -- 1,127
Home equity loans............. 9,424 -- -- -- -- 9,424
Commercial loans.............. 3,679 -- -- -- -- 3,679
Consumer loans................ 187 -- -- -- -- 187
------- ------ ------ ------- -------- --------
Total..................... $79,873 $4,462 $4,841 $19,559 $186,616 $295,351
======= ====== ====== ======= ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 2000, which have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Adjustable
Rates Rates
------- -----------
(In thousands)
<S> <C> <C>
Mortgage loans:
One- to four-family........................... $27,541 $158,853
Builder construction.......................... -- --
Commercial.................................... 4,725 24,359
Savings account loans............................. -- --
Home equity loans................................. -- --
Commercial loans.................................. -- --
Consumer loans.................................... -- --
------- --------
Total..................................... $32,266 $183,212
======= ========
</TABLE>
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 term because of prepayments. In addition, due-on-sale
clauses on loans generally give the Company 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, tends to decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market rates.
One- to Four-Family Real Estate Loans. The Company has concentrated its
lending activities on the origination of loans secured by first mortgages on
one-to four-family residences located in South Carolina. The Company offers ARM
loans at rates and terms competitive with market conditions. At September 30,
1999, $158.9 million, or 85.2%, of the Company's one- to four-family real estate
loans were subject to periodic interest rate
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<PAGE>
adjustments. Substantially all of the Company's ARM loans are underwritten and
documented in accordance with guidelines established by Freddie Mac, even though
the Company originates ARM loans primarily for its own portfolio. The Company
originates for its portfolio ARM loans that 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 Company's ARM loans generally provide
for annual and lifetime interest rate adjustment limits of 1% and 4%,
respectively. The Company'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 Company's
cost of interest-bearing liabilities, especially during periods of rapidly
increasing interest rates. The Company's ARM loans are typically based on a 30-
year amortization schedule. The initial rate on most of the Company's ARM loans
is .75% to 1% below the fully indexed rate for the loan.
The Company 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. In recent years, as part
of its asset/liability management, the Company has retained for its portfolio
fixed-rate loans with terms of ten to 15 years. The Company determines whether
to sell or retain fixed-rate loans with terms of more than 15 years on a
case-by-case basis.
The Company also offers loans to individuals for the construction and
acquisition of their personal residence. Such loans are made on the same terms
as the Company'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 Company offers second mortgage loans, although these have become less
popular since the introduction of home equity lines of credit. The Company's
second mortgage loans have fixed interest rates and terms of up to ten years. At
September 30, 1999, the Company had $778,000 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 Company's loan portfolio helps reduce the
Company'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. In
addition, although ARM loans allow the Company 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 Company has no assurance that yields on ARM loans will be sufficient to
offset increases in the Company's cost of funds. The Company believes these
risks, which have not had a material adverse effect on the Company to date,
generally are less than the risks associated with holding fixed-rate loans in
portfolio during a rising interest rate environment.
The Company 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 Company 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 Company's one- to four-family residential mortgage loans typically do
not exceed 80% of the appraised value of the security property. Pursuant to its
underwriting guidelines, the Company can lend up to 95% of the appraised value
of the property securing a one- to four-family residential loan; however, the
Company generally requires
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<PAGE>
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 Company originates residential construction
loans to local home builders, generally with whom it has an established
relationship. The Company'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 Company
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.
Prior to making a commitment to fund a construction loan, the Company
requires an appraisal of the property by a state-licensed and qualified
appraiser. The Company'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 Company 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 Company 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 Company 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 Company has attempted to minimize the foregoing risks by, among other
things, limiting its construction lending primarily to residential properties.
It is also the Company's general policy to obtain personal guarantees from
financially capable parties where the loan is made to a corporation or other
legal entity.
The Company this year began purchasing builder construction loans from two
mortgage companies. These loans are secured by residential properties with
maturities of one year or less and are made on either a pre-sold or speculative
basis. The properties securing these loans are located in various North and
South Carolina markets in which the Company buys other first mortgage loans.
These loans carry all of the greater risks inherent with construction lending as
mentioned above. In addition, brokered loans are generally considered to be
riskier than loans that the Company originates itself. To mitigate some of this
risk, the Company routinely conducts inspections of the properties under
construction.
At September 30, 1999, the largest amount of construction loans outstanding
to one builder was $4.2 million, all of which was for speculative construction.
Commercial Real Estate Loans. The Company originates mortgage loans for the
acquisition and refinancing of commercial real estate properties. The majority
of the Company'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 Company makes land acquisition and development
loans. At September 30, 1999, the Company's largest commercial real estate loan
was $1.8 million and is collateralized by commercial and industrial sites at
Gaffney, South Carolina.
Most of the Company's commercial real estate loans have adjustable interest
rates and 15-year terms. The Company requires appraisals of all properties
securing commercial real estate loans. Appraisals are performed by an
independent appraiser designated by the Company and are reviewed by management.
G-5
<PAGE>
Commercial real estate lending affords the Company 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 Company 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
Company also obtains loan guarantees from financially capable parties based on a
review of personal financial statements.
Commercial Loans. The Company does not actively solicit commercial loans.
However, the Company may originate such loans on a limited basis, generally to
customers who are well known to the Company. Commercial loans are prime based,
variable rate loans and are collateralized by various business assets. The terms
for commercial loans vary with the business purpose of the loan and the normal
business cycle of the borrower. The Company also obtains personal guarantees
from financially capable parties when the loan is made to a corporation or other
legal entity.
Commercial lending affords the Company an opportunity to earn higher
interest rates as compared with residential lending. However, commercial lending
involves greater risk than residential mortgage and other real estate secured
lending. As collateral-based lending, real estate secured loans are made on
established loan-to-collateral values and the liquidation of the real estate is
considered as a primary source of repayment in case the borrower defaults.
Notwithstanding, business assets held as collateral for commercial loans in
default may be an insufficient source of repayment due to obsolescence,
illiquidity, uncollectibility, or shrinkage, among other reasons. Therefore, the
repayment of a commercial loan depends largely on the creditworthiness of the
borrower and the success of the borrower's business.
Savings Account Loans. The Company offers loans secured by savings
deposits. At September 30, 1999, loans collateralized by savings accounts
totalled $1.1 million, or 0.4% of total loans receivable. Generally, such loans
are made up to 90% of the account balance.
Home Equity Loans. The Company originates home equity loans in the form of
lines of credit. At September 30, 1999, the Company had $9.4 million of home
equity loans and unused commitments to extend credit under home equity loans of
$9.2 million. Most of these loans are made to existing customers. The Company's
home equity loans have variable interest rates tied to the prime lending rate as
published in The Wall Street Journal. The Company imposes a maximum loan-to-
value ratio of 90% after considering the unpaid balances of both the first and
second mortgage loans on the collateralized property.
The Company'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 Company.
Consumer Loans. The Company originates consumer loans secured by
automobiles, boats and other consumer items, as well as unsecured loans for
personal use.
Loan Solicitation and Processing. The Company's lending activities are
subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the 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 Company also uses two mortgage brokers to originate loans. For the year
ended September 30, 1999, the Company originated $18.2 million of loans, or
28.8% of total originations, through these brokers. All loans originated through
these mortgage brokers are underwritten by the Company pursuant to the Company's
underwriting guidelines.
G-6
<PAGE>
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 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 Board of Directors.
Loan Originations, Purchases and Sales. While the Company 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, 1999, 1998 and 1997, the Company originated
$63.3 million, $67.7 million and $45.1 million of loans, respectively. Of the
$63.3 million of loans originated in the year ended September 30, 1999, $45.7
million, or 72.2%, had adjustable rates of interest.
The Company purchases loans from two South Carolina based mortgage banking
companies. These mortgage loans consist of single family residential loans,
commercial mortgage loans, and builder construction mortgage loans. Except for
single family residential loans written to Freddie Mac guidelines, all loans are
underwritten by the Company. All of the properties securing these loans are
located in North and South Carolina. The Company anticipates that it will
continue to purchase loans from time to time to supplement its own originations.
The Company sells loans in order to manage the interest rate risk
associated with holding long-term, fixed-rate mortgages, to enable the Company
to offer a wide variety of mortgage products, and to earn origination fees and
premiums. In 1995, the Company established a relationship with another financial
institution pursuant to which the Company sells fixed-rate, one- to four-family
mortgage loans with terms in excess of 15 years. The Company currently does not
retain servicing rights on the loans that it sells.
G-7
<PAGE>
The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loans originated:
Mortgage loans:
One- to four-family.......................... $ 42,215 $ 43,458 $ 37,020
Builder construction......................... 5,664 9,850 2,901
Commercial................................... 10,699 6,274 1,958
Savings account loans........................... 683 709 1,128
Home equity loans............................... 3,788 3,793 2,139
Commercial loans................................ -- 3,664 --
Consumer loans.................................. 241 -- --
-------- -------- --------
Total loans originated....................... 63,290 67,748 45,146
-------- -------- --------
Loans purchased:
Mortgage loans:
One- to four-family.......................... 16,644 3,311 2,975
Builder construction......................... 60,503 6,008 --
Commercial................................... 9,908 5,082 541
-------- -------- --------
Total loans purchased..................... 87,055 14,401 3,516
-------- -------- --------
Loans sold......................................... (2,195) (1,224) (479)
Principal repayments............................... (65,120) (69,301) (37,660)
Transfer to real estate owned...................... (102) (281) (996)
Increase (decrease) in other items................. (27,703) (7,408) 1,231
-------- -------- --------
Net increase (decrease) in loans $ 55,225 $ 3,935 $ 10,758
receivable, net................................. ======== ======== ========
</TABLE>
Loan Commitments. The Company 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, 1999, the
Company had loan commitments (excluding undisbursed portions of interim
construction loans of $41.6 million) of $2.3 million and unused lines of credit
of $9.2 million. See Notes 4 and 9 of Notes to the Consolidated Financial
Statements.
Loan Fees. In addition to interest earned on loans, the Company 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 Company charges loan origination fees which are calculated as a
percentage of the amount borrowed or charged as a flat fee on the amount
borrowed, depending on the loan program. 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, 1999, the Company had $373,000 of deferred loan fees. The Company
recognized $113,000, $123,000 and $151,000 of deferred loan fees during the
years ended September 30, 1999, 1998 and 1997, respectively, in connection with
loan refinancings, payoffs, sales and ongoing amortization of outstanding loans.
G-8
<PAGE>
Nonperforming Assets and Delinquencies. When a borrower fails to make a
required payment on a loan, the Company 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 Company will attempt to work out a payment
schedule. While the Company generally prefers to work with borrowers to resolve
such problems, the Company 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 to be made 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 Company's Board of Directors is informed on a monthly basis 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 Company.
The following table sets forth information with respect to the Company's
nonperforming assets and restructured loans within the meaning of SFAS No. 15 at
the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to four-family................. $ 554 $ 628 $ 444 $ 679 $ 867
Builder construction................ 121 89 411 348 40
Commercial.......................... -- 33 33 -- 28
Savings account loans.................. -- -- -- -- --
Home equity loans...................... -- 37 46 -- --
Commercial loans....................... -- -- -- -- --
Consumer loans......................... -- -- -- -- --
----- ----- ------ ------ ------
Total of non-accrual loans.......... 675 787 934 1,027 935
Real estate owned...................... -- -- 410 86 104
----- ----- ------ ------ ------
Total non-performing assets......... $ 675 $ 787 $1,344 $1,113 $1,039
===== ===== ====== ====== ======
Restructured loans..................... $ 423 $ 396 $ 732 $ 769 $ 588
===== ===== ====== ====== ======
Nonaccrual loans as a percentage of
loans receivable, net.................. 0.27% 0.40% 0.48% 0.56% 0.52%
Nonaccrual loans as a percentage of
total assets........................... 0.22% 0.26% 0.38% 0.42% 0.40%
Non-performing assets as a percentage
of total assets........................ 0.22% 0.26% 0.54% 0.45% 0.44%
</TABLE>
Interest income that would have been recorded for the year ended September
30, 1999 had nonaccruing loans been current in accordance with their original
terms amounted to $56,000. The amount of such interest included in interest
income on such loans for the year ended September 30, 1999 amounted to $26,000.
Interest income that would have been recorded for the year ended September 30,
1999 had restructured loans been current in accordance with their
G-9
<PAGE>
original terms and the amount of interest included in interest income on such
loans for that period were, in both cases, immaterial.
Real Estate Owned. Real estate acquired by the Company 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, 1999, the Company had no real estate owned.
Restructured Loans. Under generally accepted accounting principles
("GAAP"), the Company 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
Company for economic or legal reasons related to the borrower's financial
difficulties grants a concession to the borrower that the Company 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 Company had $423,000 of restructured loans as of September 30, 1999,
which consisted of four one- to four-family 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 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 Company.
The following table sets forth the number and amount of classified loans by
loan category at September 30, 1999.
<TABLE>
<CAPTION>
Loss Doubtful Substandard
------------------------- ----------------------- ------------------------
Number Principal Number Principal Number Principal
of Loans Amount of Loans Amount of Loans Amount
--------- ---------- --------- ---------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family............... -- $ -- 2 $ 71 14 $484
Builder construction.............. 1 10 2 102 1 8
Commercial loans.................. -- -- -- -- -- --
Savings account loans................ -- -- -- -- -- --
Home equity loans.................... -- -- -- -- -- --
Commercial loans..................... -- -- -- -- -- --
Consumer loans....................... -- -- -- -- -- --
---------- --------- ------ ---- -- ----
Total.......................... 1 $ 10 4 $173 15 $492
========== ========= ====== ==== == ====
</TABLE>
G-10
<PAGE>
Allowance for Loan Losses. In originating loans, the Company 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, 1999, the Company had an allowance for loan losses of
$1,356,000. Although management believes that it uses the best information
available to establish the allowance for loan losses, future adjustments to the
allowance for loan losses may be necessary and results of operations could be
significantly and adversely affected if circumstances differ substantially from
the assumptions used in making the determinations. 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 Company's control. Any material increase in the allowance for loan
losses may adversely affect the Company's financial condition and results of
operations.
G-11
<PAGE>
The following table sets forth an analysis of the Company's allowance for
loan losses.
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- ---------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period............ $ 760 $ 874 $ 670 $ 590 $ 622
---------- ------ ------ ------- ------
Provision for loan losses (recovery of
allowance)............................... 596 (105) 337 (7) 47
---------- ------ ------ ------- ------
Recoveries:
Mortgage loans:
One- to four-family.................... -- -- -- -- --
Builder construction................... -- -- -- -- --
Commercial............................. -- -- -- 115 --
Savings account loans..................... -- -- -- -- --
Home equity loans......................... -- -- -- -- --
Commercial loans.......................... -- -- -- -- --
Consumer loans............................ -- -- -- -- --
---------- ------ ------ ------- ------
Total recoveries....................... -- -- -- 115 --
---------- ------ ------ ------- ------
Charge-offs:
Mortgage loans:
One- to four-family.................... -- -- -- 28 --
Builder construction................... -- -- -- -- --
Commercial............................. -- 9 133 -- 79
Savings account loans..................... -- -- -- -- --
Home equity loans......................... -- -- -- -- --
Commercial loans.......................... -- -- -- -- --
Consumer loans............................ -- -- -- -- --
---------- ------ ------ ------- ------
Total charge-offs...................... -- 9 133 28 79
---------- ------ ------ ------- ------
Net charge-offs........................ -- 9 133 (87) 79
---------- ------ ------ ------- ------
Balance at end of period............... $ 1,356 $ 760 $ 874 $ 670 $ 590
========== ====== ====== ======= ======
Allowance for loan losses as a
percentage of total loans outstanding
at end of the period...................... 0.46% 0.36% 0.44% 0.35% 0.32%
Net charge-offs (recoveries) as a
percentage of average loans
outstanding during the period............. -- 0.01% 0.07% (0.05)% 0.05%
Allowance for loan losses as a
percentage of nonperforming loans
at end of period.......................... 200.89% 96.57% 93.58% 65.24% 63.10%
</TABLE>
G-12
<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,
-----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------- -------------------- ------------------- -------------------- ------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Category in Category in Category in Category in Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- ---------- -------- ----------- -------- --------- ------- ---------- ------ ----------
(Dollars thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family........ $ 218 63.1% $ 298 81.9% $ 398 90.0% $ 340 90.4% $ 434 90.2%
Builder construction....... 739 20.8 151 5.3 134 1.3 108 2.0 57 1.5
Commercial................. 316 11.2 228 6.8 334 4.0 218 3.3 86 4.1
Savings account loans......... 0 0.4 -- 0.5 -- 0.7 -- 0.6 -- 0.8
Home equity loans............. 5 3.2 8 4.2 8 4.0 4 3.7 13 3.4
Commercial loans.............. 74 1.2 75 1.3 -- -- -- -- -- --
Consumer loans................ 4 0.1 -- -- -- -- -- -- -- --
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Total allowance for
loan losses................ $1,356 100.0% $ 760 100.0% $ 874 100.0% $ 670 100.0% $ 590 100.0%
====== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Investment Activities
The Bank 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
Bank may also invest a portion of its assets in commercial paper and corporate
debt securities. Savings institutions like the Bank are also required to
maintain an investment in FHLB stock. The Bank is required under federal
regulations to maintain a minimum amount of liquid assets.
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 Company 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 Company's investment policies limit investments to obligations of the
U.S. Treasury and U.S. Government agencies, Federal Funds and overnight deposits
and mortgage-backed securities, such as those issued by Fannie Mae and Freddie
Mac. The Company'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 Company'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 Company's credit and interest rate risk and risk-
based capital is also considered.
G-13
<PAGE>
The Company purchases investment securities to provide for necessary
liquidity for day-to-day operations. The Company also purchases investment
securities when investable funds exceed loan demand. In recent years, the
Company's investment securities purchases have been limited to U.S. Treasury and
U.S. Government agency obligations.
The following table sets forth the amortized cost and fair value of the
Company's securities, by accounting classification and by type of security, at
the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- -------------------------- -----------------------
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...... $ 500 $ 500 $ 1,506 $ 1,515 $ 2,010 $ 2,008
U.S. Government agency
obligations................. 21,999 21,757 2,000 2,009 3,996 3,976
Freddie Mac common stock.......... 57 3,549 57 3,374 57 2,406
------- ------- ------- ------- ------- -------
Total available for sale.... 22,556 25,806 3,563 6,898 6,063 8,390
------- ------- ------- ------- ------- -------
Held to maturity:
Investment securities:
U.S. Government agency
obligations................. 3,499 3,480 17,112 17,208 15,988 15,954
Mortgage-backed securities:
Fannie Mae..................... 328 325 553 554 788 781
Freddie Mac.................... -- -- 1,142 1,137 5,877 5,854
Ginnie Mae..................... 9,819 9,900 -- -- -- --
------- ------- ------- ------- ------- -------
Total held to maturity...... 13,646 13,705 18,807 18,899 22,653 22,589
------- ------- ------- ------- ------- -------
Total..................... $36,202 $39,511 $22,370 $25,797 $28,716 $30,979
======= ======= ======= ======= ======= =======
</TABLE>
G-14
<PAGE>
The following table sets forth certain information regarding the carrying
value, weighted average yields and maturities or periods to repricing of the
Company's debt securities and mortgage-backed securities at September 30, 1999.
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 Year One to Five Years Five Years or More
--------------------------- --------------------------- --------------------------
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...... $500 7.50% $ -- --% $ -- --%
U.S. Government agency
obligations................. -- -- 20,999 5.96 1,000 7.33
---------- ------- -------
Total available for sale.... 500 7.50 20,999 5.96 1,000 --
---------- ------- -------
Held to maturity:
Investment securities:
U.S. Government agency
obligations................. -- -- 3,499 6.10 -- --
Mortgage-backed securities:
Fannie Mae..................... -- -- 328 5.53 -- --
Ginnie Mae..................... -- -- -- -- 9,819 7.50
---------- ------- -------
Total held to maturity...... -- -- 3,827 6.05 9,819 7.50
---------- ------- -------
Total....................... $500 7.50% $24,826 5.75% $10,819 7.48%
========== ======= =======
</TABLE>
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for the Company's
lending and other investment activities. In addition, the Company 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
Company has no other borrowing arrangements.
Deposit Accounts. A substantial number of the Company's depositors reside
in South Carolina. The Company'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 Company reviews
its deposit mix and pricing weekly. The Company does not utilize brokered
deposits, nor has it aggressively sought jumbo certificates of deposit. To
attract larger deposits, from time to time the Company has paid bonus rates on
large deposits.
