As filed with the Securities and Exchange Commission on August 21, 1998
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
COMMUNITY SAVINGS BANKSHARES, INC.
(Exact name of registrant as specified in its articles of incorporation)
----------------
DELAWARE 6711 (BEING APPLIED FOR)
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(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or organization) Code Number)
660 U.S. Highway One
North Palm Beach, Florida 33408
(561) 881-4800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
James B. Pittard, Jr.
President and Chief Executive Officer
660 U.S. Highway One
North Palm Beach, Florida 33408
(Name, address, including zip code,
and telephone number, including area code, of agent for service)
Copy to:
Raymond A. Tiernan, Esq.
Philip R. Bevan, Esq.
Cristen M. Zeisler, Esq.
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
12th Floor
Washington, D.C. 20005
-----------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
<TABLE>
<CAPTION>
====================================================================================================
AMOUNT
TITLE OF EACH CLASS OF TO BE PURCHASE PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
====================================================================================================
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value
per share....................... 17,192,500 shares $10.00 $171,925,000(1) $50,718
====================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
================================================================================
<PAGE>
PROSPECTUS
COMMUNITY SAVINGS BANKSHARES, INC.
(Proposed Holding Company for Community Savings, F. A.)
Minimum of 11,050,000 and Maximum of 14,950,000 Shares
of Common Stock, Consisting of a Minimum of 5,730,659 and
Maximum of 7,753,143 Shares of Conversion Stock
and a Minimum of 5,319,341 and Maximum of 7,196,257 Exchange Shares
Community Savings Bankshares, Inc. (the "Company"), a Delaware
corporation, is offering shares of its common stock, par value $1.00 per share
(the "Common Stock"), in connection with the conversion and reorganization of
Community Savings, F. A. (the "Association") from the two-tier mutual holding
company structure to the stock holding company structure. The Association is
currently a wholly owned subsidiary of Community Savings Bankshares, Inc., a
federal corporation (the "Mid-Tier Holding Company" ), which is the wholly owned
subsidiary of ComFed, M. H. C. (the "MHC"), both of which will be merged out of
existence, and the Association will become a wholly owned subsidiary of the
Company.
THE OFFERINGS. Pursuant to a Plan of Conversion and Agreement and Plan
of Reorganization (the "Plan") adopted by the Association, the Mid-Tier Holding
Company and the MHC, the Association will become a subsidiary of the Company
upon consummation of the transactions described herein (collectively, with the
Offerings (as hereinafter defined), the "Conversion"). Pursuant to the Plan,
nontransferable subscription rights to subscribe for up to 7,753,143 shares
(which may be increased to 8,916,176 shares under certain circumstances
described below) of Common Stock (the "Conversion Stock") have been granted to
certain depositors and borrowers of the Association as of specified record
dates, the Employee Stock Ownership Plan ("ESOP"), and directors, officers and
employees of the Association, subject to the limitations described herein (the
"Subscription Offering"). Commencing concurrently with the Subscription
Offering, and subject to the prior rights of holders of subscription rights, the
right of the Company, the MHC, the Mid- Tier Holding Company and the Association
(the "Primary Parties") to reject such orders in whole or in part and the other
limitations described herein, the Company is offering the shares of Conversion
Stock not subscribed for in the Subscription Offering, if any, for sale to
shareholders of the Mid-Tier Holding Company as of _________ __, 1998 other than
the MHC (the "Eligible Public Shareholders") (the "Eligible Public Shareholders
Offering"). After satisfying those with subscription rights and the Eligible
Public Shareholders, the Company is offering shares of Conversion Stock in a
community offering (the "Community Offering") to certain members of the general
public to whom a copy of this Prospectus is delivered by or on behalf of the
Company, with preference given to natural persons residing in the counties in
which the Association has an office. The Subscription Offering, the Community
Offering and the Eligible Public Shareholders Offering are collectively referred
to as the "Offerings."
(CONTINUED ON THE FOLLOWING PAGE)
FOR A DISCUSSION OF VARIOUS FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" BEGINNING ON PAGE 20.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENTAL AGENCY.
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF CONVERSION STOCK,
PLEASE CALL THE STOCK CENTER AT 1-888-___-____.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY OR STATE SECURITIES COMMISSION, NOR HAS ANY SUCH COMMISSION,
OFFICE OR AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
Estimated
Underwriting
Subscription Fees and Other Estimated Net
Price(1) Expenses(2) Proceeds(3)
------------ -------------- -------------
Minimum Per Share $ 10.00 $ .25 $ 9.75
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Midpoint Per Share $ 10.00 $ .23 $ 9.77
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Maximum Per Share $ 10.00 $ .21 $ 9.79
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Maximum Per Share, as adjusted $ 10.00 $ .19 $ 9.81
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Total Minimum(1) $57,306,590 $1,456,415 $55,850,175
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Total Midpoint(1) $67,417,770 $1,526,183 $65,891,587
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Total Maximum(1) $77,531,430 $1,595,967 $75,935,463
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Total Maximum, as adjusted(1)(4) $89,161,760 $1,676,216 $87,485,544
================================================================================
(1) Based upon the minimum, midpoint, maximum and 15% above the maximum,
respectively, of the portion of the independent appraisal attributable
to the Conversion Stock.
(2) Consists of the estimated costs to be incurred in connection with the
Conversion, including estimated fixed expenses of $1,061,000 and
marketing fees to be paid to Friedman, Billings Ramsey & Co., Inc.
("FBR") in connection with the Offerings, which fees are estimated to
be a minimum of $395,415 and a maximum of $534,967. See "The Conversion
- Marketing Arrangements." The actual fees and expenses may vary from
the estimates. Such fees paid to FBR may be deemed to be underwriting
fees. See "Pro Forma Data."
(3) Actual net proceeds may vary substantially from estimated amounts
depending on the number of shares sold in the Offerings and other
factors. Does not give effect to purchases of shares of Conversion
Stock by the Company's ESOP, which initially will be deducted from the
Company's shareholders' equity. For the effects of such purchases, see
"Capitalization" and "Pro Forma Data."
(4) As adjusted to give effect to the sale of up to an additional 15% of
the shares that may be offered without resolicitation of subscribers or
any right of cancellation.
---------------------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is _______________, 1998.
<PAGE>
THE EXCHANGE. As a result of the Conversion, each share of common
stock, par value $1.00 per share, of the Mid-Tier Holding Company (the "Mid-Tier
Holding Company Common Stock") held by the MHC, which currently holds 2,620,144
shares or 51.34% of the outstanding Mid-Tier Holding Company Common Stock, will
be cancelled and each share of Mid-Tier Holding Company Common Stock as of the
date hereof, held by Shareholders other than the MHC (the "Public Mid-Tier
Holding Company Shares") will be converted into shares of Common Stock (the
"Exchange Shares") pursuant to a ratio (the "Exchange Ratio") that will result
in the holders of such shares (the "Public Shareholders") owning in the
aggregate approximately the same percentage of the Company as they owned of the
Mid- Tier Holding Company, before giving effect to (a) the payment of cash in
lieu of fractional Exchange Shares or (b) any shares of Common Stock purchased
by such shareholders in the Offerings described herein or the ESOP (the
"Exchange"). As discussed under "Independent Valuation" below and herein, the
final Exchange Ratio will be determined based on the Public Shareholders'
ownership interest and not on the market value of the Public Mid-Tier Holding
Company Shares.
The Primary Parties have engaged FBR to consult with and advise them in
the Conversion, and FBR has agreed to use its best efforts to solicit
subscriptions and purchase orders for shares of Conversion Stock in the
Offerings. FBR is not obligated to take or purchase any shares of Conversion
Stock in the Offerings. See "The Conversion - Marketing Arrangements."
THE SUBSCRIPTION OFFERING WILL TERMINATE AT NOON, EASTERN TIME, ON
_______, 1998 (THE "EXPIRATION DATE"), UNLESS EXTENDED WITH APPROVAL OF THE
OFFICE OF THRIFT SUPERVISION ("OTS"), IF NECESSARY. THE ELIGIBLE PUBLIC
SHAREHOLDERS OFFERING AND THE COMMUNITY OFFERING ARE EXPECTED TO TERMINATE AT
THE SAME TIME AS THE SUBSCRIPTION OFFERING. THE ELIGIBLE PUBLIC SHAREHOLDERS
OFFERING AND THE COMMUNITY OFFERING MUST BE COMPLETED WITHIN 45 DAYS AFTER THE
CLOSE OF THE SUBSCRIPTION OFFERING, OR ________, 1998, UNLESS EXTENDED FOR A
MAXIMUM OF 90 DAYS AT A TIME WITH THE APPROVAL OF THE OTS, IF NECESSARY, EXCEPT
THAT THE EXTENSIONS MAY NOT GO BEYOND ______, 2000. Orders submitted are
irrevocable until the completion of the Conversion; provided that, if the
Conversion is not completed within the 45-day period referred to above, unless
such period has been extended with the consent of the OTS, if necessary, all
subscribers will have their funds returned promptly with interest, and all
withdrawal authorizations will be canceled. If the Offerings are extended beyond
________, 1998, all subscribers will be given the opportunity to modify or
cancel their orders and subscribers who do not affirmatively elect to continue
with an order will have their funds returned promptly with interest (and any
withdrawal authorizations will be canceled). See "The Conversion - The Offerings
- - Subscription Offering."
INDEPENDENT VALUATION. FinPro, Inc. ("FinPro") has prepared an
independent appraisal, which states that the estimated pro forma market value of
the Common Stock was $130,000,000 as of August 13, 1998 (the "Appraisal"). The
Appraisal was multiplied by the MHC's adjusted percentage interest in the
Mid-Tier Holding Company to determine a midpoint ($67,417,770), and the minimum
and maximum range were set at 15% below and above the midpoint, respectively,
resulting in a range of $57,306,590 to $77,531,430 for the Conversion Stock (the
"Estimated Valuation Range").
Based upon the Estimated Valuation Range, the Exchange Ratio is
expected to range from 2.1416 Exchange Shares to 2.8975 Exchange Shares for each
share of the Mid-Tier Holding Company Common Stock outstanding (other than those
held by the MHC, which will be canceled). Accordingly, the value of the Exchange
Shares is expected to range from $53,193,410 to $71,968,570, or between
5,319,341 and 7,196,857 Exchange Shares. The Estimated Valuation Range may be
increased or decreased to reflect changes in market and economic conditions
prior to completion of the Conversion, and under certain circumstances specified
herein subscribers will be resolicited and given the right to modify or cancel
their orders. See "The Conversion - Stock Pricing, Exchange Ratio and Number of
Shares to be Issued."
PURCHASE LIMITATIONS. The Plan sets forth various purchase limitations
which are applicable in the Offerings. See "The Conversion - The Offerings -
Subscription Offering," "Eligible Public Shareholders Offering,"- Community
Offering," and "- Limitations on Conversion Stock Purchases."
2
<PAGE>
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES. No person
may transfer or enter into any agreement or understanding to transfer the legal
or beneficial ownership of the subscription rights issued under the Plan or the
shares of Common Stock to be issued upon their exercise. Each person exercising
subscription rights will be required to certify that a purchase of Common Stock
is solely for such purchaser's own account and that there is no agreement or
understanding regarding the sale or transfer of such shares. See "The Conversion
- - Restrictions on Transfer of Subscription Rights and Shares." The Primary
Parties will pursue any and all legal and equitable remedies in the event they
become aware of the transfer of subscription rights and will not honor orders
known by them to involve the transfer of such rights.
MARKET FOR COMMON STOCK. The Mid-Tier Holding Company Common Stock is
currently quoted on The Nasdaq Stock Market under the symbol "CMSV." The Company
has applied to The Nasdaq Stock Market to have the Common Stock quoted on The
Nasdaq Stock Market under the same symbol upon completion of the Conversion. See
"Market for Common Stock."
REQUIRED APPROVALS. The consummation of the Conversion is subject to
the receipt of various regulatory approvals and the approval of the members of
the MHC and the shareholders of the Mid-Tier Holding Company in the manner set
forth herein.
3
<PAGE>
[MAP TO BE INSERTED WHICH SHOWS THE STATE OF FLORIDA,
WITH AN ENLARGEMENT OF INDIAN RIVER, ST. LUCIE, BREVARD, MARTIN
AND PALM BEACH COUNTIES SHOWING THE CITIES IN WHICH OFFICES ARE LOCATED.]
[GRAPHIC OMITTED IN EDGAR COPY.]
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENTAL AGENCY.
4
<PAGE>
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SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION REGARDING THE COMPANY, THE MID-TIER HOLDING COMPANY, THE ASSOCIATION
AND THE MHC AND THE CONSOLIDATED FINANCIAL STATEMENTS OF THE MID-TIER HOLDING
COMPANY APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN
FORWARD LOOKING STATEMENTS CONSISTING OF ESTIMATES WITH RESPECT TO THE FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY, THE MID-TIER
HOLDING COMPANY AND THE ASSOCIATION. PROSPECTIVE INVESTORS ARE CAUTIONED THAT
SUCH FORWARD LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO VARIOUS FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THESE ESTIMATES. THESE FACTORS INCLUDE CHANGES IN GENERAL ECONOMIC AND
MARKET CONDITIONS, AND THE DEVELOPMENT OF AN INTEREST RATE ENVIRONMENT THAT
ADVERSELY AFFECTS THE INTEREST RATE SPREAD OR OTHER INCOME ANTICIPATED FROM THE
COMPANY'S AND THE ASSOCIATION'S OPERATIONS AND INVESTMENTS. SEE "RISK FACTORS"
FOR A DISCUSSION OF OTHER FACTORS THAT MIGHT CAUSE ACTUAL RESULTS TO DIFFER FROM
SUCH ESTIMATES.
COMMUNITY SAVINGS BANKSHARES, INC.
Community Savings Bankshares, Inc., is a Delaware corporation organized
in August 1998 by the Association for the purpose of holding all of the capital
stock of the Association and in order to facilitate the Conversion. Upon
completion of the Conversion, the only significant assets of the Company will be
all of the outstanding Association common stock, $1.00 par value per share
("Association Common Stock"), the note evidencing the Company's loan to the ESOP
and the portion of the net proceeds from the Offerings retained by the Company.
The business of the Company will initially consist of the business of the
Association. See "Business" and "Regulation - The Company."
THE MID-TIER HOLDING COMPANY
The Mid-Tier Holding Company is a federally chartered mid-tier stock
holding company organized in August 1997 in order to effect the reorganization
of the Association and the MHC into a two-tier mutual holding company structure
("Mid-Tier Reorganization"). The only significant asset of the Mid-Tier Holding
Company is its investment in the Association. The Mid-Tier Holding Company is
majority owned by the MHC, a federally chartered mutual holding company.
Effective September 30,1997, the Mid-Tier Holding Company acquired all of the
issued and outstanding Association Common Stock in connection with the Mid-Tier
Reorganization. At that time, each share of Association Common Stock was
converted into one share of Mid-Tier Holding Company Common Stock. As of the
date hereof, the MHC owned 2,620,144 shares (or 51.34%) of Mid-Tier Holding
Company Common Stock with the remaining 2,483,816 shares (or 48.66%) being owned
by the Public Shareholders. The Mid-Tier Reorganization was accounted for at
historical cost in a manner similar to a pooling of interests. Therefore, all
financial information has been presented as if the Mid-Tier Holding Company had
been in existence for all periods included in this Prospectus. At June 30, 1998,
the Mid-Tier Holding Company had total assets of $765.5 million, total loans of
$527.4 million, total deposits of $574.4 million and total shareholders' equity
of $83.1 million.
Pursuant to the Conversion, the Mid-Tier Holding Company will convert
to a federal interim savings association and merge with and into the
Association, with the Association as the survivor. As a result, the Mid-Tier
Holding Company will cease to exist.
COMMUNITY SAVINGS, F. A.
The Association, founded in 1955, is a federally chartered savings and
loan association headquartered in North Palm Beach, Florida. The Association's
deposits are federally insured by the Federal Deposit Insurance Corporation
("FDIC") through the Savings Association Insurance Fund ("SAIF"). The
Association has been a member of the Federal Home Loan Bank of Atlanta ("FHLB")
since 1955. The Association is regulated by the OTS. On October 24, 1994, the
Association completed a reorganization into a federally chartered mutual holding
company (the "MHC Reorganization"). As part of the MHC Reorganization, the
Association organized a new federally chartered stock savings association and
transferred substantially all of its assets and liabilities to the stock savings
association in exchange for a majority of the common stock of the stock savings
association. In connection with the MHC
5
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<PAGE>
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Reorganization, the Association issued 2,379,856 shares of Association Common
Stock to the public resulting in net proceeds of $34.0 million. The remaining
2,620,144 shares of Association Common Stock were issued to the MHC.
The Association is a community-oriented financial institution engaged
primarily in the business of attracting deposits from the general public in the
Association's market area and using such funds, together with other borrowings,
to invest primarily in various residential real estate loans, commercial
business loans and mortgage-related securities as well as United States
Government and agency securities, mutual funds and corporate debt securities. At
June 30, 1998, the Association's total assets were $765.3 million, including
$527.4 million of loans and $154.6 million of securities (including securities
available-for-sale). The Association's current business strategy is to operate
as a well- capitalized, profitable and independent community-oriented savings
and loan association dedicated to providing quality retail financial products
and personalized customer service. The Association has implemented this strategy
by emphasizing retail deposits as its primary source of funds and investing a
substantial part of such funds in locally- originated residential first mortgage
loans, in mortgage-related securities and in other liquid investment securities.
Specifically, the Association's business strategy incorporates the following
elements: (i) operating as a community- oriented financial institution and
maintaining a strong core customer base; (ii) emphasizing traditional lending
and investment activities; (iii) maintaining asset quality; (iv) maintaining a
strong retail deposit base; (v) managing interest rate risk while achieving
desirable levels of profitability; and (vi) pursuing controlled growth.
Highlights of the Association's strategy, include the following:
o COMMUNITY-ORIENTED INSTITUTION. The Association is committed to meeting
the financial needs of its customers in Palm Beach, Martin, St. Lucie,
Indian River and Brevard counties in Florida, the communities in which
it operates, through its branch network of 21 full-service branch
offices and two loan production offices. Management believes that the
Association can be more effective in servicing its customers than many
of its non-local competitors because of its ability to quickly and
effectively provide senior management responses to customer needs and
inquiries and its extensive knowledge of the local market.
o EMPHASIS ON TRADITIONAL LENDING AND INVESTMENT ACTIVITIES. Since its
inception in 1955, the Association has emphasized residential real
estate financing and anticipates a continued commitment to financing
the purchase or improvement of residential real estate in its market
area. As of June 30, 1998, 75.6% of the Association's total loan
portfolio consisted of one- to four-family residential mortgage loans.
To supplement local mortgage loan originations and purchases, the
Association invests in investment securities as well as (i) mutual
funds which invest primarily in mortgage-backed and related securities
and U.S. Government and agency securities and (ii) mortgage-backed and
related securities that are primarily issued or guaranteed by the U.S.
Government or agencies thereof. Mortgage-backed and related securities
and investment securities (including mutual funds) represented 10.9%
and 13.8% of total assets, respectively. Investing in single-family
residential loans and various types of mortgage-backed and related
securities and U.S. Government agency securities is generally
considered to involve less risk than other types of investments
including commercial and multi-family residential real estate loans.
o MAINTAIN ASSET QUALITY. Management believes that high asset quality is
a key to long-term financial success and, as a result, the investments
which are emphasized by the Association are intended to maintain a high
level of asset quality and moderate credit risk. At June 30, 1998, the
Association's non-performing assets (which include loans past due 90
days or more and real estate acquired or deemed acquired by
foreclosure) amounted to $2.1 million, or 0.27%, of total assets. At
June 30, 1998, the Association's allowance for loan losses amounted to
$2.8 million, or 202.6% of the Association's non-performing loans.
o EMPHASIS ON RETAIL DEPOSITS. The Association's liability strategy
emphasizes retail deposits drawn from the 21 full-service offices in
its market area rather than institutional or wholesale deposits. At
June 30, 1998, 38.5% of the Association's deposit base of $574.4
million consisted of core deposits, which included non-interest-bearing
demand accounts, NOW accounts, passbook and statement savings and money
market deposit accounts.
6
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<PAGE>
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o INTEREST RATE RISK MANAGEMENT. The Association has sought to manage
interest rate risk by investing a substantial portion of its assets in
adjustable-rate mortgage ("ARM") loans and other adjustable-rate loans,
in short- and medium-term United States Government and agency
securities and investment securities, in mutual funds that invest in
adjustable-rate securities, and in short- and medium-term fixed-rate
mortgage-backed securities. Of the Association's total investment in
loans, mortgage-backed and related securities and investment securities
at June 30, 1998, $ 331.4 million, or 46.2%, had adjustable interest
rates. Management seeks to manage the Association's interest rate risk
exposure by monitoring the levels of interest rate sensitive assets and
liabilities while maintaining an acceptable interest rate spread. At
June 30, 1998, total interest- earning assets repricing or maturing
within one year exceeded total interest-bearing liabilities maturing or
repricing in the same period by $3.4 million, representing a positive
0.44% cumulative one-year gap ratio.
o CONTROLLED GROWTH. The Association has sought to grow its asset base
carefully primarily through expansion of its banking franchise combined
with emphasizing increased locally generated loan originations. To that
end, the Association's total assets have grown $242.2 million or 46.3%
from $523.2 million at September 30, 1993 to $765.5 million at June 30,
1998.
The Association's executive office is located at 660 U.S. Highway One,
North Palm Beach, Florida, and its telephone number is (561) 881-4800.
COMFED, M. H. C.
ComFed, M. H. C. is a federally chartered mutual holding company
chartered on October 24, 1994 in connection with the MHC Reorganization. The
MHC's primary asset is 2,620,144 shares of Mid-Tier Holding Company Common
Stock, which represents 51.34% of the shares of Mid-Tier Holding Company Common
Stock outstanding as of the date of this Prospectus. The MHC's only other asset
consists of cash totalling approximately $206,000 at June 30, 1998 (which will
become an asset of the Association upon consummation of the Conversion). As part
of the Conversion, the MHC will convert from mutual form to a federal interim
stock savings institution and simultaneously merge with and into the
Association, with the Association being the surviving entity.
THE CONVERSION
On July 29, 1998, the Boards of Directors of the Association, the
Mid-Tier Holding Company and the MHC adopted the Plan, and on August 6, 1998 the
Association incorporated the Company under Delaware law as a first-tier wholly
owned subsidiary of the Association. Pursuant to the Plan, (i) the Mid-Tier
Holding Company will convert to an interim federal savings association and
simultaneously merge with and into the Association, (ii) the MHC will convert to
an interim federal stock savings institution and simultaneously merge with and
into the Association, pursuant to which the MHC will cease to exist and the
2,620,144 shares of Mid-Tier Holding Company Common Stock held by the MHC will
be canceled, and (iii) an interim savings institution ("Interim") to be formed
as a wholly owned subsidiary of the Company solely for such purpose will then
merge with and into the Association. As a result of the merger of Interim with
and into the Association, the Association will become a wholly owned subsidiary
of the Company and the 2,483,816 outstanding Public Mid-Tier Holding Company
Shares will be converted into Exchange Shares pursuant to the Exchange Ratio,
which will result in the holders of such shares owning in the aggregate
approximately the same percentage of the Common Stock to be outstanding upon
completion of the Conversion (I.E., the Conversion Stock and the Exchange
Shares) as the percentage of Mid-Tier Holding Company Common Stock owned by them
in the aggregate immediately prior to consummation of the Conversion (as
adjusted to reflect the dividends previously waived by the MHC), before giving
effect to (a) the payment of cash in lieu of issuing fractional Exchange Shares
and (b) any shares of Conversion Stock purchased by the Public Shareholders in
the Offerings. See "The Conversion - Stock Pricing, Exchange Ratio and Number of
Shares to be Issued."
Because the MHC has previously waived dividends declared by the
Mid-Tier Holding Company (and dividends declared by the Association prior to the
Mid-Tier Reorganization) and paid to the Public Shareholders, for purposes of
the Conversion the respective percentage ownership interests of the MHC and the
Public Shareholders were adjusted
7
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<PAGE>
to reflect the waived dividends. As a result, the MHC's percentage interest
increased from 51.34% to 51.86%, and the aggregate percentage interest of the
Public Shareholders decreased from 48.66% to 48.14%. These ownership interests
will be adjusted immediately prior to consummation of the Conversion to reflect
additional dividends waived by the MHC subsequent to the date hereof in
accordance with current regulatory policies.
In addition to the Exchange Shares to be issued to the Public
Shareholders pursuant to the Exchange, the Company is offering shares of
Conversion Stock in the Offerings as part of the Conversion. See "- The
Offerings" below and "The Conversion - The Offerings."
The following diagram outlines the current organizational structure of
the parties' ownership interests:
CURRENT ORGANIZATIONAL STRUCTURE
----------------------- ---------------------------------
| ComFed, M. H. C. | | Holders of Public Mid-Tier |
| | | Holding Company Shares |
----------------------- ---------------------------------
| |
51.34% | | 48.66%
---------------------------------------------------------
| Mid-Tier Holding Company |
---------------------------------------------------------
|
| 100%
---------------------------------------------------------
| Community Savings, F. A. |
---------------------------------------------------------
The following diagram reflects the resulting structure of the parties
upon consummation of the Conversion, including (i) the merger of the MHC and the
Mid-Tier Holding Company (following their conversion into interim federal stock
savings associations) with and into the Association, (ii) the merger of Interim
with and into the Association, pursuant to which the Public Mid-Tier Holding
Company Shares will be converted into Exchange Shares, and (iii) the offering of
Conversion Stock. The aggregate percentage interest of the holders of Public
Mid-Tier Holding Company Shares was decreased from 48.66% to 48.14% to reflect
the dividends that were paid previously to the Public Shareholders but waived by
the MHC. The diagram assumes that there are no fractional Exchange Shares and
does not give effect to (i) purchases of Conversion Stock by holders of Public
Mid-Tier Holding Company Shares or (ii) the exercise of outstanding stock
options under the Mid-Tier Holding Company's 1995 Stock Option Plan.
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STRUCTURE AFTER THE CONVERSION
------------------------------------ ------------------------------
| | | Holders of Public Mid-Tier |
| Purchasers of Conversion Stock | | Holding Company Shares |
------------------------------------ ------------------------------
51.86% | | 48.14%
| |
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| Community Savings Bankshares, Inc. |
---------------------------------------------------------
|
|
| 100%
---------------------------------------------------------
| Community Savings, F. A. |
---------------------------------------------------------
Pursuant to OTS regulations, consummation of the Conversion is
conditioned upon the approval of the Plan by the OTS, as well as (1) the
approval of the holders of at least a majority of the total number of votes
eligible to be cast by the members of the MHC (who are depositors and certain
borrowers of the Association) ("Members") as of the close of business on ____
__, 1998 (the "Voting Record Date") at a special meeting of Members called for
the purpose of submitting the Plan for approval (the "Members' Meeting"), and
(2) the approval of the holders of at least two-thirds of the outstanding shares
of Mid-Tier Holding Company Common Stock held by the MHC and the Public
Shareholders (collectively, the "Shareholders"), as of the Voting Record Date at
a special meeting of Shareholders called for the purpose of considering the Plan
(the "Shareholders' Meeting"). The MHC intends to vote its shares of Mid-Tier
Holding Company Common Stock, which amount to 51.34% of the outstanding shares,
in favor of the Plan at the Shareholders' Meeting. In addition, the Primary
Parties have conditioned the consummation of the Conversion on the approval of
the Plan by at least a majority of the votes cast, in person or by proxy, by the
Public Shareholders at the Shareholders' Meeting. The consummation of the
Conversion is also contingent on the receipt of various approvals of the OTS.
PURPOSES OF THE CONVERSION
One of the principal purposes of the Conversion is to structure the
Company in the stock form, a form used by most other holding companies of
savings institutions and commercial banks and most other business entities. The
increase in capital resulting from the Offerings will support the future
expansion of operations of the Association, as well as possible diversification
into other banking-related businesses and for other business or investment
purposes. Although there are no current arrangements, understandings or
agreements regarding such opportunities, the Company will be in a position after
the Conversion, subject to regulatory limitations and the Company's financial
position, to take advantage of any additional opportunities for such expansion
that may arise in the future.
If the Association had undertaken a standard conversion involving the
formation of a stock holding company in 1994, applicable OTS regulations would
have required almost twice the amount of common stock to be sold than the $34.0
million of net proceeds raised in the MHC Reorganization. Management of the
Association believed at such time that its ability to generate sufficient loan
volume, particularly in its market area, would have made it difficult to
prudently invest in a timely manner the significantly larger amount of capital
that would have been raised in a standard conversion, when compared to the net
proceeds raised in connection with the MHC Reorganization. A standard conversion
in 1994 also would have immediately eliminated all aspects of the mutual form of
organization.
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The Offerings will increase further the capital of the Company and the
Association and provide them with additional flexibility to grow and increase
net income. Furthermore, the Conversion will enhance the Company's and the
Association's ability to access the capital markets.
In light of the foregoing, the Boards of Directors of the Association,
the Mid-Tier Holding Company and the MHC believe that the Conversion is in the
best interests of such companies and their respective Shareholders and Members.
See "The Conversion."
THE OFFERINGS
Pursuant to the Plan and in connection with the Conversion, the Company
is offering up to 7,753,143 shares of Conversion Stock in the Offerings, which
may be increased to up to 8,916,176 shares of Conversion Stock if the Estimated
Valuation Range is increased by up to 15%. Conversion Stock is first being
offered in the Subscription Offering with nontransferable subscription rights
being granted, in the following order of priority, to (i) depositors of the
Association with account balances of $50.00 or more as of the close of business
on June 30, 1997 ("Eligible Account Holders"); (ii) the ESOP; (iii) depositors
of the Association with account balances of $50.00 or more as of the close of
business on _____ __, 1998 (other than Eligible Account Holders) ("Supplemental
Eligible Account Holders"); (iv) depositors and certain borrowers of the
Association as of the Voting Record Date, ____ __, 1998 (other than Eligible
Account Holders and Supplemental Eligible Account Holders) ("Other Members");
and (v) directors, officers and employees of the Association. Subscription
rights will expire if not exercised by noon, Eastern Time, on ______ __, 1998,
unless extended.
Subject to the prior rights of holders of subscription rights,
Conversion Stock not subscribed for in the Subscription Offering is being
offered first to Eligible Public Shareholders and then in the Community Offering
to certain members of the general public to whom a copy of this Prospectus and a
stock order form and certification ("Order Form") are delivered, with preference
given to natural persons residing in Palm Beach, Martin, St. Lucie, Indian River
and Brevard Counties, Florida. The Primary Parties reserve the absolute right to
reject or accept any orders submitted in the Eligible Public Shareholder
Offering and the Community Offering , in whole or in part, either at the time of
receipt of an order or as soon as practicable following the Expiration Date. The
closing of all shares of Common Stock sold in the Offerings will occur
simultaneously and all shares will be sold at a uniform price of $10.00 per
share ("Purchase Price").
The Primary Parties have retained FBR as a consultant and advisor in
connection with the Offerings and to assist in soliciting subscriptions in the
Offerings. See "The Conversion - The Offerings - Subscription Offering," "
- -Eligible Public Shareholders Offering," "-Community Offering," and "- Marketing
Arrangements."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the Order
Form will confirm receipt or delivery of the Prospectus in accordance with Rule
15c2-8. Order Forms will only be distributed with a Prospectus. Material related
to the Conversion will only be available through the Stock Center.
To purchase shares in the Offerings, an executed original Order Form
and the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at the Association (which
may be given by completing the appropriate blanks on the Order Form), must be
received by the Association at any of its offices by 12 noon, Eastern Time, on ,
1998. Order Forms which are not received by such time or are executed
defectively or are received without full payment (or appropriate withdrawal
instructions) are not required to be accepted. The Association is not required
to accept orders submitted on facsimilied Order Forms. The Primary Parties have
the right to waive or permit the correction of incomplete or improperly executed
forms, but do not
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represent that they will do so. The waiver of an irregularity on an Order Form,
the allowance by the Primary Parties of a correction of an incomplete or
improperly executed Order Form, or the acceptance of an order after 12 noon on
the Expiration Date in no way obligates the Primary Parties to waive an
irregularity, allow a correction, or accept an order with respect to any other
Order Form. The interpretation by the Primary Parties of the acceptability of an
Order Form will be final. Once received, an executed Order Form may not be
modified, amended or rescinded without the consent of the Primary Parties,
unless the Offerings have not been completed within 45 days after the end of the
Subscription, Eligible Public Shareholders and Community Offerings, unless such
period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priority, depositors as of the close of business on the Eligibility
Record Date (June 30, 1997), the Supplemental Eligibility Record Date ( , 1998)
and the Voting Record Date ( , 1998) must list on the Order Form all accounts in
which they have an ownership interest at the applicable eligibility date, giving
all names in each account and the account numbers. Members qualifying for a
stock purchase priority who add individuals with a lower, or no, stock purchase
priority as subscribers on an Order Form will have their stock purchase priority
reduced or eliminated based on the lower priority.
Payment for subscriptions and orders may be made (i) in cash if
delivered in person at any office of the Association, (ii) by check or money
order, or (iii) by authorization of withdrawal from deposit accounts maintained
with the Association. The Primary Parties may in their sole discretion elect not
to accept payment for shares of Conversion Stock by wired funds and there shall
be no liability for failure to accept such payment. Funds will be deposited in a
segregated account at the Association and interest will be paid on funds made by
cash, check or money order at the Association's passbook rate of interest from
the date payment is received until completion or termination of the Conversion.
If payment is made by authorization of withdrawal from deposit accounts, the
funds authorized to be withdrawn from an Association deposit account may
continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds, thereby
making them unavailable to the depositor until completion or termination of the
Conversion.
If a subscriber authorizes the Association to withdraw the aggregate
amount of the purchase price from a deposit account, the Association will do so
as of the effective date of the Conversion. The Association may waive any
applicable penalties for early withdrawal from certificate accounts. If the
remaining balance in a certificate account is reduced below the applicable
minimum balance requirement at the time that the funds actually are transferred
under the authorization, the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at the
passbook rate.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but rather may pay for such shares of Conversion Stock
subscribed for upon consummation of the Offerings, provided that there is in
force from the time of its subscription until such time, a loan commitment from
an unrelated financial institution or the Company to lend to the ESOP, at such
time, the aggregate Purchase Price of the shares for which it subscribed.
A depositor interested in using his or her individual retirement
account ("IRA ") funds to purchase Conversion Stock must do so through a
self-directed IRA. Depositors interested in using funds in a Association IRA to
purchase Conversion Stock should contact the Stock Center as soon as possible so
that the necessary forms may be forwarded for execution prior to the Expiration
Date.
The Primary Parties have retained FBR as consultant and advisor in
connection with the Offerings and to assist in soliciting subscriptions in the
Offerings on a best efforts basis. See "The Conversion - The Offerings" and " -
Marketing Arrangements."
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RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS
No person may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Common Stock to be issued upon their exercise.
Each person exercising subscription rights will be required to certify that the
purchase of Common Stock is solely for the purchaser's own account and that
there is no agreement or understanding regarding the sale or transfer of such
shares. See "The Conversion - Restrictions on Transfer of Subscription Rights
and Shares." SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE AND PERSONS FOUND TO BE
ATTEMPTING TO TRANSFER SUBSCRIPTION RIGHTS WILL BE SUBJECT TO THE FORFEITURE OF
SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE OTS. The
Company and the Association intend to pursue any and all legal and equitable
remedies in the event they become aware of the transfer of subscription rights
and will not honor orders known by them to involve the transfer of such rights.
PURCHASE LIMITATIONS
With the exception of the ESOP, which intends to purchase up to an
aggregate of 8% of the number of shares of Conversion Stock to be issued in the
Offerings, no Eligible Account Holder, Supplemental Eligible Account Holder,
Other Member, or director, officer or employee may purchase in their capacity as
such in the Subscription Offering more than $250,000 of Conversion Stock (25,000
shares of Conversion Stock); no person may purchase in each of the Community
Offering or the Eligible Public Shareholders Offering more than $250,000 of
Conversion Stock; and no person, together with associates of or persons acting
in concert with such person, may purchase in the Offerings more than the number
of shares of Conversion Stock that when combined with Exchange Shares received
by such person, together with associates of and persons acting in concert with
such person, aggregate more than 1% of the total number of shares of Common
Stock issued in the Conversion (57,306 shares and 77,531 shares at the minimum
and maximum of the Estimated Valuation Range, respectively). At any time during
the Offerings, and without further approval by the Members or the Shareholders,
the Primary Parties may in their sole discretion decrease or increase any of the
purchase limitations up to 5% of the Common Stock issued in the Conversion.
Under certain circumstances, certain subscribers who subscribed for the maximum
amount of Conversion Stock may be resolicited in the event of such an increase.
The Plan sets forth various purchase limitations applicable to the Offerings.
The minimum purchase is 25 shares. See "The Conversion - Limitations on
Conversion Stock Purchases." In the event of an oversubscription, shares will be
allocated in accordance with the Plan, as described under "The Conversion - The
Offerings - Subscription Offering," "- Eligible Public Shareholders Offering"
and "- Community Offering." BECAUSE THE OVERALL PURCHASE LIMITATION CONTAINED IN
THE PLAN OF CONVERSION INCLUDES EXCHANGE SHARES TO BE ISSUED TO PUBLIC
SHAREHOLDERS FOR THEIR PUBLIC MID-TIER HOLDING COMPANY SHARES, CERTAIN HOLDERS
OF PUBLIC MID-TIER HOLDING COMPANY SHARES MAY BE LIMITED IN THEIR ABILITY TO
PURCHASE CONVERSION STOCK IN THE OFFERINGS. NOTWITHSTANDING ANYTHING TO THE
CONTRARY, EXCEPT AS OTHERWISE REQUIRED BY THE OTS, PUBLIC SHAREHOLDERS WILL NOT
HAVE TO SELL COMMON STOCK OR BE LIMITED IN RECEIVING EXCHANGE SHARES EVEN IF
THEIR OWNERSHIP OF COMMON STOCK WHEN CONVERTED PURSUANT TO THE EXCHANGE RATIO
WOULD EXCEED THE ABOVE LIMITATION.
The term "acting in concert" means (i) knowing participation in a joint
activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an express agreement; or (ii) a combination or
pooling of voting or other interests in the securities of an issuer for a common
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. THE COMPANY AND THE ASSOCIATION
MAY PRESUME THAT CERTAIN PERSONS ARE ACTING IN CONCERT BASED UPON, AMONG OTHER
THINGS, JOINT ACCOUNT RELATIONSHIPS AND THE FACT THAT SUCH PERSONS HAVE FILED
JOINT SCHEDULE 13DS WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC") WITH
RESPECT TO OTHER COMPANIES. The term "associate" of a person is defined in the
Plan to mean (i) any corporation or organization (other than the MHC, the
Mid-Tier Holding Company or the Association or a majority-owned subsidiary of
the Association or the Company) of which such person is a director, officer or
partner or is, directly or indirectly, the beneficial owner of 10% or more of
any class of equity securities; (ii) any trust or other estate in which such
person has a substantial beneficial interest or as to which such person serves
as trustee or in a similar fiduciary capacity (excluding tax-qualified employee
benefit plans of the Company, the Mid-Tier Holding Company or the Association);
and (iii) any relative or spouse of such person, or any relative of such spouse,
who either has the same home as such person or who is a director or officer of
the Company or the Association or any of their
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subsidiaries. In addition, joint account relationships and common addresses will
be taken into account in applying the maximum purchase limitations.
STOCK PRICING, EXCHANGE RATIO AND NUMBER OF SHARES TO BE ISSUED IN THE
CONVERSION
Federal regulations require the aggregate purchase price of the
Conversion Stock to be consistent with FinPro's pro forma appraisal of the
Common Stock, which was $130,000,000 as of August 13, 1998. The holders of the
Public Mid-Tier Holding Company Shares will continue to hold the same aggregate
percentage ownership interest in the Company as they held in the Mid-Tier
Holding Company as adjusted to reflect the dividends waived by the MHC and
before giving effect to any shares of Common Stock purchased by the Mid-Tier
Holding Company's Shareholders in the Offerings, the exercise of any existing
options issued under the 1995 Stock Option Plan and the payment of cash in lieu
of issuing fractional Exchange Shares. As a result, the Appraisal was multiplied
by the MHC's adjusted percentage interest in the Mid-Tier Holding Company, which
corresponds with the amount of Conversion Stock to be sold in the Offerings
(I.E., 51.86%), to determine the midpoint of the Estimated Valuation Range,
which was $67,417,770. In accordance with OTS regulations, the minimum and
maximum of the Estimated Valuation Range were set at 15% below and above the
midpoint, respectively, resulting in an offering range for the Conversion Stock
of $57,306,590 to $77,531,430. The full text of the appraisal report of FinPro
describes the procedures followed, the assumptions made, limitations on the
review undertaken and matters considered. The appraisal report has been filed as
an exhibit to the Registration Statement and Application for Conversion of which
this Prospectus is a part, and is available in the manner set forth under
"Additional Information." THIS APPRAISAL OF THE CONVERSION STOCK IS NOT INTENDED
AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE
ADVISABILITY OF PURCHASING SUCH STOCK.
All shares of Conversion Stock will be sold at the Purchase Price of
$10.00 per share, which was established by the Boards of Directors of the
Primary Parties. The actual number of shares to be issued in the Offerings will
be determined by the Primary Parties based upon the final updated valuation of
the estimated pro forma market value of the Conversion Stock at the completion
of the Offerings. The number of shares of Conversion Stock to be issued is
expected to range from a minimum of 5,730,659 shares to a maximum of 7,753,143
shares. Subject to approval of the OTS, the Estimated Valuation Range may be
increased or decreased to reflect market and economic conditions prior to the
completion of the Offerings, and under such circumstances the Primary Parties
may increase or decrease the number of shares of Conversion Stock. No
resolicitation of subscribers will be made and subscribers will not be permitted
to modify or cancel their subscriptions unless (i) the gross proceeds from the
sale of the Conversion Stock are less than the minimum or more than 15% above
the maximum of the current Estimated Valuation Range or (ii) the Offerings are
extended beyond _______ __, 1998. Any increase or decrease in the number of
shares of Conversion Stock will result in a corresponding change in the number
of Exchange Shares, so that upon consummation of the Conversion, the Conversion
Stock and the Exchange Shares will represent approximately 51.86% and 48.14%,
respectively, of the Company's total outstanding shares (excluding cash in lieu
of fractional Exchange Shares). See "Pro Forma Data," "Risk Factors - Possible
Dilutive Effect of Issuance of Additional Shares" and "The Conversion - Stock
Pricing, Exchange Ratio and Number of Shares to be Issued."
Based on the 2,483,816 Public Mid-Tier Holding Company Shares
outstanding as of the date of this Prospectus, and assuming a minimum of
5,730,659 and a maximum of 7,753,143 shares of Conversion Stock are issued in
the Offerings, the Exchange Ratio is expected to range from approximately 2.1416
Exchange Shares to 2.8975 Exchange Shares for each Public Mid-Tier Holding
Company Share outstanding immediately prior to the consummation of the
Conversion. The Exchange Ratio will be affected if any stock options to purchase
shares of Mid-Tier Holding Company Common Stock are exercised after the date
hereof and prior to consummation of the Conversion. If any of such stock options
are outstanding immediately prior to consummation of the Conversion, they will
be converted into options to purchase shares of Common Stock, with the number of
shares subject to the option and the exercise price per share to be adjusted
based upon the Exchange Ratio so that the aggregate exercise price remains
unchanged, and with the duration of the option remaining unchanged. As of the
date hereof, there were options to purchase 214,350 shares of Mid-Tier Holding
Company Common Stock outstanding which had exercise prices ranging from $11.125
to $19.016
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per share. The Mid-Tier Holding Company has no plans to grant additional stock
options prior to the consummation of the Conversion.
The following table sets forth, based upon the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range, the
following: (i) the total number of shares of Conversion Stock and Exchange
Shares to be issued in the Conversion, (ii) the percentage of the total Common
Stock represented by the Conversion Stock and the Exchange Shares, and (iii) the
Exchange Ratio. The table assumes that there are no fractional Exchange Shares.
<TABLE>
<CAPTION>
Conversion Stock to Be Total Shares of
Issued(1) Exchange Shares to be Issued(1) Common Stock to
--------------------------- ------------------------------ be Exchange
Amount Percent Amount Percent Outstanding(1) Ratio(1)
------------ ------------ ----------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Minimum .............. 5,730,659 51.86% 5,319,341 48.14% 11,050,000 2.1416
Midpoint ............. 6,741,777 51.86 6,258,223 48.14 13,000,000 2.5196
Maximum .............. 7,753,143 51.86 7,196,857 48.14 14,950,000 2.8975
15% above maximum .... 8,916,176 51.86 8,276,324 48.14 17,192,500 3.3321
</TABLE>
- ----------
(1) Assumes that outstanding options to purchase 214,350 shares of Mid-Tier
Holding Company Common Stock as of the date of this Prospectus are not
exercised prior to consummation of the Conversion. The Mid-Tier Holding
Company's and the Association's directors and executive officers
currently do not expect to exercise their stock options prior to
consummation of the Conversion.
The final Exchange Ratio will be determined based upon the number of
shares issued in the Offerings in order to maintain the Public Shareholders'
adjusted 48.14% ownership interest in the Mid-Tier Holding Company and will not
be based upon the market value of the Public Mid-Tier Holding Company Shares. As
an example of the Exchange Ratio, at the minimum, midpoint and maximum of the
Estimated Valuation Range, 1,000 Public Mid-Tier Holding Company Shares will be
exchanged for 2,141, 2,519 and 2,897 whole shares of Common Stock, respectively,
plus cash in lieu of any fractional share at the rate of $10.00 per whole share
(which shares and cash have a calculated equivalent estimated value of
$21,416.00, $25,196.00 and $28,975.00 based on the $10.00 Purchase Price of a
share of Common Stock in the Offerings and the aforementioned Exchange Ratios).
However, there can be no assurance as to the actual market value of a share of
Common Stock after the Conversion or that such shares could be sold at or above
the $10.00 Purchase Price.
DELIVERY AND EXCHANGE OF CERTIFICATES
Upon consummation of the Conversion, holders of Public Mid-Tier Holding
Company Shares in certificate form (other than the MHC) will receive a
transmittal letter with instruction on delivery of certificates for exchange.
See "The Conversion - Delivery and Exchange of Certificates." Upon surrender of
such certificates to an agent appointed by the Mid-Tier Holding Company (the
"Exchange Agent"), a Public Shareholder will be entitled to receive in exchange
therefore a certificate or certificates representing the number of full Exchange
Shares to which he or she is entitled based on the Exchange Ratio. The Exchange
Agent will provide each shareholder of record a letter of transmittal with
instructions for the exchange of shares. Shares of Mid-Tier Holding Company
Common Stock held in the Mid-Tier Holding Company's Dividend Reinvestment Plan
will also be exchanged for Common Stock pursuant to the Exchange Ratio. HOLDERS
OF MID-TIER HOLDING COMPANY COMMON STOCK SHOULD NOT FORWARD SHARES TO THE
ASSOCIATION OR EXCHANGE AGENT UNTIL THEY HAVE RECEIVED INSTRUCTIONS FROM THE
EXCHANGE AGENT.
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BENEFITS OF CONVERSION TO DIRECTORS AND OFFICERS
STOCK OPTION AND RECOGNITION PLANS. The Company intends to adopt
certain stock benefit plans for the benefit of directors, officers and employees
of the Company and the Association and to submit such plans to shareholders for
approval at an annual or special meeting of shareholders of the Company to be
held at least six months following the consummation of the Conversion. The
proposed benefit plans are as follows: (i) a 1999 Stock Option Plan, pursuant to
which a number of authorized but unissued shares of Common Stock equal to 10% of
the Conversion Stock sold in the Offerings (775,314 shares at the maximum of the
Estimated Valuation Range) will be reserved for issuance pursuant to stock
options and stock appreciation rights to directors, officers and employees; and
(ii) a 1999 Recognition and Retention Plan and Trust Agreement (the "1999
Recognition Plan"), which will, following the receipt of shareholder approval,
purchase a number of shares of Common Stock, with funds contributed by the
Company, either from the Company or in the open market equal to 4% of the
Conversion Stock sold in the Offerings (310,125 shares at the maximum of the
Estimated Valuation Range) for distribution to directors, officers and
employees. For stock option and restricted stock plans implemented within one
year following the Conversion, current OTS regulations provide that individual
members of management may receive a maximum of 25% of the shares granted
pursuant to any stock option or non-tax qualified stock benefit plan and
directors who are not employees may receive a maximum of 5% of such stock (or
stock options) individually and a maximum of 30% in the aggregate under any such
plan. In the event that the 1999 Recognition Plan purchases shares of Common
Stock in the open market with funds contributed by the Company, the cost of such
shares initially will be deducted from the Company's shareholders' equity, but
the number of outstanding shares of Common Stock will not increase and
shareholders accordingly will not experience dilution of their ownership
interest. In the event that the 1999 Recognition Plan purchases shares of Common
Stock from the Company with funds contributed by the Company, total
shareholders' equity would neither increase nor decrease, but under such
circumstances shareholders would experience dilution of their ownership
interests (by 2.0% at the maximum of the Estimated Valuation Range) and per
share shareholders' equity and per share net earnings (as awards vest) would
decrease as a result of an increase in the number of outstanding shares of
Common Stock. In either case, the Company will incur operating expense and
increases in shareholders' equity as the shares held by the 1999 Recognition
Plan are granted and issued in accordance with the terms thereof. For a
presentation of the effects of anticipated purchases of Common Stock by the 1999
Recognition Plan, see "Pro Forma Data."
Although no specific award determinations have been made, upon receipt
of shareholder approval of the 1999 Stock Option Plan, the Company anticipates
granting stock options for shares of Common Stock to directors, executive
officers and other key personnel. A total of 75% of the Common Stock to be
reserved for issuance pursuant to the 1999 Stock Option Plan will be available
for the grant of stock options to executive officers and key employees of the
Association. The 1999 Stock Option Plan will be administered by a committee of
two or more non-employee members of the Board of Directors of the Company within
the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended
("Exchange Act"). Such persons shall also meet the definition of "outside
director" for purposes of Section 162(m) of the Internal Revenue Code of 1986,
as amended (the "Code"). In addition, pursuant to the 1999 Stock Option Plan,
25% of the shares of Common Stock to be reserved for issuance pursuant to the
1999 Stock Option Plan will be available for the grant of compensatory stock
options to outside directors of the Company. All of the stock options will be
granted at no cost to the recipients, although the recipients will be required
to pay the applicable exercise price at the time of exercise in order to receive
the underlying shares of Common Stock. Following receipt of shareholder approval
of the 1999 Recognition Plan, the Company intends to award shares of Common
Stock pursuant to such plan to certain directors, officers and employees at no
cost to the recipients. See "Management - New Stock Benefit Plans" and "Risk
Factors - Possible Dilutive Effect of Issuance of Additional Shares."
The foregoing plans are in addition to a 1995 Stock Option Plan and a
1995 Recognition and Retention Plan for Employees and Outside Directors ("1995
Recognition Plan") which were adopted by the Association following the MHC
Reorganization and subsequently approved by the shareholders of the Association.
These plans will continue in existence after the Conversion as plans of the
Company, with appropriate changes to reflect the Exchange Ratio. See "Management
- - Existing Stock Options" and "The Conversion - Effects of the Conversion -
Effect on Existing Compensation Plans."
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ESOP. The Company's ESOP intends to purchase 8% of the Conversion Stock
to be sold in the Offerings (620,251 shares or $6.2 million of Conversion Stock
at the maximum of the Estimated Valuation Range) with a loan funded by the
Company. See "Use of Proceeds." In the event that the total number of shares of
Conversion Stock sold in the Offerings is increased to an amount greater than
the number of shares representing the maximum of the Estimated Valuation Range,
the ESOP will have a priority right to purchase such increased number up to an
aggregate of 8% of the Conversion Stock. See "Management - Employee Stock
Ownership Plan" and "The Conversion - The Offerings Subscription Offering."
PRO FORMA EFFECTS. For presentations of the pro forma effects of the
1999 Recognition Plan and the ESOP on the net income of the Company (which was
estimated to aggregate $.02 and $.05 per share during the six months ended June
30, 1998 and the year ended December 31, 1997, respectively, at the midpoint of
the Estimated Valuation Range) and its shareholders' equity, see
"Capitalization" and "Pro Forma Data."
EMPLOYMENT AGREEMENTS. [DISCLOSURE WITH RESPECT TO PROPOSED EMPLOYMENT
AND SEVERANCE AGREEMENTS WITH SENIOR OFFICERS OF THE COMPANY AND/OR THE
ASSOCIATION TO BE PROVIDED BY AMENDMENT.] See "Management - Employment
Agreements."
USE OF PROCEEDS
Net proceeds from the sale of the Conversion Stock are estimated to be
between $55.8 million and $75.9 million ($87.5 million assuming an increase in
the Estimated Valuation Range by 15%). See "Pro Forma Data." The Company plans
to contribute to the Association 50% of the net proceeds from the Offerings
(after deduction for the loan to be made to the ESOP and funds to be contributed
to the 1999 Recognition Plan) and retain the remainder of the net proceeds. The
Company intends to use a portion of the net proceeds retained by it to make a
loan directly to the ESOP to enable the ESOP to purchase 8% of the Conversion
Stock. The amount of the loan is expected to be between $4.6 million and $6.2
million at the minimum and maximum of the Estimated Valuation Range,
respectively. It is anticipated that the loan to the ESOP will have a term of
not less than 15 years and a fixed interest rate at the prime rate as of the
date of the loan. See "Management - Employee Stock Ownership Plan." Funds
retained by the Company may be used to support the future expansion of
operations or diversification into other banking-related businesses and for
other business or investment purposes, including the opening or acquisition of
other branch offices. There are no current plans, arrangements, understandings
or agreements regarding such diversification or acquisitions. Subject to
applicable limitations and then-existing circumstances, such funds also may be
used in the future to repurchase shares of Common Stock. See "The Conversion -
Certain Restrictions on Purchases or Transfer of Shares After the Conversion."
Funds contributed to the Association from the Company will be used for general
business purposes. The proceeds will be used to support the Association's
lending and investment activities and thereby enhance the Association's
capabilities to serve the borrowing and other financial needs of the communities
it serves. See "Use of Proceeds."
DIVIDEND POLICY
Since the completion of the first quarter after the MHC Reorganization
(I.E. December 31, 1994), until adoption of the Plan, the Mid-Tier Holding
Company or the Association has paid a regular quarterly dividend. For the
quarters ended March 31, 1998 and June 30, 1998, that dividend was $.225 per
share. Following consummation of the Conversion, the Board of Directors of the
Company intends to declare cash dividends on the Common Stock at an initial
quarterly rate equal to no less than $.225 ($.90 annualized) per share on the
total Public Mid-Tier Holding Company Shares outstanding immediately preceding
the consummation of the Conversion, commencing with the first quarter following
consummation of the Conversion. For example, based upon the Exchange Ratio of
2.5196 at the midpoint of the Estimated Valuation Range, the cash dividend after
the Conversion would be approximately $.0893 per share per quarter. Declarations
of dividends by the Company's Board of Directors will depend upon a number of
factors, including the amount of the net proceeds from the Offerings retained by
the Company, investment opportunities available to the Company or the
Association, capital requirements, regulatory limitations, the Company's and the
16
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Association's financial condition and results of operations, tax considerations
and general economic conditions. Consequently, there can be no assurance that
dividends will in fact be paid on the Common Stock or that, if paid, such
dividends will not be reduced or eliminated in future periods. The Mid-Tier
Holding Company intends to continue to pay regular quarterly dividends through
either the date of consummation of the Conversion (on a pro rata basis) or the
end of the fiscal quarter during which the consummation of the Conversion
occurs. For a period of one year following completion of the Conversion, the
Company will neither pay any dividends that would be treated for tax purposes as
a return of capital nor take any actions towards or propose such dividends. See
"Dividend Policy."
DISSENTERS' RIGHTS AND RIGHTS OF APPRAISAL
Pursuant to 12 C.F.R. Section 552.14, Public Shareholders will not have
dissenters' rights or rights of appraisal in connection with the Conversion.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors.
17
- --------------------------------------------------------------------------------
<PAGE>
SELECTED FINANCIAL DATA
(Dollars in Thousands, except Per Share Data)
Set forth below are selected consolidated financial and other data of
the Mid-Tier Holding Company and its wholly owned subsidiary, the Association.
This information is derived in part from and should be read in conjunction with
the Consolidated Financial Statements of the Mid-Tier Holding Company and the
notes thereto presented elsewhere in the Prospectus. The consolidated financial
statements, from which the Selected Consolidated Financial Condition and
Operating Data at or for the six month periods ended June 30, 1998 and 1997 is
derived, are unaudited. However, in the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
at such dates and for such periods have been made. The results of operations for
the six month periods ended June 30, 1998 and 1997 are not necessarily
indicative of results that may be expected for a full fiscal year. Effective
with the year and three months ended December 31, 1996, the fiscal year of all
related entities was changed from September 30 to December 31.
<TABLE>
<CAPTION>
AT AT
AT DECEMBER 31, SEPTEMBER 30,
JUNE 30, -------------------- ----------------------------------------------
1998 1997 1996 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED
FINANCIAL CONDITION DATA:
Total assets ................. $ 765,488 $ 720,133 $ 655,209 $ 650,332 $ 567,006 $ 560,268 $ 523,248
Cash and cash equivalents .... 47,425 25,954 42,442 44,780 42,497 89,843 35,188
Securities available for sale 91,316 142,269 123,152 124,287 27,028 26,729 69,459
Investments - held to maturity 21,443 21,388 22,139 22,293 59,679 52,204 43,789
Mortgage-backed securities -
held to maturity ............ 41,884 46,413 53,405 54,945 77,499 41,281 14,290
Loans receivable, net ........ 527,375 451,709 389,040 376,219 329,442 317,117 328,747
Real estate owned ............ 711 592 1,455 1,384 1,910 3,686 1,324
Deposits ..................... 574,383 550,708 513,709 498,929 437,376 459,979 450,356
Borrowed funds ............... 91,513 75,098 53,908 55,867 39,101 19,233 20,113
Total shareholders' equity ... 83,078 81,259 76,119 75,056 72,848 38,110 34,846
Shareholders' equity per share $ 16.66 $ 16.39 $ 15.50 $ 15.33 $ 15.04 -- --
Shares, allocated and out-
standing, end of period ..... 4,985,288 4,958,217 4,909,676 4,895,282 4,843,344 -- --
</TABLE>
<TABLE>
<CAPTION>
THREE
SIX MONTHS ENDED YEAR ENDED MONTHS ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, YEAR ENDED SEPTEMBER 30,
----------------------- ----------- ------------ -------------------------------------------------
1998 1997 1997 1996 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED
OPERATING DATA:
Interest income .............. $ 26,827 $ 24,577 $ 50,316 $ 11,896 $ 43,889 $ 37,720 $ 34,130 $ 39,747
Interest expense ............. 14,655 13,260 27,390 6,378 22,859 18,634 15,525 17,639
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income ....... 12,172 11,317 22,926 5,518 21,030 19,086 18,605 22,108
Provision for loan losses .... 213 83 264 243 98 240 989 2,398
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 11,959 11,234 22,662 5,275 20,932 18,846 17,616 19,710
Other income ................. 1,756 1,862 4,185 1,225 3,544 3,394 3,317 5,093
Operating expense(1) ......... 9,846 8,805 18,561 4,644 19,800 14,903 14,939 15,614
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before provision
for income taxes ........... 3,869 4,291 8,286 1,856 4,676 7,337 5,994 9,189
Provision for income taxes ... 1,358 1,556 2,930 696 761 2,763 2,257 3,788
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income ................... $ 2,511 $ 2,735 $ 5,356 $ 1,160 $ 3,915 $ 4,574 $ 3,737 $ 5,401
========== ========== ========== ========== ========== ========== ========== ==========
Earnings per share - basic ... $ 0.51 $ 0.55 $ 1.09 $ 0.24 $ 0.80 $ 0.94 $ -- $ --
========== ========== ========== ========== ========== ========== ========== ==========
Earnings per share - diluted . $ 0.49 $ 0.54 $ 1.06 $ 0.23 $ 0.79 $ 0.94 $ -- $ --
========== ========== ========== ========== ========== ========== ========== ==========
Cash dividends per share(2) .. $ 0.45 $ 0.45 $ 0.90 $ 0.20 $ 0.75 $ 0.59 $ -- $ --
========== ========== ========== ========== ========== ========== ========== ==========
Basic weighted average
common shares outstanding . 4,970,782 4,919,960 4,929,989 4,902,479 4,869,238 4,845,384 -- --
========== ========== ========== ========== ========== ========== ========== ==========
Diluted weighted average
common shares outstanding .. 5,116,956 5,021,739 5,054,853 4,951,820 4,936,763 4,882,658 -- --
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Three months
Six months ended Year ended ended
June 30,(3) December 31, December 31,(3) Year ended September 30,
---------------- ------------ --------------- ------------------------------------
1998 1997 1997 1996 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
KEY FINANCIAL AND OTHER DATA(4):
PERFORMANCE RATIOS:
Return on average assets (1)...... 0.67% 0.80% 0.77% 0.71% 0.64% 0.84% 0.71% 1.01%
Return on average equity (1)...... 6.10 7.08 6.80 6.11 5.25 6.66 10.27 17.02
Net interest rate spread (5)...... 3.14 3.15 3.13 3.16 3.24 3.40 3.69 4.43
Net interest margin (5)........... 3.47 3.53 3.51 3.58 3.65 3.78 3.79 4.50
Other income to average assets .. 0.47 0.55 0.60 0.75 0.55 0.62 0.63 0.96
Operating expense to
average assets (1)............ 2.63 2.59 2.68 2.85 3.20 2.74 2.82 2.93
Net interest income to
operating expenses (1)........ 123.62 128.53 123.52 118.82 106.21 128.07 124.54 141.59
Average interest-earning
assets to average
interest-bearing liabilities . 108.06 109.05 109.06 110.15 110.47 110.09 103.08 101.86
ASSET QUALITY RATIOS:
Non-performing assets to
total assets at end
of period (6)................... 0.27 0.40 0.47 0.47 0.4 0.45 1.25 1.54
Allowance for loan losses to
non-performing loans at
end of period ................ 202.56 177.49 193.04 155.86 274.58 527.49 114.72 55.65
Allowance for loan losses to net
loans receivable at
end of period ................ 0.52 0.63 0.59 0.65 0.61 1.06 1.07 1.14
CAPITAL RATIOS:
Average equity to average assets . 11.00 11.37 11.37 11.65 12.20 12.72 6.89 5.96
Shareholders' equity to assets at
end of period ................ 10.85 11.24 11.28 11.62 11.54 12.85 6.80 6.65
OTHER DATA:
Number of full service offices ... 21 20 21 19 19 18 17 17
</TABLE>
- ----------------
(1) Includes for the year ending September 30, 1996, a one-time SAIF special
assessment expense of $2.8 million ($1.8 million, net of taxes). Without
this one-time assessment, return on average assets, return on average
equity, operating expenses to average assets and net interest income to
operating expense would have been 0.93%, 7.54%, 2.77% and 123.86%,
respectively.
(2) Cash dividends are declared on Public Mid-Tier Holding Company Shares only.
The MHC has waived receipt of all dividends since the MHC Reorganization.
(3) Ratios for the periods ended June 30, 1998 and 1997 and the three months
ended December 31, 1996 have been presented on an annualized basis.
(4) Ratios are based on the average monthly balances except at end of period
ratios.
(5) Net interest rate spread represents the difference between the average
yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earning assets.
(6) Non-performing assets include non-performing loans and real estate owned.
In addition, the year ended September 30, 1996 includes a claim for a
deposit account which was recovered in its entirety in a later period.
(7) Non-performing loans are loans which are not performing in accordance with
the terms of the loan agreement and on which the Association has ceased
accruing interest.
19
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS, IN ADDITION TO THOSE DISCUSSED ELSEWHERE IN
THIS PROSPECTUS, SHOULD BE CAREFULLY CONSIDERED BY INVESTORS IN DECIDING WHETHER
TO PURCHASE THE COMMON STOCK OFFERED HEREBY.
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION; UNCERTAINTY AS TO
FUTURE GROWTH OPPORTUNITIES
At June 30, 1998, the Mid-Tier Holding Company' ratio of equity to
assets was 10.9%. The Company's equity position will be significantly increased
as a result of the Conversion. On a pro forma basis as of June 30, 1998,
assuming the sale of Common Stock at the midpoint of the Estimated Valuation
Range, the Company's ratio of equity to assets would be 17.1%. The Company's
ability to leverage this capital will be significantly affected by industry
competition for loans and deposits. The Company currently anticipates that it
will take time to prudently deploy such capital. As a result, the Company's
return on equity initially is expected to be below the industry average after
the Conversion.
In an effort to fully deploy post-Conversion capital, in addition to
attempting to increase its loan and deposit growth, the Company may seek to
expand its banking franchise by opening new branches. The Company's ability to
expand by establishing new branch offices will depend on its ability to identify
advantageous branch office locations and generate new deposits and loans from
those locations that will create an acceptable level of return to the Company.
There can be no assurance the Company will be able to generate internal growth
or successfully integrate any new or acquired branches into the Company. The
Association has acquired to placed deposits on four parcels of land for possible
future branch sites, which sites may be developed over the next three years. See
"Business - Properties." Other than as described herein, neither the Company nor
the Association has any specific plans, arrangements or understandings regarding
any such expansions or acquisitions at this time.
PRICE OF COMMON STOCK FOLLOWING THE CONVERSION
Since the MHC Reorganization and public stock issuance on October 24,
1994, the Mid-Tier Holding Company Common Stock and its predecessor, the
Association Common Stock, has increased in value. The Association's Common Stock
(which was exchanged for Mid-Tier Holding Company Common Stock on a one-for-one
basis) were initially sold to the public at $15.00 per share. On ______ __,
1998, the date of this Prospectus, the closing price of the Public Mid-Tier
Holding Company Shares was $_____. There can be no assurance that the Conversion
Stock will appreciate in value as have the Public Mid-Tier Holding Company
Shares. Additionally, there can be no assurance that the Common Stock will
appreciate after the Conversion. The Boards of Directors of the Primary Parties
have set an offering price for the Conversion Stock of $10.00 a share. However,
the pricing of this stock should in no way be seen as an indication or assurance
that the Conversion Stock or the Common Stock will appreciate after the
Conversion in the same manner as the Public Mid-Tier Holding Company Shares. In
addition, the trading prices in the open market of common securities issued in
other recently completed second step conversions of mutual holding companies
have in most cases traded below the initial offering price of such securities in
the conversion of such institutions.
POSSIBLE DILUTION TO PUBLIC SHAREHOLDERS AS A RESULT OF PURCHASE LIMITATIONS
The OTS has required that the aggregate purchase limitation contained
in the Plan of Conversion include Exchange Shares to be issued to Public
Shareholders for their Public Mid-Tier Holding Company Shares. As a result,
certain holders of Public Shares may be limited in their ability to purchase
Conversion Stock in the Offerings. For example, a Public Shareholder which
acquires 77,531 Exchange Shares will not be able to purchase any shares of
Conversion Stock in the Offerings, although such a shareholder will be able to
purchase shares of Mid-Tier Holding Company Common Stock in the market during
the Offerings and thereafter. As a result, the purchase limitation may prevent
such shareholders from maintaining their current ownership percentage of the
Mid-Tier Holding Company after the Conversion through purchases of Conversion
Stock in the Offerings. See "The Conversion - Limitations on Conversion Stock
Purchases."
20
<PAGE>
INTENT TO REMAIN INDEPENDENT; UNSUITABILITY AS A SHORT-TERM INVESTMENT
The Association and its predecessors have operated as independent
community-oriented savings associations since 1955. Following the Conversion,
the Company intends to continue to operate as an independent financial
institution. Accordingly, the Common Stock may not be a suitable investment for
individuals anticipating a rapid sale of the Company to a third party.
Also due to the Company's intention to remain independent, certain
provisions in the Company's Certificate of Incorporation and Bylaws may assist
the Company in maintaining its status as an independent publicly owned
corporation. These provisions, as well as the Delaware General Corporation Law
("DGCL") and certain federal regulations, may have certain anti-takeover
effects. Such provisions include, among others, restriction on the acquisition
of the Company's equity securities and limitations on voting rights, the
classification of the terms of the members of the Board of Directors, certain
provisions relating to special meetings of shareholders, noncumulative voting by
shareholders in the election of directors, the issuance of preferred stock and
additional shares of Common Stock without shareholder approval, and
supermajority provisions for the approval of certain business combinations. See
"Restrictions on Acquisition of the Company." As a result, shareholders who
might wish to participate in a change of control transaction may not have the
opportunity to do so.
POTENTIAL EFFECTS OF CHANGES IN INTEREST RATES AND THE CURRENT INTEREST RATE
ENVIRONMENT
The operations of the Association are substantially dependent on its
net interest income, which is the difference between the interest income earned
on its interest-earning assets and the interest expense paid on its
interest-bearing liabilities. Like most savings institutions, the Association's
earnings are affected by changes in market interest rates, and other economic
factors beyond its control. While the Association's average interest rate spread
increased slightly from 3.13% for fiscal 1997 to 3.14% for the six months ended
June 30, 1998, no assurance can be given that the Association's average interest
rate spread will not decrease in future periods. Any future decrease in the
Association's average interest rate spread could adversely affect the
Association's net interest income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risk Analysis."
If an institution's interest-earning assets have shorter effective
maturities than its interest-bearing liabilities, the yield on the institution's
interest-earning assets generally will adjust more rapidly than the cost of its
interest-bearing liabilities and, as a result, the institution's net interest
income generally would be adversely affected by material and prolonged increases
in interest rates and positively affected by comparable declines in interest
rates. The Association attempts to reduce the vulnerability of its operations to
changes in interest rates by maintaining significant amounts of assets with
relatively short terms and/or adjustable rates of interest. The difference in
the dollar amount of interest-earning assets and interest-bearing liabilities
expressed as a percentage of total assets is a measure of interest rate risk and
is referred to as an institution's interest sensitivity gap. Based upon certain
repricing assumptions, at June 30, 1998 the Association's interest-earning
assets repricing or maturing within one year exceeded its interest-bearing
liabilities with similar characteristics by $3.4 million or .44% of total
assets. Accordingly, an increase in interest rates generally would result in an
increase in the Association's average interest rate spread and net interest
income. Savings and NOW accounts which could reprice within one year are assumed
to reprice in varying rates over several years. If these deposits were all to
reprice within one year, it would result in a negative one-year gap position of
$70.0 million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Market Risk Analysis."
In addition to affecting interest income and expense, changes in
interest rates also can affect the value of the Association's interest-earning
assets, which are comprised of fixed and adjustable-rate instruments, and the
ability to realize gains from the sale of such assets. Generally, the value of
fixed-rate instruments fluctuates inversely with changes in interest rates. At
June 30, 1998, the Association had $91.3 million of investment and
mortgage-backed securities available for sale ($48.0 million of which had
fixed-rates of interest). The Association had $433,000 of net unrealized losses
with respect to such securities, which were included as a separate component in
the Mid-Tier Holding Company shareholders' equity, net of tax benefit, as of
such date.
21
<PAGE>
The OTS has delayed indefinitely implementing an interest rate risk
component into its risk-based capital rules, which is designed to calculate on a
quarterly basis the extent to which the value of an institution's assets and
liabilities would change if interest rates increase or decrease. If the net
portfolio value of an institution would decline by more than 2% of the estimated
market value of the institution's assets in the event of a 200 basis point
increase or decrease in interest rates, then the institution is deemed to be
subject to a greater than "normal" interest rate risk and must deduct from its
capital 50% of the amount by which the decline in net portfolio value exceeds 2%
of the estimated market value of the institution's assets, as of an effective
date to be determined. As of June 30, 1998, if interest rates increased by 200
basis points, the Association's net portfolio value would decrease by $19.5
million, or 19.0% of the estimated portfolio value of the Association's assets,
using assumptions provided by the OTS. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Market Risk Analysis."
Changes in interest rates also can affect the average life of loans and
mortgage-related securities. Decreases in interest rates in recent periods have
resulted in increased prepayments of loans and mortgage-related securities, as
borrowers refinanced to reduce borrowing costs. Under these circumstances, the
Association is subject to reinvestment risk to the extent that it is not able to
reinvest such prepayments at rates which are comparable to the rates on the
maturing loans or securities. See "Business - Lending Activities."
In addition, at June 30, 1998, the Association had $574.4 million of
deposits, of which $241.3 million or 42.0% consisted of certificates of deposit
maturing in one year or less. An increase in interest rates could result in a
decline in deposits, a higher average cost of deposits, or both.
RISKS RELATED TO COMMERCIAL REAL ESTATE LOANS, MULTI-FAMILY RESIDENTIAL REAL
ESTATE LOANS, CONSTRUCTION AND LAND LOANS
Commercial real estate, multi-family residential real estate,
construction and land lending generally is considered to involve a higher degree
of risk than single-family residential lending due to a variety of factors,
including generally larger loan balances, the dependency on successful operation
of the project for repayment, loan terms which often do not require full
amortization of the loan over its term, and the need to successfully develop
and/or sell the property. In addition, risk of loss on a construction loan
largely depends upon the accuracy of the initial estimate of the property's
value at completion of construction or development and the estimated cost
(including interest) of construction. During the construction phase, a number of
factors could result in delays and cost overruns. If the estimate of value
proves to be inaccurate, the Association may be confronted, at or prior to the
maturity of the loan, with a project, when completed, having a value which is
insufficient to assure full repayment. Commercial and multi-family residential
real estate loans may involve large loan balances to single borrowers or groups
of related borrowers, with the repayment of such loans typically dependent on
the successful operations and income stream of the borrower. Such risks can be
significantly affected by economic conditions. In addition, commercial and
multi-family residential real estate lending generally requires substantially
greater oversight efforts compared to single-family residential real estate
lending. See "Business -Lending Activities - Multi-Family Residential Real
Estate Loans" "-Commercial Real Estate Loans," "Construction and Land Loans" and
"Asset Quality - Non-Performing Assets."
The following table sets forth certain information regarding the
composition of the Association's loan portfolio with respect to commercial real
estate, multi-family residential, construction and land loans at June 30, 1998.
At June 30, 1998
--------------------------
Percent of
Amount Total Loans
--------- -----------
(Dollars in Thousands)
Commercial ................ $ 46,147 8.32%
Multi-family .............. 8,739 1.58
Land ...................... 12,409 2.24
Construction .............. 47,024 8.49
--------- -----
$ 114,319 20.63%
========= =====
22
<PAGE>
STRONG COMPETITION WITHIN THE ASSOCIATION'S MARKET AREA
The Association faces significant competition in both making loans and
attracting deposits. As of March 31, 1998, the Association held 2.14%, 6.28%,
2.93% and 0.80% of all bank and savings association deposits in Palm Beach,
Martin, St. Lucie and Indian River Counties, respectively. In its market area,
the Association competes with commercial banks, savings institutions, mortgage
brokerage firms, credit unions, finance companies, mutual funds, insurance
companies, and brokerage and investment banking firms operating locally and
elsewhere. Many of these competitors have substantially greater resources and
lending limits than the Association and may offer certain services that the
Association does not or cannot provide. The profitability of the Association
depends upon its continued ability to successfully compete in its market area.
GEOGRAPHIC CONCENTRATION OF LOANS
The Association's market area consists primarily of Palm Beach, Martin,
St. Lucie, Indian River and Brevard Counties. In excess of 90% of the
Association's real estate loans are secured by properties located in its market
area. In addition, in excess of 90% of all of its loans are made to residents of
its market area. The economy of the Association's market area is service
oriented and is significantly dependent upon government, foreign trade, tourism
and its continued attraction as a retirement area. Accordingly, the asset
quality of the Association's loan portfolio is highly dependent upon the economy
and the unemployment rate in its market area. No assurance can be given that
downturns, if any, which may occur in the economy in the Association's market
area may not adversely affect the Association's operations in the future.
CERTAIN ANTI-TAKEOVER PROVISIONS
PROVISIONS IN THE COMPANY'S GOVERNING INSTRUMENTS AND DELAWARE LAW.
Certain provisions of the Company's Certificate of Incorporation and Bylaws, as
well as certain provisions in Delaware law, will assist the Company in
maintaining its status as an independent publicly owned corporation. Provisions
in the Company's Certificate of Incorporation and Bylaws provide, among other
things, (i) that the Board of Directors of the Company shall be divided into
three classes; (ii) that special meetings of shareholders may only be called by
the Board of Directors of the Company; (iii) that shareholders generally must
provide the Company advance notice of shareholder proposals and nominations for
director and provide certain specified related information; (iv) noncumulative
voting for the election of directors; (v) that no person may acquire more than
10% of the issued and outstanding shares of any class of equity security of the
Company; (vi) the authority to issue shares of authorized but unissued Common
Stock and preferred stock and to establish the terms of any one or more series
of Preferred Stock, including voting rights (which may be waived by the Board of
Directors under certain circumstances); and (vii) supermajority voting
requirements with respect to certain business transactions involving the
Company. Provisions under DGCL applicable to the Company provide, among other
things, that the Company may not engage in a business combination with an
"interested shareholder" (generally a holder of 15% of a corporation's voting
stock) during the three-year period after the interested shareholder became such
except under certain specified circumstances. In addition, OTS regulations
prohibit, for a period of one year following the date of Conversion, offers to
acquire or the acquisition of beneficial ownership of more than 10% of the
outstanding voting stock of the Company. The above provisions may discourage
potential proxy contests and other potential takeover attempts, particularly
those which have not been negotiated with the Board of Directors, and thus
generally may serve to perpetuate current management. See "Restrictions on
Acquisitions of the Company and the Association."
VOTING POWER OF OFFICERS AND DIRECTORS. Directors and executive
officers of the Company expect to purchase approximately 2.35% or 1.73% of the
shares of Common Stock outstanding based upon the issuance of (i) the Exchange
Shares and (ii) shares of Conversion Stock at the minimum and the maximum of the
Estimated Valuation Range, respectively. See "Proposed Management Purchases."
The Company intends to seek shareholder approval of the Company's
proposed 1999 Recognition Plan, which is a non-tax-qualified restricted stock
plan for the benefit of directors, officers and employees of the Company and the
Association. Assuming the receipt of shareholder approval, which shareholder
approval cannot be obtained earlier than
23
<PAGE>
six months following the Conversion pursuant to OTS regulations, the Company
expects to acquire Common Stock on behalf of the 1999 Recognition Plan in an
amount equal to 4% of the Conversion Stock sold in the Offerings, or 228,146
shares and 310,125 shares at the minimum and maximum of the Estimated Valuation
Range, respectively. These shares will be acquired either through open market
purchases, if permissible, or from authorized but unissued Common Stock. Under
the terms of the 1999 Recognition Plan, recipients of awards will be entitled to
instruct the trustees of the 1999 Recognition Plan as to how the underlying
shares should be voted, and the trustees will be entitled to vote all
unallocated shares in their discretion. If the shares are purchased in the open
market, directors and executive officers would have effective control over ___%
or ___% of the Common Stock outstanding at such time based upon the issuance of
the (i) Exchange Shares and (ii) shares of Conversion Stock at the minimum and
the maximum of the Estimated Valuation Range, respectively, before giving effect
to the potential exercise of any stock options by directors and officers of the
Company and the Association, and shares held by the ESOP. If approved by
shareholders at a meeting held no earlier than six months following the
Conversion, the Company intends to reserve for future issuance pursuant to the
1999 Stock Option Plan a number of authorized shares of Common Stock equal to an
aggregate of 10% of the Conversion Stock sold in the Offerings (775,314 shares,
based on the issuance of the maximum 7,753,143 shares). See "Management - New
Stock Benefit Plans." Management's potential voting control could, together with
additional shareholder support, preclude or make more difficult takeover
attempts that certain shareholders deem to be in their best interest and may
tend to perpetuate existing management.
PROVISIONS OF STOCK BENEFIT PLANS AND EMPLOYMENT AGREEMENTS. The ESOP
provides for accelerated vesting in the event of a change in control. In
addition, it is possible that the 1999 Stock Option Plan and the 1999
Recognition Plan may not be implemented until more than one year following
completion of the Conversion, and, in such event, such plans could provide for
accelerated vesting in the event of a change in control of the Company.