The Company believes it is competitive in the interest rates it offers on
its deposit products. The Company does not seek to pay the highest deposit rates
but competitive rates. The Company determines the rates paid based on a number
of conditions, including rates paid by competitors, the Company's interest rate
spread, loan demand and deposit balances.
G-15
<PAGE>
The following table indicates the amount of the Company's jumbo certificate
accounts by time remaining until maturity as of September 30, 1999. Jumbo
certificate accounts have principal balances of $100,000 or more.
<TABLE>
<CAPTION>
Jumbo
Certificate
Maturity Period Accounts
----------------- -------------
(In thousands)
<S> <C>
Three months or less.................................. $17,657
Over three months through six months.................. 15,731
Over six months through 12 months..................... 12,979
Over 12 months........................................ 15,145
-------
Total........................................... $61,512
=======
</TABLE>
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 Company between the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------
1999 1998
---------------------------------- ---------------------------------
Increase Increase
Amount Percent (Decrease) Amount Percent (Decrease)
------- ------- ---------- ------ ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts.......................... $ 9,589 4.6% $ (357) $ 9,946 4.8% $ (1,477)
NOW and money market accounts.............. 14,761 7.2 11,306 3,455 1.7 (317)
Fixed-rate certificate accounts which
mature in the year ending:
Within 1 year........................... 137,618 66.7 4,417 133,201 64.6 (15,658)
After 1 year, but within 2 years........ 41,039 19.9 (12,751) 53,790 26.1 12,506
After 2 years, but within 5 years....... 3,375 1.6 (2,337) 5,712 2.8 (4,362)
-------- ----- -------- -------- ----- --------
Total............................. $206,382 100.0% $ 278 $206,104 100.0% $ (9,308)
======== ===== ======== ======== ===== ========
<CAPTION>
1997
---------------------
Amount Percent
------ -------
<S> <C> <C>
Passbook accounts.......................... $ 11,423 5.3%
NOW and money market accounts.............. 3,772 1.7
Fixed-rate certificate accounts which
mature in the year ending:
Within 1 year........................... 148,859 69.1
After 1 year, but within 2 years........ 41,284 19.2
After 2 years, but within 5 years....... 10,074 4.7
-------- -----
Total............................. $215,412 100.0%
======== =====
</TABLE>
The following table sets forth the amount of time deposits in the Company
categorized by rates at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------
1999 1998 1997
--------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C>
2.01 - 3.00%.............................. $ 1,131 $ -- $ --
3.01 - 4.00%.............................. 347 5,198 5,575
4.01 - 5.00%.............................. 70,718 2,338 1,218
5.01 - 6.00%.............................. 96,210 137,246 95,528
6.01 - 7.00%.............................. 12,693 46,895 92,245
7.01 - 8.00%.............................. 933 1,026 5,651
-------- -------- --------
Total............................ $182,032 $192,703 $200,217
======== ======== ========
</TABLE>
G-16
<PAGE>
The following table sets forth the amount of time deposits in the Company
categorized by maturities at September 30, 1999.
<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>
2.01 - 3.00%................. $ 1,131 $ -- $ -- $ -- $ -- $ 1,131
3.01 - 4.00%................. 347 -- -- -- -- 347
4.01 - 5.00%................. 51,467 18,025 830 284 112 70,718
5.01 - 6.00%................. 72,821 21,833 1,303 130 123 96,210
6.01 - 7.00%................. 10,919 1,181 593 -- -- 12,693
7.01 - 8.00%................. 933 -- -- -- -- 933
-------- ------- ------ ------ ---- --------
Total...................... $137,618 $41,039 $2,726 $ 414 $235 $182,032
======== ======= ====== ====== ==== ========
</TABLE>
The following table sets forth the deposit activity of the Company for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------
1999 1998 1997
------------ ---------- ----------
(In thousands)
<S> <C> <C> <C>
Beginning balance.................................. $206,104 $215,412 $209,730
-------- -------- --------
Net deposits (withdrawals) before
interest credited............................... (8,730) (18,893) (3,430)
Interest credited.................................. 9,008 9,585 9,112
-------- -------- --------
Net increase (decrease) in deposits................ 278 (9,308) 5,682
-------- -------- --------
Ending balance..................................... $206,382 $206,104 $215,412
======== ======== ========
</TABLE>
Borrowings. The Bank 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 Bank 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.
See Note 7 of Notes to the Consolidated Financial Statements for further
information on the Bank's borrowings.
Subsidiary Activities
The only subsidiary of the Company is the Bank. Under OTS regulations, the
Bank 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 Bank does not
have any subsidiaries.
Personnel
As of September 30, 1999, the Company had 37 full-time and 4 part-time
employees, none of whom is represented by a collective bargaining unit. The
Company believes its relationship with its employees is good.
G-17
<PAGE>
Properties
At September 30, 1999, the net book value of the Company's properties
(including land and buildings), fixtures, furniture and equipment was $4.0
million. The following table sets forth certain information regarding the
Company's offices at September 30, 1999, all of which are owned.
<TABLE>
<CAPTION>
Year Approximate
Location Opened Square Footage Deposits
- --------- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Main Office 1995(1) 24,500 $97,413
201 West Main Street
Laurens, SC 29360
Belton Office 1962 1,800 62,139
208 Anderson Street
Belton, SC 29627
Ware Shoals Office 1968 1,444 21,618
81 North Greenwood Avenue
Ware Shoals, SC 29692
Simpsonville Office 1977 3,668 25,212
514 North Main Street
Simpsonville, SC 29681
</TABLE>
____________________________________
(1) The Bank occupied a smaller facility at the same location from 1955 to
1995.
Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties in
which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. Neither the Company nor the Bank is a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Company.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the OTS. The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Bank is a member of the FHLB-Atlanta and its deposit
accounts are insured up to applicable limits by the SAIF managed by the FDIC.
The Bank must file reports with the OTS and the FDIC concerning its activities
and financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other savings institutions. The OTS and/or the FDIC conduct periodic
examinations to test the Bank's safety and soundness and compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. 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
G-18
<PAGE>
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank and their operations. Certain of the
regulatory requirements applicable to the Bank and to the Company are referred
to below or elsewhere herein. The description of statutory provisions and
regulations applicable to savings institutions and their holding companies set
forth in this appendix does not purport to be a complete description of such
statutes and regulations and their effects on the Company and the Bank.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company
within the meaning of federal law. As a unitary savings and loan holding
company, the Company generally is not restricted under existing laws as to the
types of business activities in which it may engage, provided that the Bank
continues to be a qualified thrift lender. See "Regulation and Supervision--QTL
Test." Upon any non-supervisory acquisition by the Company of another savings
institution or savings bank that meets the qualified thrift lender test and is
deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and generally would be limited to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, subject to the prior approval of the OTS, and certain activities
authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding
companies to acquire savings institutions, the OTS considers the financial and
managerial resources and future prospects of the Bank and institution involved,
the effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (1) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (2) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. The Bank must notify the
OTS 30 days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Prior approval of the OTS is necessary before a "change in control" occurs
in a savings and loan holding company such as the Company. A "change in
control" may occur upon a person or entity's acquisition (alone or acting in
concert) of 10% or more of the Company's stock.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal
associations, e.g., commercial, non-residential real property loans and consumer
loans, are limited to a specified percentage of the institution's capital or
assets. In addition, certain activities, such as mergers and acquisitions, and
branching, are subject to the prior approval of the OTS.
G-19
<PAGE>
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% (3% for institutions receiving the highest rating on the CAMELS
financial institution examination rating system) leverage ratio and an 8% risk-
based capital ratio. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMELS financial institution rating system), and, together with the risk-
based capital standard itself, a 4% Tier I risk-based capital standard. The OTS
regulations also require that, in meeting the tangible, leverage and risk-based
capital standards, institutions generally must deduct investments in and loans
to subsidiaries engaged in activities as principal that are not permissible for
a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Tier I (core) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair values. Overall, the amount of supplementary capital included
as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk component. At September 30, 1999, the Bank met each
of its mandated capital requirements.
The following table presents the Bank's capital position at September 30,
1999.
<TABLE>
<CAPTION>
Capital
Excess ------------------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
------------- -------------- -------------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible......... $63,404 $ 4,675 $58,729 20.3% 1.5%
Core (Leverage).. 63,404 9,350 54,054 20.3 3.0
Risk-based....... 64,749 14,598 50,151 35.5 8.0
</TABLE>
Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk-weighted assets of
less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less
than 4%, or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company in an amount of
up to the lesser of 5% of the
G-20
<PAGE>
institution's assets or the amount which would bring the institution into
compliance with all capital standards. In addition, numerous mandatory
supervisory actions become immediately applicable to an undercapitalized
institution, including, but not limited to, increased monitoring by regulators
and restrictions on growth, capital distributions and expansion. The OTS also
could take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank presently are insured
by the SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon
the categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999,
FICO payments for SAIF members, including the Bank, approximated 6.10 basis
points, while Bank Insurance Fund ("BIF") members paid 1.22 basis points. By
law, SAIF and BIF members began equal sharing of FICO payments on January 1,
2000.
The FDIC has authority to increase insurance assessments. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank. Management cannot
predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to its termination of deposit insurance.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At
September 30, 1999, the Bank's limit on loans to one borrower was $9.7 million,
and the Bank's largest aggregate outstanding balance of loans to one borrower
was $6 million.
QTL Test. Federal law requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio assets" (total assets less: (1)
specified liquid assets up to 20% of total assets; (2) intangibles, including
goodwill; and (3) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least nine
months out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of September 30, 1999, the Bank met the qualified thrift
lender test. Recent legislation has expanded the extent to which education
loans, credit card loans and small business loans may be considered "qualified
thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. The rule effective in 1998
established three tiers of institutions based primarily on an institution's
capital level. An institution that exceeded all capital requirements before and
after a proposed capital distribution ("Tier I Bank") and had not been advised
by the OTS that it was in need of more than normal supervision,
G-21
<PAGE>
could, after prior notice but without obtaining approval of the OTS, make
capital distributions during the calendar year equal to the greater of (1) 100%
of its net earnings to date during the calendar year plus the amount that would
reduce by one-half the excess capital over its capital requirements at the
beginning of the calendar year or (2) 75% of its net income for the previous
four quarters. Any additional capital distributions required prior regulatory
approval. At June 30, 1999, the Bank was a Tier I Bank. Effective April 1, 1999,
the OTS's capital distribution regulation changed. Under the new regulation, an
application to and the prior approval of the OTS will be required prior to any
capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (i.e., generally,
safety and soundness, compliance and Community Reinvestment Act examination
ratings in the two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, the institution would be undercapitalized
following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with OTS. If an application is not required,
the institution must still provide prior notice to OTS of the capital
distribution. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 4%, but may be changed from time to time
by the OTS to any amount within the range of 4% to 10%. Monetary penalties may
be imposed for failure to meet these liquidity requirements. The Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Bank and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is also
governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of
G-22
<PAGE>
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. The FDIC has the authority to recommend to the Director of the OTS that
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such action
under certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
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 a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB-Atlanta provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB-Atlanta, is required to acquire
and hold shares of capital stock in the FHLB-Atlanta in an amount at least equal
to 1.0% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB-Atlanta, whichever is greater. The Bank was
in compliance with this requirement with an investment in FHLB-Atlanta stock at
September 30, 1999, of $1.7 million. FHLB-Atlanta advances must be secured by
specified types of collateral and all long-term advances may only be obtained
for the purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally
provide that reserves be maintained against aggregate transaction accounts as
follows: for accounts aggregating $46.5 million or less (subject to adjustment
by the Federal Reserve Board), the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $46.5
million. The first $4.9 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank complies with the foregoing requirements.
TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year,
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Company or the Bank. For its 1999 taxable year, the Company
is subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code were permitted to use certain favorable
G-23
<PAGE>
provisions to calculate their deductions from taxable income for annual
additions to their bad debt reserve. A reserve could be established for bad
debts on qualifying real property loans (generally secured by interests in real
property improved or to be improved) under (i) the percentage of taxable income
method or (ii) the experience method. The reserve for nonqualifying loans was
computed using the experience method.
Congress repealed the reserve method of accounting for bad debts for tax
years beginning after 1995 and required savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves.
Thrift institutions eligible to be treated as "small banks" (assets of $500
million or less) are allowed to use the experience method applicable to such
institutions, while thrift institutions that are treated as large banks (assets
exceeding $500 million) are required to use only the specific charge-off method.
Thus, the percentage of taxable income method of accounting for bad debts is no
longer available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the Internal
Revenue Service. Any Section 481(a) adjustment required to be taken into income
with respect to such change generally will be taken into income ratably over a
six-taxable year period, beginning with the first taxable year beginning after
1995, subject to a 2-year suspension if the "residential loan requirement" is
satisfied.
Under the residential loan requirement provision, the required recapture
will be suspended for each of two successive taxable years, beginning with the
Bank's 1996 taxable year, in which the Bank originates a minimum of certain
residential loans based upon the average of the principal amounts of such loans
made by the Bank during its six taxable years preceding its current taxable
year.
Distributions. If the Bank makes "non-dividend distributions" to the
Company, such distributions will be considered to have been made from the Bank's
unrecaptured tax bad debt reserves (including the balance of its reserves as of
December 31, 1987) to the extent thereof, and then from the Bank's supplemental
reserve for losses on loans, to the extent thereof, and an amount based on the
amount distributed (but not in excess of the amount of such reserves) will be
included in the Bank's income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits, as
calculated for federal income tax purposes, distributions in redemption of
stock, and distributions in partial or complete liquidation. Dividends paid out
of the Bank's current or accumulated earnings and profits will not be so
included in its income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Bank makes a non-dividend distribution
to the Company, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
State Taxation
Delaware. As a Delaware holding company not earning income in Delaware,
the Company is exempted 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.
South Carolina. The provisions of South Carolina tax law mirror the
Internal Revenue Code, with certain modifications, as it relates to savings and
loans and banks. The Bank is subject to South Carolina income tax at the rate
of 6%. This rate of tax is imposed on savings banks in lieu of the general
state business corporation income tax. The Bank's state income tax returns have
not been audited within the last five years.
For additional information regarding taxation, see Note 8 of Notes to
Consolidated Financial Statements contained in this appendix.
G-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 Company. The information contained in this section
should be read in conjunction with the Consolidated Financial Statements and
accompanying Notes thereto contained elsewhere in this appendix.
Operating Strategy
The Company's business consists principally of attracting retail deposits
from the general public and using these funds to originate mortgage loans
secured by one- to four-family residences located in South Carolina. The
Company also originates commercial real estate loans, home equity loans, builder
construction loans, commercial loans and consumer loans. The Company intends to
continue to fund its assets primarily with retail deposits, although FHLB-
Atlanta advances are used as a supplemental source of funds.
The Company'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 level of
other operating income and expenses also affects the Company's profitability.
Other operating income includes service charges and fees, gain on sale of
mortgage loans and gain on sale of investments. Other operating expenses
primarily include compensation and benefits, occupancy and equipment expenses,
deposit insurance premiums and data processing expenses. The Company's results
of operations also are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government legislation and regulation and monetary and fiscal policies.
The Company'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 fiscal 1999, the Company
sought to reallocate its mortgage lending portfolio loans by increasing its
originations of builder construction and commercial real estate loans for the
purpose of increasing overall loan yield and size of the loan portfolio. As
these types of loans generally present more risk than one- to four-family
mortgage loans, the Company has increased its allowance for loan loss. The
Company believes that its current mortgage loan portfolio is now balanced to
yield an attractive return with acceptable risk and intends to maintain the
composition of the portfolio at its approximate current levels. To manage
interest risk, the Company will continue to place emphasis on origination of
adjustable-rate loans and fixed-rate loans with a maturity of less than fifteen
years. While the Company continues to rely heavily on certificates of deposit
as its primary source of funds, in fiscal 1999 a greater emphasis was placed on
attracting transaction accounts. Consequently, the higher cost of funds
generally associated with certificates of deposit has been mitigated by growth
in lower cost checking and money market accounts. A lower cost of funds
contributes to a higher interest rate spread and increased profitability.
However, any future inability to attract and retain lower cost deposits, as well
as changes in market interest rates, could lower the Company's interest rate
spread and reduce its profitability.
Comparison of Financial Condition at December 31, 1999 and September 30, 1999
Total assets increased $20.4 million, or 6.5%, during the first three
months of fiscal 2000 to $334.1 million. The increase resulted primarily from
an increase in cash and cash equivalents of $4.9 million, or 36.0%, and an
increase in loans receivable of $16.9 million, or 6.7%, offset by a decrease in
investments and mortgage backed securities. The increase in loans receivable is
the result of continued demand for home mortgage and construction loan products.
Investment securities decreased 5.2% to $27.8 million from $29.3 million, as
investments matured or were called and not replaced. Mortgage backed securities
decreased $922,000 as a result of normal repayments and prepayments.
G-25
<PAGE>
Deposit accounts decreased $3.8 million, or 1.8%, during the first three
months of fiscal 2000 to $202.6 million. The decrease is primarily due to
normal savings withdrawals and aggressive local competition for savings
deposits.
Advances from the Federal Home Loan Bank grew by $25 million, or 83.3%, to
$55 million at December 31, 1999. These short-term daily interest advances were
used to fund loan growth.
Total equity decreased $1.1 million, or 1.5%, to $73.5 million at December
31, 1999 from $74.6 million. The decrease was primarily due to the Company's
repurchase of its shares on the open market offset by the current quarter of net
income.
Nonaccrual loans increased $607,000 to $1.3 million from $675,000 at
September 30, 1999. Nonaccrual one-to-four family mortgage loans and nonaccrual
home equity loans increased $322,000 and $6,000 respectively while nonaccrual
builder construction loans increased $279,000. At December 31, 1999 and
September 30, 1999, total nonaccrual loans accounted for 0.48% and 0.27 %,
respectively, of net loans receivable. There was no real-estate owned as of
September 30, 1999 and December 31, 1999. Total nonperforming assets were 0.38%
of total assets at December 31, 1999, compared to 0.22% at September 30, 1999.
Comparison of Financial Condition at September 30, 1999 and 1998
Total assets increased $8.8 million, or 2.9%, to $313.7 million from $304.9
million at September 30, 1998. Loans receivable increased $55.2 million, or
28.1%, to $252.0 million from $196.8 million. Builder construction and
commercial mortgage loans increased by $68.7 million, or 266.7%. One- to four-
family mortgage loans increased $12.6 million or 7.3%. Mortgage-backed
securities increased to $10.1 million from $1.7 million. Mortgage-backed
securities in the amount of $10.0 million were purchased with FHLB advances.
Investment securities increased to $29.3 million from $24.0 million. Growth in
brokered loans resulted in a decrease in loan origination fees. Cash and cash
equivalents decreased $60.4 million, or 81.7%, to $13.5 million from $73.9
million as the Company used cash during the 1999 fiscal year to fund loan
growth, pay a $4.00 per share distribution on June 22, 1999, and purchase
investment securities.
Total liabilities increased $29.5 million, or 14.1%, from $209.6 million to
$239.1 million. Deposit accounts increased $278,000, from $206.1 million to
$206.4 million. During fiscal 1999, the Company borrowed $30 million in FHLB
advances to help fund loan growth and to purchase mortgage-backed securities.
Total equity decreased $20.7 million, or 21.8%, from $95.3 million to $74.6
million. The decrease is primarily the result of the Company's payment of the
cash distribution and the repurchase of shares of its stock.
Comparison of Operating Results for the Three Months Ended December 1999 and
1998
General. Net income increased $127,000, or 13.2%, to $1.1 million for the
three months ended December 31, 1999 from $965,000 for the three months ended
December 31, 1998. The increase was primarily the result of an increase in
interest income offset by an increase in interest expense, provision for loan
losses, income taxes, and other operating expenses.
Net Interest Income. Net interest income increased $409,000, or 16.4%, for
the first quarter of fiscal 2000 compared to the first quarter of fiscal 1999
because of an increase in the average balance of interest-earning assets, an
increase in the yield on those assets, and a decrease in the cost of funds on
interest bearing liabilities. This increase was offset by an increase in the
average balance of total interest bearing liabilities of $40.9 million which was
primarily due to an increase in Federal Home Loan Bank advances of $42.6 million
offset by a decrease in the average balance of deposits of $1.7 million.
Interest income increased $702,000, or 13.1%, between the periods. Interest
income on loans increased $1.2 million as a result of an increase in the average
balance of loans receivable to $262.2 million from $201.7 million. The
G-26
<PAGE>
average balance of interest-earning assets increased to $315.8 million from
$298.2 million and the average yield on total interest-earning assets was 7.69%
compared to 7.20% for the first quarter of fiscal 1999. The increase in the
average balance of interest-earning assets was due chiefly to an increase in
loans receivable.
Interest expense increased to $3.2 million for the quarter ended December
31, 1999 from $2.9 million for the quarter ended December 31, 1998. The
increase was due to an increase in interest expense on advances from Federal
Home Loan Bank from $0 to $596,000 offset by a decrease in interest expense on
deposits of $303,000 from $2.9 million to $2.6 million. The reduction in
deposit expense was primarily the result of a decrease in total average deposit
accounts from $205.4 million for the quarter ended December 31, 1998 to $203.7
million for the quarter ended December 31, 1999 and a decrease in the yield on
average deposits to 5.04% from 5.59%.
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 $149,000 for the three months
ended December 31, 1999 compared with $75,000 for the three months ended
December 31, 1998. At December 31, 1999, the Bank's allowance for loan losses
totaled $1.5 million, which equaled 0.5% of total loans outstanding compared to
$835,000, which equaled 0.4% of total loans outstanding, on December 31, 1998.
The increase in loan loss is chiefly a reflection of the increase in non-
performing loans.
Other Income. Other income decreased $15,000, or 23.1%, to $50,000 for the
three months ended December 31, 1999 from $65,000 for the three months ended
December 31, 1998. This decrease was primarily the result of a $20,000 decrease
from the gain on sale of mortgages for the quarter ended December 31, 1999
compared to the quarter ended December 31, 1998 offset by an increase of $5,000
in fee income for the quarter ended December 31, 1999 compared to the quarter
ended December 31, 1998.
Other Operating Expenses. Other operating expenses increased $39,000, or
4.0%, from the first quarter of fiscal 1999 to the first quarter of fiscal 2000.
Employee benefit and compensation increased $150,000 during the first quarter of
fiscal 2000 primarily due to expenses associated with the Employee Stock
Ownership Plan ("ESOP") and the Management Recognition and Development Plan
("MRDP"), offset by decreases in professional fees, shareholder expenses,
deposit insurance premiums, and data processing.
Income Taxes. The provision for income tax was $702,000 in the first
quarter of fiscal 2000 compared to $548,000 in the first quarter of fiscal 1999.
The income tax provision was higher in fiscal 1999 because of higher taxable
income.
Comparison of Operating Results for the Years Ended September 30, 1999 and 1998
Net Income. Net income decreased $1.1 million, or 31.4%, to $2.4 million
for the year ended September 30, 1999 from $3.4 million for the year ended
September 30, 1998. The decrease in net income was primarily the result of an
increase in employee compensation and benefit expense and an increase in data
processing fees. The Company paid a cash distribution to stockholders of $4.00
a share on June 22, 1999 that resulted in a one-time charge of $1.9 million to
employee compensation and benefit expense.
Net Interest Income. Net interest income increased $2.7 million, or 34.5%,
from fiscal year 1998 to fiscal year 1999, due to an increase in the average
balance of interest-earning assets, primarily growth in the loan portfolio, and
a decrease in interest expense of $1.0 million, or 8.4%.
Total interest income increased $1.7 million, or 8.6%, from fiscal 1998 to
fiscal 1999. Interest income on loans receivable increased $2.0 million as a
result of an increase of $24.9 million, or 12.8%, in the average balance of
loans. Yield on the average balance of loans receivable was essentially
unchanged. The growth in interest income on loans was partially offset by a
reduction in interest income on mortgage-backed securities, as the Company
reduced the
G-27
<PAGE>
average balance of these investments. The average balance of interest-earning
assets increased to $292.7 million in 1999 from $272.2 million in 1998. The
increase in the average balance was due to an increase in the average balance of
loans receivable partially offset by a decrease in interest-bearing overnight
funds. The yield on the Company's interest-earning assets increased to 7.37%
from 7.30% as a result of market trends and the investment of lower yielding
overnight funds into higher yielding loans.
Total interest expense decreased $1.0 million, or 8.4%, from fiscal 1998 to
fiscal 1999. The average balance of interest-bearing liabilities decreased
$17.4 million, or 7.7%, while the average rate paid decreased to 5.30% from
5.34%. Interest paid on passbook, NOW and money market accounts increased a
total of $104,000 primarily because of an increase in the average balance and
rate of such accounts. Interest paid on certificates of deposit decreased $1.3
million because of a decrease in the average balance of such accounts. This was
partially offset by an increase in the average rate paid on certificates of
deposit to 5.55% from 5.53%. Interest paid on FHLB advances was $203,000 for
fiscal 1999 compared to no interest paid in fiscal 1998.
Provision for Loan Losses. The provision for loan losses was $596,000 in
fiscal year 1999 compared with a net recovery of $105,000 in fiscal 1998. At
September 30, 1999, the Company's allowance for loan losses totaled $1.4
million, which equaled 0.54% 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 Company's control. While the Company 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 or that actual losses will not exceed the
estimated amounts.
Other Income. Other income decreased $34,000, or 13.8%, to $212,000 for
fiscal 1999 from $246,000 for fiscal 1998. Substantially all of the Company's
other income is derived from service charges and fees. Service charges and fees
totaled $188,000 in fiscal 1999 compared with $228,000 in fiscal 1998. Growth
in brokered loans resulted in a decrease in loan origination fees. Gain on sale
of mortgage loans increased to $43,000 in fiscal 1999 from $18,000 in fiscal
1998 as a result of an increase in loan sales in 1999. The Company had a loss
of $20,000 on sale of investments in fiscal 1999 compared to no loss on sale of
investments in fiscal 1998.
Other Operating Expenses. Other operating expenses were $5.8 million in
fiscal 1999 compared to $2.9 million in fiscal 1998. Employee compensation and
benefits expense increased $2.4 million, or 138.5%, primarily as a result of a
$4.00 a share cash distribution on June 22, 1999 to stockholders of record that
resulted in a one-time charge of $1.9 million to employee compensation and
benefit expense. The increase is also the result of compensation expenses
associated with the Management Recognition and Development Plan and normal
payroll growth.
Income Taxes. The provision for income taxes increased to $2.0 million for
fiscal 1999 from $1.9 million for fiscal 1998. Although income before income
taxes decreased for fiscal 1999, a portion of the cash distribution charge to
compensation expense was not deductible for income tax purposes.
Comparison of Operating Results for the Years Ended September 30, 1998 and 1997
Net Income. Net income increased $1.5 million, or 76.0%, to $3.4 million
for the year ended September 30, 1998 from $2.0 million for the year ended
September 30, 1997. The increase was primarily the result of an increase in
interest income, a decrease in interest expense on FHLB borrowings, a recovery
of loan losses and a decline in deposit insurance premiums. This was offset by
an increase in employee compensation and real estate operations expense.
Net Interest Income. Net interest income increased $2.3 million, or 42.0%,
to $7.9 million for fiscal 1998 from $5.5 million for fiscal 1997. The
Company's interest rate spread increased 20 basis points to 1.96% for fiscal
1998 from 1.76% for fiscal 1997 as the Company experienced a 17 basis point
decrease in the yield on its interest-earning assets and a 37 basis point
decrease in the cost of its interest-bearing liabilities.
G-28
<PAGE>
Total interest income increased $2.1 million, or 11.9%, from fiscal 1997 to
fiscal 1998. Interest income on loans receivable increased $756,000 largely as
a result of an increase of $5.5 million, or 2.9%, in the average balance of
loans and a 16 basis point increase in the yield on loans receivable for the
year ended September 30, 1998. The growth in interest income on loans was
partially offset by a reduction in interest income on mortgage-backed
securities, as the Company reduced the average balance and yield of these
investments. The average balance of interest-earning assets increased to $272.2
million in 1998 from $237.9 million in 1997. The increase in the average
balance was due in part to funds received from the proceeds of the initial
public offering and an increase in the average balance of loans receivable. The
yield on the Company's interest-earning assets decreased to 7.30% from 7.47% as
a result of market trends and the investment of the offering proceeds in lower
yielding, short term investments.
Total interest expense decreased $220,000, or 1.8%, from fiscal 1997 to
fiscal 1998. The average balance of interest-bearing liabilities increased
$10.6 million, or 4.96%, while the average rate paid decreased to 5.34% from
5.71%. Interest paid on passbook, NOW and money market accounts decreased a
total of $35,000 primarily because of a decrease in the average balance and rate
of such accounts. Interest paid on certificates of deposit increased $41,000
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 5.53% from 5.91%. Interest paid on FHLB advances decreased $226,000
as a result of no borrowings in the year ended September 30, 1998.
Provision for Loan Losses. The provision for loan losses was a net
recovery of $105,000 in fiscal year 1998 compared with a provision of $337,000
in fiscal 1997. This recovery came as the result of a loan previously
classified as a loss being paid off. Additionally, the Company added $10,000 to
the allowance for loan losses to provide for estimated losses on specific
problem loans. It was not necessary for the Company to add to the allowance for
loan losses based on its re-evaluation of the risks inherent in the loan
portfolio because upon analysis current reserves proved adequate. At September
30, 1998, the Company's allowance for loan losses totalled $760,000 which
equaled 0.36% of total loans.
Other Income. Other income increased $44,000, or 21.8%, to $246,000 for
fiscal 1998 from $202,000 for fiscal 1997. Service charges and fees totalled
$228,000 in fiscal 1998 compared with $206,000 in fiscal 1997. Gain on sale of
mortgage loans increased to $18,000 in fiscal 1998 from $6,000 in fiscal 1997 as
a result of an increase in loan sales in 1998. The Company had no sale of
investments in fiscal 1998 resulting in no gains or losses compared to a loss of
$13,000 in fiscal 1997.
Other Operating Expenses. Other operating expenses were $2.9 million in
fiscal 1998 compared to $2.4 million in fiscal 1997. Employee compensation and
benefits expense increased $263,000, or 18.1%, as a result of normal wage
increases and new costs associated with the implementation of the Employee Stock
Ownership Plan. Expense from real estate operations was $69,000 in fiscal year
1998 compared with income of $167,000 in fiscal 1997 as a result of gains on
sales of real estate owned.
Income Taxes. The provision for income taxes increased to $2.0 million
for fiscal 1998 from $1.1 million for fiscal 1997. The income tax provision was
higher in fiscal 1998 because of higher taxable income.
G-29
<PAGE>
Average Balances, Interest and Average Yields/Costs
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.
<TABLE>
<CAPTION>
For the Years Ended September 30,
-----------------------------------------------------------------------
1999 1998
---------------------------------- ---------------------------------
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
--------- --------- ------- -------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)............. $220,162 $17,834 8.10% $195,232 $15,790 8.09%
Mortgage-backed securities............ 1,424 105 7.36 4,268 208 4.87
Investment securities (2)............. 23,163 1,225 5.29 27,104 1,442 5.32
FHLB stock............................ 1,883 142 7.53 2,042 149 7.31
Federal funds sold and overnight
deposits........................... 46,109 2,282 4.95 43,546 2,291 5.26
-------- ------- ---- -------- ------- ----
Total interest-earning assets...... 292,741 21,588 7.37 272,192 19,880 7.30
------- ---- ------- ----
Noninterest-earning assets............... 7,452 8,219
-------- --------
Total average assets............... $300,193 $280,411
======== ========
Interest-bearing liabilities (3):
Passbook accounts..................... $ 9,921 297 3.00 $ 11,025 304 2.27
NOW and money market accounts......... 9,699 201 2.07 3,966 90 2.76
Certificates of deposit............... 185,585 10,299 5.55 209,893 11,616 5.53
-------- ------- ---- -------- ------- ----
Total deposits..................... 205,205 10,797 5.26 224,884 12,010 5.34
FHLB advances......................... 2,329 203 -- -- -- --
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities. 207,534 11,000 5.30 224,884 12,010 5.34
------- ---- ------- ----
Noninterest-bearing liabilities.......... 3,471 5,125
-------- --------
Total average liabilities.......... 211,005 230,009
-------- --------
Average equity........................... 89,188 50,402
-------- --------
Total average liabilities and
equity............................. $300,193 $280,411
======== ========
Net interest income...................... $10,588 $ 7,870
======= =======
Interest rate spread..................... 2.07% 1.96%
==== ====
Net interest margin...................... 3.62% 2.89%
==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................... 1.41x 1.21x
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended September 30,
---------------------------------
1997
---------------------------------
Interest Average
Average and Yield/
Balance Dividends Cost
--------- --------- -------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)............. $189,689 $15,034 7.93%
Mortgage-backed securities............ 8,401 450 5.36
Investment securities (2)............. 32,397 1,856 5.73
FHLB stock............................ 2,042 148 7.25
Federal funds sold and overnight 5,335 285 5.34
deposits........................... -------- ------- ----
Total interest-earning assets...... 237,864 17,773 7.47
------- ----
Noninterest-earning assets............... 7,315
--------
Total average assets............... $245,179
========
Interest-bearing liabilities (3):
Passbook accounts..................... $ 11,561 340 2.94
NOW and money market accounts......... 3,751 89 2.37
Certificates of deposit............... 195,853 11,575 5.91
-------- ------- ----
Total deposits..................... 211,165 12,004 5.68
FHLB advances......................... 3,082 226 7.33
-------- ------- ----
Total interest-bearing liabilities. 214,247 12,230 5.71
------- ----
Noninterest-bearing liabilities.......... 2,759
--------
Total average liabilities.......... 217,006
--------
Average equity........................... 28,173
--------
Total average liabilities and $245,179
equity............................. ========
Net interest income...................... $ 5,543
=======
Interest rate spread..................... 1.76%
====
Net interest margin...................... 2.33%
====
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................... 1.11x
____________________________________
</TABLE>
(1) Loans receivable, net includes loans held-for-sale and nonaccrual loans.
Interest on loans receivable does not include interest on nonaccrual loans.
(2) Yield information does not give affect to changes in fair value that are
reflected as a component of equity.
(3) Does not include escrow balances.
G-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 Company. 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>
1999 Compared to 1998 1998 Compared to 1997
---------------------------- -------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------- ----------------------
Rate Volume Net Rate Volume Net
---- ------ --- ---- ------ ---
(In thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, net (1).............. $ 20 $ 2,024 $2,044 $ 309 $ 447 $ 756
Mortgage-backed securities............. 344 (447) (103) (38) (204) (242)
Investment securities.................. (8) (209) (217) (126) (288) (414)
FHLB stock............................. 5 (12) (7) 1 -- 1
Federal funds sold and overnight
deposits............................ 1,206 (1,215) (9) (4) 2,010 2,006
------ ------- ------ ------ ------ ------
Total net change in income on interest-
earning assets......................... 1,567 141 1,708 142 1,965 2,107
------ ------- ------ ------ ------ ------
Interest-bearing liabilities:
Passbook accounts...................... 35 (42) (7) (20) (16) (36)
NOW and money market accounts.......... (7) 118 111 (4) 5 1
Certificates of deposit................ 42 (1,359) (1,317) (355) 396 41
------ ------- ------ ------ ------ ------
Total average deposits.............. 70 (1,283) (1,213) (379) 385 6
FHLB advances.......................... -- 203 203 -- (226) (226)
------ ------- ------ ------ ------ ------
Total net change in expense on interest-
bearing liabilities.................... 70 (1,080) (1,010) (379) 159 (220)
------ ------- ------ ------ ------ ------
Net change in net interest income......... $1,497 $ 1,221 $2,718 $ 521 $1,806 $2,327
====== ======= ====== ====== ====== ======
____________________________________
</TABLE>
(1) Does not include interest on nonaccrual loans.
Asset and Liability Management
Quantitative Aspects of Market Risk. The Company does not maintain a
trading account for any class of financial instrument nor does the Company
engage in hedging activities or purchase high-risk derivative instruments.
Furthermore, the Company is not subject to foreign currency exchange rate risk
or commodity price risk. For information regarding the sensitivity to interest
rate risk of the Company's interest-earning assets and interest-bearing
liabilities, see the tables under "Lending Activities--Maturity of Loan
Portfolio," "--Investment Activities" and "--Deposit Activities and Other
Sources of Funds."
Qualitative Aspects of Market Risk. The Company's principal financial
objective is to achieve long-term profitability while reducing its exposure to
fluctuating market interest rates. The Company has sought to reduce the exposure
of its earnings to changes in market interest rates by attempting to manage the
mismatch between asset and
G-31
<PAGE>
liability maturities and interest rates. The principal element in achieving this
objective is to increase the interest-rate sensitivity of the Company'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 Company maintains an investment portfolio of U.S. Treasury
and U.S. Government agency obligations with contractual maturities of between
one and five years. The Company 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.
The Company uses interest rate sensitivity analysis to measure its interest
rate risk by computing changes in NPV (net portfolio value) of its cash flows
from assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market risk sensitive instruments in the
event of a sudden and sustained 100 to 400 basis point increase or decrease in
market interest rates with no effect given to any steps that management might
take to counter the effect of that interest rate movement. Using data compiled
by the FHLB, the Company receives a report which measures interest rate risk by
modeling the change in NPV over a variety of interest rate scenarios.
The following table is provided by the FHLB and sets forth the change in
the Company's NPV at September 30, 1999 and 1998, based on FHLB 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.
<TABLE>
<CAPTION>
Estimated Change in
Basis Point ("bp") Net Portfolio Value
Change in Rates at September 30,
------------------ ---------------------------------------
1999 1998
------ ------
(In thousands)
<S> <C> <C> <C>
+300 (14,340) (5,651)
+200 (8,538) (2,616)
+100 (3,796) (1,308)
0 -- --
(100) 3,184 1,481
(200) 5,734 2,962
(300) 7,431 3,483
</TABLE>
The above table illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at September 30, 1999 would reduce the
Company's NPV by approximately $8.5 million, or 12.4%, at that date.
G-32
<PAGE>
The following table prepared with information supplied by the FHLB presents
the Company's financial instruments that are sensitive to changes in interest
rates, categorized by expected maturity.
<TABLE>
<CAPTION>
After 3
Within One Year Years to Beyond 5
1 Year to 3 Years 5 Years Years Total
-------- ---------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable................................ $ 92,142 $107,430 $19,432 $35,142 $254,146
Mortgage-backed securities...................... 328 9,819 -- -- 10,147
Investment securities........................... -- -- 29,305 -- 29,305
FHLB stock...................................... 1,690 -- -- -- 1,690
Federal funds sold and
overnight deposits........................... 11,185 -- -- -- 11,185
-------- -------- ------- ------- --------
Total interest-earning assets................ $105,345 $117,249 $48,737 $35,142 $306,473
======== ======== ======= ======= ========
Interest-bearing liabilities:
Passbook accounts............................... $ 853 $ 3,253 $ 1,614 $ 3,869 $ 9,589
NOW and money market accounts................... 5,387 6,410 1,071 1,893 14,761
Certificates of deposit......................... 50,388 130,995 649 -- 182,032
-------- -------- ------- ------- --------
Total deposits............................... 56,628 140,658 3,334 5,762 206,382
FHLB advances...................................... 24,000 -- -- 6,000 30,000
-------- -------- ------- ------- --------
Total interest-bearing liabilities........... $ 80,628 $140,658 $ 3,334 $11,762 $236,382
======== ======== ======= ======= ========
Interest sensitivity gap per period................ 24,717 (23,409) 45,403 23,380 70,091
Cumulative interest sensitivity gap................ 24,717 1,308 46,711 70,091
Percentage of cumulative gap to
total earning assets............................ 8.1% 0.4% 15.2% 22.9%
Cumulative ratio of interest sensitive
assets to interest sensitive liabilities........ 1.31% 0.83% 14.62% 2.99%
</TABLE>
Certain assumptions utilized by the FHLB in assessing the interest rate
risk of savings associations within its region were utilized in preparing the
preceding tables. 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 tables. 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 Company'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.
G-33
<PAGE>
The Company 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 Company generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At December 31,
1999, cash and cash equivalents totaled $18.4 million, or 5.5% of total assets,
and investment securities classified as available-for-sale totaled $24.8
million. At December 31, 1999, the Bank had received $55 million in advances
from Federal Home Loan Bank.
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 Company's actual liquidity ratio at December 31, 1999 was well
in excess of this requirement.
The Company's primary investing activity is the origination of one- to
four-family mortgage loans. During the years ended September 30, 1999, 1998 and
1997, the Company originated $42.2 million, $43.5 million and $37.0 million of
such loans, respectively. At September 30, 1999, the Company had loan
commitments totalling $2.3 million, unused lines of credit of $9.2 million and
undisbursed loans in process totalling $41.6 million. The Company 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, 1999 totalled $137.6 million. Historically, the Company has been
able to retain a significant amount of its deposits as they mature.