[DISCLOSURE REGARDING EMPLOYMENT AND/OR SEVERANCE AGREEMENTS TO BE ADDED BY
AMENDMENT.] See "Restrictions on Acquisition of the Company and the Association
- - Restrictions in the Company's Certificate of Incorporation and Bylaws,"
"Management - New Stock Benefit Plans" and "Management - Employment Agreements."
REGULATORY OVERSIGHT AND LEGISLATION
The Association is subject to extensive regulation, supervision and
examination by the OTS, as its chartering authority, and by the FDIC as insurer
of its deposits up to applicable limits. The Association is a member of the FHLB
System and is subject to certain limited regulations promulgated by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). As the
holding company of the Association, the Company also will be subject to
regulation and oversight by the OTS. Such regulation and supervision govern the
activities in which an institution can engage and are intended primarily for the
protection of the insurance fund and depositors. Regulatory authorities have
been granted extensive discretion in connection with their supervisory and
enforcement activities which are intended to strengthen the financial condition
of the banking and thrift industries, including the imposition of restrictions
on the operation of an institution, the classification of assets by the
institution and the adequacy of an institution's allowance for loan losses. Any
change in such regulation and oversight, whether by the OTS, the FDIC or
Congress, could have a material impact on the Company, the Association and their
respective operations. See "Regulation."
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIF")
was enacted into law. The DIF Act contemplates the development of a common
charter for all federally chartered depository institutions and the abolition of
separate charters for national banks and federal savings institutions. It is not
known what form the common charter may take and what effect, if any, the
adoption of a new charter would have on the financial condition or results of
operations of the Association. See "Regulation - The Association."
Legislation is proposed periodically providing for a comprehensive
reform of the banking and thrift industries, and has included provisions that
would (i) require federal savings institutions to convert to a national bank or
a state-chartered bank or thrift, (ii) require all savings and loan holding
companies to become bank holding companies, and (iii) abolish the OTS. It is
uncertain when or if any of this type of legislation will be passed, and, if
passed, in what form the legislation would be passed. As a result, management
cannot accurately predict the possible impact of such legislation on the
Association.
24
<PAGE>
POSSIBLE INCREASE IN NUMBER OF SHARES ISSUED IN THE CONVERSION
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Valuation Range of up to 15% to reflect
changes in market and financial conditions prior to completion of the Conversion
or to fill the order of the ESOP. In the event that the Estimated Valuation
Range is so increased, it is expected that the Company will issue up to
8,916,176 shares of Conversion Stock at the Purchase Price for an aggregate
price of up to $89,161,760. An increase in the number of shares will decrease
net income per share and shareholders' equity per share on a pro forma basis and
will increase the Company's consolidated shareholders' equity and net income.
Such an increase will also increase the Purchase Price as a percentage of pro
forma shareholders' equity per share and net income per share.
The ESOP currently intends to purchase 8% of the Conversion Stock sold
in the Offerings. In the event that the number of shares to be sold in the
Conversion are increased as a result of an increase in the Estimated Valuation
Range, the ESOP shall have a first priority to purchase all shares of Conversion
Stock sold in the Offerings in excess of 7,753,143 shares, up to a maximum of 8%
of the total number of shares of Conversion Stock sold in the Offerings. See
"Pro Forma Data" and "The Conversion - Stock Pricing, Exchange Ratio and Number
of Shares to be Issued."
POSSIBLE DILUTIVE EFFECT OF ISSUANCE OF ADDITIONAL SHARES
If the 1999 Recognition Plan is approved by shareholders of the
Company, the 1999 Recognition Plan intends to acquire an amount of Conversion
Stock equal to 4% of the shares of Conversion Stock sold in the Offerings. If
such shares are acquired at a per share price equal to the Purchase Price, the
cost of such shares would be $3.1 million, assuming the Conversion Stock sold in
the Offerings is equal to the maximum of the Estimated Valuation Range. Such
shares of Common Stock may be acquired in the open market with funds provided by
the Company, if permissible, or from authorized but unissued shares of Common
Stock. In the event that the 1999 Recognition Plan acquires authorized but
unissued shares of Common Stock from the Company, the interests of existing
shareholders will be diluted. The issuance of authorized but unissued shares of
Common Stock to such plan in an amount equal to 4% of the Conversion Stock sold
in the Offerings would dilute the voting interests of existing shareholders by
approximately 2.0%and net income per share and shareholders' equity per share
would be decreased by a corresponding amount. See "Pro Forma Data" and
"Management - New Stock Benefit Plans - Recognition Plan."
If the 1999 Stock Option Plan is approved by shareholders of the
Company, the Company intends to reserve for future issuance pursuant to such
plan a number of shares of Common Stock equal to an aggregate of 10% of the
Conversion Stock sold in the Offerings (775,314 shares, based on the issuance of
the maximum 7,753,143 shares). Such shares may be authorized but previously
unissued shares, treasury shares or shares purchased by the Company in the open
market or from private sources. If only authorized but previously unissued
shares are used under such plan, the issuance of the total number of shares
available under such plan would dilute the voting interests of existing
shareholders by approximately 4.9%, and net income per share and shareholders'
equity per share would be decreased by a corresponding amount. See "Pro Forma
Data" and "Management - New Stock Benefit Plans - Stock Option Plan."
The Association also has adopted and maintains the 1995 Stock Option
Plan, which reserves for issuance 222,926 shares of Mid-Tier Holding Company
Common Stock. As of the date of this Prospectus, 15,060 shares had been issued
as a result of the exercise of options granted under such option plan. Upon
consummation of the Conversion, this plan will become the plan of the Company
and Common Stock will be issued in lieu of Mid-Tier Holding Company Common Stock
pursuant to the terms of such plan. See "Management-Existing Stock Options."
INCREASED COMPENSATION EXPENSE AFTER THE CONVERSION
The Association is required to record compensation expense in an amount
equal to the fair value of shares committed to be released to employees from an
employee stock ownership plan instead of an amount equal to the cost basis of
such shares. If the shares of Common Stock appreciate in value over time, this
requirement will result in increased compensation expense with respect to the
ESOP. It is impossible to determine at this time the extent of such impact on
future net income. See "Pro Forma Data." In addition, after consummation of the
Conversion, the Company intends to implement, subject to shareholder approval
(which approval cannot be obtained earlier than six months
25
<PAGE>
subsequent to the Conversion), the 1999 Recognition Plan. Upon implementation,
the release of shares of Common Stock from the 1999 Recognition Plan will result
in additional compensation expense. See "Pro Forma Data" and "Management - New
Stock Benefit Plans - Recognition Plan."
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES
The Company and the Association have received a letter from FinPro
advising them of its belief that subscription rights granted to Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members have no value.
However, this letter is not binding on the Internal Revenue Service ("IRS"). If
the subscription rights granted to Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are deemed to have an ascertainable
value, receipt of such rights would be taxable probably only to those Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members who
exercise the subscription rights (either as capital gain or ordinary income) in
an amount equal to such value. Based upon the letter from FinPro, the Company
does not believe that the receipt of subscription rights should be a taxable
event. However, whether subscription rights are considered to have ascertainable
value is an inherently factual determination. See "The Conversion - Effects of
Conversion" and " - Tax Aspects."
In addition, the Association has received an opinion of Elias, Matz,
Tiernan & Herrick L.L.P., subject to certain assumptions stated therein, that
the mergers constituting the Conversion will qualify under the Code as
reorganizations where no gain or loss will be recognized to the Primary Parties.
However, such opinion is not binding on the IRS. Accordingly, if the IRS were to
successfully assert that the mergers constituting the Conversion either were
part of a step transaction without independent economic significance and
business purpose or that the transactions circumvented the repeal of the
"General Utilities" doctrine, the mergers would not qualify as tax-free
reorganizations resulting in taxable gain to the parties to the transaction. See
"The Conversion -- Effects of the Conversion" and" -- Tax Aspects."
YEAR 2000 COMPLIANCE
As the year 2000 approaches, significant concerns have been expressed
with respect to the ability of existing computer software programs and operating
systems to function properly with respect to data containing dates in the year
2000 and thereafter. Many existing application software products were designed
to accommodate only a two digit year (E.G., 1998 is reflected as "98"). The
Association's operating, processing and accounting operations are computer
reliant and could be affected by the Year 2000 issues. The Association is
reliant on third-party vendors for their data processing needs as well as
certain other significant functions and services (E.G., securities safekeeping
services, securities pricing data, etc.). The Association currently is working
with its third-party vendors in order to assess their Year 2000 readiness. While
no assurance can be given that such third party vendors will be Year 2000
compliant, management believes that such vendors are taking appropriate steps to
address the issues on a timely basis. In addition, as of June 30, 1998, the
Association had contacted all of its commercial credit customers regarding the
customers' awareness of the Year 2000 issue. The Association has completed its
own company-wide contingency plan. Individual contingency plans concerning
specific software and hardware issues are currently being formulated.
Based on certain preliminary estimates, the Association believes that
its expenses related to upgrading its systems and software for Year 2000 issues
will not exceed $2.0 million. Of that amount, approximately $1.2 million and
$39,000 was expensed during the twelve months ended December 31, 1997 and 1996,
respectively. While the Association currently has no reason to believe that the
cost of addressing such issues will materially affect the Association's
products, services or ability to compete effectively, no assurance can be made
that the Association or the third party vendors on which it relies will become
Year 2000 compliant in a successful and timely fashion. Nevertheless, the
Company does not believe that the cost of addressing the Year 2000 issues will
be a material event or uncertainty that would cause reported financial
information not to be necessarily indicative of future operating results or
financial conditions, nor does it believe that the costs or the consequences of
incomplete or untimely resolution of its Year 2000 issues represent a known
material event or uncertainty that is reasonably likely to affect its future
financial results, or cause its reported financial information not to be
necessarily indicative of future operating results or future financial
condition.
26
<PAGE>
IRREVOCABILITY OF ORDERS; POTENTIAL DELAY IN COMPLETION OF OFFERINGS
Orders submitted in the Subscription Offering, Eligible Public
Shareholders Offering or the Community Offering are irrevocable. Funds submitted
in connection with any purchase of Conversion Stock in the Offerings will be
held by the Company until the completion or termination of the Conversion,
including any extension of the Expiration Date. Because, among other factors,
completion of the Conversion will be subject to an update of the independent
appraisal prepared by FinPro, there may be one or more delays in the completion
of the Conversion. Subscribers will have no access to subscription funds and/or
shares of Conversion Stock until the Conversion is completed or terminated.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
anticipated that the net proceeds from the sale of the Conversion Stock will be
between $57.3 million and $77.5 million ($89.2 million assuming an increase in
the Estimated Valuation Range by 15%). See "Pro Forma Data" and "The Conversion
- - Stock Pricing, Exchange Ratio and Number of Shares to be Issued" as to the
assumptions used to arrive at such amounts.
The Company plans to contribute to the Association 50% of the net
Conversion proceeds (after deducting therefrom the amounts to be loaned to the
ESOP and contributed to the 1999 Recognition Plan) and retain the remaining 50%
of the net proceeds. The Company intends to use a portion of the net proceeds to
make a loan directly to the ESOP to enable the ESOP to purchase up to 8% of the
Conversion Stock sold in the Offerings. Based upon the issuance of 5,703,659
shares or 7,753,143 shares at the minimum and maximum of the Estimated Valuation
Range, respectively, the loan to the ESOP would be $4.6 million and $6.2
million, respectively. See "Management -Employee Stock Ownership Plan." The
remaining net proceeds retained by the Company initially may be used to invest
in investment securities, mortgage-backed and related securities, U.S.
Government and federal agency securities of various maturities, deposits in
either the Association or other financial institutions, or a combination
thereof. The portion of the net proceeds retained by the Company may ultimately
be used to support the Association's lending activities, to support the future
expansion of operations, and for other business and investment purposes,
including the payment of regular or special cash dividends, possible repurchases
of the Common Stock or returns of capital (the Company and the Association have
committed that no return of capital will be made on the Common Stock during the
one-year period subsequent to consummation of the Conversion) or the development
of new branch office locations. The Association has acquired or placed deposits
for four parcels of real estate which may be used for new branch offices over
the next three years. Other than as previously disclosed herein, neither the
Association nor the Company has any specific plans, arrangements, or
understandings regarding any branch acquisitions or diversification of
activities at this time.
Following the completion of the Conversion (to the extent permitted by
the OTS), and based upon then existing facts and circumstances, the Company's
Board of Directors may determine to repurchase some shares of Common Stock,
subject to any applicable statutory and regulatory requirements. Such facts and
circumstances may include but not be limited to: (i) market and economic factors
such as the price at which the stock is trading in the market, the volume of
trading, the attractiveness of other investment alternatives in terms of the
rate of return and risk involved in the investment, the ability to increase the
book value and/or earnings per share of the remaining outstanding shares, and an
improvement in the Company's return on equity; (ii) the avoidance of dilution to
shareholders by not having to issue additional shares to cover the exercise of
stock options or to fund employee stock benefit plans; and (iii) any other
circumstances in which repurchases would be deemed in the best interests of the
Company and its shareholders. Any stock repurchases will be subject to the
determination of the Company's Board of Directors that the Association will be
capitalized in excess of all applicable regulatory requirements after any such
repurchases. The payment of dividends or repurchase of stock, however, would be
prohibited if the Association's net worth would be reduced below the amount
required for the liquidation account to be established for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders. As of the
date of this Prospectus, the initial balance of the liquidation account would be
approximately $50.8 million. See "Dividend Policy," "The Conversion -
Liquidation Rights" and "The Conversion Certain Restrictions on Purchase or
Transfer of Shares After the Conversion."
27
<PAGE>
The Company will be a unitary savings and loan holding company which,
under existing laws, would generally not be restricted as to the types of
business activities in which it may engage, provided that the Association
continues to be a qualified thrift lender ("QTL"). See "Regulation - The
Company" for a description of certain regulations applicable to the Company.
The portion of the net proceeds contributed by the Company to the
Association will be added to the Association's general funds to be used for
general corporate purposes, including increased lending activities and purchases
of securities. While the amount of net proceeds received by the Association will
further strengthen the Association's capital position, which already
substantially exceeds all regulatory requirements, it should be noted that the
Association is not converting primarily to raise capital. After the Conversion,
the Association's tangible capital ratio will be 12.5% (based upon the midpoint
of the Estimated Valuation Range). As a result, the Association will continue to
be a well-capitalized institution. After the Conversion, the Association intends
to emphasize capital strength and growth in assets and earnings.
THE NET PROCEEDS MAY VARY BECAUSE TOTAL EXPENSES OF THE CONVERSION MAY
BE MORE OR LESS THAN THOSE ESTIMATED. The net proceeds will also vary if the
number of shares to be issued in the Conversion is adjusted to reflect a change
in the estimated pro forma market value of the Common Stock. Payments for shares
made through withdrawals from existing deposit accounts at the Association will
not result in the receipt of new funds for investment by the Association but
will result in a reduction of the Association's interest expense and liabilities
as funds are transferred from interest-bearing certificates or other deposit
accounts.
DIVIDEND POLICY
Upon completion of the Conversion, the Board of Directors of the
Company will have the authority to declare dividends on the Common Stock,
subject to statutory and regulatory requirements. The Board of Directors intends
to pay quarterly cash dividends on the Common Stock at an initial rate equal to
the amount of the existing quarterly dividend paid on the Public Mid-Tier
Holding Company Shares ($.225 per share) divided by the Exchange Ratio
commencing the first quarter after the consummation of the Conversion. Based
upon the current Estimated Price Range, the Exchange Ratio is expected to be
2.1416, 2.5196, 2.8975 and 3.3321 at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Price Range, respectively, resulting in an
initial quarterly dividend rate of $.1051, $.0893, $.0777 and $.0675 per share,
respectively, following consummation of the Conversion. Declarations of
dividends by the Board of Directors will depend upon a number of factors,
including the amount of net proceeds retained by the Company in the Conversion,
investment opportunities available to the Company or the Association, capital
requirements, the Company's and the Association's financial condition and
results of operations, tax considerations, statutory and regulatory limitations,
and general economic conditions. No assurances can be given that any dividends
will be paid or that, if paid, will not be reduced or eliminated in future
periods. Special cash dividends, stock dividends or returns of capital may be
paid in addition to, or in lieu of, regular cash dividends (however, the Company
and the Association have committed to the OTS that they will take no action with
respect to any return of capital during the one-year period following
consummation of the Conversion).
Dividends from the Company may eventually depend, in part, upon receipt
of dividends from the Association, because the Company initially will have no
source of income other than dividends from the Association, earnings from the
investment of proceeds from the sale of Conversion Stock retained by the Company
and interest payments with respect to the Company's loan to the ESOP. A
regulation of the OTS imposes limitations on "capital distributions" by savings
institutions, including cash dividends, payments by a savings institution to
repurchase or otherwise acquire its stock, payments to shareholders of another
savings institution in a cash-out merger and other distributions charged against
capital. As of June 30, 1998, the Association was a Tier 1 savings institution
and is expected to continue to so qualify immediately following the consummation
of the Conversion. Based on the regulatory capital level of the Association at
June 30, 1998, the Association would have been permitted to make a capital
distribution to the Company of up to $23.2 million as of July 1, 1998. See
"Regulation - The Association - Capital Distribution Regulation." However,
because the accumulated earnings and profits tax attribute was retained by the
MHC in the MHC Reorganization, the Association's accumulated earnings and
profits at June 30, 1998 was approximately $12.5 million. Any dividends or other
distributions paid in excess of the Association's accumulated earnings and
profits would require a recapture of a
28
<PAGE>
portion of the Association's bad debt reserves, resulting in a tax liability as
discussed below. The Conversion will re-unite the tax attribute retained by the
MHC with the Association's retained earnings and thus increase the Association's
ability to pay dividends.
Any payment of dividends by the Association to the Company which would
be deemed to be drawn out of the Association's bad debt reserves would require a
payment of taxes at the then-current tax rate by the Association on the amount
of earnings deemed to be removed from the reserves for such distribution. The
Association does not intend to make any distribution to the Company that would
create such a federal tax liability. See "Taxation."
Unlike the Association, the Company is not subject to the
aforementioned regulatory restrictions on the payment of dividends to its
shareholders, although the source of such dividends may eventually be dependent,
in part, upon dividends from the Association in addition to the net proceeds
retained by the Company and earnings thereon. The Company is subject, however,
to the requirements of Delaware law which generally limits dividends to an
amount equal to the excess of the net assets of the Company (the amount by which
total assets exceed total liabilities) over its statutory capital, or if there
is no such excess, to its net profits for the current and/or immediately
preceding fiscal year.
MARKET FOR COMMON STOCK
There is an established market for Mid-Tier Holding Company Common
Stock which is currently listed on The Nasdaq Stock Market under the symbol,
"CMSV," and the Mid-Tier Holding Company had market makers as of _______, 1998.
As a newly formed company, the Company has never issued capital stock (other
than 100 shares issued to the Association, which will be canceled upon
consummation of the Conversion) and consequently there is no established market
for the Common Stock. It is expected that the Common Stock will be more liquid
than the Mid- Tier Holding Company Common Stock since there will be
significantly more outstanding shares owned by the public. Public Mid-Tier
Holding Company Shares (including shares held in the Dividend Reinvestment Plan)
will automatically, without further action by the holders thereof, be converted
into and become a right to receive a number of shares of Common Stock that is
determined pursuant to the Exchange Ratio. See "The Conversion Stock Pricing,
Exchange Ratio and Number of Shares to be Issued."
The Company has applied to have its Common Stock listed on The Nasdaq
Stock Market under the Mid-Tier Holding Company's previous symbol "CMSV." There
are various requirements for qualification and continued quotation of the Common
Stock on The Nasdaq Stock Market including a minimum number of market makers for
the Common Stock. The Company will seek to encourage and assist market makers to
make a market in its Common Stock, and, based upon the number of market makers
for the Mid-Tier Common Stock, believes that enough market makers will make a
market in the Common Stock in order to continue listing the Common Stock on The
Nasdaq Stock Market. Making a market involves maintaining bid and ask quotations
and being able, as principal, to effect transactions in reasonable quantities at
those quoted prices, subject to various securities laws and other regulatory
requirements. Although not legally or contractually required to do so, FBR has
advised the Company that upon completion of the Conversion, it intends to act as
a market maker in the Common Stock.
Additionally, the development of a public market having the desirable
characteristics of depth, liquidity and orderliness depends on the existence of
willing buyers and sellers, the presence of which is not within the control of
the Company, the Association or any market maker. In the event that
institutional investors buy a relatively large proportion of the Offering, the
number of active buyers and sellers of the Common Stock at any particular time
may be limited. There can be no assurance that persons purchasing Conversion
Stock will be able to sell their shares at or above the Purchase Price.
Therefore, purchasers of Conversion Stock should have a long-term investment
intent and should recognize that a possibly limited trading market may make it
difficult to sell the Common Stock after the Conversion and may have an adverse
effect on the price of the Common Stock.
As of the date of this Prospectus, there were 5,103,920 shares of
Mid-Tier Holding Company Common Stock outstanding, including 2,483,816 publicly
held shares, which were held of record by approximately 931 registered
shareholders. The following table shows the high and low per share sales prices
of Mid-Tier Holding Company
29
<PAGE>
Common Stock as reported by The Nasdaq Stock Market and the dividends declared
per share during the periods indicated. Such quotations reflect inter-dealer
prices, without retail markup, markdown or commission, and may not necessarily
represent actual transactions.
Dividends Declared
QUARTER ENDED High Low Per Share
- --------------------------- ------- ------- ------------------
March 31, 1996 ............ $ 17.00 $ 15.50 $ .175
June 30, 1996 ............. 16.00 14.25 .200
September 30, 1996 ........ 17.00 15.75 .200
December 31, 1996 ......... 20.75 16.25 .200
March 31, 1997 ............ 20.625 18.50 .225
June 30, 1997 ............. 22.50 19.625 .225
September 30, 1997 ........ 37.25 21.75 .225
December 31, 1997 ......... 39.75 32.25 .225
March 31, 1998 ............ 41.00 33.625 .225
June 30, 1998 ............. 39.00 31.00 .225
REGULATORY CAPITAL
At June 30, 1998, the Association exceeded all of the regulatory
capital requirements applicable to it. The table on the following page sets
forth the Association's historical regulatory capital at June 30, 1998 and the
pro forma regulatory capital of the Association after giving effect to the
Conversion, based upon the sale of the number of shares shown in the table. The
pro forma regulatory capital amounts reflect the receipt by the Association of
50% of the net Conversion proceeds (less the amounts to be loaned to the ESOP
and contributed to the 1999 Recognition Plan). The pro forma risk-based capital
amounts assume the investment of the net proceeds received by the Association in
assets which have a risk-weight of 50% under applicable regulations, as if such
net proceeds had been received and so applied at June 30, 1998.
30
<PAGE>
<TABLE>
<CAPTION>
Pro Forma at June 30,1998 Based on
-------------------------------------------------------------------------------
5,703,659 6,741,777 7,753,143 8,916,176
Shares Sold Shares Sold Shares Sold Shares Sold
Historical at at $10.00 at $10.00 at $10.00 at $10.00
June 30, 1998 Per Share Per Share Per Share Per Share
------------------- ------------------- ------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Amount Assets(1) Amount Assets(1) Amount Assets(1) Amount Assets(1) Amount Assets(1)
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital ......... $ 73,308 9.6% $104,127 13.2% $107,934 13.7% $111,743 14.1% $116,122 14.5%
Tangible capital:
Actual ............. 73,742 9.6% 94,791 12.1% $ 98,598 12.5% $102,407 12.9% 106,786 13.4%
Requirement ........ 11,486 1.5 11,802 1.5 11,859 1.5 11,916 1.5 11,982 1.5
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Excess ............. $ 62,256 8.1% $ 82,989 10.6% $ 86,739 11.0% $ 80,480 11.4% $ 94,804 11.9%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Core capital(2):
Actual ............. 73,742 9.6% 94,791 12.1% $ 98,598 12.5% $102,407 12.9% $106,786 13.4%
Requirement ........ 22,972 3.0 23,604 3.0 23,718 3.0 23,832 3.0 23,964 3.0
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Excess ............. $ 50,770 6.6% $ 71,187 9.1% $ 74,880 9.5% $ 78,574 9.9% $ 82,822 10.4%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Risk-based capital(2):
Actual ............. $ 76,509 17.3% $ 94,357 21.7% $ 98,164 22.5% $101,973 23.3% $106,352 24.2%
Requirement ........ 33,913 8.0 34,755 8.0 34,907 8.0 35,059 8.0 35,234 8.0
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Excess ............. $ 39,395 9.3% $ 59,602 13.7% $ 83,257 14.5% $ 66,913 15.3% $ 71,118 16.2%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
- --------------------------------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate, except that
the ratios regarding GAAP capital are based on total assets.
(2) Does not reflect the interest rate risk component to be added to the
risk-based capital requirements or, in the case of the core capital
requirement, the 4.0% requirement to be met in order for an institution to
be "adequately capitalized" under applicable laws and regulations. See
"Regulation - The Association - Regulatory Capital Requirements."
31
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the
Mid-Tier Holding Company at June 30, 1998, and the pro forma consolidated
capitalization of the Company after giving effect to the Conversion, based upon
the sale of the number of shares shown below and the other assumptions set forth
under "Pro Forma Data."
<TABLE>
<CAPTION>
The Company - Pro Forma
Based Upon Sale at $10.00 Per Share
--------------------------------------------------------------
8,916,176
Shares(1)
The Mid-Tier Holding 5,730,659 Shares 6,741,777 Shares 7,751,143 Shares (15% above
Company Historical (Minimum of (Midpoint of (Maximum of Maximum of
Capitalization Range) Range) Range) Range)
-------------------- ---------------- ---------------- ----------------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(2) ................................... $ 574,383 $ 574,383 $ 574,383 $ 574,383 $ 574,383
Borrowings .................................... 91,513 91,513 91,513 91,513 91,513
--------- --------- --------- --------- ---------
Total deposits and borrowings ................. $ 665,896 $ 665,896 $ 665,896 $ 665,896 $ 665,896
========= ========= ========= ========= =========
Shareholders' equity:
Preferred Stock, par value $1.00, 10,000,000
shares authorized; none to be issued ..... $ -- $ -- $ -- $ -- $ --
Common Stock, par value $1.00,
60,000,000 shares authorized; shares to
be issued as reflected(3) ............... 5,100 11,050 13,000 14,950 17,193
Additional paid-in capital(4) .............. 30,621 80,722 88,813 96,906 106,214
Retained earnings(5) ....................... 49,347 49,347 49,347 49,347 49,347
Net unrealized loss on securities available
for sale ............................... (433) (433) (433) (433) (433)
Less:
Common Stock currently held by the ESOP .. (1,227) (1,127) (1,127) (1,127) (1,127)
Common Stock to be acquired by the
ESOP(6) ................................ -- (4,585) (5,393) (6,202) (7,133)
Common Stock acquired or to be acquired
by Recognition Plans(7) ................ (330) (2,622) (3,027) (3,431) (3,896)
--------- --------- --------- --------- ---------
Total shareholders' equity .................... $ 84,635 $ 132,252 $ 141,080 $ 149,910 $ 160,065
========= ========= ========= ========= =========
(FOOTNOTES ON FOLLOWING PAGE)
32
</TABLE>
<PAGE>
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up
to 15% to reflect changes in market and financial conditions following
the commencement of the Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Conversion Stock in the Offerings. Such withdrawals would reduce pro
forma deposits by the amount of such withdrawals.
(3) Assumes that (i) the 2,483,816 Public Mid-Tier Holding Company Shares
currently outstanding are converted into 5,319,341, 6,258,223,
7,196,857, and 8,276,324 Exchange Shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively, (ii) there are no fractional Exchange Shares, and (iii)
the number of shares of Conversion Stock shown are sold in the
Offerings. No effect has been given to the issuance of additional
shares of Common Stock pursuant to the proposed 1999 Stock Option Plan.
See "Pro Forma Data" and "Management - New Stock Benefit Plans - Stock
Option Plan."
(4) The pro forma additional paid-in capital includes the approximately
$206,000 to be acquired by the Association upon the merger of the MHC
into the Association.
(5) The retained earnings of the Association will be substantially
restricted after the Conversion by virtue of the liquidation account to
be established in connection with the Conversion. See "The Conversion -
Liquidation Rights." In addition, certain distributions from the
Association's retained earnings may be treated as being from its
accumulated bad debt reserve for tax purposes, which would cause the
Association to have additional taxable income. See "Taxation."
(6) Assumes that 8% of the Conversion Stock sold in the Offerings will be
purchased by the ESOP, which is reflected as a reduction of
shareholders' equity. The ESOP shares will be purchased with funds
loaned to the ESOP by the Company. See "Pro Forma Data" and "Management
- Employee Stock Ownership Plan."
(7) The Company intends to adopt the 1999 Recognition Plan and to submit
such plan to shareholders at an annual or special meeting of
shareholders held at least six months following the consummation of the
Conversion. If the plan is approved by shareholders, the Company
intends to contribute sufficient funds to the trust created under the
1999 Recognition Plan to enable the trust to purchase a number of
shares of Common Stock equal to 4% of the Conversion Stock sold in the
Offerings. Assumes that shareholder approval has been obtained and that
the shares have been purchased in the open market at the Purchase
Price. However, in the event the Company issues authorized but unissued
shares of Common Stock to the 1999 Recognition Plan in the amount of 4%
of the Conversion Stock sold in the Offerings, the voting interests of
shareholders would be diluted by approximately 2.0%. The shares are
reflected as a reduction of shareholders' equity. See "Pro Forma Data"
and "Management - New Stock Benefit Plans - Recognition Plan."
33
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Conversion Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $55.9 million and $75.9 million (or $87.5
million in the event the Estimated Valuation Range is increased by 15%) based
upon the following assumptions: (i) all shares of Conversion Stock will be sold
in the Subscription Offering; (ii) no fees will be paid to FBR on shares
purchased by (x) the ESOP and any other employee benefit plan of the Company or
the Association or (y) officers, directors, employees and members of their
immediate families, which purchases are estimated to aggregate 21,600 shares of
Conversion Stock at the midpoint of the Estimated Valuation Range; (iii) FBR
will receive a fee equal to .75% of the aggregate Purchase Price for sales in
the Subscription Offering (excluding the sale of shares to the ESOP, employee
benefit plans, and officers, directors, employees and their immediate families),
with such fee estimated to be $394,000 and $533,000 at the minimum and maximum
of the Estimated Valuation Range (or $614,000 in the event the Estimated
Valuation Range is increased by 15%); and (iv) total other expenses, excluding
the marketing fees paid to FBR, will be $1.1 million. Actual expenses may vary
from those estimated.
Pro forma consolidated net income and shareholders' equity of the
Company have been calculated for the six months ended June 30, 1998 and for the
year ended December 31, 1997 as if the Conversion Stock to be issued in the
Offerings had been sold at the beginning of the respective periods and the net
proceeds had been invested at 5.41% which represents the yield on one-year U.S.
Government securities at June 30, 1998 (which, in light of changes in interest
rates in recent periods, are deemed by the Company and the Association to more
accurately reflect pro forma reinvestment rates than the arithmetic average
method). The effect of withdrawals from deposit accounts for the purchase of
Conversion Stock has not been reflected. A marginal tax rate of 37.65% has been
assumed for each of the periods resulting in an after-tax yield of 3.37%.
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of Common
Stock. See Note 4 to the tables below. No effect has been given in the pro forma
shareholders' equity calculations for the assumed earnings on the net proceeds.
As discussed under "Use of Proceeds," the Company intends to make a loan to fund
the purchase of 8% of the Conversion Stock by the ESOP and retain 50% of the net
proceeds from the Offerings.
No effect has been given in the tables to the issuance of additional
shares of Common Stock equal to 10% of the Conversion Stock pursuant to the
proposed 1999 Stock Option Plan. See "Management - New Stock Benefit Plans Stock
Option Plan." The table below gives effect to the 1999 Recognition Plan, which
is expected to be adopted by the Company following the Conversion and presented
(together with the 1999 Stock Option Plan) to shareholders for approval at an
annual or special meeting of shareholders to be held at least six months
following the consummation of the Conversion. If the 1999 Recognition Plan is
approved by shareholders, the 1999 Recognition Plan intends to acquire an amount
of Common Stock equal to 4% of the shares of Conversion Stock sold in the
Offerings, either through open market purchases or from authorized but unissued
shares of Common Stock. The table below assumes that shareholder approval has
been obtained, as to which there can be no assurance, and that the shares
acquired by the 1999 Recognition Plan are purchased in the open market at the
Purchase Price. No effect has been given to (i) the Company's results of
operations after the Conversion, (ii) the market price of the Common Stock after
the Conversion, or (iii) a less than 4% purchase by the 1999 Recognition Plan.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma shareholders' equity represents the difference
between the stated amount of assets and liabilities of the Company computed in
accordance with GAAP.
THE PRO FORMA SHAREHOLDERS' EQUITY IS NOT INTENDED TO REPRESENT THE
FAIR MARKET VALUE OF THE COMMON STOCK AND MAY BE DIFFERENT THAN AMOUNTS THAT
WOULD BE AVAILABLE FOR DISTRIBUTION TO SHAREHOLDERS IN THE EVENT OF LIQUIDATION.
34
<PAGE>
<TABLE>
<CAPTION>
At or For the Six Months Ended June 30, 1998
--------------------------------------------------------------
8,916,176
5,730,659 6,741,777 7,753,143 Shares Sold
Shares Sold Shares Sold Shares Sold at $10.00 Per
at $10.00 at $10.00 at $10.00 Share (15%
Per Share Per Share Per Share above
(Minimum of (Midpoint (Maximum of Maximum
Range) of Range) Range) of Range)(8)
------------ ------------ ------------ ------------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds ................................ $ 57,307 $ 67,418 $ 77,531 $ 89,162
Less offering expenses and commissions ........ 1,456 1,526 1,596 1,676
------------ ------------ ------------ ------------
Estimated net proceeds ...................... 55,851 65,892 75,935 87,486
Less: Shares purchased by the ESOP ............ (4,585) (5,393) (6,202) (7,133)
Shares to be purchased by the
1999 Recognition Plan ................... (2,292) (2,697) (3,101) (3,566)
------------ ------------ ------------ ------------
Total estimated net proceeds, as adjusted(1) .. $ 48,974 $ 57,802 $ 66,632 $ 76,787
============ ============ ============ ============
Net income:
Historical .................................. $ 2,511 $ 2,511 $ 2,511 $ 2,511
Pro forma income on net proceeds,
as adjusted ............................... 825 974 1,123 1,294
Pro forma ESOP adjustment(2) ................ (95) (112) (129) (148)
Pro forma 1999 Recognition Plan
adjustment(3) ............................. (143) (168) (193) (222)
------------ ------------ ------------ ------------
Pro forma net income ........................ $ 3,098 $ 3,205 $ 3,312 $ 3,435
============ ============ ============ ============
Net income per share(4)(5):
Historical (6) .............................. $ 0.24 $ 0.20 $ 0.18 $ 0.15
Pro forma income on net proceeds, as adjusted 0.08 0.08 0.08 0.08
Pro forma ESOP adjustment(3) ................ (0.01) (0.01) (0.01) (0.01)
Pro forma 1999 Recognition Plan
adjustment(3) ............................. (0.01) (0.01) (0.01) (0.01)
------------ ------------ ------------ ------------
Pro forma net income per share(4)(5) ........ $ 0.30 $ 0.26 $ 0.24 $ 0.21
============ ============ ============ ============
Offering price to pro forma net
income per share (4) ........................ 16.7x 19.2x 20.8x 23.8x
============ ============ ============ ============
Average shares outstanding .................... 10,454,240 12,229,114 14,143,977 16,265,570
============ ============ ============ ============
Shareholders' equity:
Historical(6) ............................... $ 83,278 $ 83,278 $ 83,278 $ 83,278
Estimated net proceeds ...................... 55,851 65,892 75,935 87,486
Less: Common Stock acquired
by the ESOP(2) ........................ (4,585) (5,393) (6,202) (7,133)
Common Stock to be acquired by
the 1999 Recognition Plan(3) .......... (2,292) (2,697) (3,101) (3,566)
------------ ------------ ------------ ------------
Pro forma shareholders' equity(5)(6)(7) ..... $ 132,252 $ 141,080 $ 149,910 $ 160,065
============ ============ ============ ============
Shareholders' equity per share(4):
Historical (6) .............................. $ 7.54 $ 6.41 $ 5.57 $ 4.84
Estimated net proceeds ...................... 5.05 5.07 5.08 5.09
Less: Common Stock acquired
by the ESOP(2) ........................ (0.41) (0.41) (0.41) (0.41)
Common Stock to be acquired by
the 1999 Recognition Plan(3) .......... (0.21) (0.21) (0.21) (0.21)
------------ ------------ ------------ ------------
Pro forma shareholders' equity
per share(5)(6)(7) ........................ $ 11.97 $ 10.86 $ 10.03 $ 9.31
============ ============ ============ ============
Shares outstanding (5) ........................ 11,050,000 13,000,000 14,950,000 17,192,500
============ ============ ============ ============
Offering price as a percentage of pro
forma shareholders' equity per share(4) ..... 83.5% 92.1% 99.7% 107.4%
============ ============ ============ ============
Exchange Ratio ................................ 2.1416 2.5196 2.8975 3.3321
============ ============ ============ ============
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1997
---------------------------------------------------------------
5,730,659 6,741,777 7,753,143 8,916,176
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00 Per
Per Share Per Share Per Share Share (15%
(Minimum of (Midpoint (Maximum of above Maximum
Range) of Range) Range) of Range)(8)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(Dollars in Thousands, Except Per Share Amounts)
Gross proceeds ................................ $ 57,307 $ 67,418 $ 77,531 $ 89,162
Less offering expenses and commissions ........ 1,456 1,526 1,596 1,676
------------ ------------ ------------ ------------
Estimated net proceeds ...................... 55,851 65,892 75,935 87,486
Less: Shares purchased by the ESOP ............ (4,585) (5,393) (6,202) (7,133)
Shares to be purchased by the
1999 Recognition Plan ................... (2,292) (2,697) (3,101) (3,566)
------------ ------------ ------------ ------------
Total estimated net proceeds, as adjusted(1) .. $ 48,974 $ 57,802 $ 66,632 $ 76,787
============ ============ ============ ============
Net income:
Historical .................................. $ 5,356 $ 5,356 $ 5,356 $ 5,356
Pro forma income on net proceeds,
as adjusted ............................... 1,650 1,948 2,245 2,588
Pro forma ESOP adjustment(2) ................ (191) (224) (258) (296)
Pro forma 1999 Recognition Plan
adjustment(3) ............................. (286) (336) (387) (445)
------------ ------------ ------------ ------------
Pro forma net income ........................ $ 6,529 $ 6,744 $ 6,956 $ 7,203
============ ============ ============ ============
Net income per share(4)(5):
Historical .................................. $ 0.51 $ 0.43 $ 0.38 $ 0.33
Pro forma income on net proceeds, as adjusted 0.16 0.16 0.16 0.16
Pro forma ESOP adjustment(3) ................ (0.02) (0.02) (0.02) (0.02)
Pro forma 1999 Recognition Plan
adjustment(3) ............................. (0.03) (0.03) (0.03) (0.03)
------------ ------------ ------------ ------------
Pro forma net income per share(4)(5) ........ $ 0.62 $ 0.54 $ 0.49 $ 0.44
============ ============ ============ ============
Offering price to pro forma net
income per share (4) ........................ 16.1x 18.5x 20.4x 22.7x
============ ============ ============ ============
Average shares outstanding .................... 10,469,522 12,317,092 14,164,652 16,289,347
============ ============ ============ ============
Shareholders' equity:
Historical(6) ............................... $ 81,459 $ 81,459 $ 81,459 $ 81,459
Estimated net proceeds ...................... 55,851 65,892 75,935 87,486
Less: Common Stock acquired
by the ESOP(2) ........................ (4,585) (5,393) (6,202) (7,133)
Common Stock to be acquired by
the 1999 Recognition Plan(3) .......... (2,292) (2,697) (3,101) (3,566)
------------ ------------ ------------ ------------
Pro forma shareholders' equity(5)(6)(7) ..... $ 130,433 $ 139,261 $ 148,091 $ 158,246
============ ============ ============ ============
Shareholders' equity per share(4):
Historical (6) .............................. 7.37 6.27 5.45 4.74
Estimated net proceeds ...................... 5.05 5.07 5.08 5.09
Less: Common Stock acquired
by the ESOP(2) ........................ (0.41) (0.41) (0.41) (0.41)
Common Stock to be acquired by
the 1999 Recognition Plan(3) .......... (0.21) (0.21) (0.21) (0.21)
------------ ------------ ------------ ------------
Pro forma shareholders' equity
per share(5)(6)(7) ........................ $ 11.80 $ 10.72 $ 9.91 $ 9.21
============ ============ ============ ============
Shares outstanding (5) ........................ 11,050,000 13,000,000 14,950,000 17,192,500
============ ============ ============ ============
Offering price as a percentage of pro
forma shareholders' equity per share(4) ..... 84.8% 93.3% 100.9% 108.6%
============ ============ ============ ============
Exchange Ratio ................................ 2.1416 2.5196 2.8975 3.3321
============ ============ ============ ============
</TABLE>
36
<PAGE>
- ----------
(1) Estimated net proceeds, as adjusted, consist of the estimated net
proceeds from the Offerings minus (i) the proceeds attributable to the
purchase by the ESOP and (ii) the value of the shares to be purchased
by the 1999 Recognition Plan, subject to shareholder approval, after
the Conversion at an assumed purchase price of $10.00 per share.
(2) It is assumed that 8% of the shares of Conversion Stock sold in the
Offerings will be purchased by the ESOP with funds loaned by the
Company. The Company and the Association intend to make annual
contributions to the ESOP in an amount at least equal to the principal
and interest requirement of the debt. The pro forma net income assumes
(i) that the loan to the ESOP is payable over 15 years, with the ESOP
shares having an average fair value of $10.00 per share in accordance
with SOP 93-6, entitled "Employers' Accounting for Employee Stock
Ownership Plans," of the AICPA and (ii) the effective tax rate was
37.7% for each of the periods. See "Management - Employee Stock
Ownership Plan."
(3) It is assumed that the 1999 Recognition Plan will purchase, following
shareholder approval of such plan, a number of shares of Common Stock
equal to 4% of the shares of Conversion Stock sold in the Offerings for
issuance to directors, officers and employees. Funds used by the 1999
Recognition Plan to purchase the shares initially will be contributed
to the 1999 Recognition Plan by the Company. It is further assumed that
the shares were acquired by the 1999 Recognition Plan at the beginning
of each of the periods presented in open market purchases at the
Purchase Price and that 10% and 20% of the amount contributed, net of
taxes, was an amortized expense during the six months ended June 30,
1998 and the year ended December 31, 1997, respectively. The issuance
of authorized but unissued shares of Common Stock pursuant to the 1999
Recognition Plan in the amount of 4% of the Conversion Stock sold in
the Offerings would dilute the voting interests of shareholders by
approximately 2.0% and under such circumstances pro forma net income
per share for the (i) six months ended June 30, 1998 would be $.29,
$.25, $.23 and $.21 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, respectively, and pro forma
shareholders' equity per share at June 30, 1998 would be $11.51 $10.43,
$9.64 and $8.95 at the minimum, midpoint maximum and 15% above the
maximum of such range, respectively, and (ii) the year ended December
31, 1997 would be $.61, $.53, $.48 and $.43 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively, and pro forma shareholders' equity per share at December
31, 1997 would be $11.35, $10.30, $9.52 and $8.85 at the minimum,
midpoint, maximum and 15% above the maximum of such range,
respectively. There can be no assurance that the actual purchase price
of shares purchased by or issued to the 1999 Recognition Plan will be
equal to the Purchase Price. See "Management - New Stock Benefit Plans
- Recognition Plan."
(4) The net income per share calculations (i) for the six months ended June
30, 1998 are based upon 10,454,240, 12,294,114, 14,143,977 and
16,265,570 shares of Common Stock at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively,
which amounts include 5,319,341, 6,258,223, 7,196,857, and 8,276,324
Exchange Shares, respectively, and exclude, in accordance with
Statement of Position 93-6 entitled "Employers Accounting for Employee
Stock Ownership Plans", 597,000, 701,000, 806,000 and 927,000 shares,
respectively, representing the ESOP shares which have not been
committed for release during the six months ended June 30, 1998 and
(ii) for the year ended December 31, 1997 are based upon 10,469,522,
12,317,092, 14,164,652 and 16,289,347 shares of Common Stock at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range respectively, which amounts include 5,319,341,
6,258,223, 7,196,857 and 8,276,324 Exchange Shares, respectively, and
exclude 581,000, 682,000, 785,000 and 902,000 shares, respectively,
representing ESOP shares which have not been committed for release
during such period. Assuming the uncommitted ESOP shares were not
subtracted from the number of shares of Common Stock outstanding at
June 30, 1998, the offering price as a multiple of pro forma net income
per share would be 17.8x, 20.3x, 22.6x and 25.0x at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range, respectively, and at December 31, 1997, the offering price as a
multiple of pro forma net income per share would be 16.9x, 19.3x, 21.5x
and 23.9x at the minimum, midpoint, maximum and 15% above the maximum
of the estimated Valuation Range, respectively. The historical net
income per share and historical shareholders' equity per share figures
represent the Mid-Tier Holding Company's historical per share amounts
divided by the Exchange Ratio. For a description of the Exchange Ratio,
see "The Conversion - Stock Pricing, Exchange Ratio and Number of
Shares to be Issued in the Conversion." For purposes of calculating pro
forma shareholders' equity per share, it is assumed that the number of
shares of Common Stock outstanding total 11,050,000, 13,000,000,
14,950,000 and 17,192,000 shares at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range.
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the 1999 Stock Option Plan, which will be adopted by
the Company following the Conversion and presented for approval by
shareholders at an annual or special meeting of shareholders of the
Company held at least six months following the consummation of the
Conversion. If the 1999 Stock Option Plan is approved by shareholders,
an amount equal to 10% of the Conversion Stock sold in the
37
<PAGE>
Offerings, or 573,066, 674,178, 775,314 and 891,618 shares at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively, will be reserved for future issuance
upon the exercise of options to be granted under the 1999 Stock Option
Plan. The issuance of Common Stock pursuant to the exercise of options
under the 1999 Stock Option Plan will result in the dilution of
existing shareholders' interests by approximately 4.9%. Assuming
shareholder approval of the 1999 Stock Option Plan, that all these
options were exercised at the beginning of the period at an exercise
price of $10.00 per share and that the shares to fund the 1999
Recognition Plan are acquired through open market purchases at the
Purchase Price, (i) pro forma net income per share for the six months
ended June 30, 1998 would be $.28, $.25, $.22 and $.20 at the minimum,
midpoint, maximum and 15% above the maximum of such range,
respectively, and pro forma shareholders' equity per share at June 30,
1998 would be $11.87 $ 10.81, $10.03 and $9.34 at the minimum,
midpoint, maximum and 15% above the maximum of such range, respectively
and (ii) pro forma net income per share for the year ended December 31,
1997 would be $.59, $.52, $.47 and $.42 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively, and pro forma shareholders' equity per share at December
31, 1997 would be $11.71, $10.68, $9.91 and $9.24 at the minimum,
midpoint, maximum and 15% above the maximum of such range,
respectively. See "Management - New Share Benefit Plans - Stock Option
Plan."
(6) Includes the $206,000 to be acquired by the Association upon the merger
of the MHC into the Association.
(7) The retained earnings of the Association will be substantially
restricted after the Conversion by virtue of the liquidation account to
be established in connection with the Conversion. See "Dividend Policy"
and "The Conversion - Liquidation Rights." In addition, certain
distributions from the Association's retained earnings may be treated
as being from its accumulated bad debt reserve for tax purposes, which
would cause the Association to have additional taxable income. See
"Taxation - Federal Taxation." Pro form a shareholders' equity and pro
forma shareholders' equity per share do not give effect to the
liquidation account or the bad debt reserves established by the
Association for federal income tax purposes in the event of a
liquidation of the Association.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up
to 15% to reflect changes in market and financial conditions following
the commencement of the Offerings.
38
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
The condensed consolidated statements of operations of the Mid-Tier
Holding Company and its wholly owned subsidiary for the years ended December 31,
1997, the three months ended December 31, 1996, and the years ended September
30, 1996 and 1995 have been derived from the consolidated financial statements
audited by Deloitte & Touche LLP, independent auditors whose report thereon
appears elsewhere herein. The Consolidated Statements of Operations for the six
month periods ended June 30, 1998 and 1997 are unaudited and, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the results for the unaudited
periods. The results of operations for the six month period ended June 30, 1998
is not necessarily indicative of the results that may be expected for the entire
fiscal year ended December 31, 1998. The condensed consolidated statements of
operations should be read in conjunction with the Consolidated Financial
Statements and related notes thereto contained elsewhere herein.
<TABLE>
<CAPTION>
For the For the Three
For the Six Months Year Ended Months Ended For the Years Ended
Ended June 30, December 31, December 31, September 30,
--------------------------- ------------ ------------- ----------------------
1998 1997 1997 1996 1996 1995
------- ------- ------- ------- ------- -------
(In Thousands except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Interest income ............... $26,827 $24,577 $50,316 $11,896 $43,889 $37,720
Interest expense .............. 14,655 13,260 27,390 6,378 22,859 18,634
------- ------- ------- ------- ------- -------
Net interest income ........... 12,172 11,317 22,926 5,518 21,030 19,086
Provision for loan losses ..... 213 83 264 243 98 240
------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses. 11,959 11,234 22,662 5,275 20,932 18,846
------- ------- ------- ------- ------- -------
Other income ................. 1,756 1,862 4,185 1,225 3,544 3,394
Operating expense ............ 9,846 8,805 18,561 4,644 19,800 14,903
------- ------- ------- ------- ------- -------
Income before
provision for income taxes 3,869 4,291 8,286 1,856 4,676 7,337
Provision for income taxes .... 1,358 1,556 2,930 696 761 2,763
------- ------- ------- ------- ------- -------
Net income .................... $ 2,511 $ 2,735 $ 5,356 $ 1,160 $ 3,915 $ 4,574
======= ======= ======= ======= ======= =======
Basic earnings per share ...... $ 0.51 $ 0.55 $ 1.09 $ 0.24 $ 0.80 $ 0.94
======= ======= ======= ======= ======= =======
Diluted earnings per share .... $ 0.49 $ 0.54 $ 1.06 $ 0.23 $ 0.79 $ 0.94
======= ======= ======= ======= ======= =======
</TABLE>
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis is intended to provide assistance
and understanding of the financial condition and results of operations. The
information in this section should be read with the financial statements and the
notes to the financial statements beginning at page F-1. As a financial
institution, the results of operations are primarily dependent on net interest
income. Net interest income is a function of the yield earned in any one period
on the balances of loans and investments in the portfolio, offset by the
interest paid on deposits and borrowed funds outstanding during that same
period. Non-interest income consists primarily of fees and service charges,
gains on sale of loans and investments, and, depending on the period, real
estate operations which have either generated income or losses. The results of
operations can also be significantly impacted by the amount of provisions for
loan losses which are dependent upon, among other things, the size and
composition of the loan portfolio, loan quality, and loan trends. Operating
expenses consist primarily of employee compensation and benefits, occupancy
expenses, professional fees and federal deposit insurance premiums. Results of
operations are influenced by general economic and competitive conditions,
including changes in prevailing interest rates and the policies of regulatory
agencies.
BUSINESS STRATEGY
The Association's current business strategy is to operate as a
well-capitalized, profitable and independent community-oriented savings and loan
association dedicated to providing quality retail financial products and
personalized customer service. The Association has implemented this strategy by
emphasizing retail deposits as its primary source of funds and investing a
substantial part of such funds in locally originated residential first mortgage
loans, in mortgage-backed and related securities and in other liquid investment
securities. Specifically, the Association's business strategy incorporates the
following elements: (i) operating as a community-oriented financial institution
and maintaining a strong core customer base by providing a high degree of
personalized banking services; (ii) emphasizing traditional lending and
investment activities; (iii) maintaining asset quality; (iv) maintaining a
strong retail deposit base; (v) managing interest rate risk while achieving
desirable levels of profitability; and (vi) pursuing controlled growth.
Highlights of the Association's business strategy are as follows:
COMMUNITY-ORIENTED INSTITUTION. The Association is committed to meeting
the financial needs of its customers in Palm Beach, Martin, St. Lucie, Indian
River and Brevard Counties in Florida, the communities in which it operates. In
that connection, the Association operates 21 conveniently located full service
branch offices as well as two loan production offices in these communities. The
Association has sufficient resources to provide a full range of personal and
business financial services, while being able to provide such services on a
personalized and efficient basis. The continued consolidation of the financial
services industry in Florida as a result of acquisitions by several regional and
super regional bank holding companies has resulted in a declining number of
locally based institutions that are fully knowledgeable about the communities in
which they operate. Management believes that these institutions are unable to
make decisions at the local level, thus reducing the responsiveness of such
institutions to the needs of the local community. Management believes that the
Association can be more effective in servicing its customers than many of its
non-local competitors because of its ability to quickly and effectively provide
senior management responses to customer needs and inquiries. The Association's
ability to provide these services is enhanced by the stability of the
Association's senior management, which has an average tenure with the
Association of 16 years.
EMPHASIS ON TRADITIONAL LENDING AND INVESTMENT ACTIVITIES. Since its
inception in 1955, the Association has emphasized residential real estate
financing and anticipates a continued commitment to financing the purchase or
improvement of residential real estate in its market area through either locally
originated or to a lesser extent, purchased loans or participation interests. As
of June 30, 1998, 75.63% of the Association's total loan portfolio consisted of
one-to four-family residential mortgage loans. To supplement local mortgage loan
originations and purchases, the
40
<PAGE>
Association invests in investment securities, as well as mutual funds which
invest primarily in mortgage-backed and related securities and government and
agency securities, and mortgage-backed and related securities that are primarily
issued or guaranteed by the United States Government or agencies thereof. By
investing in insured or guaranteed assets, the Association has reduced the
credit risk of its asset base in exchange for lower yields than would typically
be available on commercial real estate and multi-family real estate loans.
Mortgage-backed securities and investment securities and mutual funds
represented 10.91% and 13.83% of total assets, respectively, at June 30, 1998.
Included in the Association's portfolio of securities and investments are $59.5
million (7.77% of total assets) of collateralized mortgage obligations ("CMOs")
issued by private issuers. Such securities are not insured or guaranteed by such
issuers.
MAINTAIN ASSET QUALITY. Management believes that high asset quality is
a key to long-term financial success and, as a result, the Association's
investments are characterized by a high level of asset quality and moderate
credit risk. At June 30, 1998, the Association's non-performing assets amounted
to $2.1 million, or 0.27%, of total assets. At June 30, 1998, the Association's
allowance for loan losses amounted to $2.8 million or 202.6% of the
Association's non-performing loans.
RETAIL DEPOSIT BASE. The Association has a strong retail deposit base
drawn from the 21 full-service offices located in its market area. At June 30,
1998, 38.5% of the Association's deposit base of $574.4 million consisted of
core deposits, which included non-interest-bearing demand accounts, NOW
accounts, passbook and statement savings accounts and money market deposit
accounts. Core deposits are considered to be a more stable and lower cost source
of funds than certificates of deposit or outside borrowings. The Association
will continue to emphasize retail deposits by maintaining its network of
full-service offices and providing depositors with a full range of accounts.
INTEREST RATE RISK MANAGEMENT. The Association has sought to manage
interest rate risk by investing a substantial portion of its assets in ARM loans
and other adjustable-rate loans, and in relatively short- and medium-term United
States Government and agency securities, investment securities, and in mutual
funds that invest in adjustable-rate securities, and in short- and medium-term
fixed-rate mortgage-backed and related securities. Borrowers in the currently
relatively stable interest rate environment tend to demand fixed-rate loans
instead of variable-rate loans. The Association offers loan products which offer
a fixed-rate for a short term, typically for five to seven years and then
convert to a one-year adjustable-rate loan. Of the Association's total
investment in loans, mortgage-backed and related securities and investment
securities at June 30, 1998, $331.4 million, or 46.23%, had adjustable interest
rates. The difference in the dollar amount of interest-earning assets and
interest-bearing liabilities expressed as a percentage of total assets, is a
measure of interest rate risk, and is referred to as an institution's interest
sensitivity rate gap. An interest sensitivity rate gap is considered positive if
interest-earning assets maturing or repricing in a particular time period exceed
interest-bearing liabilities maturing or repricing within the same time period.
An interest sensitivity rate gap is considered negative if interest-bearing
liabilities maturing or repricing in a particular time period exceed
interest-earning assets maturing or repricing within the same time period.
Management seeks to manage the Association's interest rate risk exposure by
monitoring the levels of interest rate sensitive assets and liabilities while
maintaining an acceptable interest rate spread. At June 30, 1998, total
interest-earning assets exceeded total interest-bearing liabilities maturing or
repricing in the same period by $3.4 million, representing a positive 0.44%
cumulative one-year gap ratio.
41
<PAGE>
AVERAGE BALANCE SHEET
The following tables set forth certain information relating to the
Mid-Tier Holding Company average balance sheet and reflects the average yield on
assets and average cost of liabilities for the periods indicated and the average
yields earned and rates paid. Such yields and costs are derived by dividing
income or expense by the average balance of assets or liabilities, respectively,
for the periods presented. The use of monthly average balances (except as noted
otherwise) instead of daily average balances has not caused any material
difference in the information presented.
<TABLE>
<CAPTION>
At June 30, For the Six Months Ended June 30,
------------------------ --------------------------------------
1998 1998
------------------------ --------------------------------------
Average Average
Balance Yield/Cost Balance Interest Yield/Cost
-------- ---------- -------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Real estate loans .................. $506,704 7.76% $467,119 $18,377 7.87%
Consumer and other loans ........... 20,671 9.13 19,809 913 9.22
Mortgage-backed and
related securities ............... 83,495 7.16 88,532 3,174 7.17
Investment securities .............. 71,148 6.67 89,346 3,217 7.20
Other investments (1) .............. 34,730 6.25 36,788 1,146 6.23
-------- -------- -------
Total interest-earning assets .... 716,748 7.55 701,594 26,827 7.65
-------
Non-interest-earning assets .......... 48,740 46,527
-------- --------
Total assets ..................... $765,488 $748,121
======== ========
Interest-bearing liabilities:
Deposits ........................... $574,383 4.16 $571,282 11,976 4.19
Borrowed funds ..................... 91,513 6.62 77,967 2,679 6.87
-------- -------- -------
Total interest-bearing liabilities 665,896 4.50 649,249 14,655 4.51
-------
Non-interest-bearing liabilities ..... 16,514 16,606
--------
Total liabilities ................ 682,410 665,855
Shareholders' equity ................. 83,078 82,266
-------- --------
Total liabilities and shareholders'
equity ......................... $765,488 $748,121
======== ========
Net interest income .................. $12,172
=======
Net interest rate spread (3) ......... 3.05% 3.14%
====== ======
Net yield on interest-earning assets (4) 3.40% 3.47%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities ....... 107.64% 108.06%
====== ======
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30, For the Year Ended December 31,
------------------------------------- ------------------------------------
1997 1997
------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans .................. $381,169 $15,479 8.12% $392,782 $31,846 8.11%
Consumer and other loans ........... 18,408 817 8.88 18,316 1,644 8.98
Mortgage-backed securities ......... 103,089 3,768 7.31 99,884 7,330 7.34
Investment securities .............. 105,350 3,522 6.69 110,986 7,540 6.79
Other investments (1) .............. 33,643 991 5.89 31,851 1,956 6.14
-------- ------- -------- -------
Total interest-earning assets .... 641,659 24,577 7.66 653,819 50,316 7.70
------- -------
Non-interest-earning assets .......... 38,244 39,356
-------- --------
Total assets ..................... $679.903 $693,175
======== ========
Interest-bearing liabilities:
Deposits ........................... $531.512 11,031 4.15 $537,965 22,648 4.21
Borrowed funds ..................... 56,882 2,229 7.84 61,551 4,742 7.70
-------- ------- -------- -------
Total interest-bearing liabilities 588,394 13,260 4.51 599,516 27,390 4.57
------- -------
Non-interest-bearing liabilities ..... 14,229 14,837
-------- --------
Total liabilities ................ 602,623 614,353
Shareholders' equity ................. 77,280 78,822
-------- --------
Total liabilities and shareholders'
equity ......................... $679,903 $693,175
======== ========
Net interest income .................. $11,317 $22,926
======= =======
Net interest rate spread (2) ......... 3.15% 3.13%
====== ======
Net yield on interest-earning assets (3) 3.53% 3.51%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities ....... 109.05% 109.06%
====== ======
</TABLE>
- --------------------------
(1) The average balances of loans include non-performing loans, interest on
which is recognized on a cash basis.
(2) Includes interest-earning deposits and FHLB stock.
(3) Net interest-rate spread represents the difference between the average yield
earned on interest-earning assets and the average rate paid on
interest-bearing liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(Table continued on next page)
42
<PAGE>
<TABLE>
<CAPTION>
For the three months ended December 31, For the years ended September 30,
--------------------------------------- ------------------------------------
1996 1996
--------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans .................. $365,269 $ 7,427 8.13% $331,134 $26,765 8.09%
Consumer and other loans ........... 17,989 408 9.07 15,746 1,508 9.48
Mortgage-backed securities ......... 107,190 1,992 7.43 99,959 7,423 7.43
Investment securities .............. 93,399 1,578 6.76 87,280 5,700 6.53
Other investments (1) .............. 32,764 491 5.99 41,817 2,493 5.96
-------- ------- -------- -------
Total interest-earning assets .... 616,611 11,896 7.72 575,936 43,889 7.62
------- -------
Non-interest-earning assets .......... 35,425 36,068
-------- --------
Total assets ..................... $652,036 $612,004
======== ========
Interest-bearing liabilities:
Deposits ........................... $504,738 5,251 4.16 $478,955 19,247 4.02
Borrowed funds ..................... 55,063 1,127 8.19 42,416 3,612 8.52
-------- ------- -------- -------
Total interest-bearing liabilities 559,801 6,378 4.56 521,371 22,859 4.38
------- -------
Non-interest-bearing liabilities ..... 16,294 15,995
-------- --------
Total liabilities ................ 576,095 537,366
Shareholders' equity ................. 75,941 74,638
-------- --------
Total liabilities and shareholders'
equity ......................... $652,036 $612,004
======== ========
Net interest income .................. $ 5,518 $21,030
======= =======
Net interest rate spread (2) ......... 3.16% 3.24%
====== ======
Net yield on interest-earning assets (3) 3.58% 3.65%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities ....... 110.15% 110.47%
====== ======
</TABLE>
<TABLE>
<CAPTION>
For the years ended September 30,
------------------------------------
1995
------------------------------------
Average Average
Balance Interest Yield/cost
------- -------- ----------
<S> <C> <C> <C>
Interest-earning assets:
Real estate loans .................. $308,793 $23,661 7.66%
Consumer and other loans ........... 13,056 1,197 9.17
Mortgage-backed securities ......... 53,349 4,198 7.87
Investment securities .............. 83,650 5,945 7.11
Other investments (1) .............. 46,444 2,719 5.85
-------- -------
Total interest-earning assets .... 505,292 37,720 7.46
-------
Non-interest-earning assets .......... 39,263
--------
Total assets ..................... $544,555
========
Interest-bearing liabilities:
Deposits ........................... $429,893 15,679 3.65
Borrowed funds ..................... 29,086 2,955 10.16
-------- -------
Total interest-bearing liabilities 458,979 18,634 4.06
-------
Non-interest-bearing liabilities ..... 16,313
--------
Total liabilities ................ 475,292
Shareholders' equity ................. 69,263
--------
Total liabilities and shareholders'
equity ......................... $544,555
========
Net interest income .................. $19,086
=======
Net interest rate spread (2) ......... 3.40%
======
Net yield on interest-earning assets (3) 3.78%
======
Ratio of average interest-
earning assets to average
interest-bearing liabilities ....... 110.09%
======
</TABLE>
- --------------------
(1) Includes interest-earning deposits and FHLB stock.
(2) Net interest-rate spread represents the difference between the average yield
earned on interest-earning assets and the average rate paid on
interest-bearing liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
43
<PAGE>
RATE VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of
changing interest rates on interest-earning assets and interest-bearing
liabilities and changing the volume or amount of these assets and liabilities.
The following table represents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (i)
changes attributable to changes in average volume (change in average volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior average volume); (iii) changes in rate-volume
(changes in rate multiplied by changes in average volume); and (iv) the net
change.
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1998 vs. 1997 December 31, 1997 vs. 1996
-------------------------------------------- ------------------------------------------
Increase/Decrease Due to Increase/Decrease Due to
-------------------------------- -----------------------------
Total Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
------- ------- ------- ---------- ------- ------- ------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Real estate loans .................. $ 3,490 $ (478) $ (115) $ 2,898 $4,981 $ 99 $ 1 $ 5,081
Consumer and other loans ........... 62 32 3 96 246 (94) (16) 136
Mortgage-backed securities ......... (532) (72) 10 (594) (6) (90) 3 (93)
Investment securities .............. (536) 269 (38) (305) 1,548 227 65 1,840
Other investments (1) .............. 93 57 6 155 (594) 75 (18) (537)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets .... 2,577 (192) (135) 2,250 6,175 217 35 6,427
------- ------- ------- ------- ------- ------- ------- -------
Interest expense
Deposits ........................... 825 107 14 945 2,372 910 119 3,401
Borrowed funds ..................... 827 (276) (101) 450 1,630 (348) (152) 1,130
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 1,652 (170) (87) 1,395 4,002 562 (33) 4,531
------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest income .... $ 925 $ (22) $ (48) $ 855 $ 2,173 $ (345) $ 68 $ 1,896
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Three months ended Year ended
December 31, 1996 vs. 1995 September 30, 1996 vs. 1995
----------------------------------------- -----------------------------------------
Increase/Decrease Due to Increase/Decrease Due to
----------------------------- -----------------------------
Total Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
------- ------- ------- ---------- ------- ------- ------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Real estate loans .................. $ 947 $ 175 $ 27 $ 1,149 $ 1,711 $ 1,297 $ 96 $ 3,104
Consumer and other loans ........... 74 (9) (2) 63 247 54 10 311
Mortgage-backed securities ......... 523 (72) (23) 428 3,668 (235) (208) 3,225
Investment securities .............. 171 42 4 217 258 (485) (18) (245)
Other investments (1) .............. (157) (12) 3 (166) (271) 51 (6) (226)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets .... 1,558 124 9 1,691 5,613 682 (126) 6,169
------- ------- ------- ------- ------- ------- ------- -------
Interest expense
Deposits ........................... 588 145 19 752 1,791 1,591 186 3,568
Borrowed funds ..................... 363 (60) (26) 277 1,354 (477) (220) 657
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 951 85 (7) 1,029 3,145 1,114 (34) 4,225
------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest income .... $ 607 $ 39 $ 16 $ 662 $ 2,468 $ (432) $ (92) $ 1,944
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------------
(1) Includes interest-earning deposits and FHLB stock.
44
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
GENERAL. Net income for the six months ended June 30, 1998 was $2.5
million, or $0.51 per share, a $224,000 decrease from $2.7 million, or $0.55 per
share, for the six months ended June 30, 1997. The decrease in net income was
primarily the result of increases in operating expense of $1.0 million, the
provision for loan losses of $130,000 and a decrease in other income of
$106,000, offset partially by a $855,000 increase in net interest income and a
$198,000 decrease in the provision for income taxes.
NET INTEREST INCOME. Net interest income increased to $12.2 million for
the six months ended June 30, 1998 from $11.3 million for the same period in
1997 primarily as a result of a $59.9 million increase in average
interest-earning assets to $701.6 million for the six months ended June 30, 1998
from $641.7 million for the same period in the prior year. Such increase
reflected a $87.4 million increase in the net loan portfolio, offset in part by
a $30.6 million decrease in the Association's aggregate securities portfolio.
The average yield on interest-earning assets decreased to 7.65% for the six
months ended June 30, 1998 from 7.66% for the 1997 period, primarily as a result
of decreased average yields on real estate loans and mortgage-backed and related
securities as well as the increase in the net loan portfolio, which was offset
in part by increased average yields earned on investment securities and consumer
and other loans. The increase in interest income was partially offset by a $60.8
million increase in average interest-bearing liabilities to $649.2 million for
the six months ended June 30, 1998 from $588.4 million for the same period in
1997, primarily reflecting the growth of the Association's deposit portfolio and
additional FHLB advances. The average yield on interest-bearing liabilities was
unchanged at 4.51% for the six months ended June 30, 1998 from the 1997 period.
The weighted average cost of deposits increased to 4.19 % for the six months
ended June 30, 1998 from 4.15% for the same period in 1997. This increase in the
cost of deposits was offset by a decrease in the cost of borrowed funds to 6.87%
for the six months ended June 30, 1998 from 7.84% for the same period in 1997.
PROVISION FOR LOAN LOSSES. The Association maintains an allowance for
loan losses based upon a periodic evaluation of, among other things, known and
inherent risks in the loan portfolio, past loan loss experience, adverse
situations that may affect borrowers' ability to repay loans, the estimated
value of underlying loan collateral, volume and type of lending conducted by the
Association and current economic conditions in its market area. Loan loss
provisions are based upon management's estimate of the fair value of the
collateral and the actual loss experience, as well as guidelines applied by the
OTS and the FDIC. Management reviews the adequacy of its allowance for loan
losses monthly through its asset classification review. The provision for loan
losses was $213,000 for the six months ended June 30, 1998, as compared to
$83,000 for the six months ended June 30, 1997. The $130,000 increase was due to
$108,000 in specific reserves on loans on five residential properties and one
land loan, as well as a $45,000 increase in the amount provided for general loan
loss reserves due to the continued growth of the loan portfolio of 16.75% during
the period. The allowance for loan losses as a percentage of net loans
receivable was 0.52% and 0.63% at June 30, 1998 and 1997, respectively. In
management's judgement it was prudent to increase the allowance for loan losses
based upon, among other factors, the overall growth in its loan portfolio as
well as the Association's increasing involvement in residential and
non-residential construction lending secured primarily by properties located in
the Association's primary market area.
OTHER INCOME. Other income consists of servicing income and fee income
and service charges. Other income decreased $106,000 to $1.8 million for the six
months ended June 30, 1998, from $1.9 million for the same period in 1997. This
decrease reflected the amortization of the affordable housing tax credit
partnership of $140,000 during the six months ended June 30, 1998. The
partnership did not begin amortizing until the second half of 1997.
OPERATING EXPENSE. Operating expense increased $1.0 million to $9.8
million for the six month period ended June 30, 1998 from $8.8 million for the
same period in 1997. Increased employee compensation and benefits and occupancy
and equipment costs accounted for the majority of such increase, increasing
$741,000 and $107,000, respectively, during the six months ended June 30, 1998
as compared to the 1997 period. Additional costs related to the incentive-based
loan originators were incurred during the 1998 period as a result of increased
loan originations. In
45
<PAGE>
addition, increases in staffing and occupancy costs resulted from two additional
branch offices operating in the six months ended June 30, 1998 that were not
open during the same period in 1997, the requirements of the new company wide
computer network, which involved new hardware and software depreciation expense
and the hiring of additional personnel for implementation and training, as well
as the increased cost of stock benefit programs reflecting the increase in
market value of the Mid-Tier Holding Company's Common Stock.
PROVISION FOR INCOME TAXES. The provision for income taxes was $1.4
million for the six months ended June 30, 1998 as compared to $1.6 million for
the same period in 1997 reflecting the $174,000 tax benefit received from the
affordable housing tax credit partnership during the six months ended June 30,
1998 which did not occur during 1997, as well as the decrease in net income.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND SEPTEMBER 30,
1996
GENERAL. The comparison periods vary due to the change in the fiscal
year of the Mid-Tier Holding Company and the Association from September 30 to
December 31. Net income for the year ended December 31, 1997 increased 38.5% to
$5.4 million, or $1.09 per share, compared to $3.9 million, or $0.80 per share
for the year ended September 30, 1996. This increase in net income was primarily
due to the special one time SAIF special assessment of $2.8 million (pre-tax)
which was recorded during September 1996 and which did not reoccur during the
year ended December 31, 1997. Net interest income increased $1.9 million to
$22.9 million for the year ended December 31, 1997 from $21.0 million for the
year ended September 30, 1996. Other income and the provision for income taxes
increased $641,000 and $2.2 million, respectively, for the year ended December
31, 1997 while operating expense decreased $1.2 million during this period due
to the absence of any special assessment.
INTEREST INCOME. Interest income for the year ended December 31, 1997
totaled $50.3 million, an increase of $6.4 million, or 14.6%, from $43.9 million
for the year ended September 30, 1996 reflecting, in part, the implementation of
the Association's growth strategy to increase the net loan portfolio and
securities held for sale. The increase was due primarily to an increase in
average interest-earning assets of $77.9 million to $653.8 million for the year
ended December 31, 1997 from $575.9 million for the year ended September 30,
1996, enhanced by an increase in the average yield on average interest-earning
assets to 7.70% for the year ended December 31, 1997 from 7.62% for the year
ended September 30, 1996. Interest income on loans increased $5.2 million, or
18.5%, to $33.5 million for the year ended December 31, 1997 compared to $28.3
million for the year ended September 30, 1996. Interest income on real estate
loans increased by $5.0 million, or 19.0%, to $31.8 million for the year ended
December 31, 1997 from $26.8 million for the year ended September 30, 1996
primarily because of an increase in the average balance of real estate loans of
$61.6 million, or 18.6%, and an increase in the average yield on real estate
loans to 8.11% from 8.09%. Interest income from investment securities and
securities available for sale increased by $1.7 million, or 19.5%, to $10.4
million for the year ended December 31, 1997 from $8.7 million for the year
ended September 30, 1996. The increase in income from investment securities and
securities available for sale was primarily caused by an increase in the average
balance of $23.7 million to $111.0 million for the year ended December 31, 1997
from $87.3 million for the year ended September 30, 1996, as well as an increase
in the average yield to 6.79% for the year ended December 31, 1997 from 6.53%
for the year ended September 30, 1996. Interest income from other investments,
which includes interest-earning deposits and FHLB stock, decreased $537,000, or
21.5%, to $2.0 million for the year ended December 31, 1997 from $2.5 million
for the year ended September 30, 1996. The decrease in interest from other
investments is primarily attributable to a $10.0 million, or 23.9%, decrease in
the average balance of other investments to $31.8 million during 1997 from $41.8
million during 1996, partially offset by an increase in the average yield on
other investments to 6.14% for the year ended December 31, 1997 from 5.96% for
the year ended September 30, 1996.
INTEREST EXPENSE. Interest expense increased $4.5 million, or 19.8%, to
$27.4 million for the year ended December 31, 1997 from $22.9 million for the
year ended September 30, 1996. Interest on deposits increased $3.4 million, or
17.7%, to $22.6 million for the year ended December 31, 1997 from $19.2 million
for the year ended September 30, 1996. The increase was due primarily to the
increase in average cost of deposits to 4.21% from 4.02%, as well as an increase
in the average balance of deposits of $59.0 million, or 12.3%, to $538.0 million
during 1997 from $479.0 million during 1996. In order to increase its market
share of total deposits during 1997 as well as to maintain
46
<PAGE>
its existing deposit customers, the Association placed an increased emphasis on
competitively pricing its deposit products, including odd-term certificate of
deposit products, as well as existing certificate of deposit products, as part
of its asset liability policy. Certificates of deposit typically have a higher
interest rate cost to the Association than transaction accounts. Certificates of
deposits and transaction accounts increased $19.4 million and $17.6 million,
respectively, at December 31, 1997 as compared to September 30, 1996. Interest
expense attributable to borrowed funds increased $1.1 million, or 31.2%, to $4.7
million for the year ended December 31, 1997 from $3.6 million for the year
ended September 30, 1996. The increase in interest expense attributable to
borrowed funds is due to an increase in the average balance of borrowed funds to
$61.6 million during 1997 from $42.4 million during the 1996 period, partially
offset by a decrease in the average cost of borrowed funds to 7.70% for the year
ended December 31, 1997 from 8.52% for the 1996 period. During 1997, additional
advances from the FHLB were used primarily to fund the purchase of securities
with higher interest yields than the interest cost of the FHLB advances.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $264,000
for the year ended December 31, 1997 as compared to $98,000 for the year ended
September 30, 1996. The increase in the provision for loan losses for 1997
reflected management's assessment that the allowance for loan losses needed to
be increased to absorb the risk inherent in the loan portfolio due to not only
growth in the loan portfolio (which increased by $62.7 million) but also due to
increased investment in commercial and multi-family real estate lending which is
deemed to have greater risk than single-family residential lending. The
allowance for loan losses as a percentage of net loans receivable at December
31, 1997 and September 30, 1996 was 0.59% and 0.61%, respectively.
OTHER INCOME. Other income consists of servicing income and fee income,
service charges, gain or loss on the sale or early maturity of securities
available for sale, loans, and other assets as well as income or loss from a
real estate venture in which a subsidiary of the Association was involved. Other
income increased $641,000, or 18.1%, to $4.2 million for the year ended December
31, 1997 from $3.5 million for the year ended September 30, 1996. Net gain on
sale of other assets of $617,000 in the year ended December 31, 1997 represented
the sale of stock of the Association's data service bureau which did not occur
during 1996. In addition, the year ended December 31, 1997 reflected a $3,000
net gain on the sale of loans as compared to a $225,000 net loss for the 1996
period. Fee income (which includes servicing income and other loan fees, and NOW
account and other customer fees) increased $310,000 to $3.6 million for the 1997
year from $3.3 million for the 1996 period as a result of fee structure changes
put in place during 1997. These increases were partially offset by a decrease in
miscellaneous income of $252,000. This decrease reflected the amortization of
the affordable housing tax credit partnership of $147,000 during the year ended
December 31, 1997.
OPERATING EXPENSE. Total operating expense decreased $1.2 million to
$18.6 million for the year ended December 31, 1997 from $19.8 million for the
year ended September 30, 1996. Operating expense was higher in the 1996 period
primarily due to the one-time $2.8 million special assessment for
recapitalization of the SAIF. This special assessment was levied against
institutions having SAIF-insured deposits as of March 31, 1995, as mandated by
the DIF. Due to new reduced deposit insurance premium levels during 1997, the
1997 regular premium was $270,000 as compared to $1.1 million for the 1996
period. Employee compensation and benefits increased by $1.2 million to $9.0
million during the year ended December 31, 1997 from $7.8 million during the
year ended September 30, 1996 and occupancy and equipment expense increased
$478,000 to $5.1 million for the year ended December 31, 1997 from $4.6 million
for the 1996 period. These increases are primarily the result of the opening of
three new branch offices, the implementation of a new company wide computer
network, and additional costs related to the incentive-based loan originators.
These events involved construction costs, increases in staffing and depreciation
increases related to new computer hardware and software for the network.
PROVISION FOR INCOME TAXES. Provision for income taxes increased $2.2
million to $2.9 million for the year ended December 31, 1997 from $761,000 for
the 1996 period. This increase was the result of higher taxable income during
the year ended December 31, 1997. In addition, the 1996 period included the
reversal of a $1.1 million prior accrued liability which, in management's
opinion, was no longer required and which was reversed with a credit to the 1996
income tax provision.
47
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
GENERAL. Net income for the three months ended December 31, 1996
increased 10.5% to $1.2 million, or $0.24 per share, compared to $1.1 million,
or $0.22 per share, for the three months ended December 31, 1995. The increase
in net income was due to increases in net interest income of $662,000 and in
other income of $145,000 offset partially by increases of $213,000 in the
provision for loan losses, $455,000 in operating expense and $29,000 in the
provision for income taxes.
NET INTEREST INCOME. Net interest income increased to $5.5 million for
the quarter ended December 31, 1996 from $4.9 million for the three months ended
December 31, 1995 primarily as a result of a $78.0 million increase in average
interest-earning assets to $616.6 million for the three months ended December
31, 1996 from $538.6 million for the same period in 1995. This increase was
offset in large part by a $74.8 million increase in average interest-bearing
liabilities to $559.8 million for the three months ended December 31, 1996 from
$485.0 million for the same period in 1995.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $243,000
for the three months ended December 31, 1996 as compared to $30,000 for the same
period in 1995. The increase in the provision of $213,000 included a $200,000
transfer to the general loan valuation allowance from a specific reserve which
had been maintained with respect to an interest-earning deposit which was
pledged as collateral for the loan made to the ESOP and which was recovered
during the three months ended December 31, 1996. The allowance for loan losses
as a percentage of net loans receivable was 0.65% and 1.04% at December 31, 1996
and 1995, respectively.