OTS regulations require the Bank to maintain specific amounts of regulatory
capital. As of December 31, 1999, the Bank complied with all regulatory capital
requirements as of that date with tangible, core and risk-based capital ratios
of 19.21%, 19.21% and 31.85%, respectively,
Year 2000 Issues
As the year 2000 approached, the Company's information and data processing
system was assessed to insure appropriate operation after December 31, 1999.
Many such systems in use worldwide faced the possibility of not being able to
interpret dates after December 31, 1999 properly because such systems allowed
only two digits to indicate the year in a date. Programmers initially used a
two-digit dating system that became integrated into applications and hardware
which could have caused systems to function improperly or fail on January 1,
2000. The problem could reside in computer programs, computer hardware, or
electronic devices that reference dates in the course of their functions. Also,
the Company had to consider the potential problems that Year 2000 posed for
third party service providers.
Year 2000 risk was present in virtually all of the Company's normal
operating activities. To confront these risks, the Company developed a Year 2000
Plan, which was reviewed by senior management and the Board of Directors. The
plan contained a review of Company systems that could have been affected by Year
2000 problems along with an assessment of the potential impact that Year 2000
system problems could pose to the Company's normal operation. Management
categorized Year 2000 potential risks as either critical, important, or
noncritical. Critical issues were those that would cause the Company to lose its
data communication and data processing capability and thus render normal
operations virtually impossible. Noncritical issues were those that would pose
an inconvenience but could be readily remediated through a manual or alternate
processing system. Important issues were those that would cause some disruption
to administrative or management functions but would cause no immediate
operational problems and could be handled easily in a non-automated manner.
Management determined the most critical aspects of the Company's operations
that could be affected were the Company's interaction with its data processing
provider and the proper operation of its internal computer system. While other
areas of concern, such as payroll and accounting services and mortgage escrow
and tax services could pose some inconvenience and delays in normal operations,
problems in these areas would be noncritical and could be readily corrected.
G-34
<PAGE>
The Company requested and received Year 2000 readiness certifications from
third party service providers, whose services have been deemed critical to Bank
operations. For critical systems, contingency plans were developed that made
provisions for alternate and/or manual processing.
The Company monitored the Year 2000 date change and operations following
the date change and experienced no disruptions or problems; furthermore, the
Company experienced no problems related to Year 2000 with its vendors or
customers. Management will continue to monitor the Company's systems through the
Year 2000.
The external costs associated with the Company's Year 2000 compliance were
less than $50,000. The Company does not track internal costs as these are
related to normal payroll costs. The Company expects little or no further
expense associated with Year 2000.
Impact of Accounting Pronouncements and Regulatory Policies
See Note 1 to the Consolidated Financial Statements for a discussion of the
anticipated impact of recently issued accounting statements.
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 be 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 Company'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.
EXECUTIVE AND DIRECTOR COMPENSATION
Summary Compensation Table
The following information is furnished for Mr. Wells. No other executive
officer of the Bank received salary and bonus of $100,000 or more during the
year ended September 30, 1999.
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------
Annual Compensation Awards
-------------------------------- -------------------------
Other Restricted Securities
Annual Stock Underlying All Other
Name and Principal Fiscal Salary Bonus Compensation Awards Options Compensation
Positions Year ($) ($) ($)(1) ($) (#) ($)
- -------------------------------- ------ -------- ------ ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
J. Edward Wells 1999 $156,845 $5,038 $15,000(2) $885,500(3) 104,140 $231,439(4)
President and Chief Executive 1998 150,138 4,740 -- -- -- 9,061
Officer 1997 145,052 4,372 -- -- -- 21,754
</TABLE>
________________________________
(1) Does not include the aggregate amount of perquisites and other personal
benefits, which was less than 10% of the total annual salary and bonus
reported.
(2) Consists of directors' fees.
(3) Represents the total value of the award of 46,000 shares of restricted stock
on April 15, 1999, which award will vest ratably over a five-year period.
At September 30, 1999, the value of the unvested restricted stock award was
$790,625. Dividends will be paid on the restricted stock.
(4) Consists of employer contribution to The Bank's 401(k) plan of $3,238,
contribution to ESOP of $44,201 and payment of $4.00 per share special cash
distribution with respect to unvested shares of restricted stock, which
totaled $184,000.
G-35
<PAGE>
Option Grants in Last Fiscal Year
The following table provides information regarding stock option grants to
Mr. Wells during the year ended September 30, 1999.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Number of % of Total Appreciation for
Securities Options Options(3)
---------------------
Underlying Granted to Exercise
Options Employees Price
Granted in Per Expiration
Name (#)(1) Fiscal Year Share(2) Date 5% 10%
- --------------- --------- ------------ ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
J. Edward Wells 104,140 41.7% $15.10 04/15/09 $989,330 $2,506,650
</TABLE>
__________________________
(1) One-half of the options granted are exercisable immediately and one-half of
the options granted are exercisable on April 15, 2000; provided, however,
that options will be immediately exercisable upon a change in control and in
the event the optionee terminates employment due to death or disability.
(2) Reflects reduction in exercise price to reflect the $4.00 per share special
cash distribution paid by the Company on June 22, 1999, as authorized under
the anti-dilution provisions of the 1998 Stock Option Plan.
(3) The dollar gains under these columns result from calculations required by
the Securities and Exchange Commission's rules and are not intended to
forecast future price appreciation of the Company's common stock. It is
important to note that options have value only if the stock price increases
above the exercise price shown in the table during the effective option
period. In order for the executive to realize the potential values set forth
in the 5% and 10% columns in the table, the price per share of the Company's
common stock would be approximately $24.60 and $39.17, respectively, as of
the expiration date of the options.
Option Value at Fiscal Year End
The following table provides information regarding unexercised stock
options for Mr. Wells as of September 30, 1999. Mr. Wells did not exercise any
stock options during the year ended September 30, 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-End
Name at Fiscal Year-End (#) ($)(1)
- ----------------- ----------------------------- ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
J. Edward Wells 52,070 52,070 $108,696 $108,696
</TABLE>
_______________________________
(1) Value of unexercised in-the-money stock options equals the market value of
shares covered by in-the-money options on September 30, 1999 less the option
exercise price. Options are in-the-money if the market value of shares
covered by the options is greater than the exercise price.
Employment Agreement
The Company and the Bank have entered into a three-year employment
agreement with Mr. Wells. Under the employment agreement, the current salary
level for Mr. Wells is $151,000, which amount is paid by the Bank 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 may be extended for an additional year at the discretion of
the Board. The agreement is terminable by the Company and the Bank at any time,
by Mr. Wells if he is
G-36
<PAGE>
assigned duties inconsistent with his initial position, duties, responsibilities
and status, or upon the occurrence of certain events specified by federal
regulations. If Mr. Wells' employment is terminated without cause or upon Mr.
Wells' voluntary termination following the occurrence of an event described in
the previous sentence, the Bank 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 Company or the Bank. 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 maximum present value of the severance benefits under the employment
agreement 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, (1) in the form of a lump
sum cash payment equal to 2.99 times Mr. Wells' base amount or (2) a combination
of a cash payment and continued coverage under the Bank's 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 Mr. Well's base amount. Section
280G of the Internal Revenue 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 the payment in excess of the base amount, and the Company would
not be entitled to deduct such amount.
The employment agreement restricts Mr. Wells' right to compete against the
Company and The Bank 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.
Directors' Compensation
Directors of the Bank 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, 1999, the
Bank paid an aggregate of $1,840 in bonuses to non-employee Directors. No
separate fees are paid for service on the Company's Board of Directors.
During the year ended September 30, 1999, each non-employee director
received options to acquire 41,650 shares of the Company's common stock and
18,500 shares of restricted stock. The stock options are all exercisable and
the restricted stock vests ratably over five years.
G-37
<PAGE>
Index of Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report........................................... G-39
Consolidated Balance Sheets as of September 30, 1999 and 1998.......... G-40
Consolidated Statements of Income for the Years Ended
September 30, 1999, 1998 and 1997..................................... G-41
Consolidated Statements of Stockholders' Equity
for the Years Ended September 30, 1999, 1998 and 1997................. G-42
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1999, 1998 and 1997..................................... G-43
Notes to Consolidated Financial Statements............................. G-45
Consolidated Balance Sheets as of December 31, 1999 and
September 30, 1999 (unaudited)........................................ G-68
Consolidated Statements of Income for the Three Month Periods Ended
December 31, 1999 and 1998 (unaudited)................................ G-69
Consolidated Statement of Stockholders' Equity for the Three Month
Period Ended December 31, 1999........................................ G-70
Consolidated Statements of Cash Flows for the Three Month Periods
Ended December 31, 1999 and 1998 (unaudited).......................... G-71
Notes to Consolidated Financial Statements (unaudited)................. G-72
</TABLE>
G-38
<PAGE>
Deloitte & Touche LLP
1200 NationsBank Plaza
7 North Laurens Street
Greenville, South Carolina 29601
telephone: (864) 240-5700
facsimile: (864) 235-8563
INDEPENDENT AUDITORS' REPORT
Board of Directors
Heritage Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Heritage
Bancorp, Inc. and its subsidiary (the "Company") as of September 30, 1999 and
1998, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended September 30,
1999. These financial statements are the responsibility of the Company'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 consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1999 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
November 5, 1999
Greenville, South Carolina
G-39
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS 1999 1998
Cash $ 2,341 $ 1,917
Federal funds sold and overnight interest-bearing deposits 11,185 72,003
-------- --------
Total cash and cash equivalents 13,526 73,920
Investment securities (Note 2):
Held-to-maturity - at amortized cost (fair value: 1999 - $3,480; 1998 - $17,208) 3,499 17,112
Available-for-sale - at fair value (amortized cost: 1999 - $22,556; 1998 - $3,563) 25,806 6,898
Mortgage-backed securities - held to maturity - at amortized cost (fair value:
1999 - $10,225; 1998 - $1,691) (Note 3) 10,147 1,695
Loans receivable - net (Notes 4 and 7) 252,014 196,789
Loans held-for-sale - at lower of cost or market (market value: 1999 - $788;
1998 - $869) 777 849
Office properties and equipment - net (Note 5) 4,033 4,103
Federal Home Loan Bank Stock - at cost (Note 7) 1,690 2,042
Accrued interest receivable 1,948 1,335
Other assets 277 178
-------- --------
TOTAL $313,717 $304,921
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposit accounts (Note 6) $206,382 $206,104
Advances from FHLB (Note 7) 30,000 -
Accrued interest on deposit accounts 446 359
Other liabilities (Note 8) 2,307 3,128
-------- --------
Total liabilities 239,135 209,591
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Common stock of $0.01 par value per share. Authorized 10,000,000 shares,
issued 4,628,750 shares and outstanding 4,426,770 shares and 4,628,750 at
September 30, 1999 and 1998, respectively 46 46
Additional paid-in capital 51,214 67,987
Retained income - substantially restricted (Notes 8 and 12) 31,700 30,565
Unallocated ESOP shares (Note 10) (4,164) (5,369)
Unearned MRDP shares (Note 11) (2,600) -
Treasury stock (Note 12) (3,661) -
Accumulated other comprehensive income 2,047 2,101
-------- --------
Total stockholders' equity 74,582 95,330
-------- --------
TOTAL $313,717 $304,921
======== ========
</TABLE>
See notes to consolidated financial statements.
G-40
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(In Thousands of Dollars, Except Per Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------
1999 1998 1997
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 17,833 $ 15,790 $ 15,034
Investment securities and other 3,650 3,882 2,289
Mortgage-backed securities 105 208 450
---------- ---------- --------
Total interest income 21,588 19,880 17,773
---------- ---------- --------
INTEREST EXPENSE:
Deposits (Note 6) 10,797 12,010 12,004
Federal Home Loan Bank borrowings 203 - 226
---------- ---------- --------
Total interest expense 11,000 12,010 12,230
---------- ---------- --------
NET INTEREST INCOME 10,588 7,870 5,543
PROVISION FOR LOAN LOSSES (RECOVERY OF
ALLOWANCE) (Note 4) 596 (105) 337
---------- ---------- --------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 9,992 7,975 5,206
---------- ---------- --------
OTHER INCOME:
Service charges and fees 188 228 205
Gain on sale of mortgage loans held-for-sale 43 18 6
Loss on sale of investments available-for-sale (20) - (13)
Other income, net 1 - 4
---------- ---------- --------
Total other income 212 246 202
---------- ---------- --------
OTHER OPERATING EXPENSES:
Employee compensation and benefits (Note 10 and 11) 4,086 1,713 1,450
Deposit insurance premiums 148 124 234
Occupancy and equipment expense 427 413 397
Data processing - service bureau fees 202 134 132
Office supplies, postage, printing, etc. 116 101 81
Professional fees 280 82 56
Advertising and promotions 50 26 24
Loss (income) from real estate operations
(8) 69 (167)
Other 516 195 155
---------- ---------- --------
Total other operating expenses 5,817 2,857 2,362
---------- ---------- --------
INCOME BEFORE INCOME TAXES 4,387 5,364 3,046
PROVISION FOR INCOME TAXES (Note 8) 2,031 1,929 1,094
---------- ---------- --------
NET INCOME $ 2,356 $ 3,435 $ 1,952
========== ========== ========
PER SHARE DATA (Note 1):
Basic earnings per share $ 0.56 $ 0.53 N/A
========== ==========
Weighted average shares outstanding - basic 4,179,576 4,264,627
========== ==========
Earnings per share assuming dilution $ 0.56 $ 0.53 N/A
========== ==========
Weighted average shares outstanding - assuming dilution 4,246,523 4,264,627
========== ==========
</TABLE>
See notes to consolidated financial statements.
G-41
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Unallocated Unearned
Common Stock Paid-In ESOP MRDP Retained Treasury
------------------
Shares Amount Capital Shares Shares Income Stock
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1996 $ 25,817
--------
Comprehensive income:
Net income 1,952
Net unrealized gain on available-for-sale
securities, net of reclassification
adjustment -
--------
Total comprehensive income 1,952
--------
BALANCE, SEPTEMBER 30, 1997 27,769
--------
Comprehensive income:
Net income 3,435
Net unrealized gain on available-for-sale
securities, net of reclassification
adjustment -
--------
Total comprehensive income 3,435
--------
Net proceeds of common stock issued 4,629 $ 46 $ 67,930 $ (5,555) -
Shares released from ESOP - - 57 186 -
Dividends declared - - - - (639)
------- ------ -------- -------- --------
BALANCE, SEPTEMBER 30, 1998 4,629 46 67,987 (5,369) 30,565
Comprehensive income:
Net income - - - - 2,356
Net unrealized loss on available-for-sale
securities, net of reclassification
adjustment - - - - -
--------
Total comprehensive income - - - - 2,356
--------
Shares released from ESOP - - 291 1,205 -
Dividends on common stock - - - - (1,221)
Common stock repurchased (387) - - - - $ (7,479)
Issuance of treasury stock to MRDP 185 - (346) - $(3,472) - 3,818
Vesting of MRDP shares - - - - 283 - -
Cash distribution - - (16,718) - 589 - -
------- ------ -------- -------- ------- -------- --------
BALANCE, SEPTEMBER 30, 1999 4,427 $ 46 $ 51,214 $ (4,164) $(2,600) $ 31,700 $ (3,661)
======= ====== ======== ======== ======= ======== ========
<CAPTION>
Accumulated
Other
Comprehensive
Income Total
<S> <C> <C>
BALANCE, SEPTEMBER 30, 1996 $ 923 $ 26,740
Comprehensive income:
Net income - 1,952
Net unrealized gain on available-for-sale
securities, net of reclassification
adjustment 543 543
-------- --------
Total comprehensive income 543 2,495
-------- --------
BALANCE, SEPTEMBER 30, 1997 1,466 29,235
-------- --------
Comprehensive income:
Net income - 3,435
Net unrealized gain on available-for-sale
securities, net of reclassification
adjustment 635 635
-------- --------
Total comprehensive income 635 4,070
-------- --------
Net proceeds of common stock issued - 62,421
Shares released from ESOP - 243
Dividends declared - (639)
-------- --------
BALANCE, SEPTEMBER 30, 1998 2,101 95,330
-------- --------
Comprehensive income:
Net income - 2,356
Net unrealized loss on available-for-sale
securities, net of reclassification
adjustment (54) (54)
-------- --------
Total comprehensive income (54) 2,302
-------- --------
Shares released from ESOP - 1,496
Dividends on common stock - (1,221)
Common stock repurchased - (7,479)
Issuance of treasury stock to MRDP - -
Vesting of MRDP shares - 283
Cash distribution - (16,129)
-------- --------
BALANCE, SEPTEMBER 30, 1999 $ 2,047 $ 74,582
======== ========
</TABLE>
See notes to consolidated financial statements.
G-42
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,356 $ 3,435 $ 1,952
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income taxes (481) (72) 528
Release of ESOP shares 1,496 243 -
Vesting of MRDP shares 283 - -
Loss on sale of available-for-sale securities 20 - 13
(Accretion) amortization of premium on investment and
mortgage-backed securities - (7) 30
Gain on sale of loans held-for-sale (44) (18) (6)
Amortization of net deferred income (113) (123) (151)
Provision for loan losses (recovery of allowance) 596 (105) 337
Proceeds from the sale of loans held-for-sale 2,239 1,243 485
Purchase of loans held-for-sale - - (1,051)
Originations of loans held-for-sale (2,252) (1,225) (486)
Principal repayments on loans held-for-sale 149 195 7
Depreciation on office properties and equipment 276 276 280
Gain on sale of property (6) - -
Provision for losses on real estate acquired in settlement of loans - 28 15
Loss (gain) on sales of real estate acquired in settlement of loans (7) 34 (191)
(Increase) decrease in accrued interest receivable and other assets (659) (99) 199
Decrease in accrued interest payable and other liabilities (275) (359) (1,184)
--------- --------- ---------
Net cash provided by operating activities 3,578 3,446 777
--------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from maturities and calls of available-for-sale investment
securities 2,000 4,000 8,100
Proceeds from maturities and calls of held-to-maturity investment
securities 13,615 16,000 8,500
Proceeds from the sale of available-for-sale investment securities 2,980 - 1,737
Purchases of available-for-sale investment securities (24,000) (1,500) (500)
Purchases of held-to-maturity investment securities - (17,114) (3,492)
Purchases of mortgage-backed securities (9,927) - -
Principal repayments on mortgage-backed securities 1,480 4,965 3,049
Purchase of loans receivable (87,055) (14,401) (2,465)
Net (increase) decrease in loans 31,224 10,223 (8,424)
Proceeds from sale of FHLB stock 352 - -
Proceeds from sales of real estate acquired in settlement of loans 109 1,080 986
Capitalized costs of real estate acquired in settlement of loans - (450) (138)
Proceeds from sale of office properties and equipment 10 - -
Acquisition of office properties and equipment (209) (101) (28)
--------- --------- ---------
Net cash provided by (used in) investing activities (69,421) 2,702 7,325
--------- --------- ---------
</TABLE>
G-43
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
(In Thousands of Dollars)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------
1999 1998 1997
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net (decrease) increase in deposits $ 278 $(9,308) $ 5,682
Net proceeds from sale of common stock - 62,421 -
Principal repayments on Federal Home Loan Bank borrowings - - (5,000)
Advances from Federal Home Loan Bank 30,000 - -
Purchase of treasury stock (7,479) - -
Cash distribution to stockholders (16,129) - -
Dividend payment (1,221) - -
-------- -------- -------
Net cash provided by financing activities 5,449 53,113 682
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (60,394) 59,261 8,784
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 73,920 14,659 5,875
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,526 $ 73,920 $14,659
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 10,913 $ 11,988 $12,250
-------- -------- -------
Income taxes $ 2,191 $ 1,815 $ 553
-------- -------- -------
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Transfers from loans to real estate acquired in settlement of loans $ 102 $ 281 $ 996
-------- -------- -------
Increase (decrease) in net unrealized gain on available-for-sale
investment securities $ (54) $ 635 $ 543
-------- -------- -------
Sale of common stock to ESOP $ - $ 5,555 N/A
-------- -------- -------
Transfer of common stock from treasury stock to MRDP Plan $ 3,818 $ - $ -
-------- -------- -------
</TABLE>
See notes to consolidated financial statements.
G-44
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Conversion to Capital Stock Form of Ownership -
Heritage Bancorp, Inc. (the "Corporation") was incorporated under Delaware
law in November 1997 by Heritage Federal Savings and Loan Association (the
"Association") in connection with the conversion of the Association from a
federally chartered mutual savings and loan association to a federally
chartered stock savings and loan association, the issuance of the
Association's stock to the Corporation and the offer and sale of the
Corporation's common stock by the Corporation (the "Conversion").
On April 7, 1998, the Corporation issued approximately 4.6 million shares
of common stock for proceeds of approximately $69.4 million (net of costs
of $1.4 million). The Association issued all of its outstanding capital
stock to the Corporation in exchange for one-half of the net proceeds from
the sale of the Corporation's stock. The Corporation accounted for the
purchase of the Association in a manner similar to a pooling of interest
whereby assets and liabilities of the Association maintain their
historical cost basis in the consolidated company.
In April 1998, the Association changed its name to Heritage Federal Bank
(the "Bank").
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Corporation and its wholly owned
subsidiary, the Bank (collectively referred to herein as the "Company").
All significant intercompany balances and transfers have been eliminated
in consolidation. The following is a description of the significant
accounting policies which the Company follows in preparing and presenting
its consolidated statements.
Basis of Accounting - The accounting and reporting policies of the Company
conform to generally accepted accounting principles and, additionally, the
Bank conforms to reporting practices generally followed 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.
G-45
<PAGE>
Investment and Mortgage-Backed Securities - Debt securities that the
Company 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. No securities have been classified as
trading securities.
Realized gains and losses on investment securities are recognized at the
time of sale based upon the specific identification method.
Loans - Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are reported
at their outstanding principal amounts, adjusted for any charge-offs,
allowance for loan losses and any deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased loans.
Discounts and premiums on purchased residential real estate loans are
amortized to income using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
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.
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, 1999, 1998 and 1997.
Allowances for Losses - The Company 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
Company's control. Unanticipated future adverse changes in such conditions
could result in material adjustments to allowances (and future results of
operations).
G-46
<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 against income.
Office Properties and Equipment - Office properties and equipment are
stated at cost less accumulated depreciation. Depreciation is computed
over the estimated useful lives of the related assets using straight-line
and accelerated methods.
Real Estate Acquired in Settlement of Loans - Real estate acquired in
settlement of loans initially is stated at fair value at the date of
foreclosure, thereby establishing a new cost basis. Valuations are
performed periodically by management and allowances for 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 Company's
control. Accordingly, these estimates are particularly susceptible to
changes that could result in a material adjustment in the near term.
Advertising Costs - The Company 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.
Earnings Per Share - As the Company's initial public offering ("IPO")
closed on April 7, 1998, earnings per share for the year ended September
30, 1997 is not presented. Additionally, for the year ended September 30,
1998, earnings per share has been calculated based only on net income and
average outstanding shares for the period April 1, 1998 through September
30, 1998 (the period subsequent to the IPO).
Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
year adjusted for the weighted average number of unallocated shares held
by the Employee Stock Ownership Plan ("ESOP"). Diluted earnings per share
reflects the effect on weighted average shares outstanding of the number
of additional shares outstanding if dilutive stock options (Note 11) were
converted into common stock using the treasury stock method.
A reconciliation of the weighted average shares outstanding for the years
ended September 30, 1999 and 1998 follows:
1999 1998
--------- ---------
Basic shares 4,179,576 4,264,627
Dilutive impact of stock options 66,947 --
--------- ---------
Diluted shares 4,246,523 4,264,627
========= =========
G-47
<PAGE>
Recently Issued Accounting Standards - The Financial Accounting Standards
Board ("FASB") recently issued four new accounting standards that will
affect accounting, reporting and disclosure of financial information by
the Company. Adoption of these standards is not expected to have a
material impact on the financial condition or results of operations. 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 is disclosed
separately from retained income in the equity section of the balance
sheet. The Company adopted this statement for the fiscal year ended
September 30, 1999.
. 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. The Company adopted
this statement for the fiscal year ended September 30, 1999. As a
community-oriented financial institution, substantially all of the
Company's operations involve the delivery of loan and deposit
products to customers. Management makes operating decisions and
assesses performance based on an ongoing review of these community
banking operations, which constitute the Company's only operating
segment for financial reporting purposes under SFAS No. 131.
. SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities- This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The new standard requires
that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 137 delayed the implementation
date for this standard and, as a result, it will become effective for
the Company for the fiscal year beginning October 1, 2000. The
Company is in the process of evaluating the effect of SFAS No. 133 on
its financial position and results of operations, and therefore is
unable to estimate the effect of the adoption.
Reclassifications - Certain 1998 and 1997 amounts have been reclassified
to conform with the 1999 presentation.
G-48
<PAGE>
2. INVESTMENT SECURITIES
Investment securities at September 30, 1999 and 1998 are summarized as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 1999 Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held-to-maturity - U.S. Government
Agency obligations $ 3,499 $ - $ 19 $ 3,480
--------- --------- --------- ---------
Available-for-sale:
U.S. Treasury obligations $ 500 $ - $ - $ 500
U.S. Government Agency obligations 21,999 - 242 21,757
FHLMC common stock 57 3,492 - 3,549
--------- --------- --------- ---------
Total $ 22,556 $ 3,492 $ 242 $ 25,806
========= ========= ========= =========
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 1998 Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held-to-maturity - U.S. Government
Agency obligations $ 17,112 $ 96 $ - $ 17,208
--------- --------- --------- ---------
Available-for-sale:
U.S. Treasury obligations $ 1,506 $ 9 $ - $ 1,515
U.S. Government Agency obligations 2,000 9 - 2,009
FHLMC common stock 57 3,317 - 3,374
--------- --------- --------- ---------
Total $ 3,563 $ 3,335 $ - $ 6,898
========= ========= ========= =========
</TABLE>
The amortized cost and fair value of debt securities at September 30, 1999,
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 $ 500 $ 500 $ - $ -
Due after one year through five years 20,999 20,767 3,499 3,480
Due after five years through ten years 1,000 990 - -
--------- --------- --------- ---------
Total $ 22,499 $ 22,257 $ 3,499 $ 3,480
========= ========= ========= =========
</TABLE>
There were no gross realized gains on sales of available-for-sale
securities in fiscal 1999, 1998 and 1997. Gross realized losses on sales of
available-for-sale investment securities were $20,000 in fiscal 1999, none
in fiscal 1998 and $13,000 in fiscal 1997.
G-49
<PAGE>
Investment securities totaling $900,000 at September 30, 1999 were pledged
as collateral for public deposits.
3. MORTGAGE-BACKED SECURITIES
Fixed rate mortgage-backed securities are classified as held-to-maturity
investments and consist of the following types of investments (in thousands
of dollars):
<TABLE>
<CAPTION>
Amortized Fair Amortized Fair
September 30, 1999 Cost Value Cost Value
<S> <C> <C> <C> <C>
FNMA $ 328 $ - $ 3 $ 325
GNMA 9,819 81 - 9,900
--------- --------- --------- ---------
Total $ 10,147 $ 81 $ 3 $ 10,225
========= ========= ========= =========
September 30, 1998
FNMA $ 553 $ 3 $ 2 $ 554
FHLMC 1,142 - 5 1,137
--------- --------- --------- ---------
Total $ 1,695 $ 3 $ 7 $ 1,691
========= ========= ========= =========
</TABLE>
The amortized cost and fair value of mortgage-backed securities by
contractual maturity, was as follows at September 30, 1999 (in thousands of
dollars):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ - $ -
Due after one year through five years 328 325
Due after five year through ten years - -
Due after ten years 9,819 9,900
--------- ---------
Total $ 10,147 $ 10,225
========= =========
</TABLE>
G-50
<PAGE>
4. LOANS RECEIVABLE
Loans receivable consist of the following (in thousands of dollars):
<TABLE>
<CAPTION>
September 30,
-----------------------------
1999 1998
<S> <C> <C>
Mortgage loans:
Residential (1-4 family) $ 186,525 $ 173,891
Builder construction loans 61,428 11,261
Commercial loans 32,981 14,484
Savings account loans 1,127 1,077
Home equity loans 9,424 8,925
Commercial loans 3,679 2,785
Consumer loans 187 -
--------- ---------
Total loans 295,351 212,423
Less:
Undisbursed portion of loans in process (41,608) (14,514)
Deferred loan origination fees (373) (360)
Allowance for loan losses (1,356) (760)
--------- ---------
Total $ 252,014 $ 196,789
========= =========
Weighted average interest rate of loans 8.01% 8.02%
========= =========
</TABLE>
Subsequent to August 9, 1989, the Bank may not make loans to one borrower
in excess of 15% of unimpaired capital under regulations of the Office of
Thrift Supervision ("OTS"). At September 30, 1999, the Company had loans
outstanding to individual borrowers ranging up to $6 million and was in
compliance with this regulation.
The Bank periodically 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, 1999, 1998 and 1997, the Bank serviced loans for others with
total balances outstanding of $3.0 million, $4.1 million and $5.4 million,
respectively, and held borrowers' escrow balances in the amounts of
$26,000, $32,000 and $41,000, respectively.
The following is a reconciliation of the allowance for loan losses for the
years ended September 30, 1999, 1998 and 1997 (in thousands of dollars):
<TABLE>
<CAPTION>
Years Ended
September 30,
-----------------------------------
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of year $ 760 $ 874 $ 670
Provision for losses (recovery of allowance) 596 (105) 337
Write-offs - (9) (133)
Recoveries - - -
------- ------- -------
Balance at end of year $ 1,356 $ 760 $ 874
======= ======= =======
</TABLE>
G-51
<PAGE>
The total principal amount of impaired loans recognized in conformity with
FASB Statement No. 114, as amended by FASB Statement No. 118, was
immaterial at September 30, 1999 and 1998.
Directors and officers of the Company 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, 1999 and 1998, loans to officers or directors of the Company
totaled approximately $477,000 and $503,000, respectively.
5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows (in thousands of
dollars):
September 30,
--------------------
1999 1998
Land $ 233 $ 237
Land improvements 271 271
Office buildings 3,592 3,457
Furniture, fixtures and equipment 1,329 1,254
Total 5,425 5,219
Less accumulated depreciation (1,392) (1,116)
-------- --------
Office properties and equipment - net $ 4,033 $ 4,103
======== ========
6. DEPOSIT ACCOUNTS
Deposit accounts are as follows (in thousands of dollars):
September 30,
--------------------
1999 1998
Account Type
Passbook Accounts (1999 - 1.94%; 1998 - 2.7%) $ 9,589 $ 9,946
-------- --------
NOW Accounts (1999 - .76%; 1998 - 2.1%) 5,290 2,627
-------- --------
Money Market Deposit Accounts (1999 - 4.24%;
1998 - 3.0%) 9,471 828
-------- --------
Certificates of Deposit:
2.01-3.00% 1,131 -
3.01-4.00% 347 5,198
4.01-5.00% 70,718 2,338
5.01-6.00% 96,210 137,246
6.01-7.00% 12,693 46,895
7.01-8.00% 933 1,026
-------- --------
Total certificates of deposit 182,032 192,703
-------- --------
Total $206,382 $206,104
======== ========
Weighted average rate:
Savings certificates 5.28% 5.82%
All deposit accounts 4.95% 5.62%
G-52
<PAGE>
At September 30, 1999, deposit accounts with balances of $100,000 and
greater totaled approximately $61.5 million. Deposits in excess of $100,000
are not federally insured. The Company does not accept brokered deposits.
Maturities of certificates of deposits (in thousands of dollars):
Year Ended September 30, 1999
Maturing:
Within 1 year $ 137,618
After 1 but within 2 years 41,039
After 2 but within 3 years 2,726
After 3 but within 4 years 414
After 4 but within 5 years 235
---------
Total $ 182,032
=========
Interest expense by type of deposit is summarized as follows (in thousands
of dollars):
Years Ended September 30,
-----------------------------------
1999 1998 1997
Demand accounts:
Passbook $ 201 $ 304 $ 340
NOW and Money Market Accounts 297 90 89
Certificate accounts 10,299 11,616 11,575
--------- --------- ---------
Total $ 10,797 $ 12,010 $ 12,004
========= ========= =========
7. SHORT-TERM AND LONG-TERM BORROWING ARRANGEMENTS WITH FEDERAL HOME LOAN BANK
OF ATLANTA
The following table summarizes information regarding short-term Federal
Home Loan Bank of Atlanta ("FHLB") advances (in thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------
1999 1998 1997
<S> <C> <C> <C>
Balance $ 10,000 $ 0 $ 0
Weighted average interest rate 5.75% 0.00% 0.00%
Maximum amount outstanding at any month-end 10,000 0 5,000
Average amount outstanding during the year 833 0 3,082
Weighted average interest rate during the year 5.39% 0.00% 7.33%
</TABLE>
G-53
<PAGE>
The following table summarizes information regarding long-term FHLB
advances at September 30, 1999; there were no long-term FHLB advances at
September 30, 1998 (in thousands):
Maturity Date Amount Rate
August 9, 2009 $ 14,000,000 4.950%
August 13, 2009 $ 6,000,000 6.385%
The long-term FHLB advances listed above have conversion provisions which
allow the FHLB to request that the advance be converted into a three month
LIBOR-based floating rate advance. The $14 million advance could be
converted on a quarterly basis beginning on February 7, 2000. The $6
million advance could be converted on August 13, 2004.
The Company pledged as collateral for these borrowings its FHLB stock and
has entered into blanket collateral agreements with the FHLB whereby the
Company 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 Company may borrow under various line of credit programs
with the FHLB. Any amounts advanced to the Company under these programs are
secured by the Company's investment securities and bear interest at an
adjustable rate with interest payable monthly. At September 30, 1999 and
1998, the Company had no amounts outstanding with the FHLB under these
lines of credit.
8. INCOME TAXES
The tax effects of significant items comprising the Company's net deferred
tax liability as of September 30, 1999 and 1998 are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
September 30,
-------------------------
1999 1998
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 473 $ 260
Deferred loan fees 141 23
Difference between book and tax compensation under the ESOP 73 34
Difference between book and tax compensation under the MRDP Plan 83 -
Other - 62
------ ------
Total 770 379
------ ------
Deferred tax liabilities:
Difference between book and tax basis of Federal Home Loan
Bank stock 264 336
Unrealized gain on investments available-for-sale 1,203 1,234
Difference between book and tax basis of fixed assets 78 44
Recapture of tax basis bad debt reserve arising after December 31, 1987 158 214
Other 4 -
------ ------
Total 1,707 1,828
------ ------
Net deferred tax liability $ 937 $1,449
====== ======
</TABLE>
G-54
<PAGE>
The net deferred tax liability at September 30, 1999 and 1998 is included
in "other liabilities" in the balance sheet.
The provision for income taxes is summarized as follows (in thousands of
dollars):
Years Ended September 30,
--------------------------------
1999 1998 1997
Current provision:
Federal $ 2,289 $ 1,842 $ 553
State 223 159 13
------- ------- -------
Total current 2,512 2,001 566
------- ------- -------
Deferred (benefit) provision:
Federal (404) (61) 443
State (77) (11) 85
------- ------- -------
Total deferred (481) (72) 528
------- ------- -------
Total provision for income taxes $ 2,031 $ 1,929 $ 1,094
======= ======= =======
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 Bank generates net taxable income.
In years ended September 30, 1996 and prior, the Bank 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 Bank beginning with the fiscal year ended
September 30, 1997.
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 Bank was required to recapture
the post-1987 tax bad debt reserve of approximately $834,000 into expense
over a six-year period beginning with the fiscal year ended September 30,
1998. 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, 1999 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 Bank 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 Bank.
G-55
<PAGE>
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,
-------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Tax at statutory federal income tax rate (34%) $ 1,492 $ 1,824 $ 1,036
Increase (decrease) resulting from:
State income taxes 97 98 66
ESOP compensation not deductible for tax 383 - -
MRDP Plan compensation not deductible for tax 22 - -
Other - net 37 7 (8)
------- ------- -------
Total $ 2,031 $ 1,929 $ 1,094
------- ------- -------
Effective rate 46.3% 36.0% 35.9%
</TABLE>
9. 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 payments
of fees. Commitments to extend credit at fixed rates exposes the Company to
some degree of interest rate risk. The Company 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, 1999, the Company had loan commitments,
excluding undisbursed portions of interim construction loans, of approximately
$2.3 million.
At September 30, 1999, the Company had approved home equity lines of credit
approximating $18.6 million, of which approximately $9.4 million was in use
and approximately $9.2 million was available for use.
The Company leases various property and equipment. The effect of these leases
on the financial position or results of operations is insignificant.
The Company has no additional financial instruments with off-balance sheet
risk.
Potential Impact of Changes in Interest Rates - The Company'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 Company'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 Company'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 Company's earnings could be affected adversely
during periods of rising interest rates.
Litigation - The Company 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 Company's business activity is principally
with customers located in South Carolina. Except for residential loans in the
Company's market area, the Company has no other significant concentrations of
credit risk.
G-56
<PAGE>
Employment and Severance Agreement - Both the Corporation and the Bank
have entered into an employment agreement with J. Edward Wells, Chief
Executive Officer. The employment agreement establishes the duties and
compensation of Mr. Wells and has been executed in order to ensure a
stable and competent management base. The employment agreement provides
for an initial term of three years. The Board of Directors may agree after
conducting a performance evaluation of the executive, to extend an
employment agreement on each anniversary date for an additional year. The
employment agreement generally provides for the continued payment of
specified compensation and benefits for the remaining term of the
agreement after Mr. Wells is terminated, unless the termination is for
"cause" as defined in the employment agreement. Additionally, the
employment agreements provide for severance payments if employment is
terminated following a change in control in the amount of 2.99 times the
average annual compensation paid during the five years immediately
preceding the change in control to the respective executive.
Severance Agreements - The Bank and the Corporation have entered into
severance agreements with four senior officers ("officers") (none of whom
have entered into employment agreements) with an initial term of two
years. The Board of Directors may agree after conducting a performance
evaluation of the officers, to extend an employment agreement on each
anniversary date for an additional year. The severance agreements provide
for severance payments in the amount of 2 times annual salary during the
12-month period preceding the change in control in connection with
termination or other specified actions in the event of a change in control
of the Company.
Employee Severance Compensation Plan ("Severance Plan") - In general, all
employees (except for executives and officers who have entered into
separate employment or severance agreements) are eligible to participate
in the Severance Plan. Under the Severance Plan, employees terminated
within 12 months of a change in control are entitled to a severance
benefit up to 52 weeks of their current compensation based upon length of
service.
10. BENEFIT PLANS
401(k) Plan - The Company provides 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 Company is allowed to make discretionary contributions, subject to
certain limitations. Participants are 100% vested upon participation in
the plan.
Total expense under the retirement plan for the years ended September 30,
1999, 1998 and 1997 was approximately $28,000, $67,000 and $151,000,
respectively.
The Company provides no other post-employment benefits.
Employee Stock Ownership Plan ("ESOP") - The ESOP is a noncontributory
retirement plan adopted by the Company effective January 1, 1997 that
includes all employees who meet minimum eligibility requirements. The ESOP
acquired 370,000 shares of the Corporation's common stock in the
Conversion at a price of $15 per share with proceeds of a loan from the
Corporation in the amount of approximately $5.6 million. The Bank makes
periodic cash contributions to the ESOP in an amount sufficient for the
ESOP to make the scheduled payments under the note payable to the
Corporation. In connection with the cash distribution (discussed in Note
12), the ESOP received approximately $1.4 million on its shares of the
Company's common stock. The ESOP used these funds to prepay a portion of
the ESOP's debt obligation to the Company resulting in a charge of
approximately $1.2 million of compensation expense and the release of
additional share to the plan participants.
G-57
<PAGE>
The note payable has a term of 15 years, bears interest at 8.5% and
requires a level quarterly payment of principal and interest of
approximately $124,000. The note is collateralized by the shares of common
stock held by the ESOP. As the note is repaid, shares are released from
collateral based on the proportion of the payment in relation to total
payments required to be made on the loan. The shares released from
collateral are then allocated to participants based upon compensation.
Compensation expense is determined by multiplying the per share market
price of the Corporation's stock at the time the shares are committed to
be released by the number of shares to be released. Any difference between
the value of the released shares at market and cost is recorded as an
addition or deduction to additional paid-in capital. The Company
recognized approximately $1.5 million, including cash distribution, and
$243,000 in compensation expense in the years ended September 30, 1999 and
1998, respectively, related to the ESOP.
The cost of the unallocated shares is reflected as a reduction of equity.
Unallocated shares are considered neither outstanding shares for
computation of basic earnings per share nor potentially dilutive
securities for computation of diluted earnings per share. Dividends on
unallocated ESOP shares are reflected as a reduction in the note payable
(and the Bank's contribution reduced accordingly).