OTHER INCOME. Other income consists of servicing income and fee income,
service charges, gain or loss on the sale of securities available for sale and
income or loss from the Association's subsidiary's real estate venture. Other
income increased $145,000 to $1.2 million for the three months ended December
31, 1996 from $1.1 million for the same period in 1995, due to the reversal of a
specific reserve of $200,000 referenced above which had been maintained with
respect to an interest-earning deposit which was pledged as collateral for the
ESOP loan and which was recovered during the 1996 period.
OPERATING EXPENSE. Operating expense increased $455,000, or 10.9%, to
$4.6 million for the three month period ended December 31, 1996, from $4.2
million from the same period in 1995, primarily due to increases of $135,000 in
advertising and promotion due to increased advertising designed to increase the
Association's market share, and $122,000 in employee compensation and benefits
as a result of increased staffing due to both a branch office opening and the
expansion of the Association's loan portfolio.
PROVISION FOR INCOME TAXES. Provision for income taxes increased
$29,000 to $696,000 for the three months ended December 31, 1996 as compared to
$667,000 for the same period in 1995 due to the increase in net income.
RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
GENERAL. Net income for the year ended September 30, 1996 decreased
15.2% to $3.9 million, or $0.80 per share, compared to $4.6 million, or $0.94
per share, for the same period in 1995 due primarily to the $2.8 million special
SAIF assessment as well as a $1.8 million increase in other operating expense.
Such increases in expenses were partially offset by an increase in net interest
income of $1.9 million, a decrease of $142,000 in the provision for loan losses,
and a decrease in the provision for income taxes of $2.0 million.
INTEREST INCOME. Interest income for the year ended September 30, 1996
totaled $43.9 million, an increase of $6.2 million, or 16.4%, from $37.7 million
for the year ended September 30, 1995. The increase was due primarily to an
increase in average interest-earning assets of $70.6 million to $575.9 million
for the year ended September 30, 1996 from $505.3 million for the same period in
1995, enhanced by an increase in the average yield on average interest-earning
assets to 7.62% for the year ended September 30, 1996 from 7.46% for the year
ended September 30, 1995.
48
<PAGE>
Interest income on loans increased $3.4 million, or 13.7%, to $28.3 million for
the year ended September 30, 1996 compared to $24.9 million for the same period
in 1995. Interest income on real estate loans increased by $3.1 million, or
13.1%, to $26.8 million for the year ended September 30, 1996 from $23.7 million
for the same period in 1995, primarily because of an increase in the average
yield on real estate loans to 8.09% from 7.66%, and an increase in the average
balance of real estate loans of $22.4 million, or 7.3%. Interest income on
consumer and other loans increased by $288,000 in 1996 as compared to 1995,
principally because of an increase in the average balance of such loans of $2.6
million to $15.7 million for the year ended September 30, 1996 from $13.1
million for the year ended September 30, 1995. Interest income on
mortgage-backed and related securities increased by $205,000, or 4.9%, to $4.4
million. The increase in interest income from mortgage-backed and related
securities is primarily attributable to an increase in the average balance of
mortgage-backed and related securities to $100.0 million from $53.3 million,
partially offset by a decrease in the average yield to 7.43% from 7.87%.
Interest income from investment securities and securities available for sale
increased by $2.8 million, or 46.7%, to $8.7 million for the year ended
September 30, 1996 from $5.9 million for the year ended September 30, 1995. The
increase in income from investment securities and securities available for sale
was primarily caused by an increase in the average balance of $3.6 million to
$87.3 million for the year ended September 30, 1996 from $83.7 million, offset
by a decrease in the average yield to 6.53% for the year ended September 30,
1996 from 7.11% for the year ended September 30, 1995. Interest income from
other investments decreased $226,000, or 8.3%, to $2.5 million for the year
ended September 30, 1996 from $2.7 million for the year ended September 30,
1995. The decrease in interest from other investments was primarily attributable
to a $4.6 million, or 9.9%, decrease in the average balance of other investments
to $41.8 million during 1996 from $46.4 million during 1995, partially offset by
an increase in the average yield on other investments to 5.96% for the year
ended September 30, 1996 from 5.85% for the year ended September 30, 1995.
INTEREST EXPENSE. Interest expense increased $4.2 million, or 22.7%, to
$22.9 million for the year ended September 30, 1996 from $18.6 million for the
same period in 1995. Interest on deposits increased $3.6 million, or 22.8%, to
$19.2 million for the year ended September 30, 1996 from $15.7 million for the
year ended September 30, 1995. The increase was due primarily to the increase in
average cost of deposits to 4.02% from 3.65%, and to a lesser degree, an
increase in the average balance of deposits of $49.1 million, or 11.4%, to
$479.0 million during 1996 from $429.9 million during 1995. In order to
maintain, and if possible, to increase its market share of total deposits,
during fiscal 1996 the Association placed an increased emphasis on certificate
of deposit products, including a new odd-term certificate of deposit product, as
well as existing certificate of deposit products as part of its asset liability
policy. Interest expense attributable to borrowed funds increased $657,000, or
22.2%, to $3.6 million for the year ended September 30, 1996 from $3.0 million
for the year ended September 30, 1995. The increase in interest expense
attributable to borrowed funds is due to an increase in the average balance of
borrowed funds to $42.4 million during fiscal 1996 from $29.1 million during
fiscal 1995, partially offset by a decrease in the average cost of borrowed
funds to 8.52% for the year ended September 30, 1996 from 10.16% for the same
period in 1995. During fiscal year 1996, the Association used additional
advances from the FHLB primarily to fund the purchase of securities bearing
higher yields than the rate paid on such advances.
PROVISION FOR LOAN LOSSES. The Association's provision for loan losses
was $98,000 for the year ended September 30, 1996 as compared to $240,000 for
the year ended September 30, 1995. The decrease in the provision for loan losses
for fiscal 1996 was attributable to management's assessment that the allowance
for loan losses was sufficient to absorb risk inherent in the Association's
portfolio. The Association's allowance for loan losses as a percentage of net
loans receivable at September 30, 1996 and 1995 was 0.61% and 1.06%,
respectively.
OTHER INCOME. Other income during the periods consisted of servicing
income and fee income, service charges, gain or loss on the sale or call of
mortgage-backed and related securities and investment securities and income or
loss from a real estate venture in which a subsidiary was involved (which
subsidiary is no longer active). Other income increased $150,000, or 4.4%, to
$3.5 million for the year ended September 30, 1996 from $3.4 million for the
year ended September 30, 1995. The increase in other income was primarily due to
increases of $383,000 in NOW accounts and other customer fees (consisting of
fees from money orders, transaction accounts, safe deposit boxes, and overdraft
fees) and a $254,000 gain on the early maturity of an investment. These
increases were partially offset by a
49
<PAGE>
decrease in miscellaneous income of $226,000 primarily as a result of a $279,000
decrease in the Association's income from its subsidiary's real estate venture
which reflected the smaller number of closings on sales of units during fiscal
1996 as the Association's real estate venture sold the majority of the units. In
addition, the Association recorded a net loss on the sale of loans of $225,000
during fiscal 1996 which did not occur in fiscal 1995.
OPERATING EXPENSE. Total operating expense increased $4.9 million to
$19.8 million for the year ended September 30, 1996 from $14.9 million for the
year ended September 30, 1995. The increase in operating expense was primarily
attributable to a one-time $2.8 million special assessment for recapitalization
of the SAIF as discussed previously. In addition, employee compensation and
benefits increased by $492,000 to $7.8 million during 1996 from $7.3 million
during 1995, miscellaneous expense increased by $836,000 to $3.2 million during
1996 from $2.3 million during 1995, and the net gain on real estate owned
decreased by $569,000 to $243,000 for 1996 from $812,000 for 1995. During fiscal
year 1996, the Association received an additional payment of $470,000
representing a final settlement of the Association's claim with the State of
Florida Department of Insurance, as Receiver for International Medical Centers,
Inc. of Miami ("IMC"). Of this amount, $260,000 was classified as net gain on
real estate owned while the remaining $210,000 was classified as interest
income. During fiscal 1995, the Association received an initial settlement of
this claim of $816,000 which was classified as net gain on real estate owned.
Occupancy and equipment expense increased $75,000 to $4.6 million for 1996 from
$4.5 million for 1995 primarily due to the opening of a new office, and
advertising and promotion increased $71,000 to $616,000 for 1996 from $545,000
for 1995 primarily due to increased advertising for the Association's lending
products.
PROVISION FOR INCOME TAXES. Provision for income taxes decreased $2.0
million to $761,000 for the year ended September 30, 1996 from $2.8 million for
the same period in 1995. The decrease in income tax expense reflected lower
pre-tax income during the comparative periods as well as the reversal of a $1.1
million prior accrued liability which in management's opinion was no longer
required and which was reversed with a credit to the 1996 income tax provision.
MARKET RISK ANALYSIS
As a holding company for a financial institution, the Mid-Tier Holding
Company's primary component of market risk is interest rate volatility.
Fluctuations in interest rates will ultimately impact both the level of income
and expense recorded on a large portion of the Association's assets and
liabilities, and the market value of all interest-earning assets and
interest-bearing liabilities, other than those which have a short term to
maturity. Since the Mid-Tier Holding Company's interest-earning assets and
interest-bearing liabilities are held by the Association, all of the Mid-Tier
Holding Company's interest rate risk exposure lies at the Association level. As
a result, all significant interest rate risk management procedures are performed
by management of the Association. Based upon the nature of the Association's
operations, the Association is not subject to foreign currency exchange or
commodity price risk. The Association's loan portfolio is secured by assets
located primarily in Palm Beach, Martin, St. Lucie, Indian River and Brevard
Counties in Florida and is, therefore, subject to risks associated with the
local economy. As of June 30, 1998, the Association did not own any trading
assets, and does not have any hedging transactions in place such as interest
rate swaps and caps.
The Association's interest rate risk management is the responsibility
of the Asset/Liability Committee ("ALCO"), which makes quarterly reports to the
Board of Directors. ALCO establishes policies to monitor and coordinate the
Association's sources, uses and pricing of funds.
The Association's interest rate management strategy is designed to
manage the volatility of its net interest income by managing the relationship of
interest-rate sensitive assets to interest-rate sensitive liabilities. The
Association monitors interest rate risk through the use of a simulation model
which measures the sensitivity of future net interest income and the net
portfolio value to changes in interest rates. In addition, the Association
monitors interest rate sensitivity through analysis by measuring the terms to
maturity or next repricing date of interest-earning assets and interest-bearing
liabilities The extent to which assets and liabilities are "interest rate
sensitive" is measured by an institution's interest rate sensitivity "gap." An
asset or liability is said to be interest rate sensitive within a specific time
50
<PAGE>
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to result in a
decrease in net interest income while a positive gap would tend to result in an
increase in net interest income. Conversely, during a period of falling interest
rates, a negative gap would tend to positively affect net interest income while
a positive gap would tend to adversely affect net interest income. See "- GAP
Table". At June 30, 1998, total interest-earning assets maturing or repricing
within one year exceeded total interest-bearing liabilities maturing or
repricing in the same period by $3.4 million, representing a cumulative one-year
gap ratio of a positive 0.44%. See "- GAP Table."
In the declining interest rate environment that has existed over the
past several years, the Association invested a substantial portion of its assets
in short- and medium-term liquid assets. While such investments typically yield
less than could be obtained in investments in mortgage loans, the Association
believes such investments will allow it to reinvest at higher yields if interest
rates rise. In this regard, the Association has emphasized the origination of
ARM loans and other adjustable-rate or short-term loans, as well as purchased
short-term and medium-term investments. In addition, in recent years, the
Association has de-emphasized the origination of fixed-rate residential loans
and has used hybrid loan products which have a fixed-interest rate for a stated
period of either five or seven years. At the end of the fixed-interest rate
period, the loan converts to a one year ARM. The Association retains ARM loans
and fixed-rate loans with maturities of 15 years or less in its portfolio. Based
on management's assessment of the current portfolio mix and Board of Director
established limits, fixed rate loans with maturities greater than 15 years are
either held in the portfolio or sold when originated in the secondary market,
except those originated for special financing on low income housing. The
Association also invests in United States Government and agency securities,
investment securities, including mutual funds that invest in adjustable-rate
securities, and short-term and medium-term fixed-rate mortgage-backed and
related securities. Of the Association's total investment in loans,
mortgage-backed and related securities and investment securities at June 30,
1998, $331.4 million, or 46.2%, had adjustable interest rates. In addition, the
Association does not solicit high-rate certificates of deposit in excess of
$100,000 or brokered funds.
MARKET VALUE PORTFOLIO EQUITY. Although interest rate sensitivity gap
is a useful measurement and contributes toward effective asset and liability
management, it is difficult to predict the effect of changing interest rates
based solely on that measure. An alternative methodology is to estimate the
change in the market value of portfolio equity ("MVPE"). The assumptions used by
management to evaluate the vulnerability of the Mid-Tier Holding Company's
operations to changes in interest rates in the table below are primarily based
on assumptions provided by the FHLB of Atlanta (see "- Gap Table"). Although
management finds these assumptions reasonable, the interest rate sensitivity of
the assets and liabilities and the estimated effects of changes in interest
rates on the net interest income and MVPE indicated in the following table could
vary substantially if different assumptions were used or actual experience
differs from such assumptions.
51
<PAGE>
The following table presents the Mid-Tier Holding Company's internal
calculations of MVPE at June 30, 1998.
<TABLE>
<CAPTION>
Change in Interest Estimated Net Market Value
Rates in Basis Points of Portfolio Equity NPV as % of PV of Average Assets
- ------------------------------------- ---------------------------------------- --------------------------------
(Rate Shock) Amount $ Change % Change NPV Ratio Change
- ------------------------------------- --------- -------- -------- ------------- -------------
(Dollars in Thousands) (Basis Points)
<S> <C> <C> <C> <C> <C>
400 $ 66,779 $(35,874) (34.9)% 8.93% (479)
300 74,595 (28,059) (27.3) 9.97 (375)
200 83,118 (19,535) (19.0) 11.11 (261)
100 92,438 (10,215) (10.0) 12.36 (136)
Static 102,653 -- -- 13.72 --
(100) 113,880 11,226 10.9 15.22 150
(200) 126,250 23,596 23.0 16.88 316
(300) 139,916 37,263 36.3 18.70 498
(400) 155,056 52,403 51.0 20.73 701
</TABLE>
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields an costs respond to changes in market interest rates. In this regard, the
MPV table presented assumes that the composition of the Mid-Tier Holding
Company's interest sensitive assets and liabilities existing at the beginning of
a period remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV table provides an indication of the
Mid-Tier Holding Company's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Mid-Tier
Holding Company's net interest income and will differ from actual results.
52
<PAGE>
GAP TABLE. The following table sets forth the amounts of
interest-earning assets and interest-bearing liabilities outstanding at June 30,
1998, which are expected to reprice or mature, based on certain assumptions, in
each of the future time periods shown. Except as stated below, the amounts of
assets and liabilities shown that reprice or mature during a particular period
were determined in accordance with the earlier term of repricing or the
contractual terms of the asset or liability.
<TABLE>
<CAPTION>
Amounts Maturing or Repricing
-----------------------------------------------------
6 Months
Less than 3 3 to 6 to 1 1 to
Months Months Year 3 Years
----------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans:
Residential one- to four-family:
Market index ARMs .................... $ 75,325 $ 21,920 $ 60,227 $ 19,133
Fixed-rate ........................... 8,969 10,047 17,601 58,744
Commercial and multi-family:
ARMs ................................. 28,007 4,027 15,l87 3,489
Fixed-rate ........................... 392 178 3,693 2,830
Valuation allowances ..................... -- -- -- --
Yield adjustments ........................ 25 25 51 204
Consumer loans ........................... 1,100 898 1,554 2,865
Equity line of credit loans .............. 8,273 -- -- --
Commercial business loans ................ 5,026 33 135 52
Collateralized mortgage obligations ...... 16,094 5,897 8,855 21,428
Other mortgage-backed securities ......... 1,492 1,195 2,154 5,727
Investment securities .................... 47,474 1,535 516 1,468
Deposits in other institutions and cash
equivalents ............................ 30,948 -- -- --
FHLB stock ............................... 3,782 -- -- --
--------- --------- --------- ---------
TOTAL INTEREST-EARNING ASSETS .......... 226,907 45,755 109,973 115,940
--------- --------- --------- ---------
Interest-bearing liabilities:
Passbook accounts ........................ 1,399 1,399 2,800 7,059
NOW accounts ............................. 6,878 6,878 13,756 15,866
Money market accounts .................... 16,659 16,659 33,317 1,948
Certificate accounts ..................... 68,140 67,030 106,033 81,365
FHLB advances ............................ 16,588 2,123 3,711 13,030
Other borrowed funds ..................... 15,883 -- -- --
--------- --------- --------- ---------
TOTAL INTEREST-BEARING LIABILITIES ..... 125,547 94,089 159,617 119,268
--------- --------- --------- ---------
Interest-earning assets less interest-
bearing liabilities ("interest rate
sensitivity gap") ....................... $ 101,360 $ (48,334) $ (49,644) $ (3,328)
========= ========= ========= =========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities ............. $ 101,360 $ 53,026 $ 3,382 $ 54
========= ========= ========= =========
Interest sensitivity gap to total assets ... 13.24% (6.31)% (6.49)% (0.43)%
Cumulative interest sensitivity gap to totat
assets .................................. 13.24% 6.93% 0.44% 0.01%
Ratio of interest-earning assets to interest
bearing liabilities ...................... 180.73% 48.63% 68.90% 97.21%
Cumulative ratio of interest-earning assets
to interest-bearing liabilities .......... 180.73% 124.14% 100.89% 100.01%
Cumulative interest-earning assets ......... $ 226,907 $ 272,662 $ 382,635 $ 498,575
Cumulative interest-bearing liabilities .... $ 125,547 $ 219,636 $ 379,253 $ 498,521
</TABLE>
<TABLE>
<CAPTION>
Amounts Maturing or Repricing
-------------------------------------------------
3 to More than
5 Years 5-10 Years 10 Years Total
--------- ---------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans:
Residential one- to four-family:
Market index ARMs .................... $ 12,739 $ -- $ -- $ 189,344
Fixed-rate ........................... 42,906 65,717 48,315 252,299
Commercial and multi-family:
ARMs ................................. -- -- -- 50,710
Fixed-rate ........................... 3,654 2,686 2,466 15,899
Valuation allowances ..................... -- -- (2,767) (2,767)
Yield adjustments ........................ 208 93 583 1,189
Consumer loans ........................... 457 45 -- 6,919
Equity line of credit loans .............. -- -- -- 8,273
Commercial business loans ................ 263 -- -- 5,509
Collateralized mortgage obligations ...... 11,154 5,814 3,267 72,509
Other mortgage-backed securities ......... 418 -- -- 10,986
Investment securities .................... 15,485 4,670 -- 71,148
Deposits in other institutions and cash
equivalents ............................ -- -- -- 30,948
FHLB stock ............................... -- -- -- 3,782
--------- --------- --------- ---------
TOTAL INTEREST-EARNING ASSETS .......... 87,284 79,025 51,864 716,748
--------- --------- --------- ---------
Interest-bearing liabilities:
Passbook accounts ........................ 3,413 6,805 10,061 32,936
NOW accounts ............................. 2,807 5,654 22,516 74,355
Money market accounts .................... 826 711 14,227 84,347
Certificate accounts ..................... 29,658 956 -- 353,182
FHLB advances ............................ 17,643 22,535 -- 75,630
Other borrowed funds ..................... -- -- -- 15,883
--------- --------- --------- ---------
TOTAL INTEREST-BEARING LIABILITIES ..... 54,347 36,661 46,804 636,333
--------- --------- --------- ---------
Interest-earning assets less interest-
bearing liabilities ("interest rate
sensitivity gap") ....................... $ 32,937 $ 42,364 $ 5,060 $ 80,415
========= ========= ========= =========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities ............. $ 32,991 $ 75,355 $ 80,415
========= ========= =========
Interest sensitivity gap to total assets ... 4.30% 5.53% 0.66%
Cumulative interest sensitivity gap to totat
assets .................................. 4.31% 9.84% 10.51%
Ratio of interest-earning assets to interest
bearing liabilities ...................... 160.61% 215.56% 110.81%
Cumulative ratio of interest-earning assets
to interest-bearing liabilities .......... 105.97% 112.78% 112.64%
Cumulative interest-earning assets ......... $ 585,859 $ 664,884 $ 716,748
Cumulative interest-bearing liabilities .... $ 552,868 $ 589,529 $ 636,333
</TABLE>
In preparing the table above, it has been assumed, consistent with the
assumptions used by the FHLB of Atlanta, as of March 1998, in assessing the
interest rate sensitivity of savings associations, that: (i) adjustable-rate
first mortgage loans will prepay at a rate of 23% per year; (ii) fixed-rate
mortgage loans on one- to four-family residential properties with terms to
maturity of 15 years or less will prepay at a rate of 10% per year; (iii) second
mortgage loans on one- to four-family residential properties will prepay at a
rate of 16% per year; (iv) fixed maturity deposits will not be withdrawn prior
to maturity; (v) these withdrawal rates as well as loan prepayment assumptions
are based on certain
53
<PAGE>
assumptions for loan prepayments and deposit withdrawals and (vi) fixed-rate
first mortgage loans on one- to four-family residential properties with
remaining terms to maturity of over 15 years will prepay annually as follows:
Prepayment Interest Rate Assumption
------------------------ ----------
Less than 7% 9%
7 to 7.99% 11%
8 to 8.99% 14%
9 to 9.99% 19%
10% and over 27%
Management believes that these assumptions approximate actual experience
and considers them appropriate and reasonable. NOW, passbook and statement
savings accounts and money market accounts are assumed to decay at the following
rates:
<TABLE>
<CAPTION>
Over 1 Over 3 Over 5 Over 10
1 Year Through Through Through Through Over 20
or Less 3 Years 5 Years 10 Years 20 Years Years
------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
NOW accounts ..................... 37% 34% 9% 20% 20% 20%
Passbook accounts ................ 17 26 17 40 40 40
Money market deposit accounts .... 79 11 5 5 5 5
</TABLE>
The above assumptions utilized by the FHLB of Atlanta are annual
percentages based on remaining balances and should not be regarded as indicative
of the actual prepayments and withdrawals that may be experienced by Bankshares.
Moreover, certain shortcomings are inherent in the analysis presented by 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, interest rates on certain types of
assets and liabilities may fluctuate in advance of or lag behind changes in
market interest rates. Additionally, certain assets, such as ARM loans, have
features that restrict changes in interest rates on a short-term basis and over
the life of the assets. Moreover, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. For information regarding the
contractual maturities of the loan, securities and deposit portfolios, see Notes
to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Association adjusts its liquidity levels in order to meet funding
needs of deposit outflows, payment of real estate taxes on mortgage loans,
repayment of borrowings, and loan commitments. The Association also adjusts
liquidity as appropriate to meet its asset and liability management objectives.
A major portion of the Association's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities.
The Association is required to maintain minimum levels of liquid assets
as defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. Currently, the required ratio is 4.0%.
The Association's liquidity ratio averaged 12.2% during the six months ended
June 30, 1998 while liquidity ratios averaged 14.2% for the year ended December
31, 1997.
54
<PAGE>
The Association's primary sources of funds are deposits, amortization
and prepayment of loans and mortgage-backed and related securities, maturities
of investment securities and other short-term investments, FHLB advances, and
earnings and funds provided from operations. While scheduled principal
repayments on loans and MBS, and maturities of securities are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions, and competition. The
Association manages the pricing of its deposits to maintain a desired deposit
balance. In addition, the Association invests funds in excess of its immediate
needs in short-term interest-earning deposits and other assets, which provide
liquidity to meet lending requirements. Short-term interest-bearing deposits
with the FHLB of Atlanta amounted to $30.6 million at June 30, 1998. Other
assets qualifying for liquidity outstanding at June 30, 1998 amounted to $14.8
million. For additional information about cash flows from the operating,
financing, and investing activities, see the unaudited consolidated statements
of cash flows included in the financial statements.
Liquidity management is both a daily and long-term function of business
management. If funds are required beyond the ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. FHLB advances totaled $75.6 million at June 30, 1998.
At June 30, 1998, outstanding loan commitments totaled $22.1 million,
which amount does not include the unfunded portion of loans in process.
Certificates of deposit scheduled to mature in less than one year totaled $241.2
million at June 30, 1998. Based on prior experience, management believes that a
significant portion of such deposits will remain with the Association.
The Association is subject to various regulatory capital requirements
administered by the OTS. 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
Bankshares' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Association must meet
specific capital guidelines that involve quantitative measures of the
Association's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Association's capital
amounts and classifications are also subject to qualitative judgments by
regulators about components, risk-weighting, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts and ratios of
tangible capital of not less than 1.5% of adjusted total assets, total capital
to risk-weighted assets of not less than 8.0%, Tier I capital of not less than
3.0% of adjusted total assets, and Tier I capital to risk-weighted assets of not
less than 4.0% (as defined in the regulations). Management believes, as of June
30, 1998, that the Association meets all capital adequacy requirements to which
it is subject.
As of June 30, 1998, the most recent notification from the OTS
categorized the Association as "Well Capitalized" under the framework for prompt
corrective action. To be considered well capitalized under such framework, the
Association must maintain total risk-based, Tier I risk-based, and Tier I
leverage ratios of 10.0%, 6.0% and 5.0%, respectively. There are no conditions
or events since that notification that management believes have changed the
Association's categorization. See Note 16 to Consolidated Financial Statements.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"), which establishes
annual and interim reporting standards for an enterprise's operating segments
and related disclosures about its products, services, geographic areas, and
major customers. Adoption of this statement will not affect the Mid-Tier Holding
Company's consolidated financial position, results of operations, or cash flows,
and any effect is limited to the form and content of its disclosures. The
statement is effective for the fiscal year ended December 31, 1998.
55
<PAGE>
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), issued in June
1998, must be adopted as of January 1, 2000. This Statement establishes
accounting and reporting standards for derivative financial instruments and for
hedging activities. Upon adoption of the Statement, all derivatives must be
recognized at fair value as either assets or liabilities in the statement of
financial position. Changes in the fair value of derivatives not designated as
hedging instruments are to be recognized currently in earnings. Gains or losses
on derivatives designated as hedging instruments are either to be recognized
currently in earnings or are to be recognized as a component of other
comprehensive income, depending on the intended use of the derivatives and the
resulting designations. Upon adoption, retroactive application of this Statement
to financial statements of prior periods is not permitted. The Mid-Tier Holding
Company is currently in the process of evaluating the impact of SFAS No.133 on
its consolidated financial position and results of operations.
YEAR 2000 CONSIDERATIONS
In order to be ready for the year 2000 (the "Year 2000 Issue"), the
Association has developed a Year 2000 Action Plan (the "Action Plan") which was
presented to the Audit Committee of the Board of Directors during July 1997. The
Action Plan was developed using the guidelines outlined in the Federal Financial
Institutions Examination's Council's "The Effect of 2000 on Computer Systems".
The Association's Strategic Planning Committee assigned responsibility for the
Action Plan to the Year 2000 Committee which reports to the Strategic Planning
Committee and the Board of Directors on a monthly basis. The Action Plan
recognizes that the Association's operating, processing and accounting
operations are computer reliant and could be affected by the Year 2000 Issue.
The Association is primarily reliant on third party vendors for its computer
output and processing, as well as other significant functions and services
(I.E., securities safekeeping services, securities pricing information, et
cetera). The Year 2000 Committee is currently working with these third party
vendors to assess their year 2000 readiness. Based upon the initial assessment,
management presently believes that with planned modifications to existing
software and hardware and planned conversions to new software and hardware, the
Association's third party vendors are taking the appropriate steps to ensure
critical systems will function properly. The Association currently expects such
modifications and conversions and related testing to be completed by December
31, 1998. However, if such modifications and conversions are not made, or are
not completed on a timely basis, the Year 2000 Issue could have a material
impact on the operations of the Association.
The Year 2000 issues also affect certain of the Association's
customers, particularly in the areas of access to funds and additional
expenditures to achieve compliance. As of June 30, 1998, the Association had
contacted all of its commercial credit customers regarding the customers
awareness of the Year 2000 Issue.
The Association has completed its own company-wide Year 2000
contingency plan. Individual contingency plans concerning specific software and
hardware issues are currently being formulated.
The costs of modifications to the existing software is being primarily
absorbed by the third party vendors, however the Association recognized that the
need exists to purchase new hardware and software. Based upon current estimates,
the Association has identified $1,800,000 in total costs, including hardware,
software, and other issues, for completing the Year 2000 project. Of that
amount, approximately $1,226,000 and $39,000 was purchased during the twelve
months ended December 31, 1997 and 1996, respectively, with the remaining
$535,000 budgeted for the year ended December 31, 1998.
56
<PAGE>
BUSINESS OF THE MID-TIER HOLDING COMPANY
The Mid-Tier Holding Company is a federally chartered mid-tier stock
holding company organized in August 1997. The only significant asset of the
Mid-Tier Holding Company is its investment in the Association. The Mid-Tier
Holding Company is majority owned by the MHC, a federally chartered mutual
holding company. Effective September 30, 1997, the Mid-Tier Holding Company
acquired all of the issued and outstanding common stock of the Association in
connection with the Association's reorganization into the two-tier form of
mutual holding company ownership. At that time, each share of Association's
Common Stock was converted into one share of Mid-Tier Holding Company Common
Stock. As of the date hereof, the MHC owned 2,620,144 shares of Mid-Tier Holding
Company Common Stock with the remaining 2,479,976 shares being owned by the
Public Shareholders. The Mid-Tier Reorganization was accounted for at historical
cost in a manner similar to a pooling of interests. Therefore, all financial
information has been presented as if the Mid-Tier Holding Company had been in
existence for all periods included in this report. On a consolidated basis, at
June 30, 1998, the Mid-Tier Holding Company had total assets of $765.5 million,
total loans of $527.4 million, total deposits of $574.4 million, and total
shareholders' equity of $83.1 million.
The Mid-Tier Holding Company's executive office is located at 660 U.S.
Highway One, North Palm Beach, Florida and its telephone number at that address
is (561) 881-2212.
BUSINESS OF COMMUNITY SAVINGS, F. A.
GENERAL. The Association, founded in 1955, is a federally chartered
savings and loan association headquartered in North Palm Beach, Florida. The
Association's deposits are federally insured by the FDIC through the SAIF. The
Association has been a member of the FHLB of Atlanta since 1955. The Association
is regulated by the OTS. On October 24, 1994, the Association completed a
reorganization into a federally chartered mutual holding company, the MHC. As
part of the MHC Reorganization, the Association organized a new federally
chartered stock savings association and transferred substantially all of its
assets and liabilities to the stock savings association in exchange for a
majority of the common stock of the stock savings association. Subsequently, on
September 30, 1997, it completed the Mid-Tier Reorganization.
The Association is a community-oriented financial institution engaged
primarily in the business of attracting deposits from the general public in the
Association's market area (as described below) and using such funds, together
with other borrowings, to invest in various consumer-based real estate loans,
commercial business loans and mortgage-backed and related securities as well as
United States government and agency securities, mutual funds, corporate debt
securities, interest-earning deposits in the FHLB and FHLB stock. See "Lending
Activities," "Mortgage-Backed and Related Securities," and "Investment
Activities." The Associations principal source of funds are deposits, principal
and interest payments on loans and securities, and FHLB advances. The principal
source of income is interest received from loans and securities, while principal
expenses are interest paid on deposits and borrowings and employee compensation
and benefits. See "Sources of Funds." The Association's plan is to operate as a
well-capitalized, profitable and independent institution. The Association's
profitability is highly dependent on its net interest income. The components
that determine net interest income are the amount of interest-earning assets and
interest-bearing liabilities, together with the rates earned or paid on such
interest rate-sensitive instruments. The Association is sensitive to managing
interest rate risk exposure through its efforts to better match asset and
liability maturities and rates. This is accomplished while considering the
credit risk of certain assets. The Association maintains asset quality by
utilizing comprehensive loan underwriting standards and collection efforts as
well as by primarily originating or purchasing secured or guaranteed assets.
The Association's executive office is located at 660 U.S. Highway One,
North Palm Beach, Florida, and its telephone number at that address is (561)
881-4800.
57
<PAGE>
CHANGE OF FISCAL YEAR
In January 1997, the Board of Directors of the Association approved a
change of the Association's fiscal year from September 30 to December 31,
effective December 31, 1996. The Mid-Tier Holding Company and the MHC use a
fiscal year end of December 31 as well.
MARKET AREA AND COMPETITION
The Mid-Tier Holding Company and the Association are headquartered in
North Palm Beach, Florida. Because the Mid-Tier Holding Company's only
significant asset is its ownership of all the issued and outstanding capital
stock of the Association, the market area and competition are identical for both
entities. The Association operates 21 offices in its market area in southeastern
Florida. Five offices are located in Martin County, twelve offices are located
in Palm Beach County, three offices are located in St. Lucie County and one
office is located in Indian River County. The Association operates two loan
production offices, one located in Vero Beach in Indian River County and one in
Melbourne in Brevard County.
According to county projections prepared by the University of Florida,
population in Palm Beach, Martin, St. Lucie, and Indian River counties was
estimated at l.4 million for 1997. This study projects a 6.6% growth rate to 1.5
million by the year 2000 and a 38.6% growth rate from the year 2001 to the year
2020 to 2.l million. This population growth combined with a lower interest rate
environment during early 1998 suggests an increased demand for mortgage loans in
the four county market as well as the State of Florida. However, such estimates
may not prove representative of trends for the remainder of 1998.
Based on total assets as of March 31, 1998, the Association was the
third largest savings institution headquartered in Palm Beach County. The
Association held 2.14%, 6.28%, 2.93% and 0.80% of all bank and savings
association deposits in Palm Beach, Martin, St. Lucie, and Indian River
counties, respectively, at March 31, 1998.
The counties in the Association's market area, have experienced
significant growth since the 1960s. Several of the counties are currently
undertaking major redevelopment projects. In Palm Beach County, the City of West
Palm Beach is implementing a $375 million project called City Place designed to
continue the revitalization of the downtown area. Also in Palm Beach County,
construction has begun on a new subdivision development (called Abacoa) which
features a major league baseball stadium to be used for Spring training,
commercial office space and retail space, recreational facilities, a branch
campus of Florida Atlantic University as well as single-family and multi-family
residential properties which will accommodate approximately 10,000 residents.
TriRail, the commuter train service for southern Florida, will be extended
northward to service this community.
In Martin County, redevelopment of the City of Stuart's downtown area
has been supplemented by the completion of the new Roosevelt bridge facilitating
access to the city from the north.
In St. Lucie County, the Professional Golfers Association has planned
three new championship golf courses, a golf learning center and a housing
development.
The economy in this market area is service-oriented and is
significantly dependent upon government, foreign trade, tourism, and its
continued attraction as a retirement area. In Palm Beach and Martin counties,
cooperative efforts between the counties and local municipalities are producing
business growth and expansion in the county. A variety of county-supported
programs have been instituted to create new jobs and to encourage relocation or
expansion of companies with an emphasis placed on high-technology and service
industries. Consequently, commercial building vacancies are at a low level.
Major employers in Palm Beach County include Pratt and Whitney (United
Technologies), Motorola, Inc., St. Mary's and Good Samaritan Hospitals, Florida
Power and Light Co. and Flo Sun, Inc. Martin County major employers include
Martin Memorial Health System, Staff Leasing, and Publix. St. Lucie County major
employers
58
<PAGE>
include Indian River Community College, Columbia Lawnwood Regional Medical,
Publix, and Staff Leasing. Indian River County major employers include Indian
River Memorial Hospital, Publix and New Piper Aircraft Corp.
The Association's market area in southeast Florida has a large
concentration of financial institutions, many of which are significantly larger
and have greater financial resources than the Association, and all of which are
competitors of the Association to varying degrees. As a result, the Association
encounters strong competition both in attracting deposits and in originating
real estate and other loans. Its most direct competition for deposits has come
historically from commercial banks, securities broker-dealers, other savings
associations, and credit unions in its market area. Continued strong competition
from such financial institutions is expected in the foreseeable future. The
market area includes branches of several commercial banks that are substantially
larger than the Association in terms of state-wide deposits. The Association
competes for savings by offering depositors a high level of personal service and
expertise together with a wide range of financial services as well as
competitive pricing. In recent years many financial institutions have been
aggressively expanding through the acquisition of branch locations or entire
financial institutions, thereby increasing competition.
The competition for real estate and other loans comes principally from
commercial banks, mortgage-banking companies, and other savings associations.
The competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the market area as well
as the increased efforts by commercial banks to expand mortgage loan
originations. The Association competes for loans primarily through the
competitive interest rates and loan fees it charges and the efficiency and
quality of services it provides borrowers, real estate brokers, and builders.
Factors that affect competition include general and local economic conditions,
current interest rate levels, and the volatility of the mortgage markets.
LENDING ACTIVITIES
GENERAL. Historically, the principal lending activity of the
Association has been the origination of fixed- and adjustable-rate mortgage
loans collateralized by one- to four-family residential properties located in
its primary market area. It is the Association's intention to offer varied
products in the residential mortgage loan area. The Association currently
emphasizes the origination of ARM loans and fixed-rate residential mortgage
loans with terms of 15 years or less, as well as a residential mortgage loan
which provides for a fixed-rate of interest during the first five or seven years
and which thereafter converts to an ARM loan, the interest rate of which adjusts
annually. At times, it has been the Association's policy to sell in the
secondary market all fixed-rate mortgage loan originations with terms greater
than 15 years on a servicing retained basis. However, based on management's
assessment of the market at a particular time and Board of Director limits, the
Association may periodically decide to retain such loans in the portfolio. There
were no loans held for sale at June 30, 1998. Loans serviced for other
institutions totaled $16.3 million.
While the Association's primary emphasis is on residential real estate
lending, the Association's policy is to meet demand for other types of loans by
offering a wide variety of loan programs designed to meet its customers' needs.
In response to customer demand, the Association began expanding its commercial
lending programs in fiscal year 1996. At June 30, 1998, the gross loan portfolio
totaled $554.1 million, of which $419.1 million, or 75.6%, consisted of one-to
four-family residential mortgage loans; $42.8 million, or 7.7%, consisted of
residential construction loans; $4.2 million, or 0.8%, consisted of
nonresidential construction loans; $12.4 million, or 2.2%, consisted of land
loans; $8.7 million, or 1.6%, consisted of multi-family residential real estate
loans; $46.1 million, or 8.3%, consisted of commercial real estate loans; $15.2
million, or 2.7%, consisted of consumer loans (primarily home equity lines of
credit, automobile loans, and loans secured by savings deposits); and $5.5
million, or 1.0%, consisted of commercial business loans. At June 30, 1998, the
weighted average remaining term to maturity of the loan portfolio was
approximately 17 years. At June 30, 1998, $253.2 million, or 48.0% of the total
net loan portfolio consisted of loans with adjustable interest rates. To
supplement local loan originations, the Association also invests in
mortgage-backed and related securities that directly or indirectly provide funds
principally for residential home buyers in the United States. The Association
has also purchased either participations in or whole residential real estate
loans which are serviced by other institutions.
59
<PAGE>
Such loans totaled $53.2 million, net of premiums, at June 30, 1998. The
Association also participates with other financial institutions in programs
which provide residential mortgage loans to low and moderate income borrowers.
ANALYSIS OF LOAN PORTFOLIO. Set forth below is selected data relating
to the composition of the loan portfolio by type of loan.
<TABLE>
<CAPTION>
At June 30, At December 31,
--------------------- ------------------------------------------
1998 1997 1996
--------------------- --------------------- -------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family (1) ...... $419,069 75.63% $339,117 70.90% $293,366 71.11%
Residential construction loans .. 42,807 7.73 32,828 6.86 33,158 8.04
Nonresidential construction loans 4,217 0.76 2,022 0.42 2,200 0.53
Land loans ...................... 12,409 2.24 17,117 3.58 19,426 4.71
Multi-family (2) ................ 8,739 1.58 8,800 1.84 8,096 1.96
Commercial (3) .................. 46,147 8.32 59,220 12.38 37,815 9.17
-------- ------ -------- ------ -------- ------
Total real estate loans ....... 533,388 96.26 459,104 95.98 394,061 95.52
-------- ------ -------- ------ -------- ------
Non-real estate loans:
Consumer loans (4) ............... 15,191 2.74 15,694 3.28 16,028 3.89
Commercial business .............. 5,508 1.00 3,530 0.74 2,458 0.60
-------- ------ -------- ------ -------- ------
Total non-real estate loans ... 20,699 3.74 19,224 4.02 18,486 4.48
-------- ------ -------- ------ -------- ------
Total loans receivable ........ 554,087 100.00% 478,328 100.00% 412,547 100.00%
====== ====== ======
Less:
Undisbursed loan proceeds ........ 25,134 24,163 20,765
Unearned discount (premium) and
net deferred loan fees (costs) (1,189) (206) 200
Allowance for loan losses ....... 2,767 2,662 2,542
-------- -------- --------
Total loans receivable, net ... $527,375 $451,709 $389,040
======== ======== ========
</TABLE>
- ----------------
(1) Includes participations or whole loans of $52.5 million, $19.5 million and
$1.7 million at June 30, 1998 and December 31, 1997 and 1996, respectively.
(2) Includes participations of $153,000 and $505,000 at June 30, 1998 and
December 31, 1996, respectively.
(3) Includes participations of $162,000 and $190,000 at December 31, 1997 and
1996, respectively.
(4) Includes primarily home equity lines of credit, automobile loans, and loans
secured by savings deposits. At June 30, 1998, the disbursed portion of home
equity lines of credit totaled $8.2 million.
60
<PAGE>
ANALYSIS OF LOAN PORTFOLIO, CONTINUED.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------
1996 1995 1994 1993
--------------------- --------------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Real estate loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential 1-4 family (1) ... $284,474 70.92% $248,769 71.27% $247,867 74.82% $262,480 77.16%
Residential construction loans 35,720 8.91 27,314 7.83 12,265 3.70 7,965 2.34
Land loans ................... 16,846 4.20 15,601 4.47 20,476 6.18 17,072 5.02
Multi-family (2) ............. 8,153 2.03 7,351 2.11 6,772 2.04 5,952 1.75
Commercial (3) ............... 38,433 9.58 35,402 10.14 32,612 9.84 34,953 10.27
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans .... 383,626 95.64 334,437 95.82 319,992 96.59 328,422 96.54
-------- ------ -------- ------ -------- ------ -------- ------
Non-real estate loans:
Consumer loans (4) .......... 15,606 3.89 12,638 3.62 10,237 3.09 10,844 3.19
Commercial business ......... 1,874 0.47 1,958 0.56 1,058 0.32 929 0.27
-------- ------ -------- ------ -------- ------ -------- ------
Total non-real estate loans 17,480 4.36 14,596 4.18 11,295 3.41 11,773 3.46
-------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable .... 401,106 100.00% 349,033 100.00% 331,287 100.00% 340,195 100.00%
====== ====== ====== ======
Less:
Undisbursed loan proceeds . 22,318 15,253 9,872 6,466
Unearned discount (premium) and
net deferred fees (costs) 257 846 908 1,234
Allowance for loan losses . 2,312 3,492 3,390 3,748
-------- -------- -------- --------
Total loans receivable, net $376,219 $329,442 $317,117 $328,747
======== ======== ======== ========
</TABLE>
---------------------
(1) Includes participations or whole loans of $1.8 million, $2.2 million, $2.6
million and $0, at September 30, 1996, 1995, 1994, and 1993, respectively.
(2) Includes participations of $360,000 at September 30, 1996.
(3) Includes participations of $198,000, $4.9 million and $5.0 million at
September 30, 1996, 1995 and 1994 respectively.
(4) Includes primarily home equity lines of credit, automobile loans, and loans
secured by savings deposits.
LOAN AND MORTGAGE-BACKED AND RELATED SECURITIES MATURITY AND REPRICING
SCHEDULE. The following table sets forth certain information as of June 30,
1998, regarding the dollar amount of loans and mortgage-backed and related
securities maturing in the Association's portfolio based on their contractual
terms to maturity. Demand loans, loans having no stated schedule of repayments
and no stated maturity, and overdrafts are reported as due in one year or less.
Adjustable-and floating-rate loans are included in the period in which interest
rates are next scheduled to adjust rather the period than in which they
contractually mature, and fixed-rate loans are included in the period in which
the final contractual repayment is due. Fixed-rate mortgage-backed and related
securities are assumed to mature in the period in which the final contractual
payment is due on the underlying mortgage.
<TABLE>
<CAPTION>
Within 1-3 3-5 5-10 More Than
1 Year Years Years Years 10 Years Total
-------- -------- -------- -------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential ... $214,322 $ 77,877 $ 55,645 $ 65,717 $ 48,315 $461,876
Commercial, multi-family and land . 56,387 6,319 3,654 2,686 2,466 71,512
Consumer loans (excluding lines of
credit) ........................... 3,552 2,864 457 45 -- 6,918
Equity lines of credit ............... 8,273 -- -- -- -- 8,273
Commercial business loans ............ 5,193 52 263 -- -- 5,508
-------- -------- -------- -------- -------- --------
Total loans receivable (gross) ... $287,728 $ 87,112 $ 60,019 $ 68,448 $ 50,781 $554,087
======== ======== ======== ======== ======== ========
Mortgage-backed and related securities $ 35,687 $ 27,155 $ 11,572 $ 5,814 $ 3,268 $ 83,496
======== ======== ======== ======== ======== ========
</TABLE>
61
<PAGE>
The following table sets forth at June 30, 1998, the dollar amount of
all fixed-rate and adjustable-rate loans and mortgage-backed and related
securities due after June 30, 1999 based on the contractual maturity as
described above.
Fixed Adjustable Total
-------- ---------- --------
(Dollars In Thousands)
Real estate loans:
One- to four-family residential ...... $215,682 $ 31,872 $247,554
Commercial, multi-family and land .... 11,636 3,489 15,125
Consumer and commercial business loans 3,682 -- 3,682
-------- -------- --------
Total .......................... $231,000 $ 35,361 $266,361
======== ======== ========
Percentage of total loans ............ 41.70% 6.38% 48.08%
======== ======== ========
Mortgage-backed and related securities .... $ 47,809 $ -- $ 47,809
======== ======== ========
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Association's
primary lending activity consists of the origination of one- to four-family,
owner-occupied, residential mortgage loans secured by properties located in its
market area. Such loans are generally underwritten in conformity with the
criteria established by Fannie Mae ("FNMA"), with the exception of loans
exceeding applicable agency dollar limits and loans purchased through the
Association's affiliation with a consortium of financial institutions which
provides loans to low and moderate income borrowers (discussed below). The
Association generally does not originate one- to four-family residential loans
secured by properties outside of its market area (although in recent periods it
has purchased a modest amount of single-family loans secured by properties in
the southeast United States). At June 30, 1998, $419.1 million, or 75.63%, of
the gross loan portfolio consisted of one- to four-family residential mortgage
loans. The weighted average contractual maturity of one-to four-family
residential mortgage loans at the time they are originated is approximately 22
years. However, it has been the Association's experience that the average length
of time which such loans remain outstanding is approximately six years.
The Association currently offers one- to four-family residential
mortgage loans with terms typically ranging from 15 to 30 years, and with
adjustable or fixed interest rates. Originations of fixed-rate mortgage loans
and ARM loans are monitored on an ongoing basis and are affected significantly
by the level of market interest rates, customer preference, the Association's
interest rate sensitivity gap position, and loan products offered by its
competitors. In a relatively low interest rate environment, which existed
throughout fiscal 1997 and the six months ended June 30, 1998, borrowers
typically prefer fixed-rate loans to ARM loans. Nonetheless, the Association has
continued to emphasize its ARM loan products. ARM loan originations totaled
$29.7 million, or 29.9%, of all one- to four-family loan originations during the
six months ended June 30, 1998. In connection with the Association's effort to
increase mortgage lending, the Association offers residential mortgage loans
which provide for a fixed-rate of interest during the first five or seven years
of the term of the loans and which thereafter convert to ARM loans on which the
interest rate adjusts on an annual basis. This loan product allows the
Association to offer a loan with a relatively short period during which the
interest rate remains fixed but which typically provides for an initial interest
rate which is greater than could be obtained from ARM loans originated in the
local market. This loan product is generally offered with a term between 15 and
30 years.
The Association currently offers ARM loans with an adjustment of one
year based on changes in the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year plus a margin. Previously, the
Association ARM loans were indexed to the National Monthly Median Cost of Funds
plus a margin. Each ARM loan currently adjusts annually with an annual interest
rate adjustment limitation of 200 basis points and a maximum lifetime adjustment
of 600 basis points above the initial rate. ARM loans are originated with
initial rates which are below the fully indexed rate, the amount of such
discount varying depending upon market conditions, and which provide for an
annual adjustment. Management determines whether a borrower qualifies for an ARM
loan based on the fully indexed rate of the ARM loan at the time the loan is
originated. Negative amortization of the ARM loans is not allowed. One-to
four-family residential ARM loans totaled $181.8 million at June 30, 1998.
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<PAGE>
The primary purpose of offering ARM loans is to make the loan portfolio
more interest rate sensitive. However, as the interest income earned on ARM
loans varies with prevailing interest rates, such loans do not offer as
consistently predictable interest income as long-term, fixed-rate loans. ARM
loans carry increased credit risk associated with potentially higher monthly
payments by borrowers as general market interest rates increase. It is possible,
therefore, that during periods of rising interest rates, the risk of default on
ARM loans may increase due to the upward adjustment of interest costs to the
borrower. To offset this risk, loans are underwritten as if the highest market
rate which the borrower would be capable of paying under the terms of the loan
was in effect.
Fixed-rate loans generally are originated and underwritten according to
standards that permit sale in the secondary mortgage market. Whether management
can or will sell fixed-rate loans in the secondary market, however, depends on a
number of factors including the yields and the terms of the loans, market
conditions, the Association's current interest rate sensitivity gap position and
Board of Director established limits. The Association has had varying policies
with respect to retention in portfolio of fixed-rate loans with contractual
terms in excess of 15 years. Its current policy is to limit fixed-rate loans,
including loans with a 30 year term, to a specified percentage of total assets.
The Association's fixed-rate mortgage loans are amortized on a monthly basis
with principal and interest due each month. One- to four-family residential real
estate loans often remain outstanding for significantly shorter periods than
their contractual terms because borrowers may refinance or prepay loans at their
option without prepayment penalties.
In prior years, the Association has participated with other financial
institutions in local consortiums which are committed to provide financing of
one- to four-family mortgage loans for low and moderate income borrowers. The
consortiums underwrite and package the loans which are either sold to the member
institutions on a whole loan basis or closed and funded directly by the member
institution. These loans are originated to borrowers within the Association's
market area and provide for either fixed or adjustable rates of interest. The
Association determines which loans it will purchase or fund directly after
conducting its own due diligence review of the loan package offered. The
Association closed approximately $302,000 and $687,000 in consortium loans for
the six months ended June 30, 1998 and the year ended December 31, 1997,
respectively. For the six months ended June 30, 1998 and the year ended December
31, 1997, the Association did not purchase any loans originated by the
consortiums. It is the Association's intent, subject to market conditions, to
continue its participation in consortiums of this nature in the future.
The Association also purchases single-family residential loans from
other sources, such as mortgage origination companies or brokers, under the same
guidelines as described above. In addition, such loan purchases include a
contract between the mortgage origination company and the Association, which
contains an indemnification clause protecting the Association from loss
resulting from misrepresentations in the loan applications or other information
provided to the Association. During the six months ended June 30, 1998 and the
year ended December 31, 1997, respectively, $2.9 million and $6.3 million of
such loans were purchased. It is management's intent, subject to market
conditions, to continue purchasing such loans.
The Association's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the
Association the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells or otherwise disposes of the
underlying real property serving as security for the loan. Due-on-sale clauses
are an important means of adjusting the rates on the fixed-rate mortgage loan
portfolio (and to a lesser extent ARM loans), and the Association has generally
exercised its rights under these clauses.
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Appraisals are
generally
63
<PAGE>
performed by an independent outside appraiser. Such regulations permit a maximum
loan-to-value ratio of 95% for residential property and 80% for all other real
estate loans. The Association's lending policies generally limit the maximum
loan-to-value ratio on both fixed-rate and ARM loans without private mortgage
insurance to 80% of the lesser of the appraised value or the purchase price of
the property to serve as collateral for the loan. For one- to four-family real
estate loans with loan-to-value ratios of between 80% and 95%, the borrower is
generally required to obtain private mortgage insurance. An origination fee of
between 1 % and 2% of the total loan amount on all one- to four-family loans may
be charged depending on the market conditions. Fire and casualty insurance (and
flood insurance if the property is within a designated flood plain), as well as
a title guaranty regarding good title, are required on all properties securing
real estate loans made by the Association.
The Association may purchase participation interests or whole loans
secured by one- to four-family residences when there are funds available for
lending in excess of the demand for loans in the local market or to facilitate
funding of large projects. At June 30, 1998, the loan portfolio included $52.5
million of loan participations and whole loans secured by one- to four-family
residences which were purchased. The Association purchased $38.3 million and
$24.5 million of such loans during the six months ended June 30, 1998 and the
year ended December 31, 1997, respectively.
CONSTRUCTION AND LAND LOANS. At June 30, 1998, $42.8 million, or 7.73%,
$4.2 million or 0.76% and $12.4 million, or 2.24%, of the gross loan portfolio
consisted of residential construction loans, nonresidential construction loans
and land loans, respectively. Fixed-rate and adjustable-rate residential
construction loans are currently offered primarily for the construction of
owner-occupied single-family residences in the Association market area to
builders who have a contract for sale of the property or to owners who have a
contract for construction. Advances are made as construction is completed. In
addition, construction loans are also made to builders for single-family homes
held for sale. Such loans totaled $10.5 million at June 30, 1998. Construction
loans for owner-occupied single-family residences are generally structured to
become permanent loans upon completion of construction, and are originated with
terms of up to 30 years with an allowance of up to six months for construction
during which period the borrower makes interest-only payments. Construction
loans to builders for homes held for sale are generally originated for a term of
up to one year and provide for interest-only payments. Disbursements are made as
evidence of progress is presented to and verified by the Association.
At June 30, 1998, the Association's largest real estate construction
loan was a loan to acquire and develop 78 residential lots and had an aggregate
principal outstanding balance of $3.2 million, with disbursed funds of $2.6
million. This loan is secured by the lots which are located in the Association's
market area. The loan is currently performing in accordance with its terms.
In addition, loans are originated within the market area which are
secured by individual unimproved or improved lots zoned primarily to become
single-family residences, as well as commercial and agricultural properties.
Land loans are currently offered as either one-year ARM loans or fixed-rate
loans with terms of up to 15 years. The maximum loan-to-value ratio for such
land loans is 75%.
Adjustable-rate single-family construction and land loans are currently
offered at the weekly average yield on United States Treasury securities
adjusted to a constant maturity of one year plus a margin. Adjustable-rate
construction loans and land loans have an annual interest rate cap of 200 basis
points and a lifetime interest rate cap of 600 basis points over the initial
interest rate. Initial interest rates may be below the fully indexed rate but
the loan is underwritten at the fully indexed rate.
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<PAGE>
Construction lending generally involves a greater degree of credit risk
than one- to four-family residential mortgage lending. Risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value at completion of construction or development and the
estimated cost (including interest) of construction. During the construction
phase, a number of factors could result in delays and cost overruns. If the
estimate of value proves to be inaccurate, the Association may be confronted
with a project, when completed, which has a value insufficient to assure full
repayment. Loans made on lots carry the risk of adverse zoning changes,
environmental, or other restrictions on future use.
MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. Loans secured by
multi-family real estate constituted approximately $8.7 million, or 1.58%, of
the gross loan portfolio at June 30, 1998. At June 30, 1998, a total of 43 loans
were secured by multi-family properties. Multi-family real estate loans are
primarily secured by multi-family residences, such as rental properties with
between five and thirty-six units. At June 30, 1998, substantially all
multi-family loans were secured by properties located within the Association's
market area. At June 30, 1998, multi-family real estate loans had an average
principal balance of approximately $203,000. At such date, the largest
multi-family real estate loan had a principal balance of $1.4 million and was
performing in accordance with its terms. Multi-family real estate loans are
currently offered with adjustable interest rates. In the past, fixed-rate
multi-family real estate loans also were originated. Multi-family loans
typically have adjustable interest rates tied to a market index and amortize
over 20 to 25 years. An origination fee of between 1.5% to 2.0% is usually
charged on multi-family loans. Multi-family mortgage loans are generally made up
to 75% of the appraised value of the property securing the loan. The initial
interest rate on multi-family real estate loans is currently priced at the
weekly average yield on United States Treasury securities adjusted to a constant
maturity of one year plus a margin, depending on the nature and size of the
project. Originations of multi-family loans have been limited in recent years
due to the limited demand for such projects in the Association's market area. In
its underwriting, the Association reviews the expected net operating income
generated by the real estate to support the debt service, the age and condition
of the collateral, the financial resources and income level of the borrower, the
borrower's experience in owning or managing similar properties, and any
financial reserves the borrower may have.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family
property is typically dependent upon the successful operation of the related
real estate property.
COMMERCIAL REAL ESTATE LOANS. Loans secured by commercial real estate
constituted approximately $46.1 million, or 8.32%, of the gross loan portfolio
at June 30, 1998. Commercial real estate loans are secured by improved property
such as offices, hotels, small business facilities, strip shopping centers,
warehouses, commercial land and other non-residential buildings. At June 30,
1998, substantially all of commercial real estate loans were secured by
properties located within the Association's market area. At June 30, 1998, a
total of 181 loans were secured by commercial real estate with an average
principal balance of approximately $255,000. Commercial real estate loans are
currently only offered with adjustable-rates, although in the past the
Association has originated fixed-rate commercial real estate loans. The terms of
each commercial real estate loan are negotiated on a case-by-case basis,
although such loans typically have adjustable interest rates tied to a market
index. An origination fee of up to 2% of the principal balance of the loan is
typically charged on commercial real estate loans. Commercial real estate loans
originated by the Association generally amortize over 15 to 20 years and have a
maximum loan-to-value ratio of 75%.
The Association expanded both its commercial real estate and business
lending activities in late fiscal 1996. An experienced commercial loan officer
and a credit analyst were added to the Lending Division staff. During the six
65
<PAGE>
months ended June 30, 1998, $4.3 million of such loans were originated. The
Association intends to continue to emphasize the origination of such loans in
the future.
At June 30, 1998, the largest commercial real estate borrower had an
outstanding principal balance of $2.0 million. The loan is secured by a citrus
grove and is currently performing in accordance with its terms.
In underwriting commercial real estate loans, the same underwriting
standards and procedures are employed as are employed in underwriting
multi-family real estate loans. Loans secured by commercial real estate
generally involve a higher degree of risk than one- to four-family residential
mortgage loans and carry larger loan balances. This increased credit risk is a
result of several factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic conditions on
income producing properties, and the difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by commercial
real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
CONSUMER LOANS. As of June 30, 1998, consumer loans totaled $15.2
million, or 2.74%, of the gross loan portfolio. The principal types of consumer
loans offered are home equity lines of credit, fixed-rate second mortgage loans,
automobile loans, mobile home loans, boat loans, recreational vehicle loans,
unsecured personal loans, and loans secured by deposit accounts. Consumer loans
are offered primarily on a fixed-rate basis with maturities generally of five
years or less. Home equity lines of credit are secured by the borrower's
principal residence. Consumer loans are underwritten using the Association's
customary lending standards.
Consumer loans generally have shorter terms and higher interest rates
than traditional mortgage loans, but generally entail greater credit risk than
do residential mortgage loans, particularly in the case of consumer loans that
are unsecured or secured by assets that depreciate rapidly, such as automobiles,
mobile homes, boats, and recreational vehicles. In such cases, repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan and the remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
particular, amounts realizable on the sale of repossessed automobiles may be
significantly reduced based upon the condition of the automobiles and the
fluctuating demand for used automobiles.
COMMERCIAL BUSINESS LOANS. The Association currently offers commercial
business loans to finance small businesses in its market area. Commercial
business loans are primarily offered as a customer service to business account
holders. Such loans may include commercial lines of credit, loans on inventory,
equipment, receivables, or other collateral and unsecured loans. During the last
quarter of the fiscal year ended September 30, 1996, the Association began
expanding its activities in the commercial business lending market. The
Association anticipates that its involvement in such lending will continue. At
June 30, 1998, the 53 commercial business loans outstanding had an aggregate
balance of $5.5 million and an average loan balance of approximately $104,000.
Commercial business loans originated during the six months ended June 30, 1998
totaled $3.9 million. Commercial business loans are offered with both fixed- and
adjustable-interest rates. Adjustable-rates on commercial business loans are
priced against the Citibank, N.A. or WALL STREET JOURNAL prime rate, plus a
margin. The loans are offered with terms of up to five years. Such loans are
underwritten using the Association's customary underwriting standards.
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<PAGE>
At June 30, 1998, the largest commercial business loan was secured by
inventory and had an outstanding principal balance of $500,000. It is currently
performing in accordance with its terms.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. Personal guarantees from the borrower or a third party are
generally obtained as a condition to originating its commercial business loans.
LOAN ORIGINATIONS, SOLICITATION, PROCESSING, COMMITMENTS, AND
PURCHASES. Loan originations are derived from a number of sources including real
estate broker referrals, existing customers, developers and walk-in customers.
In the case of a real estate loan, an independent appraiser approved by the
Association appraises the real estate intended to secure the proposed loan.
Outside members of the Board of Directors, the Chairman of the Board of
Directors, the President and certain other officers have been granted the
authority to approve loans in various amounts depending on the type of loans
involved. The Association has also established a Loan Committee which consists
of at least one outside director and certain officers. Larger loans must be
approved by one or more of such authorized officers or directors or by the Loan
Committee depending on the size of the loan. Loans in excess of $2.0 million may
only be approved by the Loan Committee after the entire Board of Directors is
informed. At June 30, 1998, commitments to originate loans, excluding the
undisbursed portion of loans in process, totaled $7.6 million.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. Fire and casualty insurance is required at the time the loan
is made and throughout the term of the loan, and upon request of the
Association, flood insurance may be required. Title insurance is required on all
loans secured by real property.
In addition to originations, the Association also purchases loans
secured by one- to four-family residences from consortiums, mortgage origination
companies, or brokers. See "-One- to Four-Family Residential Real Estate Loans."
In addition, the Association may purchase participation loans when there are
more funds available for lending in excess of the demand for loans in the local
market or to facilitate funding of larger projects. Such loans, which totaled
$53.2 million at June 30, 1998, are secured by residential real estate loans.
Substantially all of such loans are whole loans; however, participation
interests account for approximately $2.0 million of the $53.2 million.
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<PAGE>
ORIGINATION, PURCHASE AND SALE OF LOANS. The table below shows the loan
origination, purchase and sales activity for the periods indicated.
<TABLE>
<CAPTION>
For Year For Three
For Six Months Ended Ended Months Ended For Year Ended
June 30, December 31, December 31, September 30,
---------------------- ------------ ------------- ----------------------
1998 1997 1997 1996 1996 1995
--------- --------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, beginning of period ........ $ 451,709 $ 389,040 $ 389,040 $ 376,219 $ 329,442 $ 317,117
Originations:
Real estate:
One- to four-family residential (1) ..... 99,229 35,587 67,923 20,226 82,596 35,909
Land loans .............................. 527 4,491 14,360 5,498 6,848 18,163
Multi-family (1) ........................ 148 902 1,427 -- 1,263 --
Commercial (1) .......................... 4,279 19,508 28,667 1,806 16,102 8,197
--------- --------- --------- --------- --------- ---------
Total real estate loans .............. 104,183 60,488 112,377 27,530 106,809 62,269
Non-real estate loans:
Consumer ................................ 2,053 2,119 4,116 1,525 5,698 4,154
Commercial business ..................... 3,915 588 2,699 515 796 646
--------- --------- --------- --------- --------- ---------
Total originations ................... 110,151 63,195 119,192 29,570 113,303 67,069
Transfer of mortgage loans to
foreclosed real estate .................... (653) (91) (558) (78) (400) (1,394)
Loan and participations purchased ............ 38,307 2,590 24,455 1,998 16,775 2,728
Repayments ................................... (72,466) (39,423) (76,816) (20,042) (72,114) (50,452)
Loan sales ................................... -- (276) (631) (283) (5,429) (105)
Decrease (increase) in allowance for loan
losses .................................... (105) (60) (120) (230) 1,180 (102)
Decrease in amortization of unearned discount
and premiums and net deferred fees and cost 983 159 406 63 589 62
Increase (decrease) in loans in process ...... (970) (4,985) (3,398) 1,553 (7,065) (5,381)
Change in other .............................. 419 (254) 139 270 (62) (100)
--------- --------- --------- --------- --------- ---------
Net loan activity ............................ 75,666 20,855 62,669 12,821 46,777 12,325
--------- --------- --------- --------- --------- ---------
Total loans receivable at end of period ...... $ 527,375 $ 409,895 $ 451,709 $ 389,040 $ 376,219 $ 329,442
========= ========= ========= ========= ========= =========
</TABLE>
- -------------------------
(l) Includes loans to finance the construction of one- to four-family
residential properties, and loans originated for sale in the secondary
market.
LOAN ORIGINATION FEES AND OTHER INCOME. In addition to interest earned
on loans, the Association may receive loan origination fees. To the extent that
loans are originated or acquired for the portfolio, Statement of Financial
Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases" ("SFAS No. 91") requires that loan origination fees and costs be
deferred and amortized as an adjustment of yield over the life of the loan by
use of the level yield method. ARM loans originated below the fully-indexed
interest rate will have a substantial portion of the deferred amount recognized
as income in the initial adjustment period. Fees and costs deferred under SFAS
No. 91 are recognized into income immediately upon prepayment or the sale of the
related loan. At June 30, 1998, unearned discounts and premiums and deferred
loan origination fees and costs totaled $1.2 million. Loan origination fees vary
with the volume and type of loans and commitments made and purchased, principal
repayments, and competitive conditions in the mortgage markets which, in turn,
respond to the demand and availability of funds.
In addition to loan origination fees, the Association also receives
servicing income and other fees that consist primarily of servicing fees, late
charges, and other miscellaneous fees. Such fees totaled $104,000, $269,000,
$33,000,
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$148,000, and $184,000 for the six months ended June 30, 1998, the year ended
December 31, 1997, the three months ended December 31, 1996 and the years ended
September 30, 1996, and 1995, respectively.
LOAN SERVICING. While the Association primarily originates loans for
its own portfolio, it also has sold fixed-rate loans to both Freddie Mac
("FHLMC") and to FNMA. At June 30, 1998, the unpaid balances of loans sold
totaled approximately $16.3 million. The Association services such loans and a
fee is received of between one-fourth to three-eighths of a percent per loan.
The Association does not purchase loan servicing from other sources.
LOANS-TO-ONE BORROWER. Savings and loan associations are subject to the
same loans-to-one borrower limits as those applicable to national banks. Under
current regulations loans to one borrower are restricted to an amount equal to
15% of unimpaired capital and unimpaired surplus on an unsecured basis, and an
additional amount equal to 10% of unimpaired capital and unimpaired surplus if
the loan is secured by readily marketable collateral (generally, financial
instruments and bullion, but not real estate). The 15% limitation resulted in a
dollar limitation of approximately $12.5 million at June 30, 1998. All of the
Association's loans are in compliance with the loans-to-one borrower limits at
June 30, 1998.
The following table presents the five largest lending relationships at
June 30, 1998:
<TABLE>
<CAPTION>
At June 30, 1998
--------------------------------
Total of Loan Amount Disbursed
-------------- ----------------
(In Thousands)
<S> <C> <C>
Construction loans to build single-family homes $9,740 $5,364
Construction loans to build single-family homes 7,139 5,072
Loans secured by convenience stores and
gas stations 5,200 4,685
Construction loans to build single-family homes 4,576 4,311
Construction loans to build multi-family homes 4,443 2,616
</TABLE>
At June 30, 1998, all of the aforementioned loans were performing in
accordance with their terms.
ASSET QUALITY
DELINQUENCIES. The Association's collection procedures provide that
when a loan is 15 days past due, a computer-generated late charge notice is sent
to the borrower requesting payment. If the delinquency continues at 30 days, a
delinquent notice is sent and personal contact efforts are attempted, either in
person or by telephone. Also, plans to arrange a repayment plan are made at this
point. If a loan becomes 60 days past due and no progress has been made in
resolving the delinquency, a 10-day demand letter is sent and personal contact
is attempted. The loan also becomes subject to possible legal action if suitable
arrangements to repay have not been made. In addition, the borrower is advised
that he or she may obtain access to consumer counseling services, to the extent
required by regulations of the Department of Housing and Urban Development
("HUD"). When a loan continues in a delinquent status for 90 days or more, and a
repayment schedule has not been made or kept by the borrower, generally a notice
of intent to foreclose is sent to the borrower, giving the borrower 10 days to
repay all outstanding interest and principal. If the delinquency is not cured,
foreclosure proceedings are initiated.
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<PAGE>
DELINQUENT LOANS. Loans are reviewed on a regular basis and are placed
on a non-accrual status when, in the opinion of management, the collection of
additional interest is doubtful. In addition, loans are placed on non-accrual
status when either principal or interest is 90 days or more past due, or less
than 90 days, in the event the loan has been referred to the Association's legal
counsel for foreclosure. Interest accrued and unpaid at the time a loan is
placed on a non-accrual status is charged against interest income.
The following table sets forth information with respect to loans past
due 60 to 89 days in the loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
At At At
June 30, December 31, September 30,
-------- ------------ -------------------------
1998 1997 1996 1996 1995 1994 1993
-------- ---- ---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Loans past due 60-89 days:
One- to four-family residential ....... $440 $469 $446 $209 $493 $193 $202
Commercial and multi-family real estate 23 -- -- -- -- -- --
Consumer and commercial business ...... 7 54 72 3 24 -- --
Land .................................. -- -- -- -- -- 95 --
---- ---- ---- ---- ---- ---- ----
Total past due 60-89 days ......... $470 $523 $518 $212 $517 $288 $202
==== ==== ==== ==== ==== ==== ====
</TABLE>
NON-PERFORMING ASSETS. At June 30,1998, non-performing assets
(non-performing loans and real estate owned (" REO")) totaled $2.1 million, and
the ratio of non-performing assets to total assets was 0.27%. Real estate
acquired by the Association as a result of foreclosure or by deed in lieu of
foreclosure is classified as substandard until such time as it is sold. REO is
recorded at cost which is the estimated fair value of the property at the time
the loan is foreclosed. Subsequent to foreclosure, these properties are carried
at the lower of cost or fair value less estimated costs to sell.
The following table sets forth information regarding non-accrual loans
delinquent 90 days or more, and real estate acquired or deemed acquired by
foreclosure at the dates indicated. When a loan is delinquent 90 days or more,
all accrued interest thereon is fully reserved and the loan ceases to accrue
interest thereafter. For all the dates indicated, there were no material
restructured loans within the meaning of SFAS No. 15 (as amended by) SFAS No.
121.
<TABLE>
<CAPTION>
At At At
June 30, December 31, September 30,
-------- ---------------- ------------------------------------
1998 1997 1996 1996 1995 1994 1993
-------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Non-performing loans:
One-to four family residential $1,201 $1,289 $1,524 $ 832 $ 605 $1,571 $2,374
Commercial and multi-family
real estate ................ 51 -- -- -- -- 1,282 4,316
Consumer and commercial
business loans ............. 50 55 107 10 39 20 36
Land ......................... 64 35 -- -- 18 82 9
------ ------ ------ ------ ------ ------ ------
Total non-performing loans ...... 1,366 1,379 1,631 842 662 2,955 6,735
REO ............................. 711 592 1,455 1,384 1,910 3,686 1,324
Other non-performing assets (1).. -- -- -- 400 -- -- --
------ ------ ------ ------ ------ ------ ------
Total non-performing assets (2).. $2,077 $1,971 $3,086 $2,626 $2,572 $6,641 $8,059
====== ====== ====== ====== ====== ====== ======
Total non-performing loans to net
loans receivable ............. 0.26% 0.31% 0.42% 0.22% 0.20% 0.93% 2.05%
Total non-performing loans to
total assets ................. 0.27 0.19 0.25 0.13 0.12 0.53 1.29
Total non-performing loans and
REO to total assets .......... 0.27 0.27 0.47 0.40 0.45 1.25 1.54
</TABLE>
70
<PAGE>
- ---------------------
(1) The other non-performing asset at September 30, 1996 represented a deposit
account due to the Association whose recovery was in doubt. All funds were
recovered in the subsequent periods.
(2) Net of specific valuation allowances.
The largest non-performing asset was REO with a recorded value of
$257,000 at June 30, 1998 and an appraised value of $340,000. The loan was
originated in fiscal 1989 and was collateralized by a citrus grove located in
St. Lucie County. There are currently no immediate prospects for the sale of the
property.
During the six months ended June 30, 1998, gross interest income of
$63,000 would have been recorded on non-performing loans accounted for on a
non-accrual basis if the loans had been current throughout the period. No
interest income on non-accrual loans was included in income during such period.
There are currently no immediate prospects for sale of the property.
The following table sets forth information regarding delinquent loans,
REO and loans to facilitate the sale of REO at June 30, 1998.
At June 30, 1998
-------------------
Balance Number
------- -------
(In Thousands)
Residential real estate:
Loans 60 to 89 days delinquent .... $ 440 8
Loans more than 89 days delinquent 1,201 18
Commercial and multi-family real estate:
Loans 60 to 89 days delinquent .... 23 1
Loans more than 89 days delinquent 51 1
Consumer and commercial business:
Loans 60 to 89 days delinquent .... 7 3
Loans more than 89 days delinquent 50 3
Land
Loans 60 to 89 days delinquent .... -- 1
Loans more than 89 days delinquent 64 2
REO .................................... 711 7
Loans to facilitate sale of REO ........ 153 3
------ ------
Total ......................... $2,700 47
====== ======
CLASSIFICATION OF ASSETS. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by OTS to be of lesser quality as substandard, doubtful, or loss
assets. An asset is considered substandard if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the distinct
possibility that the savings institution will sustain some loss if the
deficiencies are not corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard, with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. Assets classified as loss are those considered
uncollectible and of such little value that their continuance as assets without
the establishment of a specific loss reserve is not warranted. Assets that do
not expose the savings institution to risk sufficient to warrant classification
in one of the aforementioned categories, but which possess some weaknesses, are
required to be designated special mention by management.
71
<PAGE>
When a savings institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. General allowances represent
loss allowances that have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When a savings institution
classifies problem assets as loss, it is required either to establish a specific
allowance for losses equal to 100% of the amount of the assets so classified, or
to charge off such amount. A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can order the establishment of additional
general or specific loss allowances. Problem loans in the portfolio are
regularly reviewed to determine whether any loans require classification in
accordance with applicable regulations.
The following table sets forth the aggregate amount of the
Association's classified assets at the dates indicated.
At At At
June 30, December 31, September 30,
-------- ----------------- -----------------
1998 1997 1996 1996 1995
-------- ------- ------- ------- -------
(In Thousands)
Substandard assets ......... $ 2,699 $ 3,056 $ 4,205 $ 3,745 $ 8,652
Doubtful assets ............ -- -- -- -- --
Loss assets ................ 295 547 344 544 1,565
-------- ------- ------- ------- -------
Total classified assets $ 2,994 $ 3,603 $ 4,549 $ 4,289 $10,217
======== ======= ======= ======= =======
ALLOWANCE FOR LOAN LOSSES. Management's policy is to provide for
estimated losses on the loan portfolio based on management's evaluation of the
potential losses that may be incurred. Provisions for losses, which increase the
allowances for loan losses, are established by charges to income. Such
allowances represent the amounts which, in management's judgment, are adequate
to absorb charge-offs of existing loans which may become uncollectible. The
adequacy of the allowance is determined by management's monthly evaluation of
the loan portfolio and related collateral, in light of past loss experience, the
volume and type of lending engaged in by the Association, present economic
conditions and other factors considered relevant by management. Anticipated
changes in economic factors which may influence the level of the allowances are
considered in the evaluation by management if the changes can be readily
determined.
Management continues to review the entire loan portfolio to determine
the extent, if any, to which further additional loan loss provisions may be
deemed necessary. Management believes that the current allowance for loan losses
is adequate, however, there can be no assurance that the allowance for loan
losses will be adequate to cover losses that may in fact be realized in the
future or that additional provisions for loan losses will not be required.
72
<PAGE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
At or For the Six At or For the Year
Months Ended June 30, Ended December 31,
----------------------- -----------------------
1998 1997 1997 1996
--------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total loans outstanding ........................... $ 527,375 $ 409,895 $ 451,709 $ 389,040
========= ========= ========= =========
Average loans outstanding for the period .......... $ 486,928 $ 399,577 $ 411,098 $ 383,258
========= ========= ========= =========
Allowance balance (at beginning of period) ........ $ 2,662 $ 2,542 $ 2,542 $ 2,312
Provision for losses:
Real estate loans (1) ............................ 213 83 264 243
Consumer and commercial business loans ........... -- -- -- 14
Recoveries ........................................ -- -- -- --
Charge-offs:
Real estate loans (1) ........................... (108) (23) (143) (13)
Consumer and commercial business loans .......... -- -- (1) --
--------- --------- --------- ---------
Allowance balance (at end of period) .............. $ 2,767 $ 2,602 $ 2,662 $ 2,542
========= ========= ========= =========
Allowance for loan losses as a percent of net loans
receivable at end of period .................... 0.52% 0.63% 0.59% 0.65%
Net loans charged off as a percent of average
loans outstanding .............................. 0.02% --% 0.04% --%
Ratio of allowance for loan losses to total non-
performing loans at end of period (2) ........... 202.56% 177.49% 193.04% 155.86%
Ratio of allowance for loan losses to total non-
performing loans and REO at end of period (2) ... 133.22% 92.30% 135.06% 82.37%
</TABLE>
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
---------------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total loans outstanding ........................... $ 376,219 $ 329,442 $ 317,117 $ 328,747
========= ========= ========= =========
Average loans outstanding for the period .......... $ 346,880 $ 321,849 $ 321,721 $ 352,173
========= ========= ========= =========
Allowance balance (at beginning of period) ........ $ 3,492 $ 3,390 $ 3,748 $ 2,281
Provision for losses:
Real estate loans (1) ............................ 84 234 967 2,395
Consumer and commercial business loans ........... 6 22 3
Recoveries ........................................ -- -- -- --
Charge-offs:
Real estate loans (1) ........................... (1,264) (132) (1,325) (885)
Consumer and commercial business loans .......... (14) (6) (22) (46)
--------- --------- --------- ---------
Allowance balance (at end of period) .............. $ 2,312 $ 3,492 $ 3,390 $ 3,748
========= ========= ========= =========
Allowance for loan losses as a percent of net loans
receivable at end of period .................... 0.61% 1.06% 1.07% 1.14%
Net loans charged off as a percent of average
loans outstanding .............................. 0.37% 0.04% 0.41% 0.26%
Ratio of allowance for loan losses to total non-
performing loans at end of period (2) ........... 274.58% 527.49% 114.72% 55.65%
Ratio of allowance for loan losses to total non-
performing loans and REO at end of period (2) ... 103.86% 135.77% 51.05% 46.51%
</TABLE>
- ------------------
(1) The provisions in 1993 and 1994 primarily related to four non-performing
loans, including a commercial real estate loan with a principal balance in
excess of $1.2 million. The Association charged off substantially all of the
principal balance of such loans during fiscal 1993, 1994 and 1996 as a
result of the disposition of such loans.
(2) Net of specific reserves.