Shares released or committed to be released for allocation during the year
ended September 30, 1999 and 1998 totaled 80,371 and 12,342, respectively.
Shares remaining not released or committed to be released for allocation
at September 30, 1999 and 1998 totaled 277,587 and 357,958 and had a
market value of approximately $4.7 million and $6.2 million, respectively,
based on the trading market price of the Company's stock at that date.
11. STOCK COMPENSATION PLANS
Management Recognition and Development Plan - On April 15, 1999, 185,150
shares of restricted stock were awarded to participants in the Heritage
Bancorp, Inc. Management Recognition and Development Plan ("MRDP") that
was approved at the Company's Annual Meeting of Stockholders on February
3, 1999. The restricted stock awards vest over a five-year period. The
185,150 shares of stock were issued from treasury stock on the date of the
grant. The Company recorded the stock award at the market value on the
date of grant ($18.75 per share) as unearned MRDP shares in stockholders'
equity and will amortize the unearned MRDP shares to compensation expense
over the vesting period.
As a result of the payment of the cash distribution (see Note 12),
approximately $741,000 was paid on unvested shares included in the
Company's MRDP and such payment was accounted for as compensation expense.
Unearned MRDP shares were reduced (with a corresponding charge to
additional paid-in capital) to reflect the reduction in the value of the
shares held by the Plan.
Stock Option Plan - On April 15, 1999, the Company adopted the 1998
Heritage Bancorp, Inc. Stock Option Plan ("SOP"), which allows the
granting to management and directors the option to purchase common stock
of the Corporation ("options") aggregating to 416,588 shares. On April 15,
1999, the 416,588 options were granted to employees and non-employee
directors. The exercise price equaled the fair market value of the shares
on the date of grant; therefore, no compensation expense was recorded. The
non-employee director options vest immediately and the employee options
vest 50% on date of grant and 50% one year from date of grant. Each option
has a term of 10 years.
G-58
<PAGE>
A summary of stock option activity under the SOP is detailed as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
<S> <C> <C>
Outstanding, October 1, 1998 -
Granted 416,588 $ 15.10
Forfeited -
-------
Outstanding, September 30, 1999 416,588 $ 15.10
-------
Exercisable at September 30, 1999 291,594
-------
</TABLE>
The following table summarized information about stock options outstanding
at September 30, 1999:
Weighted
Average
Remaining
Contractual
Exercise Number Life in
Price Outstanding Years
$15.10 416,588 9.5
In connection with the cash distribution (see Note 12), the exercise price
of all options was adjusted in accordance with FASB Emerging Issues Task
Force Issue No. 90-9 "Changes to Fixed Employee Stock Option Plans as a
Result of Equity Restructuring." The weighted average reduction in
exercise price was $3.65 per share.
G-59
<PAGE>
The Company accounts for stock option awards using the intrinsic value
method and has recognized no compensation expense for the year ended
September 30, 1999. SFAS 123, Accounting for Stock-Based Compensation,
permits the use of the intrinsic value method; however, requires the
Company to disclose the pro forma net income and earnings per share as if
the stock based compensation had been accounted for using the fair value
method. Had the compensation costs for the Company's stock option plan
been determined based on the fair value method, the Company's net income
and earnings per share would have been reduced to the pro form amounts
indicated below (in thousands except per share data):
Amount
Net income:
As reported $ 2,356
Pro forma $ 1,623
Basic earnings per share:
As reported $ 0.56
Pro forma $ 0.39
Diluted earnings per share:
As reported $ 0.56
Pro forma $ 0.38
Weighted average fair value of an
option share granted during the year $ 3.93
The fair value of stock options granted by the Company was estimated
through the use of the Black-Scholes option pricing model applying the
following assumptions:
Risk-free interest rate 5.05%
Expected option life 5 years
Expected volatility 25%
Expected dividend yield 2%
12. EQUITY
Liquidation Account - At the time of Conversion, the Bank established a
liquidation account totaling approximately $29.8 million for the benefit
of eligible account holders as of June 30, 1996 and December 31, 1997 who
continue to maintain their accounts at the Bank after the Conversion. The
liquidation account will be reduced annually to the extent that eligible
account holders have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank,
each 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 before any
distribution may be made to the Corporation with respect to the Bank's
capital stock.
Dividends - The Corporation's sources of income and funds for dividends to
its stockholders are earnings on its investments and dividends from the
Bank. The Corporation is not subject to any regulatory restrictions on the
payment of dividends to its stockholders. However, the Bank's primary
regulator, the Office of Thrift Supervision ("OTS"), has regulations that
impose certain restrictions on payment of dividends to the Corporation.
G-60
<PAGE>
Current regulations of the OTS allow the Bank (based upon its current
capital level and supervisory status assigned by the OTS) to pay a
dividend of up to 100% of net income to date during the calendar year,
plus 50% of its surplus capital existing at the beginning of the calendar
year. Supervisory approval is not required, but 30 days prior notice to
the OTS is required. Any capital distribution in excess of this amount
would require supervisory approval. Capital distributions are further
restricted should the Bank's capital level fall below the full phased-in
capital requirements of the OTS. In no case will the Bank be allowed to
make a capital distribution in excess of the balance of the liquidation
account. The Bank declared dividends to the Corporation amounting to $1.3
million and $694,000 in the years ended September 30,1999 and 1998,
respectively.
Distributions - On June 22, 1999 the Corporation paid a cash distribution
of $16.1 million, or $4.00 per share, to its stockholders. The
distribution has been accounted for as a return of capital and reflected
in the Company's financial records as a reduction of additional paid-in
capital.
Share Repurchases - OTS regulations also place restrictions for a
three-year period after the conversion on the Corporation with respect to
repurchases of its common stock. Generally, the Corporation is not allowed
to repurchase stock in the first year after Conversion, and is allowed to
repurchase 5% of its outstanding shares in each of the next two years
after Conversion. However, in the year ended September 30, 1999, the OTS
approved two stock repurchase programs which allow the Corporation to
purchase up to 416,588 shares of its common stock. During the year ended
September 30, 1999, the Corporation purchased 387,130 shares of its common
stock under these repurchase programs. Restrictions apply, unless the OTS
approves a waiver for benefit plans.
Regulatory Capital Requirements - The Corporation is not subject to any
regulatory capital requirements. However, the Bank 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 Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification also are 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 Bank to maintain minimum amounts and ratios. Under regulations
of the OTS, the Company must satisfy certain minimum capital requirements,
including a leverage capital requirement (expressed as a ratio of core or
Tier I capital to adjusted total assets) and risk-based capital
requirements (expressed as a ratio of core or Tier I capital and total
capital to total risk-weighted assets). As an OTS regulated institution,
the Bank also is subject to a minimum tangible capital requirement
(expressed as a ratio of tangible capital to adjusted total 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, 1999, that the Bank
meets all capital adequacy requirements to which it is subject.
G-61
<PAGE>
As of September 30, 1999 and 1998, the most recent respective
notifications from the OTS classified the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table below.
Management believes that there are no conditions or events that would have
changed the Bank's category since the most recent notification.
The following is a reconciliation of the Bank'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, 1999
Total equity of the Bank $ 65,451 $ 65,451 $ 65,451
General allowance for loan losses - - 1,345
Net unrealized gain on available-for-sale securities (2,047) (2,047) (2,047)
-------- -------- --------
Regulatory Capital $ 63,404 $ 63,404 $ 64,749
======== ======== ========
September 30, 1998
Total equity of the Bank $ 60,878 $ 60,878 $ 60,878
General allowance for loan losses - - 750
Net unrealized gain on available-for-sale securities (2,101) (2,101) (2,101)
-------- -------- --------
Regulatory Capital $ 58,777 $ 58,777 $ 59,527
======== ======== ========
</TABLE>
The Bank's actual and required capital amounts and ratios are summarized
as follows (in thousands of dollars):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ------------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
September 30, 1999
Tangible Capital (to adjusted-total assets) $63,404 20.3% $ 4,675 1.5% No Requirement
Tier I Capital (to adjusted-total assets) $63,404 20.3% $ 9,350 3.0% $15,583 5.0%
Tier I Capital (to risk-weighted assets) $63,404 34.7% No Requirement $10,949 6.0%
Total Capital (to risk-weighted assets) $64,749 35.5% $14,598 8.0% $18,248 10.0%
September 30, 1998
Tangible Capital (to adjusted-total assets) $58,777 19.4% $ 4,541 1.5% No Requirement
Tier I Capital (to adjusted-total assets) $58,777 19.4% $ 9,083 3.0% $15,138 5.0%
Tier I Capital (to risk-weighted assets) $58,777 40.3% No Requirement $ 8,760 6.0%
Total Capital (to risk-weighted assets) $59,527 40.8% $11,681 8.0% $14,601 10.0%
</TABLE>
G-62
<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 Company's financial instruments, as of September 30, 1999
and 1998, are summarized below (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998
----------------------------- ---------------------------
Stated Estimated Stated Estimated
Assets Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 13,526 $ 13,526 $ 73,920 $ 73,920
Mortgage-backed securities 10,147 10,225 1,695 1,691
Investment securities 29,305 29,286 24,010 24,106
Loans receivable, net 252,014 262,096 196,789 201,342
Loans held-for-sale 777 788 849 869
Federal Home Loan Bank stock 1,690 1,690 2,042 2,042
Accrued interest receivable 1,948 1,948 1,335 1,335
--------- --------- --------- ---------
$ 309,407 $ 319,559 $ 300,640 $ 305,305
========= ========= ========= =========
<CAPTION>
Liabilities
Interest bearing demand deposits $ 9,589 $ 9,589 $ 9,946 $ 9,946
Money market accounts 9,471 9,471 828 828
NOW accounts 5,290 5,290 2,627 2,627
Certificates of deposit 182,032 181,113 192,703 194,174
FHLB Advances 30,000 29,645 - -
Accrued interest payable 446 446 359 359
--------- --------- --------- ---------
$ 236,828 $235,554 $ 206,463 $ 207,934
========= ========= ========= =========
</TABLE>
The Company 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.
G-63
<PAGE>
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.
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.
FHLB Advances - Fair values for FHLB advances are estimated using a
discounted cash flow technique that applies interest rates currently being
offered on advances to a schedule of aggregate expected monthly maturities
of FHLB advances.
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 Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company'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.
G-64
<PAGE>
14. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The following condensed balance sheets, as of September 30, 1999 and 1998
and condensed statements of income and cash flows for the year ended
September 30, 1999 and the period from April 6, 1998 (date of
incorporation) to September 30, 1998 for Heritage Bancorp, Inc. should be
read in conjunction with the consolidated financial statements and the
notes thereto (in thousands of dollars):
<TABLE>
<CAPTION>
BALANCE SHEET September 30,
-------------------------------
1999 1998
<S> <C> <C>
Assets
Cash and cash equivalents $ 5,230 $28,953
Investment in subsidiary 65,450 60,933
Note receivable 3,969 5,453
Other assets 13 773
------- -------
Total $74,662 $96,112
------- -------
Liabilities and Shareholders' Equity
Dividend payable $ - $ 694
Income taxes payable 80 88
Shareholders' equity 74,582 95,330
------- -------
Total $74,662 $96,112
======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Period
from April 6,
Year Ended 1998 to
September 30, September 30,
STATEMENT OF INCOME 1999 1998
<S> <C> <C>
Interest income $ 1,354 $ 724
Dividend income from bank 1,327 694
------- -------
Total income 2,681 1,418
------- -------
Other operating expenses 341 -
Provision for income taxes 522 273
Equity in undistributed earnings of subsidiary (538) (1,115)
------- -------
Net income $ 2,356 $ 2,260
======= =======
</TABLE>
G-65
<PAGE>
<TABLE>
<CAPTION>
For the Period
from April 6,
Year Ended 1998 to
September 30, September 30,
STATEMENT OF CASH FLOWS 1999 1998
<S> <C> <C>
Operating activities:
Net income $ 2,356 $ 2,260
Adjustments to reconcile net income to
cash provided by operating activities:
Equity in undistributed earnings of subsidiary (538) (1,115)
Increase (decrease) in other assets 760 (773)
(Decrease) increase in income taxes payable (63) 88
-------- --------
Net cash provided by operating activities 2,515 460
-------- --------
Investing activities:
Investment in subsidiary (2,254) (34,029)
Principal payments on ESOP loan receivable 1,484 101
-------- --------
Net cash used in investing activities (770) (33,928)
-------- --------
Financing activities:
Net proceeds from sale of common stock - 62,421
Purchase of treasury stock (7,479) -
Payment of cash distribution (16,129) -
Payment of cash dividends (1,860) -
-------- --------
Net cash (used in) provided by financing activities (25,468) 62,421
-------- --------
Net (decrease) increase in cash and cash equivalents (23,723) 28,953
Cash and cash equivalents at beginning of period 28,953 -
-------- --------
Cash and cash equivalents at end of period $ 5,230 $ 28,953
======== ========
</TABLE>
G-66
<PAGE>
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized unaudited quarterly operating results for the years ended
September 30, 1999 and 1998 are as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
First Second Third Fourth
September 30, 1999 Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Interest income $ 5,370 $ 5,280 $ 5,322 $ 5,616
Interest expense 2,870 2,693 2,625 2,812
------- ------- ------- -------
Net interest income 2,500 2,587 2,697 2,804
Provision for loan losses (recovery of allowance) 75 - 382 139
------- ------- ------- -------
Net interest income after provision for loan losses 2,425 2,587 2,315 2,665
Other income 65 60 41 46
Other expense 977 1,004 2,855/(2)/ 981
------- ------- ------- -------
Income before income taxes 1,513 1,643 (499) 1,730
Provision for income taxes 548 569 269 645
------- ------- ------- -------
Net income (loss) $ 965 $ 1,074 $ (768) $ 1,085
------- ------- ------- -------
Basic earnings per share $ 0.23 $ 0.26 $ (0.18) $ 0.26
Diluted earnings per share $ 0.23 $ 0.26 $ (0.18) $ 0.26
<CAPTION>
First Second Third Fourth
September 30, 1998 Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Interest income $ 4,512 $ 4,794 $ 5,223 $ 5,351
Interest expense 3,118 3,178 2,826 2,888
------- ------- ------- -------
Net interest income 1,394 1,616 2,397 2,463
Provision for loan losses (recovery of allowance) - (115) - 10
------- ------- ------- -------
Net interest income after losses (recovery or allowance) 1,394 1,731 2,397 2,453
Other income 48 57 81 60
Other expense 588 777 714 778
------- ------- ------- -------
Income before income taxes 854 1,011 1,764 1,735
Provision for income taxes 330 360 655 584
------- ------- ------- -------
Net income $ 524 $ 651 $ 1,109 $ 1,151
Basic earnings per share /(1)/ $ - $ - $ 0.26 $ 0.27
Diluted earnings per share /(1)/ $ - $ - $ 0.26 $ 0.27
</TABLE>
(1) Heritage Bancorp, Inc.'s initial public offering closed on April 6,
1999. For purposes of earnings per share calculations for the third
quarter, shares issued on April 6, 1999 have been assumed to be
outstanding as of April 1, 1999.
(2) Includes a $1.9 million compensation charge related to the cash
distribution of $4.00 per share.
G-67
<PAGE>
HERITAGE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of Dollars, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
Assets:
Cash....................................................................... $ 3,951 $ 2,341
Federal funds sold and overnight interest-bearing deposits................. 14,442 11,185
-------- --------
Total cash and cash equivalents...................................... 18,393 13,526
Investment securities:
Held-to-maturity - at amortized cost (market value: December 31,
1999 - $2,962; September 30, 1999 - $3,480).......................... 2,999 3,499
Available-for-sale - at fair value (amortized cost: December 31,
1999 - $22,056; September 30, 1999 - $22,556)........................ 24,769 25,806
Mortgage-backed securities - held to maturity - at amortized cost
(market value: December 31, 1999 - $9,648; September 30,
1999 - $10,225)......................................................... 9,225 10,147
Loans receivable - net..................................................... 268,944 252,014
Loans held-for-sale - at lower of cost or market (market value: 774 777
December 31, 1999 - $774; September 30, 1999 - $788)....................
Office properties and equipment - net...................................... 4,132 4,033
Federal Home Loan Bank Stock - at cost..................................... 2,750 1,690
Accrued interest receivable................................................ 1,974 1,948
Real estate acquired in settlement of loans - net..........................
Other assets............................................................... 140 277
-------- --------
Total assets.................................................................. $334,100 $313,717
======== ========
Liabilities and Equity:
Liabilities:
Deposit accounts........................................................ $202,625 $206,382
Advance from Federal Home Loan Bank of Atlanta.......................... 55,000 30,000
Accrued interest on deposit accounts.................................... 557 446
Other liabilities....................................................... 2,464 2,307
-------- --------
Total liabilities.................................................... 260,646 239,135
-------- --------
Stockholders' equity:
Common Stock of $.01 par value per share. Authorized
10,000,000 shares: issued 4,628,750 at December 31, 1999
and September 30, 1999; outstanding: 4,301,089 and 4,426,770
at December 31, 1999 and September 30, 1999, respectively............ 46 46
Additional paid in capital.............................................. 51,221 51,214
Unallocated shares...................................................... (4,087) (4,164)
Unearned MRDP Shares.................................................... (2,457) (2,600)
Retained income - substantially restricted.............................. 32,792 31,700
Treasury Stock - at cost (327,661 and 201,980 shares at
December 31, 1999 and September 30, 1999, respectively).............. (5,770) (3,661)
Accumulated other comprehensive income.................................. 1,709 2,047
-------- --------
Total stockholders' Equity........................................... 73,454 74,582
-------- --------
Total liabilities and stockholders' equity.................................... $334,100 $313,717
======== ========
</TABLE>
See notes to consolidated financial statements.
G-68
<PAGE>
HERITAGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Interest income:
Interest on loans.......................................................... $5,287 $4,079
Investment securities and other............................................ 600 1,279
Mortgage-backed securities................................................. 185 12
------ ------
Total interest income................................................... 6,072 5,370
Interest expense:
Deposits................................................................... 2,567 2,870
Advances from Federal Home Loan Bank of Atlanta............................ 596 -
------ ------
Total interest expense.................................................. 3,163 2,870
------ ------
Net interest income........................................................... 2,909 2,500
Provision for loan losses
(recovery of allowance).................................................... 149 75
------ ------
Net interest income after provision for loan losses........................... 2,760 2,425
------ ------
Other income:
Service charges and fees................................................... 51 46
Gain on sale of mortgage loans held-for-sale............................... - 20
Other, net................................................................. (1) (1)
------ ------
Total other income...................................................... 50 65
------ ------
Other operating expenses:
Employee compensation and benefits......................................... 685 535
Deposit insurance premiums................................................. 31 45
Occupancy and equipment expense............................................ 105 105
Data processing - service bureau fees...................................... 56 58
Office supplies, postage, printing, etc.................................... 24 22
Professional fees.......................................................... 52 69
(Income) expense of real estate operations................................. - 1
Other...................................................................... 63 142
------ ------
Total other operating expenses.......................................... 1,016 977
------ ------
Income before income taxes................................................. 1,794 1,513
Provision for income taxes................................................. 702 548
------ ------
Net income................................................................. $1,092 $ 965
====== ======
</TABLE>
G-69
<PAGE>
HERITAGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Unallocated Unearned Other
Common Paid-In ESOP MRDP Retained Treasury Comprehensive
Stock Capital Shares Shares Income Stock Income Total
----- --------- -------- -------- -------- -------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance: September 30, 1999........... $46 $51,214 $(4,164) $(2,600) $31,700 $(3,661) $2,047 $74,582
Comprehensive income:
Net income.......................... - - - - 1,092 - - 1,092
Net unrealized loss on
available for sale securities
securities, net of
reclassification adjustment...... - - - - - - (338) (338)
------ ------- ------- ------- ------- ------- ------ -------
Total comprehensive income.......... - - - - 1,092 - (338) 754
------ ------- ------- ------- ------- ------- ------ -------
Shares released from ESOP.............. - 7 77 - - - - 84
Dividends on common stock.............. - - - - - - - -
Common stock repurchased............... - - - - - (2,109) (2,109)
Vesting of MRDP shares................. - - - 143 - - - 143
------ ------- ------- ------- ------- ------- ------ -------
Balance: December 31, 1999............ $46 $51,221 $(4,087) $(2,457) $32,792 $(5,770) $1,709 $73,454
====== ======= ======= ======= ======= ======= ====== =======
</TABLE>
G-70
<PAGE>
HERITAGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------
1999 1998
----------- ----------
<S> <C> <C>
Operating Activities:
Net income..................................................................... $ 1,092 $ 965
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income tax benefit.............................................. 2 (49)
Accretion (amortization) of discount (premium) on
investment and mortgage-backed securities............................. (4) 1
Amortization of net deferred income...................................... (21) (30)
Provision for loan losses (recovery of allowance)........................ 149 75
Origination of loans held for sale....................................... - (873)
Principal repayments of loans held-for-sale.............................. 3 139
Gain on sale of loans.................................................... - (20)
Proceeds from the sale of loans held-for-sale............................ - 893
Depreciation on office properties and equipment.......................... 69 69
Allocation of ESOP shares................................................ 84 114
Vesting of MRDP shares................................................... 143 -
(Increase) decrease in accrued interest receivable and other assets...... (949) 37
Increase (decrease) in accrued interest payable and other liabilities.... 465 (369)
-------- ---------
Net cash provided by operating activities.......................... 1,033 952
-------- ---------
Investing activities:
Proceeds from maturities and calls of available-for-sale investment securities. 500 1,500
Proceeds from maturities and calls of held-to-maturity investment securities... 500 6,000
Purchase of available-for-sale investment securities........................... - (4,000)
Principal repayments on mortgage-backed securities............................. 927 1,296
Purchase of loans.............................................................. (10,448) (19,893)
Net loan (originations) and principal payments on loans........................ (6,612) 12,202
Acquisition of office properties and equipment................................. (167) (69)
-------- ---------
Net cash used in investing activities.............................. (15,300) (2,964)
-------- ---------
Financing activities:
Net increase (decrease) in deposits......................................... (3,757) 1,037
Advances from Federal Home Loan Bank........................................ 25,000 -
Purchase of treasury stock.................................................. (2,109) (3,736)
-------- ---------
Net cash provided by (used in) financing activities................ 19,134 (2,699)
-------- ---------
Net increase (decrease) in cash and cash equivalents........................... 4,867 (4,711)
-------- ---------
Cash and cash equivalents at beginning of period............................... 13,526 73,920
-------- ---------
Cash and cash equivalents at end of period..................................... $ 18,393 $ 69,209
======== =========
Supplemental disclosure of cash information:
Cash paid during the year for:
Interest................................................................. $ 3,052 $ 2,214
======== =========
Income taxes............................................................. $ 60 $ 195
======== =========
Supplemental disclosure of non-cash transactions:
Net change in unrealized gain on available-for-sale securities................. $ (338) $ 634
======== =========
</TABLE>
See notes to consolidated statements.
G-71
<PAGE>
HERITAGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Heritage Bancorp, Inc. (the "Company") was incorporated under Delaware law
in November 1997 for the purpose of becoming the holding company for
Heritage Federal Bank (the "Bank") upon the Bank's conversion from a
federally chartered mutual savings and loan association to a federally
chartered stock savings bank (the "Conversion"). The Conversion was
completed on April 6, 1998 through the sale and issuance of 4,628,750
shares of common stock by the Company.
The accompanying consolidated financial statements of the Company have been
prepared in accordance with instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However,
such information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary
for a fair statement of results for the interim periods.
The results of operations for the three months ended December 31, 1999 are
not necessarily indicative of the results to be expected for the year
ending September 30, 2000. These unaudited consolidated financial
statements and notes thereto should be read in conjunction with the audited
financial statements and notes thereto for the year ended September 30,
1999, contained in the Company's Form 10-K for the fiscal year ended
September 30, 1999.
2. EARNINGS PER SHARE
A reconciliation of the weighted average shares outstanding for the three
months ended December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Basic shares 4,104,507 4,250,218
Dilutive impact of stock options 32,553 -
--------- ---------
Dilutive shares 4,137,060 4,250,218
========= =========
</TABLE>
3. SHARES REPURCHASES
On September 27, 1999, the Company announced that it had received
regulatory approval to repurchase up to 218,616 shares of the Company's
outstanding common stock. This program commenced on November 16, 1999 upon
the completion of a prior repurchase program, and is expected to be
completed within twelve months.
During the three months ended December 31, 1999 the Company purchased
125,681 shares of its common stock at an average price of $16.78 per share.
4. COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." In accordance with the provisions of SFAS No. 130,
comparative financial statements presented for earlier periods have been
reclassified to reflect the provisions of this Statement. Comprehensive
income is the change in the Company's equity during the period from
transactions and other event and circumstances. Comprehensive income
consists of net income and other comprehensive income. The Company's
"other comprehensive income" for the three months ended December
G-72
<PAGE>
31, 1999 and 1998 and the "accumulated other comprehensive income" as of
December 31, 1999 and 1998 are comprised solely of unrealized gains on
investment securities available-for-sale.
Comprehensive income for the three months periods ended December 31, 1999
and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
Net income................................... $1,092 $ 965
Other comprehensive income:
Unrealized gains on investment
securities available-for-sale arising
during the period, net of income taxes.... (338) 634
------- ------
Total comprehensive income................... $ 754 $1,599
======= ======
</TABLE>
G-73
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article XVI of the Certificate of Incorporation of SouthBanc Shares, Inc.
requires indemnification of officers and directors as follows:
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 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 the standard in
paragraph E, for amounts actually and reasonably incurred by such
II-1
<PAGE>
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 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
II-2
<PAGE>
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.
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.
For purposes of Article XVI, a "Business Combination" shall be defined as:
(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 more
than twenty-five percent (25%) 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
more than twenty-five percent (25%) 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;
(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.
II-3
<PAGE>
For the purposes of Article XVI, a "Related Person" shall be defined as (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.
Item 21. Exhibits and Financial Statement, Schedules.
(a) Exhibits.
2.0 Agreement and Plan of Merger, dated as of February 14, 2000, between
SouthBanc Shares, Inc. and Heritage Bancorp, Inc. is included as
Appendix A to the Joint Proxy Statement-Prospectus which is part of
this Registration Statement.
4.0 SouthBanc Shares, Inc. Specimen Stock Certificate (incorporated by
reference to the Company's Registration Statement on Form S-1 (File
No. 333-42517) filed on December 17, 1997).
5.0 Opinion of Malizia Spidi & Fisch, P.C. regarding legality.
8.1 Form of Opinion of Muldoon, Murphy & Faucette LLP regarding tax
matters.
8.2 Form of Opinion of Malizia Spidi & Fisch, P.C. regarding tax matters.
10.1 Stock Option Agreement dated February 14, 2000 between SouthBanc
Shares, Inc. and Heritage Bancorp, Inc. is included as Appendix B to
the Joint Proxy Statement-Prospectus which is part of this
Registration Statement.
10.2 Stock Option Agreement dated February 14, 2000 between Heritage
Bancorp, Inc. and SouthBanc Shares, Inc. is included as Appendix C to
the Joint Proxy Statement-Prospectus which is part of this
Registration Statement.
10.3 Employment Agreement between SouthBanc Shares, Inc. and Robert W. Orr
(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 1999).
10.4 Employment Agreement between SouthBanc Shares, Inc. and Thomas C.
Hall (incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended September 30, 1999).
II-4
<PAGE>
10.5 Employment Agreement between SouthBanc Shares, Inc. and Barry C.
Visioli (incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended September 30, 1999).
10.6 Employment Agreement between Perpetual Bank, A Federal Savings Bank
and Robert W. Orr (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended September 30, 1999).
10.7 Employment Agreement between Perpetual Bank, A Federal Savings Bank
and Thomas C. Hall (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended September 30, 1999).
10.8 Employment Agreement between Perpetual Bank, A Federal Savings Bank
and Barry C. Visioli (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended September 30, 1999).
10.9 1998 Stock Option Plan (incorporated by reference to the Company's
Definitive Proxy Statement dated December 18, 1998).
10.10 1998 Management Development and Recognition Plan (incorporated by
reference to the Company's Definitive Proxy Statement dated December
18, 1998).
10.11 Supplemental Executive Retirement Agreement with Robert W. Orr
(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 1999).
10.12 Supplemental Executive Retirement Agreement with Thomas C. Hall
(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 1999).
10.13 Supplemental Executive Retirement Agreement with Barry C. Visioli
(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 1999).
10.14 Perpetual Bank, A Federal Savings Bank 1997 Management Recognition
and Development Plan (incorporated by reference to the Company's
Registration Statement on Form S-8 filed on June 3, 1999).
10.15 Perpetual Bank, A Federal Savings Bank 1997 Stock Option Plan
(incorporated by reference to the Company's Registration Statement
on Form S-8 filed on June 3, 1999).
10.16 Perpetual Bank, A Federal Savings Bank 1993 Stock Option Plan and
Incentive Plan (incorporated by reference to Perpetual Bank's
Definitive Proxy Statement for the 1994 Annual Meeting of
Stockholders).
13.0 1999 Annual Report to Stockholders (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended September
30, 1999).
II-5
<PAGE>
21.0 Subsidiaries of the Registrant (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended September 30,
1999).
23.1 Consent of Malizia Spidi & Fisch, P.C. (included in Exhibit 5.1).
23.2 Consent of Muldoon, Murphy & Faucette LLP.
23.3 Consent of Malizia Spidi & Fisch, P.C.
23.4 Consent of Elliott, Davis & Company, independent auditors for
SouthBanc Shares, Inc.
23.5 Consent of Deloitte & Touche LLP, independent auditors for Heritage
Bancorp, Inc.
23.6 Form of Consent of Sandler O'Neill & Partners, L.P.
23.7 Consent of Trident Securities.
24.0 Powers of Attorney (see the signature page to this Form S-4
Registration Statement).
99.1 Opinion of Sandler O'Neill & Partners, L.P. (included as Appendix D
to the Joint Proxy Statement-Prospectus which is part of this
Registration Statement).
99.2 Opinion of Trident Securities, Inc. (included as Appendix E to the
Joint Proxy Statement-Prospectus which is part of this Registration
Statement).
99.3 SouthBanc Shares, Inc. Proxy Card.
99.4 Heritage Bancorp, Inc. Proxy Card.
99.5 Rule 438 Consents of Persons Named to Become Director.
Item 22. Undertakings.
(a) 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;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this 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 this Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered
II-6
<PAGE>
would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) (17 C.F.R.
Section 230.424(b)) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
Registration Statement; and
(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 deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) 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 Exchange Act (and, where applicable, each filing of an 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.
(c) The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the Joint Proxy Statement-Prospectus, to each person to
whom the Joint Proxy Statement-Prospectus is sent or given, the latest
annual report to security holders that is incorporated by reference in
the Joint Proxy Statement-Prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the
Exchange Act.
(d)(1) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder,
through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) of the Securities Act, the issuer
undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other Items of the
applicable form.
(d)(2) The undersigned Registrant hereby undertakes: that every prospectus
(i) that is filed pursuant to the paragraph immediately preceding, or
(ii) that purports to meet the requirements of section 10(a)(3) of the
Securities Act and is used in connection with an offering of
securities subject to Rule 415 (17 C.F.R. Section 230.415), will be
filed as a part of an amendment to the Registration Statement and will
not be used until such amendment is
II-7
<PAGE>
effective, and that, for purposes of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(e) 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
SEC, 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 such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(f) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of
responding to the request.
(g) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject
of and included in the Registration Statement when it became
effective.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, SouthBanc Shares, Inc.,
the Registrant, has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Anderson,
State of South Carolina, on April 26, 2000.
SOUTHBANC SHARES, INC.
By: /s/ Robert W. Orr
--------------------------------
Robert W. Orr
President, Chief Executive Officer, and
Chairman of the Board
POWER OF ATTORNEY
-----------------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on April 26, 2000.
On April 26, 2000, we, the undersigned officers and directors of SouthBanc
Shares, Inc., hereby, severally and individually, constitute and appoint Robert
W. Orr and Thomas C. Hall, the true and lawful attorneys-in-fact and agents
(with full power of substitution in each case) of each of us to execute, in the
name, place and stead of each of us (individually and in any capacity stated
below), any and all amendments to this Registration Statement and all
instruments necessary or advisable in connection therewith, and to file the same
with the SEC, said attorneys-in-fact and agents to have power to act and to have
full power and authority to do and perform, in the name and on behalf of each of
the undersigned, every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as any of the undersigned
might or could do in person and we hereby ratify and confirm our signatures as
they may be signed by or said attorneys-in-fact and agents to any and all such
amendments and instruments.
Name Title
---- -----
/s/ Robert W. Orr President, Chief Executive Officer (principal
- --------------------------
Robert W. Orr executive officer), and Chairman of the Board
/s/ Thomas C. Hall Senior Vice President (principal
- ---------------------------
Thomas C. Hall accounting and financial officer)
II-9
<PAGE>
/s/ Richard C. Ballenger Director
- ----------------------------
Richard C. Ballenger
/s/ Martha C. Clamp Director
- ----------------------------
Martha C. Clamp
/s/ F. Stevon Kay Director
- ----------------------------
F. Stevon Kay
/s/ H.A. Pickens, Jr. Director
- ----------------------------
H.A. Pickens, Jr.
/s/ Jim Gray Watson Director
- ----------------------------
Jim Gray Watson
II-10
<PAGE>
EXHIBIT INDEX
-------------
2.0 Agreement and Plan of Merger, dated as of February 14, 2000, between
SouthBanc Shares, Inc. and Heritage Bancorp, Inc. is included as
Appendix A to the Joint Proxy Statement-Prospectus which is part of
this Registration Statement.
4.0 SouthBanc Shares, Inc. Specimen Stock Certificate (incorporated by
reference to the Company's Registration Statement on Form S-1 (File
No. 333-42517) filed on December 17, 1997).
5.0 Opinion of Malizia Spidi & Fisch, P.C. regarding legality.
8.1 Form of Opinion of Muldoon, Murphy & Faucette LLP regarding tax
matters.
8.2 Form of Opinion of Malizia Spidi & Fisch, P.C. regarding tax matters.
10.1 Stock Option Agreement dated February 14, 2000 between SouthBanc
Shares, Inc. and Heritage Bancorp, Inc. is included as Appendix B to
the Joint Proxy Statement-Prospectus which is part of this
Registration Statement.
10.2 Stock Option Agreement dated February 14, 2000 between Heritage
Bancorp, Inc. and SouthBanc Shares, Inc. is included as Appendix C to
the Joint Proxy Statement-Prospectus which is part of this
Registration Statement.
10.3 Employment Agreement between SouthBanc Shares, Inc. and Robert W. Orr
(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 1999).
10.4 Employment Agreement between SouthBanc Shares, Inc. and Thomas C.
Hall (incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended September 30, 1999).
10.5 Employment Agreement between SouthBanc Shares, Inc. and Barry C.
Visioli (incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended September 30, 1999).
10.6 Employment Agreement between Perpetual Bank, A Federal Savings Bank
and Robert W. Orr (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended September 30, 1999).
10.7 Employment Agreement between Perpetual Bank, A Federal Savings Bank
and Thomas C. Hall (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended September 30, 1999).
10.8 Employment Agreement between Perpetual Bank, A Federal Savings Bank
and Barry C. Visioli (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended September 30, 1999).
<PAGE>
10.9 1998 Stock Option Plan (incorporated by reference to the Company's
Definitive Proxy Statement dated December 18, 1998).
10.10 1998 Management Development and Recognition Plan (incorporated by
reference to the Company's Definitive Proxy Statement dated December
18, 1998).
10.11 Supplemental Executive Retirement Agreement with Robert W. Orr
(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 1999).
10.12 Supplemental Executive Retirement Agreement with Thomas C. Hall
(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 1999).
10.13 Supplemental Executive Retirement Agreement with Barry C. Visioli
(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 1999).
10.14 Perpetual Bank, A Federal Savings Bank 1997 Management Recognition
and Development Plan (incorporated by reference to the Company's
Registration Statement on Form S-8 filed on June 3, 1999).
10.15 Perpetual Bank, A Federal Savings Bank 1997 Stock Option Plan
(incorporated by reference to the Company's Registration Statement
on Form F-8 filed on June 3, 1999).
10.16 Perpetual Bank, A Federal Savings Bank 1993 Stock Option Plan and
Incentive Plan (incorporated by reference to Perpetual Bank's
Definitive Proxy Statement for the 1994 Annual Meeting of
Stockholders).
13.0 1999 Annual Report to Stockholders (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended September
30, 1999).
21.0 Subsidiaries of the Registrant (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended September
30, 1999).
23.1 Consent of Malizia Spidi & Fisch, P.C. (included in Exhibit 5.1).
23.2 Consent of Muldoon, Murphy & Faucette LLP.
23.3 Consent of Malizia Spidi & Fisch, P.C.
23.4 Consent of Elliott, Davis & Company, independent auditors for
SouthBanc Shares, Inc.
23.5 Consent of Deloitte & Touche LLP, independent auditors for Heritage
Bancorp, Inc.
23.6 Form of Consent of Sandler O'Neill & Partners, L.P.
23.7 Consent of Trident Securities, Inc.
24.0 Powers of Attorney (see the signature page to this Form S-4
Registration Statement).
<PAGE>
99.1 Opinion of Sandler O'Neill & Partners, L.P. (included as Appendix D
to the Joint Proxy Statement-Prospectus which is part of this
Registration Statement).
99.2 Opinion of Trident Securities, Inc. (included as Appendix E to the
Joint Proxy Statement-Prospectus which is part of this Registration
Statement).
99.3 SouthBanc Shares, Inc. Proxy Card.
99.4 Heritage Bancorp, Inc. Proxy Card.
99.5 Rule 438 Consents of Persons Named to Become Director.
<PAGE>
EXHIBIT 5
April 21, 2000
Board of Directors
SouthBanc Shares, Inc.
907 North Main Street
Anderson, South Carolina 29621
Re: Registration Statement Under the Securities Act of 1933
-------------------------------------------------------
Ladies and Gentlemen:
This opinion is rendered in connection with the registration under the
Securities Act of 1933, as amended, (the "Act") of 3,124,222 shares (the
"Securities") of common stock, par value $.01 per share (the "Common Stock"), of
SouthBanc Shares, Inc. (the "Company"), in connection with the merger of
Heritage Bancorp, Inc. with and into the Company (the "Merger"). As special
counsel to the Company, we have reviewed such corporate records, certificates
and other documents, and such legal matters as we have deemed appropriate for
the purpose of rendering this opinion. In all examinations of records,
certificates and documents, we have assumed the genuineness of all signatures on
original and certified documents and the conformity to original and certified
documents of all copies submitted to us as conformed, photostatic or other
copies.
Upon the basis of the foregoing, we are of the opinion that the Common
Stock, when issued and sold in accordance with the terms of the Merger, set
forth in the registration statement on Form S-4 of the Company (the
"Registration Statement"), will be validly issued, fully paid, and non-
assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm appearing under the
heading "Legal Matters" in the Company's joint proxy statement-prospectus
included as part of the Registration Statement.
Very truly yours,
/S/ MALIZIA SPIDI & FISCH, PC
-----------------------------
MALIZIA SPIDI & FISCH, PC
<PAGE>
Exhibit 8.1
Form of Federal Tax Opinion
________________, 2000
Board of Directors
Heritage Bancorp, Inc.
201 W. Main Street
Laurens, South Carolina 29360
Gentlemen:
This letter is in response to your request for our opinion with respect to
the material federal income tax consequences of the proposed merger of Heritage
Bancorp, Inc., a Delaware corporation ("Heritage"), with and into SouthBanc
Shares, Inc., a Delaware corporation ("SouthBanc") (the "Merger"), pursuant to
the Agreement and Plan of Merger, dated February 14, 2000, between SouthBanc and
Heritage (the "Agreement"). Unless otherwise specified, the terms used herein
are defined in the Registration Statement on Form S-4 (the "Registration
Statement') initially filed by SouthBanc with the Securities and Exchange
Commission (the "SEC") on __________, 2000, or the Agreement. For purposes of
the opinions set forth below, we have relied, with the consent of both SouthBanc
and Heritage, upon the accuracy and completeness of the factual statements and
representations (which statements and representations we have neither
investigated nor verified) contained in the letters dated as of ___________,
2000, of SouthBanc and Heritage.