73
<PAGE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated. Management believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance by category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At June 30, At December 31,
------------------------------------------- -------------------------------------------
1998 1997 1997 1996
---------------------- -------------------- --------------------- --------------------
% of Loans in % of Loans in % of Loans in % of Loans in
Each Each Each Each
Category to Category to Category to Category to
Total Total Total Total
Amount Loans (1) Amount Loans (1) Amount Loans (1) Amount Loans (1)
------ -------------- ------ ------------- ------ ------------- ------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
One- to four-family residential .... $1,097 83.36% $1,042 77.56% $1,042 78.18% $1,037 79.68%
Land ............................... 650 2.24 650 3.62 650 3.58 630 4.71
Multi-family residential ........... 300 1.58 300 2.07 300 1.84 300 1.96
Commercial real estate ............. 600 9.08 520 12.52 550 12.38 500 9.17
Consumer and commercial business ... 120 3.74 90 4.23 120 4.02 75 4.48
------ ------ ------ ------ ------ ------ ------ ------
Total allowance for loan losses ....... $2,767 100.00% $2,602 100.00% $2,662 100.00% $2,542 100.00%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ------------------
(1) Percentages do not reflect adjustments for undisbursed loan proceeds,
unearned discounts and net deferred fees, and the allowance for loan losses.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------------------
1996 1995 1994 1993
---------------------- -------------------- --------------------- --------------------
% of Loans in % of Loans in % of Loans in % of Loans in
Each Each Each Each
Category to Category to Category to Category to
Total Total Total Total
Amount Loans (1) Amount Loans (1) Amount Loans (1) Amount Loans (1)
------ ------------- ------ ------------- ------ ------------- ------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
One- to four-family residential $ 870 79.83% $ 790 79.10% $ 700 78.52% $ 700 79.50%
Land 630 420 630 4.47 630 6.18 600 5.02
Multi-family residential 300 2.03 300 2.11 300 2.05 453 1.75
Commercial real estate 452 9.58 1,712 10.14 1,700 9.84 1,935 10.27
Consumer and commercial business 60 4.36 60 4.18 60 3.41 60 3.46
------ ------ ------ ------ ------ ------ ------ ------
Total allowance for loan losses $2,312 100.00% $3,492 100.00% $3,390 100.00% $3,748 100.00%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ------------------
(1) Percentages do not reflect adjustments for undisbursed loan proceeds,
unearned discounts and net deferred fees, and the allowance for loan losses.
74
<PAGE>
SECURITIES PORTFOLIO
The Association's primary focus is the origination of loans. However,
during past periods when mortgage loan demand was moderate and the Association
had de-emphasized the origination of fixed-rate loans, management invested
excess liquidity in investment securities, including mutual funds, and in
mortgage-backed and related securities rather than purchasing whole loans or
loan participations. At June 30, 1998, the Association's total securities and
investments amounted to $158.4 million. Such securities are subject to
classification based on the intentions of management. Securities purchased for
the portfolio are classified as either held to maturity or as available for
sale. The Association has no securities classified as trading. During December
1995, the provisions of SFAS No. 115 "Questions and Answers Guide" were adopted
which allowed between November 15, 1995 and December 31, 1995 a one-time
reclassification of securities from held to maturity to available for sale. The
Association reclassified $49.5 million of securities from investments-held to
maturity and mortgage-backed and related securities-held to maturity to
securities available for sale. Such reclassification resulted in a credit of
$247,000 to shareholders' equity. Subsequently, $749,000 of the securities were
sold at no gain or loss.
The Association maintains an Investment Committee which meets on a
monthly basis to review the securities portfolio and make recommendations to be
carried out by management. All investments must be rated BBB or higher by a
recognized rating service. The Investment Committee consists of the
Association's President and Chief Executive Officer, James B. Pittard, Jr.,
Senior Vice President, Chief Financial Officer and Treasurer, Larry J. Baker,
and Senior Vice President, Cecil F. Howard, Jr.
MORTGAGE-BACKED AND RELATED SECURITIES. At June 30, 1998, net
mortgage-backed and related securities totaled $83.5 million, or 10.91%, of
total assets. Of this amount, $41.9 million was classified as held to maturity
and $41.6 million was available for sale. At June 30, 1998, the market value of
the net mortgage-backed and related securities portfolio totaled approximately
$84.0 million. Management primarily invests in fixed-rate mortgage-backed and
related securities with weighted average lives of five to seven years.
Management believes that investing in short-term mortgage-backed and related
securities limits the exposure to higher interest rates. During the six months
ended June 30, 1998, no mortgage-backed and related securities were purchased.
Also included in the mortgage-backed securities portfolio at June 30, 1998, was
$72.5 million of collateralized mortgage obligations ("CMOs"), $6.3 million of
pass-through securities issued by FHLMC, $2.9 million of pass-through securities
issued by FNMA and $1.5 million of pass-through securities issued by the
Government National Mortgage Association ("GNMA"). The FHLMC and FNMA
pass-through securities are primarily comprised of five-year and seven-year
balloon mortgage loans. The GNMA pass-through securities were purchased in the
early 1980s and the loans underlying the GNMAs are well seasoned. A limited
amount of mortgage-backed securities issued by the Agency for International
Development ("AID") are also included in the portfolio.
CMOs are typically issued by a special-purpose entity (in the
Association's case, private issuers), which may be organized in a variety of
legal forms, such as a trust, a corporation, or a partnership. Substantially all
of the CMOs held in the mortgage-backed and related securities portfolio consist
of senior sequential tranches, primarily investments in one of the first three
tranches of the CMO. Generally, such tranches have stated maturities ranging
from 6.5 years to 30 years. However, because of prepayments, the expected
weighted average life of these securities is less than the stated maturities. At
June 30, 1998, the fixed-rate CMOs had coupon rates ranging from 6.0 % to 12.0 %
with a weighted average yield of 7.35%. The adjustable-rate CMOs are indexed to
the London InterBank Offered Rate ("LIBOR") or to the Ten Year Treasury Index.
Management's policy is to purchase tranches in CMOs which are deemed to be
investment grade by the Federal Financial Institutions Examination Council
("FFIEC").
75
<PAGE>
The following tables set forth the carrying value of, and activity in,
the mortgage-backed and related securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At At At
June 30, December 31, September 30,
-------- ------------------- -------------------
1998 1997 1996 1996 1995
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed and related securities:
Held to maturity:
CMOs ........................................... $ 30,892 $ 33,638 $ 37,359 $ 38,308 $ 57,586
CMO residuals .................................. 6 7 15 20 118
FHLMCs ......................................... 6,324 7,465 9,673 9,973 11,943
GNMAs .......................................... 1,525 1,751 2,108 2,233 2,774
FNMAs .......................................... 2,925 3,316 3,933 4,076 4,691
AID loans ...................................... 212 236 317 335 387
-------- -------- -------- -------- --------
Total mortgage-backed and related securities held
to maturity .................................. 41,884 46,413 53,405 54,945 77,499
Available for sale: (shown at market value)
CMOs ......................................... 41,612 46,350 51,974 53,318 --
-------- -------- -------- -------- --------
Total mortgage-backed and related securities ...... $ 83,496 $ 92,763 $105,379 $108,263 $ 77,499
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months
Six Months Year Ended Ended Year Ended
Ended June 30, December 31, December 31, September 30,
---------------------- ------------ ------------ ----------------------
1998 1997 1997 1996 1996 1995
--------- --------- ----------- ------------ --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed and related securities at:
Beginning of period ..................... $ 92,763 $ 105,379 $ 105,379 $ 108,263 $ 77,499 $ 41,281
Purchases ............................... -- 679 679 -- 43,703 41,549
Calls ................................... -- -- -- -- (311) --
Sales ................................... -- -- -- -- (749) --
Repayments .............................. (9,358) (6,388) (14,421) (2,840) (11,454) (5,286)
Discount (premium) amortization ......... 80 76 216 60 189 (45)
Gain on call ............................ -- -- -- -- 254 --
(Increase) decrease in market value
available for sale (net) ............ 11 520 910 (104) (868) --
--------- --------- --------- --------- --------- ---------
Mortgage-backed and related securities at
end of period ......................... $ 83,496 $ 100,266 $ 92,763 $ 105,379 $ 108,263 $ 77,499
========= ========= ========= ========= ========= =========
</TABLE>
76
<PAGE>
The following table sets forth the allocation of fixed- and
adjustable-rate mortgage-backed and related securities for the periods
indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
--------------------- --------------------------------------------
1998 1997 1996
--------------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Mortgage-backed and related securities, net:
Held to maturity:
Adjustable-rate CMOs ................................. $ 3,032 3.63% $ 3,028 3.26% $ 3,027 2.87%
Fixed-rate:
FHLMC .............................................. 6,324 7.57 7,465 8.05 9,673 9.18
FNMA ............................................... 2,925 3.50 3,316 3.57 3,933 3.73
GNMA ............................................... 1,525 1.83 1,751 1.89 2,108 2.00
CMO ................................................ 27,866 33.37 30,617 33.01 34,347 32.59
AID loans .......................................... 212 0.26 236 0.25 317 0.30
-------- ------ -------- ------ -------- ------
Total fixed-rate .................................. 38,852 46.53 43,385 46.77 50,378 47.81
-------- ------ -------- ------ -------- ------
Total mortgage-backed and related
securities-held to maturity, net .............. 41,884 50.16 46,413 50.03 53,405 50.68
-------- ------ -------- ------ -------- ------
Available for sale: (at market value)
Adjustable-rate CMOs ............................... 3,643 4.36 3,331 3.59 3,594 3.41
Fixed-rate CMOs .................................... 37,969 45.48 43,019 46.38 48,380 45.91
-------- ------ -------- ------ -------- ------
Total mortgage-backed and related
securities available for sale, net ................. 41,612 49.84 46,350 49.97 51,974 49.32
-------- ------ -------- ------ -------- ------
Total mortgage-backed and related securities, net ...... $ 83,496 100.00% $ 92,763 100.00% $105,379 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------
1996 1995
------------------- ------------------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Mortgage-backed and related securities, net:
Held to maturity:
Adjustable-rate CMOs ................................. $ 3,030 2.80% $ 3,980 5.14%
Fixed-rate:
FHLMC .............................................. 9,973 9.21 11,943 15.41
FNMA ............................................... 2,233 2.06 2,774 3.58
GNMA ............................................... 4,076 3.76 4,691 6.05
CMO ................................................ 35,298 32.60 53,724 69.32
AID loans .......................................... 335 0.32 387 0.50
-------- ------ -------- ------
Total fixed-rate .................................. 51,915 47.95 73,519 94.86
-------- ------ -------- ------
Total mortgage-backed and related
securities-held to maturity, net .............. 54,945 50.75 77,499 100.00
-------- ------ -------- ------
Available for sale: (at market value)
Adjustable-rate CMOs ............................... 3,670 3.39 -- --
Fixed-rate CMOs .................................... 49,648 5.86 -- --
-------- ------ -------- ------
Total mortgage-backed and related
securities available for sale, net ................. 53,318 49.25 -- --
-------- ------ -------- ------
Total mortgage-backed and related securities, net ...... $108,263 100.00% $ 77,499 100.00%
======== ====== ======== ======
</TABLE>
77
<PAGE>
INVESTMENTS. Investments purchased are comprised primarily of U.S.
Government and agency obligations, mutual funds that invest in mortgage-backed
securities and government and agency obligations, corporate debt securities and
FHLB stock. The carrying value of the interest-earning deposits, investments and
securities available for sale totaled $74.9 million or 9.79% of total assets at
June 30, 1998.
The Association is required under federal regulations to maintain a
minimum amount of liquid assets that may be invested in specified short-term
securities and certain other investments. The Association generally has
maintained a portfolio of liquid assets that exceeds regulatory requirements.
Liquidity levels may be increased or decreased depending upon the yields on
investment alternatives and upon management's judgment as to the attractiveness
of the yields then available in relation to other opportunities and its
expectation of the level of yield that will be available in the future, as well
as management's projections as to the short term demand for funds to be used in
loan origination and other activities. For further information regarding the
investments see Notes 1, 2 and 3 to the Notes to Consolidated Financial
Statements contained elsewhere herein.
INVESTMENT SECURITIES. At June 30, 1998, investment securities included
U.S. Government and agency obligations totaling $13.8 million and corporate debt
issues totaling $7.6 million. In addition, at June 30, 1998 the Association held
FHLB stock totaling $3.8 million.
Included in corporate debt issues are asset-backed securities which
include two debt securities secured by automobile loan receivables totaling
$977,000 at June 30, 1998 purchased during fiscal year 1994, the repayment of
which is secured by automobile receivables. These securities are rated BBB or
above by Standard & Poors and provide an effective yield of 6.33%. Debt
instruments which depend on the repayment of automobile loans involve a certain
degree of risk since in the event that borrowers of the automobile loan default,
the issuer of the security may have insufficient funds to repay the principal or
interest of the security in accordance with its terms.
The FHLB requires its members to own a required amount of FHLB stock
based upon the greater of a percentage of residential mortgage loans in the
portfolio or a percentage of total assets. At June 30, 1998, FHLB stock held by
the Association totaled $3.8 million.
SECURITIES AVAILABLE FOR SALE. Securities available for sale are
carried on the books at fair value as required by FASB No. 115 and totaled $91.3
million at June 30, 1998. Included in securities available for sale are equity
securities totaling $25,000, mutual funds totaling $40.6 million, and U.S.
Government and agency obligations totaling $9.1 million and mortgage-backed and
related securities totaling $41.6 million.
Mutual fund investments include mutual funds that invest primarily in
mortgage-backed securities and government and agency securities, and are
classified as available for sale for accounting purposes. The mutual funds which
invest in mortgage-backed securities have characteristics similar to the
mortgage-backed securities in which they invest. Mutual fund investments include
approximately $35.5 million in funds which invest in adjustable-rate
mortgage-backed securities issued by FNMA, FHLMC and GNMA, as well as CMOs and
real estate mortgage investment conduits and other securities collateralized by
or representing interests in real estate mortgages, and approximately $5.0
million in funds which invest in asset backed, corporate and CMO obligations.
INVESTMENT PORTFOLIO. The following table sets forth the carrying value
of the investment securities and securities available for sale at the dates
indicated. At June 30, 1998, the market value of the investments was
approximately $74.9 million. The market value of investments and securities
available for sale includes FHLB stock at book value which approximates market
value.
78
<PAGE>
<TABLE>
<CAPTION>
At At At
June 30, December 31, September 30,
-------- ------------------- -------------------
1998 1997 1996 1996 1995
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Investment securities:
United States Government and agency obligations $ 13,820 $ 13,039 $ 11,701 $ 11,691 $ 38,987
Corporate debt issues .......................... 7,623 8,349 10,138 10,602 13,692
Certificates of deposit ........................ -- -- -- -- 7,000
FHLB stock ..................................... 3,782 3,264 2,864 5,384 7,384
-------- -------- -------- -------- --------
Total investment securities ................ 25,225 24,652 24,703 27,677 67,063
-------- -------- -------- -------- --------
Securities available for sale: (shown at fair value)
Equity securities:
FNMA stock ............................... 25 23 14 14 10
Financial Institutions Insurance
Group, Limited stock .................. -- -- -- 101 86
-------- -------- -------- -------- --------
Total equity securities .................... 25 23 14 115 96
-------- -------- -------- -------- --------
Mutual funds ................................... 40,552 40,721 43,067 42,912 26,932
United States Government and agency obligations 9,127 55,175 28,097 27,942 --
-------- -------- -------- -------- --------
Total securities available for sale(1) ..... 49,704 95,919 71,178 70,969 27,028
-------- -------- -------- -------- --------
Total investment portfolio ................. $ 74,929 $120,571 $ 95,881 $ 98,646 $ 94,091
======== ======== ======== ======== ========
</TABLE>
- ----------------------------
(1) Does not include mortgage-backed and related securities classified available
for sale. See "-Mortgage-Backed and Related Securities." At June 30, 1998,
mortgage-backed and related securities available for sale amounted to $41.6
million.
79
<PAGE>
SECURITIES PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
investment securities and securities available for sale at June 30, 1998.
<TABLE>
<CAPTION>
At June 30, 1998
------------------------------------------------------------------------------------
One Year of Less One to Five Years Five to Ten Years More than Ten Years
---------------------- ---------------------- ----------------- -------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
United States Government
and agency obligations ............ $ 1,324 11.32% $ 9,743 11.18% $ 2,753 8.35% $ -- -%
Corporate debt issues ................ -- -- 977 6.33 -- -- 6,646 5.83
FHLB stock ........................... -- -- -- -- -- -- 3,782 7.25
------- ----- ------- ----- ------- ---- ------- ----
Total investment securities ...... 1,324 11.32 10,720 10.74 2,753 8.35 10,428 6.35
------- ----- ------- ----- ------- ---- ------- ----
Securities available for sale:
United States Government and
agency obligations ................ $ -- -- $ 7,210 6.27 $ 1,917 7.14 $ -- --
Equity securities .................... 25 1.35 -- -- -- -- -- --
Mutual funds ......................... 40,552 5.52 -- -- -- -- -- --
------- ------- ------- -------
Total securities available
for sale ................... 40,577 5.52 7,210 6.27 1,917 7.14 -- --
------- ----- ------- ----- ------- ---- ------- ----
Total investment securities and
securities available for sale(2) $41,901 5.70% $17,930 8.94% $ 4,670 7.85% $10,428 6.35%
======= ===== ======= ===== ======= ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1998
----------------------------------------
Total
-------------------
Average Annualized
Life Weighted
Carrying Market in -1 Average
Value Value Years Yield
-------- ------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment securities:
United States Government
and agency obligations ............ $13,820 $17,623 4.85% 10.63%
Corporate debt issues ................ 7,623 7,916 6.71 5.94
FHLB stock ........................... 3,782 3,782 -- 7.25
------- ------- ---- -----
Total investment securities ...... 25,225 29,321 5.51 8.71
------- ------- ---- -----
Securities available for sale:
United States Government and
agency obligations ................ $ 9,127 $ 9,127 3.50 6.45
Equity securities .................... 25 25 -- 1.35
Mutual funds ......................... 40,552 40,552 -- 5.52
------- ------- -----
Total securities available
for sale ................... 49,704 49,704 3.50 5.69
------- ------- ---- -----
Total investment securities and
securities available for sale(2) $74,929 $79,025 4.18% 6.70%
======= ======= ==== =====
</TABLE>
- --------------------
(1) Total weighted average life in years calculated only on United States
Government and agency obligations.
(2) Does not include mortgage-backed and related securities classified available
for sale. See "-Mortgage-Backed and Related Securities." At June 30, 1998,
mortgage-backed and related securities available for sale amounted to $41.6
million.
80
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits are the major source of funds for lending and other
investment purposes. In addition to deposits, funds are derived from the
amortization and prepayment of loans and mortgage-backed and related securities,
the maturity of investment securities, operations and, if needed, advances from
the FHLB. Scheduled loan principal repayments are a relatively stable source of
funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally
from within the market area through the offering of a broad selection of deposit
instruments including non-interest-bearing demand accounts, NOW accounts,
passbook savings, money market deposit accounts, term certificate accounts and
individual retirement accounts. While deposits of $100,000 or more are accepted,
premium rates for such deposits are not currently offered. Deposit account terms
vary according to the minimum balance required, the period of time during which
the funds must remain on deposit, and the interest rate, among other factors. A
management committee meets weekly to evaluate the internal cost of funds, survey
rates offered by competing institutions, review the Association's cash flow
requirements for lending and liquidity and the amount of certificates of deposit
maturing in the upcoming weeks. This committee executes rate changes when deemed
appropriate. Funds are not obtained through brokers, nor are funds solicited
outside the Association's market area.
The following table sets forth information regarding interest rates,
terms, minimum amounts and balances of deposits as of June 30, 1998.
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum Minimum Of Total
Interest Rate Term Checking and Savings Deposits (1) Amount Balances Deposits
- ---------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
0.00% None Non-interest-bearing account None $ 29,563 5.15%
1.00 None NOW accounts $ 100 74,355 12.95
1.73 None Passbook accounts 100 32,936 5.73
3.23 None Money market deposit accounts 1,000 84,347 14.68
-------- -------
Total checking and savings deposits 221,201 38.51
-------- -------
Certificates of Deposit (1)
--------------------------------------
4.92 1 - 5 months Fixed term, fixed-rate 1,000 12,581 2.19
5.01 6-11 months Fixed term, fixed-rate 1,000 50,990 8.88
5.54 12-19 months Fixed term, fixed-rate 1,000 182,794 31.82
5.77 24-30 months Fixed term, fixed-rate 1,000 28,469 4.96
5.78 36-47 months Fixed term, fixed-rate 1,000 14,072 2.45
5.98 48-59 months Fixed term, fixed-rate 1,000 2,317 0.40
6.15 Over 60 months Fixed term, fixed-rate 1,000 58,507 10.19
1.73 Various Fixed term, fixed-rate 1,000 1,211 0.21
5.10 Various Negotiated Jumbo 100,000 2,241 0.39
-------- -------
Total certificates of deposit 353,182 61.49
-------- -------
Total deposits $574,383 100.00%
======== =======
- ---------------------------------------------------------------------------
(1) IRA and KEOGH accounts are generally offered throughout all terms stated
above with balances of $47.1 million and $1.2 million, respectively.
</TABLE>
81
<PAGE>
The following tables sets forth the change in dollar amount in the
various types of savings accounts offered between the dates indicated:
<TABLE>
<CAPTION>
Balance at % of Incr. Balance at % of Incr. Balance at % of Incr.
06/30/98 Deposits (Decr.) 12/31/97 Deposits (Decr.) 12/31/96 Deposits (Decr.)
---------- -------- -------- ---------- -------- -------- ---------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand
accounts ................ $ 29,563 5.15% $ 4,848 $ 24,715 4.49% $ 6,088 $ 18,627 3.63% $ (905)
NOW accounts .............. 74,355 12.95 4,493 69,862 12.69 2,786 67,076 13.06 3,978
Passbooks ................. 32,936 5.73 2,715 30,221 5.49 (600) 30,821 6.00 (54)
Money market deposit
accounts ................ 84,347 14.68 5,515 78,832 14.31 9,318 69,514 13.53 93
-------- ------ -------- -------- ------ -------- -------- ------ --------
Total core deposits ....... 221,201 38.51 17,571 203,630 36.98 17,592 186,038 22.69 3,112
-------- ------ -------- -------- ------ -------- -------- ------ --------
Time deposits which mature:
Within 12 months ..... 241,203 41.99 (19,569) 260,772 47.35 6,975 253,797 49.40 13,557
Within 12-36 months .. 81,365 14.17 22,571 58,794 10.67 17,590 41,204 8.02 (1,510)
Beyond 36 months ..... 30,614 5.33 3,102 27,512 5.00 (5,158) 32,670 6.36 (379)
-------- ------ -------- -------- ------ -------- -------- ------ --------
Total time deposits ....... 353,182 61.49 6,104 347,078 63.02 19,407 327,671 63.78 11,668
-------- ------ -------- -------- ------ -------- -------- ------ --------
Total deposits .. $574,383 100.00% $ 23,675 $550,708 100.00% $ 36,999 $513,709 100.00% $ 14,780
======== ====== ======== ======== ====== ======== ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Balance at % of Incr. Balance at % of
09/30/96 Deposits (Decr.) 09/30/95 Deposits
---------- -------- -------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Non-interest-bearing demand
accounts ................ $ 19,532 3.9$ 4,688 $ 14,844 3.39%
NOW accounts .............. 63,098 12.6 (763) 63,861 14.60
Passbooks ................. 30,875 6.1 1,174 29,701 6.79
Money market deposit
accounts ................ 69,421 13.9 (6,299) 75,720 17.32
-------- ------ -------- -------- ------
Total core deposits ....... 182,926 36.6 (1,200) 184,126 42.10
-------- ------ -------- -------- ------
Time deposits which mature:
Within 12 months ..... 240,240 48.1 46,740 193,500 44.24
Within 12-36 months .. 42,714 8.5 10,290 32,424 7.41
Beyond 36 months ..... 33,049 6.6 5,723 27,326 6.25
-------- ------ -------- -------- ------
Total time deposits ....... 316,003 63,34 62,753 253,250 57.90
-------- ------ -------- -------- ------
Total deposits .. $498,929 100.00% $ 61,553 $437,376 100.00%
======== ====== ======== ======== ======
</TABLE>
82
<PAGE>
The following table sets forth the certificates of deposit classified
by rates as of the dates indicated.
<TABLE>
<CAPTION>
At At At
June 30, December 31, September 30,
--------- -------------------------- ------------------------
1998 1997 1996 1996 1995
--------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
RATE (In Thousands)
3.00% or less ........................ $ 1,211 $ 1,436 $ 1,035 $ 1,600 $ 930
3.01 - 3.99% ......................... 11 11 598 903 5,257
4.00 - 4.99% ......................... 37,827 35,699 51,484 80,831 55,583
5.00 - 5.99% ......................... 269,293 262,029 232,313 193,281 108,608
6.00 - 6.99% ......................... 36,033 39,186 33,568 29,571 70,456
7.00 - 7.99% ......................... 8,807 8,717 8,673 9,817 12,416
--------- ---------- ---------- --------- ---------
Total ............................... $ 353,182 $ 347,078 $ 327,671 $ 316,003 $ 253,250
========= ========== ========== ========= =========
</TABLE>
The following table sets forth the amount and maturities of
certificates of deposit at June 30, 1998.
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------------------------------------------------------------
Less Than After 5
One Year 1-2 Years 2-3 Years 3-4 Years 4-5 Years Years Total
--------- --------- --------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(In Thousands)
3.00% or less ......... 119 $ 1 $ 1 $ -- $ 134 $ 956 $ 1,211
3.01 - 3.99% .......... -- 11 -- -- -- -- 11
4.00 - 4.99% .......... 37,827 -- -- -- -- -- 37,827
5.00 - 5.99% .......... 199,627 44,053 12,551 5,798 7,264 -- 269,293
6.00 - 6.99% .......... 3,534 14,178 1,859 10,889 5,573 -- 36,033
7.00 - 7.99% .......... 96 8,708 3 -- -- -- 8,807
--------- -------- -------- -------- -------- ----- ---------
Total $ 241,203 $ 66,951 $ 14,414 $ 16,687 $ 12,971 $ 956 $ 353,182
========= ======== ======== ======== ======== ===== =========
</TABLE>
The following table indicates the amount of negotiable certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1998.
Certificates of
Deposit of
$100,000 or
More
----------------
REMAINING MATURITY (In Thousands)
Three months or less ..................... $11,338
Three through six months ................. 7,418
Six through twelve months ................ 12,264
Over twelve months ....................... 19,079
-------
Total ................................. $50,099
=======
83
<PAGE>
Deposits are used to fund loan originations, the purchase of securities
and for general business purposes. The deposit growth in the six months ended
June 30, 1998 of $23.7 million reflected the use of odd-term and promotional
certificate of deposit products, the opening of three new branch offices, as
well as increased retail deposits generated by aggressive, competitive pricing
of such products in the market area.
The following table sets forth the net changes in the deposit activities
for the periods indicated:
<TABLE>
<CAPTION>
Three
During Six Months Ended Year Ended Months Ended Years Ended
June 30, December 31, December 31, September 30,
------------------------- ----------- ----------- --------------------------
1998 1997 1997 1996 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Deposits ............................ $ 1,458,473 $ 1,328,224 $ 2,433,375 $ 554,294 $ 2,158,898 $ 1,952,009
Withdrawals ......................... 1,445,492 1,311,142 2,416,860 549,264 2,114,903 1,988,577
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) before
interest credited .................. 12,981 17,082 16,515 5,030 43,995 (36,568)
Interest credited ................... 10,694 9,742 20,484 9,750 17,558 13,965
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in deposits.. $ 23,675 $ 26,824 $ 36,999 $ 14,780 $ 61,553 $ (22,603)
=========== =========== =========== =========== =========== ===========
</TABLE>
BORROWINGS. Savings deposits are the primary source of funds for
lending and investment activities and for general business purposes. If the need
arises, advances from the FHLB may be used to supplement the supply of lendable
funds and to meet deposit withdrawal requirements. Advances from the FHLB
typically are collateralized by the Association's stock in the FHLB and a
blanket floating lien on the Association's one- to four-family first mortgage
loans. At June 30, 1998, $75.6 million of FHLB advances were outstanding with a
weighted average interest rate of 5.95%.
The FHLB functions as a central reserve bank providing credit for the
Association and other member savings institutions and financial institutions. As
a member, the Association is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities that are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of a member institution's net worth or on the
FHLB's assessment of the institution's creditworthiness. Although advances may
be used on a short-term basis for cash management needs, FHLB advances have not
been, nor are they expected to be, a significant long-term funding source for
the Association, although the Association periodically utilizes its ability to
access advances in order to take advantage of investment opportunities which may
arise.
On September 30, 1983, the Association sold two of its branches to
another financial institution. Under terms of the sale, the Association issued a
10.94%, 30-year term mortgage-backed bond (the "Bond") for approximately $41.6
million. A discount was recorded on the Bond which is being accreted on the
interest method of accounting over the life of the Bond. The Bond bears an
interest rate that is adjustable semi-annually on each April 1 and October 1 to
reflect changes in the average of the United States 10-year and 30-year
long-term bond rates. At June 30, 1998, the outstanding balance of the Bond was
$15.9 million with a rate of 9.79%.
On October 24, 1994, in connection with the Association's Plan of
Reorganization into a mutual holding company, the Association established the
ESOP for all eligible employees. The ESOP's purchase of 190,388 shares of
Association Common Stock in the open market was initially funded by a loan held
by an unaffliated financial
84
<PAGE>
institution with an interest rate based on the monthly average of the Federal
Funds high and low rate plus 2.35%. During 1998, the Mid-Tier Holding Company
loaned sufficient funds to the ESOP to permit the ESOP to repay the loan to the
unaffiliated lender. The terms of the loan to the ESOP from the Mid-Tier Holding
Company are substantially identical to those of the loan from the unaffiliated
lender. However, the interest rate used will be the New York prime rate which
was 8.5% at June 30, 1998. The loan is being repaid from the Association's
contributions to the ESOP over a period of up to seven years and had an
outstanding balance of $1.2 million at June 30, 1998. For further information,
see Note 14 to the Notes to the Consolidated Financial Statements.
The following table sets forth the source, balance, and rate of FHLB
advances for the periods indicated.
<TABLE>
<CAPTION>
During the Six Months During the Year During the Three Months During the Years Ended
Ended June 30, Ended December 31, Ended December 31, September 30,
--------------------- ------------------ ----------------------- ----------------------
1998 1997 1997 1996 1996 1995
------- ------- ------------------ ----------------------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances:
Maximum month-end balance ......... $75,630 $46,052 $57,341 $36,350 $36,350 $18,679
Balance at end of period .......... 75,630 46,052 57,341 34,763 36,350 18,200
Average balance (1) ............... 61,133 38,526 42,952 35,657 22,110 3,846
Weighted average interest rate during
the period ....................... 5.99% 6.27% 6.38% 6.72% 6.36% 10.80%
Weighted average interest rate
at end of period .................. 5.95% 6.47% 6.25% 6.69% 6.70% 6.86%
</TABLE>
- ----------------------
(1) Computed on the basis of month-end balances.
SUBSIDIARY ACTIVITIES
The Association currently has one active subsidiary, ComFed, Inc.,
which was formed in February 1971 for the purpose of owning and operating an
insurance agency, Community Insurance Agency, which sells mortgage life
insurance. ComFed, Inc. also receives income and incurs related expenses from
the sale of third party mutual funds and annuities. Such third party mutual
funds and annuities include products widely marketed to the investing public and
have investment advisors that are not affiliated with ComFed, Inc. For the six
months ended June 30, 1998, ComFed, Inc. reported net income of $67,000. At June
30, 1998, the Association had an equity investment in ComFed, Inc. of $140,000.
LEGAL PROCEEDINGS
The Association is involved in routine legal proceedings occurring in
the ordinary course of business which in the opinion of management, in the
aggregate, will not have a material adverse effect on the consolidated financial
condition and results of operations of the Association.
The Association has completed its investigation of a defalcation by a
former employee which may have occurred over a period of several years. The
Association maintains insurance to cover such losses with a claim deductible of
$200,000. The amount of the deductible was charged-off during the year ended
September 30, 1996. The Association notified its insurance company of the
potential claim and the insurance company acknowledged coverage. The insurance
company paid a portion of the claim in fiscal 1997. The Association and
insurance company are attempting to resolve the remainder of the Association's
claim. The terms of any resolution of such claim may not
85
<PAGE>
amount to the entire amount of the unpaid portion of the Association's claim in
excess of the deductible. However, even in such event, management does not
believe that the claim will have a material adverse effect on the Association's
financial position or results of operations. See Note 13 to the Notes to
Consolidated Financial Statements contained elsewhere herein.
PERSONNEL
As of June 30, 1998, the Mid-Tier Holding Company had no separately
compensated employees. Officers of the Mid-Tier Holding Company are employees of
the Association and receive all compensation from the Association. Because the
Mid-Tier Holding Company's only activity is holding the stock of the
Association, employees of the Association perform limited duties for the
Mid-Tier Holding Company.
As of June 30, 1998, the Association had 256 full-time and 61 part-time
employees. None of such employees is represented by a collective bargaining
group. The Association believes it has a good relationship with its employees.
PROPERTIES
The Mid-Tier Holding Company owns no property independently from the
Association. The Association conducts its business through its home office
located in North Palm Beach, Florida, and 21 full service branch offices and two
loan production offices located in Palm Beach, Martin, St. Lucie, Indian River
and Brevard counties. The following table sets forth certain information
concerning the home office and each branch office of the Association at June 30,
1998. The aggregate net book value of the Association's premises and equipment
was $22.2 million at June 30, 1998. For additional information regarding the
Association's properties, see Note 8 to the Notes to the Consolidated Financial
Statements contained elsewhere herein. In addition, the Association owns or has
placed earnest funds on four parcels of real estate for use as possible future
branch sites. The Association's total investment in such other properties
totalled $2.0 million at June 30, 1998 which is included in the aggregate net
book value of the Association's premises and equipment set forth above.
<TABLE>
<CAPTION>
OPENING OWNED/
LOCATION ADDRESS DATE LEASE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Home Office 660 U.S. Highway One, North Palm Beach, Florida 02/19/88 Owned
Branch Offices
- --------------
Riviera Beach 2600 Broadway, Riviera Beach, Florida 08/19/55 Owned
Tequesta 101 N. U.S. Highway One, Tequesta, Florida 07/19/59 Owned
Port Salerno 5545 SE Federal Highway, Port Salerno, Florida 11/05/74 Owned
Palm Beach Gardens 9600 N. Alternate AlA, Palm Beach Gardens, 12/19/74 Owned
Florida
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
86
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPENING OWNED/
LOCATION ADDRESS DATE LEASE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jensen Beach 1170 NE Jensen Beach Boulevard, 01/28/75 Owned
Jensen Beach, Florida
Singer Island 1100 East Blue Heron Boulevard, 04/01/75 Owned
Riviera Beach, Florida
Gallery Square 389 Tequesta Drive, Tequesta, Florida 01/30/76 Lease (1)
Ft. Pierce 1050 Virginia Avenue, Ft. Pierce, Florida 07/23/85 Owned
Port St. Lucie 1540 SE Floresta Drive, Port St. Lucie, Florida 07/30/84 Lease (2)
Martin Downs 3102 Martin Downs Boulevard, 07/24/85 Lease (3)
Palm City, Florida
Chasewood 6350 Indiantown Road., Suite 1, 02/26/86 Lease (4)
Jupiter, Florida
Bluffs 3950 U.S. Highway 1, Jupiter, Florida 09/18/86 Lease (5)
Village Commons 971 Village Boulevard, West Palm Beach, Florida 06/26/89 Lease (6)
Hobe Sound 11400 SE Federal Highway, Hobe Sound, Florida 02/05/90 Owned
Jupiter 520 Toney Penna Drive, Jupiter, Florida 07/10/95 Owned
PGA PGA Shoppes on the Green, 7102 Fairway Drive, 04/22/96 Owned
Palm Beach Gardens, Florida
Vero Beach 6030 20th Street, Vero Beach, Florida 07/21/97 Lease (7)
Hutchinson Island 4417 NE Ocean Boulevard, Jensen Beach, Florida 01/21/97 Lease (8)
Lake Worth 5702 Lake Worth Road, Suite # 3, Lake Worth, 10/20/97 Lease (9)
Florida
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
87
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPENING OWNED/
LOCATION ADDRESS DATE LEASE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LOAN PRODUCTION OFFICES
Vero Beach 2903 Cardinal Drive 03/01/98 Lease (10)
Vero Beach, Florida
Melbourne 1901 S. Harbor City Blvd. 05/01/98 Lease (11)
Suite 801, Melbourne, Florida
OTHER FACILITIES
Training Center 101 N. U.S. Highway One
Tequesta, Florida 07/15/98 Owned
- -----------------
</TABLE>
(1) This lease expires on December 31, 2000 and provides for a renewal option
which runs through December 31, 2015.
(2) This lease expires on January 31, 1999 and provides for a renewal option
which runs through January 31, 2004. The Association is completing
construction of a new office in Jupiter. Upon completion of construction
(expected to be in October 1998), the Association will relocate the
branch office into the new building.
(3) This lease expires on August 8, 1999 and provides for a renewal option
which runs through August 8, 2004.
(4) This lease expires on January 31, 2006. The Association is in the process
of constructing a new branch office in Port St. Lucie. Upon completion of
construction (currently expected to be the first quarter of 1999), the
Association will relocate its existing branch office to the new site.
(5) This lease expires on October 31, 2001 and provides for a renewal option
which runs through October 31, 2016.
(6) This lease expires on June 25, 2004 and provides for a renewal option
which runs through June 25, 2014.
(7) This lease expires on July 1, 2002 and provides for a renewal option
which runs through July 1, 2017. The Association has exercised an option
to purchase the property as of July 31, 1998.
(8) This lease expires on June 30, 1999 and provides for a renewal option
which runs through December 31, 2002.
(9) This lease expires on March 1, 2000 and provides for a renewal option
which runs through August 1, 2002.
(10) This lease expires on February 28, 1999 and provides for a renewal option
which runs through February 28, 2000.
(11) This lease expires on April 30, 2000.
88
<PAGE>
REGULATION
Set forth below is a brief description of certain laws and regulations
which are applicable to the Company and the Association. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations.
GENERAL
The Association, as a federally chartered savings institution, is
subject to federal regulation and oversight by the OTS extending to all aspects
of its operations. The Association also is subject to regulation and examination
by the FDIC, which insures the deposits of the Association to the maximum extent
permitted by law, and requirements established by the Federal Reserve Board.
Federally chartered savings institutions are required to file periodic reports
with the OTS and are subject to periodic examinations by the OTS and the FDIC.
The investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and such institutions are prohibited from engaging
in any activities not permitted by such laws and regulations. Such regulation
and supervision primarily is intended for the protection of depositors and not
for the purpose of protecting shareholders.
The OTS' enforcement authority over all savings institutions and their
holding companies includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS.
THE COMPANY
HOLDING COMPANY ACQUISITIONS. Upon consummation of the Conversion, the
Company will become a savings and loan holding company within the meaning of the
Home Owners' Loan Act, as amended ("HOLA"), and will be required to register
with the OTS. The HOLA and OTS regulations generally prohibit a savings and loan
holding company, without prior OTS approval, from acquiring, directly or
indirectly, the ownership or control of any other savings institution or savings
and loan holding company, or all, or substantially all, of the assets or more
than 5% of the voting shares thereof. These provisions also prohibit, among
other things, any director or officer of a savings and loan holding company, or
any individual who owns or controls more than 25% of the voting shares of such
holding company, from acquiring control of any savings institution not a
subsidiary of such savings and loan holding company, unless the acquisition is
approved by the OTS.
HOLDING COMPANY ACTIVITIES. The Company will operate as a unitary
savings and loan holding company. Generally, there are limited restrictions on
the activities of a unitary savings and loan holding company and its non-savings
institution subsidiaries. However, if the Director of the OTS determines that
there is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings institution; (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the QTL test, as
discussed under "-The Association - Qualified Thrift Lender Test," then such
unitary holding company also shall become subject to the activities restrictions
applicable to multiple savings and loan holding companies and, unless the
savings institution requalifies as a QTL within one year thereafter, shall
register as, and become subject to the restrictions applicable to, a bank
holding company. See "- The Association - Qualified Thrift Lender Test."
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The HOLA requires every savings institution subsidiary of a savings and
loan holding company to give the OTS at least 30 days' advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock, or else such dividend will be invalid. See "- The
Association - Capital Distribution Regulation."
AFFILIATE RESTRICTIONS. Transactions between a savings institution and
its "affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act and OTS regulations. Affiliates
of a savings institution include, among other entities, the savings
institution's holding company and companies that are controlled by or under
common control with the savings institution.
In general, Sections 23A and 23B and OTS regulations issued in
connection therewith limit the extent to which a savings institution or its
subsidiaries may engage in certain "covered transactions" with affiliates to an
amount equal to 10% of the institution's capital and surplus, in the case of
covered transactions with any one affiliate, and to an amount equal to 20% of
such capital and surplus, in the case of covered transactions with all
affiliates. In addition, a savings institution and its subsidiaries may engage
in covered transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings institution or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings institution may not
make a loan or extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for bank holding companies; a savings
institution may not purchase or invest in securities of an affiliate other than
shares of a subsidiary; a savings institution and its subsidiaries may not
purchase a low-quality asset from an affiliate; and covered transactions and
certain other transactions between a savings institution or its subsidiaries and
an affiliate must be on terms and conditions that are consistent with safe and
sound banking practices. With certain exceptions, each loan or extension of
credit by a savings institution to an affiliate must be secured by collateral
with a market value ranging from 100% to 130% (depending on the type of
collateral) of the amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
institution subsidiaries of savings institutions from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
institutions to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings institutions may
be required to give the OTS prior notice of affiliate transactions.
THE ASSOCIATION
INSURANCE OF ACCOUNTS. The deposits of the Association are insured to
the maximum extent permitted by the SAIF, which is administered by the FDIC, and
are backed by the full faith and credit of the U.S. Government. As insurer, the
FDIC is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action.
Under current FDIC regulations, SAIF-insured institutions are assigned
to one of three capital groups which are based solely on the level of an
institution's capital--"well capitalized," "adequately capitalized," and
"undercapitalized"--which are defined in the same manner as the regulations
establishing the prompt corrective action system discussed below. These three
groups are then divided into three subgroups which reflect varying levels of
supervisory concern, from those which are considered to be healthy to those
which are considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications, with rates ranging
prior to
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September 30, 1996 from 23 basis points for well capitalized, healthy
institutions to 31 basis points for undercapitalized institutions with
substantial supervisory concerns.
The deposits of the Association are currently insured by the SAIF. Both
the SAIF and the BIF are required by law to attain and thereafter maintain a
reserve ratio of 1.25% of insured deposits. The BIF achieved a fully funded
status first, and therefore as discussed below, effective January 1, 1996, the
FDIC substantially reduced the average deposit insurance premium paid by
BIF-insured banks. On November 14, 1995, the FDIC approved a final rule
regarding deposit insurance premiums. The final rule reduced deposit insurance
premiums for BIF member institutions to zero basis points (subject to a $2,000
minimum) for institutions in the lowest risk category, while holding deposit
insurance premiums for SAIF members at their then-current levels (23 basis
points for institutions in the lowest risk category). The reduction was
effective with respect to the semiannual premium assessment beginning January 1,
1996.
On September 30, 1996 Congress passed, and the President signed, the DIF
which mandated that all institutions which have deposits are insured by SAIF
were required to pay a one-time special assessment of 65.7 basis points on
SAIF-insured deposits (subject to adjustment for certain types of banks with
SAIF deposits) that were held at March 31,1995 payable by November 27, 1996 to
recapitalize the SAIF. The assessment increased the SAIF's reserve ratio to a
comparable level to that of the BIF at 1.25% of total insured deposits. The
Association's share of this special assessment totaled $2.8 million and is
reflected in the 1996 operating results. The FDIC, in connection with the
recapitalization, also lowered SAIF premiums from $0.23 per $100 to $0.065 per
$100 of insured deposits beginning in January 1997.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Association, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Association's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. The OTS capital requirements consist of
a "tangible capital requirement," a "leverage capital requirement" and a
"risk-based capital requirement." The OTS is also authorized to impose capital
requirements in excess of those standards on individual institutions on a
case-by-case basis.
Under the tangible capital requirement, a savings association must
maintain tangible capital in an amount equal to at least 1.5% of adjusted total
assets. Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus a specified amount of purchased mortgage
servicing rights.
Under the leverage capital requirement adopted by the OTS, savings
associations must maintain "core capital" in an amount equal to at least 3% of
adjusted total assets. Core capital is defined as common shareholders' equity
(including retained earnings), non-cumulative perpetual preferred stock, and
minority interests in the equity accounts of consolidated subsidiaries, plus
purchased mortgage servicing rights valued at the lower of 90% of fair market
value, 90% of original cost or the current amortized book value as determined
under GAAP, and "qualifying supervisory goodwill," less non-qualifying
intangible assets. At June 30, 1998, the Association's ratio of core capital to
total adjusted assets was 9.6%.
Under the risk-based capital requirement, a savings association must
maintain total capital (which is defined as core capital plus supplementary
capital) equal to at least 8.0% of risk-weighted assets. A savings association
must calculate its risk-weighted assets by multiplying each asset and
off-balance sheet item by various risk factors, which range from 0% for cash and
securities issued by the United States Government or its agencies to 100% for
repossessed assets or loans more than 90 days past due. Qualifying one- to
four-family
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residential real estate loans and qualifying multi-family residential real
estate loans (not more than 90 days delinquent and having an 80% or lower
loan-to-value ratio), which at June 30, 1998, represented 72.4% of the total
loans receivable, are weighted at a 50% risk factor. Supplementary capital may
include, among other items, cumulative perpetual preferred stock, perpetual
subordinated debt, mandatory convertible subordinated debt, intermediate-term
preferred stock, and general allowances for loan losses. The allowance for loan
losses includable in supplementary capital is limited to 1.25% of risk-weighted
assets. Supplementary capital is limited to 100% of core capital.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital, in addition to the adjustments
required for calculating core capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
non-residential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. However, in calculating
regulatory capital, institutions can add back unrealized losses and deduct
unrealized gains net of taxes, on debt securities reported as a separate
component of GAAP capital.
The OTS regulations establish special capitalization requirements for
savings associations that own service corporations and other subsidiaries,
including subsidiary savings associations. According to these regulations,
certain subsidiaries are consolidated for capital purposes and others are
excluded from assets and capital. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for
national banks, engaged solely in mortgage-banking activities, or engaged in
certain other activities solely as agent for its customers are "includable"
subsidiaries that are consolidated for capital purposes in proportion to the
association's level of ownership, including the assets of includable
subsidiaries in which the association has a minority interest that is not
consolidated for GAAP purposes. For excludable subsidiaries, the debt and equity
investments in such subsidiaries are deducted from assets and capital. At June
30, 1998, the Association had no investments subject to a deduction from
tangible capital.
The OTS amended its risk-based capital requirements that would require
institutions with an "above normal" level of interest rate risk to maintain
additional capital. A savings association is considered to have a "normal" level
of interest rate risk if the decline in the market value of its portfolio equity
after an immediate 200 basis point increase or decrease in market interest rates
(whichever leads to the greater decline) is less than two percent of the current
estimated market value of its assets. The market value of portfolio equity is
defined as the net present value of expected cash inflows and outflows from an
association's assets, liabilities and off-balance sheet items. The amount of
additional capital that an institution with an above normal interest rate risk
is required to maintain (the "interest rate risk component") equals one-half of
the dollar amount by which its measured interest rate risk exceeds the normal
level of interest rate risk. The interest rate risk component is in addition to
the capital otherwise required to satisfy the risk-based capital requirement.
Implementation of this component has been postponed by the OTS. The final rule
was to be effective as of January 1, 1994, subject however to a three quarter
lag time in implementation. However, in October 1994, the Director of the OTS
indicated that it would waive the capital deductions for institutions with a
greater than "normal" risk until the OTS published an appeals process. On August
21, 1995, the OTS released Thrift Bulletin 67, which established (i) an appeals
process to handle "requests for adjustments" to the interest rate risk component
and (ii) a process by which "well-capitalized" institutions may obtain
authorization to use their own interest rate risk model to determine their
interest rate risk component. The Director of the OTS indicated, concurrent with
the release of Thrift Bulletin 67, that the OTS will continue to delay the
implementation of the capital deduction for interest rate risk pending the
testing of the appeals process set forth in Thrift Bulletin 67.
Effective November 28, 1994, the OTS revised its interim policy issued
in August 1993 under which savings institutions computed their regulatory
capital in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under the revised OTS policy, savings institutions
must value securities available for sale at amortized cost for regulatory
capital purposes. This means that in computing regulatory capital, savings
institutions should add back any unrealized losses and deduct any unrealized
gains, net of income taxes, on debt securities reported as a separate component
of GAAP capital.
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At June 30, 1998, the Association exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 9.6%, 9.6%
and 18.1%, respectively. See Note 16 to the Notes to Consolidated Financial
Statements included elsewhere herein.
The OTS and the FDIC generally are authorized to take enforcement action
against a savings association that fails to meet its capital requirements, which
action may include restrictions on operations and banking activities, the
imposition of a capital directive, a cease-and-desist order, civil money
penalties or harsher measures such as the appointment of a receiver or
conservator or a forced merger into another institution. In addition, under
current regulatory policy, an association that fails to meet its capital
requirements is prohibited from paying any dividends.
PROMPT CORRECTIVE ACTION. Under the prompt corrective action regulations
of the OTS, an institution is deemed to be (i) "well capitalized" if it has
total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio
of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital
ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0%
under certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less
than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital
ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Under specified
circumstances, a federal banking agency may reclassify a well capitalized
institution as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
An institution generally must file a written capital restoration plan
which meets specified requirements with its appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval within 60 days after
receiving a capital restoration plan, subject to extensions by the agency. An
institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. In addition, undercapitalized institutions are subject to various
regulatory restrictions, and the appropriate federal banking agency also may
take any number of discretionary supervisory actions.
At June 30, 1998, the Association was in the "well capitalized" category
for purposes of the above regulations and as such is not subject to the above
mentioned restrictions.
SAFETY AND SOUNDNESS GUIDELINES. The OTS and the other federal bank
regulatory agencies have established guidelines for safety and soundness,
addressing operational and managerial standards, as well as compensation matters
for insured financial institutions. Institutions failing to meet these standards
are required to submit compliance plans to their appropriate federal regulators.
The OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions. The Association
believes that it is in compliance with these guidelines and standards.
LIQUIDITY REQUIREMENTS. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 4%. For the month ended June 30, 1998, the Association's
liquidity ratio was 8.5%.
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CAPITAL DISTRIBUTIONS. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt and
other transactions charged to the capital account of a savings institution to
make capital distributions. Generally, the regulations create a safe harbor for
specified levels of capital distributions from institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Savings institutions
and distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (Tier 1
institutions) may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the institution's tangible, core or
risk-based capital ratio exceeds its tangible, core or risk-based capital
requirement. Failure to meet minimum capital requirements will result in further
restrictions on capital distributions, including possible prohibition without
explicit OTS approval. See "- Regulatory Capital Requirements."
In order to make distributions under these safe harbors, Tier 1 and Tier
2 institutions must submit 30 days written notice to the OTS prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 institution deemed
to be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 institution as a result of such a determination. At June 30,
1998, the Association was a Tier 1 institution for purposes of this regulation.
BRANCHING BY FEDERAL SAVINGS INSTITUTIONS. OTS policy permits interstate
branching to the full extent permitted by statute (which is essentially
unlimited). Generally, federal law prohibits federal savings institutions from
establishing, retaining or operating a branch outside the state in which the
federal institution has its home office unless the institution meets the IRS'
domestic building and loan test (generally, 60% of a thrift's assets must be
housing-related) ("IRS Test"). The IRS Test requirement does not apply if: (i)
the branch(es) result(s) from an emergency acquisition of a troubled savings
institution (however, if the troubled savings institution is acquired by a bank
holding company, does not have its home office in the state of the bank holding
company bank subsidiary and does not qualify under the IRS Test, its branching
is limited to the branching laws for state-chartered banks in the state where
the savings institution is located); (ii) the law of the state where the branch
would be located would permit the branch to be established if the federal
savings institution were chartered by the state in which its home office is
located; or (iii) the branch was operated lawfully as a branch under state law
prior to the savings institution's conversion to a federal charter.
Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA record may be the basis for denial of a branching
application.
COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS. Savings
institutions have a responsibility under the CRA and related regulations of the
OTS to help meet the credit needs of their communities, including low- and
moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and
the Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institution's failure to comply with the
provisions of CRA could, at a minimum, result in regulatory restrictions on its
activities, and failure to comply with the Fair Lending Laws could result in
enforcement actions by the OTS, as well as other federal regulatory agencies and
the Department of Justice.
QUALIFIED THRIFT LENDER TEST. All savings institutions are required to
meet a QTL test to avoid certain restrictions on their operations. Under Section
2303 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, a
savings institution can comply with the QTL test by either qualifying as a
domestic building and loan association as defined in Section 7701(a)(19) of the
Code or by meeting the second prong of the QTL test set forth
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in Section 10(m) of the HOLA. A savings institution that does not meet the QTL
test must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank; (iii)
the institution shall not be eligible to obtain any new advances from its FHLB,
other than special liquidity advances with the approval of the OTS; and (iv)
payment of dividends by the institution shall be subject to the rules regarding
payment of dividends by a national bank. Upon the expiration of three years from
the date the savings institution ceases to be a QTL, it must cease any activity
and not retain any investment not permissible for a national bank and
immediately repay any outstanding FHLB advances (subject to safety and soundness
considerations).
Currently, the portion of the QTL test that is based on Section 10(m) of
the HOLA rather than the Code requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets on a
monthly average basis in nine out of every 12 months. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans made to
purchase, refinance, construct, improve or repair domestic residential housing
and manufactured housing; home equity loans; mortgage-backed securities (where
the mortgages are secured by domestic residential housing or manufactured
housing); stock issued by the FHLB of Atlanta; and direct or indirect
obligations of the FDIC. In a recent amendment to the QTL, small business loans,
credit card loans, student loans and loans for personal, family and household
purposes were allowed to be included without limitation as qualified
investments. In addition, the following assets, among others, may be included in
meeting the test subject to an overall limit of 20% of the savings institution's
portfolio assets: 50% of residential mortgage loans originated and sold within
90 days of origination; 100% of consumer and educational loans (limited to 10%
of total portfolio assets); and stock issued by the FHLMC or the FNMA. Portfolio
assets consist of total assets minus the sum of (i) goodwill and other
intangible assets, (ii) property used by the savings institution to conduct its
business, and (iii) liquid assets up to 20% of the institution's total assets.
At June 30, 1998, the qualified thrift investments of the Association were
approximately 76.7% of its portfolio assets.
FEDERAL HOME LOAN BANK SYSTEM. The Association is a member of the FHLB
of Atlanta, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (I.E., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB. At
June 30, 1998, the Association had $75.6 million of FHLB advances. See Note 11
to Notes to Consolidated Financial Statements.
As a member, the Association is required to purchase and maintain stock
in the FHLB of Atlanta in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At June 30, 1998, the Association had $3.9 million
in FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. These contributions also could have an adverse effect on the
value of FHLB stock in the future. The dividend yield on the Association's FHLB
stock was 7.25% for the fiscal years ended December 31, 1997 and 1996 and for
the six months ended June 30, 1998.
FEDERAL RESERVE SYSTEM. Federal Reserve Board regulations require all
depository institutions to maintain non-interest earning reserves against their
transaction accounts (primarily NOW and Super NOW checking accounts) and
non-personal time deposits. At June 30, 1998, the Association was in compliance
with these reserve requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS.
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Savings associations are authorized to borrow from a Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require savings
associations to exhaust other reasonable alternative sources of funds, including
FHLB advances, before borrowing from a Federal Reserve Bank.
THRIFT CHARTER. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Association, to convert
their charters to national or state bank charters. Recent legislation required
the Treasury Department to prepare for Congress a comprehensive study on the
development of a common charter for federal savings institutions and commercial
banks; and, in the event that the thrift charter was eliminated by January 1,
1999, would require the merger of the BIF and the SAIF into a single Deposit
Insurance Fund on that date. The Association cannot determine whether, or in
what form, such legislation may eventually be enacted and there can be no
assurance that any legislation that is enacted would not adversely affect the
Association and its parent holding company.
TAXATION
FEDERAL TAXATION
For federal income tax purposes, the Mid-Tier Holding Company files a
consolidated federal income tax return with the Association on a fiscal year
basis. Since the MHC owns less than 80% of the outstanding Common Stock of the
Mid-Tier Holding Company, the MHC is not permitted to file a consolidated
federal income tax return with the Mid-Tier Holding Company. Because the MHC has
nominal assets other than the stock of the Mid -Tier Holding Company, it has no
material federal income tax liability.
On May 13, 1997, permission was received from the IRS to change the
accounting period, for federal income tax purposes, from September 30 to
December 31, effective December 31, 1996.
The Mid-Tier Holding Company, the MHC and the Association are subject to
the rules of federal income taxation generally applicable to corporations under
the Code. Most corporations are not permitted to make deductible additions to
bad debt reserves under the Code. However, prior to the effective date of
legislation passed in 1996, savings and loan associations and savings
associations such as the Association, which met certain tests prescribed by the
Internal Revenue Service may have benefitted from favorable provisions provided
for in Section 593 of the Code regarding deductions for taxable income for
annual additions to the bad debt reserve.
During 1996, effective for years beginning after December 31, 1995,
legislation was passed that repealed Section 593 of the Code. Section 593
allowed thrift institutions, including the Association, to use the
percentage-of-taxable income bad debt accounting method, if more favorable than
the specific charge-off method, for federal income tax purposes. The excess
reserves (deduction based on the percentage-of-taxable income less the deduction
based on the specific charge-off method) accumulated post-1987 are required to
be recaptured ratably over a six year period beginning in 1996. The excess
reserve as of December 31, 1996 was approximately $685,000. The same legislation
forgave the tax liability on pre-1987 accumulated bad debt reserves which would
have penalized any thrift choosing to adopt a bank charter because the tax would
have become due and payable. The unrecorded potential liability that was
forgiven approximated $4.4 million. See Note 12 to the Notes to Consolidated
Financial Statements set forth elsewhere herein.
Deferred income taxes arise from the recognition of certain items of
income and expense for tax purposes in years different from those in which they
are recognized in the financial statements. In February 1992, the FASB issued
SFAS 109, "Accounting for Income Taxes " ("SFAS 109"). SFAS 109 was implemented
by the Company retroactively, effective October 1, 1993. The liability method
accounts for deferred income taxes by applying the enacted statutory rates in
effect at the balance sheet date to differences between the book cost and the
tax cost of assets and liabilities. The resulting deferred tax liabilities and
assets are adjusted to reflect changes in tax laws.
96
<PAGE>
The Mid-Tier Holding Company is subject to the corporate alternative
minimum tax which is imposed to the extent it exceeds the Mid-Tier Holding
Company's regular income tax for the year. The alternative minimum tax will be
imposed at the rate of 20% of a specially computed tax base. Included in this
base will be a number of preference items, including the interest on certain
tax-exempt bonds issued after August 7, 1986. In addition. for purposes of the
alternative minimum tax, the amount of alternative minimum taxable income that
may be offset by net operating losses is limited to 90% of alternative minimum
taxable income.
The Mid-Tier Holding Company was audited by IRS for the tax year 1990
during fiscal year 1994. Based upon the audit, the Mid-Tier Holding Company
received a "no-change" letter from the IRS. See Notes 1 and 12 to the Notes to
Consolidated Financial Statements set forth elsewhere herein.
STATE TAXATION
Under the laws of the State of Florida, the Mid-Tier Holding Company and
its subsidiary are generally subject to 5.5% tax on net income. The tax may be
reduced by a credit of up to 65% of the tax due as a result of certain
intangible taxes. The tax is deductible by the Mid-Tier Holding Company in
determining its federal income tax liability. The Mid-Tier Holding Company has
not been audited by the State of Florida.
97
<PAGE>
MANAGEMENT
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company is divided into three classes,
each of which contains approximately one-third of the Board. The directors shall
be elected by the shareholders of the Company for staggered three year terms, or
until their successors are elected and qualified. The following table sets forth
certain information regarding the directors of the Company, all of whom are also
directors of the Association.
<TABLE>
<CAPTION>
Position with the Association and Principal Year
Occupation During the Director Term
Name Age (1) Past Five Years Since (2) Expires
- ---- ------- ------------------------- -------- -------
<S> <C> <C> <C> <C>
Forest C. Beaty, Jr. 69 Director; Retired; Consultant; majority 1977 2001
shareholder of FMS, Inc., a holding company
(based in Lake Park, Florida) which owns retail
clothing stores.
Frederick A. Teed 70 Chairman; Retired; previously President and 1964 2001
Chief Executive Officer of the Association from
1983 to 1993.
James B. Pittard, Jr. 52 Director, President and Chief Executive Officer; 1993 1999
President and Chief Executive Officer of the
Association since 1993; from 1982 to 1993
served as Senior Vice President and Treasurer of
the Association.
Robert F. Cromwell 79 Director; Chairman Emeritus of the Association; 1955 1999
Retired; served as Chairman of the Board of the
Association from 1983 to 1993.
Karl D. Griffin 69 Director; Secretary Emeritus of the Association; 1955 2000
President of Kirklington Park, Inc., a
commercial real estate leasing company located
in Riviera Beach, Florida; President of Smith &
Yetter, Inc. from 1961 until 1994.
Harold I. Stevenson, CPA 62 Director; from 1987 through 1993, served as 1987 2000
President of Harold I. Stevenson, CPA, PA;
since 1994, self-employed, Palm Beach
Gardens, Florida and Rising Fawn, Georgia.
</TABLE>
- ---------------------------
(1) Age as of June 30, 1998
(2) Includes period served as director of the Association.
Directors of the Company initially will not be compensated by the
Company but will continue to serve as directors of and be compensated by the
Association. It is not anticipated that separate compensation will be paid to
directors of the Company until such time as such persons devote significant time
to the separate management of the Company's affairs, which is not expected to
occur until the Company becomes actively engaged in additional businesses other
than holding the stock of the Association. The Company may determine that such
compensation is appropriate in the future.
98
<PAGE>
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors.
MANAGEMENT OF THE MID-TIER HOLDING COMPANY AND THE ASSOCIATION
The directors and executive officers of the Mid-Tier Holding Company and
the Association are the same as the directors and executive officers of the
Company. Information concerning the names, ages, principal occupations during
the past five years and term of office of the directors and executive officers
of the Mid-Tier Holding Company and the Association is set forth under
"Management of the Company " and "Executive Officers who are not Directors."
BENEFICIAL OWNERSHIP OF THE MID-TIER HOLDING COMPANY COMMON STOCK
The following tables sets forth information as to the Mid-Tier Holding
Company Common Stock beneficially owned as of July 31, 1998 by (i) the only
persons or entities known to the Association to be the beneficial owners of more
than 5% of the Mid-Tier Holding Company's Common Stock, (ii) each director of
the Mid-Tier Holding Company and the Association, and (iii) all directors and
executive officers of the Mid-Tier Holding Company and the Association as a
group.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial
Name of Beneficial Owner or Ownership as of Percent of
Number of Persons in Group July 31, 1998 (1)(2)(3)(4) Common Stock
-------------------------- -------------------------- ------------
<S> <C> <C>
ComFed, M. H. C.
660 U.S. Highway One
North Palm Beach, Florida 33408 2,620,144 51.34%
Community Savings, F. A.
Employee Stock Ownership Plan
660 U.S. Highway One
North Palm Beach, Florida 33408 179,569(5) 3.52
Directors:
Frederick A. Teed 18,860 *
James B. Pittard, Jr. 17,325(6) *
Forest C. Beaty, Jr. 19,068(7) *
Robert F. Cromwell 20,860 *
Karl D. Griffin 18,760(8) *
Harold I. Stevenson, CPA 18,060(9) *
Executive officers:
Larry J. Baker, CPA 14,161(10) *
Cecil F. Howard, Jr. 5,989(11) *
Feriel G. Hughes -- *
Mary L. Kaminske 12,218(12) *
Michael E. Reinhardt 12,610(13) *
All directors and
executive officers as a
group (11 persons) 157,911(14) *
</TABLE>
- -----------------
* Represents less than 1% of the outstanding Common Stock.
- ------------------
(1) Based upon filings made pursuant to the Exchange Act and information
furnished by the respective individuals and entities. Under regulations
promulgated pursuant to the Exchange Act, shares of Common Stock are deemed
to be beneficially owned by a person if he or she directly or indirectly
has or shares (i) voting power, which includes the power to vote or to
direct the voting of the shares, or (ii) investment power, which includes
the power to dispose or to direct the disposition of the shares. Unless
otherwise indicated, the named beneficial owner has sole voting and
dispositive power with respect to the shares.
99
<PAGE>
- --------------------
(2) Under applicable regulations, a person is deemed to have beneficial
ownership of any shares of Common Stock which may be acquired within 60
days of July 31, 1998 pursuant to the exercise of outstanding stock
options. Shares of Common Stock which are subject to stock options are
deemed to be outstanding for the purpose of computing the percentage of
outstanding Common Stock owned by such person or group but not deemed
outstanding for the purpose of computing the percentage of Common Stock
owned by any other person or group.
(3) Includes amounts totaling 4,750, 4,440, 4,750, 4,750, 4,750, 4,750, 4,100,
1,000, 5,750 and 5,700 shares awarded pursuant to the 1995 Recognition
Plan granted to Messrs. Teed, Pittard, Beaty, Cromwell, Griffin,
Stevenson, Baker, Howard and Reinhardt and Ms. Kaminske, respectively.
Such shares may be voted by such persons although not all of such shares
have vested and been distributed. The awards vest at the rate of 20% per
year from the date of grant (January 1995 except with respect to Mr.
Howard whose grant was made in January 1997).
(4) Includes shares totaling 7,110, 11,360, 7,110, 7,110, 7,110, 7,110, 6,000,
1,500, 4,620 and 4,560 which may be acquired upon the exercise of options
exercisable within 60 days of July 31, 1998 granted to Messrs. Teed,
Pittard, Beaty, Cromwell, Griffin, Stevenson, Baker, Howard, Reinhardt and
Ms. Kaminske, respectively, pursuant to the 1995 Stock Option Plan.
(5) Does not include 8,259 shares allocated to or deemed beneficially owned by
the executive officers listed below, which shares are reflected in such
individuals' beneficial ownership.
(6) Includes 668 shares allocated to Mr. Pittard's wife, a former employee of
the Association, pursuant to the Association's ESOP, 56 shares owned by
Mr. Pittard's children and 792 shares allocated to Mr. Pittard pursuant to
the ESOP.
(7) Includes 4,560 shares owned jointly with Mr. Beaty's wife.
(8) Includes 3,500 shares owned jointly with Mr. Griffin's wife and 1,700
shares owned by Mr. Griffin's wife.
(9) Includes 2,500 shares owned by Mr. Stevenson's wife.
(10) Includes 1,678 shares allocated to Mr. Baker pursuant to the ESOP.
(11) Includes 2,354 shares allocated to Mr. Howard pursuant to the ESOP and 96
shares owned by Mr. Howard's wife through her IRA.
(12) Includes 3,810 shares owned jointly with Ms. Kaminske's husband (of which
3,140 of such shares are included in the shares granted to Ms. Kaminske
pursuant to the RRP as noted above) and 1,288 shares allocated to her
pursuant to the ESOP.
(13) Includes 4,211 shares owned jointly with Mr. Reinhardt's wife (of which
3,450 of such shares are included in the shares granted to Mr. Reinhardt
pursuant to the RRP as noted above) and 1,479 shares allocated to Mr.
Reinhardt pursuant to the ESOP.
(14) Includes 19,760 shares held by the 1995 Recognition Plan, which may be
voted by directors and executive officers pending vesting and
distribution, 8,259 shares allocated to executive officers pursuant to the
ESOP and 63,590 shares which may be acquired by directors and executive
officers upon the exercise of stock options exercisable within 60 days of
the Voting Record Date.
100
<PAGE>
THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARDS OF THE MID-TIER HOLDING
COMPANY AND ASSOCIATION
The business of the Mid-Tier Holding Company's Board of Directors is
conducted through meetings and activities of the Board and its committees.
Regular meetings of the Board of Directors of the Mid-Tier Holding Company are
held on a monthly basis and special meetings of the Board of Directors of the
Mid-Tier Holding Company are held from time-to-time as needed. There were only
six meetings of the Board of Directors of the Mid-Tier Holding Company held
during fiscal 1997 since the Mid-Tier Holding Company was not organized until
August 1997. No director attended fewer than 75% of the total number of meetings
of the Board of Directors of the Mid-Tier Holding Company held during fiscal
1997 and the total number of meetings held by all committees of the Board on
which the director served during such year.
The Board of Directors of the Mid-Tier Holding Company has established
various committees, including Nominating, Stock Benefits and Audit Committees.
The Audit Committee reviews the records and affairs of the Mid-Tier
Holding Company to determine its financial condition, reviews with management
and the independent auditors the systems of internal control, and monitors the
Mid-Tier Holding Company's adherence in accounting and financial reporting to
generally accepted accounting principles. Currently, all directors except
President Pittard serve as members of this Committee. The Audit Committee met
one time during fiscal 1997.
The Stock Benefits Committee consists of the non-employee directors of
the Mid-Tier Holding Company and is chaired by Mr. Stevenson. The Stock Benefits
Committee has exclusive responsibility and authority to control and manage the
operation and administration of the Association's Employee Stock Ownership Plan
("ESOP"), including the interpretation and application of its provisions, except
to the extent such responsibility and authority are otherwise specifically
allocated. In addition, the Committee has exclusive responsibility regarding
decisions concerning the payment of benefits under the ESOP. The Stock Benefits
Committee also has exclusive responsibility for determining the award of options
to employees under the 1995 Option Plan and restricted stock awards to employees
under the 1995 Recognition Plan, and are responsible for administration of such
plans. The Stock Benefits Committee met 15 times during fiscal 1997.
In accordance with the Mid-Tier Holding Company's Bylaws, the Board of
Directors acts as the Nominating Committee. The Board did not meet in such
capacity in fiscal 1997 but met subsequent to December 31, 1997 to nominate the
persons elected as directors at the annual meeting of shareholders held in April
1998.
The Board of Directors of the Association met 15 times during fiscal
1997. In addition, the Board of Directors of the Association has established
various committees including a Compensation Committee. The Compensation
Committee of the Association meets monthly to review the performance of
employees (other than officers) and determines compensation programs and
adjustments. The entire Board of Directors ratifies the recommendations of the
Compensation Committee with respect to officers other than Mr. Pittard (who is a
member of the Committee) and whose compensation is established by the Board. The
Compensation Committee during fiscal 1997 was comprised of Larry J. Baker,
Elizabeth A. DeLosh, Cecil F. Howard, Jr., Feriel G. Hughes, Mary L. Kaminske,
James B. Pittard, Jr., Michael E. Reinhardt and Jane H. Ryder. The Compensation
Committee met 15 times during fiscal 1997.
101
<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information with respect to the
executive officers of the Mid-Tier Holding Company and the Association who are
not directors.
<TABLE>
<CAPTION>
Name Age (1) Positions(s)
<S> <C> <C>
Larry J. Baker, CPA 58 Senior Vice President, Chief Financial Officer, Treasurer and Director of the
Association's Finance Division
Cecil F. Howard, Jr. 60 Senior Vice President and Director of the Association's Lending Division
Feriel G. Hughes 49 Senior Vice President and Director of the Association's Human Resources,
Marketing and Training Division
Mary L. Kaminske 60 Senior Vice President and Director of the Association's Operations Division
Michael E. Reinhardt 52 Senior Vice President and Director of the Association's Properties and Insurance
Division
</TABLE>
- --------------
(1) As of June 30, 1998.
Set forth below is a brief description of the background for at least
the last five years of each executive officer of the Mid-Tier Holding Company
and the Association who is not a director of the Mid-Tier Holding Company.
LARRY J. BAKER, CPA is Senior Vice President, Chief Financial Officer
and Treasurer of the Mid-Tier Holding Company and the Association and Director
of the Finance Division of the Association. Mr. Baker has been employed by the
Association since 1982 and has served as Senior Vice President since 1995, and
Treasurer of the Association since 1993. Mr. Baker has served in various other
positions with the Association including Controller from 1982 until 1996 and
Vice President from 1987 to 1994.
CECIL F. HOWARD, JR. is Senior Vice President of the Mid-Tier Holding
Company and the Association and has been Director of the Lending Division and
Chief Lending Officer of the Association since 1987 (except for the period from
October 1994 until January 1995 during which time he served as President of
First Federal Savings and Loan Association of Florida, Lakeland, Florida).
FERIEL G. HUGHES is Senior Vice President of the Mid-Tier Holding
Company and the Association and Director of the Human Resources, Marketing and
Training Division of the Association. Ms. Hughes joined the Association in March
1997. She previously served as a sales consultant with the national firm of
Schneider Sales Management, from February 1995 to March 1997, Human Resources
Director of Brooklyn Bow International, Riviera Beach, Florida, from October
1994 to September 1996 and as Director of Sales and Marketing of Flagler
National Bank, West Palm Beach, Florida from August 1986 until March 1994.
MARY L. KAMINSKE is Senior Vice President of the Mid-Tier Holding
Company and the Association and Director of the Operations Division of the
Association which includes oversight of the Association's branch office network.
Ms. Kaminske has been employed by the Association since 1969 in various
positions including serving as Vice President from 1987 until 1996.
MICHAEL E. REINHARDT is Senior Vice President of the Mid-Tier Holding
Company and the Association and Director of the Properties and Insurance
Division of the Association. Mr. Reinhardt was first employed by the Association
in 1973 serving in various positions, including as Vice President from 1987 to
1996 and as Senior Vice President since January 1997.
102
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of certain information
concerning the compensation awarded to or paid by the Association for services
rendered in all capacities during the past three years to the Chief Executive
Officer and the two other officers of the Association and its subsidiaries whose
compensation (salary and bonus) during the fiscal year ended December 31, 1997
exceeded $100,000. The Association changed its fiscal year from September 30 to
December 31 subsequent to September 30, 1996. Accordingly, amounts for fiscal
1996 and 1995 have been restated to be consistent with fiscal 1997. Said
officers, who also serve as executive officers of the Mid-Tier Holding Company,
do not receive separate compensation from the Company.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------------- --------------------------------------------
Other Awards
Name and Fiscal Annual ------------------------- All Other
Principal Position Year Salary Bonus Compensation(1) Stock Grants(2) Options Compensation(3)
------------------ ------ ------ ----- --------------- --------------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
James B. Pittard, Jr. 1997 $205,754 $ -- $10,500 $ -- -- $28,020
President and Chief 1996 194,334 -- 10,500 -- -- 21,360
Executive Officer 1995 150,520 -- 9,450 82,325 35,600 15,793
Larry J. Baker 1997 $100,596 $ -- $ -- $ -- -- $17,149
Senior Vice President, 1996 94,860 -- -- -- -- 12,988
Chief Financial Officer and Treasurer 1995 87,731 -- -- 45,613 10,000 9,515
and Director of the Finance Division
Cecil F. Howard, Jr. 1997 $144,131 $ -- $ -- $19,016 7,500 $24,752
Senior Vice President and Chief 1996 133,579 -- -- -- -- 18,748
Lending Officer and 1995 125,291 -- -- -- 12,572
Director of the Lending
Division
</TABLE>
- ----------------
(1) Includes director fees paid for attendance at Board meetings of the
Mid-Tier Holding Company and its subsidiaries. Does not include amounts
attributable to miscellaneous benefits received by executive officers. In
the opinion of management of the Association, the costs to the Association
of providing such benefits to any individual executive officer during the
year ended December 31, 1997 did not exceed the lesser of $50,000 or 10% of
the total of annual salary and bonus reported for the individual.
(2) Represents the grant of 7,400, 4,100, and 1,000 shares of restricted Common
Stock to Messrs. Pittard, Baker and Howard, respectively, pursuant to the
RRP. The awards vest 20% a year from the date of grant.
(3) Includes amounts allocated during the years ended December 31, 1997, 1996
and 1995 on behalf of Messrs. Pittard, Baker and Howard pursuant to the
ESOP.
103
<PAGE>
DIRECTOR COMPENSATION
BOARD FEES. During the year ended December 31, 1997, each member of the
Board of Directors of the Company and its subsidiaries received a monthly
meeting fee of $1,750, except Mr. Pittard who received $875 per monthly meeting.
STOCK OPTIONS. Pursuant to the Option Plan each non-employee director of
the Association was granted in January 1995 compensatory stock options to
purchase 11,850 shares of Common Stock. Each new non-employee director will
receive an option to purchase 200 shares of Common Stock upon election to the
Board, to the extent shares are available in the Option Plan. Options granted to
non-employee directors vest at the rate of 20% per year from the date of grant.
RESTRICTED STOCK AWARDS. Pursuant to the RRP, each non-employee director
of the Association was granted 4,750 shares of restricted stock. Each new
non-employee director will receive an award of 100 shares of Common Stock upon
election to the Board, to the extent shares are available in the RRP. The
restricted stock granted pursuant to the RRP vests at the rate of 20% per year
from the date of grant.
EXISTING STOCK OPTIONS
In addition to options covering 59,250 shares granted to non-employee
directors as described above, stock options covering 178,200 shares of
Association Common Stock have been granted to officers and employees of the
Association at exercise prices ranging from $11.125 per share to $19.016 per
share pursuant to the 1995 Stock Option Plan. A total of 237,986 shares were
originally reserved for issuance pursuant to the 1995 Stock Option Plan.
The following table sets forth certain information concerning exercises
of stock options granted pursuant to the 1995 Stock Option Plan by the named
executive officers during the fiscal year ended December 31, 1997 and options
held at December 31, 1997.
<TABLE>
<CAPTION>
Number of Unexercised Options at Value of Unexercised In the Money
Year End Options at Fiscal Year End(1)
---------------------------------- ---------------------------------
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ----------- ---------- ------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
James B. Pittard, Jr. 4,800 $96,000 9,440 21,360 $228,920 $517,980
Cecil F. Howard, Jr. -- $ -- -- 7,500 $ -- $122,693
Larry J. Baker -- $ -- 4,000 6,000 $ 97,000 $145,500
</TABLE>
(1) Based on a per share market price of $35.375 at December 31, 1997.
The following table discloses the total options granted to the one
executive officer receiving options during the year ended December 31, 1997.
<TABLE>
<CAPTION>
Number of % of Total
Options Options Granted to Exercise Expiration Fair Value of
Name Granted Employees (1) Price (2) Date Option (s)
- ----------------------- -------------- -------------------- ------------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
Cecil F. Howard 7,500 100% $19.016 1/18/2007 $39,375
</TABLE>
- ---------------
(1) Percentage of options granted to all employees and directors during fiscal
1997.
(2) The exercise price was based on the closing market price of a share of the
Association's common stock on the date of grant, which grant occurred prior
to consummation of the Reorganization.
104
<PAGE>
- -----------------
(3) The fair value of the options granted was estimated using the Binary Option
Pricing Model. Under such analysis, the interest rate was assumed to be
6.37%, the expected life of the options to be five years, the expected
volatility to be 15.36% and the dividend yield to be $2.67 per share.
DEFINED BENEFIT PLAN
The Association maintains a noncontributory defined benefit plan
("Retirement Plan"). All employees age 21 or older who have worked at the
Association for a period of one year and been credited with 1,000 or more hours
of employment with the Association during the year are eligible to accrue
benefits under the Retirement Plan. The Association annually contributes an
amount to the Retirement Plan necessary to satisfy the actuarially determined
minimum funding requirements in accordance with the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
At the normal retirement age of 65 (or completion of 30 years of service
with the Association, if earlier), the plan is designed to provide a life
annuity. The retirement benefit provided is an amount equal to 1.75% of a
participant's average monthly compensation based on the average of the three
consecutive years during the last 10 calendar years of employment which provides
the highest monthly average compensation multiplied by the participant's years
of credited service (not to exceed 35 years) to the normal retirement date.
Retirement benefits are also payable upon retirement due to early and late
retirement. A reduced benefit is payable upon early retirement at or after age
55 and the completion of fifteen years of service with the Association. Benefits
are also paid from the Retirement Plan upon a Participant's disability or death.
Upon termination of employment other than as specified above, a participant who
was employed by the Association for a minimum of two years is eligible to
receive his or her accrued benefit reduced for early retirement or a deferred
retirement benefit commencing on such participant's normal retirement date.
Benefits are payable in various annuity forms as well as in the form of a single
lump sum payment.
The following table sets forth estimated annual benefits payable upon
retirement at age 65 to the named executive officers under the Association's
Retirement Plan based upon various levels of compensation and years of service.
<TABLE>
<CAPTION>
Final Average
Compensation Years of Benefit Service at Retirement
- ------------------------- ----------------------------------------------------------------------------------
15 20 25 30 35
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 25,000 $ 6,563 $ 8,750 $10,938 $13,125 $15,313
50,000 13,125 17,500 21,875 26,250 30,625
75,000 19,688 26,250 32,813 39,375 45,938
100,000 26,250 35,000 43,750 52,500 61,250
125,000 32,813 43,750 54,688 65,625 76,563
150,000 39,375 52,500 65,625 78,750 91,875
and above
</TABLE>
The maximum annual compensation which may be taken into account under
the Internal Revenue Code (as adjusted from time to time by the IRS for
calculating contributions under qualified defined benefit plans after December
31, 1997 is $160,000 and the maximum annual benefit permitted under such plans
is $130,000.