In connection with the proposed Merger, we understand and assume the following:
(a) In accordance with the Delaware General Corporation Law, Heritage will
merge with and into SouthBanc, and SouthBanc will be the surviving
corporation;
(b) Pursuant to the Merger, all of the assets of Heritage will, by
operation of law, be transferred to SouthBanc and SouthBanc will
assume all of Heritage's liabilities;
(c) At the Effective Time, each outstanding share of Heritage Common Stock
(other than shares held by SouthBanc) will cease to be outstanding
and will be converted, at the election of the holder and subject to
the provisions of the Agreement, into a right to receive either a
number of shares of SouthBanc Common Stock, determined by reference
to the Exchange Ratio, or an amount equal to the Cash Consideration;
(d) At the Effective Time, each holder of Heritage Common Stock who
otherwise would have been entitled to a fraction of a share of
SouthBanc Common Stock will receive in lieu thereof a right to
receive cash (without interest) equal to such fraction multiplied
by the SouthBanc Price; and
<PAGE>
Board of Directors
Heritage Bancorp, Inc.
____________, 2000
Page 2
(e) SouthBanc will continue to conduct the historic business of Heritage
or use a significant portion of Heritage's historic business assets
in a business within the meaning of Treasury Regulation Section
1.368-1(d).
In connection herewith, we have examined the Agreement, the Registration
Statement (which contains a Joint Proxy Statement/Prospectus) and such other
information as we have deemed relevant. As to questions of fact material to the
opinions herein, we have relied upon representations of SouthBanc and Heritage
as set forth in letters certified by their respective officers. On the basis of
the foregoing and subject to the conditions, qualifications and limitations set
forth herein, we are of the opinion as of the date hereof that for federal
income tax purposes:
(a) The Merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code 1986, as amended
(the "Code");
(b) No gain or loss will be recognized by SouthBanc or Heritage as a
result of the Merger;
(c) No gain or loss will be recognized by the stockholders of Heritage who
exchange all of their Heritage Common Stock solely for SouthBanc
Common Stock, except with respect to cash received in lieu of a
fractional share interest in SouthBanc Common Stock;
(d) The aggregate adjusted tax basis of the SouthBanc Common Stock
received by stockholders of Heritage who exchange all of their
Heritage Common Stock solely for SouthBanc Common Stock in the Merger
will be the same as the aggregate adjusted tax basis of the Heritage
Common Stock surrendered in exchange therefor (reduced by any amount
allocable to a fractional share interest for which cash is received);
(e) The holding period of SouthBanc Common Stock received by each
stockholder in the Merger will include the holding period of Heritage
Common Stock exchanged therefor, provided that such stockholder held
such Heritage Common Stock as a capital asset on the Effective Date;
(f) Any gain realized by a Heritage stockholder who receives SouthBanc
Common Stock and cash (excluding any cash received in lieu of a
fractional share of SouthBanc Common Stock) in exchange for Heritage
Common Stock pursuant to the Merger will be recognized in an amount
not in excess of the amount of the cash received
<PAGE>
(excluding any cash received in lieu of a fractional share of
SouthBanc Common Stock), such gain will be capital gain unless the
receipt of the cash has the effect of the distribution of a dividend,
and any loss on the exchange will not be recognized;
(g) Cash received by a Heritage stockholder who has received only cash in
exchange for Heritage Common Stock will be treated as a distribution
in redemption of the Heritage Common Stock held by that stockholder,
subject to the provisions and limitations of Section 302 of the
Code; and
(h) A stockholder of Heritage who receives cash in lieu of a fractional
share of SouthBanc Common Stock will be treated as if a fractional
share of SouthBanc Common Stock was distributed in exchange of such
stockholder's interest in Heritage and immediately redeemed, with the
stockholder having received a cash distribution in full payment of
the stock so redeemed as provided in Section 302 of the Code.
This opinion does not relate to or purport to cover any matters other than
the ones expressly stated herein. The opinion expressed herein is limited to the
material consequences of the Merger under current federal income tax law as of
the date of this opinion letter. No opinion is expressed with respect to the
federal income tax consequences of the Merger to stockholders subject to special
treatment under federal income tax law. In addition, no opinion is expressed
with respect to the tax consequences of the Merger under applicable foreign,
state or local laws or under any federal tax laws other than those pertaining to
the income tax. We assume no obligation to revise or supplement this opinion
should the present federal income tax laws be changed by any legislation,
judicial decisions, or otherwise.
We hereby consent to the reference to us under the caption "Legal Matters"
in the Proxy Statement/Prospectus forming a part of the Registration Statement
and to the filing of a copy of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
MULDOON, MURPHY & FAUCETTE LLP
<PAGE>
[FORM OF OPINION] EXHIBIT 8.2
________________, 2000
Board of Directors
SouthBanc Shares, Inc.
907 Main Street
Anderson, South Carolina 29621-5526
Gentlemen:
This letter is in response to your request for our opinion with respect to
the material federal income tax consequences of the proposed merger of Heritage
Bancorp, Inc., a Delaware corporation ("Heritage"), with and into SouthBanc
Shares, Inc., a Delaware corporation ("SouthBanc") (the "Merger"), pursuant to
the Agreement and Plan of Merger, dated February 14, 2000, between SouthBanc and
Heritage (the "Agreement"). Unless otherwise specified, the terms used herein
are defined in the Registration Statement on Form S-4 (the "Registration
Statement") initially filed by SouthBanc with the Securities and Exchange
Commission (the "SEC") on __________, 2000, or the Agreement. For purposes of
the opinions set forth below, we have relied, with the consent of both SouthBanc
and Heritage, upon the accuracy and completeness of the factual statements and
representations (which statements and representations we have neither
investigated nor verified) contained in the letters dated as of ___________,
2000, of SouthBanc and Heritage.
In connection with the proposed Merger, we understand and assume the
following:
(a) In accordance with the Delaware General Corporation Law, Heritage will
merge with and into SouthBanc, and SouthBanc will be the surviving
corporation;
(b) Pursuant to the Merger, all of the assets of Heritage will, by
operation of law, be transferred to SouthBanc and SouthBanc will
assume all of Heritage's liabilities;
(c) At the Effective Time, each outstanding share of Heritage Common Stock
(other than shares held by SouthBanc) will cease to be outstanding and
will be converted, at the election of the holder and subject to the
provisions of the Agreement, into a right to receive either a number of
shares of SouthBanc Common Stock, determined by reference to the
Exchange Ratio, or an amount equal to the Cash Consideration;
<PAGE>
Board of Directors
SouthBanc Shares, Inc.
_______________, 2000
Page 2
(d) At the Effective Time, each holder of Heritage Common Stock who
otherwise would have been entitled to a fraction of a share of
SouthBanc Common Stock will receive in lieu thereof a right to
receive cash (without interest) equal to such fraction multiplied
by the SouthBanc Price; and
(e) SouthBanc will continue to conduct the historic business of Heritage or
use a significant portion of Heritage's historic business assets in a
business within the meaning of Treasury Regulation Section 1.368-1(d).
In connection herewith, we have examined the Agreement, the Registration
Statement (which contains a Joint Proxy Statement/Prospectus) and such other
information as we have deemed relevant. As to questions of fact material to
the opinions herein, we have relied upon representations of SouthBanc and
Heritage as set forth in letters certified by their respective officers. We
have assumed that such representations are true and that SouthBanc will act in
accordance with the descriptions set forth in the Registration Statement. In
addition, we have made such investigations of law as we have deemed appropriate
to form a basis for the opinions expressed below.
On the basis of the foregoing and subject to the conditions, qualifications
and limitations set forth herein, we are of the opinion as of the date hereof
that for federal income tax purposes:
(a) The Merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code 1986, as amended
(the "Code");
(b) No gain or loss will be recognized by SouthBanc or Heritage as a result
of the Merger;
(c) No gain or loss will be recognized by the stockholders of Heritage who
exchange all of their Heritage Common Stock solely for SouthBanc Common
Stock, except with respect to cash received as part of the Merger
Consideration or in lieu of a fractional share interest in SouthBanc
Common Stock;
(d) The tax basis of the SouthBanc Common Stock received by stockholders of
Heritage who exchange all of their Heritage Common Stock solely for
SouthBanc Common Stock in the Merger will be the same as the tax basis
of the Heritage Common Stock surrendered in exchange therefor (reduced
by any amount allocable to a fractional share interest for which cash
is received and increased by any gain recognized on the exchange); and
<PAGE>
Board of Directors
SouthBanc Shares, Inc.
_______________, 2000
Page 3
(e) The holding period of SouthBanc Common Stock received by each
stockholder in the Merger will include the holding period of Heritage
Common Stock exchanged therefor, provided that such stockholder held
such Heritage Common Stock as a capital asset on the Effective Date.
This opinion does not relate to or purport to cover any matters other than
the ones expressly stated herein. The opinion expressed herein is limited to the
material consequences of the Merger under current federal income tax law as of
the date of this opinion letter. No opinion is expressed with respect to the
federal income tax consequences of the Merger to stockholders subject to special
treatment under federal income tax law. In addition, no opinion is expressed
with respect to the tax consequences of the Merger under applicable foreign,
state or local laws or under any federal tax laws other than those pertaining to
the income tax. If any of the information on 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 following
federal income tax laws in effect as of the date of this opinion: the Code,
applicable Treasury regulations promulgated thereunder, and Internal Revenue
Service ("IRS") rulings, procedures, and other pronouncements published by IRS.
These authorities are all subject to change, and such change may be made with
retroactive effect, which may cause the federal income tax consequences stated
herein to become substantially different. We assume no obligation to revise or
supplement this opinion should the present federal income tax laws be changed by
any legislation, judicial decisions, or otherwise.
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 IRS or the courts, and there can be no
assurance, and none is hereby given, that the IRS or the courts, 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
IRS. Moreover, no rulings have been or will be sought from the IRS with respect
to the transaction described herein. Accordingly, we cannot assure you that the
IRS will not challenge the opinion expressed herein or that a court would not
rule in favor of the IRS.
Very truly yours,
MALIZIA SPIDI & FISCH, PC
<PAGE>
EXHIBIT 23.2
CONSENT OF MULDOON, MURPHY & FAUCETTE LLP
-----------------------------------------
We hereby consent to the filing of the form of our opinion with respect to
the federal income tax consequences of the merger as an exhibit to the
Registration Statement on Form S-4 of SouthBanc Shares, Inc. and to the
references to us in the Joint Proxy Statement-Prospectus forming a part of the
Registration Statement.
April 26, 2000 Sincerely,
/s/ MULDOON, MURPHY & FAUCETTE LLP
<PAGE>
EXHIBIT 23.3
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the joint proxy statement/prospectus included as a part of the
Registration Statement on Form S-4 and to the filing of the form of this opinion
as an exhibit to the Registration Statement and to the related summary of that
opinion which is included within the discussion under the caption "Tax
Consequences for Heritage Stockholders" in the joint proxy statement/prospectus.
/S/ MALIZIA SPIDI & FISCH, PC
-----------------------------
MALIZIA SPIDI & FISCH, PC
April 21, 2000
<PAGE>
Exhibit 23.4
[LETTERHEAD OF ELLIOTT, DAVIS & COMPANY APPEARS HERE]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
SouthBanc Shares, Inc.
Anderson, South Carolina
We consent to the incorporation by reference, in the Registration Statement of
SouthBanc Shares, Inc. on Form S-4, of our report dated November 12, 1999
relating to the consolidated financial statements of SouthBanc Shares, Inc. as
of September 30, 1999 and 1998 and for each of the three years in the period
ended September 30, 1999, which appear in the SouthBanc Shares, Inc.'s, Annual
Report on form 10-K for the year ended September 30, 1999.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Elliott, Davis & Company, LLP
Greenville, South Carolina
April 21, 2000
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of SouthBanc Shares, Inc.
on Form S-4 of our report dated November 5, 1999, appearing in the joint Proxy
Statement-Prospectus, which is part of this Registration Statement. We also
consent to the reference to us under the heading "Experts" in such joint Proxy
Statement-Prospectus.
DELOITTE & TOUCHE LLP
/s/ DELOITTE & TOUCHE LLP
Greenville, South Carolina
April 26, 2000
<PAGE>
EXHIBIT 23.6
FORM OF CONSENT OF SANDLER O'NEILL & PARTNERS, L.P.
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of SouthBanc Shares, Inc. (the "Company") as an Appendix to the Joint
Proxy Statement/Prospectus relating to the proposed merger of Heritage Bancorp,
Inc. with and into the Company contained in the Registration Statement on Form
S-4 as filed with the Securities and Exchange Commission on the date hereof, and
to the reference to our firm and such opinion in such Joint Proxy
Statement/Prospectus. In giving such consent, we do not admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended (the "Act"), or the rules and regulations of
the Securities and Exchange Commission thereunder (the "Regulations"), nor do we
admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Act or the
Regulations.
<PAGE>
EXHIBIT 23.7
TRIDENT SECURITIES
A DIVISION OF MCDONALD INVESTMENTS INC.
4601 SIX FORKS ROAD, SUITE 400
RALEIGH, NORTH CAROLINA 27609
TELEPHONE (919) 781-8900
FACSIMILE (919) 787-1670
April 21, 2000
Board of Directors
Heritage Bancorp, Inc.
201 West Main Street
Laurens, South Carolina 29360
Members of the Board:
We hereby consent to the use of our name and to the description of our
opinion letter to the Board of Directors of Heritage Bancorp, Inc., to be signed
and dated the date of the Joint Proxy Statement-Prospectus that is a part of
this Registration Statement, under the caption "Opinion of Heritage's Financial
Advisor", and to the inclusion of such opinion letter as Appendix E to the Joint
Proxy Statement-Prospectus that is a part of this Registration Statement.
TRIDENT SECURITIES
A Division of McDonald Investments Inc.
By /s/ William J. Wagner
-------------------------------------
William J. Wagner
<PAGE>
Exhibit 99.3
FORM OF REVOCABLE PROXY
SOUTHBANC SHARES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF SOUTHBANC SHARES, INC.
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON ___________________________
The undersigned stockholder of SouthBanc Shares, Inc. (the "Company")
hereby appoints _______________________________________________ as proxies, each
of them with full power of substitution, to attend and act as proxy for the
undersigned and to cast all votes which the undersigned stockholder is entitled
to cast at the special meeting of stockholders of the Company to be held at
________ _.m., local time on _______________, at 907 North Main Street,
Anderson, South Carolina, and any and all adjournments and postponements thereof
(the "Special Meeting"), with all powers which the undersigned would possess if
personally present (i) as designated below with respect to the matters set forth
below and described in the accompanying Joint Proxy Statement-Prospectus and
(ii) in their discretion with respect to any other business that may properly
come before the Special Meeting. The undersigned stockholder hereby revokes any
proxy or proxies heretofore given.
This proxy will be voted in the manner directed by the undersigned
stockholder. If no direction is made, this proxy will be voted (1) "FOR"
approval and adoption of the Merger Agreement (as defined herein) and (2) in
the discretion of the proxies as to all other matters that may properly come
before the Special Meeting.
This proxy card will also be used to provide voting instructions to the
trustee for any shares of common stock of the Company allocated to participants
under the Perpetual Bank Employee Stock Ownership Plan.
(continued--to be signed and dated on reverse side)
<PAGE>
The Board of Directors recommends a vote "FOR" approval and adoption of the
Merger Agreement.
1. Approval and adoption of the Agreement and Plan of Merger, dated as of
February 14, 2000, by and between Heritage Bancorp, Inc. and the Company
pursuant to which Heritage Bancorp, Inc. will merge with and into the
Company and each share of common stock of Heritage Bancorp, Inc., par
value at $.01 per share, will be converted into the right to receive, at
the election of the holder, either shares of common stock, par value
$.01 per share, of SouthBanc or cash, all on and subject to the terms
and conditions contained therein.
FOR AGAINST ABSTAIN
[_] [_] [_]
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Stockholders and the Joint Proxy Statement-Prospectus, dated
__________________, for the Special Meeting.
Dated: ____________________________________
Signature: _________________________________
Signature: _________________________________
Title: _____________________________________
(Please date and sign here exactly as name
appears at left. When signing as attorney,
administrator, trustee or guardian, give full
title as such; and when stock has been issued
in the name of two or more persons, all should
sign.)
PLEASE ACT PROMPTLY.
SIGN, DATE AND MAIL YOUR PROXY CARD TODAY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
IF YOU RECEIVE MORE THAN ONE PROXY CARD, PLEASE DATE,
SIGN AND RETURN ALL CARDS IN THE ACCOMPANYING ENVELOPE.
2
<PAGE>
Exhibit 99.4
FORM OF REVOCABLE PROXY
HERITAGE BANCORP, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF HERITAGE BANCORP, INC.
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON ___________________________
The undersigned stockholder of Heritage Bancorp, Inc. (the "Company")
hereby appoints _______________________________________________ as proxies, each
of them with full power of substitution, to attend and act as proxy for the
undersigned and to cast all votes which the undersigned stockholder is entitled
to cast at the special meeting of stockholders of the Company to be held at
________ _.m., local time on _______________, at 201 West Main Street, Laurens,
South Carolina, and any and all adjournments and postponements thereof (the
"Special Meeting"), with all powers which the undersigned would possess if
personally present (i) as designated below with respect to the matters set forth
below and described in the accompanying Joint Proxy Statement-Prospectus and
(ii) in their discretion with respect to any other business that may properly
come before the Special Meeting. The undersigned stockholder hereby revokes any
proxy or proxies heretofore given.
This proxy will be voted in the manner directed by the undersigned
stockholder. If no direction is made, this proxy will be voted (1) "FOR"
approval and adoption of the Merger Agreement (as defined herein) and (2) in
the discretion of the proxies as to all other matters that may properly come
before the Special Meeting.
This proxy card will also be used to provide voting instructions to the
trustee for any shares of common stock of the Company allocated to participants
under the Heritage Federal Bank Employee Stock Ownership Plan.
(continued--to be signed and dated on reverse side)
<PAGE>
The Board of Directors recommends a vote "FOR" approval and adoption of the
Merger Agreement.
1. Approval and adoption of the Agreement and Plan of Merger, dated as of
February 14, 2000, by and between SouthBanc Shares, Inc. and the
Company pursuant to which the Company will merge with and into
SouthBanc and each share of common stock of the Company, par value at
$.01 per share, will be converted into the right to receive, at the
election of the holder, either shares of common stock, par value $.01
per share, of SouthBanc or cash, all on and subject to the terms and
conditions contained therein.
FOR AGAINST ABSTAIN
[_] [_] [_]
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Stockholders and the Joint Proxy Statement-Prospectus, dated
__________________, for the Special Meeting.
Dated: ____________________________________
Signature: _________________________________
Signature: _________________________________
Title: _____________________________________
(Please date and sign here exactly as name
appears at left. When signing as attorney,
administrator, trustee or guardian, give full
title as such; and when stock has been issued
in the name of two or more persons, all should
sign.)
PLEASE ACT PROMPTLY.
SIGN, DATE AND MAIL YOUR PROXY CARD TODAY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
IF YOU RECEIVE MORE THAN ONE PROXY CARD, PLEASE DATE,
SIGN AND RETURN ALL CARDS IN THE ACCOMPANYING ENVELOPE.
2
<PAGE>
Exhibit 99.5
CONSENT TO PERSON DESIGNATED
TO SERVE ON THE BOARD OF DIRECTORS OF
SOUTHBANC SHARES, INC.
The undersigned hereby consents, pursuant to Rule 438 under the Securities
Act of 1933, as amended, to being named in the Joint Proxy Statement-Prospectus
constituting part of SouthBanc Shares, Inc.'s Registration Statement on Form S-4
as a person to become a director of SouthBanc Shares, Inc.
/s/ J. Riley Bailes
-------------------
J. Riley Bailes
Dated: April 4, 2000
<PAGE>
Exhibit 99.5
CONSENT TO PERSON DESIGNATED
TO SERVE ON THE BOARD OF DIRECTORS OF
SOUTHBANC SHARES, INC.
The undersigned hereby consents, pursuant to Rule 438 under the Securities
Act of 1933, as amended, to being named in the Joint Proxy Statement-Prospectus
constituting part of SouthBanc Shares, Inc.'s Registration Statement on Form S-4
as a person to become a director of SouthBanc Shares, Inc.
/s/John C. Owings, II
---------------------
John C. Owings, II
Dated: April 3, 2000
<PAGE>
Exhibit 99.5
CONSENT TO PERSON DESIGNATED
TO SERVE ON THE BOARD OF DIRECTORS OF
SOUTHBANC SHARES, INC.
The undersigned hereby consents, pursuant to Rule 438 under the Securities
Act of 1933, as amended, to being named in the Joint Proxy Statement-Prospectus
constituting part of SouthBanc Shares, Inc.'s Registration Statement on Form S-4
as a person to become a director of SouthBanc Shares, Inc.
/s/ J. Edward Wells
-------------------
J. Edward Wells
Dated: April 4, 2000