At December 31, 1997, Messrs. Pittard, Howard and Baker had 16, 10 and
15 years of credited service, respectively, under the Retirement Plan.
105
<PAGE>
EMPLOYEE STOCK OWNERSHIP PLAN
The Association has established an ESOP for employees age 21 or older
who have at least one year of credited service with the Association. The ESOP is
funded by the Association's contributions made in cash. Benefits may be paid
either in shares of Common Stock or, to the extent permitted, in cash.
In October 1994, the ESOP borrowed $2.8 million from an unaffiliated
lender to purchase 190,388 shares of Association Common Stock in the open market
(which was deemed exchanged for Mid-Tier Holding Company Common Stock as a
result of the Mid-Tier Reorganization). The Association makes scheduled
discretionary cash contributions to the ESOP sufficient to amortize the
principal and interest on the loan, which has a maturity of seven years.
Subsequent to December 31, 1997, the Mid-Tier Holding Company loaned sufficient
funds to the ESOP to permit the ESOP to repay the loan to the unaffiliated
lender. The terms of the loan to ESOP from the Mid-Tier Holding Company are
substantially identical to those of the loan from the unaffiliated lender. The
Association may, in any plan year, make additional discretionary contributions
for the benefit of plan participants in either cash or shares of Mid-Tier
Holding Company Common Stock, which may be acquired through the purchase of
outstanding shares in the market or from individual shareholders, upon the
original issuance of additional shares by the Mid-Tier Holding Company or upon
the sale of treasury shares by the Mid-Tier Holding Company. Such purchases, if
made, would be funded through additional borrowings by the ESOP or additional
contributions from the Association. The timing, amount and manner of future
contributions to the ESOP will be affected by various factors, including
prevailing regulatory policies, the requirements of applicable laws and
regulations and market conditions.
Shares purchased by the ESOP with the proceeds of the loan are held in a
loan suspense account and released on a pro rata basis as debt service payments
are made. Discretionary contributions to the ESOP and shares released from the
suspense account will be allocated among participants on the basis of
compensation. Forfeitures will be reallocated among remaining participating
employees and may reduce any amount the Association might otherwise have
contributed to the ESOP. Benefits generally vest at the rate of 20% per year
beginning in the second year of participation until the participant becomes 100%
vested after six years of credited service. Benefits may be payable upon
retirement, early retirement, disability or separation from service. The
Association's contributions to the ESOP are not fixed, so benefits payable under
the ESOP cannot be estimated.
The Stock Benefits Committee of the Board administers the ESOP and an
unaffiliated financial institution has been appointed to act as trustee of the
related trust. The Stock Benefits Committee may instruct the trustee regarding
investment of funds contributed to the ESOP. Under the ESOP, the trustee must
vote all allocated shares held in the ESOP in accordance with the instructions
of the participating employees, and allocated shares for which employees do not
give instructions will be voted in the same ratio on any matter as to those
shares for which instructions are given. Unallocated shares held in the ESOP
will be voted by the ESOP trustee after considering the recommendation of the
Stock Benefits Committee.
The ESOP is subject to the requirements of ERISA and the regulations of
the IRS and the Department of Labor thereunder.
As part of the Conversion, the ESOP plans to borrow funds from the
Company and use the funds to purchase up to 8% of the Conversion Stock sold in
the Offerings. Collateral from the loan will be the Common Stock purchased by
the ESOP with the loan proceeds. The loan will be repaid principally from the
Association's contributions to the ESOP over a period of at least 15 years. The
interest rate will be at the prime rate. Shares purchased by the ESOP will be
held in a loan expense account and released on a pro rata basis as debt service
payments are made.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Association maintains a non-qualified supplemental executive
retirement plan ("SERP") for certain executives of the Association (including
Messrs. Pittard, Baker and Howard) to compensate those executives participating
in the Association's Retirement Plan whose benefits are limited by Section 415
or Section 401(a)(17) of the Internal Revenue Code. As of December 31, 1997,
there were four executive officers participating in the SERP.
106
<PAGE>
The SERP provides the designated executives with retirement benefits generally
equal to the difference between (i) seventy-five percent (75%) of the
executive's compensation and (ii) the sum of the executive's retirement benefit
under the Association's Retirement Plan and the executive's social security
benefits. Benefits under the SERP vest on normal retirement age (age 65). If an
executive remains employed with the Association after normal retirement age, the
executive will receive retirement benefits, actuarially adjusted to reflect the
executive's later retirement. Retirement benefits will be payable to the
executive in the form of a quarterly benefit for fifteen consecutive years.
Death benefits are payable to an executive's beneficiary only if the executive
survives to retirement from the Association. Benefits will be paid to the
beneficiary until the executive and the beneficiary have received a total of
sixty quarterly payments.
The SERP is considered an unfunded plan for tax and ERISA purposes. All
obligations arising under the SERP are payable from the general assets of the
Association. However, the Association has chosen to purchase life insurance
contracts to ensure that sufficient assets will be available to pay the benefits
under the SERP.
The benefits paid under the SERP supplement the benefits paid by the
Retirement Plan. The following table indicates the expected aggregate annual
retirement benefit payable from the SERP to SERP participants, expressed in the
form of a single-life annuity for the final average salary and years of service
specified below.
<TABLE>
<CAPTION>
Final Average
Compensation Years of Service and Benefit Payable at Retirement
- ---------------------- --------------------------------------------------------------------------
15 20 25 30 35
--- --- --- --- ---
<S> <C> <C> <C> <C> <C>
$100,000 $ 32,838 $ 24,088 $ 15,338 $ 6,588 $ --
125,000 45,026 34,088 23,151 12,213 1,276
150,000 57,213 44,088 30,963 17,838 4,713
175,000 75,963 62,838 49,713 36,588 23,463
200,000 94,713 81,588 68,463 55,338 42,213
225,000 113,463 100,338 87,213 74,088 60,963
250,000 132,213 119,088 105,963 92,838 79,713
275,000 150,963 137,838 124,713 111,588 98,463
300,000 169,713 156,588 143,463 130,338 117,213
</TABLE>
Messrs. Pittard, Howard and Baker have 16, 10 and 15 years,
respectively, of credited service under the SERP. The Association's pension cost
attributable to the SERP was $54,000 for the year ended December 31, 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Executive compensation philosophy, policies, levels and programs are the
responsibility of the full Board of Directors. Mr. Pittard, who serves as
President and Chief Executive Officer as well as a director of the Mid-Tier
Holding Company and the Association, does not participate in the Board's
determination of his compensation.
EMPLOYMENT AGREEMENTS
[DISCLOSURE WITH RESPECT TO PROPOSED EMPLOYMENT AND/OR SEVERANCE
AGREEMENTS WILL BE PROVIDED BY AMENDMENT.]
INDEBTEDNESS OF MANAGEMENT
In accordance and in compliance with applicable federal laws and
regulations, the Association offers mortgage loans to its directors, officers
and full-time employees for the financing of their primary residences and
certain other loans. Currently, all existing loans made by the Association to
its executive officers and directors and their associates were made on
substantially the same terms, including interest rate and collateral, as those
prevailing at the time for comparable transactions with non-affiliated persons.
It is the belief of management that these loans neither involve more than the
normal risk of collectibility nor present other unfavorable features.
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<PAGE>
All transactions between the Company and/or the Association and their
respective executive officers, directors, holders of 10% or more of the shares
of its Common Stock and affiliates thereof, are on terms no less favorable to
the Company or the Association, as the case may be, than could have been
obtained by it in arm's-length negotiations with unaffiliated persons. Such
transactions must be approved by a majority of independent outside directors of
the Company, or the Association, as the case may be, not having any interest in
the transaction.
NEW STOCK BENEFIT PLANS
STOCK OPTION PLAN. Following consummation of the Conversion, the Board
of Directors of the Company intends to adopt a 1999 Stock Option Plan, which
will be designed to attract and retain qualified personnel in key positions,
provide directors, officers and key employees with a proprietary interest in the
Company as an incentive to contribute to the success of the Company and reward
key employees for outstanding performance. The 1999 Option Plan will provide for
the grant of incentive stock options intended to comply with the requirements of
Section 422 of the Code ("incentive stock options"), non-incentive or
compensatory stock options, stock appreciation rights and limited rights which
will be exercisable only upon a change in control of the Company (collectively
"Awards"). Awards may be granted to directors and key employees of the Company
and any subsidiaries. The 1999 Stock Option Plan will be administered and
interpreted by a Stock Benefits Committee of the Board of Directors. Unless
sooner terminated, the Stock Option Plan shall continue in effect for a period
of 10 years from the date the Stock Option Plan is adopted by the Board of
Directors.
Under the 1999 Stock Option Plan, the Stock Benefits Committee will
determine which directors, officers and key employees will be granted Awards,
whether options will be incentive or compensatory options, the number of shares
subject to each Award, the exercise price of each option, whether options may be
exercised by delivering other shares of Common Stock and when such options
become exercisable. The per share exercise price of an incentive stock option
must at least equal the fair market value of a share of Common Stock on the date
the option is granted (110% of fair market value in the case of incentive stock
options granted to employees who are 5% shareholders).
At a meeting of shareholders of the Company following the Conversion,
which under applicable OTS regulations may be held no earlier than six months
after the completion of the Conversion, the Board of Directors intends to
present the 1999 Stock Option Plan to shareholders for approval and to reserve
an amount equal to 10% of the shares of Conversion Stock sold in the Offerings
(or 775,314 shares based upon the issuance of 7,753,143 shares of Conversion
Stock at the maximum of the Estimated Valuation Range), for issuance under the
1999 Stock Option Plan. OTS regulations provide that, in the event such plan is
implemented within one year following the Conversion, no individual officer or
employee of the Association may receive more than 25% of the options granted
under the 1999 Stock Option Plan and non-employee directors may not receive more
than 5% individually, or 30% in the aggregate of the options granted under the
1999 Stock Option Plan. OTS regulations also provide that the exercise price of
any options granted under any such plan must be at least equal to the fair
market value of the Common Stock as of the date of grant. Each stock option or
portion thereof will be exercisable at any time on or after it vests and will be
exercisable until 10 years after its date of grant or for periods of up to one
year, subject to extension by the Committee, following the death, disability or
other termination of the optionee's employment or service as a director.
However, failure to exercise incentive stock options within three months after
the date on which the optionee's employment terminates may result in the loss of
incentive stock option treatment.
At the time an Award is granted pursuant to the 1999 Stock Option Plan,
the recipient will not be required to make any payment in consideration for such
grant. With respect to incentive or compensatory stock options, the optionee
will be required to pay the applicable exercise price at the time of exercise in
order to receive the underlying shares of Common Stock. The shares reserved for
issuance under the 1999 Stock Option Plan may be authorized but previously
unissued shares, treasury shares, or shares purchased by the Company on the open
market or from private sources. In the event of a stock split, reverse stock
split or stock dividend, the number of shares of Common Stock under the 1999
Stock Option Plan, the number of shares to which any Award relates and the
exercise price per share under any option or stock appreciation right shall be
adjusted to reflect such increase or decrease in the total number
108
<PAGE>
of shares of Common Stock outstanding. In the event the Company declares a
special cash dividend or return of capital following the implementation of the
1999 Stock Option Plan in an amount per share which exceeds 10% of the fair
market value of a share of Common Stock as of the date of declaration, the per
share exercise price of all previously granted options which remain unexercised
as of the date of such declaration shall, subject to certain limitations, be
proportionately adjusted to give effect to such special cash dividend or return
of capital as of the date of payment of such special cash dividend or return of
capital.
Under current provisions of the Code, the federal income tax treatment
of incentive stock options and compensatory stock options is different. As
regards incentive stock options, an optionee who meets certain holding period
requirements will not recognize income at the time the option is granted or at
the time the option is exercised, and a federal income tax deduction generally
will not be available to the Company at any time as a result of such grant or
exercise. With respect to compensatory stock options, the difference between the
fair market value on the date of exercise and the option exercise price
generally will be treated as compensation income upon exercise, and the Company
will be entitled to a deduction in the amount of income so recognized by the
optionee. Upon the exercise of a stock appreciation right, the holder will
realize income for federal income tax purposes equal to the amount received by
him, whether in cash, shares of stock or both, and the Company will be entitled
to a deduction for federal income tax purposes in the same amount.
It is currently expected that the 1999 Stock Option Plan will provide
that no individual officer will be able to receive stock options for more than
25% of the shares available under the 1999 Stock Option Plan, or 193,828 shares
if the amount of Conversion Stock sold in the Offerings is equal to the maximum
of the Estimated Valuation Range, vesting over a five-year period (or 38,765
shares per year based upon the maximum of the Estimated Valuation Range).
RECOGNITION PLAN. Following consummation of the Conversion, the Board of
Directors of the Company also intends to adopt a 1999 Recognition Plan for
directors, officers and employees. The objective of the 1999 Recognition Plan
will be to enable the Company to provide directors, officers and employees with
a proprietary interest in the Company as an incentive to contribute to its
success. The Company intends to present the 1999 Recognition Plan to
shareholders for their approval at a meeting of shareholders which, pursuant to
applicable OTS regulations, may be held no earlier than six months subsequent to
completion of the Conversion.
The 1999 Recognition Plan will be administered by the Stock Benefit
Committee of the Board of Directors, which will have the responsibility to
invest all funds contributed to the trust created for the 1999 Recognition Plan
(the "Trust"). The Company will contribute sufficient funds to the Trust so that
the Trust can purchase, following the receipt of shareholder approval, a number
of shares equal to an aggregate of 4% of the Conversion Stock sold in the
Offerings (310,125 shares, based on the sale of 7,753,143 shares at the maximum
of the Estimated Valuation Range). Shares of Common Stock granted pursuant to
the 1999 Recognition Plan generally will be in the form of restricted stock
vesting at the rate of 20% per year over the five years following the date of
grant. Certain of such awards may include performance criteria, the satisfaction
of which may be required in order for the awards to vest. For accounting
purposes, compensation expense in the amount of the fair market value of the
Common Stock at the date of the grant to the recipient will be recognized pro
rata over the period during which the shares are payable. A recipient will be
entitled to all voting and other shareholder rights, except that the shares,
while restricted, may not be sold, pledged or otherwise disposed of and are
required to be held in the Trust. Under the terms of the 1999 Recognition Plan,
recipients of awards will be entitled to instruct the trustees of the 1999
Recognition Plan as to how the underlying shares should be voted, and the
trustees will be entitled to vote all unallocated shares in their discretion. If
a recipient's employment is terminated as a result of death or disability, all
restrictions will expire and all allocated shares will become unrestricted. The
Board of Directors of the Company can terminate the 1999 Recognition Plan at any
time, and if it does so, any shares not allocated will revert to the Company.
Recipients of grants under the 1999 Recognition Plan will not be required to
make any payment at the time of grant or when the underlying shares of Common
Stock become vested, other than payment of withholding taxes.
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<PAGE>
It is currently expected that the 1999 Recognition Plan will provide
that no individual officer will be able to receive an award for more than 25% of
the shares available under the 1999 Recognition Plan, or 77,531 shares if the
amount of Conversion Stock sold in the Offerings is equal to the maximum of the
Estimated Valuation Range, vesting over a five-year period (or 15,506 shares per
year based upon the maximum of the Estimated Valuation Range).
PROPOSED MANAGEMENT PURCHASES
The following table sets forth, for each of the Company's directors and
for all of the directors and executive officers as a group, (1) the number of
Exchange Shares to be held upon consummation of the Conversion, based upon their
beneficial ownership of Mid-Tier Holding Company Common Stock as of the date of
this Prospectus, (2) the proposed purchases of Conversion Stock, assuming
sufficient shares are available to satisfy their subscriptions, and (3) the
total amount of Common Stock to be held upon consummation of the Conversion, in
each case assuming that 6,741,777 shares of Conversion Stock are sold, which is
the midpoint of the Estimated Valuation Range.
<TABLE>
<CAPTION>
Proposed Purchase of Total Common Stock
Conversion Stock to be Held
--------------------------------- ----------------------------
Number of
Exchange Shares to Number Number Percentage
Name be Held(1)(2)(3) Amount of Shares of Shares of Total
- ---------------------------- --------------------- ----------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Frederick A. Teed 29,605 $ 10,000 1,000 30,605 .24%
James B. Pittard, Jr 15,029 50,000 5,000 20,029 .15
Forest C. Beaty, Jr 30,129 15,000 1,500 31,629 .24
Robert F. Cromwell 34,644 20,000 2,000 36,644 .28
Karl D. Griffin 29,353 20,000 2,000 31,353 .24
Harold I. Stevenson 27,589 -- -- 27,589 .21
Larry J. Baker 20,562 50,000 5,000 25,562 .20
Cecil F. Howard, Jr 11,309 30,000 3,000 14,309 .11
Feriel G. Hughes -- 1,000 100 100 --
Mary L. Kaminske 19,295 10,000 1,000 20,295 .16
Michael E. Reinhart 20,130 10,000 1,000 21,130 .16
All directors and 237,645 $216,000 21,600 259,245 1.99
executive officers
as a group (11 persons)
</TABLE>
- ----------------
(1) Excludes shares which may be received upon the exercise of outstanding
stock options. Based upon the Exchange Ratio of 2.5196 Exchange Shares for
each Public Mid-Tier Holding Company Share at the midpoint of the Estimated
Valuation Range, the persons named in the table would have options to
purchase Common Stock as follows: 11,942 shares for each of Messrs. Teed,
Beaty, Cromwell, Griffin and Stevenson, 35,879, 10,078, 15,117 and 7,760
shares for Messrs. Pittard, Baker, Howard and Reinhardt, respectively,
7,659 shares for Ms. Kaminske, and for all directors and executive officers
as a group, 136,203 shares.
(2) Includes unvested shares awarded under the 1995 Recognition Plan, based
upon the above Exchange Ratio, in the following amounts: 4,787 shares for
each of Messrs. Teed, Beaty, Crowell, Griffin, Stevenson; 7,458, 4,132,
2,015 and 5,795 shares for Messrs. Pittard, Baker, Howard and Reinhardt,
respectively, 6,450 shares for Ms. Kaminske, and for all directors and
executive officers as a group, 49,785 shares.
(3) Excludes stock options and awards to be granted under the Company's 1999
Stock Option Plan and 1999 Recognition Plan if such plans are approved by
shareholders at an annual or special meeting of shareholders at least six
months following the Conversion and Reorganization. See "Management - New
Stock Benefit Plans."
110
<PAGE>
THE CONVERSION
THE BOARDS OF DIRECTORS OF THE MHC, THE MID-TIER HOLDING COMPANY, THE
ASSOCIATION AND THE COMPANY HAVE APPROVED THE PLAN OF CONVERSION, AS HAS THE
OTS, SUBJECT TO APPROVAL BY THE MEMBERS OF THE MHC AND THE SHAREHOLDERS OF THE
MID-TIER HOLDING COMPANY ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION OF
CERTAIN OTHER CONDITIONS. SUCH OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY SUCH AGENCY.
GENERAL
The Boards of Directors of the MHC, the Mid-Tier Holding Company and the
Association unanimously adopted the Plan on July 29, 1998. The Plan was
subsequently amended on August 13, 1998. Following the incorporation of the
Company, the Board of Directors of the Company unanimously adopted the amended
Plan on August 13, 1998. The Plan has been approved by the OTS, subject to,
among other things, approval of the Plan by the Members of the MHC and the
Shareholders of the Mid-Tier Holding Company. The Members' Meeting and the
Shareholders' Meeting have been called for this purpose on ____ __, 1998.
The following is a summary of the material aspects of the Plan and the
Conversion. The summary is qualified in its entirety by reference to the
provisions of the Plan, which is available for inspection at each branch office
of the Association and at the offices of the OTS. The Plan also is filed as an
exhibit to the Registration Statement of which this Prospectus is a part, copies
of which may be obtained from the SEC. See "Additional Information."
PURPOSES OF THE CONVERSION
The MHC, as a federally chartered mutual holding company, does not have
shareholders and has no authority to issue capital stock. As a result of the
Conversion, the Company will be structured in the form used by holding companies
of commercial banks, most business entities and a growing number of savings
institutions. The Conversion will be important to the future growth and
performance of the holding company organization by providing a larger capital
base to support the operations of the Association and Company and by enhancing
their future access to capital markets, ability to diversify into other
financial services related activities, and ability to provide services to the
public. Although the Mid-Tier Holding Company currently has the ability to raise
additional capital through the sale of additional shares of Mid-Tier Holding
Company Common Stock, that ability is limited by the mutual holding company
structure which, among other things, requires that the Mutual Holding Company
hold a majority of the outstanding shares of Mid-Tier Holding Company Common
Stock.
The Conversion also will result in an increase in the number of
outstanding shares of Common Stock following the Conversion, as compared to the
number of outstanding shares of Public Mid-Tier Holding Company Shares prior to
the Conversion, which will increase the likelihood of the development of an
active and liquid trading market for the Common Stock. See "Market for Common
Stock."
If the Association had undertaken a standard conversion involving the
formation of a stock holding company in 1994, applicable OTS regulations would
have required a greater amount of common stock to be sold than the $34.0 million
of net proceeds raised in the MHC Reorganization. Management of the Association
believed that its ability to generate sufficient loan volume, particularly
within its market area, would have made it difficult to prudently invest in a
timely manner the significantly larger amount of capital that would have been
raised in a standard conversion when compared to the net proceeds raised in the
MHC Reorganization. A standard conversion in 1994 also would have immediately
eliminated all aspects of the mutual form of organization.
The Offerings will further increase the capital of the Company and the
Association and provide them with additional flexibility to grow and increase
net income.
111
<PAGE>
In light of the foregoing, the Boards of Directors of the Association,
the Mid-Tier Holding Company and the MHC believe that the Conversion is in the
best interests of such companies and their respective Shareholders and Members.
DESCRIPTION OF THE CONVERSION
On July 29, 1998, the Boards of Directors of the Association, the
Mid-Tier Holding Company and the MHC adopted the Plan. The Boards subsequently
amended the Plan on August 13, 1998. The Association incorporated the Company
under Delaware law as a first-tier wholly owned subsidiary of the Association.
Pursuant to the Plan, (i) the Mid-Tier Holding Company will convert to a federal
interim stock savings institution and simultaneously merge with and into the
Association with the Association being the survivor thereof, (ii) the MHC will
convert from mutual form to a federal interim stock savings institution and
simultaneously merge with and into the Association, pursuant to which the MHC
will cease to exist and the shares of Mid-Tier Holding Company Common Stock held
by the MHC will be cancelled, and (iii) an interim savings institution
("Interim") to be formed as a wholly owned subsidiary of the Company will then
merge with and into the Association. As a result of the merger of Interim with
and into the Association, the Association will become a wholly-owned subsidiary
of the Company and the Public Mid-Tier Holding Company Shares will be converted
into the Exchange Shares pursuant to the Exchange Ratio, which will result in
the holders of such shares owning in the aggregate approximately the same
percentage of the Common Stock to be outstanding upon the completion of the
Conversion (I.E., the Conversion Stock and the Exchange Shares) as the
percentage of Mid-Tier Holding Company Common Stock owned by them in the
aggregate immediately prior to consummation of the Conversion (as adjusted from
48.66% to 48.14% to reflect the amount of dividends previously waived by the
MHC), before giving effect to (a) the payment of cash in lieu of issuing
fractional Exchange Shares, and (b) any shares of Conversion Stock purchased by
Public Shareholders in the Offerings.
Pursuant to OTS regulations, consummation of the Conversion (including
the offering of Conversion Stock in the Offerings, as described below) is
conditioned upon the approval of the Plan by (1) the OTS, (2) at least a
majority of the total number of votes eligible to be cast by Members of the MHC
at the Members' Meeting, and (3) holders of at least two-thirds of the shares of
the outstanding Mid-Tier Holding Company Common Stock at the Shareholders'
Meeting. In addition, the Primary Parties have conditioned the consummation of
the Conversion on the approval of the Plan by at least a majority of the votes
cast, in person or by proxy, by the Public Shareholders at the Shareholders'
Meeting.
EFFECTS OF THE CONVERSION
GENERAL. Prior to the Conversion, each depositor in the Association has
both a deposit account in the institution and a pro rata ownership interest in
the net worth of the MHC based upon the balance in his account, which interest
may only be realized in the event of a liquidation of the MHC. However, this
ownership interest is tied to the depositor's account and has no tangible market
value separate from such deposit account. A depositor who reduces or closes his
account receives a portion or all of the balance in the account but nothing for
his ownership interest in the net worth of the MHC, which is lost to the extent
that the balance in the account is reduced.
Consequently, the depositors of the Association normally have no way to
realize the value of their ownership interest in the MHC, which has realizable
value only in the unlikely event that the MHC is liquidated. In such event, the
depositors of record at that time, as owners, would share pro rata in any
residual surplus and reserves of the MHC after other claims are paid.
Upon consummation of the Conversion, permanent nonwithdrawable capital
stock will be created to represent the ownership of the net worth of the
Company. The Common Stock of the Company is separate and apart from deposit
accounts and cannot be and is not insured by the FDIC or any other governmental
agency. Certificates are issued to evidence ownership of the permanent stock.
The stock certificates are transferable, and therefore the stock may be sold or
traded if a purchaser is available with no effect on any account the seller may
hold in the Association.
112
<PAGE>
CONTINUITY. While the Conversion is being accomplished, the normal
business of the Association of accepting deposits and making loans will continue
without interruption. The Association will continue to be subject to regulation
by the OTS and the FDIC. After the Conversion, the Association will continue to
provide services for depositors and borrowers under current policies by its
present management and staff.
The directors and officers of the Association at the time of the
Conversion will continue to serve as directors and officers of the Association
after the Conversion. The directors and officers of the Company consist of
individuals currently serving as directors and officers of the MHC, the Mid-Tier
Holding Company and the Association, and they generally will retain their
positions in the Company after the Conversion.
EFFECT ON PUBLIC MID-TIER HOLDING COMPANY SHARES. Under the Plan, upon
consummation of the Conversion, the Public Mid-Tier Holding Company Shares shall
be converted into Common Stock based upon the Exchange Ratio without any further
action on the part of the holder thereof. Upon surrender of the Public Mid-Tier
Holding Company Shares, Common Stock will be issued in exchange for such shares.
See "- Delivery and Exchange of Certificates."
Upon consummation of the Conversion, the Public Shareholders of Mid-Tier
Holding Company, a federally chartered stock corporation, will become
shareholders of the Company, a Delaware corporation. For a description of
certain changes in the rights of shareholders as a result of the Conversion, see
"The Conversion - Comparison of Shareholders' Rights" in the Mid-Tier Holding
Company's Proxy Statement for the Shareholders' Meeting.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the
Association at the time of the Conversion will automatically continue as a
depositor after the Conversion, and each such deposit account will remain the
same with respect to deposit balance, interest rate and other terms, except to
the extent that funds in the account are withdrawn to purchase Conversion Stock
to be issued in the Offerings. Each such account will be insured by the FDIC to
the same extent as before the Conversion. Depositors will continue to hold their
existing certificates, passbooks and other evidences of their accounts.
EFFECT ON LOANS. No loan outstanding from the Association will be
affected by the Conversion, and the amount, interest rate, maturity and security
for each loan will remain as they were contractually fixed prior to the
Conversion.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors and
certain borrowers of the Association are members of, and have voting rights in,
the MHC as to all matters requiring membership action. Upon completion of the
Conversion, depositors and borrowers will cease to be members and will no longer
be entitled to vote at meetings of the MHC (which will cease to exist). Upon
completion of the Conversion, all voting rights in the Association will be
vested in the Company as the sole shareholder of the Association. Exclusive
voting rights with respect to the Company will be vested in the holders of
Common Stock. Depositors and borrowers of the Association will not have voting
rights in the Company after the Conversion, except to the extent that they
become shareholders of the Company.
TAX EFFECTS. Consummation of the Conversion is conditioned on prior
receipt by the Primary Parties of rulings or opinions with regard to federal and
Florida income taxation which indicate that the adoption and implementation of
the Plan of Conversion set forth herein will not be taxable for federal or
Florida income tax purposes to the Primary Parties or the Association's Eligible
Account Holders, Supplemental Eligible Account Holders or Other Members, except
as discussed below. See "- Tax Aspects" below and "Risk Factors.".
EFFECT ON LIQUIDATION RIGHTS. Were the MHC to liquidate, all claims of
the MHC's creditors would be paid first. Thereafter, if there were any assets
remaining, Members of the MHC would receive such remaining assets, pro rata,
based upon the deposit balances in their deposit accounts at the Association
immediately prior to liquidation. In the unlikely event that the Association
were to liquidate after the Conversion, all claims of creditors (including those
of depositors, to the extent of their deposit balances) also would be paid
first, followed by distribution of the
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<PAGE>
"liquidation account" to certain depositors (see "- Liquidation Rights" below),
with any assets remaining thereafter distributed to the Company as the holder of
the Association's capital stock. Pursuant to the rules and regulations of the
OTS, a merger, consolidation, sale of bulk assets or similar combination or
transaction with another insured institution would not be considered a
liquidation for this purpose and, in such a transaction, the liquidation account
would be required to be assumed by the surviving institution.
EFFECT ON EXISTING COMPENSATION PLANS. Under the Plan, the 1995 Stock
Option Plan and the 1995 Recognition Plan will become stock benefit plans of the
Company and shares of Common Stock will be issued (or reserved for issuance)
pursuant to such benefit plans and not shares of Mid-Tier Holding Company Common
Stock. Upon consummation of the Conversion, the Public Mid-Tier Holding Company
Shares held by such benefit plans shall be converted into Common Stock based
upon the Exchange Ratio. Also upon consummation of the Conversion, (i) all
rights to purchase, sell or receive Public Mid-Tier Holding Company Shares under
any agreement between the Association and any director, officer or employee of
the Association or under any plan or program of the Association or the Mid-Tier
Holding Company (including, without limitation, the 1995 Recognition Plan),
shall automatically, by operation of law, be converted into and shall become an
identical right to purchase, sell or receive Common Stock and an identical right
to make payment in Common Stock under any such agreement between the Association
and any director, officer or employee of the Association or under such plan or
program of the Association, and (ii) rights outstanding under the 1995 Stock
Option Plan shall be assumed by the Company and thereafter shall be rights only
for shares of Common Stock, with each such right being for a number of shares of
Common Stock based upon the Exchange Ratio and the number of shares of Public
Mid-Tier Holding Company Shares that were available thereunder immediately prior
to consummation of the Conversion, with the price adjusted to reflect the
Exchange Ratio but with no change in any other term or condition of such right.
See "Management - Existing Stock Options."
THE OFFERINGS
SUBSCRIPTION OFFERING. In accordance with the Plan of Conversion, rights
to subscribe for the purchase of Conversion Stock have been granted under the
Plan of Conversion to the following persons in the following order of descending
priority: (1) Eligible Account Holders, (2) the ESOP, (3) Supplemental Eligible
Account Holders, (4) Other Members and (5) directors, officers and employees of
the Association. All subscriptions received will be subject to the availability
of Conversion Stock after satisfaction of all subscriptions of all persons
having prior rights in the Subscription Offering and to the maximum and minimum
purchase limitations set forth in the Plan of Conversion and as described below
under "- Limitations on Conversion Stock Purchases."
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of (i)
$250,000 of Conversion Stock, (ii) one-tenth of one percent (.1%) of the total
offering of shares of Conversion Stock in the Subscription Offering and (iii) 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Conversion Stock offered in the
Subscription Offering by a fraction, of which the numerator is the amount of the
Eligible Account Holder's qualifying deposit and the denominator of which is the
total amount of qualifying deposits of all Eligible Account Holders, in each
case as of the close of business on June 30, 1997 (the "Eligibility Record
Date"), subject to the overall purchase limitations and excluding the issuance
of any Contingent Shares. See "- Limitations on Conversion Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated so as to permit each subscribing
Eligible Account Holder to purchase a number of shares sufficient to make his
total allocation equal to the lesser of the number of shares subscribed for or
100 shares. Thereafter, unallocated shares will be allocated to subscribing
Eligible Account Holders whose subscriptions remain unfilled in the proportion
that the amounts of their respective eligible deposits bear to the total amount
of eligible deposits of all subscribing Eligible Account Holders whose
subscriptions remain unfilled, provided that no fractional shares shall be
issued. The subscription rights of Eligible Account Holders who are also
directors or officers of the MHC, the Mid-Tier Holding Company or the
Association and their associates will be subordinated to the subscription rights
of other Eligible Account Holders to the extent attributable to increased
deposits in the year preceding June 30, 1997.
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PRIORITY 2: ESOP. The ESOP will receive, without payment therefor,
second priority, nontransferable subscription rights to purchase, in the
aggregate, up to 8% of the Conversion Stock, including any increase in the
number of shares of Conversion Stock after the date hereof as a result of an
increase of up to 15% in the maximum of the Estimated Valuation. The ESOP
intends to purchase 8% of the shares of Conversion Stock, or 620,251 shares
based on the maximum of the Estimated Valuation Range. Subscriptions by the ESOP
will not be aggregated with shares of Conversion Stock purchased directly by or
which are otherwise attributable to any other participants in the Subscription
and Community Offerings, including subscriptions of any of the Association's
directors, officers, employees or associates thereof. See "Management - Employee
Stock Ownership Plan." In the event that the total number of shares of
Conversion Stock sold in the Offerings is increased to an amount greater than
the number of shares representing the maximum of the Estimated Valuation Range
("Maximum Shares"), the ESOP will have a priority right to purchase any such
shares exceeding the Maximum Shares up to an aggregate of 8% of the Conversion
Stock. See "- Limitations on Conversion Stock Purchases" and "Risk Factors -
Possible Dilutive Effect of Issuance of Additional Shares."
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of (i) $250,000 of Conversion Stock, (ii) one-tenth
of one percent (.1%) of the total offering of shares of Conversion Stock in the
Subscription Offering and (iii) 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of Conversion
Stock offered in the Subscription Offering by a fraction, of which the numerator
is the amount of the Supplemental Eligible Account Holder's qualifying deposit
and the denominator of which is the total amount of qualifying deposits of all
Supplemental Eligible Account Holders, in each case as of the close of business
on _______ __, 1998 (the "Supplemental Eligibility Record Date"), subject to the
overall purchase limitations and excluding the issuance of any Contingent
Shares. See "- Limitations on Conversion Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated so as to permit each subscribing
Supplemental Eligible Account Holder to purchase a number of shares sufficient
to make his total allocation equal to the lesser of the number of shares
subscribed for or 100 shares. Thereafter, unallocated shares will be allocated
to subscribing Supplemental Eligible Account Holders whose subscriptions remain
unfilled in the proportion that the amounts of their respective eligible
deposits bear to the total amount of eligible deposits of all such subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled,
provided that no fractional shares shall be issued.
PRIORITY 4: OTHER MEMBERS. To the extent that there are shares remaining
after satisfaction of subscriptions by Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders, each Other Member will receive, without
payment therefor, fourth priority, nontransferable subscription rights to
subscribe for Conversion Stock in the Subscription Offering up to the greater of
(i) $250,000 of Conversion Stock and (ii) one-tenth of one percent (.1%) of the
total offering of shares of Conversion Stock in the Subscription Offering,
subject to the overall purchase limitations. See "- Limitations on Conversion
Stock Purchases."
In the event the Other Members subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders, the ESOP
and Supplemental Eligible Account Holders, is in excess of the total number of
shares of Conversion Stock offered in the Subscription Offering, shares first
will be allocated so as to permit each subscribing Other Member to purchase a
number of shares sufficient to make his total allocation equal to the lesser of
the number of shares subscribed for or 100 shares. Thereafter, any remaining
shares will be allocated among subscribing Other Members on a pro rata basis in
the same proportion as each Other Member's subscription bears to the total
subscriptions of all subscribing Other Members, provided that no fractional
shares shall be issued.
PRIORITY 5: DIRECTORS, OFFICERS AND EMPLOYEES. To the extent that there
are shares remaining after satisfaction of all subscriptions by Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders and Other Members, then
directors, officers and employees of the Association will receive, without
payment therefor, fifth priority, nontransferable subscription rights to
subscribe for, in this category, up to an aggregate of 15.0% of the shares of
the shares
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of Conversion Stock offered in the Subscription Offering. The ability of
directors, officers and employees to purchase Conversion Stock under this
category is in addition to rights which are otherwise available to them under
the Plan, which generally allows such persons to purchase in the aggregate up to
25.0% of the total number of shares of Conversion Stock sold in the Offerings.
See "- Limitations on Conversion Stock Purchases."
In the event of an oversubscription in this category, subscription
rights will be allocated among the individual directors, officers and employees
on a point system basis, whereby such individuals will receive subscription
rights in the proportion that the number of points assigned to each of them
bears to the total points assigned to all directors, officers and employees,
provided that no fractional shares shall be issued. One point will be assigned
for each year of service with the Association, one point for each salary
increment of $5,000 per annum and five points for each office presently held in
the Mutual Holding Company and the Association, including directorships. For
information as to the number of shares proposed to be purchased by certain of
the directors and officers, see "Proposed Management Purchases."
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will expire at noon, Eastern Time, on _______, ____, unless extended for up to
45 days or such additional periods by the Primary Parties with the approval of
the OTS. Such extensions may not be extended beyond ____ __, 2000. Subscription
rights which have not been exercised prior to the Expiration Date will become
void.
The Primary Parties will not execute orders until at least the minimum
number of shares of Conversion Stock (5,730,659 shares) have been subscribed for
or otherwise sold. If all shares have not been subscribed for or sold within 45
days after the Expiration Date, unless such period is extended with the consent
of the OTS, all funds delivered to the Association pursuant to the Subscription
Offering will be returned promptly to the subscribers with interest and all
withdrawal authorizations will be cancelled. If an extension beyond the 45-day
period following the Expiration Date is granted, the Primary Parties will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions.
ELIGIBLE PUBLIC SHAREHOLDERS OFFERING. To the extent that there are
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders, Other Members and
directors, officers and employees, each Public Shareholder as of the Voting
Record Date (______ __, 1998) may purchase up to the greater of (i) $250,000 of
Conversion Stock and (ii) one-tenth of one-percent (.1%) of the total offering
of shares of Conversion Stock in the Subscription Offering, subject to the
overall purchase limitations.
In the event the Eligible Public Shareholders as of the Voting Record
Date submit orders for a number of shares which, when added to the shares
subscribed for by Eligible Account Holders, the ESOP, Supplemental Eligible
Account Holders, Other Members and directors, officers and employees, is in
excess of the total number of shares of Conversion Stock offered in the
Offerings, available shares will be allocated among Eligible Public Shareholders
as of the Voting Record Date on a pro rata basis in the same proportion as each
Eligible Public Shareholder's order bears to the total orders of all Eligible
Public Shareholders, provided that no fractional shares shall be issued.
THE OPPORTUNITY TO SUBMIT ORDERS FOR SHARES OF CONVERSION STOCK IN THE
ELIGIBLE PUBLIC SHAREHOLDERS OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE
PRIMARY PARTIES, IN THEIR SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS
IN WHOLE OR IN PART FOR ANY REASON EITHER AT THE TIME OF RECEIPT OF AN ORDER OR
AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE. ELIGIBLE PUBLIC
SHAREHOLDERS DO NOT HAVE SUBSCRIPTION RIGHTS WITH RESPECT TO THE CONVERSION.
COMMUNITY OFFERING. To the extent that shares remain available for
purchase after satisfaction of all subscriptions of Eligible Account Holders,
the ESOP, Supplemental Eligible Account Holders, Other Members, directors,
officers and employees of the Association and orders of Eligible Public
Shareholders, the Primary Parties have determined to offer shares pursuant to
the Plan to certain members of the general public, with preference given to
natural persons residing in the Palm Beach, Martin, St. Lucie and Indian River
Counties (such natural persons referred to as "Preferred Subscribers"). Such
persons may purchase up to the greater of (i) $250,000 of Conversion
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Stock and (ii) one-tenth of one percent (.1%) of the total offering of shares of
Conversion Stock in the Subscription Offering, subject to the maximum purchase
limitations. See "- Limitations on Conversion Stock Purchases." THIS AMOUNT MAY
BE INCREASED AT THE SOLE DISCRETION OF THE PRIMARY PARTIES. THE OPPORTUNITY TO
SUBSCRIBE FOR SHARES OF CONVERSION STOCK IN THE COMMUNITY OFFERING CATEGORY IS
SUBJECT TO THE RIGHT OF THE PRIMARY PARTIES, IN THEIR SOLE DISCRETION, TO ACCEPT
OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT THE TIME OF RECEIPT OF
AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE.
If there are not sufficient shares available to fill the orders of
Preferred Subscribers after completion of the Subscription, Community and
Eligible Public Shareholder Offerings, such stock will be allocated first to
each Preferred Subscriber whose order is accepted by the Primary Parties, in an
amount equal to the lesser of 100 shares or the number of shares subscribed for
by each such Preferred Subscriber, if possible. Thereafter, unallocated shares
will be allocated among the Preferred Subscribers whose orders remain
unsatisfied in the same proportion that the unfilled subscription of each bears
to the total unfilled subscriptions of all Preferred Subscribers whose
subscription remains unsatisfied. If there are any shares remaining, shares will
be allocated to other members of the general public who subscribe in the
Community Offering applying the same allocation described above for Preferred
Subscribers.
The Plan provides that, if feasible, all shares of Conversion Stock not
purchased in the Subscription, Community and Eligible Public Shareholder
Offerings may be offered for sale to the general public in a Syndicated
Community Offering through a syndicate of registered broker-dealers to be
formed. No person will be permitted to subscribe in the Syndicated Community
Offering for more than $250,000 of Conversion Stock subject to the maximum
purchase limitations. The Primary Parties have the right to reject orders in
whole or part in their sole discretion in the Syndicated Community Offering.
Neither FBR nor any registered broker-dealer shall have any obligation to take
or purchase any shares of Conversion Stock in the Syndicated Community Offering;
however, FBR has agreed to use its best efforts in the sale of shares in the
Syndicated Community Offering.
In addition to the foregoing, if a syndicate of broker-dealers
("selected dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his shares with funds held by or deposited with a selected
dealer. If an order form is executed and forwarded to the selected dealer or if
the selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Association for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. The selected dealer will
acknowledge receipt of the order to its customer in writing on the following
business day and will debit such customer's account on the third business day
after the customer has confirmed his intent to purchase (the "debit date") and
on or before noon of the next business day following the debit date will send
funds to the Association for deposit in a segregated account. If such
alternative procedure is employed, purchasers' funds are not required to be in
their accounts with selected dealers until the debit date.
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by the Primary Parties with the
approval of the OTS. See "- Stock Pricing, Exchange Ratio and Number of Shares
to be Issued" below for a discussion of rights of subscribers, if any, in the
event an extension is granted.
STOCK PRICING, EXCHANGE RATIO AND NUMBER OF SHARES TO BE ISSUED
The Plan of Conversion requires that the purchase price of the
Conversion Stock must be based on the appraised pro forma market value of the
Conversion Stock, as determined on the basis of an independent valuation. The
Primary Parties have retained FinPro to make such valuation. For its services in
making such appraisal and any expenses incurred in connection therewith, FinPro
will receive a fee of $28,500 (which fee includes the preparation of a business
plan), plus out-of-pocket expenses which are not expected to exceed $5,000. The
Primary Parties have agreed to indemnify FinPro and its employees and affiliates
against certain losses (including any losses in connection
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with claims under the federal securities laws) arising out of its services as
appraiser, except where FinPro's liability results from its negligence or bad
faith.
The Appraisal has been prepared by FinPro in reliance upon the
information contained in this Prospectus, including the Financial Statements.
FinPro also considered the following factors, among others: the present and
projected operating results and financial condition of the Primary Parties and
the economic and demographic conditions in the Association's existing market
area; certain historical, financial and other information relating to the
Association; a comparative evaluation of the operating and financial statistics
of Mid-Tier Holding Company with those of other similarly situated
publicly-traded companies located in Florida and other regions of the United
States; the aggregate size of the offering of the Conversion Stock; the impact
of the Conversion on the Association's net worth and earnings potential; the
proposed dividend policy of the Company and the Association; and the trading
market for Mid-Tier Holding Company Common Stock and securities of comparable
companies and general conditions in the market for such securities. The
projected operating results reviewed by FinPro covered periods through June 30,
1998. The financial projections assume (i) a flat interest rate environment
based on interest rates as of June 30, 1998 (ii) the Association's lending and
investment activities continue to emphasize loan originations and purchases of
mortgage-related securities, (iii) gradual asset growth funded primarily by
interest-bearing deposits and borrowings, and (iv) the net Conversion proceeds
retained by the Company are initially primarily invested in short-term
investment securities.
On the basis of the foregoing, FinPro has advised the Primary Parties
that in its opinion the estimated pro forma market value of the Common Stock was
$130.0 million as of August 13, 1998. The holders of the Public Mid-Tier Holding
Company Shares will continue to hold the same aggregate percentage ownership
interest in the Company as they currently hold in the Association, as adjusted
from 48.66% to 48.14% to reflect the amount of dividends previously waived by
the MHC and before giving effect to the payment of cash in lieu of issuing
fractional Exchange Shares and any shares of Conversion Stock purchased by the
Mid-Tier Holding Company's shareholders in the Offerings. As a result, the
Appraisal was multiplied by the MHC's adjusted percentage interest in the
Mid-Tier Holding Company (I.E., 51.86%), to determine the midpoint of the
valuation ($67,417,770), and the minimum and maximum of the valuation were set
at 15% below and above the midpoint, respectively, resulting in a range of
$57,306,590 to $77,531,430. The Boards of Directors of the Primary Parties
determined that the Conversion Stock would be sold at $10.00 per share,
resulting in a range of 5,730,659 to 7,753,143 shares of Conversion Stock being
offered. Upon consummation of the Conversion, the Conversion Stock and the
Exchange Shares will represent approximately 51.86% and 48.14%, respectively, of
the Company's total outstanding shares, before giving effect to the items set
forth above.
The Boards of Directors of the Primary Parties reviewed FinPro's
appraisal report, including the methodology and the assumptions used by FinPro,
and determined that the Estimated Valuation Range was reasonable and adequate.
The Boards of Directors of the Primary Parties also established the formula for
determining the Exchange Ratio. Based upon such formula and the Estimated
Valuation Range, the Exchange Ratio ranged from a minimum of 2.1416 to a maximum
of 2.8975 Exchange Shares for each Public Mid-Tier Holding Company Share, with a
midpoint of 2.5196. Based upon these Exchange Ratios, the Company expects to
issue between 5,319,341 and 7,196,857 shares of Exchange Shares to the holders
of Public Mid-Tier Holding Company Shares outstanding immediately prior to the
consummation of the Conversion. The Estimated Valuation Range and the Exchange
Ratio may be amended with the approval of the OTS, if required, or if
necessitated by subsequent developments in the financial condition of any of the
Primary Parties or market conditions generally. In the event the Appraisal is
updated so that the Conversion Stock is below $57,306,590 or above $89,161,760
(the maximum of the Estimated Valuation Range, as adjusted by 15%), such
Appraisal will be filed with the SEC by post-effective amendment.
Based upon current market and financial conditions and recent practices
and policies of the OTS, in the event the Company receives orders for Conversion
Stock in excess of $77,531,430 (the maximum of the Estimated Valuation) and up
to $89,161,760 (the maximum of the Estimated Valuation, as adjusted by 15%), the
Company may be required by the OTS to accept all such orders. No assurances,
however, can be made that the Company will receive orders for Conversion Stock
in excess of the maximum of the Estimated Valuation Range or that, if such
orders are
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received, that all such orders will be accepted because the Company's final
valuation and number of shares to be issued are subject to the receipt of an
updated appraisal from FinPro which reflects such an increase in the valuation
and the approval of such increase by the OTS. There is no obligation or
understanding on the part of management to take and/or pay for any shares of
Conversion Stock in order to complete the Offerings.
Based on the Estimated Valuation, the 51.34% of the outstanding shares
of the Mid-Tier Holding Company Common Stock held by the MHC as of the date of
the Estimated Valuation, and the MHC's waiver of certain dividends as described
above which resulted in an adjustment of approximately .52%, the following table
sets forth, based upon the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Valuation Range, the following: (i) the total number of shares
of Conversion Stock and Exchange Shares to be issued in the Conversion, (ii) the
percentage of the total Common Stock represented by the Conversion Stock and the
Exchange Shares, and (iii) the Exchange Ratio. The table assumes that there are
no fractional Exchange Shares.
<TABLE>
<CAPTION>
Conversion Stock to be
Issued Exchange Shares to be Issued Total Shares of
--------------------------- ------------------------------- Common Stock to Exchange
Amount Percent Amount Percent be Outstanding Ratio
------------ ------------ -------------- ------------- ------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Minimum 5,730,659 51.86% 5,319,341 48.14% 11,050,000 2.1416
Midpoint 6,741,777 51.86% 6,258,223 48.14% 13,000,000 2.5196
Maximum 7,753,143 51.86% 7,196,857 48.14% 14,950,000 2.8975
15% above maximum 8,916,176 51.86% 8,276,324 48.14% 17,192,500 3.3321
</TABLE>
Options to purchase Public Mid-Tier Holding Company Shares will also be
converted into and become options to purchase Common Stock. As of the date of
this Prospectus there were outstanding options to purchase 214,350 shares of
Mid-Tier Holding Company Common Stock with exercise prices ranging from $11.125
to $19.016 per share. The number of shares of Common Stock to be received upon
exercise of such options will be determined pursuant to the Exchange Ratio. The
aggregate exercise price, duration, and vesting schedule of such options will
not be affected. If such options are exercised prior to the consummation of the
Conversion there will be an increase in the number of Exchange Shares issued to
Public Shareholders and a decrease in the Exchange Ratio. The Mid-Tier Holding
Company has no plans to grant additional stock options prior to the completion
of the Conversion.
FINPRO'S VALUATION IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH SHARES.
FINPRO DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER
INFORMATION PROVIDED BY THE ASSOCIATION, THE MID-TIER HOLDING COMPANY AND THE
MHC, NOR DID FINPRO VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE
ASSOCIATION OR THE MID-TIER HOLDING COMPANY. THE VALUATION CONSIDERS THE
ASSOCIATION, THE MID-TIER HOLDING COMPANY AND THE MHC AS GOING CONCERNS AND
SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF THE
ASSOCIATION, THE MID-TIER HOLDING COMPANY AND THE MHC. MOREOVER, BECAUSE SUCH
VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN
BE GIVEN THAT PERSONS PURCHASING CONVERSION STOCK OR RECEIVING EXCHANGE SHARES
IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES AT OR
ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING VALUATION OF THE PRO
FORMA MARKET VALUE THEREOF.
No sale of shares of Conversion Stock or issuance of Exchange Shares may
be consummated unless prior to such consummation FinPro confirms that nothing of
a material nature has occurred which, taking into account all relevant factors,
would cause it to conclude that the Purchase Price is materially incompatible
with the estimate of the pro forma market value of a share of Common Stock upon
consummation of the Conversion. If such is not the case, a new Estimated
Valuation Range may be set, a new Exchange Ratio may be determined based upon
the new Estimated Valuation Range, a new Subscription and Community Offering
and/or Syndicated Community Offering may be held or such other action may be
taken as the Primary Parties shall determine and the OTS may permit or require.
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Depending upon market or financial conditions following the commencement
of the Subscription Offering, the total number of shares of Conversion Stock to
be issued in the Offerings may be increased or decreased without a
resolicitation of subscribers, provided that the product of the total number of
shares times the Purchase Price is not below the minimum or more than 15% above
the maximum of the Estimated Valuation Range. In the event market or financial
conditions change so as to cause the aggregate Purchase Price of the shares to
be below the minimum of the Estimated Valuation Range or more than 15% above the
maximum of such range, purchasers will be resolicited (I.E., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded with interest at The
Association's passbook rate of interest, or be permitted to modify or rescind
their subscriptions). Any increase or decrease in the number of shares of
Conversion Stock will result in a corresponding change in the number of Exchange
Shares, so that upon consummation of the Conversion the Conversion Stock and the
Exchange Shares will represent approximately 51.86% and 48.14%, respectively, of
the Company's total outstanding shares of Common Stock (exclusive of the effects
of the exercise of outstanding stock options).
An increase in the number of shares of Conversion Stock as a result of
an increase in the Estimated Valuation Range would decrease both a subscriber's
ownership interest and the Company's pro forma net earnings and shareholders'
equity on a per share basis while increasing pro forma net earnings and
shareholders' equity on an aggregate basis. A decrease in the number of shares
of Conversion Stock would increase both a subscriber's ownership interest and
the Company's pro forma net earnings and shareholders' equity on a per share
basis while decreasing pro forma net earnings and shareholders' equity on an
aggregate basis. See "Risk Factors - Possible Dilutive Effect of Issuance of
Additional Shares" and "Pro Forma Data."
The appraisal report of FinPro has been filed as an exhibit to the
Company's Registration Statement and the MHC's Application for Conversion, of
which this Prospectus is a part, and is available for inspection in the manner
set forth under "Additional Information."
PERSONS IN NON-QUALIFIED STATES OR FOREIGN COUNTRIES
The Primary Parties will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for stock pursuant to the Plan reside. However, the Primary Parties
are not required to offer stock in the Subscription Offering to any person who
resides in a foreign country or resides in a state of the United States with
respect to which all of the following apply: (a) the number of persons otherwise
eligible to subscribe for shares under the Plan who reside in such jurisdiction
is small; (b) the granting of subscription rights or the offer or sale of shares
of Conversion Stock to such persons would require any of the Primary Parties or
their officers, directors or employees, under the laws of such jurisdiction, to
register as a broker, dealer, salesman or selling agent or to register or
otherwise qualify its securities for sale in such jurisdiction or to qualify as
a foreign corporation or file a consent to service of process in such
jurisdiction; and (c) such registration, qualification or filing in the judgment
of the Primary Parties would be impracticable or unduly burdensome for reasons
of costs or otherwise. Where the number of persons eligible to subscribe for
shares in one state is small, the Primary Parties will base their decision as to
whether or not to offer the Conversion Stock in such state on a number of
factors, including but not limited to the size of accounts held by account
holders in the state, the cost of registering or qualifying the shares or the
need to register the Company, its officers, directors or employees as brokers,
dealers or salesmen. No payments in lieu of subscription rights will be granted
to any such persons.
LIMITATIONS ON CONVERSION STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Conversion Stock which may be purchased:
(1) No less than 25 shares of Conversion Stock may be purchased,
to the extent such shares are available;
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(2) Each Eligible Account Holder may subscribe for and purchase
in the Subscription Offering up to the greater of (i) $250,000 of
Conversion Stock, (ii) one-tenth of one percent (.1%) of the total
offering of shares of Conversion Stock in the Subscription Offering and
(iii) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Conversion Stock
to be issued by a fraction, of which the numerator is the amount of the
qualifying deposit of the Eligible Account Holder and the denominator is
the total amount of qualifying deposits of all Eligible Account Holders,
in each case as of the close of business on the Eligibility Record Date,
subject to the overall limitation in clause (6) below;
(3) The ESOP may purchase in the aggregate up to 8% of the
shares of Conversion Stock to be issued in the Offerings, including any
additional shares issued in the event of an increase in the Estimated
Valuation Range;
(4) Each Supplemental Eligible Account Holder may subscribe for
and purchase in the Subscription Offering up to the greater of (i)
$250,000 of Conversion Stock, (ii) one-tenth of one percent (.1%) of the
total offering of shares of Conversion Stock in the Subscription
Offering and (iii) 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Conversion
Stock to be issued by a fraction, of which the numerator is the amount
of the qualifying deposit of the Supplemental Eligible Account Holder
and the denominator is the total amount of qualifying deposits of all
Supplemental Eligible Account Holders, in each case as of the close of
business on the Supplemental Eligibility Record Date, subject to the
overall limitation in clause (6) below;
(5) Each Other Member, Eligible Public Shareholder or any other
person purchasing shares of Conversion Stock in the Subscription
Offering, the Community Offering, the Eligible Public Shareholder
Offering or in the Syndicated Community Offering, as applicable, may
subscribe for and purchase in the respective Offering up to the greater
of $250,000 of Conversion Stock and (ii) one-tenth of one percent (.1%)
of the total offering of shares of Conversion Stock in the Subscription
Offering, subject to the overall limitation in clause (6) below;
(6) Except for the ESOP and certain Eligible Account Holders and
Supplemental Eligible Account Holders whose subscription rights are
based upon the amount of their deposits, the maximum number of shares of
Conversion Stock subscribed for or purchased in all categories by any
person, together with associates of and groups of persons acting in
concert with such persons, shall not exceed the number of shares of
Conversion Stock that, when combined with Exchange Shares received,
aggregate 1% of the number of shares of Common Stock issued in the
Conversion (57,306 shares and 77,531 shares at the minimum and maximum
of the Estimated Valuation Range, respectively); and
(7) No more than 15% of the total number of shares sold in the
Subscription Offering may be purchased by directors and officers of the
MHC and the Association in the fifth priority category in the
Subscription Offering. No more than 25% of the total number of shares
sold in the Offerings may be purchased by directors and officers of the
Association and their associates in the aggregate, excluding purchases
by the ESOP.
For purposes of the purchase limitations set forth in the Plan of
Conversion, Exchange Shares will be valued at the same price that shares of
Conversion Stock are issued in the Offerings.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the Members of
the MHC or the Shareholders of Mid-Tier Holding Company, both the individual
amount permitted to be subscribed for and the overall purchase limitation may be
decreased or increased up to a maximum of 5% of the total shares of Common Stock
to be issued in the Conversion at the sole discretion of the Primary Parties. If
such amount is increased, subscribers for the maximum amount will be, and
certain other large subscribers in the sole discretion of the Primary Parties
may be, given the opportunity to increase their subscriptions up to the then
applicable limit.
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An individual Eligible Account Holder, Supplemental Eligible Account
Holder, Other Member or Public Shareholder may not purchase individually in the
Subscription Offering the overall maximum purchase limit of 1% of the number of
shares of Common Stock issued in the Conversion but may make such purchase,
together with associates of and persons acting in concert with such person, by
also purchasing in other available categories, subject to availability of shares
and the maximum overall purchase limit for purchases in the Offerings, including
Exchange Shares received by Public Shareholders for Public Mid-Tier Holding
Company Shares. However, except as may otherwise be required by the OTS, Public
Shareholders will not have to sell any Public Mid-Tier Holding Company Shares or
be limited in receiving Exchange Shares even if their current ownership of
Public Mid-Tier Holding Company Shares when converted into Exchange Shares
exceeds an applicable purchase limitation, including the maximum purchase
limitation of 1% of the number of shares of Common Stock issued in the
Conversion; provided, however, that a Public Shareholder who would exceed an
applicable purchase limitation may be precluded from purchasing Conversion Stock
in the Offerings.
In the event of an increase in the total number of shares of Conversion
Stock offered in the Conversion due to an increase in the Estimated Valuation
Range of up to 15% (the "Adjusted Maximum"), the additional shares will be
allocated in the following order of priority in accordance with the Plan: (i) to
fill the ESOP's subscription of 8% of the Adjusted Maximum number of shares;
(ii) in the event that there is an oversubscription by Eligible Account Holders,
to fill unfulfilled subscriptions of Eligible Account Holders, inclusive of the
Adjusted Maximum; (iii) in the event that there is an oversubscription by
Supplemental Eligible Account Holders, to fill unfulfilled subscriptions of
Supplemental Eligible Account Holders, inclusive of the Adjusted Maximum; (iv)
in the event that there is an oversubscription by Other Members, to fill
unfulfilled subscriptions of Other Members, inclusive of the Adjusted Maximum;
(v) in the event there is an oversubscription by directors, officers and
employees of the Association, to fill unfulfilled subscriptions of directors,
officers and employees, inclusive of the Adjusted Maximum; (vi) in the event
that there is an oversubscription by Public Shareholders, to fill unfulfilled
subscriptions of Public Shareholders, inclusive of the Adjusted Maximum; and
(vii) to fill unfulfilled subscriptions in the Community Offering to the extent
possible, inclusive of the Adjusted Maximum.
The term "associate" of a person is defined to mean (i) any corporation
or other organization (other than the Primary Parties or a majority-owned
subsidiary of the Association or the Company) of which such person is a
director, officer or partner or is directly or indirectly the beneficial owner
of 10% or more of any class of equity securities; (ii) any trust or other estate
in which such person has a substantial beneficial interest or as to which such
person serves as trustee or in a similar fiduciary capacity, provided, however,
that such term shall not include any tax-qualified employee stock benefit plan
of the Primary Parties in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; and (iii)
any relative or spouse of such person, or any relative of such spouse, who
either has the same home as such person or who is a director or officer of the
Primary Parties or any of their subsidiaries. In addition, joint account
relationships and common addresses will be taken into account in applying the
maximum purchase limitations.
MARKETING ARRANGEMENTS
The Company and the Association have engaged FBR as a financial advisor
and marketing agent in connection with the offering of the Common Stock, and FBR
has agreed to use its best efforts to solicit subscriptions and purchase orders
for shares of Conversion Stock in the Offerings. FBR is a member of the National
Association of Securities Dealers, Inc. ("NASD") and an SEC-registered
broker-dealer. FBR will provide various services including, but not limited to,
(1) training and educating the Association's directors, officers and employees
regarding the mechanics and regulatory requirements of the stock sales process;
(2) providing its employees to assist in staffing the Stock Center to assist the
Association's customers and internal stock purchasers and to assist in records
management for orders of shares of Common Stock; (3) targeting the Company's
sales efforts, including assisting in the preparation of marketing materials;
(4) soliciting orders for Conversion Stock; and (5) assisting in soliciting of
proxies of Members and Public Shareholders. Based upon negotiations between the
Company and the Association concerning fee structure, FBR will receive (i) a
management fee of $50,000 which will be subtracted from the total commission due
under (ii) and (ii) a total commission equal to 0.75% of the aggregate dollar
amount of Conversion
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Stock sold in the Offerings, excluding any shares of Conversion Stock purchased
in the Offerings by directors, officers, employees (or members of their
immediate families) and employee benefit plans of the Company and the
Association. The commission will be payable upon consummation of the Conversion.
In the event that a selected dealers agreement is entered into in connection
with a Syndicated Community Offering, the Association will pay to such selected
dealers a fee at the commission rate to be agreed upon by the Company, the
Association and FBR not to exceed .75% of the aggregate dollar amount of the
Conversion Stock for shares sold by an NASD member firm pursuant to a selected
dealers agreement. Fees to FBR and to any other broker-dealer may be deemed to
be underwriting fees, and FBR and including such broker-dealers may be deemed to
be underwriters. FBR will also be reimbursed for its out-of-pocket expenses
(including legal fees) in an amount not to exceed $70,000 of which $_______ has
been paid to date. The Company and the Association have agreed to indemnify FBR
and each person, if any, who controls FBR against all losses, claims, damages or
liabilities, joint or several, and all legal and other expenses reasonably
incurred by them in connection with certain claims that may arise as a result of
the Conversion, including liabilities under the Securities Act, except those
that are due to FBR's willful misconduct or gross negligence.
Directors and executive officers of the Primary Parties may participate
in the solicitation of offers to purchase Conversion Stock. Other employees of
the Association may participate in the Offerings in ministerial capacities or
providing clerical work in effecting a sales transaction. Such other employees
have been instructed not to solicit offers to purchase Conversion Stock or
provide advice regarding the purchase of Conversion Stock. Questions of
prospective purchasers will be directed to executive officers or registered
representatives. The Company will rely on Rule 3a4-1 under the Exchange Act, and
sales of Conversion Stock will be conducted within the requirements of Rule
3a4-1, so as to permit officers, directors and employees to participate in the
sale of Conversion Stock. No officer, director or employee of the Primary
Parties will be compensated in connection with his solicitations or other
participation in the Offerings or the Exchange by the payment of commissions or
other remuneration based either directly or indirectly on transactions in the
Conversion Stock and Exchange Shares, respectively.
PROCEDURE FOR PURCHASING SHARES IN THE OFFERINGS
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery of the Prospectus in accordance with Rule
15c2-8. Order Forms will only be distributed with a Prospectus.
To purchase shares in the Offerings, an executed original Order Form and
the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at the Association (which
may be given by completing the appropriate blanks on the Order Form), must be
received by the Association at any of its offices by 12 noon, Eastern Time, on
____ __, 1998. Order Forms which are not received by such time or are executed
defectively or are received without full payment (or appropriate withdrawal
instructions) are not required to be accepted. The Association is not required
to accept orders submitted on facsimilied Order Forms. The Primary Parties have
the right to waive or permit the correction of incomplete or improperly executed
forms, but do not represent that they will do so. The waiver of an irregularity
on an Order Form, the allowance by the Primary Parties of a correction of an
incomplete or improperly executed Order Form, or the acceptance of an order
after 12 noon on the Expiration Date in no way obligates the Primary Parties to
waive an irregularity, allow a correction, or accept an order with respect to
any other Order Form. The interpretation by the Primary Parties of the
acceptability of an Order Form will be final. Once received, an executed Order
Form may not be modified, amended or rescinded without the consent of the
Primary Parties, unless the Offerings have not been completed within 45 days
after the end of the Subscription, Eligible Public Shareholders, and Community
Offerings, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priority, depositors as of the close of business on the Eligibility
Record Date (June 30, 1997), the Supplemental Eligibility Record Date (____ __,
1998) and the Voting
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Record Date (____ __, 1998) must list on the Order Form all accounts in which
they have an ownership interest at the applicable eligibility date, giving all
names in each account and the account numbers. Members qualifying for a stock
purchase priority who add individuals with a lower, or no, stock purchase
priority as subscribers on an Order Form will have their stock purchase priority
reduced or eliminated based on the lower priority.
Payment for subscriptions and orders may be made (i) in cash if
delivered in person at any office of the Association, (ii) by check or money
order, or (iii) by authorization of withdrawal from deposit accounts maintained
with the Association. The Primary Parties may in their sole discretion elect not
to accept payment for shares of Conversion Stock by wired funds and there shall
be no liability for failure to accept such payment. Funds will be deposited in a
segregated account at the Association and interest will be paid on funds made by
cash, check or money order at the Association's passbook rate of interest from
the date payment is received until completion or termination of the Conversion.
If payment is made by authorization of withdrawal from deposit accounts, the
funds authorized to be withdrawn from a Association deposit account may continue
to accrue interest at the contractual rates until completion or termination of
the Conversion, but a hold will be placed on such funds, thereby making them
unavailable to the depositor until completion or termination of the Conversion.
If a subscriber authorizes the Association to withdraw the aggregate
amount of the purchase price from a deposit account, the Association will do so
as of the effective date of the Conversion. The Association may waive any
applicable penalties for early withdrawal from certificate accounts. If the
remaining balance in a certificate account is reduced below the applicable
minimum balance requirement at the time that the funds actually are transferred
under the authorization, the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at the
passbook rate.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but rather may pay for such shares of Conversion Stock
subscribed for upon consummation of the Offerings, provided that there is in
force from the time of its subscription until such time, a loan commitment from
an unrelated financial institution or the Company to lend to the ESOP, at such
time, the aggregate purchase price of the shares for which it subscribed.
A depositor interested in using his or her IRA funds to purchase
Conversion Stock must do so through a self-directed IRA. Depositors interested
in using funds in a Association IRA to purchase Conversion Stock should contact
the Stock Center as soon as possible so that the necessary forms may be
forwarded for execution prior to the Expiration Date.
The Primary Parties have retained FBR as consultant and advisor in
connection with the Offerings and to assist in soliciting subscriptions in the
Offerings on a best efforts basis. See "The Conversion - The Offerings" and " -
Marketing Arrangements."
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Conversion Stock to be issued upon their
exercise. Such rights may be exercised only by the person to whom they are
granted and only for such person's account. Each person exercising such
subscription rights will be required to certify that such person is purchasing
shares solely for such person's own account and that such person has no
agreement or understanding regarding the sale or transfer of such shares.
Federal regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of Conversion Stock prior to the completion of the
Conversion.
THE PRIMARY PARTIES WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES
IN THE EVENT THEY BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS AND WILL
NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE TRANSFER OF SUCH RIGHTS.
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LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the MHC in its
present mutual form, each depositor of The Association would receive his pro
rata share of any assets of the MHC remaining after payment of claims of all
creditors. Each depositor's pro rata share of such remaining assets would be in
the same proportion as the value of his deposit account was to the total value
of all deposit accounts in the Association at the time of liquidation. After the
Conversion, each depositor, in the event of a complete liquidation of the
Association, would have a claim as a creditor of the same general priority as
the claims of all other general creditors of the Association. However, except as
described below, his claim would be solely in the amount of the balance in his
deposit account plus accrued interest. He would not have an interest in the
value or assets of the Association or the Company above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the amount of any dividends waived by the MHC ($8.2 million at June 30, 1998)
plus the greater of (1) the Association's retained earnings of $34.1 million at
March 31, 1994, the date of the latest statement of financial condition
contained in the final offering circular utilized in the MHC Reorganization, or
(2) 51.34% of the Mid-Tier Holding Company's total shareholders' equity as
reflected in its latest statement of financial condition contained in the final
Prospectus utilized in the Offerings. As of the date of this Prospectus, the
initial balance of the liquidation account would be approximately $50.8 million.
Each Eligible Account Holder and Supplemental Eligible Account Holder, if he
were to continue to maintain his deposit account at the Association, would be
entitled, upon a complete liquidation of the Association after the Conversion,
to an interest in the liquidation account prior to any payment to the Company as
the sole shareholder of the Association. Each Eligible Account Holder and
Supplemental Eligible Account Holder would have an initial interest in such
liquidation account for each deposit account, including passbook accounts,
transaction accounts such as checking accounts, money market deposit accounts
and certificates of deposit, held in the Association at the close of business on
June 30, 1997 or______ __, 1998, as the case may be. Each Eligible Account
Holder and Supplemental Eligible Account Holder will have a pro rata interest in
the total liquidation account for each of his deposit accounts based on the
proportion that the balance of each such deposit account on the June 30, 1997
Eligibility Record Date (or the ________, 1998 Supplemental Eligibility Record
Date, as the case may be) bore to the balance of all deposit accounts in the
Association on such date.
If, however, on any December 31 annual closing date of the Association,
commencing December 31, 1998, the amount in any deposit account is less than the
amount in such deposit account on June 30, 1997 or ________, 1998, as the case
may be, or any other annual closing date, then the interest in the liquidation
account relating to such deposit account would be reduced by the proportion of
any such reduction, and such interest will cease to exist if such deposit
account is closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related deposit
account. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole shareholder of the Association.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon prior
receipt of either a ruling or an opinion of counsel with respect to federal tax
laws, and either a ruling or an opinion with respect to Florida tax laws, to the
effect that consummation of the transactions contemplated hereby will not result
in a taxable reorganization under the provisions of the applicable codes or
otherwise result in any adverse tax consequences to the MHC, the Mid-Tier
Holding Company, the Association, the Company or to account holders receiving
subscription rights, except to the extent, if any, that subscription rights are
deemed to have fair market value on the date such rights are issued. This
condition may not be waived by the Primary Parties. The Company believes that
the tax opinions summarized below address all material federal income tax
consequences that are generally applicable to the Primary Parties and the
persons receiving subscription rights.
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Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C., has issued an
opinion to the Company and the Association to the effect that, for federal
income tax purposes: (1) the conversion of the MHC from mutual form to a federal
interim stock savings institution and its simultaneous merger with and into the
Association, with the Association being the surviving institution, will qualify
as a reorganization within the meaning of Section 368(a)(1)(A) of the Code, (2)
the conversion of the Mid-Tier Holding Company to a federal interim stock
savings association and its simultaneous merger with and into the Association
with the Association being the surviving institution, will qualify as a
reorganization within the meaning of Section 368(a)(1)(A) of the Code, (3) no
gain or loss will be recognized by the Association upon the receipt of the
assets of the MHC and the Mid-Tier Holding Company in such mergers, (4) the
merger of Interim with and into the Association, with the Association being the
surviving institution, will qualify as a reorganization within the meaning of
Section 368(a)(1)(A) of the Code, (5) no gain or loss will be recognized by
Interim upon the transfer of its assets to the Association, (6) no gain or loss
will be recognized by the Association upon the receipt of the assets of Interim,
(7) no gain or loss will be recognized by the Company upon the receipt of the
Association Common Stock solely in exchange for Common Stock, (8) no gain or
loss will be recognized by the Public Shareholders upon the receipt of Common
Stock solely in exchange for their Public Mid-Tier Holding Company Shares, (9)
the basis of the Common Stock to be received by the Public Shareholders will be
the same as the basis of the Public Mid-Tier Holding Company Shares surrendered
in exchange therefor, before giving effect to any payment of cash in lieu of
fractional shares, (10) the holding period of the Common Stock to be received by
the Public Shareholders will include the holding period of the Public Mid-Tier
Holding Company Shares, provided that the Public Mid-Tier Holding Company Shares
were held as a capital asset on the date of the exchange, (11) no gain or loss
will be recognized by the Company upon the sale of shares of Conversion Stock in
the Offerings, (12) the Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members will recognize gain, if any, upon the issuance to them
of withdrawable savings accounts in the Association following the Conversion,
interests in the liquidation account and nontransferable subscription rights to
purchase Conversion Stock, but only to the extent of the value, if any, of the
subscription rights, and (13) the tax basis to the holders of Conversion Stock
purchased in the Offerings will be the amount paid therefor, and the holding
period for the shares of Conversion Stock will begin on the date of consummation
of the Offerings if purchased through the exercise of subscription rights and on
the day after the date of purchase if purchased in the Community Offering or
Syndicated Community Offering.
Crowe, Chizek & Company LLP has issued an opinion to the Company and the
Association to the effect that the income tax consequences under Florida law of
the Conversion are not materially different than for federal tax purposes.
The opinion states that although case law and IRS pronouncements
indicate otherwise, it is possible that the IRS could assert that the overall
plan of the transactions contemplated by the Plan is the maintenance of the
Association's holding company structure and the merger of MHC into the
Association. If so, the IRS could argue that the "step transaction" doctrine
should be applied and the transitory elimination of the holding company
structure in the merger of the Mid-Tier Holding Company (after conversion to an
interim savings association) with and into the Association the survivor thereof
and the re-creation of the holding company structure in connection with the
merger of Interim into and with the Association with the Association the
survivor thereof should be ignored for tax purposes. If the IRS were successful
with such an assertion, the transaction would be treated as a direct merger of
MHC into the Association which may not qualify as a tax free reorganization,
resulting in taxable gain to the parties to the transaction.
However, the case law and the IRS' pronouncements indicate that if two
or more transactions carried out pursuant to an overall plan have economic
significance independent of each other, the transactions generally will not be
stepped together. The IRS's most significant pronouncement regarding independent
economic significance is Rev. Rul. 79-250. In that ruling, the IRS will respect
the transaction if each step demonstrates independent economic significance, is
not subject to attack as a sham, and was undertaken for valid business purposes
and not mere avoidance of taxes.
The opinion of Elias, Matz, Tiernan & Herrick L.L.P. indicates that the
parties to the merger of the MHC (as converted to a federal interim stock
savings association) with and into the Association with the Association the
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survivor thereof maintain a separate and distinct business purpose for
consummating such merger (e.g., allowing for the conversion of the MHC from
mutual to stock form). Immediately after the consummation of such Merger, the
Association will no longer be controlled by the MHC but will instead be
controlled by its Public Shareholders and that the Association's capital will be
substantially increased. The facts indicate that the merger of MHC with and into
the Association will result in a real and substantial change in the form of
ownership of the Association that is sufficient to conclude that such merger
comports with the underlying purposes and assumptions of a reorganization under
Section 368(a)(1)(A) of the Code.
In addition, Elias, Matz, Tiernan & Herrick L.L.P. believes that,
because the various steps contemplated by the Plan were necessitated by the
requirements of the OTS, each of the three mergers contemplated by the Plan has
a business purpose and independent significance and, as a result, the step
transaction should not be applied to this transaction.
The IRS is currently also reviewing the question of whether certain
downstream mergers of a parent corporation into its subsidiary, known as
inversion transactions, where a parent and its subsidiary reverse positions,
which otherwise qualify for tax-free treatment nevertheless should be treated as
taxable transactions. Elias, Matz, Tiernan & Herrick L.L.P. does not believe
that the transactions undertaken pursuant to the Plan should be so treated.
However, Elias, Matz, Tiernan & Herrick L.L.P.'s opinion is not binding on the
IRS and there can be no assurance that the IRS will not assert a contradictory
position.
Based on a letter from FinPro, which letter is not binding on the IRS,
the Company believes that the subscription rights do not have any value, based
on the fact that such rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right only
to purchase the Conversion Stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the unsubscribed
shares of Conversion Stock. If the subscription rights granted to eligible
subscribers are deemed to have an ascertainable value, receipt of such rights
likely would be taxable only to those eligible subscribers who exercise the
subscription rights (either as a capital gain or ordinary income) in an amount
equal to such value, and the Primary Parties could recognize gain on such
distribution. Eligible subscribers are encouraged to consult with their own tax
advisor as to the tax consequences in the event that such subscription rights
are deemed to have an ascertainable value.
Unlike private rulings, an opinion is not binding on the IRS and the IRS
could disagree with the conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding. If the IRS determines that the tax
effects of the transactions contemplated by the Plan are to be treated
differently from those presented in the opinion, the Primary Parties may be
subject to adverse tax consequences as a result of the Conversion.
DELIVERY AND EXCHANGE OF CERTIFICATES
CONVERSION STOCK. Certificates representing Conversion Stock issued in
connection with the Offerings will be mailed by the Company's transfer agent for
the Common Stock to the persons entitled thereto at the addresses of such
persons appearing on the stock order form for Conversion Stock as soon as
practicable following consummation of the Conversion. Any certificates returned
as undeliverable will be held by the Company until claimed by persons legally
entitled thereto or otherwise disposed of in accordance with applicable law.
Until certificates for Conversion Stock are available and delivered to
subscribers, subscribers may not be able to sell such shares, even though
trading of the Common Stock may have commenced.
EXCHANGE SHARES. After consummation of the Conversion, each holder of a
certificate or certificates theretofore evidencing issued and outstanding shares
of Mid-Tier Holding Company Common Stock (other than the MHC), upon surrender of
the same to an agent, duly appointed by the Company, which is anticipated to be
the transfer agent for the Common Stock (the "Exchange Agent"), shall be
entitled to receive in exchange therefor a certificate or certificates
representing the number of full shares of Common Stock for which the shares of
the Mid-Tier Holdings Company Common Stock theretofore represented by the
certificate or certificates so surrendered shall have been
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converted based on the Exchange Ratio, including shares held in the Dividend
Reinvestment Plan (which the Company intends to maintain). The Exchange Agent
shall promptly mail to each such holder of record of an outstanding certificate
which immediately prior to the consummation of the Conversion evidenced shares
of the Mid-Tier Holding Company Common Stock, and which is to be exchanged for
Common Stock based on the Exchange Ratio as provided in the Plan, a form of
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to such certificate shall pass, only upon delivery of
such certificate to the Exchange Agent) advising such holder of the terms of the
exchange effected by the Conversion and of the procedure for surrendering to the
Exchange Agent such certificate in exchange for a certificate or certificates
evidencing Common Stock. THE MID-TIER HOLDING COMPANY'S SHAREHOLDERS SHOULD NOT
FORWARD MID-TIER HOLDING COMPANY COMMON STOCK CERTIFICATES TO THE ASSOCIATION OR
THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED THE TRANSMITTAL LETTER.
No holder of a certificate theretofore representing shares of Mid-Tier
Holding Company Common Stock shall be entitled to receive any dividends in
respect of the Common Stock into which such shares shall have been converted by
virtue of the Conversion until the certificate representing such shares of
Mid-Tier Holding Company Common Stock is surrendered in exchange for
certificates representing shares of Common Stock. In the event that dividends
are declared and paid by the Company in respect of Common Stock after the
consummation of the Conversion but prior to surrender of certificates
representing shares of Mid-Tier Holding Company Common Stock, dividends payable
in respect of shares of Common Stock not then issued shall accrue (without
interest). Any such dividends shall be paid (without interest) upon surrender of
the certificates representing such shares of Mid-Tier Holding Company Common
Stock. The Company shall be entitled, after the consummation of the Conversion,
to treat certificates representing shares of Mid-Tier Holding Company Common
Stock as evidencing ownership of the number of full shares of Common Stock into
which the shares of Mid-Tier Holding Company Common Stock represented by such
certificates shall have been converted, notwithstanding the failure on the part
of the holder thereof to surrender such certificates.
The Company shall not be obligated to deliver a certificate or
certificates representing shares of Common Stock to which a holder of Mid-Tier
Holding Company Common Stock would otherwise be entitled as a result of the
Conversion until such holder surrenders the certificate or certificates
representing the shares of Mid-Tier Holding Company Common Stock for exchange as
provided above, or, in default thereof, an appropriate affidavit of loss and
indemnity agreement and/or a bond as may be required in each case by the
Company. If any certificate evidencing shares of Common Stock is to be issued in
a name other than that in which the certificate evidencing Mid-Tier Holding
Company Common Stock surrendered in exchange therefor is registered, it shall be
a condition of the issuance thereof that the certificate so surrendered shall be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange pay to the Exchange Agent any transfer or other tax
required by reason of the issuance of a certificate for shares of Common Stock
in any name other than that of the registered holder of the certificate
surrendered or otherwise establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not payable.
REQUIRED APPROVALS
Various approvals of the OTS are required in order to consummate the
Conversion. The OTS has approved the Plan of Conversion, subject to approval by
the MHC's Members and the Mid-Tier Holding Company Shareholders. In addition,
consummation of the Conversion is subject to OTS approval of the Company's
application to acquire all of the to-be-outstanding Association Common Stock and
the applications with respect to the merger of the MHC (following its conversion
to a federal interim stock savings institution) and the Mid-Tier Holding Company
(following its conversion to a federal interim stock savings association) into
the Association and the merger of Interim into the Association, with the
Association being the surviving entity in all of the mergers. Applications for
these approvals have been filed and are currently pending. There can be no
assurances that the requisite OTS approvals will be received in a timely manner,
in which event the consummation of the Conversion may be delayed beyond the
expiration of the Offerings.
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The Company is required to make certain filings with state securities
regulatory authorities in connection with the issuance of Conversion Stock and
Exchange Shares in the Conversion.
Pursuant to OTS regulations, the Plan of Conversion also must be
approved by (1) at least a majority of the total number of votes eligible to be
cast by Members of the MHC at the Members' Meeting, and (2) holders of at least
two-thirds of the outstanding Mid-Tier Holding Company Common Stock at the
Shareholders' Meeting. In addition, the Primary Parties have conditioned the
consummation of the Conversion on the approval of the Plan by at least a
majority of the votes cast, in person or by proxy, by the Public Shareholders at
the Shareholders' Meeting.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER THE CONVERSION
All shares of Conversion Stock purchased in connection with the
Conversion by a director or an executive officer of the Primary Parties will be
subject to a restriction that the shares not be sold for a period of one year
following the Conversion, except in the event of the death of such director or
executive officer or pursuant to a merger or similar transaction approved by the
OTS. Each certificate for restricted shares will bear a legend giving notice of
this restriction on transfer, and appropriate stop-transfer instructions will be
issued to the Company's transfer agent. Any shares of Common Stock issued within
this one-year period as a stock dividend, stock split or otherwise with respect
to such restricted stock will be subject to the same restrictions. The directors
and executive officers of the Company will also be subject to the insider
trading rules promulgated pursuant to the Exchange Act.
Purchases of Common Stock of the Company by directors, executive
officers and their associates during the three-year period following completion
of the Conversion may be made only through a broker or dealer registered with
the SEC, except with the prior written approval of the OTS. This restriction
does not apply, however, to negotiated transactions involving more than 1% of
the Company's outstanding Common Stock or to the purchase of stock pursuant to
any tax-qualified employee stock benefit plan, such as the ESOP, or by any
non-tax-qualified employee stock benefit plan, such as the 1999 Recognition
Plan.
Pursuant to OTS regulations, the Company will generally be prohibited
from repurchasing any shares of Common Stock within one year following
consummation of the Conversion. During the second and third years following
consummation of the Conversion, the Company may not repurchase any shares of its
Common Stock other than pursuant to (i) an offer to all shareholders on a pro
rata basis which is approved by the OTS; (ii) the repurchase of qualifying
shares of a director, if any; (iii) purchases in the open market by a
tax-qualified or non-tax-qualified employee stock benefit plan in an amount
reasonable and appropriate to fund the plan; or (iv) purchases that are part of
an open-market program not involving more than 5% of its outstanding capital
stock during a 12-month period, if the repurchases do not cause the Association
to become undercapitalized and the Association provides to the Regional Director
of the OTS no later than 10 days prior to the commencement of a repurchase
program written notice containing a full description of the program to be
undertaken and such program is not disapproved by the Regional Director.
However, the Regional Director has authority to permit repurchases during the
first year following consummation of the Conversion and to permit repurchases in
excess of 5% during the second and third years upon the establishment of
exceptional circumstances (I.E., where such repurchases would be in the best
interests of the institution and its shareholders).
RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE ASSOCIATION
GENERAL
As described below, certain provisions in the Company's Certificate of
Incorporation and Bylaws and in the Company's and the Association's proposed
benefit plans, together with provisions of Delaware corporate law and OTS
regulations, may have anti-takeover effects. In addition, regulatory
restrictions may make it difficult for persons or companies to acquire control
of either the Company or the Association.
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RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
GENERAL. A number of provisions of the Company's Certificate of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of shareholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws which might
be deemed to have a potential "anti-takeover" effect. These provisions may have
the effect of discouraging a future takeover attempt which is not approved by
the Board of Directors but which individual Company shareholders may deem to be
in their best interests or in which shareholders may receive a substantial
premium for their shares over then current market prices. As a result,
shareholders who might desire to participate in such a transaction may not have
an opportunity to do so. Such provisions will also render the removal of the
current Board of Directors or management of the Company more difficult. The
following description of certain of the provisions of the Certificate of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each case to such Certificate of Incorporation and Bylaws,
which are incorporated herein by reference. See "Additional Information" as to
how to obtain a copy of these documents.
LIMITATION ON VOTING RIGHTS. Article 12.B of the Company's Certificate
of Incorporation provides that following the date of the Conversion, no person
shall directly or indirectly offer to acquire or acquire the beneficial
ownership of (i) more than 10% of the issued and outstanding shares of any class
of an equity security of the Company, or (ii) any securities convertible into,
or exercisable for, any equity securities of the Company if, assuming conversion
or exercise by such person of all securities of which such person is the
beneficial owner which are convertible into, or exercisable for, such equity
securities (but of no securities convertible into, or exercisable for, such
equity securities of which such person is not the beneficial owner), such person
would be the beneficial owner of more than 10% of any class of an equity
security of the Company. The term "person" is broadly defined to prevent
circumvention of this restriction.
The foregoing restrictions do not apply to (i) any offer with a view
toward public resale made exclusively to the Company by underwriters or a
selling group acting on its behalf, (ii) any tax-qualified employee benefit plan
or arrangement established by the Company or the Association and any trustee of
such a plan or arrangement, and (iii) any other offer or acquisition approved in
advance by the affirmative vote of two-thirds of the Company's entire Board of
Directors. In the event that shares are acquired in violation of Article 12.B,
all shares beneficially owned by any person in excess of 10% shall be considered
"Excess Shares" and shall not be counted as shares entitled to vote and shall
not be voted by any person or counted as voting shares in connection with any
matters submitted to shareholders for a vote, and the Board of Directors may
cause such Excess Shares to be transferred to an independent trustee for sale on
the open market or otherwise, with the expenses of such trustee to be paid out
of the proceeds of sale.
BOARD OF DIRECTORS. Article 7 of the Certificate of Incorporation of the
Company contains provisions relating to the Board of Directors and provides,
among other things, that the Board of Directors shall be divided into three
classes as nearly equal in number as possible, with the term of office of one
class expiring each year. See "Management Management of the Company." The
classified Board is intended to provide for continuity of the Board of Directors
and to make it more difficult and time consuming for a shareholder group to
fully use its voting power to gain control of the Board of Directors without the
consent of the incumbent Board of Directors of the Company. Cumulative voting in
the election of directors is not permitted.
Directors may be removed without cause at a duly constituted meeting of
shareholders called expressly for that purpose upon the vote of the holders of
at least 80% of the total votes eligible to be cast by shareholders, and with
cause by the affirmative vote of a majority of the total votes eligible to be
cast by shareholders. Cause for removal shall exist only if the director whose
removal is proposed has been either declared of unsound mind by an order of a
court of competent jurisdiction, convicted of a felony or of an offense
punishable by imprisonment for a term of more than one year by a court of
competent jurisdiction, or deemed liable by a court of competent jurisdiction
for gross negligence or misconduct in the performance of such director's duties
to the Company. Any vacancy occurring in the Board of Directors for any reason
(including an increase in the number of authorized directors) may be filled by
the affirmative vote of a majority of the remaining directors, whether or not a
quorum of the Board of Directors
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is present, and a director appointed to fill a vacancy shall serve until the
expiration of the term to which he was appointed.
Article 4.15 of the Bylaws governs nominations for election to the
Board, and requires all nominations for election to the Board of Directors other
than those made by the Board to be made by a shareholder eligible to vote at an
annual meeting of shareholders who has complied with the notice provisions in
that section. Written notice of a shareholder nomination must be delivered to,
or mailed to and received at, the principal executive offices of the Company not
later than 120 days prior to the anniversary date of the initial mailing of
proxy materials by the Company in connection with the immediately preceding
annual meeting of shareholders of the Company, provided that, with respect to
the first scheduled annual meeting following completion of the Conversion,
notice must be received December 15, 1998. Each such notice shall set forth (a)
the name, age, business address and residence address of the shareholder who
intends to make the nomination and of the person or persons to be nominated; (b)
the principal occupation or employment of the shareholder submitting the notice
and of each person being nominated; (c) the class and number of shares of the
Company's stock beneficially owned by the shareholder submitting the notice, by
any person who is acting in concert with or who is an affiliate or associate of
such shareholder (as such terms are defined in the Certificate of
Incorporation), by any person who is a member of any group with such shareholder
with respect to the Company's stock or who is known by such shareholder to be
supporting such nominee(s) on the date the notice is given to the Company, by
each person being nominated, and by each person who is in control of, is
controlled by or is under common control with any of the foregoing persons (if
any of the foregoing persons is a partnership, corporation, limited liability
company, association or trust, information must be provided regarding the name
and address of, and the class of number of shares of Company stock which are
beneficially owned by, each partner in such partnership, each director,
executive officer and shareholder in such corporation, each member in such
limited liability company or association, and each trustee and beneficiary of
such trust, and in each case each person controlling such entity and each
partner, director, executive officer, shareholder, member or trustee of any
entity which is ultimately in control of such partnership, corporation, limited
liability company, association or trust); (d) a representation that the
shareholder is a holder of record of stock of the Company entitled to vote at
such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (e) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder; (f) such other
information regarding the shareholder submitting the notice, each nominee
proposed by such shareholder and any other person covered by clause (c) of this
paragraph as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the SEC; and (g) the consent of each nominee to
serve as a director of the Company if so elected.
The Company's Certificate of Incorporation provides that the personal
liability of the directors and officers of the Company for monetary damages
shall be eliminated to the fullest extent permitted by the DGCL as it exists on
the effective date of the Certificate of Incorporation or as such law may be
thereafter in effect. Section 102(b)(7) of the DGCL currently provides that
directors (but not officers) of corporations that have adopted such a provision
will not be so liable, except for (i) any breach of the director's duty of
loyalty to the corporation or its shareholders, (ii) acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) the payment of certain unlawful dividends and the making of certain stock
purchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit. This provision would absolve directors of
personal liability for negligence in the performance of their duties, including
gross negligence. It would not permit a director to be exculpated, however, for
liability for actions involving conflicts of interest or breaches of the
traditional "duty of loyalty" to the Company and its shareholders, and it would
not affect the availability of injunctive or other equitable relief as a remedy.
Article 10 of the Certificate of Incorporation provides that the Company
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
including actions by or in the right of the Company, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was a director, officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture,
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trust or other enterprise. Such indemnification is furnished to the full extent
provided by law against expenses (including attorneys' fees), judgments, fines,
and amounts paid in settlement actually and reasonably incurred in connection
with such action, suit or proceeding. The indemnification provisions also permit
the Company to pay reasonable expenses in advance of the final disposition of
any action, suit or proceeding as authorized by the Company's Board of
Directors, provided that the indemnified person undertakes to repay the Company
if it is ultimately determined that such person was not entitled to
indemnification.
The rights of indemnification provided in the Company's Certificate of
Incorporation are not exclusive of any other rights which may be available under
the Company's Bylaws, any insurance or other agreement, by vote of shareholders
or directors (regardless of whether directors authorizing such indemnification
are beneficiaries thereof) or otherwise. In addition, Section 6.4 of the Bylaws
authorizes the Company to maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the Company, whether or not the
Company would have the power to provide indemnification to such person. By
action of the Board of Directors, the Company may create and fund a trust fund
or other fund or form of self-insurance arrangement of any nature, and may enter
into agreements with its officers, directors, employees and agents for the
purpose of securing or insuring in any manner its obligation to indemnify or
advance expenses provided for in the provisions in the Certificate of
Incorporation and Bylaws regarding indemnification. These provisions are
designed to reduce, in appropriate cases, the risks incident to serving as a
director, officer, employee or agent and to enable the Company to attract and
retain the best personnel available.
The provisions regarding director elections and other provisions in the
Certificate of Incorporation and Bylaws are generally designed to protect the
ability of the Board of Directors to negotiate with the proponent of an
unfriendly or unsolicited proposal to take over or restructure the Company by
making it more difficult and time-consuming to change majority control of the
Board, whether by proxy contest or otherwise. The effect of these provisions
will be to generally require at least two (and possibly three) annual
shareholders' meetings, instead of one, to effect a change in control of the
Board of Directors of the Company even if holders of a majority of the Company's
capital stock believed that a change in the composition of the Board of
Directors was desirable. Because a majority of the directors at any given time
will have prior experience as directors, these requirements will help to ensure
continuity and stability of the Company's management and policies and facilitate
long-range planning for the Company's business. The provisions relating to
removal of directors and filling of vacancies are consistent with and supportive
of a classified board of directors.
The procedures regarding shareholder nominations will provide the Board
of Directors with sufficient time and information to evaluate a shareholder
nominee to the Board and other relevant information, such as existing
shareholder support for the nominee. The proposed procedures, however, will
provide incumbent directors advance notice of a dissident slate of nominees for
directors, and will make it easier for the Board to solicit proxies resisting
such nominees. This may make it easier for the incumbent directors to retain
their status as directors, even when certain shareholders view the shareholder
nominations as in the best interests of the Company or its shareholders.
AUTHORIZED SHARES. Article 4 of the Certificate of Incorporation
authorizes the issuance of 70,000,000 shares of which 10,000,000 shares shall be
shares of Preferred Stock, and 60,000,000 shares shall be Common Stock. The
shares of Common Stock and Preferred Stock were authorized in an amount greater
than that to be issued in the Conversion to provide the Company's Board of
Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
The Company's Board currently has no plans for the issuance of additional
shares, other than the issuance of additional shares pursuant to stock benefit
plans.
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SPECIAL MEETINGS OF SHAREHOLDERS AND SHAREHOLDER PROPOSALS. Article 8 of
the Certificate of Incorporation provides that, with limited exceptions, special
meetings of the Company's shareholders may only be called by not the Board of
Directors pursuant to a resolution approved by the affirmative vote of at least
three-fourths of the directors than in office. The Certificate of Incorporation
also provides that any action required or permitted to be approved or consented
to by the shareholders must be effected at a duly called meeting of the
shareholders and may not be effected by written consent in lieu of a meeting.
Article 2.14 of the Company's Bylaws provides that only such business as
shall have been properly brought before an annual meeting of shareholders shall
be conducted at the annual meeting. In order to be properly brought before an
annual meeting following completion of the Conversion, business must be (a)
brought before the meeting by or at the direction of the Board of Directors or
(b) otherwise properly brought before the meeting by a shareholder who has given
timely and complete notice thereof in writing to the Company. With respect to
shareholder proposals to be considered at the annual meeting of shareholders but
not included in the Company's proxy materials, the shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Company not later than 120 days prior to the anniversary date of the initial
mailing of proxy materials by the Company in connection with the immediately
preceding annual meeting; provided, however, that with respect to the first
scheduled annual meeting following completion of the Conversion, such written
notice must be received by the Company not later than the close of business on
December 15, 1998. A shareholder's notice shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (a) a description of the
proposal desired to be brought before the annual meeting, (b) the name and
address, as they appear on the Company's books, of the shareholder proposing
such business, and, to the extent known, any other shareholders known by such
shareholder to be supporting such proposal, (c) the class and number of shares
of the Company which are beneficially owned by the shareholder submitting the
notice, by any person who is acting in concert with or who is an affiliate or
associate of such shareholder (as such terms are defined in the Certificate of
Incorporation), by any person who is a member of any group with such shareholder
with respect to the Company's stock or who is known by such shareholder to be
supporting such proposal on the date the notice is given to the Company, and by
each person who is in control of, is controlled by or is under common control
with any of the foregoing persons (if any of the foregoing persons is a
partnership, corporation, limited liability company, association or trust,
information must be provided regarding the name and address of, and the class
and number of shares of Company stock which are beneficially owned by, each
partner in such partnership, each director, executive officer and shareholder in
such corporation, each member in such limited liability company or association,
and each trustee and beneficiary of such trust, and in each case each person
controlling such entity and each partner, director, executive officer,
shareholder, member or trustee of any entity which is ultimately in control of
such partnership, corporation, limited liability company, association or trust),
(d) the identification of any person retained or to be compensated by the
shareholder submitting the proposal, or any person acting on his or her behalf,
to make solicitations or recommendations to shareholders for the purpose of
assisting in the passage of such proposal and a brief description of the terms
of such employment, retainer or arrangement for compensation, and (e) any
material interest of the shareholder in such business.
The procedures regarding shareholder proposals are designed to provide
the Board with sufficient time and information to evaluate a shareholder
proposal and other relevant information, such as existing shareholder support
for the proposal. The proposed procedures, however, will give incumbent
directors advance notice of a shareholder proposal. This may make it easier for
the incumbent directors to defeat a shareholder proposal, even when certain
shareholders view such proposal as in the best interests of the Company or its
shareholders.
EVALUATION OF OFFERS. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer to the Company from another party to (i) make a tender or exchange offer
for any equity security of the Company, (ii) merge or consolidate the Company
with another corporation or entity or (iii) purchase or otherwise acquire all or
substantially all of the properties and assets of the Company, may, consistent
with the exercise of its fiduciary duties and in connection with the exercise of
its judgment in determining what is in the best interest of the Company and the
shareholders of the Company, give due consideration to the extent permitted by
law not only to the price or other consideration being offered, but also to all
other relevant factors, including, without limitation, the financial and
managerial resources and future prospects of
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the other party, the possible effects on the business of the Company and its
subsidiaries and on the employees, customers, suppliers and creditors of the
Company and its subsidiaries, and the effects on the communities in which the
Company's and its subsidiaries' facilities are located. By having these
standards in the Certificate of Incorporation of the Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then market
price of any equity security of the Company.
SHAREHOLDER APPROVAL OF MERGERS AND CERTAIN OTHER EXTRAORDINARY
TRANSACTIONS. Article 11 of the Company's Certificate of Incorporation provides
that any action taken by shareholders under Subchapter IX of the DGCL (which
relates to merger or consolidation transactions) and Subchapter X (which relates
to sale of assets, dissolution and winding up transactions) shall with certain
exceptions, generally require the affirmative vote of at least 80% of the votes
eligible to be cast by shareholders. The supermajority 80% vote requirement of
Article 11 of the Certificate of Incorporation shall not be applicable to any
transaction approved in advance by at least two-thirds of the entire Board of
Directors of the Company, in which case the transaction will require only such
shareholder approval as specified under Delaware law. The DGCL requires that
approval of the Board of Directors and the holders of a majority of the
outstanding stock of the company entitled to vote thereon for mergers or
consolidations, and for sales, leases or exchanges of all or substantially all
of the Company's assets. The DGCL permits the Company to merge with another
corporation without obtaining the approval of the Company's shareholders if (i)
the Company is the surviving corporation of the merger, (ii) the merger
agreement does not amend the Company's Certificate of Incorporation; (iii) each
share of the Company's stock outstanding immediately prior to the effective date
of the merger is to be an identical outstanding or treasury share of the Company
after the merger; and (iv) any authorized but unissued shares or treasury shares
of Common Stock to be issued or delivered under the plan of merger plus those
initially issuable upon conversion of any other securities or obligations to be
issued or delivered under such plan do not exceed 20% of the shares of Common
Stock outstanding immediately prior to the effective date of the merger.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Article 13 of the
Company's Certificate of Incorporation generally provides that any amendment of
the Certificate of Incorporation must be first approved by a majority of the
Board of Directors and then by the holders of at least 80%of the shares of the
Company entitled to vote in an election of directors ("Voting Shares"), except
that if the amendment is approved by at least two-thirds of the Board of
Directors, the amendment shall only need shareholder approval if required by the
DGCL and then only by the affirmative vote of the holders of a majority of the
Voting Shares.
The Bylaws of the Company may be amended by a majority of the Board of
Directors or by the affirmative vote of a majority of the Voting Shares, except
that the affirmative vote of at least 80% of the Voting Shares shall be required
to amend, adopt, alter, change or repeal any provision inconsistent with certain
specified provisions of the Bylaws.
DELAWARE CORPORATE LAW
In addition to the provisions contained in the Company's Certificate of
Incorporation, the DGCL includes certain provisions applicable to Delaware
corporations, such as the Company, which may be deemed to have an anti-takeover
effect. Such provisions include requirements relating to certain business
combinations.
Section 203 of the DGCL ("Section 203") imposes certain restrictions on
business combinations between the Company and large shareholders. Specifically,
Section 203 prohibits a "business combination" (as defined in Section 203,
generally including mergers, sales and leases of assets, issuances of securities
and similar transactions) between the Company or a subsidiary and an "interested
shareholder" (as defined in Section 203, generally the beneficial owner of 15%
or more of the Company Common Stock) within three years after the person or
entity becomes an interested shareholder, unless (i) prior to the person or
entity becoming an interested shareholder, the business combination or the
transaction pursuant to which such person or entity became an interested
shareholder shall have been approved by the Company's Board of Directors, (ii)
upon consummation of the transaction in which the interested shareholder became
such, the interested shareholder holds at least 85% of the Company Common Stock
(excluding shares held
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by persons who are both officers and directors and shares held by certain
employee benefit plans), or (iii) the business combination is approved by the
Company's Board of Directors and by the holders of at least two-thirds of the
outstanding Company Common Stock, excluding shares owned by the interested
shareholders.
One of the effects of Section 203 may be to prevent highly leveraged
takeovers, which depend upon getting access to the acquired corporation's assets
to support or repay acquisition indebtedness and certain coercive acquisition
tactics. By requiring approval of the holders of two-thirds of the shares held
by disinterested shareholders for business combinations involving an interested
shareholder, Section 203 may prevent any interested shareholder from taking
advantage of its position as a substantial, if not controlling, shareholder and
engaging in transactions with the Company that may not be fair to the Company's
other shareholders or that may otherwise not be in the best interests of the
Company, its shareholders and other constituencies.
For similar reasons, however, these provisions may make more difficult
or discourage an acquisition of the Company, or the acquisition of control of
the Company by a principal shareholder, and thus the removal of incumbent
management. In addition, to the extent that Section 203 discourages takeovers
that would result in the change of the Company's management, such a change may
be less likely to occur.
ANTI-TAKEOVER EFFECTS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The foregoing provisions of the Certificate of Incorporation and Bylaws
of the Company and Delaware law could have the effect of discouraging an
acquisition of the Company or stock purchases in furtherance of an acquisition,
and could accordingly, under certain circumstances, discourage transactions
which might otherwise have a favorable effect on the price of the Company's
Common Stock. In addition, such provisions may result in the Company being
deemed to be less attractive to a potential acquiror and/or might result in
shareholders receiving a lesser amount of consideration for their shares of
Common Stock than otherwise could have been available.
The Board of Directors believes that the provisions described above are
prudent and will reduce vulnerability to takeover attempts and certain other
transactions that are not negotiated with and approved by the Board of Directors
of the Company. The Board of Directors believes that these provisions are in the
best interests of the Company and its future shareholders. In the Board of
Directors' judgment, the Board of Directors is in the best position to determine
the true value of the Company and to negotiate more effectively for what may be
in the best interests of its shareholders. Accordingly, the Board of Directors
believes that it is in the best interests of the Company and its future
shareholders to encourage potential acquirors to negotiate directly with the
Board of Directors and that these provisions will encourage such negotiations
and discourage hostile takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at prices reflective of the true value of the Company and
where the transaction is in the best interests of all shareholders.
Despite the Board of Directors' belief as to the benefits to the
Company's shareholders of the foregoing provisions, these provisions also may
have the effect of discouraging a future takeover attempt in which shareholders
might receive a substantial premium for their shares over then current market
prices and may tend to perpetuate existing management. As a result, shareholders
who might desire to participate in such a transaction may not have an
opportunity to do so. The Board of Directors, however, has concluded that the
potential benefits of these provisions outweigh their possible disadvantages.
The Board of Directors of the Company and the Association are not aware
of any effort that might be made to acquire control of the Association or the
Company.
REGULATORY RESTRICTIONS
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings and loan holding company unless the OTS has been
given 60 days' prior written notice. The HOLA provides that no company may
acquire "control" of a savings and loan
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holding company without the prior approval of the OTS. Any company that acquires
such control becomes a savings and loan holding company subject to registration,
examination and regulation by the OTS. Pursuant to federal regulations, control
of a savings and loan holding company is conclusively deemed to have been
acquired by, among other things, the acquisition of more than 25% of any class
of voting stock of the institution or the ability to control the election of a
majority of the directors of an institution. Moreover, control is presumed to
have been acquired, subject to rebuttal, upon the acquisition of more than 10%
of any class of voting stock, or of more than 25% of any class of stock, of a
savings and loan holding company where certain enumerated "control factors" are
also present in the acquisition. The OTS may prohibit an acquisition if (i) it
would result in a monopoly or substantially lessen competition, (ii) the
financial condition of the acquiring person might jeopardize the financial
stability of the institution, or (iii) the competence, experience or integrity
of the acquiring person indicates that it would not be in the interest of the
depositors or of the public to permit the acquisition of control by such person.
The foregoing restrictions do not apply to the acquisition of a savings
institution's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plan or plans do not have beneficial ownership in the
aggregate of more than 25% of any class of equity security.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring, either directly or indirectly, or making an offer to
acquire more than 10% of the stock of any converted savings institution or its
holding company, without the prior written approval of the OTS, except for (i)
any offer with a view toward public resale made exclusively to the institution
or its holding company or to underwriters or a selling group acting on its
behalf, (ii) offers that if consummated would not result in the acquisition by
such person during the preceding 12-month period of more than 1% of such stock,
(iii) offers in the aggregate for up to 24.9% by the ESOP or other tax-qualified
plans of the Company or the Association, and (iv) an offer to acquire or
acquisition of beneficial ownership of more than 10% of the common stock of the
savings institution or its holding company by a corporation whose ownership is
or will be substantially the same as the ownership of the savings institution,
provided that the offer or acquisition is made more than one year following the
date of completion of the Conversion. Such prohibition also is applicable to the
acquisition of the Common Stock. In the event that any person, directly or
indirectly, violates this regulation, the securities beneficially owned by such
person in excess of 10% shall not be counted as shares entitled to vote and
shall not be voted by any person or counted as voting shares in connection with
any matters submitted to a vote of shareholders. The definition of beneficial
ownership for this regulation extends to persons holding revocable or
irrevocable proxies for the stock of an institution or its holding company under
circumstances that give rise to a conclusive or rebuttable determination of
control under OTS regulations.
In addition to the foregoing, the Plan prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of an
intent to make an offer, to purchase subscription rights for Conversion Stock.
See "The Conversion - Restrictions on Transfer of Subscription Rights and
Shares."
136
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 60,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock. The Company currently expects to issue up
to a maximum of 14,950,000 Shares of Common Stock, including 7,753,143 shares of
Conversion Stock and 7,196,857 Exchange Shares, and no shares of Preferred Stock
in the Conversion. Each share of Common Stock will have the same relative rights
as, and will be identical in all respects with, each other share of Common
Stock. Upon payment of the Purchase Price for the Conversion Stock and the
issuance of the Exchange Shares in accordance with the Plan of Conversion, all
such stock will be duly authorized, fully paid and nonassessable.
THE COMMON STOCK WILL REPRESENT NONWITHDRAWABLE CAPITAL, WILL NOT BE AN
ACCOUNT OF AN INSURABLE TYPE AND WILL NOT BE INSURED BY THE FDIC OR ANY OTHER
GOVERNMENTAL AUTHORITY.
COMMON STOCK
DIVIDENDS. The Company can pay dividends if, as and when declared by its
Board of Directors, subject to compliance with limitations which are imposed by
law. See "Dividend Policy." The holders of Common Stock will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors of the Company out of funds legally available therefor. If the Company
issues Preferred Stock, the holders thereof may have a priority over the holders
of the Common Stock with respect to dividends.
VOTING RIGHTS. Upon completion of the Conversion, the holders of Common
Stock of the Company will possess exclusive voting rights in the Company. They
will elect the Company's Board of Directors and act on such other matters as are
required to be presented to them under Delaware law or the Company's Certificate
of Incorporation or as are otherwise presented to them by the Board of
Directors. Except as discussed in "Restrictions on Acquisition of the Company
and the Association - Restrictions in the Company's Certificate of Incorporation
and Bylaws - Limitation on Voting Rights," each holder of Common Stock will be
entitled to one vote per share and will not have any right to cumulate votes in
the election of directors. If the Company issues Preferred Stock, holders of the
Preferred Stock may also possess voting rights.
LIQUIDATION. In the event of any liquidation, dissolution or winding up
of the Company, the holders of the then-outstanding Common Stock would be
entitled to receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of the Company available for distribution. If
Preferred Stock is issued, the holders thereof may have a priority over the
holders of the Common Stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the Common Stock will not be entitled to
preemptive rights with respect to any shares which may be issued in the future.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without shareholder approval, issue Preferred Stock with
voting, dividend, liquidation and conversion rights which 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.
137
<PAGE>
CHANGE IN AUDITORS
On November 6, 1997, the Board of Directors of the Mid-Tier Holding
Company terminated the services of Deloitte & Touche LLP as the Mid-Tier Holding
Company's and the Association's independent auditors subject to the completion
of Deloitte & Touche LLP's audit of the Mid-Tier Holding Company's financial
statements for the year ended December 31, 1997. Such termination was
recommended to the Board of Directors by the Audit Committee. In connection with
the termination of Deloitte & Touche LLP's services as independent auditors, the
Board of Directors of Mid-Tier Holding Company appointed Crowe, Chizek and
Company LLP, independent certified public accounts, to perform the audit of the
Mid-Tier Holding Company's financial statements for the year ending December 31,
1998.
Deloitte & Touche LLP's report on the financial statements for the two
immediately preceding fiscal years did not contain an adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles. During the two most recent fiscal years and the
subsequent interim periods preceding Deloitte & Touche LLP's replacement, there
were no disagreements between the Mid-Tier Holding Company or the Association
and Deloitte & Touche LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure.
During the Mid-Tier Holding Company's two most recent fiscal years and
the subsequent interim periods preceding Deloitte & Touche LLP's replacement,
Deloitte & Touche LLP did not advise, and has not indicated to the Mid-Tier
Holding Company or the Association that it had any reason to advise, the
Registrant of any of the following:
(a) that the internal controls necessary for the Association to develop
reliable financial statements did not exist;
(b) that information had come to Deloitte & Touche LLP's attention that
had led it to no longer be able to rely on management's representations, or that
made it unwilling to be associated with the financial statements prepared by
management;
(c) (1) the need to expand significantly the scope of the Mid-Tier
Holding Company's or the Association's audit, or that information had come to
Deloitte & Touche LLP's attention during such time period that if further
investigated might (i) materially impact the fairness or reliability of either:
a previously issued audit report or the underlying financial statements, or the
financial statements issued or to be issued covering the fiscal periods
subsequent to the date of the most recent financial statements covered by an
audit report (including information that may prevent it from rending an
unqualified audit report on those financial statements), or (ii) cause it to be
unwilling to rely on management's representation or to be associated with the
Mid-Tier Holding Company's or the Association's financial statements, and (2)
that due to Deloitte & Touche LLP's replacement or for another reason, the issue
has not been resolved to Deloitte & Touche LLP's satisfaction prior to its
replacement.
(d) (1) that information had come to Deloitte & Touche LLP's attention
that it had concluded materially impacted the fairness or reliability of either
(i) a previously issued audit report or the underlying financial statements, or
(ii) the financial statements issued or to be issued covering the fiscal periods
subsequent to the date of the most recent financial statements covered by an
audit report (including information that, unless resolved to Deloitte & Touche
LLP's satisfaction, would prevent it from rendering an unqualified audit report
on those financial statements, and (2) due to Deloitte & Touche LLP's
replacement, or for any other reason, the issue was not resolved to Deloitte &
Touche LLP's satisfaction prior to its replacement.
During the two most recent fiscal years and the subsequent interim
periods preceding the selection of Crowe, Chizek and Company, LLP, the Mid-Tier
Holding Company and the Association have not consulted Crowe, Chizek and Company
LLP regarding the application of accounting principles, either contemplated or
proposed, the type of audit opinion that might be rendered on the Association's
as the Mid-Tier Holding Company's financial statements or any other matters that
would be required to be reported therein.
138
<PAGE>
EXPERTS
The consolidated financial statements of Community Savings Bankshares,
Inc. as of December 31, 1997 and 1996 and September 30, 1996 and for the year
ended December 31, 1997, the three months ended December 31, 1996, and each of
the two years in the period ended September 30, 1996 included in this Prospectus
have been audited by Deloitte & Touche, LLP, independent auditors, as stated in
their report appearing elsewhere herein in this registration statement, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
FinPro, Inc. has consented to the publication herein of the summary of
its report to the Company, the Mid-Tier Holding Company and the Association
setting forth its opinion as to the estimated pro forma market value of the
Common Stock to be outstanding upon completion of the Conversion and its opinion
with respect to subscription rights.
LEGAL MATTERS
The legality of the Common Stock and the federal income tax consequences
of the Conversion will be passed upon for the Company and the Association by
Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C., special counsel to the
Company and the Association. The Florida income tax consequences of the
Conversion will be passed upon for the Company and the Association by Crowe,
Chizek and Company LLP. Certain legal matters will be passed upon for FBR by
Peabody & Brown, Washington, D.C.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act with respect to the Conversion Stock and the Exchange Shares
offered hereby. As permitted by the rules and regulations of the SEC, this
Prospectus does not contain all the information set forth in the Registration
Statement. Such information can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of such material can be obtained from the SEC at
prescribed rates. In addition, the SEC maintains a web site that contains
registration statements and other reports regarding registrants that file
electronically with the SEC (such as the Company). The address of the SEC's web
site is http://www.sec.gov. The statements contained in this Prospectus as to
the contents of any contract or other document filed as an exhibit to the
Registration Statement are, of necessity, brief descriptions thereof and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
The MHC has filed an Application for Conversion with the OTS with
respect to the Conversion. This Prospectus omits certain information contained
in that application. The application may be examined at the principal office of
the OTS, 1700 G Street, N.W., Washington, D.C. 20552, and at the Southeast
Regional Office of the OTS located at 1475 Peachtree Street, N.E. Atlanta,
Georgia 30309.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% shareholders,
the annual and periodic reporting requirements and certain other requirements of
the Exchange Act. Under the Plan, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion.
139
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.................................................F-1
Consolidated Statements of Financial Condition as of June 30, 1998
(unaudited), December 31, 1997 and 1996 and September 30, 1996..........F-2
Consolidated Statements of Operations for the six months ended
June 30, 1998 and 1997 (unaudited), for the year ended
December 31, 1997, for the year ended December 31, 1996 and
for the years ended September 30, 1996 and 1995.........................F-3
Consolidated Statements of Comprehensive Income for the
six months ended June 30, 1998 and 1997 (unaudited), for the
three months ended December 31, 1997, for the three months
ended December 31, 1996 and for the years ended
September 30 1996 and 1995..............................................F-4
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended June 30, 1998 (unaudited),
for the year ended December 31, 1997, for the three
months ended December 31, 1996 and for the years ended
September 30, 1996 and 1995.............................................F-5
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 (unaudited), for the year
ended December 31, 1997, for the three months ended
December 31, 1996 and for the years ended
September 30, 1996 and 1995............................................ F-6
Notes to Consolidated Financial Statements...................................F-8
All financial statement schedules are omitted because the required
information either is not applicable or is shown in the financial statements or
in the notes thereto.
ComFed, M. H. C. has limited assets other than its shares of Mid-Tier
Holding Company Common Stock (which will be cancelled in connection with the
Conversion) and has engaged in only minimal activities to date; accordingly, the
financial statements of the MHC have been omitted because of their
immateriality.
The Company was incorporated on August 6, 1998. Its current
capitalization is $1,000, and it has engaged in only minimal activities to date;
accordingly, the financial statements of the Company have been omitted because
of their immateriality.
140
<PAGE>
[DELOITTE & TOUCHE LLP LETTERHEAD LOGO]
INDEPENDENT AUDITORS' REPORT
Community Savings Bankshares, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Community Savings Bankshares, Inc. ("Bankshares") and its subsidiary as of
December 31, 1997 and 1996 and September 30, 1996, and the related consolidated
statements of operations, comprehensive income, shareholders' equity, and cash
flows for the year ended December 31, 1997, the three months ended December 31,
1996 and for each of the two years in the period ended September 30, 1996. These
consolidated financial statements are the responsibility of Bankshares'
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Bankshares and its subsidiary as of
December 31, 1997 and 1996 and September 30, 1996, and the results of its
operations and its cash flows for the year ended December 31, 1997, the three
months ended December 31, 1996, and for each of the two years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Certified Public Accountants
West Palm Beach, Florida
February 20, 1998
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31, September 30,
1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
(In Thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 16,477 $ 12,333 $ 13,547 $ 15,600
Interest-bearing deposits (Note 1) 30,948 13,621 28,895 29,180
--------- --------- --------- ---------
Total cash and cash equivalents 47,425 25,954 42,442 44,780
Securities available for sale (Approximate cost -1998, $91,750; 1997,
$142,357; 1996, $124,643;1996,$125,928)(Notes 1,2,6) 91,316 142,269 123,152 124,287
Investments - held to maturity (Approximate fair value - 1998, $25,539;
1997, $25,585; 1996, $26,266; 1996, $26,093) (Notes 1,3,6,15) 21,443 21,388 22,139 22,293
Mortgage-backed and related securities - held to maturity
(Approximate fair value - 1998, $42,360; 1997, $46,938; 1996,
$53,880; 1996, $54,988) (Notes 1,4,6) 41,884 46,413 53,405 54,945
Loans receivable, net of allowance for loan losses (1998, $2,767;
1997, $2,662; 1996, $2,542;1996, $2,312)(Notes 1,5,6) 527,375 451,709 389,040 376,219
Accrued interest receivable (Notes 1,7) 2,725 3,162 2,354 2,208
Office properties and equipment, net (Notes 1,8) 22,157 20,206 16,368 16,359
Real estate owned, net (Notes 1,9) 711 592 1,455 1,384
Federal Home Loan Bank stock - at cost (Notes 3,6) 3,782 3,264 2,864 5,384
Other assets (Note 1) 6,670 5,176 1,990 2,473
--------- --------- --------- ---------
Total assets $ 765,488 $ 720,133 $ 655,209 $ 650,332
========= ========= ========= =========
LIABILITIES
Deposits (Notes 6,10) $ 574,383 $ 550,708 $ 513,709 $ 498,929
Mortgage-backed bond, net (Notes 6,15) 15,883 16,333 17,230 17,453
Advances from Federal Home Loan Bank (Notes 6, 11) 75,630 57,341 34,763 36,350
Employee Stock Ownership Plan borrowings (Note 14) -- 1,424 1,915 2,064
Advances by borrowers for taxes and insurance 5,467 931 1,059 6,861
Other liabilities (Note 14 * 8,221 9,101 7,753 11,599
Deferred income taxes, net (Notes 1,12) 2,826 3,036 2,661 2,020
--------- --------- --------- ---------
Total liabilities 682,410 638,874 579,090 575,276
========= ========= ========= =========
Commitments and contingencies (Note 13)
SHAREHOLDERS' EQUITY
Preferred stock ($1 par value) 10,000,000 authorized shares,
no shares issued -- -- -- --
Common stock ($1 par value) 20,000,000 authorized shares, 1998,
5,100,120; 1997, 5,094,920; 1996, 5,090,120; 1996, 5,090,120 shares
issued and outstanding 5,100 5,095 5,090 5,090
Additional paid-in capital 30,621 30,278 29,920 29,881
Retained income - substantially restricted (Notes 13,16) 49,347 47,887 44,603 43,902
Common stock purchased by Employee Stock Ownership Plan (1,227) (1,424) (1,818) (1,965)
Common stock issued to Recognition and Retention Plan (330) (423) (608) (654)
Unrealized decrease in market value of securities available for sale,
net of income taxes (433) (154) (1,068) (1,198)
--------- --------- --------- ---------
Total shareholders' equity 83,078 81,259 76,119 75,056
--------- --------- --------- ---------
Total liabilities and shareholders' equity $ 765,488 $ 720,133 $ 655,209 $ 650,332
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
For the For the For the Three
Six Months Year Months For the Years
Ended Ended Ended Ended
June 30, December 31, December 31, September 30,
1998 1997 1997 1996 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Real estate loans (Note 1) $ 18,377 $ 15,479 $ 31,846 $ 7,427 $ 26,765 $ 23,661
Consumer and commercial business loans 913 817 1,644 408 1,508 1,197
Investment securities and securities available
for sale (Notes 2,3) 4,754 5,280 10,422 2,566 8,720 5,945
Mortgage-backed and related securities (Note 4) 1,637 2,010 4,448 1,004 4,403 4,198
Interest-earning deposits 1,146 991 1,956 491 2,493 2,719
---------- ---------- ---------- ---------- ---------- ----------
Total interest income 26,827 24,577 50,316 11,896 43,889 37,720
---------- ---------- ---------- ---------- ---------- ----------
Interest expense:
Deposits (Note 10) 11,976 11,031 22,648 5,251 19,247 15,679
Advances from Federal Home Loan Bank
and other borrowings (Notes 11, 15) 2,679 2,229 4,742 1,127 3,612 2,955
---------- ---------- ---------- ---------- ---------- ----------
Total interest expense 14,655 13,260 27,390 6,378 22,859 18,634
---------- ---------- ---------- ---------- ---------- ----------
Net interest income 12,172 11,317 22,926 5,518 21,030 19,086
Provision for loan losses (Notes 1,5) 213 83 264 243 98 240
---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 11,959 11,234 22,662 5,275 20,932 18,846
---------- ---------- ---------- ---------- ---------- ----------
Other income:
Servicing income and other fees 104 158 269 33 148 184
NOW account and other customer fees 1,677 1,608 3,339 820 3,150 2,767
Net gain (loss) on sale and early maturities
of securities available for sale -- -- (8) 51 -- --
Gain on early maturity of investment -- -- -- -- 254 --
Gain on sale of other assets -- -- 617 -- -- --
Net gain (loss) on sale of loans receivable -- -- 3 3 (225) --
Miscellaneous (25) 96 (35) 318 217 443
---------- ---------- ---------- ---------- ---------- ----------
Total other income 1,756 1,862 4,185 1,225 3,544 3,394
---------- ---------- ---------- ---------- ---------- ----------
Operating expense:
Employee compensation and benefits (Note 14) 4,994 4,253 8,989 2,125 7,785 7,293
Occupancy and equipment (Notes 8, 13) 2,527 2,420 5,059 1,201 4,581 4,506
Net (gain) loss on real estate owned 20 (3) (112) 37 (243) (812)
Advertising and promotion 467 432 734 240 616 545
Federal deposit insurance premium 171 99 270 288 3,883 1,029
Miscellaneous 1,667 1,604 3,621 753 3,178 2,342
---------- ---------- ---------- ---------- ---------- ----------
Total operating expense 9,846 8,805 18,561 4,644 19,800 14,903
---------- ---------- ---------- ---------- ---------- ----------
Income before provision for income taxes 3,869 4,291 8,286 1,856 4,676 7,337
---------- ---------- ---------- ---------- ---------- ----------
Provision (benefit) for income taxes: (Notes 1,12)
Current 1,502 1,612 3,042 65 1,817 3,126
Deferred (144) (56) (112) 631 (1,056) (363)
---------- ---------- ---------- ---------- ---------- ----------
Total provision for income taxes 1,358 1,556 2,930 696 761 2,763
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 2,511 $ 2,735 $ 5,356 $ 1,160 $ 3,915 $ 4,574
========== ========== ========== ========== ========== ==========
Earnings per share - basic $ 0.51 $ 0.55 $ 1.09 $ 0.24 $ 0.80 $ 0.94
========== ========== ========== ========== ========== ==========
Earnings per share - diluted $ 0.49 $ 0.54 $ 1.06 $ 0.23 $ 0.79 $ 0.94
========== ========== ========== ========== ========== ==========
Weighted average common shares outstanding - basic 4,970,782 4,919,960 4,929,989 4,902,479 4,869,238 4,845,384
========== ========== ========== ========== ========== ==========
Weighted average common shares outstanding - diluted 5,116,956 5,021,739 5,054,853 4,951,820 4,936,763 4,882,658
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
For the For the For the Three
Six Months Year Months For the Years
Ended Ended Ended Ended
June 30, December 31, December 31, September 30,
1998 1997 1997 1996 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Net income $2,511 $2,735 $5,356 $1,160 $3,915 $4,574
Other comprehensive income, net of tax:
Change in unrealized increase (decrease) in
market value of securities available for sale (279) 483 914 130 (974) 2
------ ------ ------ ------ ------ ------
Comprehensive income, net of income taxes $2,232 $3,218 $6,270 $1,290 $2,941 $4,576
====== ====== ====== ====== ====== ======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED), THE YEAR ENDED DECEMBER 31,
1997, THE THREE MONTHS ENDED DECEMBER 31, 1996 AND THE YEARS ENDED SEPTEMBER 30,
1996, AND 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized
Increase
(Decrease) in
Retained Employee Recognition Market Value
Additional Income- Stock and of Securities
Common Paid-In Substantially Ownership Retention Available for
Stock Capital Restricted Plan Plan Sale Total
------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - September 30, 1994 $ -- $ -- $38,583 $ -- $ -- $ (473) $38,110
Issuance of Common Stock pursuant to
Reorganization, net of costs of issuance of $1,712 5,000 28,984 -- -- -- -- 33,984
Assets distributed to Mutual Holding Company
pursuant to Reorganization -- -- (200) -- -- -- (200)
Purchase of Common Stock by Employee Stock
Ownership Plan -- -- -- (2,753) -- -- (2,753)
Distribution of Common Stock to Recognition
and Retention Plan 89 1,278 -- -- (1,367) -- --
Net income for the year ended September 30, 1995 -- -- 4,574 -- -- -- 4,574
Unrealized increase in market value of assets
available for sale (net of income taxes) -- -- -- -- -- 2 2
Amortization of deferred compensation -Employee Stock
Ownership Plan and Recognition and Retention Plan -- (80) -- 297 205 -- 422
Dividends declared -- -- (1,291) -- -- -- (1,291)
------------------------------------------------------------------------------
Balance - September 30, 1995 5,089 30,182 41,666 (2,456) (1,162) (471) 72,848
Net income for the year ended September 30, 1996 -- -- 3,915 -- -- -- 3,915
Stock options exercised 1 12 -- -- -- -- 13
Transfer from securities held to maturity
to securities available for sale (net of
income taxes) -- -- -- -- -- 247 247
Unrealized decrease in market value of assets
available for sale (net of income taxes) (974) (974)
Adjustment to deferred compensation-
Recognition and Retention Plan -- (378) -- -- 378 -- --
Amortization of deferred compensation -Employee
Stock Ownership Plan and Recognition and -- 65 -- 491 130 -- 686
Retention Plan
Dividends declared -- -- (1,679) -- -- -- (1,679)
------------------------------------------------------------------------------
Balance - September 30, 1996 5,090 29,881 43,902 (1,965) (654) (1,198) 75,056
Net income for three months ended December 31,
1996 -- -- 1,160 -- -- -- 1,160
Stock options exercised -- 4 -- -- -- -- 4
Unrealized increase in market value of assets
available for sale (net of income taxes) -- -- -- -- -- 130 130
Amortization of deferred compensation -Employee
Stock Ownership Plan and Recognition and
Retention Plan -- 35 -- 147 46 -- 228
Dividends declared -- -- (459) -- -- -- (459)
------------------------------------------------------------------------------
Balance - December 31, 1996 5,090 29,920 44,603 (1,818) (608) (1,068) 76,119
Net income for the year ended December 31, 1997 -- -- 5,356 -- -- -- 5,356
Stock options exercised 5 45 -- -- -- -- 50
Unrealized increase in market value of assets
available for sale (net of income taxes) -- -- -- -- -- 914 914
Amortization of deferred compensation -Employee
Stock Ownership Plan and Recognition and
Retention Plan -- 313 -- 394 185 -- 892
Dividends declared -- -- (2,072) -- -- -- (2,072)
------------------------------------------------------------------------------
Balance - December 31, 1997 5,095 30,278 47,887 (1,424) (423) (154) 81,259
------------------------------------------------------------------------------
Net income for the six months ended June 30,
1998 (Unaudited) -- -- 2,511 -- -- -- 2,511
Stock options exercised (Unaudited) 5 45 -- -- -- -- 50
Unrealized decrease in market value of assets
available for sale (net of income taxes)
(Unaudited) -- -- -- -- -- (279) (279)
Amortization of deferred compensation -Employee
Stock Ownership Plan and Recognition and
Retention Plan (Unaudited) -- 298 -- 197 93 -- 588
Dividends declared (Unaudited) -- -- (1,051) -- -- -- (1,051)
------------------------------------------------------------------------------
Balance - June 30, 1998 (Unaudited) $5,100 $30,621 $49,347 $(1,227) $ (330) $ (433) $83,078
------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
For the For the For the Three For the
Six Months Year Months Years
Ended Ended Ended Ended
June 30, December 31, December 31, September 30,
1998 1997 1997 1996 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from (for) operating activities:
Net income $ 2,511 $ 2,735 $ 5,356 $ 1,160 $ 3,915 $ 4,574
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation 720 677 1,503 329 1,304 1,353
Employee Stock Ownership Plan and Recognition
and Retention Plan compensation expense 588 371 892 228 686 422
Deferred income tax provision (144) (56) (112) 631 (1,056) (363)
Accretion of discounts, amortization of premiums,
and other deferred yield items (1,531) (766) (1,915) (396) (1,494) (1,497)
Provision for losses on other assets -- -- -- -- 200 --
Provision for loan losses 213 83 264 243 98 240
Provision for losses and net (gains) losses
on sales of real estate owned (15) (2) (173) -- (67) (102)
Amortization of discount on mortgage-backed bond 243 246 490 123 496 498
Net (gain) loss on sale and early maturities of:
Securities available for sale -- -- 8 (51) -- --
Loans and other assets 1 (14) (16) (10) 208 4
Gain on early maturity of investment -- -- -- -- (254) --
Decrease (increase) in accrued interest receivable 437 (526) (808) (146) (65) (1,181)
(Increase) decrease in other assets (1,494) (1,967) (3,186) 327 (609) 473
Decrease (increase) in loans available for sale -- (10) 70 137 109 (316)
Increase (decrease) in other liabilities (1,024) 526 1,347 (3,851) 4,424 85
------- ------- ------- ------ ------- -------
Net cash provided by (used for) operating
activities 505 1,297 3,720 (1,276) 7,895 4,190
------- ------- ------- ------ ------- -------
Cash flows from (for) investing activities:
Loan originations and principal payments on
loans - net (37,633) (18,406) (38,694) (11,257) (34,182) (10,825)
Principal payments received on mortgage-backed
and related securities and securities
available for sale 17,004 6,389 14,422 2,840 11,454 5,286
Principal payments received on investments - held
to maturity 743 939 1,825 475 2,671 2,694
Purchases of:
Loans (38,307) (2,590) (24,455) (1,998) (16,775) (2,728)
Mortgage-backed and related securities -- -- -- -- (6,103) (41,549)
Investments - held to maturity -- -- -- -- -- (30,085)
Federal Home Loan Bank stock (518) (399) (400) -- -- --
Securities available for sale -- (41,309) (46,311) -- (67,641) --
Office property and equipment (2,674) (2,756) (5,300) (344) (1,481) (1,805)
Proceeds from sales of:
Securities available for sale -- -- 2,435 100 749 --
Federal Home Loan Bank stock -- -- -- 2,520 2,000 --
Office property and equipment 1 78 128 178 443 25
Real estate acquired in settlement of loans 522 189 1,551 -- 767 3,130
Loans purchased -- -- 3,452 --
Proceeds from calls or maturities of investments-held
to maturity and securities available for sale 38,381 12,300 19,300 -- 22,012 21,000
Investment in real estate venture -- (27) -- 156 1,305 1,588
Other investing 65 (103) (351) (184) (455) 148
------- ------- ------- ------ ------- -------
Net cash used for investing activities (22,416) (45,695) (75,850) (7,514) (81,694) (53,121)
------- ------- ------- ------ ------- -------
</TABLE>
Continued on next page
F-6
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
For the For the For the Three For the
Six Months Year Months Years
Ended Ended Ended Ended
June 30, December 31, December 31, September 30,
1998 1997 1997 1996 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from (for) financing activities:
Net increase (decrease) in
NOW accounts, demand deposits, and savings accounts 17,571 3,445 17,591 3,112 (1,200) (34,139)
Certificates of deposit 6,104 23,379 19,408 11,668 62,753 41,868
Stock subscriptions applied or returned -- -- -- -- -- (55,716)
Advances from Federal Home Loan Bank 22,000 15,000 30,000 -- 22,500 19,000
Repayment of advances from Federal Home Loan Bank (3,711) (3,711) (7,425) (1,587) (4,350) (800)
Advances by borrowers for taxes and insurance 4,536 3,776 (128) (5,802) (136) 99
Employee Stock Ownership Plan loan (1,424) (196) (491) (149) (493) 2,557
Purchases of Employee Stock Ownership Plan shares -- -- -- -- -- (2,753)
Sale of common stock-net of issuance costs -- -- 13 33,758
Proceeds from exercise of stock options 50 -- 50 4 -- --
Payments made on mortgage-backed bond (693) (694) (1,387) (346) (1,387) (1,387)
Dividends paid (1,051) (973) (1,976) (448) (1,618) (902)
-------- -------- -------- -------- -------- --------
Net cash provided by financing activities 43,382 40,026 55,642 6,452 76,082 1,585
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 21,471 (4,372) (16,488) (2,338) 2,283 (47,346)
Cash and cash equivalents, beginning of period 25,954 42,442 42,442 44,780 42,497 89,843
-------- -------- -------- -------- -------- --------
Cash and cash equivalents, end of period $ 47,425 $ 38,070 $ 25,954 $ 42,442 $ 44,780 $ 42,497
======== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997, THE YEAR ENDED DECEMBER 31,
1997, THE THREE MONTHS ENDED DECEMBER 31, 1996, AND THE YEARS ENDED SEPTEMBER
30, 1996 AND 1995
(Information at June 30, 1998 and 1997 and for the six months then ended is
unaudited.)
1. SIGNIFICANT ACCOUNTING POLICIES
On September 30, 1997, Community Savings, F. A. (the "Association")
completed its reorganization into the two-tier form of mutual holding
company ownership. Pursuant to the reorganization, the Association is now
the wholly owned subsidiary of the newly-formed, federally chartered
mid-tier stock holding company, Community Savings Bankshares, Inc.
("Bankshares"). Bankshares is the majority owned subsidiary of ComFed, M.
H. C. (the "MHC"). The MHC, Bankshares, and the Association are chartered
and regulated by the Office of Thrift Supervision ("OTS").
The reorganization was accounted for in a manner similar to a pooling of
interests and did not result in any significant accounting adjustments.
The Bankshares' only significant asset is the common stock of the
Association. Consequently, the majority of its net income is derived from
the Association.
The accounting and reporting policies of Bankshares, the Association, and
the Association's wholly-owned subsidiary conform to generally accepted
accounting principles and to general practices within the savings and loan
industry. The following summarizes the more significant of these policies
and practices:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Bankshares, the Association and the Association's
wholly-owned subsidiary, ComFed, Inc. ComFed, Inc. was formed for the
purpose of owning and operating an insurance agency, Community Insurance
Agency. Prior to December 31, 1996, the Association had three other
wholly-owned subsidiaries, ComFed Development Co., which was engaged in
real estate development activities under joint venture arrangements with
local developers, Select Florida Properties, Inc. and Select Florida
Properties II, Inc., which were formed to acquire and sell foreclosed
assets as well as hold delinquent loans. These subsidiaries were dissolved
into ComFed, Inc. All significant intercompany balances and transactions
have been eliminated.
CHANGE IN YEAR END - During January 1997, the Board of Directors voted to
change the fiscal year end for all related entities from September 30th to
December 31st, effective with the year and three months ending December
31, 1996.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - 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 that affect the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS - For presentation purposes in the consolidated
financial statements, The Association considers all highly liquid debt
instruments purchased with an original maturity of three months or less to
be cash equivalents.
INVESTMENTS - HELD TO MATURITY - Investments - held to maturity are
carried at cost, adjusted for amortization of premiums and accretion of
discounts using the interest method. The Association has the intent and
ability to hold these securities to maturity.
SECURITIES AVAILABLE FOR SALE - Securities available for sale are carried
at fair value. In accordance with Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities", ("SFAS No.115") unrealized gains or losses related to
securities available for sale are excluded from earnings and reported as a
net amount as a separate component of shareholders' equity. Gains and
losses on sales of securities available for sale are computed using the
specific identification method.
MORTGAGE-BACKED AND RELATED SECURITIES - HELD TO MATURITY -
Mortgage-backed and related securities - held to maturity are carried at
cost, adjusted for amortization of premiums and accretion of discounts
using the interest method. The Association has the intent and ability to
hold these securities to maturity.
F-8
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTEREST RATE RISK - The Association is engaged principally in providing
first mortgage loans (adjustable-rate, fixed-rate and hybrid-rate) to
individuals and commercial enterprises. At June 30, 1998, December 31,
1997 and 1996 and September 30, 1996, the Association's assets consisted
primarily of assets that earned interest at adjustable interest rates.
Those assets were funded primarily with short-term liabilities that have
interest rates that vary with market rates over time.
PROVISIONS FOR LOSSES - Provisions for losses, which increase the
allowances for loan losses and real estate losses, are established by
charges to income. Such allowances represent the amounts which, in
management's judgment, are adequate to absorb charge-offs of both existing
loans which may become uncollectable and for future declines in the fair
value of real estate owned. The adequacy of the allowances are determined
by management's monthly evaluation of the loan and real estate owned
portfolios in light of past loss experience, present economic conditions
and other factors considered relevant by management. Anticipated changes
in economic factors which may influence the level of the allowances are
considered in the evaluation by management when the likelihood of the
changes can be reasonably determined.
On October 1, 1995, Bankshares adopted SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan", ("SFAS No. 114") and SFAS No. 118
"Accounting by Creditors for Impairment of a Loan - Recognition and
Disclosures", ("SFAS No. 118") an amendment of SFAS No. 114. These
standards address the accounting for impairment of certain loans when it
is probable that all amounts due pursuant to the contractual terms of the
loan will not be collected. Adoption of these standards included the
identification of commercial business and commercial real estate loans
which are considered impaired under the provisions of SFAS No. 114. Groups
of smaller-balance homogeneous loans (generally residential mortgage and
consumer installment and other loans) are collectively evaluated for
impairment. Adoption of these statements did not have a material impact on
Bankshares' financial position or results of operations.
Under the provisions of these standards, a loan is impaired when, based on
current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of
the loan agreement. Individually identified impaired loans are measured
based on the present value of payments expected to be received, using the
historical effective loan rates as the discount rate. Alternatively,
measurement may also be based on observable market prices, or for loans
that are solely dependent on the collateral for repayment, measurement may
be based on the fair value of the collateral. Loans that are to be
foreclosed are measured based on the fair value of the collateral. If the
recorded investment in the impaired loan exceeds the measure of fair
value, a valuation allowance is required as a component of the allowance
for loan losses. Changes to the valuation allowance are recorded as a
component of the provision for loan losses.
UNCOLLECTED INTEREST - The Association reverses accrued interest on
mortgage loans which are more than ninety days past due or if management
determines at an earlier date that the loan is not performing and ceases
accruing interest on such loans thereafter. Any such interest ultimately
collected is credited to income in the period of recovery.
OFFICE PROPERTIES AND EQUIPMENT - Office properties and equipment are
carried at cost less accumulated depreciation. Depreciation is computed on
the straight-line method over the estimated useful lives of the assets
which range from 13 to 50 years for buildings, executed lease terms for
leasehold improvements, and from 3 to 10 years for furniture and
equipment.
LOANS HELD FOR SALE - Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated fair
value determined on an aggregate loan basis. Net unrealized losses are
recognized in a valuation allowance by charges to income.
REAL ESTATE OWNED - Real estate owned is recorded at cost which is the
estimated fair value of the property at the time the loan is foreclosed.
Subsequent to foreclosure, these properties are carried at the lower of
cost or fair value minus estimated costs to sell. Provisions for losses on
real estate owned are summarized in Note 9.
The amounts the Association could ultimately recover from real estate
owned could differ materially from the amounts used in arriving at the net
carrying value of the assets because of future market factors beyond its
control or changes in its strategy for recovering its investment.
F-9
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LIMITED PARTNERSHIP INVESTMENTS IN QUALIFIED AFFORDABLE HOUSING PROJECTS -
The Association has an approximate 4% limited partner interest in three
separate real estate partnerships that operate qualified affordable
housing projects. The Association receives tax benefits from the
partnerships in the form of tax deductions from operating losses and tax
credits. The Association accounts for its investments in the partnerships
on the effective yield method and is amortizing the cost over the
estimated life of the partnerships (15 years). The amortized cost of the
investments at June 30, 1998 and December 31, 1997 is $4.5 million and
$3.0 million, respectively, and is included in other assets. Amortization
for the six months ended June 30, 1998 and the year ended December 31,
1997 was $140,000 and $147,000, respectively and is included in
miscellaneous income. In addition to the tax benefit related to the
amortization, tax credits of $174,000 and $197,000, respectively were
recognized during the six months ended June 30, 1998 and the year ended
December 31, 1997 as a reduction of the provision for income taxes.
LOAN FEES - Loan origination fees and certain direct incremental costs
related to such loans are deferred. Net deferred loan fees are amortized
to income using the interest method over the contractual life of the loan.
Unamortized net loan fees on loans sold prior to maturity are credited to
income as an adjustment to the gain or loss at the time of sale.
PREMIUMS AND DISCOUNTS ON LOANS - Unearned discounts on home improvement
loans and other installment loans are amortized to income over the terms
of the related loans using the interest method. Premiums and discounts on
loans purchased are amortized to income using the interest method.
INCOME TAXES - Bankshares, the Association and ComFed, Inc. file
consolidated federal and state income tax returns. Income taxes are
allocated proportionately to each entity as though separate tax returns
were being filed.
Deferred income taxes are provided on items recognized for financial
reporting purposes in periods different than such items are recognized for
income tax purposes in accordance with the provisions of SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No.109").
EARNINGS PER SHARE - Earnings per share are determined in accordance with
the provisions of SFAS No. 128 "Earnings per Share" ("SFAS No. 128")
issued in February 1997. The weighted average number of shares of common
stock used in calculating basic earnings per share was determined by
reducing outstanding shares by unallocated Employee Stock Ownership
("ESOP") shares and unvested Recognition and Retention Plan ("RRP")
shares. Diluted earnings per share includes the maximum dilutive effect of
stock issuable upon exercise of common stock options. The effect of stock
options on weighted average shares outstanding are calculated using the
treasury stock method. All prior period earnings per share data has been
restated in accordance with SFAS No. 128.
IMPACT OF NEW ACCOUNTING ISSUES - In June 1997, the FASB issued SFAS No.
130 "Reporting Comprehensive Income" ("SFAS No. 130"), which requires that
an enterprise report, by major components and as a single total, the
change in its net assets during the period from non-owner sources; and
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major
customers. Adoption of these statements will not impact Bankshares'
consolidated financial position, results of operations, or cash flows, and
any effect will be limited to the form and content of its disclosures.
SFAS No. 130 is effective for fiscal years beginning after December 15,
1997 and is applicable to interim periods. SFAS No. 130 has been adopted
in the accompanying financial statements for all periods presented. SFAS
No. 131 is also effective for fiscal years beginning after December 15,
1997, but need not be applied to interim financial statements in the
initial year of application.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), issued June 1998, must be adopted by the
Bankshares as of January 1, 2000. This Statement establishes accounting
and reporting standards for derivative financial instruments and for
hedging activities. Upon adoption of the Statement, all derivatives must
be recognized at fair value as either assets or liabilities in the
statement of financial position. Changes in the fair value of derivatives
not designated as hedging instruments are to be recognized currently in
earnings. Gains or losses on derivatives designated as hedging instruments
are either to be recognized currently in earnings or are to be recognized
as a component of other comprehensive income, depending on the intended
use of the derivatives and the resulting designations. Upon adoption,
retroactive application of this Statement to financial statements of prior
periods is not permitted. Bankshares is currently in the process of
evaluating the impact of SFAS No. 133 on its consolidated financial
position and results of operations.
RECLASSIFICATIONS - Certain amounts in the 1996 and 1995 consolidated
financial statements have been reclassified to conform to the presentation
for 1997.
F-10
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES AVAILABLE FOR SALE
During the quarter ended December 31, 1995, the Association adopted the
provisions of SFAS No. 115 Questions and Answers Guide ("SFAS No. 115
Q&A") which allowed a one time reclassification of securities from held to
maturity to available for sale between November 15, 1995 and December 31,
1995. Securities totaling $49.5 million were reclassified from held to
maturity to available for sale. Such reclassification resulted in a credit
of $247,000 to shareholders' equity. The Association subsequently sold
$749,000 of such securities at no gain or loss. Securities available for
sale at June 30, 1998, December 31, 1997 and 1996 and September 30, 1996
are summarized as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
June 30, 1998:
Equity securities $ 7 $ 18 $ -- $ 25
United States Government and agency obligations 9,080 47 -- 9,127
Mutual funds 41,000 35 (483) 40,552
Collateralized mortgage obligations:
Government backed 3,165 2 -- 3,167
Private issue 38,498 234 (287) 38,445
-------- ---- ------- --------
Total collateralized mortgage obligations 41,663 236 (287) 41,612
-------- ---- ------- --------
Total securities available for sale $ 91,750 $336 $ (770) $ 91,316
======== ==== ======= ========
Weighted average interest rate 6.35%
========
December 31, 1997:
Equity securities $ 7 $ 16 $ -- $ 23
United States Government and agency obligations 54,937 258 (20) 55,175
Mutual funds 41,000 58 (337) 40,721
Collateralized mortgage obligations:
Government backed 3,300 30 -- 3,330
Private issue 43,113 245 (338) 43,020
-------- ---- ------- --------
Total collateralized mortgage obligations 46,413 275 (338) 46,350
-------- ---- ------- --------
Total securities available for sale $142,357 $607 $ (695) $142,269
======== ==== ======= ========
Weighted average interest rate 6.52%
========
December 31, 1996:
Equity securities $ 7 $ 7 $ -- $ 14
United States Government and agency obligations 28,247 55 (205) 28,097
Mutual funds 43,443 29 (405) 43,067
Collateralized mortgage obligations:
Government backed 3,601 -- (7) 3,594
Private issue 49,345 147 (1,112) 48,380
-------- ---- ------- --------
Total collateralized mortgage obligations 52,946 147 (1,119) 51,974
-------- ---- ------- --------
Total securities available for sale $124,643 $238 $(1,729) $123,152
======== ==== ======= ========
Weighted average interest rate 6.60%
========
September 30, 1996:
Equity securities $ 57 $ 58 $ -- $ 115
United States Government and agency obligations 28,238 31 (327) 27,942
Mutual funds 43,443 5 (536) 42,912
Collateralized mortgage obligations:
Government backed 3,677 -- (7) 3,670
Private issue 50,513 239 (1,104) 49,648
-------- ---- ------- --------
Total collateralized mortgage obligations 54,190 239 (1,111) 53,318
-------- ---- ------- --------
Total securities available for sale $125,928 $333 $(1,974) $124,287
======== ==== ======= ========
Weighted average interest rate 6.60%
========
</TABLE>
F-11
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proceeds from the sale of securities available for sale were $0, $0,
$2,435,000, $100,000, $749,000 and $0 during the six months ended June 30,
1998 and 1997, the year ended December 31, 1997, the three months ended
December 31, 1996, and the years ended September 30, 1996 and 1995,
respectively. For the year ended December 31, 1997, sales resulted in
gross losses of $ 8,000. For the three months ended December 31, 1996,
sales resulted in gross gains of $51,000. There were no gross realized
gains or losses during the six months ended June 30, 1998 and 1997, and
the years ended September 30, 1996 and 1995.
The fair value of securities available for sale is based on quoted market
prices.
3. INVESTMENTS - HELD TO MATURITY
Investments - held to maturity at June 30, 1998, December 31, 1997 and
1996 and September 30, 1996 are summarized as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
June 30, 1998:
United States Government and agency obligations $13,820 $ 3,897 $ (94) $17,623
Corporate debt issues:
Chase Federal mortgage-backed bond 6,646 293 -- 6,939
Auto Bond Receivables Corp. 977 -- -- 977
------- ------- ------- -------
Total corporate debt issues 7,623 293 -- 7,916
------- ------- ------- -------
Total investment securities $21,443 $ 4,190 $ (94) $25,539
======= ======= ======= =======
Weighted average interest rate 8.94%
=======
December 31, 1997:
United States Government and agency obligations $13,039 $ 3,891 $ -- $16,930
Corporate debt issues:
Chase Federal mortgage-backed bond 6,856 311 -- 7,167
Auto Bond Receivables Corp. 1,493 -- (5) 1,488
------- ------- ------- -------
Total corporate debt issues 8,349 311 (5) 8,655
------- ------- ------- -------
Total investment securities $21,388 $ 4,202 $ (5) $25,585
======= ======= ======= =======
Weighted average interest rate 9.29%
=======
December 31, 1996:
United States Government and agency obligations $11,701 $ 3,807 $ -- $15,508
Municipal obligations 300 1 -- 301
Corporate debt issues:
Chase Federal mortgage-backed bond 7,236 347 -- 7,583
Auto Bond Receivables Corp. 2,902 8 (36) 2,874
------- ------- ------- -------
Total corporate debt issues 10,138 355 (36) 10,457
------- ------- ------- -------
Total investment securities $22,139 $ 4,163 $ (36) $26,266
======= ======= ======= =======
Weighted average interest rate 8.63%
=======
September 30, 1996:
United States Government and agency obligations $11,391 $ 3,431 $ -- $14,822
Municipal obligations 300 4 -- 304
Corporate debt issues:
Chase Federal mortgage-backed bond 7,320 359 -- 7,679
Auto Bond Receivables Corp. 3,282 8 (2) 3,288
------- ------- ------- -------
Total corporate debt issues 10,602 367 (2) 10,967
------- ------- ------- -------
Total investment securities $22,293 $ 3,802 $ (2) $26,093
======= ======= ======= =======
Weighted average interest rate 8.72%
=======
</TABLE>
F-12
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below sets forth the contractual maturity distribution of the
investments - held to maturity at June 30, 1998, December 31, 1997 and
1996 and September 30, 1996.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
June 30, 1998 December 31, 1997 December 31, 1996 September 30, 1996
Carrying Fair Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value Value Value
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 1,324 $ 1,372 $ 1,251 $ 1,334 $ 300 $ 301 $ 300 $ 304
Due after one year through
five years 977 977 1,493 1,488 4,030 4,131 4,379 4,517
Due after five years through
ten years 12,496 16,251 11,283 14,945 10,111 13,675 9,843 13,049
Due after ten years 6,646 6,939 7,361 7,818 7,698 8,159 7,771 8,223
------- ------- ------- ------- ------- ------- ------- -------
Total $21,443 $25,539 $21,388 $25,585 $22,139 $26,266 $22,293 $26,093
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
There were no sales of investment securities - held to maturity during the
six months ended June 30, 1998 and 1997, the year ended December 31, 1997,
the three months ended December 31, 1996, or the years ended September 30,
1996 and 1995. The fair value of investment securities is based on quoted
market prices.
Federal Home Loan Bank Stock - At June 30, 1998, December 31, 1997 and
1996 and September 30, 1996, the Association held $3,782,000, $3,264,000,
$2,864,000 and $5,384,000, respectively, of FHLB Stock, which approximates
fair value. FHLB Stock is not readily marketable as it is not traded on a
registered security exchange.
F-13
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. MORTGAGE-BACKED AND RELATED SECURITIES - HELD TO MATURITY
Mortgage-backed and related securities - held to maturity at June 30,
1998, December 31, 1997 and 1996 and September 30, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
June 30, 1998:
FHLMC $ 6,324 $ 48 $ (50) $ 6,322
GNMA - pass throughs 1,525 54 (7) 1,572
FNMA - pass throughs 2,925 11 -- 2,936
Agency for International Development - pass throughs 212 -- -- 212
Collateralized mortgage obligations:
Government-backed 10,046 235 (15) 10,266
Private issue 20,846 223 (23) 21,046
------- ------- ------- -------
Total collateralized mortgage obligations 30,892 458 (38) 31,312
CMO residual interest bonds 6 -- -- 6
------- ------- ------- -------
Total mortgage-backed and related securities $41,884 $ 571 $ (95) $42,360
======= ======= ======= =======
December 31, 1997:
FHLMC $ 7,465 $ 62 $ (85) $ 7,442
GNMA - pass throughs 1,751 63 -- 1,814
FNMA - pass throughs 3,316 11 (10) 3,317
Agency for International Development - pass throughs 236 -- -- 236
Collateralized mortgage obligations:
Government-backed 10,872 344 -- 11,216
Private issue 22,766 273 (133) 22,906
------- ------- ------- -------
Total collateralized mortgage obligations 33,638 617 (133) 34,122
CMO residual interest bonds 7 -- -- 7
------- ------- ------- -------
Total mortgage-backed and related securities $46,413 $ 753 $ (228) $46,938
======= ======= ======= =======
December 31, 1996:
FHLMC $ 9,673 $ 79 $ (143) $ 9,609
GNMA - pass throughs 2,108 74 -- 2,182
FNMA - pass throughs 3,933 -- (13) 3,920
Agency for International Development - pass throughs 317 -- -- 317
Collateralized mortgage obligations:
Government-backed 12,229 526 (8) 12,747
Private issue 25,130 300 (340) 25,090
------- ------- ------- -------
Total collateralized mortgage obligations 37,359 826 (348) 37,837
CMO residual interest bonds 15 -- -- 15
------- ------- ------- -------
Total mortgage-backed and related securities $53,405 $ 979 $ (504) $53,880
======= ======= ======= =======
September 30, 1996:
FHLMC $ 9,973 $ 73 $ (269) $ 9,777
GNMA - pass throughs 2,233 79 (14) 2,298
FNMA - pass throughs 4,076 2 (140) 3,938
Agency for International Development - pass throughs 335 -- -- 335
Collateralized mortgage obligations:
Government-backed 12,763 510 (34) 13,239
Private issue 25,545 353 (517) 25,381
------- ------- ------- -------
Total collateralized mortgage obligations 38,308 863 (551) 38,620
CMO residual interest bonds 20 -- -- 20
------- ------- ------- -------
Total mortgage-backed and related securities $54,945 $ 1,017 $ (974) $54,988
======= ======= ======= =======
</TABLE>
F-14
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no sales of mortgage-backed and related securities - held to
maturity during the six months ended June 30, 1998, the year ended
December 31, 1997, the three months ended December 31, 1996, and the years
ended September 30, 1996 and 1995. The fair value of mortgage-backed and
related securities is based on quoted market prices.
Mortgage-backed securities represent participating interest in pools of
long-term first mortgage loans. Although mortgage-backed securities are
initially issued with a stated maturity date, the underlying mortgage
collateral may be prepaid by the mortgagee and, therefore, such
certificates may not reach their maturity date.
The Association also invests in mortgage-related securities such as
collateralized mortgage obligations ("CMOs"), CMO residual interest bonds,
and real estate investment conduits ("REMICs"). These securities are
generally divided into tranches whereby principal repayments from the
underlying mortgages are used sequentially to retire the securities
according to the priority of the tranches. The Association invests
primarily in senior sequential tranches of CMOs. Such tranches have stated
maturities ranging from 6.5 years to 30 years; however, because of
prepayments, the expected weighted average life of these securities is
less than the stated maturities. At June 30, 1998 and December 31, 1997,
the Association had $30,892,000 and $33,638,000, respectively, in such
mortgage-related securities, which were held for investment and had a
market value of $31,312,000 and $34,122,000, respectively. Fixed-rate CMOs
have coupon rates ranging from 6.0% to 12.0%. Variable-rate CMOs are
indexed to the London Interbank Offered Rate ("LIBOR") or the Ten-Year
Treasury Index, and the residual tranches do not have a stated coupon. The
weighted average yield of the CMO securities was 6.89% at June 30, 1998.
The residual interest is in a CMO in which at least one class of bonds has
a variable interest rate. In these investments, a rise in the
variable-rate index reduces the cash flows available to the residual
owner. Conversely, in a low interest rate environment, collateral
prepayments will usually accelerate. The Association's ability to recover
its investment in the CMO residuals is dependent on the future outcome of
the above factors. At June 30, 1998 and December 31, 1997, the
Association's interest in CMO residual bonds was $6,000 and $6,500,
respectively, with a market value of $6,000 and $6,500, respectively.
5. LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
June 30, December 31, December 31, September 30,
1998 1997 1996 1996
------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $419,069 $339,117 $293,296 $284,267
Residential 1-4 family held for sale
(at lower of cost or estimated fair value) - - 70 207
Residential construction loans 42,807 32,828 33,158 33,520
Nonresidential construction loans 4,217 2,022 2,200 2,200
Land loans 12,409 17,117 19,426 16,846
Multi-family loans 8,739 8,800 8,096 8,153
Commercial 46,147 59,220 37,815 38,433
-------- -------- -------- --------
Total real estate loans 533,388 459,104 394,061 383,626
-------- -------- -------- --------
Non-real estate loans:
Consumer loans 15,191 15,694 16,028 15,606
Commercial business 5,508 3,530 2,458 1,874
-------- -------- -------- --------
Total non-real estate loans 20,699 19,224 18,486 17,480
-------- -------- -------- --------
Total loans receivable 554,087 478,328 412,547 401,106
Less:
Undisbursed loan proceeds 25,134 24,163 20,765 22,318
Unearned discount (premium) and
net deferred loan fees (costs) (1,189) (206) 200 257
Allowance for loan losses 2,767 2,662 2,542 2,312
-------- -------- -------- --------
Total loans receivable, net $527,375 $451,709 $389,040 $376,219
======== ======== ======== ========
</TABLE>
The Association's lending market is concentrated in Palm Beach, Martin, St.
Lucie, and Indian River Counties in Florida.
F-15
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non accrual loans consisted of the following:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
At or for the
At or for the At or for the Three Months At or for the
Six Months Ended Year Ended Ended Years Ended
June 30, December 31, December 31, September 30,
1998 1997 1997 1996 1996 1995
-----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Principal balance of loans not
accruing interest $1,366 $1,466 $1,379 $1,631 $842 $662
Interest not accrued related to
above loans 63 98 86 65 44 49
</TABLE>
An analysis of the changes in the allowance for loan losses for the year
ended December 31, 1997, the three months ended December 31, 1996 and the
years ended September 30, 1996, and 1995 is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
For the Six Months Ended For the Year For the Three For the Years Ended
June 30, Ended Months Ended September 30,
1998 1997 December 31, 1997 December 31, 1996 1996 1995
--------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $2,662 $2,542 $2,542 $2,312 $3,492 $3,390
Provision charged to income 213 83 264 243 98 240
Losses charged to allowance (108) (23) (144) (13) (1,278) (138)
Recoveries -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Balance, end of year $2,767 $2,602 $2,662 $2,542 $2,312 $3,492
====== ====== ====== ====== ====== ======
</TABLE>
During the year ended September 30, 1996, the Association sold its
interest in a note with a net carrying value of $3,453,000. Included in
the allowance for loan losses at September 30, 1995 was a $1,200,000
specific reserve related to such interest. In connection with the sale,
the Association recorded an additional loss of $217,000.
Loans Held for Sale - The Association originates both adjustable- and
fixed-rate loans. The adjustable- and fixed-rate loans with original
maturities of 15 years or less are held in the Association's portfolio.
Based on management's assessment of current portfolio mix and Board of
Director established limits, fixed-rate loans with maturities greater than
15 years are either held in the portfolio or sold when originated, except
those originated for special financing on low income housing. Included in
loans receivable at June 30, 1998, December 31, 1997 and 1996 and
September 30, 1996 are $0, $0, $70,000 and $207,000, respectively, of
loans held for sale.
Loans Serviced for Others - Mortgage loans serviced for others are not
included in the accompanying consolidated statements of financial
condition. The unpaid balances of these loans at June 30, 1998, December
31, 1997 and 1996 and September 30, 1996 were $16,331,000, $18,967,000,
$21,761,000 and $22,466,000, respectively. Custodial escrow balances
maintained in connection with the foregoing loan servicing were $295,000,
$47,000, $57,000 and $497,000, respectively.
Rate Composition of Loans - The Association originates and purchases both
adjustable- and fixed-rate loans. At June 30, 1998 and December 31, 1997,
fixed-rate loans totaled $300,872,000 and $178,630,000, respectively, and
adjustable-rate loans totaled $253,215,000 and $273,079,000, respectively.
The adjustable-rate loans have interest rate adjustment limitations and
are indexed to the OTS National Monthly Median Cost of Funds, the U. S.
Treasury Weekly Average Yield index, or the prime rate. Future market
factors may affect the correlation of the interest rate adjustment with
the rates the Association pays on the short-term deposits that have been
primarily utilized to fund those loans.
F-16
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial Real Estate Lending - The Association originates and purchases
commercial real estate and construction loans, which totaled $50,364,000,
$61,242,000, $40,015,000 and $40,633,000 at June 30, 1998, December 31,
1997 and 1996 and September 30, 1996, respectively. These loans are
considered by management to be of a somewhat greater risk of
collectibility due to the dependency on income production or future
development of the real estate. Accordingly, the Association's management
establishes a greater provision for probable, but not yet identified,
losses on these loans than on less risky residential mortgage loans. The
composition of commercial real estate loans and its primary collateral at
June 30, 1998, December 31, 1997 and 1996 and September 30, 1996 are
approximately as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
June 30, December 31, December 31, September 30,
1998 1997 1996 1996
---------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Commercial land $ 3,834 $ 6,037 $ 451 $ 120
Office buildings 4,688 4,614 4,598 4,583
Hotel property 277 210 2,439 4,310
Shopping centers 3,005 3,124 3,262 3,293
Light industrial and warehouses 7,677 9,243 7,265 7,444
Churches 5,625 5,733 5,468 4,433
Other commercial 21,041 30,259 14,332 14,250
------- ------- ------- -------
Total commercial real estate 46,147 59,220 37,815 38,433
Commercial construction projects 4,217 2,022 2,200 2,200
------- ------- ------- -------
Total commercial real estate and construction loans $50,364 $61,242 $40,015 $40,633
======= ======= ======= =======
</TABLE>
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), a federally chartered savings and loan association's
aggregate commercial real estate loans may not exceed 400% of its capital
as determined under the capital standards provisions of FIRREA. The
Association is federally chartered and subject to this limitation. FIRREA
does not require divestiture of any loan that was lawful when it was
originated. At June 30, 1998 and December 31, 1997, management estimates
that, while remaining in compliance with this limitation, the Association
could have originated an additional $242,868,000 and $218,950,000,
respectively, of commercial real estate loans, but has no immediate plans
to do so.
Loans to One-Borrower Limitation - Under FIRREA, the Association may not
make real estate loans to one borrower in excess of 15% of its unimpaired
capital and surplus. This 15% limitation results in a dollar limitation of
approximately $10,996,000 and $10,507,000 at June 30, 1998 and December
31, 1997, respectively. At June 30, 1998 and December 31, 1997, the
Association met the loans to one borrower limitation under current
regulations.
Loans to Officers and Directors - The Association offers loans to its
employees, including directors and senior management, at prevailing market
interest rates. For adjustable-rate loans, employees are offered a 50
basis point reduction from the margin. The Association waives the points
charged for employee loans. However, directors and senior management pay
points based on current loan terms. These loans are made in the ordinary
course of business and on substantially the same terms and collateral
requirements as those of comparable transactions prevailing at the time.
The total loans to such persons did not exceed 5% of retained earnings at
June 30, 1998 and December 31, 1997. At June 30, 1998 and December 31,
1997, the total of loans to directors, executive officers, and associates
of such persons was $944,000 and $433,000, respectively.
Troubled Debt Restructuring - Included in loans receivable at June 30,
1998, December 31, 1997 and 1996 and September 30, 1996 are loans
considered to be troubled debt restructured with an aggregate recorded
investment of $0, $1,044,000, $1,071,000 and $1,081,000, respectively.
Included in interest income is interest on these loans which totaled $0,
$46,000, $91,000, $24,000, $94,000, and $69,000 for the six months ended
June 30, 1998 and 1997, the year ended December 31, 1997, the three months
ended December 31, 1996, and the years ended September 30, 1996 and 1995,
respectively.
F-17
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired Loans - Impaired loans owned by the Association have been
recognized in conformity with SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures" as of October
1, 1995. A loan is impaired when, based on current information and events,
it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. A loan is not
necessarily impaired during an insignificant delay or insignificant
shortfall in the amount of payments.
An analysis of the recorded investment in impaired loans is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
At or for the At or for the At or for the At or for the
Six Months Ended Year Ended Three Months Ended Years Ended
June 30, December 31, December 31, September 30,
1998 1997 1997 1996 1996 1995
------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Impaired loan balance $ -- $1,056 $1,044 $1,071 $1,081 $6,244
Related allowance -- 252 252 252 252 1,452
Average impaired loan
balance 522 1,050 1,057 1,076 4,046 5,597
Interest income recognized -- 46 91 24 94 69
</TABLE>
The Association's policy on interest income on impaired loans is to
reverse all accrued interest against interest income if a loan becomes
more than 90 days delinquent or if management determines at an earlier
date that the loan is not performing and ceases accruing interest
thereafter. Such interest ultimately collected is credited to income in
the period of recovery. Cash receipts for impaired loans are used first to
satisfy any outstanding interest due, and any amounts remaining are
applied to the outstanding principal balance.
6. PLEDGED ASSETS
In the normal course of doing business the Association is required to
comply with certain collateral requirements.
The following tables set forth amounts of various asset components, as of
June 30, 1998, December 31, 1997 and 1996 and September 30, 1996 which
were pledged as collateral:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
June 30, December 31, December 31, September 30,
1998 1997 1996 1996
--------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Real estate loans (unpaid principal balance) $75,630 $54,018 $31,847 $30,833
FHLB Stock and accrued interest 3,851 3,323 2,916 5,517
------- ------- ------- -------
Total pledged to the FHLB $79,481 $57,341 $34,763 $36,350
======= ======= ======= =======
Other pledged assets:
Deposits of public funds - State of Florida
Mortgage-backed and related securities $21,681 $31,681 $21,681 $21,681
Line of credit - Federal Reserve Bank of Atlanta
United States Government and agency obligations 1,800 1,800 1,800 1,800
Treasury tax and loan deposits
United States Government and agency obligations 300 200 200 200
Mortgage-backed bond
Unpaid principal balance of loans 35,949 31,738 37,395 38,863
------- ------- ------- -------
Total for other pledged assets $59,730 $65,419 $61,076 $62,544
======= ======= ======= =======
</TABLE>
FHLB Advances - The Association has a security agreement with the FHLB which
includes a blanket floating lien that requires the Association to maintain as
collateral for its advances, the Association's FHLB capital stock and first
mortgage loans equal to 100% of the unpaid amount of FHLB advances outstanding.
F-18
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at June 30, 1998, December 31, 1997 and 1996
and September 30, 1996 consisted of the following:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
June 30, December 31, December 31, September 30,
1998 1997 1996 1996
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Loans $1,800 $1,404 $ 711 $ 612
Investments 98 106 141 184
Securities available for sale 564 1,372 1,169 979
Mortgage-backed and related securities 263 280 333 433
------ ------ ------ ------
Total accrued interest receivable $2,725 $3,162 $2,354 $2,208
====== ====== ====== ======
</TABLE>
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at June 30, 1998, December 31, 1997 and
1996 and September 30, 1996 are summarized as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
June 30, December 31, December 31, September 30,
1998 1997 1996 1996
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Land $ 6,684 $ 5,571 $ 3,347 $ 3,317
Buildings and improvements 17,205 16,431 15,623 15,558
Furniture and equipment 16,052 15,268 13,052 12,974
-------- -------- -------- --------
Total 39,941 37,270 32,022 31,849
Less accumulated depreciation (17,784) (17,064) (15,654) (15,490)
-------- -------- -------- --------
Total office properties and equipment - net $ 22,157 $ 20,206 $ 16,368 $ 16,359
======== ======== ======== ========
</TABLE>
9. REAL ESTATE OWNED
Real estate owned at June 30, 1998, December 31, 1997 and 1996 and
September 30, 1996 consisted of the following:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
June 30, December 31, December 31, September 30,
1998 1997 1996 1996
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Real estate owned $752 $633 $1,547 $1,476
Less allowance for loss 41 41 92 92
---- ---- ------ ------
Total real estate owned $711 $592 $1,455 $1,384
==== ==== ====== ======
</TABLE>
Changes in allowance for losses on real estate owned were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
For the Six For the Year For the Three
Months Ended Ended Months Ended For the Years Ended
June 30, December 31, December 31, September 30,
1998 1997 1997 1996 1996 1995
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $41 $92 $92 $92 $113 $80
Provision charged to income -- -- 4 -- 8 141
Losses charged to allowance -- (43) (55) -- (29) (108)
--- --- --- --- --- ----
Balance, end of period $41 $49 $41 $92 $92 $113
=== === === === === ====
</TABLE>
F-19
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. DEPOSITS
The weighted-average interest rates on deposits at June 30, 1998, December
31, 1997 and 1996 and September 30, 1996 were 4.16%, 4.21%, 4.05% and
4.09%, respectively. Deposit accounts, by type and range of rates at June
30, 1998 and 1997, December 31, 1997 and 1996 and September 30, 1996
consisted of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
June 30, December 31, September 30,
1998 1997 1996 1996
--------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Account type and rate:
Non-interest-earning checking accounts $ 29,563 $ 24,715 $ 18,627 $ 19,532
NOW, Super NOW and funds transfer accounts 1998,
1997, 1996, and 1995, 1.00% through 1.98% 74,355 69,862 67,076 63,098
Passbook and statement accounts 1998, 1997,
1996, and 1995, 1.73%through 1.98% 32,936 30,221 30,821 30,875
Money market accounts 1998, 1997, 1996, and 1995,
2.27% through 3.40% 84,347 78,832 69,514 69,421
-------- -------- -------- --------
Total non-certificate accounts 221,201 203,630 186,038 182,926
-------- -------- -------- --------
Certificates:
3.00% or less 1,211 1,436 1,035 1,600
3.01% - 3.99% 11 11 598 903
4.00% - 4.99% 37,827 35,699 51,484 80,831
5.00% - 5.99% 269,293 262,029 232,313 193,281
6.00% - 6.99% 36,033 39,186 33,568 29,571
7.00% - 7.99% 8,807 8,717 8,673 9,817
-------- -------- -------- --------
Total certificates of deposit 353,182 347,078 327,671 316,003
-------- -------- -------- --------
Total deposits $574,383 $550,708 $513,709 $498,929
======== ======== ======== ========
</TABLE>
Individual deposits greater than $100,000 at June 30, 1998, December 31,
1997 and 1996 and September 30, 1998 aggregated approximately $79,893,000,
$87,257,000, $72,504,000 and $67,467,000, respectively. Deposits in excess
of $100,000 are not insured.
Scheduled maturities of certificate accounts at June 30, 1998, December
31, 1997 and 1996 and September 30, 1996 were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
June 30, December 31, December 31, September 30,
1998 1997 1996 1996
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Maturity
Less than 1 year $241,203 $260,941 $253,587 $240,240
1 year - 2 years 66,951 30,794 29,270 32,254
2 years - 3 years 14,414 27,832 12,146 10,460
3 years - 4 years 16,687 11,220 20,167 20,953
4 years - 5 years 12,971 15,065 11,694 10,738
Thereafter 956 1,226 807 1,358
-------- -------- -------- --------
Total certificates of deposit $353,182 $347,078 $327,671 $316,003
======== ======== ======== ========
</TABLE>
F-20
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest expense on deposits consisted of the following during the six
months ended June 30, 1998 and 1997, the year ended December 31, 1997, the
three months ended December 31, 1996 and the years ended September 30,
1996 and 1995:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
For the Six Months For the For the Three For the Years
Ended Year Ended Months Ended Ended
June 30, December 31, December 31, September 30,
1998 1997 1997 1996 1996 1995
--------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 273 $ 265 $ 522 $ 133 $ 560 $ 625
NOW accounts 360 368 701 201 930 1,002
Money market accounts 1,397 1,135 2,377 552 2,023 2,143
Certificate accounts 9,946 9,263 19,048 4,365 15,734 11,909
------- ------- ------- ------ ------- -------
Total interest expense $11,976 $11,031 $22,648 $5,251 $19,247 $15,679
======= ======= ======= ====== ======= =======
</TABLE>
11. ADVANCES FROM FEDERAL HOME LOAN BANK
At June 30, 1998, December 31, 1997 and 1996 and September 30, 1996,
outstanding advances from the FHLB totaled $75,630,000, $57,341,000,
$34,763,000 and $36,350,000, respectively.
Scheduled maturities of FHLB advances at December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Years Ending Average Interest $
December 31, Rate Maturing
------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
1998 6.80% $ 7,421
1999 6.83 6,734
2000 6.35 8,471
2001 6.36 7,572
2002 5.93 26,071
2003 6.69 1,072
---- -------
Total FHLB advances 6.28% $57,341
==== =======
</TABLE>
12. INCOME TAXES
In accordance with SFAS No. 109, deferred income tax assets and
liabilities are computed annually for differences between financial
statement and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable or refundable for the
period adjusted for the change during the period in deferred tax assets
and liabilities.
On May 13, 1997, the Association received permission from the Internal
Revenue Service ("IRS") to change its accounting period, for federal
income tax purposes, from September 30th to December 31st, effective
December 31, 1996. In order to comply with IRS requirements, the
Association filed a consolidated tax return for the short period October
1, 1996 through December 31, 1996.
F-21
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax provision consists of the following components for the year
ended December 31, 1997, the three months ended December 31, 1996, and the
years ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
For the Year For the Three For the Years
Ended Months Ended Ended
December 31, December 31, September 30,
1997 1996 1996 1995
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current - federal $2,745 $ 49 $ 1,592 $2,789
Current - state 297 16 225 337
------ ---- ------- ------
Total current 3,042 65 1,817 3,126
Deferred - federal and state (112) 631 (1,056) (363)
------ ---- ------- ------
Total provision for income taxes $2,930 $696 $ 761 $2,763
====== ==== ======= ======
</TABLE>
Bankshares' provision for income taxes differs from the amounts determined
by applying the statutory federal income tax rate to income before income
taxes for the following reasons:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
For the Year For the Three For the Years
Ended Months Ended Ended
December 31, December 31, September 30,
1997 1996 1996 1995
Amount % Amount % Amount % Amount %
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate $2,900 35.0% $650 35.0% $1,637 35.0% $2,568 35.0%
State income taxes, net of
Federal income tax
benefits 281 3.3 70 3.8 139 3.0 186 2.5
Reversal of prior year
liability -- -- -- -- (1,140) (24.4) -- --
Other (168) (2.0) (6) (0.3) 172 3.7 82 1.1
Benefit of graduated tax
rate (83) (1.0) (18) (1.0) (47) (1.0) (73) (1.0)
------ ---- ---- ---- ------ ----- ------ ----
Total provision for income
taxes $2,930 35.3% $696 37.5% $ 761 16.3% $2,763 37.6%
====== ==== ==== ==== ====== ==== ====== ====
</TABLE>
During the year ended September 30, 1996, management concluded that a
liability accrued in prior years was no longer required and reversed such
liability resulting in a $1,140,000 credit to the 1996 income tax
provision.
F-22
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effect of temporary differences that gave rise to deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
For the Year For the Three For the Years
Ended Months Ended Ended
December 31, December 31, September 30,
1997 1996 1996 1995
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Depreciation $ 582 $ 627 $ 639 $ 551
Loan fee income 170 167 188 319
FHLB stock dividends 457 454 868 1,172
Deferred loan costs 467 412 392 208
Unamortized discount on mortgage-backed bond 2,112 2,302 2,350 2,526
Book over tax on investments in partnerships 1,003 1,003 937 882
Other -- -- -- 17
------ ------ ------ ------
Gross deferred tax liabilities 4,791 4,965 5,374 5,675
------ ------ ------ ------
Deferred tax assets:
Excess of book bad debt reserve over tax reserve 1,043 918 907 1,298
Retirement plans 586 802 686 586
Unrealized loss on decrease in fair value
of securities available for sale 33 561 615 182
Deferred loss on loans held for sale 43 46 48 60
Deferred compensation 130 115 109 105
SAIF recapitalization -- -- 1,088 --
Other 19 -- 83 117
------ ------ ------ ------
Gross deferred tax assets 1,854 2,442 3,536 2,348
------ ------ ------ ------
Valuation allowance on unrealized loss on decrease in
fair value of securities available for sale (99) (138) (182) (182)
------ ------ ------ ------
Gross deferred tax assets - net of valuation allowance 1,755 2,304 3,354 2,166
------ ------ ------ ------
Net deferred tax liability $3,036 $2,661 $2,020 $3,509
====== ====== ====== ======
</TABLE>
During 1996, legislation was passed that repealed Section 593 of the
Internal Revenue Code for taxable years beginning after December 31, 1995.
Section 593 allowed thrift institutions, including the Association, to use
the percentage-of-taxable income bad debt accounting method, if more
favorable than the specific charge-off method, for federal income tax
purposes. The excess reserves (deduction based on the
percentage-of-taxable income less the deduction based on the specific
charge-off method) accumulated post-1987 are required to be recaptured
ratably over a six year period beginning in 1996. The Association had no
excess reserves as of December 31, 1996 and the recapture has no effect on
Bankshares' statement of operations as taxes were provided for in prior
years in accordance with SFAS 109, "Accounting for Income Taxes." The same
legislation forgave the tax liability on pre-1987 accumulated bad debt
reserves which would have penalized any thrift choosing to adopt a bank
charter because the tax would have become due and payable. The unrecorded
potential liability that was forgiven approximated $4.3 million.
13. COMMITMENTS AND CONTINGENCIES
Loan Commitments - In the normal course of business, the Association makes
commitments to extend credit. Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition
established in the contract. The interest rates on both fixed- and
variable-rate loans are based on the market rates in effect on the date of
closing.
F-23
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commitments generally have fixed expiration dates of 30 to 60 days and
other termination clauses. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Each customer's
creditworthiness is evaluated on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Association upon extension
of credit is based on management's credit evaluation of the customer.
Collateral held varies, but may include single-family homes, marketable
securities and income-producing residential and commercial properties.
Credit losses may occur when one of the parties fails to perform in
accordance with the terms of the contract. The Association's exposure to
credit risk is represented by the contractual amount of the commitments to
extend credit. Commitments to extend credit for mortgage loans, excluding
undisbursed portions of loans in process, were approximately $7,598,000,
$4,733,000, $5,732,000 and $16,551,000 at June 30, 1998, December 31, 1997
and 1996 and September 30, 1996, respectively.
At June 30, 1998, the $7,598,000 of loan commitments were comprised of
approximately $5,895,000 of fixed-rate commitments and $1,703,000 of
variable rate commitments. At December 31, 1997, the $4,733,000 of loan
commitments were comprised of approximately $3,593,000 of fixed-rate
commitments and $1,140,000 of variable-rate commitments. These commitments
are at prevailing market rates and terms. Interest rates on fixed-rate
loan commitments were from 6.5% to 7.75%, 6.125% to 9.0%, 6.0% to 9.125%
and 6.75% to 9.125% at June 30, 1998, December 31, 1997 and 1996 and
September 30, 1996, respectively. No value is placed on the commitments as
the borrower is required to close at the market rates in effect on the
date of closing. No fees are received in connection with such commitments.
Unused consumer lines of credit were $6,385,000, $8,948,000, $8,219,000
and $5,657,000 at June 30, 1998, December 31, 1997 and 1996 and September
30, 1996, respectively.
Commercial lines and letters of credit and other loan commitments were
$4,022,000, $7,369,000, $3,172,000 and $4,345,000 at June 30, 1998,
December 31, 1997 and 1996 and September 30, 1996, respectively.
Commitments to sell loans to FNMA were $0, $0, $70,000 and $207,000 at
June 30, 1998, December 31, 1997 and 1996 and September 30, 1996,
respectively. Commitments to purchase loans were $0, $0, $171,000 and
$619,000 at June 30, 1998, December 31, 1997 and 1996 and September 30,
1996, respectively.
Lease Commitments - The Association leases various properties for original
periods ranging from 2 to 25 years. Rent expense for the six months ended
June 30, 1998 and 1997, the year ended December 31, 1997, the three months
ended December 31, 1996, and the years ended September 30, 1996 and 1995,
was approximately $338,000, $304,000, $626,000, $141,000, $545,000, and
$535,000, respectively. At December 31, 1997, future minimum lease
payments under these operating leases were as follows:
--------------------------------------------------------------------------
Years Ending
December 31, Amount
--------------------------------------------------------------------------
(In Thousands)
1998 $ 576
1999 514
2000 475
2001 340
2002 208
Thereafter 1,163
------
Total $3,276
======
Line of Credit - The Association has a $1,800,000 available line of credit
with the Federal Reserve Bank of Atlanta which is secured by United States
Government and agency obligations (see Note 6). At June 30, 1998, December
31, 1997 and 1996 and September 30, 1996, the Association had no
outstanding advances.
F-24
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINGENCIES - The Association completed its investigation of a
defalcation by a former employee which may have occurred over a period of
several years. The Association maintains insurance to cover such losses
with a claim deductible of $200,000. An expense for the amount of the
deductible was recorded during the year ended September 30, 1996. The
Association notified its insurance company of the potential claim and the
insurance company acknowledged coverage. The insurance company has
completed its due diligence related to the claim. The Association and the
insurance company are currently negotiating the terms of a settlement of
the Association's claim. The terms of such settlement may not amount to
the entire amount of the Association's claim in excess of the deductible.
However, even in such event, management does not believe that the claim
will have any material adverse effect on the Association's financial
position or results of its operations.
14. BENEFIT PLANS
PENSION PLAN - The Association has a noncontributory, qualified pension
plan covering substantially all employees. The plan calls for benefits to
be paid to eligible employees at retirement based primarily upon years of
service with the Association and compensation rates during those years.
Currently, the Association's policy is to fund the qualified retirement
plan in an amount that is determined in accordance with the minimum
funding standards of the Employee Retirement Income Security Act, but
falls below the tax deductible contribution. Plan assets consist primarily
of corporate and government agency bonds, mutual funds, common stock, and
managed funds.
Pension expense for the plan amounted to $42,000, $126,000, $251,000,
$63,000, $403,000, and $578,000 for the six months ended June 30, 1998 and
1997, the year ended December 31, 1997, the three months ended December
31, 1996, and the years ended September 30, 1996 and 1995, respectively.
Pension expense for the year ended December 31, 1997, the three months
ended December 31, 1996, and the years ended September 30, 1996 and 1995
included the following components:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
For the Year For the Three For the Years Ended
Ended Months Ended September 30,
December 31, 1997 December 31, 1996 1996 1995
---------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Service cost $550 $ 137 $551 $603
Interest cost 447 112 453 460
Actual return on assets (626) (156) (533) (417)
Net amortization and deferral (120) (30) (68) (68)
---- ----- ---- ----
Net periodic pension cost $251 $ 63 $403 $578
==== ===== ==== ====
</TABLE>
For the year ended December 31, 1997, the three months ended December 31,
1996, and the years ended September 30, 1996 and 1995, pension expense
amounts were based upon actuarial computations.
The following sets forth the funded status of the qualified plan at
December 31, 1997 and 1996 and September 30, 1996:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
December 31, December 31, September 30,
1997 1996 1996
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $3,903 $3,641 $3,515
Nonvested benefits 472 465 442
------ ------ ------
Accumulated benefit obligation 4,375 4,106 3,957
Effect of anticipated future compensation levels and other
events 2,702 2,755 2,683
------ ------ ------
Projected benefit obligation 7,077 6,861 6,640
------ ------ ------
Fair value of assets held in the plan (estimated) 9,644 7,350 7,381
------ ------ ------
Plan assets over projected benefit obligation $2,567 $ 489 $ 741
====== ====== ======
The excess plan assets consist of the following:
Unamortized net transition asset $ 339 $ 411 $ 428
Accrued pension cost (962) (1,335) (1,272)
Unrecognized net gain due to changes in assumptions 3,218 1,444 1,616
Prior service cost (28) (31) (31)
------ ------ ------
Total $2,567 $ 489 $ 741
====== ====== ======
</TABLE>
F-25
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Retirement Income Plan - During 1989, the Association's Board
of Directors established a nonqualified unfunded defined benefit plan for
certain officers. For the six months ended June 30, 1998 and 1997, the
year ended December 31, 1997, the three months ended December 31, 1996,
and the years ended September 30, 1996 and 1995, the net periodic expense
for the officers' plan totaled $38,000, $27,000, $54,000, $13,000,
$60,000, and $65,000, respectively. The projected benefit obligation as of
December 31, 1997 and 1996 and September 30, 1996 was estimated at
$480,000, $388,000 and $380,000, respectively.
The actuarial present value of benefit obligations at December 31, 1997
and 1996 and September 30, 1996 was as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
December 31, December 31, September 30,
1997 1996 1996
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Projected benefit obligation $480 $388 $380
Prior service cost 33 41 43
Unrecognized net gains 40 86 87
---- ---- ----
Accrued retirement plan cost 553 515 510
Prior years accrual (515) (506) (466)
Employer contributions 16 4 16
---- ---- ----
Net periodic retirement plan expense $ 54 $ 13 $ 60
==== ==== ====
</TABLE>
Actuarial Assumptions - Actuarial assumptions represent estimates of
future experience based on the characteristics of the particular plan and
its covered employees. The actuarial assumptions used in the pension plan
and retirement plan valuations were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Year Ended Three Months Ended Years Ended
December 31, December 31, September 30,
1997 1996 1996 1995
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.00% 6.75% 6.50% 6.50%
Asset rate 8.50% 8.50% 8.00% 8.00%
Salary scale 5.00% 5.00% 5.00% 6.00%
</TABLE>
Bankshares and the Association do not provide any material postretirement
or postemployment benefits.
Employee Stock Ownership Plan - As of December 31, 1997, the Employee
Stock Ownership Plan ("ESOP") had an outstanding loan balance of
$1,424,000 from an unaffliated lender related to the purchase of 190,388
shares of common stock in the open market. Collateral for the loan was the
common stock purchased by the ESOP. During the six months ended June 30,
1998, Bankshares loaned sufficient funds to the ESOP to pay off the
original loan. The terms of the loan from Bankshares to the ESOP are
substantially the same as the terms of the loan from the unaffiliated
lender. Payment of the loan is principally from the Association's
contributions to the ESOP over a period of up to seven years, and the
interest rate used is New York prime, which was 8.50% at June 30, 1998.
Such loan is eliminated in consolidation at June 30, 1998.
Statement of Position 93-6 "Employers' Accounting for Employee Stock
Ownership Plan" ("SOP 93-6") requires that the Association reflect shares
allocated to employees under the ESOP as compensation expense at their
fair value, rather than cost. The difference between the cost of such
shares and their fair value is treated, net of tax, as an adjustment of
additional paid-in capital. During the six months ended June 30, 1998 and
1997, the year ended December 31, 1997, the three months ended December
31, 1996, and the years ended September 30, 1996 and 1995, compensation
expense related to the ESOP was $487,000, $277,000, $707,000, $183,000,
$556,000, and $272,000, respectively.
F-26
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contributions to the ESOP will be in an amount proportional to the
repayment of the ESOP loan, and will be allocated among participants on
the basis of compensation in the year of allocation, up to an annual
adjusted maximum level of compensation. In accordance with generally
accepted accounting principles, the unallocated shares held by the ESOP
are shown as a deduction from shareholders' equity.
Recognition and Retention Plan - In January 1995, the shareholders of the
Association approved the Recognition and Retention Plan (the "Recognition
Plan") for certain officers and non-employee directors of the Association.
Concurrent with such approval, such officers and directors were awarded
88,900 shares of common stock, which vest in five equal annual
installments, starting January 1996. The fair value of the shares on the
date of award will be recognized as compensation expense over the vesting
period. To fund this plan, 88,900 shares were issued from authorized but
unissued shares of common stock in July 1995. During the year ended
September 30, 1996, unamortized deferred compensation and additional
paid-in capital were adjusted to correct amounts initially recorded in
connection with the Recognition Plan. Unamortized deferred compensation of
$330,000 and $423,000 at June 30, 1998 and December 31, 1997,
respectively, is reflected as a reduction of shareholders' equity.
Compensation expense related to the Recognition Plan was $93,000, $93,000,
$185,000, $46,000, $130,000 and $148,000 for the six months ended June 30,
1998 and 1997, the year ended December 31, 1997, the three months ended
December 31, 1996, and the years ended September 30, 1996 and 1995,
respectively.
Stock Option Plan - The Association has a stock option plan for the
benefit of its directors, officers, and other key employees. The number of
shares of Bankshares' common stock reserved for issuance under the stock
option plan was equal to 237,986 shares or 10% of the total number of
common shares issued to persons other than the MHC pursuant to the
Association's conversion to the stock form of ownership. The option
exercise price cannot be less than the fair value of the underlying common
stock as of the date of the option grant and the maximum option term
cannot exceed ten years. The stock options granted to the directors,
officers, and employees are exercisable in five equal annual installments.
The first installment became exercisable on January 18, 1996. At January
18, 1995, there were 237,450 options granted with 536 options reserved for
future use. Below is a summary of transactions:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Option Price
--------------------------------------
Number of Average
Options Price Per Aggregate
Outstanding Share Price
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options Outstanding:
Balance - September 30, 1995 222,950 $11.125 $2,480,319
Granted -- -- --
Exercised (1,220) $11.125 (13,573)
Canceled (4,880) $11.125 (54,290)
------- ------- ----------
Balance - September 30, 1996 216,850 2,412,456
Granted -- -- --
Exercised -- -- --
Canceled -- -- --
------- ------- ----------
Balance - December 31, 1996 216,850 2,412,456
Granted 7,500 $19.016 142,617
Exercised (4,800) $11.125 (53,400)
Canceled -- -- --
------- ------- ----------
Balance - December 31, 1997 219,550 2,501,673
------- ------- ----------
Granted -- -- --
Exercised (5,200) $11.125 (57,850)
Canceled -- -- --
------- ------- ----------
Balance - June 30, 1998 214,350 $11.401 $2,443,823
======= ======= ==========
</TABLE>
Options exercisable at June 30, 1998, December 31, 1997 and 1996, and
September 30, 1996 and 1995 were 125,610, 84,820, 43,370, 43,370, and 0,
respectively. Bankshares adopted the disclosure-only option under SFAS No.
123, "Accounting for Stock-based Compensation" as of January 1, 1997.
F-27
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of options granted under the stock option plan during the
fiscal year ended December 31, 1997 was estimated using the Binary Option
Pricing Model with the following assumptions used:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Number of Exercise Fair Value Risk Free Expected Expected Dividend
Grant date Options Price of Options Interest Rate Life (Years) Volatility Yield
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
01/18/97 7,500 $19.016 $5.25 6.37% 5 15.36% $2.67
</TABLE>
Had compensation cost for the stock options been determined based on the
fair value at the grant date for awards under those plans consistent with
the method of SFAS No. 123, Bankshares' net income and earnings per share
for the year ended December 31, 1997 would have been reduced to the pro
forma amounts indicated below:
--------------------------------------------------------------------------
For the Year Ended
December 31, 1997
--------------------------------------------------------------------------
Net income
As reported $5,356,000
Pro forma $5,332,000
Basic earnings per share
As reported $ 1.09
Pro forma $ 1.08
15. MORTGAGE-BACKED BOND
On September 30, 1983, the Association sold two of its branch offices to
another financial institution with the approval of the Federal Home Loan
Bank Board ("FHLBB"), predecessor to the OTS. Under terms of the sale, the
Association issued a 10.94%, 30-year term mortgage-backed bond (the
"Bond") for approximately $41,601,000. The Bond issue has a stated
interest rate which was less than the market rate (assumed to have been
17.53%) for similar debt at the effective date of the sale. Accordingly,
the Association recorded a discount on the Bond which is being accreted on
the interest method over the life of the Bond.
The Bond bears an interest rate that is adjustable semi-annually, on April
1 and October 1, to reflect changes in the average of the United States
10-year and 30-year long-term bond rates. The Bond's interest rate on June
30, 1998, December 31, 1997 and 1996 and September 30, 1996 was 5.07%,
5.62%, 6.20% and 5.70%, respectively. The unamortized discount at June 30,
1998, December 31, 1997 and 1996 and September 30, 1996 was $5,196,000,
$5,439,000, $5,929,000 and $6,052,000, respectively. Principal and
interest payments are due quarterly. During the six months ended June 30,
1998 and 1997, the year ended December 31, 1997, the three months ended
December 31, 1996, and the years ended September 30, 1996 and 1995,
approximately $243,000, $246,000, $490,000, $123,000, $496,000, and
$498,000, respectively, of the discount was accreted.
At June 30, 1998, December 31, 1997 and 1996 and September 30, 1996, the
Association held $13,820,000, $13,039,000, $11,701,000 and $11,391,000
(net of discounts of $9,380,000, $10,161,000, $11,499,000 and
$11,809,000), respectively, of Salomon Brothers Certificates of Accrual on
Treasury Securities ("CATS") which were purchased at the time of issuing
the Bond. The accrual of interest on the CATS offsets the discount
amortization of the Bond. The CATS are included in United States
Government and agency obligations described in Note 3 to the consolidated
financial statements.
F-28
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bond at December 31, 1997, was repayable as follows:
-----------------------------------------------------------------------
Years Ending Amount
December 31, (In Thousands)
-----------------------------------------------------------------------
1998 $ 1,387
1999 1,387
2000 1,387
2001 1,387
2002 1,387
2003 and after 14,837
-------
Total 21,772
Less unamortized discount 5,439
-------
Total mortgage-backed bond $16,333
=======
16. REGULATORY RESTRICTIONS ON RETAINED INCOME AND REGULATORY CAPITAL
REQUIREMENT
The Association is subject to various regulatory capital requirements
administered by the OTS. 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 Bankshares' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Association must meet specific capital guidelines that involve
quantitative measures of the Association's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Association's capital amounts and classifications are also
subject to qualitative judgments by regulators about components,
risk-weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of tangible
capital of not less that 1.5% of adjusted total assets, total risk-based
capital to risk-weighted assets of not less that 8.0%, Tier I capital
equal to adjusted total assets of 3.0%, and Tier I capital to
risk-weighted assets of 4.0% (as defined in the regulations). Management
believes, as of December 31, 1997, that the Association meets all capital
adequacy requirements to which it is subject.
As of June 30, 1998 and December 31, 1997, the most recent notification
from the OTS categorized the Association as "Well Capitalized" under the
framework for prompt corrective action. To be considered well capitalized
under Prompt Corrective Action Provisions, the Association must maintain
total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the following table. There are no conditions or events since that
notification that management believes have changed the Association's
categorization.
F-29
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Association is required to report capital ratios unconsolidated with
Bankshares. The Association's actual capital amounts and ratios are
presented in the following tables:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
To be Considered
Well Capitalized
for Prompt
For Corrective
Capital Adequacy Action
Actual Purposes Provisions
---------------------------------------------------------------
Ratio Amount Ratio Amount Ratio Amount
-------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Total Risk-based Capital ( to Risk-weighted Assets) 18.1% $76,509 8.0% $33,913 10.0% $42,391
Core (Tier 1) Capital (to Adjusted Tangible Assets) 9.6 73,742 3.0 22,972 5.0 32,287
Tangible Capital (to Tangible Assets) 9.6 73,742 1.5 11,486 N/A N/A
Core (Tier 1) Capital (to Risk-weighted Assets) 17.4 73,742 4.0 16,956 6.0 25,434
As of June 30, 1998, tangible assets, adjusted tangible assets, and risk-weighted assets were $765,748,000,
$765,748,000, and $423,908,000, respectively.
As of December 31, 1997:
Total Risk-based Capital ( to Risk-weighted Assets) 18.4% 70,048 8.0% $30,416 10.0% $38,020
Core (Tier 1) Capital (to Adjusted Tangible Assets) 9.8 70,681 3.0 21,609 5.0 36,014
Tangible Capital (to Tangible Assets) 9.8 70,681 1.5 10,804 N/A N/A
Core (Tier 1) Capital (to Risk-weighted Assets) 18.6 70,681 4.0 15,208 6.0 22,812
As of December 31, 1997, tangible assets, adjusted tangible assets, and risk-weighted assets were $720,284,000,
$720,284,000, and $380,197,000, respectively and $380,197,000, respectively.
As of December 31, 1996:
Total Risk-based Capital ( to Risk-weighted Assets) 24.7% $78,845 8.0% $25,492 10.0% $31,865
Core (Tier 1) Capital (to Adjusted Tangible Assets) 11.8 77,187 3.0 19,688 5.0 32,814
Tangible Capital (to Tangible Assets) 11.8 77,187 1.5 9,844 N/A N/A
Core (Tier 1) Capital (to Risk-weighted Assets) 24.2 77,187 4.0 12,746 6.0 19,119
As of December 31, 1996, tangible assets, adjusted tangible assets, and risk-weighted assets were $656,277,000,
$656,277,000 and $318,649,000, respectively
As of September 30, 1996:
Total Risk-based Capital ( to Risk-weighted Assets) 23.9% $74,977 8.0% $25,115 10.0% $31,394
Core (Tier 1) Capital (to Adjusted Tangible Assets) 11.3 73,599 3.0 19,539 5.0 32,565
Tangible Capital (to Tangible Assets) 11.3 73,599 1.5 9,770 N/A N/A
Core (Tier 1) Capital (to Risk-weighted Assets) 23.4 73,599 4.0 12,558 6.0 18,837
As of September 30, 1996, tangible assets, adjusted tangible assets, and risk-weighted assets were $651,306,000,
$651,306,000 and $313,942,000, respectively
</TABLE>
F-30
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
For the Six For the Year For the Three For the Years
Months Ended Ended Months Ended Ended
June 30, December 31, December 31, September 30,
1998 1997 1997 1996 1996 1995
-------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 2,315 $ 1,452 $ 2,836 $ 220 $ 1,877 $ 3,200
======= ======= ======= ====== ======= =======
Cash paid for interest on deposits and other
borrowings $14,321 $12,873 $27,959 $6,255 $22,146 $17,949
======= ======= ======= ====== ======= =======
Supplemental schedule of noncash investing:
and financing activities:
Real estate acquired in settlement of loans $ 653 $ 91 $ 558 $ 78 $ 400 $ 1,394
======= ======= ======= ====== ======= =======
Distribution of Common Stock to fund the
Recognition and Retention Plan $ -- $ -- $ -- $ -- $ -- $ 989
======= ======= ======= ====== ======= =======
</TABLE>
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, as amended by SFAS No. 119, "Disclosures about Fair Value of
Financial Instruments" ("SFAS No. 107"), requires the estimation of fair
values of financial instruments, as defined in SFAS No. 107.
Estimates of fair value are made at a specific date, based upon, where
available, relevant market prices and information about the financial
instrument. For a substantial portion of the financial instruments, no
quoted market exists. Therefore, estimates of fair value are necessarily
based on a number of significant assumptions (many of which involve events
outside the control of management). Such assumptions include assessments
of current economic conditions, perceived risks associated with these
financial instruments and their counterparties, future expected loss
experience and other factors. Given the uncertainties surrounding these
assumptions, the reported fair values represent estimates only and,
therefore, cannot be compared to the historical accounting model. Use of
different assumptions or methodologies are likely to result in
significantly different fair value estimates.
Although management uses its best judgment in estimating the fair value of
the financial instruments, there are inherent limitations in any
estimation technique. Therefore, the fair value estimates presented herein
are not necessarily indicative of the amounts which could be realized in a
current transaction.
The estimated fair values presented neither include nor give effect to the
values associated with the Association's existing customer relationships,
extensive branch banking network or property, or certain tax implications
related to the realization of unrealized gains or losses. Also under SFAS
No. 107, the fair value of non-interest-bearing checking accounts,
interest-bearing NOW accounts, passbook and statement accounts, and money
market accounts is equal to the carrying amount because these deposits
have no stated maturity. The approach to estimating fair value excludes
the significant benefit that results from the low-cost funding provided by
such deposit liabilities, as compared to alternative sources of funding.
The following methods and assumptions were used to estimate the fair value
of each major classification of financial instruments at June 30, 1998,
December 31, 1997 and 1996 and September 30, 1996:
Cash and Cash Equivalents - The carrying amounts reported in the Statement
of Financial Condition for cash and cash equivalents approximates their
fair value.
Investments - Held to Maturity and Securities Available for Sale - Fair
value is determined by reference to quoted market prices or by use of
broker price estimates.
F-31
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOANS RECEIVABLE - The fair value of loans was estimated by using a method
which approximates the effect of discounting the estimated future cash
flows over the expected repayment periods using rates which consider
credit risk, servicing costs and other relevant factors.
MORTGAGE-BACKED AND RELATED SECURITIES - Fair value is determined by
reference to quoted market prices or by use of broker price estimates.
Deposits - Current carrying amounts approximate estimated fair value of
deposits with no stated maturity, including demand deposits, interest
bearing NOW accounts, passbooks and statement accounts, and money market
accounts. Fair value for fixed maturity certificate of deposit accounts
was estimated by discounting the contractual cash flow using a rate which
reflects the Association's cost of funds adjusted for the cost of
servicing deposit accounts.
MORTGAGE-BACKED BOND - The carrying amount of the mortgage-backed bond is
a reasonable estimate of fair market value.
ADVANCES FROM FEDERAL HOME LOAN BANK - Fair value is estimated using the
Association's cost of funds adjusted for the cost of operations.
ESOP LOAN - The carrying amount of the ESOP loan is a reasonable estimate
of fair market value.
COMMITMENTS TO EXTEND CREDIT - At June 30, 1998, December 31, 1997 and
1996 and September 30, 1996, the fair value of commitments to extend
credit was considered insignificant due to the short-term nature of the
commitments.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
June 30, 1998 December 31, 1997 December 31, 1996 September 30, 1996
Carrying Fair Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value Value Value
---------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 47,425 $ 47,425 $ 25,954 $ 25,954 $ 42,442 $ 42,442 $ 44,780 $ 44,780
Investments - held to maturity 21,443 25,539 21,388 25,585 22,139 26,266 22,293 26,093
Securities available for sale 91,316 91,316 142,269 142,269 123,152 123,152 124,287 124,287
Mortgage-backed and
related securities 41,884 42,360 46,413 46,938 53,405 53,880 54,945 54,988
Loans receivable - net 527,375 539,967 451,709 461,650 389,040 397,627 376,219 385,491
Financial liabilities:
Deposits $574,383 $571,282 $550,708 $548,321 $513,709 $511,327 $498,929 $496,529
Mortgage-backed bond 15,883 15,883 16,333 16,333 17,230 17,230 17,453 17,453
Advances from FHLB 75,630 59,689 57,341 57,246 34,763 34,875 36,350 36,545
ESOP borrowings 1,227 1,227 1,424 1,424 1,915 1,915 2,064 2,064
</TABLE>
19. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition as of June 30,
1998, December 31, 1997 and 1996 and September 30, 1996, and the condensed
statements of operations and statements of cash flows for the six months
ended June 30, 1998 and 1997, the year ended December 31, 1997, the three
months ended December 31, 1996, and the years ended September 30, 1996 and
1995 should be read in conjunction with the consolidated financial
statements and the related notes. Since the organization of Bankshares was
accounted for in a manner similar to a pooling of interests, these
statements have been presented as if Bankshares was in existence for all
periods covered by the consolidated financial statements.
F-32
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statements of Financial Condition
-----------------------------------------------------------------------------------------------------------------------
At June 30, At December 31, At September 30,
1998 1997 1996 1996
-----------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 279 $11,243 $ -- $ --
Investment in and loans to the Association 83,151 70,527 76,578 75,504
Other assets 149 -- -- --
------- ------- ------- -------
Total assets $83,579 $81,770 $76,578 $75,504
======= ======= ======= =======
Liabilities $501 $ 511 $ 459 $ 448
Shareholders' equity 83,078 81,259 76,119 75,056
------- ------- ------- -------
Total liabilities and shareholders' equity $83,579 $81,770 $76,578 $75,504
======= ======= ======= =======
Statements of Operations
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
For the Six Months For the For the Three For the Years
Ended Year Ended Months Ended Ended
June 30, December 31, December 31, September 30,
1998 1997 1997 1996 1996 1995
-----------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Income $ 192 $ -- $ -- $ -- $ -- $ --
Expenses 148 -- 41 -- -- --
------- ------ ------- ------ ------ ------
Income (loss) before income taxes and equity
in earnings of the Association 44 -- (41) -- -- --
Income tax benefit 45 -- 15 -- -- --
------- ------ ------- ------ ------ ------
Income (loss) before equity in earnings of
Association 89 -- (26) -- -- --
Equity in earnings of the Association 2,422 2,735 5,382 1,160 3,915 4,574
------- ------ ------- ------ ------ ------
Net income $ 2,511 $2,735 $ 5,356 $1,160 $3,915 $4,574
======= ====== ======= ====== ====== ======
<CAPTION>
Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------------------
For the Six Months For the For the Three For the Years
Ended Year Ended Months Ended Ended
June 30, December 31, December 31, September 30,
1998 1997 1997 1996 1996 1995
-----------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,511 $2,735 $ 5,356 $1,160 $3,915 $4,574
Adjustments to reconcile net income
to net cash used for operating
activities:
Equity in earnings of the Association (2,422) (2,735) (5,382) (1,160) (3,915) (4,574)
Other (98) -- (15) -- -- --
------- ------ ------- ------ ------ ------
Net cash used for operating activities (9) -- (41) -- -- --
------- ------ ------- ------ ------ ------
Cash flows from investing activities:
Loan originations and principal
payments on loans (9,901) -- -- -- -- --
Dividends received from Association -- 973 13,260 448 1,618 902
------- ------ ------- ------ ------ ------
Net cash provided by investing activities (9,901) 973 13,260 448 1,618 902
------- ------ ------- ------ ------ ------
Cash flows from financing activities:
Dividends paid (1,053) (973) (1,976) (448) (1,618) (902)
------- ------ ------- ------ ------ ------
Net cash used for financing activities (1,053) (973) (1,976) (448) (1,618) (902)
------- ------ ------- ------ ------ ------
Net increase (decrease) in cash and
cash equivalents (10,963) -- 11,243 -- -- --
Cash and cash equivalents, beginning of
period 11,242 -- -- -- -- --
------- ------ ------- ------ ------ ------
Cash and cash equivalents, end of period $ 279 $ -- $11,243 $ -- $ -- $ --
======= ====== ======= ====== ====== ======
</TABLE>
Payment of dividends to Bankshares by the Association is subject to
various limitations by bank regulatory agencies. Undistributed earnings of
the Association available for distribution as dividends under these
limitations were $21,185,000, $30,773,000, $27,203,000 and $1,618,000 as
of June 30, 1998, December 31, 1997 and 1996 and September 30, 1996,
respectively.
F-33
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------------------------------------------
March 31, June 30,
--------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C>
Six months ended June 30, 1998:
Interest income $13,358 $13,469
Interest expense 7,299 7,356
------- -------
Net interest income 6,059 6,113
Provision for loan losses 117 96
Other income 934 821
Operating expense 4,963 4,882
Provision for income taxes 681 677
------- -------
Net income $ 1,232 $ 1,279
======= =======
Basic earnings per share $ 0.25 $ 0.26
======= =======
Diluted earnings per share $ 0.24 $ 0.25
======= =======
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Interest income $12,020 $12,557 $12,894 $12,845
Interest expense 6,448 6,813 7,036 7,093
------- ------- ------- -------
Net interest income 5,572 5,744 5,858 5,752
Provision for loan losses 30 53 138 43
Other income 891 971 1,522 801
Operating expense 4,293 4,512 4,973 4,783
Provision for income taxes 789 767 720 654
------- ------- ------- -------
Net income $1,351 $ 1,383 $ 1,549 $ 1,073
======= ======= ======= =======
Basic earnings per share $ 0.27 $ 0.28 $ 0.31 $ 0.22
======= ======= ======= =======
Diluted earnings per share $ 0.27 $ 0.27 $ 0.31 $ 0.21
======= ======= ======= =======
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------------------------------------------
December 31, 1995 March 31, June 30, September 30, December 31,
--------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
and three months ended
December 31, 1995
Interest income $10,205 $10,748 $11,091 $11,845 $11,896
Interest expense 5,349 5,834 5,724 5,952 6,378
------- ------- ------- ------- -------
Net interest income 4,856 4,914 5,367 5,893 5,518
Provision for loan losses 30 2 38 28 243
Other income 1,080 967 370 927 1,225
Operating expense 4,189 3,992 4,277 7,142 4,644
Provision (benefit) for
income taxes 667 619 (361) (164) 696
------- ------- ------- ------- -------
Net income (loss) $ 1,050 $ 1,268 $ 1,783 $ (186) $ 1,160
======= ======= ======= ======= =======
Basic earnings (loss) per share $ 0.22 $ 0.26 $ 0.37 $ (0.04) $ 0.24
======= ======= ======= ======= =======
Diluted earnings (loss) per share $ 0.22 $ 0.26 $ 0.36 $ (0.04) $ 0.23
======= ======= ======= ======= =======
</TABLE>
The quarter ended June 30, 1996 results of operations include a $1,140,000
credit to the income tax provision related to the reversal of a liability
accrued in prior years which management concluded was no longer necessary.
The quarter ended September 30, 1996 results of operations include a
one-time special assessment of $2,800,000 for the recapitalization of the
SAIF administered by the FDIC.
F-34
<PAGE>
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE MHC, THE MID-TIER HOLDING COMPANY, THE
ASSOCIATION OR FBR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY, THE MID-TIER HOLDING COMPANY OR
THE ASSOCIATION SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED
HEREIN OR SINCE THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
---------------------
Page
----
Summary..................................................................
Selected Financial Data..................................................
Risk Factors.............................................................
Use of Proceeds..........................................................
Dividend Policy..........................................................
Market for Common Stock..................................................
Regulatory Capital.......................................................
Capitalization...........................................................
Pro Forma Data...........................................................
Condensed Statements of Operations.......................................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..........................................................
Management Purchases.....................................................
Business ................................................................
Regulation...............................................................
Taxation.................................................................
Management ..............................................................
Proposed Management Purchases............................................
The Conversion ..........................................................
Restrictions on Acquisition of the
Company and the Association............................................
Description of Capital Stock of the Company..............................
Change in Auditors.......................................................
Experts..................................................................
Legal Matters............................................................
Additional Information...................................................
Index to Financial Statements............................................
UNTIL ____ __, 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED COMMUNITY
OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
_________SHARES
COMMUNITY SAVINGS
BANKSHARES, INC.
(Proposed Holding Company for
Community Savings, F. A.)
COMMON STOCK
--------------------
PROSPECTUS
--------------------
--------------------
_____ __, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1).
<TABLE>
<CAPTION>
<S> <C>
SEC filing fees................................................ $ 50,718
OTS filing fees................................................ 8,400
Nasdaq filing fees............................................. 93,000
Printing, postage and mailing ................................. 375,000
Legal fees..................................................... 200,000
Blue Sky filing fees and expenses.............................. 10,000
Accounting fees................................................ 125,000
Appraiser's fees (including preparation of business plan)..... 33,500
Conversion agent fees and expenses............................. 40,000
Transfer and exchange agent fees and expenses.................. 15,000
Stock center telephone, temporary support staff and equipment;
special meetings expenses................................. 60,000
Miscellaneous.................................................. 52,002
----------
TOTAL..................................................... $1,062,620
==========
</TABLE>
In addition to the foregoing expenses, Friedman, Billings, Ramsey &
Co., Inc. will receive fees based on the number of shares of Conversion Stock
sold in the Conversion, plus expenses. Based upon the assumptions and the
information set forth under "Pro Forma Data" and "The Conversion - Marketing
Arrangements" in the Prospectus, it is estimated that such fees will amount to
$393,795, $463,563, $533,347 and $613,596 in the event that 5,730,659 shares,
6,741,777 shares, 7,753,143 shares and 8,916,176 shares of Conversion Stock are
sold by the Company in the Conversion, respectively.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law sets forth
circumstances under which directors, officers, employees and agents may be
insured or indemnified against liability which they may incur in their capacity
as such. The Certificate of Incorporation and the Bylaws of the Company provide
that the directors, officers, employees and agents of the Company shall be
indemnified to the full extent permitted by law. Such indemnity shall extend to
expenses, including attorney's fees, judgments, fines and amounts paid in the
settlement, prosecution or defense of the foregoing actions.
Article 10 of the Registrant's Certificate of Incorporation provides as
follows:
ARTICLE 10. INDEMNIFICATION. The Corporation shall indemnify its
directors, officers, employees, agents and former directors, officers, employees
and agents, and any other persons
II-1
<PAGE>
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, association, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees, judgments, fines
and amounts paid in settlement) incurred in connection with any pending or
threatened action, suit or proceeding, whether civil, criminal, administrative
or investigative, with respect to which such director, officer, employee, agent
or other person is a party, or is threatened to be made a party, to the full
extent permitted by the General Corporation Law of the State of Delaware,
provided, however, that the Corporation shall not be liable for any amounts
which may be due to any person in connection with a settlement of any action,
suit or proceeding effected without its prior written consent or any action,
suit or proceeding initiated by any person seeking indemnification hereunder
without its prior written consent. The indemnification provided herein (i) shall
not be deemed exclusive of any other right to which any person seeking
indemnification may be entitled under any bylaw, agreement or vote of
stockholders or disinterested directors or otherwise, both as to action in his
or her official capacity and as to action in any other capacity, and (ii) shall
inure to the benefit of the heirs, executors and administrators of any such
person. The Corporation shall have the power, but shall not be obligated, to
purchase and maintain insurance on behalf of any person or persons enumerated
above against any liability asserted against or incurred by them or any of them
arising out of their status as corporate directors, officers, employees, or
agents whether or not the Corporation would have the power to indemnify them
against such liability under the provisions of this Article 10.
Article VI of the Company's Bylaws provides as follows:
6.1 INDEMNIFICATION. The Corporation shall provide indemnification to
its directors, officers, employees, agents and former directors, officers,
employees and agents and to others in accordance with the Corporation's
Certificate of Incorporation.
6.2 ADVANCEMENT OF EXPENSES. Reasonable expenses (including attorneys'
fees) incurred by a director, officer or employee of the Corporation in
defending any civil, criminal, administrative or investigative action, suit or
proceeding described in Section 6.1 may be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding as authorized by the
Board of Directors only upon receipt of an undertaking by or on behalf of such
person to repay such amount if it shall ultimately be determined that the person
is not entitled to be indemnified by the Corporation.
6.3 OTHER RIGHTS AND REMEDIES. The indemnification and advancement of
expenses provided by, or granted pursuant to, this Article VI shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under the Corporation's Certificate of
Incorporation, any agreement, vote of stockholders or disinterested directors or
otherwise, both as to actions in their official capacity and as to actions in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer or employee and shall inure to the
benefit of the heirs, executors and administrators of such person.
II-2
<PAGE>
6.4 INSURANCE. Upon resolution passed by the Board of Directors, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer of employee of the Corporation, or is or was serving
at the request of the corporation as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise, against any
liability asserted against him or incurred by him in any such capacity or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of its
Certificate of Incorporation or this Article VI.
6.5 MODIFICATION. The duties of the Corporation to indemnify and to
advance expenses to a director, officer or employee provided in this Article VI
shall be in the nature of a contract between the Corporation and each such
person, and no amendment or repeal of any provision of this Article VI shall
alter, to the detriment of such person, the right of such person to the advance
of expenses or indemnification related to a claim based on an act or failure to
act which took place prior to such amendment or repeal.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The only securities sold by the Registrant to date consist of 100
shares of common stock issued on August 13, 1998, to its sole incorporator,
Community Savings, F. A., for $10.00 per share, which shares will be cancelled
upon consummation of the Conversion. Because the shares were sold to only on
entity and were sold only to facilitate the incorporation of the Registrant, the
sale was exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2) thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) LIST OF EXHIBITS (filed herewith unless otherwise noted)
1.1 Engagement Letter with Friedman, Billings, Ramsey & Co., Inc.
1.2 Form of Agency Agreement with Friedman, Billings, Ramsey & Co., Inc.*
2.1 Plan of Conversion, as amended
3.1 Certificate of Incorporation of Community Savings Bankshares, Inc.
3.2 Bylaws of Community Savings Bankshares, Inc.
4.0 Form of Stock Certificate of Community Savings Bankshares, Inc.
5.0 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. re: legality*
8.1 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. re: Federal tax
matters*
8.2 Opinion of Crowe, Chizek and Company LLP re: Florida tax matters*
8.3 Letter of FinPro, Inc. re: Subscription Rights
10.1 1995 Stock Option Plan
10.2 1995 Recognition and Retention Plan for Employees and Outside Directors
23.1 Consent of Elias, Matz, Tiernan & Herrick L.L.P. (included in Exhibits
5.0 and 8.1, respectively)*
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Crowe, Chizek and Company LLP (included in Exhibit 8.2)*
II-3
<PAGE>
23.4 Consent of FinPro, Inc.
24.0 Power of Attorney (previously included in Signature Page of this
Registration Statement)
27.0 Financial Data Schedule
99.1 Proxy Statement and form of proxy for solicitation of members of
ComFed, M.H.C.
99.2 Proxy Statement and form of proxy for solicitation of shareholders of
Community Savings Bankshares, Inc. (a federal corporation)
99.3 Subscription Order Form and Instructions*
99.4 Additional Solicitation Material 99.5*
99.5 Appraisal Report of FinPro, Inc.*
- -------------
* To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as not applicable or not required under
the rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of the securities offered would not exceed that which was
registered) and any deviation from the low or high and the estimated
maximum offering range may be reflected in the form of Prospectus filed
with the Commission pursuant to Rule 424 (b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to
II-4
<PAGE>
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.
The undersigned Registrant hereby undertakes to furnish stock
certificates to or in accordance with the instructions of the respective
purchasers of the Common Stock, so as to make delivery to each purchaser
promptly following the closing under the Plan of Conversion.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the 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 of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Form S-1 Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the State of
Florida on August 21, 1998.
COMMUNITY SAVINGS BANKSHARES, INC.
By: /s/ JAMES B. PITTARD, JR.
---------------------------------
James B. Pittard, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
hereby makes, constitutes and appoints James B. Pittard, Jr. his true and lawful
attorney, with full power to sign for each person and in such person's name and
capacity indicated below, and with full power of substitution, any and all
amendments to this Registration Statement, hereby ratifying and confirming such
person's signature as it may be signed by said attorney to any and all
amendments.
<TABLE>
<CAPTION>
Name Title Date
- ----------------------------------- ---------------------------------- ---------------------------
<S> <C> <C>
/s/ FREDERICK A. TEED Chairman of the Board August 21, 1998
- ---------------------------------
Frederick A. Teed
/s/ JAMES B. PITTARD, JR. President and Chief Executive
- --------------------------------- Officer August 21, 1998
James B. Pittard, Jr.
/s/ FOREST C. BEATY, JR. Director August 21, 1998
- ---------------------------------
Forest C. Beaty, Jr.
/s/ ROBERT F. CROMWELL Director August 21, 1998
- ---------------------------------
Robert F. Cromwell
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
- ----------------------------------- ---------------------------------- ---------------------------
<S> <C> <C>
/s/ KARL D. GRIFFIN Director August 21, 1998
- ---------------------------------
Karl D. Griffin
/s/ HAROLD I. STEVENSON Director August 21, 1998
- ---------------------------------
Harold I. Stevenson
/s/ LARRY J. BAKER Senior Vice President, Chief August 21, 1998
- --------------------------------- Financial Officer and Treasurer
Larry J. Baker (principal financial and
accounting officer)
</TABLE>
[LETTERHEAD OF FRIEDMAN, BILLINGS, RAMSEY & CO. INC.]
INSTITUTIONAL BROKERAGE
RESEARCH
INVESTMENT BANKING
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209-1710
Telephone (703) 312-9500
Fax (703) 812-9501
August 19, 1998
Board of Directors
Attn: James B. Pittard, Jr.
President & Chief Executive Officer
Community Savings, F. A.
660 US Highway 1
North Palm Beach, FL 33408
RE: Reorganization and Plan of Conversion Marketing Services
Gentlemen:
This letter sets forth the terms of the proposed engagement between Friedman,
Billings, Ramsey and Co., Inc. ("FBR") and Community Savings, F. A. ("Community
Savings"), concerning our Investment Banking Services in connection with the
Plan of Conversion and Plan of Reorganization (the "Plan") in connection with
the reorganization of Community Savings, F. A. and Community Savings Bankshares,
Inc. from the mutual holding company format into the stock holding company
structure.
FBR is prepared to assist Community Savings in connection with the offering of
its shares of common stock during the Subscription Offering and Community
Offering as such terms are defined in the Plan. The specific terms of the
services contemplated hereunder shall be set forth in a definitive sales agency
agreement (the "Agreement") between FBR and Community Savings to be executed
prior to mailing of the Offering material. The price of the shares during the
Subscription Offering and Community Offering will be the price established by
Community Savings Board of Directors, based upon an independent appraisal as
approved by the appropriate regulatory authorities, provided such price is
mutually acceptable to FBR and Community Savings.
In connection with the Subscription Offering and Community Offering, FBR will
render the following services:
1. Act as the Financial Advisor to Community Savings;
2. Create marketing materials and formulate a marketing plan;
3. Conduct training for all Directors and Employees concerning the
reorganization and stock offering;
4. Manage Stock Center and staff with FBR personnel;
5. Assist Community Savings and Attorneys with listing on Nasdaq; and
6. Provide general advisory services including capital management strategies,
dividend policy and mergers and acquisitions strategies for a period of
one year following the completion of the Offering
After the Offering, FBR intends to become a Market Maker and continue coverage
of Community Savings through after market support and research.
At the appropriate time, FBR, in conjunction with its counsel, will conduct an
examination of the relevant documents and records of Community Savings as FBR
deems necessary and appropriate. Community Savings will make all documents,
records and other information deemed reasonably necessary by FBR or its counsel
available to them upon request, subject to any limitations imposed by applicable
law and regulations.
<PAGE>
Mr. James B. Pittard, Jr.
August 19, 1998
Page 2 of 5
For its services hereunder, FBR will receive the following compensation and
reimbursement from Community Savings:
1. A management fee of $50,000 payable as follows, $25,000 upon the signing of
this letter and $25,000 upon receiving OTS approval of the Plan Application.
Should the Plan be terminated for any reason not attributable to the action or
inaction of FBR, FBR shall have earned and be entitled to be paid fees accruing
through the stage at which point the termination occurred.
2. A marketing fee of 0.75% of the aggregate Purchase Price of Common Stock sold
in the Subscription Offering and Community Offering, excluding those shares
purchased by Community Savings officers, directors, or employees (or members of
their immediate families) or by any ESOP, charitable foundation, tax-qualified
or stock compensation plans (except IRA's) or similar plan created by Community
Savings for some or all of its directors or employees. The management fee of
$50,000 will be subtracted from the marketing fee.
3. If any shares of Common Stock remain available after the Subscription and
Community Offering, at the request of Community Savings, FBR will seek to form a
syndicate of registered broker-dealers to assist in the sale of such remaining
Common Stock on a best efforts basis, subject to the terms and conditions set
forth in a selected dealers agreement. Total fees paid to FBR and selected
broker-dealers will not exceed 0.75% of the aggregate Purchase Price of the
shares of Common Stock sold in a syndicated offering. The decision to utilize
selected broker-dealers will be made by Community Savings upon consultation with
FBR. In the event, with the respect to any stock purchases, fees are paid
pursuant to this paragraph 3, such fees shall be in lieu of, and not in addition
to, any payment required pursuant to paragraph 2.
4. The foregoing commissions are to be payable to FBR at closing as defined in
the agreement to be entered into between FBR and Community Savings.
5. FBR shall be reimbursed for allocable expenses incurred by them, including
legal fees, whether or not the Agreement is consummated. These expenses shall
not exceed $70,000.
It is further understood that Community Savings will pay all other expenses of
the Plan including but not limited to its attorneys' fees, NASD filing fees,
filing and registration fees and fees of either FBR's attorneys or the attorneys
relating to any required state securities law filings, telephone charges, air
freight, supplies, conversion agent charges, transfer agent charges, fees
relating to auditing and accounting and costs of printing all documents
necessary in connection with the foregoing.
For purpose of FBR's obligation to file certain documents and to make certain
representations to the NASD in connection with the Plan, Community Savings
warrants that: (a) Community Savings has not privately placed any securities
within the last 18 months; (b) there have been no material dealings within the
last 12 months between Community Savings and any NASD member or any person
related to or associated with any such member; (c) none of the officers or
directors of Community Savings has any affiliation with the NASD; (d) except as
contemplated by this engagement letter with FBR , Community Savings has no
financial or management consulting contracts outstanding with any other person;
(e) Community Savings has not granted FBR a right of first refusal with respect
to the underwriting of any future offering of Community Savings stock; and (f)
there has been no intermediary between FBR and Community Savings in connection
with the public offering of Community Savings shares, and no person is being
compensated in any manner for providing such service.
Community Savings agrees to indemnify FBR and its controlling persons,
representatives and agents in accordance with the indemnification provisions
(the "Indemnification Provisions") set forth in Appendix A hereto, and agrees to
the other provisions of Appendix A, which is incorporated herein by this
reference, regardless of whether the proposed Offering is consummated.
<PAGE>
Mr. James B. Pittard, Jr.
August 19, 1998
Page 3 of 5
This letter is merely a statement of intent and is not a binding legal agreement
except as to the compensation and reimbursement paragraphs numbered 1-5 above
and the indemnity described above. While FBR and Community Savings agree in
principle to the contents hereof and the purpose to proceed promptly, and in
good faith, to work out the arrangements with respect to the proposed Offering,
any legal obligations between FBR and Community Savings shall be only as set
forth in a duly executed Agreement. The indemnification provision described
above will be superseded by the indemnification provisions of the Agreement
entered into by Community Savings and FBR. Such Agreement shall be in the form
and content satisfactory to, among other things, there being in FBR's opinion no
material adverse change in the condition or obligations of Community Savings or
no material change in market conditions which would render the sale of the
shares by Community Savings hereby contemplated inadvisable.
The validity and interpretation of this Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the Commonwealth of
Virginia (excluding the conflicts of laws rules).
Please acknowledge your agreement to the foregoing by signing below and
returning to FBR one copy of this letter along with a payment of $25,000. This
proposal is open for your acceptance for a period of thirty (30) days from the
date hereof.
Very truly yours,
/s/ J. ROCK TONKEL, JR. /s/ RICHARD A. BUCKNER
------------------------------ ------------------------------
By: J. Rock Tonkel, Jr. Richard A. Buckner
Title: Managing Director Senior Vice President
Date: August 19, 1998
Agreed and Accepted to this _________ day of ____________, 1998.
Community Savings, F. A.
By: ________________________
Title: _________________________
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY & CO. INC.
Mr. James B. Pittard, Jr.
August 19, 1998
Page 4 of 5
APPENDIX A
Community Savings F. A., Community Savings Bancshares, Inc. (a Delaware
corporation), ComFed M. H. C., and Community Savings Bancshares, Inc. (a federal
corporation) (here and after, known as "Community Savings") agree to indemnify
and hold harmless FBR and its affiliates (as defined in Rule 405 under the
Securities Act of 1933, as amended) and their respective directors, officers,
employees, agents and controlling persons (FBR and each person being an
"Indemnified Party") from and against all losses, claims, damages and
liabilities (or actions, including shareholder actions, in respect thereof),
joint or several, to which such Indemnified Party may become subject under any
applicable federal or state law, or otherwise, which are related to or result
from the performance by FBR of the services contemplated by or the engagement of
FBR pursuant to, this letter agreement and will promptly reimburse any
Indemnified Party for all reasonable expenses (including reasonable counsel fees
and expenses) as they are incurred in connection with the investigation of,
preparation for or defense arising from any threatened or pending claim, whether
or not such Indemnified Party is a party and whether or not such claim, action
or proceeding is initiated or brought by Community Savings. Community Savings
will not be liable to any Indemnified Party under the foregoing indemnification
and reimbursement provisions, (i) for any settlement by an Indemnified Party
effected without its prior written consent (not to be unreasonably withheld); or
(ii) to the extent that any loss, claim, damage or liability is found in a final
non-appealable judgment by a court of competent jurisdiction to have resulted
primarily from FBR's willful misconduct or gross negligence. Community Savings
also agrees that no Indemnified Party shall have any liability (whether direct
or indirect, in contract or tort or otherwise) to Community Savings or its
security holders or creditors related to or arising out of the engagement of FBR
pursuant to, or the performance by FBR of the services contemplated by, the
letter agreement of even date herewith to which this is an appendix thereto (the
"Letter Agreement"), except to the extent that any loss, claim, damage or
liability is found in a final non-appealable judgment by a court of competent
jurisdiction to have resulted primarily from FBR's willful misconduct or gross
negligence.
Promptly after receipt by an Indemnified Party of notice of any intention or
threat to commence an action, suit or proceeding or notice of the commencement
of any action, suit or proceeding, such Indemnified Party will, if a claim in
respect thereof is to be made against Community Savings pursuant hereto,
promptly notify Community Savings in writing of the same. In case any such
action is brought against any Indemnified Party and such Indemnified Party
notifies Community Savings of the commencement thereof, Community Savings may
elect to assume the defense thereof, with counsel reasonably satisfactory to
such Indemnified Party, and an Indemnified Party may retain counsel to
participate in the defense of any such action; provided, however, that in no
event shall Community Savings be required to pay fees and expenses for more than
one firm of attorneys representing all Indemnified Parties unless the defense of
one Indemnified Party is unique or separate from that of another Indemnified
Party subject to the same claim or condition. Any failure or delay by an
Indemnified Party to give the notice referred to in this paragraph shall not
affect such Indemnified Party's right to be indemnified hereunder, except to the
extent that such failure or delay causes actual harm to Community Savings, or
prejudices its ability to defend such action, suit or proceeding on behalf of
such Indemnified Party.
If the indemnification provided for in this letter agreement is for any reason
held unenforceable by an Indemnified Party, Community Savings agrees to
contribute to the losses, claims, damages and liabilities for which such
indemnification is held unenforceable (i) in such proportion as is appropriate
to reflect the relative benefits to Community Savings, on the one hand, and FBR
on the other hand, of the Offering as contemplated (whether or not the Offering
is consummated) or, (ii) if (but only if) the allocation provided for in clause
(i) is for any reason unenforceable, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) but also the
relative fault of Community Savings, on the one hand and FBR, on the other hand,
as well as any other relevant equitable considerations. Community Savings agrees
that for the purposes of this paragraph the relative benefits to Community
Savings and FBR of the Offering as contemplated shall be deemed to be in the
same proportion that the total value received or contemplated to be received by
Community Savings or its shareholders, as the case may be, as a result of or in
connection with the Offering bears to the fees paid or to be paid to FBR under
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY & CO. INC.
Mr. James B. Pittard, Jr.
August 19, 1998
Page 5 of 5
the Letter Agreement. Notwithstanding the foregoing, Community Savings expressly
agrees that FBR shall not be required to contribute any amount in excess of the
amount by which fees owed FBR under said Letter Agreement (excluding
reimbursable expenses), exceeds the amount of any damages which FBR has
otherwise been required to pay.
Community Savings agrees that without FBR's prior written consent, which shall
not be unreasonably withheld, it will not settle, compromise or consent to the
entry of any judgment in any pending or threatened claim, action or proceeding
in respect of which this indemnification could be sought under the
indemnification provisions of this letter agreement (in which FBR or any other
indemnified Party is an actual or potential party to such claim, action or
proceeding).
In the event that Community Savings does not promptly assume the defense of a
claim or action, the Indemnified Party shall have the right to employ counsel
reasonable satisfactory to Community Savings, at Community Savings's expense, to
defend such pending or threatened action or claim.
Agreed and Accepted to this _________ day of ___________, 1998.
Community Savings, F.A.
By: __________________________
Title: _______________________
PLAN OF CONVERSION
AS AMENDED
of
COMFED, M. H. C.
and
AGREEMENT AND PLAN OF REORGANIZATION
between
COMFED, M. H. C.,
COMMUNITY SAVINGS BANKSHARES, INC.
(A Federal Corporation)
COMMUNITY SAVINGS BANKSHARES, INC.
(A Delaware Corporation)
and
COMMUNITY SAVINGS, F. A.
<PAGE>
TABLE OF CONTENTS
SECTION
NUMBER PAGE
1. Introduction....................................................... 1
2. Definitions........................................................ 3
3. General Procedure for Conversion and Reorganization................ 9
4. Total Number of Shares and Purchase Price of
Conversion Stock................................................. 12
5. Subscription Rights of Eligible Account Holders.................... 13
6. Subscription Rights of Tax-Qualified Employee
Stock Benefit Plans.............................................. 14
7. Subscription Rights of Supplemental Eligible Account Holders....... 14
8. Subscription Rights of Other Members............................... 15
9. Subscription Rights of Directors, Officers and Employees........... 16
10. Public Shareholders Offering....................................... 16
11. Community Offering, Syndicated Community Offering and
Other Offerings.................................................. 17
12. Limitations on Subscriptions and Purchases of Conversion Stock..... 19
13. Timing of Subscription Offering; Manner of Exercising
Subscription Rights and Order Forms.............................. 21
14. Payment for Conversion Stock....................................... 23
15. Account Holders in Nonqualified States or in Foreign Countries..... 24
16. Voting Rights of Shareholders...................................... 24
17. Liquidation Account................................................ 24
18. Transfer of Deposit Accounts....................................... 26
19. Requirements Following Conversion and Reorganization for
Registration, Market Making and Stock Exchange Listing........... 26
20. Directors and Officers of the Association.......................... 27
21. Requirements for Stock Purchases by Directors
and Officers Following the Conversion and Reorganization......... 27
22. Restrictions on Transfer of Stock.................................. 27
23. Restrictions on Acquisition of Stock of the Holding Company........ 28
24. Tax Rulings or Opinions............................................ 28
25. Stock Compensation Plans........................................... 29
26. Dividend and Repurchase Restrictions on Stock...................... 29
27. Payment of Fees to Brokers......................................... 30
28. Effective Date..................................................... 30
29. Amendment or Termination of the Plan............................... 30
30. Interpretation of the Plan......................................... 31
Annex A - Plan of Merger between the Mid-Tier Holding Company and the
Association
Annex B - Plan of Merger between the Mutual Holding Company and the Association
Annex C - Plan of Merger between the Association, the Holding Company and
Interim
<PAGE>
1. INTRODUCTION.
For purposes of this section, all capitalized terms have the meanings
ascribed to them in Section 2.
On October 24, 1994, Community Savings, F. A., a federally chartered
mutual savings association ("Community Savings"), reorganized into the mutual
holding company form of organization. To accomplish this transaction, Community
Savings organized a federally chartered, stock savings association known as
Community Savings, F. A. (the "Association") as a wholly owned subsidiary.
Community Savings then transferred substantially all of its assets and
liabilities to the Association in exchange for 2,620,144 shares of Association
Common Stock, and reorganized itself into a federally chartered mutual holding
company known as ComFed, M. H. C. (the "Mutual Holding Company"). The
Association simultaneously sold 2,379,856 shares of Association Common Stock to
depositors of the Association, employee stock benefit plans of the Association,
directors, officers and employees of the Association and members of the general
public. On September 30, 1997, the Association completed a reorganization in
which the Association became a wholly owned subsidiary of a federally chartered
stock mid-tier holding company known as "Community Savings Bankshares, Inc."
(the "Mid-Tier Holding Company"). Shareholders of the Association became
shareholders of the Mid-Tier Holding Company, exchanging their shares of
Association Common Stock on a one-for-one basis for shares of Mid-Tier Holding
Company Common Stock. As of the date hereof, after taking into account the
issuance of 103,960 shares pursuant to stock benefit plans, the Mutual Holding
Company and the other Shareholders own an aggregate of 51.34% and 48.66% of the
outstanding Mid-Tier Holding Company Common Stock, respectively.
The Boards of Directors of the Mutual Holding Company, the Mid-Tier
Holding Company and the Association believe that a conversion of the Mutual
Holding Company to stock form and reorganization of the Association pursuant to
this Plan of Conversion is in the best interests of the Mutual Holding Company,
the Mid-Tier Holding Company and the Association, as well as the best interests
of their respective Members and Shareholders. The Boards of Directors determined
that this Plan of Conversion equitably provides for the interests of Members
through the granting of subscription rights and the establishment of a
liquidation account. The Conversion and Reorganization will result in the
raising of additional capital for the Association and the Holding Company and
should result in a more active and liquid market for the Holding Company Common
Stock than currently exists for the Mid-Tier Holding Company Common Stock,
although there can be no assurances that this will be the case. In addition, the
Conversion and Reorganization have been structured to re-unite the accumulated
earnings and profits tax attribute retained by the Mutual Holding Company with
the retained earnings of the Association through a tax-free reorganization.
Finally, the Conversion and Reorganization is designed to enable the Association
and the Holding Company to more effectively compete in the financial services
marketplace.
If the Association had undertaken a standard conversion involving the
formation of a stock holding company in 1994, applicable OTS regulations would
have required a greater amount of Association Common Stock to be sold than the
$34.0 million of net proceeds raised in connection with the formation of the
Mutual Holding Company. In addition, if a standard conversion had been
<PAGE>
conducted in 1994, management of the Association believed that its ability to
generate sufficient loan volume, particularly in its market area, would have
made it difficult to prudently invest in a timely manner the significantly
larger amount of capital that would have been raised, when compared to the net
proceeds raised in connection with the formation of the Mutual Holding Company.
A standard conversion in 1994 also would have immediately eliminated all aspects
of the mutual form of organization.
Subsequent to the formation of the Mutual Holding Company, there have
been certain changes in the policies of the OTS relating to mutual holding
companies. In addition, market conditions for the stocks of savings institutions
and their holding companies have improved. The Association and the Mid-Tier
Holding Company have also gained experience in being companies required to meet
the filing requirements of the Securities Exchange Act of 1934 and in conducting
shareholder meetings and other shareholder matters, such as communications,
press releases, NASD matters and dividend payments. In light of the foregoing,
the Boards of Directors of the Mutual Holding Company, the Mid-Tier Holding
Company and the Association believe that it is in the best interests of such
companies and their respective Members and Shareholders to raise additional
capital at this time, and that the most feasible way to do so is through the
Conversion and Reorganization.
In connection with the Conversion and Reorganization, the Association
will form a new first-tier, wholly-owned subsidiary known as Community Savings
Bankshares, Inc., which will become the Holding Company upon consummation of the
Conversion and Reorganization. The Holding Company will in turn form a federally
chartered interim savings association ("Interim") as a wholly-owned subsidiary.
The Association formed the Mid-Tier Holding Company which became the holding
company for the Association pursuant to a reorganization completed on September
30, 1997. As described in more detail in Section 3, the Mutual Holding Company
will convert from the mutual form to a federal interim stock savings association
and simultaneously merge with and into the Association pursuant to the Plan of
Merger included as Annex B hereto, pursuant to which the Mutual Holding Company
will cease to exist and a liquidation account will be established by the
Association for the benefit of depositor Members as of specified dates, and
Interim will then merge with and into the Association pursuant to the Plan of
Merger included as Annex C hereto, pursuant to which the Association will become
a wholly owned subsidiary of the Holding Company. In connection therewith, each
share of Mid-Tier Holding Company Common Stock outstanding immediately prior to
the effective time thereof shall be automatically converted, without further
action by the holder thereof, into and become the right to receive shares of
Holding Company Common Stock based on the Exchange Ratio, plus cash in lieu of
any fractional share interest. Preceding these transactions the Mid-Tier Holding
Company will convert to an interim federal stock savings association and merge
with and into the Association with the Association as the surviving entity.
Annex A hereto describes this transaction.
In connection with the Conversion and Reorganization, the Holding
Company will offer shares of Conversion Stock in the Offerings as provided
herein. Shares of Conversion Stock will be offered in a Subscription Offering in
descending order of priority to Eligible Account Holders,
2
<PAGE>
Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account
Holders, Other Members and Directors, Officers and Employees. The Subscription
Rights granted in connection with the Subscription Offering are
non-transferrable. Any shares of Conversion Stock remaining unsold after the
Subscription Offering will be offered for sale initially to Public Shareholders
in the Public Shareholders Offering. Any shares of conversion stock remaining
unsold after the Subscription Offering and the Public Shareholders Offering will
be offered for sale to the public through a Community Offering and/or Syndicated
Community Offering, as determined by the Boards of Directors of the Holding
Company, the Mid-Tier Holding Company and the Association in their sole
discretion.
The Conversion and Reorganization is intended to provide a larger
capital base to support the Association's lending and investment activities and
thereby enhance the Association's capabilities to serve the borrowing and other
financial needs of the communities it serves. The use of the Holding Company
will provide greater organizational flexibility and possible diversification.
This Plan was adopted by the Boards of Directors of the Mutual Holding
Company, the Mid-Tier Holding Company and the Association on July 28, 1998 and
amended August 13, 1998.
This Plan is subject to the approval of the OTS and must be adopted by
(1) at least a majority of the total number of votes eligible to be cast by
Voting Members of the Mutual Holding Company at the Special Meeting and (2)
holders of at least two-thirds of the outstanding Mid-Tier Common Stock at the
Shareholders' Meeting. In addition, the Primary Parties have conditioned the
consummation of the Conversion and Reorganization on the approval of the Plan by
at least a majority of the votes cast, in person or by proxy, by the Public
Shareholders at the Shareholders' Meeting.
After the Conversion and Reorganization, the Association will continue
to be regulated by the OTS, as its chartering authority, and by the FDIC, which
insures the Association's deposits. In addition, the Association will continue
to be a member of the Federal Home Loan Bank System and all insured savings
deposits will continue to be insured by the FDIC up to the maximum provided by
law.
2. DEFINITIONS.
As used in this Plan, the terms set forth below have the following
meaning:
2.1 ACTUAL PURCHASE PRICE means the price per share at which the
Conversion Stock is ultimately sold by the Holding Company in the Offerings in
accordance with the terms hereof.
2.2 AFFILIATE means a Person who, directly or indirectly, through one
or more intermediaries, controls or is controlled by or is under common control
with the Person specified.
3
<PAGE>
2.3 ASSOCIATE, when used to indicate a relationship with any Person,
means (i) a corporation or organization (other than the Mutual Holding Company,
the Mid-Tier Holding Company, the Association, a majority-owned subsidiary of
the Association or the Holding Company) of which such Person is a director,
officer or partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of equity securities, (ii) any trust or other estate in which
such Person has a substantial beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity, provided, however, that
such term shall not include any Tax-Qualified Employee Stock Benefit Plan of the
Holding Company or the Association in which such Person has a substantial
beneficial interest or serves as a trustee or in a similar fiduciary capacity,
and (iii) any relative or spouse of such Person, or any relative of such spouse,
who has the same home as such Person or who is a director or officer of the
Holding Company or the Association or any of the subsidiaries of the foregoing.
2.4 ASSOCIATION means Community Savings, F. A., a federally chartered
savings and loan association.
2.5 ASSOCIATION MERGER means the merger of Interim with and into the
Association pursuant to the Plan of Merger included as Annex C hereto.
2.6 ASSOCIATION COMMON STOCK means the common stock of the
Association, par value $1.00 per share, which stock is not and will not be
insured by the FDIC or any other governmental authority, all of which is
currently held by the Mid-Tier Holding Company and subsequent to the Conversion
and Reorganization, all of which will be held by the Holding Company.
2.7 CODE means the Internal Revenue Code of 1986, as amended.
2.8 COMMUNITY OFFERING means the offering for sale by the Holding
Company of any shares of Conversion Stock not subscribed for in the Subscription
Offering or the Public Shareholders Offering to such Persons within or without
the State of Florida as may be selected by the Holding Company, the Mid-Tier
Holding Company and the Association in their sole discretion and to whom a copy
of the Prospectus and an Order Form are delivered by or on behalf of the Holding
Company.
2.9 CONTROL (including the terms "controlling," "controlled by," and
"under common control with") means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
2.10 CONVERSION AND REORGANIZATION means (i) the conversion of the
Mid-Tier Holding Company from a federally chartered stock corporation to a
federal interim savings association and the subsequent Mid-Tier Holding Company
Merger pursuant to which the Mid-Tier Holding Company will cease to exist, (ii)
the conversion of the Mutual Holding Company from mutual form to a federal
interim stock savings association and the subsequent Mutual Holding Company
Merger,
4
<PAGE>
pursuant to which the Mutual Holding Company will cease to exist, (iii) the
Association Merger, pursuant to which the Association will become a wholly owned
subsidiary of the Holding Company and, in connection therewith, each share of
Mid-Tier Holding Company Common Stock outstanding immediately prior to the
effective time thereof shall automatically be converted, without further action
by the holder thereof, into and become the right to receive shares of Holding
Company Common Stock based on the Exchange Ratio, plus cash in lieu of any
fractional share interest, and (iv) the issuance of Conversion Stock by the
Holding Company in the Offerings as provided herein, which will increase the
number of shares of Holding Company Common Stock outstanding and the
capitalization of the Holding Company and the Association. All such transactions
shall occur substantially simultaneously.
2.11 CONVERSION STOCK means the Holding Company Common Stock to be
issued and sold in the Offerings pursuant to the Plan of Conversion.
2.12 DEPOSIT ACCOUNT means withdrawable or repurchasable shares,
investment certificates or deposits or other savings accounts, including money
market deposit accounts, negotiable order of withdrawal accounts and demand
accounts, held by an account holder of the Association.
2.13 DIRECTOR, OFFICER AND EMPLOYEE means the terms as applied
respectively to any person who is a director, officer or employee of the Mutual
Holding Company, the Mid-Tier Holding Company, the Association or any subsidiary
thereof.
2.14 ELIGIBLE ACCOUNT HOLDER means any Person holding a Qualifying
Deposit on the Eligibility Record Date for purposes of determining Subscription
Rights and establishing subaccount balances in the liquidation account to be
established pursuant to Section 17 hereof.
2.15 ELIGIBILITY RECORD DATE means the date for determining Qualifying
Deposits of Eligible Account Holders and is the close of business on June 30,
1997.
2.16 ESTIMATED PRICE RANGE means the range of the estimated aggregate
pro forma market value of the total number of shares of Conversion Stock to be
issued in the Offerings, as determined by the Independent Appraiser in
accordance with Section 4 hereof.
2.17 EXCHANGE RATIO means the rate at which shares of Holding Company
Common Stock will be exchanged for shares of Mid-Tier Holding Common Stock held
by the Public Shareholders in connection with the Association Merger. The exact
rate shall be determined by the Mutual Holding Company, the Mid-Tier Holding
Company and the Association in order to ensure that upon consummation of the
Conversion and Reorganization the Public Shareholders will own in the aggregate
approximately the same percentage of the Holding Company Common Stock to be
outstanding upon completion of the Conversion and Reorganization as the
percentage of Mid-Tier Holding Company Common Stock owned by them in the
aggregate immediately prior to consummation of the Conversion and
Reorganization, before giving effect to (a) cash paid in lieu of any fractional
interests of Holding Company Common Stock and (b) any shares of Conversion
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Stock purchased by the Public Shareholders or Tax-Qualified Employee Stock
Benefit Plans in the Offerings.
2.18 EXCHANGE SHARES mean the shares of Holding Company Common Stock to
be issued to the Public Shareholders in connection with the Association Merger.
2.19 FDIC means the Federal Deposit Insurance Corporation or any
successor thereto.
2.20 HOLDING COMPANY means Community Savings Bankshares, Inc., a stock
corporation to be organized under the laws of the State of Delaware. Such
corporation will be initially formed as a first-tier, wholly owned subsidiary of
the Association. Upon completion of the Conversion and Reorganization, the
Holding Company shall hold all of the outstanding capital stock of the
Association.
2.21 HOLDING COMPANY COMMON STOCK means the common stock of the Holding
Company, par value $1.00 per share, which stock cannot and will not be insured
by the FDIC or any other governmental authority.
2.22 INDEPENDENT APPRAISER means the independent investment banking or
financial consulting firm retained by the Holding Company, the Mid-Tier Holding
Company and the Association to prepare an appraisal of the estimated pro forma
market value of the Conversion Stock.
2.23 INITIAL PURCHASE PRICE means the price per share to be paid
initially by Participants for shares of Conversion Stock subscribed for in the
Subscription Offering and by Persons for shares of Conversion Stock ordered in
the Community Offering and/or Syndicated Community Offering.
2.24 INTERIM means Community Interim Federal Savings Association, which
will be formed as a first-tier, wholly-owned subsidiary of the Holding Company
to facilitate the Association Merger.
2.25 MEMBER means any Person qualifying as a member of the Mutual
Holding Company in accordance with its mutual charter and bylaws and the laws of
the United States.
2.26 MID-TIER HOLDING COMPANY means Community Savings Bankshares, Inc.,
an existing federally chartered stock corporation.
2.27 MID-TIER HOLDING COMMON STOCK means the common stock of the
Mid-Tier Holding Company, par value $1.00 per share, which stock is not insured
by the FDIC or any other governmental entity.
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2.28 MID-TIER HOLDING COMPANY MERGER means the Merger of the Mid-Tier
Mutual Holding Company (following its conversion to a federal interim stock
savings association) with and into the Association pursuant to the Plan of
Merger included as Annex A hereto
2.29 MUTUAL HOLDING COMPANY means ComFed, M. H. C.
2.30 MUTUAL HOLDING COMPANY MERGER means the merger of the Mutual
Holding Company (following its conversion into a federal interim stock savings
association) with and into the Association pursuant to the Plan of Merger
included as Annex B hereto.
2.31 OFFERINGS mean the Subscription Offering, the Public Shareholders
Offering, the Community Offering and the Syndicated Community Offering.
2.32 OFFICER means the chairman of the board of directors, president,
chief executive officer, vice-president, secretary, treasurer or principal
financial officer, comptroller or principal accounting officer and any other
person performing similar functions with respect to any organization whether
incorporated or unincorporated.
2.33 ORDER FORM means the form or forms to be provided by the Holding
Company, containing all such terms and provisions as set forth in Section 13
hereof, to a Participant or other Person by which Conversion Stock may be
ordered in the Offerings.
2.34 OTHER MEMBER means a Voting Member who is not an Eligible Account
Holder or a Supplemental Eligible Account Holder.
2.35 OTS means the Office of Thrift Supervision or any successor
thereto.
2.36 PARTICIPANT means any Eligible Account Holder, Tax-Qualified
Employee Stock Benefit Plan, Supplemental Eligible Account Holder, Other Member
and Director, Officer and Employee.
2.37 PERSON means an individual, a corporation, a limited liability
company, a partnership, a limited liability partnership, an association, a joint
stock company, a trust, an unincorporated organization or a government or any
political subdivision thereof.
2.38 PLAN and PLAN OF CONVERSION mean this Plan of Conversion and
Agreement and Plan of Reorganization as adopted by the Boards of Directors of
the Mutual Holding Company, the Mid-Tier Holding Company and the Association and
any amendment hereto approved as provided herein. The Board of Directors of the
Holding Company shall adopt this Plan as soon as practicable following its
organization, and the Board of Directors of Interim shall adopt the Plan of
Merger included as Annex C hereto as soon as practicable following its
organization.
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2.39 PRIMARY PARTIES mean the Mutual Holding Company, the Mid-Tier
Holding Company, the Association and the Holding Company.
2.40 PROSPECTUS means the one or more documents to be used in offering
the Conversion Stock in the Offerings.
2.41 PUBLIC OFFERING means an underwritten firm commitment offering to
the public through one or more underwriters.
2.42 PUBLIC SHAREHOLDERS mean those Persons who own shares of Mid-Tier
Holding Company Common Stock, excluding the Mutual Holding Company, as of the
Voting Record Date.
2.43 PUBLIC SHAREHOLDERS OFFERING means the offering for sale by the
Holding Company of any shares of Conversion Stock not subscribed for in the
Subscription Offering to Public Shareholders in the sole discretion of the
Holding Company, the Mid-Tier Holding Company and the Association.
2.44 QUALIFYING DEPOSIT means the aggregate balance of all Deposit
Accounts in the Association of (i) an Eligible Account Holder at the close of
business on the Eligibility Record Date, provided such aggregate balance is not
less than $50, and (ii) a Supplemental Eligible Account Holder at the close of
business on the Supplemental Eligibility Record Date, provided such aggregate
balance is not less than $50.
2.45 SEC means the Securities and Exchange Commission.
2.46 SPECIAL MEETING means the Special Meeting of Members of the Mutual
Holding Company called for the purpose of submitting this Plan to the Members
for their approval, including any adjournments of such meeting.
2.47 SHAREHOLDERS mean those Persons who own shares of Mid-Tier Holding
Company Common Stock.
2.48 SHAREHOLDERS' MEETING means the annual or special meeting of
Shareholders of the Mid-Tier Holding Company called for the purpose of
submitting this Plan to the Shareholders for their approval, including any
adjournments of such meeting.
2.49 SUBSCRIPTION OFFERING means the offering of the Conversion Stock
to Participants.
2.50 SUBSCRIPTION RIGHTS mean nontransferable rights to subscribe for
Conversion Stock granted to Participants pursuant to the terms of this Plan.
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2.51 SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER means any Person, except
Directors and Officers of the Association and their Associates, holding a
Qualifying Deposit at the close of business on the Supplemental Eligibility
Record Date.
2.52 SUPPLEMENTAL ELIGIBILITY RECORD DATE, if applicable, means the
date for determining Qualifying Deposits of Supplemental Eligible Account
Holders and shall be required if the Eligibility Record Date is more than 15
months prior to the date of the latest amendment to the Application for
Conversion filed by the Mutual Holding Company prior to approval of such
application by the OTS. If applicable, the Supplemental Eligibility Record Date
shall be the last day of the calendar quarter preceding OTS approval of the
Application for Conversion submitted by the Mutual Holding Company pursuant to
this Plan of Conversion.
2.53 SYNDICATED COMMUNITY OFFERING means the offering for sale by a
syndicate of broker-dealers to the general public of shares of Conversion Stock
not purchased in the Subscription Offering and the Community Offering.
2.54 TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLAN means any defined
benefit plan or defined contribution plan, such as an employee stock ownership
plan, stock bonus plan, profit-sharing plan or other plan, which is established
for the benefit of the employees of the Holding Company and/or the Association
and which, with its related trust, meets the requirements to be "qualified"
under Section 401 of the Code as from time to time in effect. A
"Non-Tax-Qualified Employee Stock Benefit Plan" is any defined benefit plan or
defined contribution stock benefit plan which is not so qualified.
2.55 VOTING MEMBER means a Person who at the close of business on the
Voting Record Date is entitled to vote as a Member of the Mutual Holding Company
in accordance with its mutual charter and bylaws.
2.56 VOTING RECORD DATE means the date or dates for determining the
eligibility of Members to vote at the Special Meeting and of Shareholders to
vote at the Shareholders' Meeting, as applicable.
3. GENERAL PROCEDURE FOR CONVERSION AND REORGANIZATION.
(a) After the Association's organization of the Holding Company and the
receipt of all requisite regulatory approvals, the Holding Company will form
Interim as a first-tier, wholly owned subsidiary of the Holding Company, and the
Board of Directors of Interim shall adopt the Plan of Merger included as Annex C
hereto by at least a two-thirds vote. In addition, the Holding Company shall
approve such Plan of Merger in its capacity as the sole shareholder of Interim.
Furthermore, the Mid-Tier Holding Company shall approve the Plan and the Plan of
Merger in its capacity as the sole shareholder of the Association.
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(b) An application for the Conversion and Reorganization, including the
Plan and all other requisite material (the "Application for Conversion"), shall
be submitted to the OTS for approval. The Mutual Holding Company, the Mid-Tier
Holding Company and the Association also will cause notice of the adoption of
the Plan by the Boards of Directors of the Mutual Holding Company, the Mid-Tier
Holding Company and the Association to be given by publication in a newspaper
having general circulation in each community in which an office of the
Association is located and will cause copies of the Plan to be made available at
each office of the Mutual Holding Company, the Mid-Tier Holding Company and the
Association for inspection by Members and Shareholders. The Mutual Holding
Company, the Mid-Tier Holding Company and the Association will again cause to be
published, in accordance with the requirements of applicable regulations of the
OTS, a notice of the filing with the OTS of an application to convert the Mutual
Holding Company from mutual to stock form and will post the notice of the filing
for the Application for Conversion in each of their offices.
(c) Promptly following receipt of requisite approval of the OTS, this
Plan will be submitted to the Members for their consideration and approval at
the Special Meeting. The Mutual Holding Company may, at its option, mail to all
Members as of the Voting Record Date, at their last known address appearing on
the records of the Mutual Holding Company and the Association, a proxy statement
in either long or, to the extent permitted by applicable law and regulation,
summary form describing the Plan which will be submitted to a vote of the
Members at the Special Meeting. The Holding Company also shall mail to all such
Members (as well as other Participants) either a Prospectus and Order Form for
the purchase of Conversion Stock or, to the extent permitted by applicable law
and regulation, a letter informing them of their right to receive a Prospectus
and Order Form and a postage prepaid card to request such materials, subject to
the provisions of Section 15 hereof. In addition, all such Members will receive,
or be given the opportunity to request by returning a postage-prepaid card which
will be distributed with the proxy statement, letter or other written
communication, a copy of the certificate of incorporation and bylaws of the
Holding Company. The Plan must be approved by the affirmative vote of at least a
majority of the total number of votes eligible to be cast by Voting Members at
the Special Meeting.
(d) Subscription Rights to purchase shares of Conversion Stock will be
issued without payment therefor to Eligible Account Holders, Tax-Qualified
Employee Stock Benefit Plans, Supplemental Eligible Account Holders, if any,
Other Members and Directors, Officers and Employees as set forth in Sections 5,
6, 7, 8 and 9 hereof.
(e) The Mid-Tier Holding Company shall file preliminary proxy materials
with the OTS and the SEC in order to seek the approval of the Plan by its
Shareholders. Promptly following clearance of such proxy materials and the
receipt of any other requisite approval of the OTS, the Mid-Tier Holding Company
will mail definitive proxy materials to all Shareholders as of the Voting Record
Date, at their last known address appearing on the records of the Mid-Tier
Holding Company, for their consideration and approval of this Plan at the
Shareholders' Meeting. The Plan must be approved by the holders of at least
two-thirds of the outstanding Mid-Tier Holding Company Common Stock as of the
Voting Record Date. In addition, the Primary Parties have
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conditioned the consummation of the Conversion and Reorganization on the
approval of the Plan by at least a majority of the votes cast, in person or by
proxy, by the Public Shareholders at the Shareholders' Meeting.
(f) The Holding Company shall submit or cause to be submitted an
Application H-(e)1 or H-(e)1-S to the OTS for approval of the acquisition of the
Association. Such application also shall include an application to form Interim.
In addition, an application to merge the Mutual Holding Company (following its
conversion into a federal interim stock savings association) and the
Association, an application to merge the Mid-Tier Holding Company (following its
conversion into a federal interim stock savings association and the Association)
and an application to merge Interim and the Association shall be filed with the
OTS, either as exhibits to the Application H-(e)1 or H-(e)1-S or separately. All
notices required to be published in connection with such applications shall be
published at the times required.
(g) The Holding Company shall file a Registration Statement with the
SEC to register the Holding Company Common Stock to be issued in the Conversion
and Reorganization under the Securities Act of 1933, as amended, and shall
register such Holding Company Common Stock under any applicable state securities
laws. Upon registration and after the receipt of all required regulatory
approvals, the Conversion Stock shall be first offered for sale in a
Subscription Offering to Eligible Account Holders, Tax-Qualified Employee Stock
Benefit Plans, Supplemental Eligible Account Holders, if any, Other Members and
Directors, Officers and Employees. It is anticipated that any shares of
Conversion Stock remaining unsold after the Subscription Offering will be sold
(i) initially to Public Shareholders as of the Voting Record Date in the Public
Shareholders Offering and (ii) to the extent any shares of Conversion Stock
remain available after filling orders submitted in the Public Shareholders
Offering through a Community Offering and/or a Syndicated Community Offering.
The purchase price per share for the Conversion Stock shall be a uniform price
determined in accordance with Section 4 hereof. The Holding Company shall
contribute to the Association an amount of the net proceeds received by the
Holding Company from the sale of Conversion Stock as shall be determined by the
Boards of Directors of the Holding Company and the Association and as shall be
approved by the OTS.
(h) The effective date of the Conversion and Reorganization shall be
the date set forth in Section 28 hereof. Upon the effective date, the following
transactions shall occur:
(i) The Mutual Holding Company shall convert from a mutual
holding company to a federal interim stock savings association. The
Mid-Tier Holding Company shall convert into a federal interim stock
savings association and simultaneously merge with and into the
Association in the Mid-Tier Holding Company Merger, with the
Association being the surviving institution. Immediately thereafter,
the Mutual Holding Company, as converted, shall merge with and into the
Association in the Mutual Holding Company Merger, with the Association
being the surviving institution. As a result of the Mutual Holding
Company Merger and the Mid-Tier Holding Company Merger, (x) the shares
of Mid-Tier Holding Company
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Common Stock held by the Mutual Holding Company (following its
conversion to a federal interim stock savings association) shall be
extinguished and (y) Members of the Mutual Holding Company will be
granted interests in the liquidation account to be established by the
Association pursuant to Section 17 hereof.
(ii) Interim shall merge with and into the Association pursuant
to the Association Merger, with the Association being the surviving
institution. As a result of the Association Merger, (x) the shares of
Holding Company Common Stock held by the Association shall be
extinguished; (y) the shares of Mid-Tier Holding Company Common Stock
held by the Public Shareholders shall be converted into the right to
receive shares of Holding Company Common Stock based upon the Exchange
Ratio, plus cash in lieu of any fractional share interest based upon
the Actual Purchase Price; and (z) the shares of common stock of
Interim held by the Holding Company shall be converted into shares of
Association Common Stock on a one-for-one basis, with the result that
the Association shall become a wholly owned subsidiary of the Holding
Company. In addition, as a result of the Association Merger, options to
purchase shares of Mid-Tier Holding Company Common Stock which are
outstanding immediately prior to consummation of the Conversion and
Reorganization shall be converted into options to purchase shares of
Holding Company Common Stock, with the number of shares subject to the
option and the exercise price per share to be adjusted based upon the
Exchange Ratio so that the aggregate exercise price remains unchanged,
and with the duration of the option remaining unchanged.
(iii) The Holding Company shall sell the Conversion Stock in the
Offerings, as provided herein.
(i) The Primary Parties may retain and pay for the services of
financial and other advisors and investment bankers to assist in connection with
any or all aspects of the Conversion and Reorganization, including in connection
with the Offerings the payment of fees to brokers and investment bankers for
assisting Persons in completing and/or submitting Order Forms. All fees,
expenses, retainers and similar items shall be reasonable.
4. TOTAL NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION
STOCK.
(a) The aggregate price at which shares of Conversion Stock shall be
sold in the Offerings shall be based on a pro forma valuation of the aggregate
market value of the Conversion Stock prepared by the Independent Appraiser. The
valuation shall be based on financial information relating to the Primary
Parties, market, financial and economic conditions, a comparison of the Primary
Parties with selected publicly-held financial institutions and holding companies
and with comparable financial institutions and holding companies and such other
factors as the Independent Appraiser may deem to be important. The valuation
shall be stated in terms of an Estimated Price
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Range, the maximum of which shall generally be no more than 15% above the
average of the minimum and maximum of such price range and the minimum of which
shall generally be no more than 15% below such average. The valuation shall be
updated during the Conversion and Reorganization as market and financial
conditions warrant and as may be required by the OTS.
(b) Based upon the independent valuation, the Boards of Directors of
the Primary Parties shall fix the Initial Purchase Price and the number (or
range) of shares of Conversion Stock to be offered in the Subscription Offering,
Public Shareholders Offering, Community Offering and/or Syndicated Community
Offering. The Actual Purchase Price and the total number of shares of Conversion
Stock to be issued in the Offerings shall be determined by the Boards of
Directors of the Primary Parties upon conclusion of the Offerings in
consultation with the Independent Appraiser and any financial advisor or
investment banker retained by the Primary Parties in connection therewith.
(c) Subject to the approval of the OTS, the Estimated Price Range may
be increased or decreased to reflect market, financial and economic conditions
prior to completion of the Conversion and Reorganization, and under such
circumstances the Primary Parties may increase or decrease the total number of
shares of Conversion Stock to be issued in the Conversion and Reorganization to
reflect any such change. Notwithstanding anything to the contrary contained in
this Plan, no resolicitation of subscribers shall be required and subscribers
shall not be permitted to modify or cancel their subscriptions unless the gross
proceeds from the sale of the Conversion Stock issued in the Conversion and
Reorganization are less than the minimum or more than 15% above the maximum of
the Estimated Price Range set forth in the Prospectus. In the event of an
increase in the total number of shares offered in the Conversion and
Reorganization due to an increase in the Estimated Price Range, the priority of
share allocation shall be as set forth in this Plan.
5. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS.
(a) Each Eligible Account Holder shall receive, without payment,
Subscription Rights to purchase up to the greater of (i) $250,000 of Conversion
Stock (or such maximum purchase limitation as may be established for the
Community Offering and/or Syndicated Community Offering), (ii) one-tenth of 1%
of the total offering of shares in the Subscription Offering and (iii) 15 times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Conversion Stock offered in the Subscription Offering
by a fraction, of which the numerator is the amount of the Qualifying Deposits
of the Eligible Account Holder and the denominator is the total amount of all
Qualifying Deposits of all Eligible Account Holders, in each case subject to
Sections 12 and 15 hereof.
(b) In the event of an oversubscription for shares of Conversion Stock
pursuant to Section 5(a), available shares shall be allocated among subscribing
Eligible Account Holders so as to permit each such Eligible Account Holder, to
the extent possible, to purchase a number of shares which will make his or her
total allocation equal to the lesser of the number of shares subscribed for or
100 shares. Any available shares remaining after each subscribing Eligible
Account Holder has
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been allocated the lesser of the number of shares subscribed for or 100 shares
shall be allocated among the subscribing Eligible Account Holders in the
proportion which the Qualifying Deposit of each such subscribing Eligible
Account Holder bears to the total Qualifying Deposits of all such subscribing
Eligible Account Holders whose orders are unfilled, provided that no fractional
shares shall be issued. Subscription Rights of Eligible Account Holders who are
also Directors or Officers and their Associates shall be subordinated to those
of other Eligible Account Holders to the extent that they are attributable to
increased deposits during the one-year period preceding the Eligibility Record
Date.
6. SUBSCRIPTION RIGHTS OF TAX-QUALIFIED EMPLOYEE STOCK BENEFIT
PLANS.
Tax-Qualified Employee Stock Benefit Plans shall receive, without
payment, Subscription Rights to purchase in the aggregate up to 10% of the
Conversion Stock, including any shares of Conversion Stock to be issued in the
Conversion and Reorganization as a result of an increase in the Estimated Price
Range after commencement of the Subscription Offering and prior to completion of
the Conversion and Reorganization. The subscription rights granted to
Tax-Qualified Employee Stock Benefit Plans shall be subject to the availability
of shares of Conversion Stock after taking into account the shares of Conversion
Stock purchased by Eligible Account Holders; provided, however, that in the
event that the total number of shares of Conversion is increased to any amount
greater than the number of shares representing the maximum of the Estimated
Price Range as set forth in the Prospectus ("Maximum Shares"), the ESOP shall
have a priority right to purchase any such shares exceeding the Maximum Shares
up to an aggregate of 8% of Conversion Stock. Shares of Conversion Stock
purchased by any individual participant ("Plan Participant") in a Tax-Qualified
Employee Stock Benefit Plan using funds therein pursuant to the exercise of
subscription rights granted to such Participant in his individual capacity as a
Participant and/or purchases by such Plan Participant in the Community Offering
shall not be deemed to be purchases by a Tax-Qualified Employee Stock Benefit
Plan for purposes of calculating the maximum amount of Conversion Stock that
Tax-Qualified Employee Stock Benefit Plans may purchase pursuant to the first
sentence of this Section 6 if the individual Plan Participant controls or
directs the investment authority with respect to such account or subaccount.
Consistent with applicable laws and regulations and policies and practices of
the OTS, the Tax-Qualified Employee Stock Benefit Plans may use funds
contributed by the Holding Company or the Association and/or borrowed from an
independent financial institution to exercise such Subscription Rights, and the
Holding Company and the Association may make scheduled discretionary
contributions thereto, provided that such contributions do not cause the Holding
Company or the Association to fail to meet any applicable regulatory capital
requirement.
7. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT
HOLDERS.
(a) In the event that the Eligibility Record Date is more than 15
months prior to the date of the latest amendment to the Application for
Conversion filed prior to OTS approval, then, and
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only in that event, a Supplemental Eligibility Record Date shall be set and each
Supplemental Eligible Account Holder shall receive, without payment,
Subscription Rights to purchase up to the greater of (i) $250,000 of Conversion
Stock in the Subscription Offering (or such maximum purchase limitation as may
be established for the Community Offering and/or Syndicated Community Offering),
(ii) one-tenth of 1% of the total offering of shares in the Subscription
Offering and (iii) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Conversion Stock offered
in the Subscription Offering by a fraction, of which the numerator is the amount
of the Qualifying Deposits of the Supplemental Eligible Account Holder and the
denominator is the total amount of all Qualifying Deposits of all Supplemental
Eligible Account Holders, in each case subject to Sections 12 and 15 hereof and
the availability of shares of Conversion Stock for purchase after taking into
account the shares of Conversion Stock purchased by Eligible Account Holders and
Tax-Qualified Employee Stock Benefit Plans through the exercise of Subscription
Rights under Sections 5 and 6 hereof.
(b) In the event of an oversubscription for shares of Conversion Stock
pursuant to Section 7(a), available shares shall be allocated among subscribing
Supplemental Eligible Account Holders so as to permit each such Supplemental
Eligible Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his or her total allocation (including the number of shares,
if any, allocated in accordance with Section 5(a)) equal to the lesser of the
number of shares subscribed for or 100 shares. Any remaining available shares
shall be allocated among subscribing Supplemental Eligible Account Holders in
the proportion that the amount of their respective Qualifying Deposits bears to
the total amount of the Qualifying Deposits of all such subscribing Supplemental
Eligible Account Holders whose orders are unfilled, provided that no fractional
shares shall be issued.
8. SUBSCRIPTION RIGHTS OF OTHER MEMBERS.
(a) Each Other Member shall receive, without payment, Subscription
Rights to purchase up to the greater of (i) $250,000 of Conversion Stock in the
Subscription Offering (or such maximum purchase limitation as may be established
for the Community Offering and/or Syndicated Community Offering) and (ii)
one-tenth of 1% of the total offering of shares in the Subscription Offering,
subject to Sections 12 and 15 hereof and the availability of shares of
Conversion Stock for purchase after taking into account the shares of Conversion
Stock purchased by Eligible Account Holders, Tax-Qualified Employee Stock
Benefit Plans and Supplemental Eligible Account Holders, if any, through the
exercise of Subscription Rights under Sections 5, 6 and 7 hereof.
(b) If, pursuant to this Section 8, Other Members subscribe for a
number of shares of Conversion Stock in excess of the total number of shares of
Conversion Stock remaining, available shares shall be allocated among
subscribing Other Members so as to permit each such Other Member, to the extent
possible, to purchase a number of shares which will make his or her total
allocation equal to the lesser of the number of shares subscribed for or 100
shares. Any remaining shares shall be allocated among subscribing Other Members
on a pro rata basis in the same
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proportion as each such Other Member's subscription bears to the total
subscriptions of all such subscribing Other Members, provided that no fractional
shares shall be issued.
9. SUBSCRIPTION RIGHTS OF DIRECTORS, OFFICERS AND EMPLOYEES.
(a) To the extent that there are sufficient shares remaining after
satisfaction of all subscriptions under the above categories, Directors,
Officers and Employees of the Association shall receive, without payment,
Subscription Rights to purchase in this category up to an aggregate of 15.0% of
the shares of Conversion Stock offered in the Subscription Offering.
(b) In the event of an oversubscription for shares of Conversion Stock
pursuant to Section 9(a), Subscription Rights for the purchase of such shares
shall be allocated among the individual Directors, Officers and Employees on a
point system basis, whereby a point will be assigned for each year of employment
and for each salary increment of $5,000 per annum and five points for each
office held in the Mutual Holding Company and the Association, including a
directorship. If any such Director, Officer or Employee does not subscribe for
his or her full allocation of shares, any shares not subscribed for may be
purchased by other Directors, Officers and Employees in proportion to their
respective subscriptions, provided that no fractional shares shall be issued.
10. PUBLIC SHAREHOLDERS OFFERING.
(a) If less than the total number of shares of Conversion Stock are
sold in the Subscription Offering, all remaining shares will be offered for sale
to Public Shareholders as of the Voting Record Date. The amount of Conversion
Stock that any Public Shareholder may purchase in the Public Shareholders
Offering shall not exceed the greater of (i) $250,000 of Conversion Stock in the
Subscription Offering (or such maximum purchase limitation as may be established
for the Community Offering and/or Syndicated Community Offering) and (ii)
one-tenth of 1% of the total offering of shares in the Subscription Offering,
subject to Sections 12 and 15 hereof and the availability of shares of
Conversion Stock for purchase after taking into account the shares of Conversion
Stock purchased by Eligible Account Holders, Tax-Qualified Employee Stock
Benefit Plans, Supplemental Eligible Account Holders, if any, Other Members and
Directors, Officers and Employees. Each order for Conversion Stock in the Public
Shareholders Offering shall be subject to the absolute right of the Primary
Parties to accept or reject any such order in whole or in part either at the
time of receipt of an order or as soon as practicable following completion of
the Public Shareholders Offering. The Primary Parties may commence the Public
Shareholders Offering concurrently with, at any time during, or as soon as
practicable after the end of the Subscription Offering and the Public
Shareholders Offering must be completed within 45 days of the completion of the
Subscription Offering, unless extended by the Primary Parties with any required
regulatory approval.
(b) If, pursuant to this Section 10, Public Shareholders submit orders
for a number of shares of Conversion Stock in excess of the total number of
shares of Conversion Stock remaining,
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available shares shall be allocated among subscribing Public Shareholders as of
the Voting Record Date on a pro rata basis in the same proportion as each such
Public Shareholder's order bears to the total orders of all such subscribing
Public Shareholders, provided that no fractional shares shall be issued.
11. COMMUNITY OFFERING, SYNDICATED COMMUNITY OFFERING AND
OTHER OFFERINGS.
(a) If less than the total number of shares of Conversion Stock are
sold in the Subscription Offering, it is anticipated that all remaining shares
of Conversion Stock shall, if practicable, be sold in a Community Offering.
Subject to the requirements set forth herein, the manner in which the Conversion
Stock is sold in the Community Offering shall have as the objective the
achievement of the widest possible distribution of such stock.
(b) In the event of a Community Offering, all shares of Conversion
Stock which are not subscribed for in the Subscription Offering or ordered in
the Public Shareholders Offering shall be offered for sale by means of a direct
community marketing program, which may provide for the use of brokers, dealers
or investment banking firms experienced in the sale of financial institution
securities. Any available shares in excess of those not subscribed for in the
Subscription Offering will be available for purchase by members of the general
public to whom a Prospectus and an Order Form is delivered by the Holding
Company or on its behalf, with preference given to natural persons residing in
counties in Florida in which the Association has a branch office ("Preferred
Subscribers").
(c) A Prospectus and Order Form shall be furnished to such Persons as
the Primary Parties may select in connection with the Community Offering, and
each order for Conversion Stock in the Community Offering shall be subject to
the absolute right of the Primary Parties to accept or reject any such order in
whole or in part either at the time of receipt of an order or as soon as
practicable following completion of the Community Offering. Available shares
will be allocated first to each Preferred Subscriber whose order is accepted in
an amount equal to the lesser of 100 shares or the number of shares subscribed
for by each such Preferred Subscriber, if possible. Thereafter, unallocated
shares shall be allocated among the Preferred Subscribers whose accepted orders
remain unsatisfied in the same proportion that the unfilled order of each bears
to the total unfilled orders of all Preferred Subscribers whose accepted orders
remain unsatisfied, provided that no fractional shares shall be issued. If there
are any shares remaining after all accepted orders by Preferred Subscribers have
been satisfied, such remaining shares shall be allocated to other members of the
general public who purchase in the Community Offering, applying the same
allocation described above for Preferred Subscribers.
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(d) The amount of Conversion Stock that any Person may purchase in the
Community Offering shall not exceed the greater of (i) $250,000 of Conversion
Stock in the Subscription Offering or (ii) one-tenth of 1% of the total offering
in the Subscription Offering, provided, however, that this amount may be
increased to up to 5% of the total offering of shares of Conversion Stock,
subject to any required regulatory approval but without the further approval of
Members of the Mutual Holding Company or the Shareholders of the Mid-Tier
Holding Company; and provided further that, to the extent applicable, and
subject to the preferences set forth in Section 11(b) and (c) of this Plan and
the limitations on purchases of Conversion Stock set forth in this Section 11(d)
and Section 12 of this Plan, orders for Conversion Stock in the Community
Offering shall first be filled to a maximum of 2% of the total number of shares
of Conversion Stock sold in the Offerings and thereafter any remaining shares
shall be allocated on an equal number of shares basis per order until all orders
have been filled. The Primary Parties may commence the Community Offering
concurrently with, at any time during, or as soon as practicable after the end
of, the Subscription Offering, and the Community Offering must be completed
within 45 days after the completion of the Subscription Offering, unless
extended by the Primary Parties with any required regulatory approval.
(e) Subject to such terms, conditions and procedures as may be
determined by the Primary Parties, all shares of Conversion Stock not subscribed
for in the Subscription Offering or ordered in the Public Shareholders Offering
or the Community Offering may be sold by a syndicate of broker-dealers to the
general public in a Syndicated Community Offering. Each order for Conversion
Stock in the Syndicated Community Offering shall be subject to the absolute
right of the Primary Parties to accept or reject any such order in whole or in
part either at the time of receipt of an order or as soon as practicable after
completion of the Syndicated Community Offering. The amount of Conversion Stock
that any Person may purchase in the Syndicated Community Offering shall not
exceed $250,000 of Conversion Stock in the Subscription Offering, provided,
however, that this amount may be increased to up to 5% of the total offering of
shares of Conversion Stock, subject to any required regulatory approval but
without the further approval of Members of the Mutual Holding Company or the
Shareholders of the Mid-Tier Holding Company; and provided further that, to the
extent applicable, and subject to the limitations on purchases of Conversion
Stock set forth in this Section 11(e) and Section 12 of this Plan, orders for
Conversion Stock in the Syndicated Community Offering shall first be filled to a
maximum of 2% of the total number of shares of Conversion Stock sold in the
Offerings and thereafter any remaining shares shall be allocated on an equal
number of shares basis per order until all orders have been filled. The Primary
Parties may commence the Syndicated Community Offering concurrently with, at any
time during, or as soon as practicable after the end of, the Subscription
Offering and/or Community Offering, and the Syndicated Community Offering must
be completed within 45 days after the completion of the Subscription Offering,
unless extended by the Primary Parties with any required regulatory approval.
(f) The Holding Company and the Association may sell any shares of
Conversion Stock remaining following the Subscription Offering, the Public
Shareholders Offering, Community Offering and/or the Syndicated Community
Offering in a Public Offering. The provisions of
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Section 12 hereof shall not be applicable to the sales to underwriters for
purposes of the Public Offering but shall be applicable to sales by the
underwriters to the public. The price to be paid by the underwriters in such an
offering shall be equal to the Actual Purchase Price less an underwriting
discount to be negotiated among such underwriters and the Association and the
Holding Company, subject to any required regulatory approval or consent.
(g) If for any reason a Syndicated Community Offering or Public
Offering of shares of Conversion Stock not sold in the Subscription Offering and
the Community Offering cannot be effected, or in the event that any
insignificant residue of shares of Conversion Stock is not sold in the
Subscription Offering, Community Offering or Syndicated Community Offering, the
Primary Parties shall use their best efforts to obtain other purchasers for such
shares in such manner and upon such conditions as may be satisfactory to the
OTS.
12. LIMITATIONS ON SUBSCRIPTIONS AND PURCHASES OF CONVERSION
STOCK.
(a) The maximum number of shares of Conversion Stock which may be
purchased in the Conversion by the ESOP shall not exceed 8% and all
Tax-Qualified Employee Stock Benefit Plans shall not exceed 10% of the total
number of shares of Conversion Stock sold in the Offerings, in each instance,
including any shares which may be issued in the event of an increase in the
maximum of the Estimated Price Range to reflect changes in market, financial and
economic conditions after commencement of the Subscription Offering and prior to
completion of the Offerings; provided, however, that purchases of Conversion
Stock which are made by Plan Participants pursuant to the exercise of
subscription rights granted to such Plan Participant in his individual capacity
as a Participant or purchases by a Plan Participant in the Public Shareholders
Offering or the Community Offering using the funds thereof held in Tax-Qualified
Employee Stock Benefit Plans shall not be deemed to be purchases by a
Tax-Qualified Employee Stock Benefit Plan for purposes of this Section 12(a).
(b) Except in the case of Tax-Qualified Employee Stock Benefit Plans in
the aggregate, as set forth in Section 12(a) hereof, and certain Eligible
Account Holders and Supplemental Eligible Account Holders, as set forth in
Sections 5(a)(ii) and (iii) and 7(a)(ii) and (iii) hereof, and in addition to
the other restrictions and limitations set forth herein, the maximum amount of
Holding Company Common Stock which any Person together with any Associate or
group of Persons acting in concert may, directly or indirectly, subscribe for or
purchase in the Conversion and Reorganization shall not exceed the number of
shares of Conversion Stock that when combined with Exchange Shares received
aggregate 1% of the total number of shares of Holding Company Common Stock
issued in the Conversion and Reorganization.
(c) The number of shares of Conversion Stock which Directors and
Officers and their Associates may purchase in the aggregate in the Offerings
shall not exceed 25% of the total number of shares of Conversion Stock sold in
the Offerings, including any shares which may be issued in the event of an
increase in the maximum of the Estimated Price Range to reflect changes in
market,
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financial and economic conditions after commencement of the Subscription
Offering and prior to completion of the Offerings.
(d) No Person may purchase fewer than 25 shares of Conversion Stock in
the Offerings, to the extent such shares are available; provided, however, that
if the Actual Purchase Price is greater than $20.00 per share, such minimum
number of shares shall be adjusted so that the aggregate Actual Purchase Price
for such minimum shares will not exceed $500.00.
(e) For purposes of the foregoing limitations and the determination of
Subscription Rights, (i) Directors, Officers and Employees shall not be deemed
to be Associates or a group acting in concert solely as a result of their
capacities as such, (ii) shares purchased by Tax-Qualified Employee Stock
Benefit Plans shall not be attributable to the individual trustees or
beneficiaries of any such plan for purposes of determining compliance with the
limitations set forth in Section 12(b) or Section 12(c) hereof, (iii) Exchange
Shares shall be valued at the Actual Purchase Price, and (iv) shares purchased
by a Tax-Qualified Employee Stock Benefit Plan pursuant to instructions of an
individual in an account in such plan in which the individual has the right to
direct the investment, including any plan of the Association qualified under
Section 401(k) of the Code, shall be aggregated and included in that
individual's purchases and not attributed to the Tax-Qualified Employee Stock
Benefit Plan.
(f) Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the Members of
the Mutual Holding Company or the Shareholders of the Mid-Tier Holding Company,
the Primary Parties may increase or decrease any of the individual or aggregate
purchase limitations set forth herein to a percentage which does not exceed 5%
of the total offering of shares of Holding Company Common Stock in the
Conversion and Reorganization whether prior to, during or after the Subscription
Offering, Public Shareholders Offering, Community Offering and/or Syndicated
Community Offering. In the event that an individual purchase limitation is
increased after commencement of the Subscription Offering or any other offering,
the Primary Parties shall permit any Person who subscribed for the maximum
number of shares of Conversion Stock to purchase an additional number of shares,
so that such Person shall be permitted to subscribe for the then maximum number
of shares permitted to be subscribed for by such Person, subject to the rights
and preferences of any Person who has priority Subscription Rights. In the event
that any of the individual or aggregate purchase limitations are decreased after
commencement of the Subscription Offering or any other offering, the orders of
any Person who subscribed for more than the new purchase limitation shall be
decreased by the minimum amount necessary so that such Person shall be in
compliance with the then maximum number of shares permitted to be subscribed for
by such Person.
(g) The Primary Parties shall have the right to take all such action as
they may, in their sole discretion, deem necessary, appropriate or advisable in
order to monitor and enforce the terms, conditions, limitations and restrictions
contained in this Section 12 and elsewhere in this Plan and the terms,
conditions and representations contained in the Order Form, including, but not
limited to, the absolute right (subject only to any necessary regulatory
approvals or concurrences) to reject,
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<PAGE>
limit or revoke acceptance of any subscription or order and to delay, terminate
or refuse to consummate any sale of Conversion Stock which they believe might
violate, or is designed to, or is any part of a plan to, evade or circumvent
such terms, conditions, limitations, restrictions and representations. Any such
action shall be final, conclusive and binding on all persons, and the Primary
Parties and their respective Boards shall be free from any liability to any
Person on account of any such action.
(h) Notwithstanding anything to the contrary contained in this Plan and
except as may otherwise be required by the OTS, the Public Shareholders will not
have to sell any Mid-Tier Holding Company Common Stock or be limited in
receiving Exchange Shares even if their ownership of Mid-Tier Holding Company
Common Stock when converted into Exchange Shares would exceed an applicable
purchase limitation; provided, however, that a Public Shareholder who would
exceed an applicable purchase limitation may be precluded from purchasing
Conversion Stock in the Offerings.
13. TIMING OF SUBSCRIPTION OFFERING; MANNER OF EXERCISING
SUBSCRIPTION RIGHTS AND ORDER FORMS.
(a) The Subscription Offering may be commenced concurrently with or at
any time after the mailing to Voting Members of the Mutual Holding Company and
Shareholders of the Mid-Tier Holding Company of the proxy statement(s) to be
used in connection with the Special Meeting and the Shareholders' Meeting. The
Subscription Offering may be closed before the Special Meeting and the
Shareholders' Meeting, provided that the offer and sale of the Conversion Stock
shall be conditioned upon the approval of the Plan by the Voting Members of the
Mutual Holding Company and the Shareholders of the Mid-Tier Holding Company at
the Special Meeting and the Shareholders' Meeting, respectively.
(b) The exact timing of the commencement of the Subscription Offering
shall be determined by the Primary Parties in consultation with the Independent
Appraiser and any financial or advisory or investment banking firm retained by
them in connection with the Conversion. The Primary Parties may consider a
number of factors, including, but not limited to, their current and projected
future earnings, local and national economic conditions, and the prevailing
market for stocks in general and stocks of financial institutions in particular.
The Primary Parties shall have the right to withdraw, terminate, suspend, delay,
revoke or modify any such Subscription Offering, at any time and from time to
time, as they in their sole discretion may determine, without liability to any
Person, subject to compliance with applicable securities laws and any necessary
regulatory approval or concurrence.
(c) The Primary Parties shall, promptly after the SEC has declared the
Registration Statement, which includes the Prospectus, effective and all
required regulatory approvals have been obtained, distribute or make available
the Prospectus, together with Order Forms for the purchase of Conversion Stock,
to all Participants for the purpose of enabling them to exercise their
respective Subscription Rights, subject to Section 15 hereof. To the extent
permitted by applicable law and
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regulation, the Primary Parties may elect to mail a Prospectus and Order Form
only to those Participants who request such materials by returning a
postage-paid card to the Primary Parties by a date specified in the letter
informing them of their Subscription Rights. Under such circumstances, the
Subscription Offering shall not be closed prior to the expiration of 30 days
after the mailing by the Primary Parties of the postage-paid card to
Participants.
(d) A single Order Form for all Deposit Accounts maintained with the
Association by an Eligible Account Holder and any Supplemental Eligible Account
Holder may be furnished, irrespective of the number of Deposit Accounts
maintained with the Association on the Eligibility Record Date and Supplemental
Eligibility Record Date, respectively. No person holding a subscription right
may exceed any otherwise applicable purchase limitation by submitting multiple
orders for Conversion stock. Multiple orders are subject to adjustment, as
appropriate, on a pro rata basis and deposit balances will be divided equally
among such orders in allocating shares in the event of an oversubscription.
(e) The recipient of an Order Form shall have no less than 20 days and
no more than 45 days from the date of mailing of the Order Form (with the exact
termination date to be set forth on the Order Form) to properly complete and
execute the Order Form and deliver it to the Primary Parties. The Primary
Parties may extend such period by such amount of time as they determine is
appropriate. Failure of any Participant to deliver a properly executed Order
Form to the Primary Parties, along with payment (or authorization for payment by
withdrawal) for the shares of Conversion Stock subscribed for, within the time
limits prescribed, shall be deemed a waiver and release by such person of any
rights to subscribe for shares of Conversion Stock. Each Participant shall be
required to confirm to the Primary Parties by executing an Order Form that such
Person has fully complied with all of the terms, conditions, limitations and
restrictions in the Plan.
(f) The Primary Parties shall have the absolute right, in their sole
discretion and without liability to any Participant or other Person, to reject
any Order Form, including, but not limited to, any Order Form that is (i)
improperly completed or executed; (ii) not timely received; (iii) not
accompanied by the proper payment (or authorization of withdrawal for payment)
or, in the case of institutional investors in the Community Offering, not
accompanied by an irrevocable order together with a legally binding commitment
to pay the full amount of the purchase price prior to 48 hours before the
completion of the Offerings; or (iv) submitted by a Person whose representations
the Primary Parties believe to be false or who they otherwise believe, either
alone, or acting in concert with others, is violating, evading or circumventing,
or intends to violate, evade or circumvent, the terms and conditions of the
Plan. Furthermore, in the event Order Forms (i) are not delivered and are
returned to the Association, the Mid-Tier Holding Company or the Mutual Holding
Company by the Untied States Postal Service or the Association, the Mid-Tier
Holding Company or the Mutual Holding Company is unable to locate the addressee,
or (ii) are not mailed pursuant to a "no mail" order placed in effect by the
account holder, the subscription rights of the person to which such rights have
been granted will lapse as though such person failed to return the contemplated
Order Form within the time period specified thereon. The Primary Parties may,
but will not be required to, waive any irregularity on any Order Form or may
require the submission of corrected
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Order Forms or the remittance of full payment for shares of Conversion Stock by
such date as they may specify. The interpretation of the Primary Parties of the
terms and conditions of the Order Forms shall be final and conclusive.
14. PAYMENT FOR CONVERSION STOCK.
(a) Payment for shares of Conversion Stock subscribed for by
Participants in the Subscription Offering and payment for shares of Conversion
Stock ordered by Persons in the Public Shareholders Offering or the Community
Offering shall be equal to the Initial Purchase Price multiplied by the number
of shares which are being subscribed for or ordered, respectively. Such payment
may be made in cash, if delivered in person, or by check or money order at the
time the Order Form is delivered to the Primary Parties. The Primary Parties, in
their sole and absolute discretion, may also elect to receive payment for shares
of Conversion Stock by wire transfer. In addition, the Primary Parties may elect
to provide Participants and/or other Persons who have a Deposit Account with the
Association the opportunity to pay for shares of Conversion Stock by authorizing
the Association to withdraw from such Deposit Account an amount equal to the
aggregate Initial Purchase Price of such shares. If the Actual Purchase Price is
less than the Initial Purchase Price, the Primary Parties shall refund the
difference to all Participants and other Persons, unless the Primary Parties
choose to provide Participants and other Persons the opportunity on the Order
Form to elect to have such difference applied to the purchase of additional
whole shares of Conversion Stock. If the Actual Purchase Price is more than the
Initial Purchase Price, the Primary Parties shall reduce the number of shares of
Conversion Stock ordered by Participants and other Persons and refund any
remaining amount which is attributable to a fractional share interest, unless
the Primary Parties choose to provide Participants and other Persons the
opportunity to increase the Actual Purchase Price submitted by them.
(b) Consistent with applicable laws and regulations and policies and
practices of the OTS, payment for shares of Conversion Stock subscribed for by
Tax-Qualified Employee Stock Benefit Plans may be made with funds contributed by
the Holding Company and/or the Association and/or funds obtained pursuant to a
loan from an unrelated financial institution pursuant to a loan commitment which
is in force from the time that any such plan submits an Order Form until the
closing of the transactions contemplated hereby.
(c) If a Participant or other Person authorizes the Association to
withdraw the amount of the Initial Purchase Price from his or her Deposit
Account, the Association shall have the right to make such withdrawal or to
freeze funds equal to the aggregate Initial Purchase Price upon receipt of the
Order Form. Notwithstanding any regulatory provisions regarding penalties for
early withdrawals from certificate accounts, the Association may allow payment
by means of withdrawal from certificate accounts without the assessment of such
penalties. In the case of an early withdrawal of only a portion of such account,
the certificate evidencing such account shall be canceled if any applicable
minimum balance requirement ceases to be met. In such case, the remaining
balance will earn interest at the regular passbook rate. However, where any
applicable minimum balance is maintained in such certificate account, the rate
of return on the balance of the
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certificate account shall remain the same as prior to such early withdrawal.
This waiver of the early withdrawal penalty applies only to withdrawals made in
connection with the purchase of Conversion Stock and is entirely within the
discretion of the Primary Parties.
(d) The Association shall pay interest, at not less than the passbook
rate, for all amounts paid in cash, by check or money order to purchase shares
of Conversion Stock in the Subscription Offering and the Community Offering from
the date payment is received until the date the Conversion and Reorganization is
completed or terminated.
(e) The Association shall not knowingly loan funds or otherwise extend
credit to any Participant or other Person to purchase Conversion Stock.
(f) Each share of Conversion Stock shall be non-assessable upon payment
in full of the Actual Purchase Price.
15. ACCOUNT HOLDERS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES.
The Primary Parties shall make reasonable efforts to comply with the
securities laws of all jurisdictions in the United States in which Participants
reside. However, no Participant will be offered or receive any Conversion Stock
under the Plan if such Participant resides in a foreign country or resides in a
jurisdiction of the United States with respect to which all of the following
apply: (a) there are few Participants otherwise eligible to subscribe for shares
under this Plan who reside in such jurisdiction; (b) the granting of
Subscription Rights or the offer or sale of shares of Conversion Stock to such
Participants would require any of the Primary Parties or their respective
Directors and Officers, under the laws of such jurisdiction, to register as a
broker-dealer, salesman or selling agent or to register or otherwise qualify the
Conversion Stock for sale in such jurisdiction, or any of the Primary Parties
would be required to qualify as a foreign corporation or file a consent to
service of process in such jurisdiction; and (c) such registration,
qualification or filing in the judgment of the Primary Parties would be
impracticable or unduly burdensome for reasons of cost or otherwise.
16. VOTING RIGHTS OF SHAREHOLDERS.
Following consummation of the Conversion and Reorganization, voting
rights with respect to the Association shall be held and exercised exclusively
by the Holding Company as holder of all of the Association's outstanding voting
capital stock, and voting rights with respect to the Holding Company shall be
held and exercised exclusively by the holders of the Holding Company's voting
capital stock.
17. LIQUIDATION ACCOUNT.
(a) At the time of the Mutual Holding Company Merger, the Association
shall establish a liquidation account in an amount equal to the amount of
dividends with respect to the Association
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Common Stock of the Mid-Tier Holding Company Common Stock waived by the Mutual
Holding Company plus the greater of (i) $36,134,000, which is equal to 100% of
the retained earnings of the Association as of March 31, 1994, the date of the
latest statement of financial condition contained in the final offering circular
utilized in the formation of the Mutual Holding Company, or (ii) 51.34% of the
Mid-Tier Holding Company's total shareholders' equity as reflected in its latest
statement of financial condition contained in the final Prospectus utilized in
the Conversion and Reorganization. The function of the liquidation account will
be to preserve the rights of certain holders of Deposit Accounts in the
Association who maintain such accounts in the Association following the
Conversion and Reorganization to a priority to distributions in the unlikely
event of a liquidation of the Association subsequent to the Conversion and
Reorganization.
(b) The liquidation account shall be maintained for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders, if any, who
maintain their Deposit Accounts in the Association after the Conversion and
Reorganization. Each such account holder will, with respect to each Deposit
Account held, have a related inchoate interest in a portion of the liquidation
account balance, which interest will be referred to in this Section 17 as the
"subaccount balance." All Deposit Accounts having the same social security
number will be aggregated for purposes of determining the initial subaccount
balance with respect to such Deposit Accounts, except as provided in Section
17(d) hereof.
(c) In the event of a complete liquidation of the Association
subsequent to the Conversion and Reorganization (and only in such event), each
Eligible Account Holder and Supplemental Eligible Account Holder, if any, shall
be entitled to receive a liquidation distribution from the liquidation account
in the amount of the then current subaccount balances for Deposit Accounts then
held (adjusted as described below) before any liquidation distribution may be
made with respect to the capital stock of the Association. No merger,
consolidation, sale of bulk assets or similar combination transaction with
another FDIC-insured institution in which the Association is not the surviving
entity shall be considered a complete liquidation for this purpose. In any such
transaction, the liquidation account shall be assumed by the surviving entity.
(d) The initial subaccount balance for a Deposit Account held by an
Eligible Account Holder and Supplemental Eligible Account Holder, if any, shall
be determined by multiplying the opening balance in the liquidation account by a
fraction, of which the numerator is the amount of the Qualifying Deposits of
such account holder and the denominator is the total amount of Qualifying
Deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders, if any. For Deposit Accounts in existence at both the Eligibility
Record Date and the Supplemental Eligibility Record Date, if any, separate
initial subaccount balances shall be determined on the basis of the Qualifying
Deposits in such Deposit Accounts on each such record date. Initial subaccount
balances shall not be increased, and shall be subject to downward adjustment as
provided below.
(e) If the aggregate deposit balance in the Deposit Account(s) of any
Eligible Account Holder or Supplemental Eligible Account Holder, if any, at the
close of business on any December 31 annual closing date, commencing December
31, 1998, is less than the lesser of (a) the aggregate
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deposit balance in such Deposit Account(s) at the close of business on any other
annual closing date subsequent to such record dates or (b) the aggregate deposit
balance in such Deposit Account(s) as of the Eligibility Record Date or the
Supplemental Eligibility Record Date, if any, the subaccount balance for such
Deposit Account(s) shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of
such a downward adjustment, the subaccount balance shall not be subsequently
increased, notwithstanding any subsequent increase in the deposit balance of the
related Deposit Account(s). The subaccount balance of an Eligible Account Holder
or Supplemental Eligible Account Holder, if any, will be reduced to zero if the
Account Holder ceases to maintain a Deposit Account at the Association that has
the same social security number as appeared on his Deposit Account(s) at the
Eligibility Record Date or, if applicable, the Supplemental Eligibility Record
Date.
(f) Subsequent to the Conversion and Reorganization, the Association
may not pay cash dividends generally on deposit accounts and/or capital stock of
the Association, or repurchase any of the capital stock of the Association, if
such dividend or repurchase would reduce the Association's regulatory capital
below the aggregate amount of the then current subaccount balances for Deposit
Accounts then held; otherwise, the existence of the liquidation account shall
not operate to restrict the use or application of any of the net worth accounts
of the Association.
(g) For purposes of this Section 17, a Deposit Account includes a
predecessor or successor account which is held by an Account Holder with the
same social security number.
18. TRANSFER OF DEPOSIT ACCOUNTS.
Each Deposit Account in the Association at the time of the consummation
of the Conversion and Reorganization shall become, without further action by the
holder, a Deposit Account in the Association equivalent in withdrawable amount
to the withdrawal value (as adjusted to give effect to any withdrawal made for
the purchase of Conversion Stock), and subject to the same terms and conditions
(except as to voting and liquidation rights) as such Deposit Account in the
Association immediately preceding consummation of the Conversion and
Reorganization. Holders of Deposit Accounts in the Association shall not, as
such holders, have any voting rights.
19. REQUIREMENTS FOLLOWING CONVERSION FOR REGISTRATION,
MARKET MAKING AND STOCK EXCHANGE LISTING.
In connection with the Conversion and Reorganization, the Holding
Company shall register the Holding Company Common Stock pursuant to Section 12
of the Securities Exchange Act of 1934, as amended, and shall undertake not to
deregister such stock for a period of three years thereafter. The Holding
Company also shall use its best efforts to (i) encourage and assist a market
maker to establish and maintain a market for the Holding Company Common Stock
and (ii) list the Holding Company Common Stock on a national or regional
securities exchange or to have quotations for such stock disseminated on The
Nasdaq Stock Market.
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20. DIRECTORS AND OFFICERS OF THE ASSOCIATION.
Each person serving as a Director or Officer of the Association at the
time of the Conversion and Reorganization shall continue to serve as a Director
or Officer of the Association for the balance of the term for which the person
was elected prior to the Conversion and Reorganization, and until a successor is
elected and qualified. The number, names, business addresses and terms of the
Directors of the Association are set forth in the Plans of Merger included as
Annexes A, B and C hereto.
21. REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND OFFICERS
FOLLOWING THE CONVERSION AND REORGANIZATION.
For a period of three years following the Conversion and
Reorganization, the Directors and Officers of the Holding Company and the
Association and their Associates may not purchase, without the prior written
approval of the OTS, Holding Company Common Stock except from a broker-dealer
registered with the SEC. This prohibition shall not apply, however, to (i) a
negotiated transaction arrived at by direct negotiation between buyer and seller
and involving more than 1% of the outstanding Holding Company Common Stock and
(ii) purchases of stock made by and held by any Tax-Qualified Employee Stock
Benefit Plan (and purchases of stock made by and held by any Non-Tax-Qualified
Employee Stock Benefit Plan following the receipt of shareholder approval of
such plan) which may be attributable to individual officers or directors.
The foregoing restriction on purchases of Holding Company Common Stock
shall be in addition to any restrictions that may be imposed by federal and
state securities laws.
22. RESTRICTIONS ON TRANSFER OF STOCK.
All shares of Conversion Stock which are purchased by Persons other
than Directors and Officers shall be transferable without restriction, except in
connection with a transaction proscribed by Section 23 of this Plan. Shares of
Conversion Stock purchased by Directors and Officers of the Holding Company and
the Association on original issue from the Holding Company (by subscription or
otherwise) shall be subject to the restriction that such shares shall not be
sold or otherwise disposed of for value for a period of one year following the
date of purchase, except for any disposition of such shares following the death
of the original purchaser or pursuant to any merger or similar transaction
approved by the OTS. The shares of Conversion Stock issued by the Holding
Company to Directors and Officers shall bear the following legend giving
appropriate notice of such one-year restriction:
"The shares of stock evidenced by this Certificate
are restricted as to transfer for a period of one year from
the date of this Certificate pursuant to Part 563b of the
Rules and Regulations of the Office of Thrift Supervision.
These shares may not be transferred during such one-year
period without a legal opinion of counsel for the Company
that said transfer is permissible under the provisions of
applicable law and
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regulation. This restrictive legend shall be deemed null and
void after one year from the date of this Certificate."
In addition, the Holding Company shall give appropriate instructions to
the transfer agent for the Holding Company Common Stock with respect to the
applicable restrictions relating to the transfer of restricted stock. Any shares
issued at a later date as a stock dividend, stock split or otherwise with
respect to any such restricted stock shall be subject to the same holding period
restrictions as may then be applicable to such restricted stock.
The foregoing restriction on transfer shall be in addition to any
restrictions on transfer that may be imposed by federal and state securities
laws.
23. RESTRICTIONS ON ACQUISITION OF STOCK OF THE HOLDING COMPANY.
The certificate of incorporation of the Holding Company shall prohibit
any Person together with Associates or group of Persons acting in concert from
offering to acquire or acquiring, directly or indirectly, beneficial ownership
of more than 10% of any class of equity securities of the Holding Company, or of
securities convertible into more than 10% of any such class, for such period of
time following completion of the Conversion and Reorganization as may be
determined by the Board of Directors of the Holding Company. The certificate of
incorporation of the Holding Company also shall provide that all equity
securities beneficially owned by any Person in excess of 10% of any class of
equity securities shall be considered "excess shares", and that excess shares
shall not be counted as shares entitled to vote and shall not be voted by any
Person or counted as voting shares in connection with any matters submitted to
the shareholders for a vote. The foregoing restrictions shall not apply to (i)
any offer with a view toward public resale made exclusively to the Holding
Company by underwriters or a selling group acting on its behalf, (ii) the
purchase of shares by a Tax-Qualified Employee Stock Benefit Plan established
for the benefit of the employees of the Holding Company and its subsidiaries
which is exempt from approval requirements under 12 C.F.R. ss.574.3(c)(1)(vi) or
any successor thereto, and (iii) any offer or acquisition approved in advance by
the affirmative vote of two-thirds of the entire Board of Directors of the
Holding Company. Directors, Officers or Employees of the Holding Company or the
Association or any subsidiary thereof shall not be deemed to be Associates or a
group acting in concert with respect to their individual acquisitions of any
class of equity securities of the Holding Company solely as a result of their
capacities as such.
24. TAX RULINGS OR OPINIONS.
Consummation of the Conversion and Reorganization is conditioned upon
prior receipt by the Primary Parties of either a ruling or an opinion of counsel
with respect to federal tax laws, and either a ruling or an opinion with respect
to Florida tax laws, to the effect that consummation of the transactions
contemplated hereby will not result in a taxable reorganization under the
provisions of the applicable codes or otherwise result in any adverse tax
consequences to the Primary Parties or to account holders receiving Subscription
Rights before or after the Conversion and Reorganization,
28
<PAGE>
except in each case to the extent, if any, that Subscription Rights are deemed
to have fair market value on the date such rights are issued.
25. STOCK COMPENSATION PLANS.
(a) The Holding Company and the Association are authorized to adopt
Tax-Qualified Employee Stock Benefit Plans in connection with the Conversion and
Reorganization, including without limitation an employee stock ownership plan.
(b) The Holding Company and the Association also are authorized to
adopt stock option plans, restricted stock grant plans and other
Non-Tax-Qualified Employee Stock Benefit Plans, provided that no stock options
shall be granted, and no shares of Conversion Stock shall be purchased, pursuant
to any of such plans prior to the earlier of (i) the one-year anniversary of the
consummation of the Conversion and Reorganization or (ii) the receipt of
shareholder approval of such plans at either an annual or special meeting of
shareholders of the Holding Company held no earlier than six months following
the Conversion and Reorganization.
(c) Existing as well as any newly-created Tax-Qualified Employee Stock
Benefit Plans may purchase shares of Conversion Stock in the Offerings, to the
extent permitted by the terms of such benefit plans and this Plan.
(d) The Holding Company and the Association are authorized to enter
into employment or severance agreements with their executive officers.
26. DIVIDEND AND REPURCHASE RESTRICTIONS ON STOCK.
(a) The Holding Company generally may not repurchase any shares of its
capital stock during the first year following consummation of the Conversion and
Reorganization, except as may be otherwise approved by the OTS. During the
second and third years following consummation of the Conversion and
Reorganization, the Holding Company may not repurchase any of its capital stock
from any person, other than pursuant to (i) an offer to repurchase made by the
Holding Company on a pro rata basis to all of its shareholders and which is
approved by the OTS, (ii) the repurchase of qualifying shares of a director, if
any, (iii) purchases in the open market by a Tax-Qualified or Non-Tax-Qualified
Employee Stock Benefit Plan in an amount reasonable and appropriate to fund the
plan, or (iv) a repurchase program approved by the OTS.
(b) The Association may not declare or pay a cash dividend on, or
repurchase any of, its capital stock if the effect thereof would cause the
regulatory capital of the Association to be reduced below the amount required
for the liquidation account. Any dividend declared or paid on, or repurchase of,
the Association's capital stock also shall be in compliance with Section 563.134
of the Regulations Applicable to All Savings Associations, or any successor
thereto.
29
<PAGE>
(c) Notwithstanding anything to the contrary set forth herein, the
Holding Company may repurchase its capital stock to the extent and subject to
the requirements set forth in Section 563b.3(g)(3) of the Regulations Applicable
to All Savings Associations, or any successor thereto, or as otherwise may be
approved by the OTS.
27. PAYMENT OF FEES TO BROKERS.
The Primary Parties may elect to offer to pay fees on a per share basis
to securities brokers who assist purchasers of Conversion Stock in the
Offerings.
28. EFFECTIVE DATE.
The effective date of the Conversion and Reorganization shall be the
date upon which the last of the following actions occurs: (i) the filing of
Articles of Combination with the OTS with respect to the Mid-Tier Holding
Company Merger, (ii) the filing of Articles of Combination with the OTS with
respect to the Mutual Holding Company Merger, (iii) the filing of Articles of
Combination with the OTS with respect to the Association Merger and (iv) the
closing of the issuance of the shares of Conversion Stock in the Offerings. The
filing of Articles of Combination relating to the Mutual Holding Company Merger,
the Mid-Tier Holding Company Merger and the Association Merger and the closing
of the issuance of shares of Conversion Stock in the Offerings shall not occur
until all requisite regulatory, Member and Shareholder approvals have been
obtained, all applicable waiting periods have expired and sufficient
subscriptions and orders for the Conversion Stock have been received. It is
intended that the closing of the Mutual Holding Company Merger, the Mid-Tier
Holding Company Merger, the Association Merger and the sale of shares of
Conversion Stock in the Offerings shall occur consecutively and substantially
simultaneously.
29. AMENDMENT OR TERMINATION OF THE PLAN.
If deemed necessary or desirable by the Boards of Directors of the
Primary Parties, this Plan may be substantively amended, as a result of comments
from regulatory authorities or otherwise, at any time prior to the solicitation
of proxies from Members and Shareholders to vote on the Plan and at any time
thereafter with the concurrence of the OTS. Any amendment to this Plan made
after approval by the Members and Shareholders with the concurrence of the OTS
shall not necessitate further approval by the Members or Shareholders unless
otherwise required by the OTS. This Plan shall terminate if the sale of all
shares of Conversion Stock is not completed within 24 months from the date of
the Special Meeting. Prior to the earlier of the Special Meeting and the
Shareholders' Meeting, this Plan may be terminated by the Boards of Directors of
the Primary Parties without approval of the OTS; after the Special Meeting or
the Shareholders' Meeting, the Boards of Directors may terminate this Plan only
with the approval of the OTS.
30. INTERPRETATION OF THE PLAN.
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of each of the Boards of Directors of the
Primary Parties shall be final, subject to the authority of the OTS.
30
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Plan, as amended to be
executed by their duly authorized officers as of this 13th day of August 1998.
COMFED, M. H. C.
Attest: /s/ DEBORAH M. ROUSSEAU By: /s/ JAMES B. PITTARD, JR.
------------------------ -----------------------------------------
Deborah M. Rousseau James B. Pittard, Jr.
Secretary President and Chief Executive Officer
COMMUNITY SAVINGS, F. A.
Attest: /s/ DEBORAH M. ROUSSEAU By: /s/ JAMES B. PITTARD, JR.
------------------------ -----------------------------------------
Deborah M. Rousseau James B. Pittard, Jr.
Secretary President and Chief Executive Officer
COMMUNITY SAVINGS BANKSHARES, INC.
(a federal corporation)
Attest: /s/ DEBORAH M. ROUSSEAU By: /s/ JAMES B. PITTARD, JR.
------------------------ -----------------------------------------
Deborah M. Rousseau James B. Pittard, Jr.
Secretary President and Chief Executive Officer
COMMUNITY SAVINGS BANKSHARES, INC.
(a Delaware corporation)
Attest: /s/ DEBORAH M. ROUSSEAU By: /s/ JAMES B. PITTARD, JR.
Deborah M. Rousseau James B. Pittard, Jr.
Secretary President and Chief Executive Officer
31
<PAGE>
ANNEX A
PLAN OF MERGER
This Plan of Merger, dated as of August 13, 1998, is between Community
Savings Bankshares, Inc. (the "Mid-Tier Holding Company"), a federally chartered
stock corporation, and Community Savings, F. A. (the "Association" or the
"Surviving Association"), a federally chartered savings association.
WITNESSETH:
WHEREAS, the Mid-Tier Holding Company, ComFed, M. H. C. (the "Mutual
Holding Company") and the Association have adopted a Plan of Conversion of the
Mutual Holding Company and Agreement and Plan of Reorganization between
Community Savings Bankshares, Inc. (the "Holding Company"), the Mutual Holding
Company and the Association (the "Plan of Conversion"), pursuant to which (i)
the Mid-Tier Holding Company will convert to a federally chartered interim stock
savings association and simultaneously merge with and into the Association; (ii)
the Mutual Holding Company will convert to a federally chartered interim stock
savings association and simultaneously merge with and into the Association (the
"Mutual Holding Company Merger"), (iii) the Association and a newly-formed
interim savings association will merge, pursuant to which the Association will
become a wholly owned subsidiary of the Holding Company (the "Association
Merger"), and (iv) the Holding Company will offer shares of its common stock in
the manner set forth in the Plan of Conversion;
WHEREAS, the Mutual Holding Company, which owns 51.4% of the
outstanding common stock of the Mid-Tier Holding Company, par value $1.00 per
share ("Mid-Tier Holding Company Common Stock"), will convert to a federally
chartered interim stock savings association pursuant to the Plan of Conversion
and merge with and into the Association pursuant to a Plan of Merger (the
"Mutual Holding Company Merger"), pursuant to which, among other things, all
shares of Mid-Tier Holding Company Common Stock held by the Mutual Holding
Company and all interest of members in the Mutual Holding Company will be
canceled; and
WHEREAS, the Mid-Tier Holding Company owns 100% of the outstanding
common stock of the Association, par value $1.00 per share ("Association Common
Stock");
WHEREAS, the Mid-Tier Holding Company will convert to a federally
chartered interim stock savings association pursuant to the Plan of Conversion
and merge with and into the Association pursuant to this Plan of Merger (the
"Mid-Tier Holding Company Merger"), pursuant to which, among other things, all
shares of Association Common Stock held by the Mid-Tier Holding Company will be
cancelled; and
<PAGE>
WHEREAS, the Mid-Tier Holding Company and the Association (the
"Constituent Associations") desire to provide for the terms and conditions of
the Mid-Tier Holding Company Merger.
NOW, THEREFORE, the Mid-Tier Holding Company and the Association hereby
agree as follows:
1. EFFECTIVE DATE. The Mid-Tier Holding Company Merger shall become
effective on the date specified in the endorsement of the Articles of
Combination relating to the Mid-Tier Holding Company Merger by the Secretary of
the Office of Thrift Supervision ("OTS") pursuant to 12 C.F.R.
ss.552.13(k), or any successor thereto (the "Effective Date").
2. THE MID-TIER HOLDING COMPANY MERGER AND EFFECT THEREOF. Subject to
the terms and conditions set forth herein and the prior approval of the OTS of
the Conversion and Reorganization, as defined in the Plan of Conversion, and the
expiration of all applicable waiting periods, the Mid-Tier Holding Company shall
convert from federal stock corporation to a federal interim stock savings
association and simultaneously merge with and into the Association, which shall
be the Surviving Association. Upon consummation of the Mid-Tier Holding Company
Merger, the Surviving Association shall be considered the same business and
corporate entity as each of the Constituent Associations and thereupon and
thereafter all the property, rights, powers and franchises of each of the
Constituent Associations shall vest in the Surviving Association and the
Surviving Association shall be subject to and be deemed to have assumed all of
the debts, liabilities, obligations and duties of each of the Constituent
Associations and shall have succeeded to all of each of their relationships,
fiduciary or otherwise, as fully and to the same extent as if such property,
rights, privileges, powers, franchises, debts, obligations, duties and
relationships had been originally acquired, incurred or entered into by the
Surviving Association. In addition, any reference to either of the Constituent
Associations in any contract, will or document, whether executed or taking
effect before or after the Effective Date, shall be considered a reference to
the Surviving Association if not inconsistent with the other provisions of the
contract, will or document; and any pending action or other judicial proceeding
to which either of the Constituent Associations is a party shall not be deemed
to have abated or to have been discontinued by reason of the Mid-Tier Holding
Company Merger, but may be prosecuted to final judgment, order or decree in the
same manner as if the Mid-Tier Holding Company Merger had not occurred or the
Surviving Association may be substituted as a party to such action or
proceeding, and any judgment, order or decree may be rendered for or against it
that might have been rendered for or against either of the Constituent
Associations if the Mid-Tier Holding Company Merger had not occurred.
3. CANCELLATION OF ASSOCIATION COMMON STOCK HELD BY THE MID-TIER
HOLDING COMPANY AND MEMBER INTERESTS; LIQUIDATION ACCOUNT.
(a) On the Effective Date, (i) each share of Association Common Stock
issued and outstanding immediately prior to the Effective Date and held by the
Mid-Tier Holding Company shall, by virtue of the Mid-Tier Holding Company Merger
and without any action on the part of the
A-2
<PAGE>
holder thereof, be canceled, (ii) the interests in the Mutual Holding Company of
any person, firm or entity who or which qualified as a member of the Mutual
Holding Company in accordance with its mutual charter and bylaws and the laws of
the United States prior to the Mutual Holding Company's conversion from mutual
to stock form (the "Members") shall, by virtue of the Mutual Holding Company
Merger which shall occur substantially simultaneously with the Mid-Tier Mutual
Holding Company Merger and without any action on the part of the holder thereof,
be canceled, and (iii) the Association shall establish a liquidation account on
behalf of each depositor member of the Mutual Holding Company, as defined in the
Plan of Conversion, in accordance with Section 17 of the Plan of Conversion.
(b) At or after the Effective Date and prior to the Association Merger,
each certificate or certificates theretofore evidencing issued and outstanding
shares of Mid-Tier Holding Company Common Stock, other than any such certificate
or certificates held by the Mutual Holding Company, which shall be canceled,
shall be deemed to represent issued and outstanding shares of Association Common
Stock which shall be exchanged as provided by the Association Merger.
4. DISSENTING SHARES. No shareholder of the Mid-Tier Holding Company
shall have any dissenter or appraisal rights in connection with the Mid-Tier
Holding Company Merger.
5. NAME OF SURVIVING CORPORATION. The name of the Surviving
Association shall be "Community Savings, F. A."
6. DIRECTORS OF THE SURVIVING ASSOCIATION. Upon and after the
Effective Date, until changed in accordance with the Charter and Bylaws of the
Surviving Association and applicable law, the number of directors of the
Surviving Association shall be seven. The names of those persons who, upon and
after the Effective Date, shall be directors of the Surviving Association are
set forth below. Each such director shall serve for the term which expires at
the annual meeting of shareholders of the Surviving Association in the year set
forth after his respective name, and until a successor is elected and qualified.
Name Term Expires
---- ------------
James B. Pittard, Jr. 1999
Robert F. Cromwell 1999
Karl D. Griffin 2000
Harold I. Stevenson 2000
Forest C. Beaty, Jr. 2001
Frederick A. Teed 2001
The address of each such director is c/o Community Savings, F. A., 660
U.S. Highway One, North Palm Beach, Florida 33408.
A-3
<PAGE>
7. OFFICERS OF THE SURVIVING ASSOCIATION. Upon and after the Effective
Date, until changed in accordance with the Charter and Bylaws of the Surviving
Association and applicable law, the officers of the Association immediately
prior to the Effective Date shall be the officers of the Surviving Association.
8. OFFICES. Upon the Effective Date, all offices of the Association
shall be offices of the Surviving Association. As of the Effective Date, the
home office of the Surviving Association shall remain at 660 U.S. Highway One,
North Palm Beach, Florida, 33408 and the locations of the other offices of the
Surviving Association shall be as set forth in Exhibit A hereto, except for the
addition of deposit-taking offices authorized or the deletion of deposit-taking
offices closed subsequent to the date hereof and the Effective Date.
9. CHARTER AND BYLAWS. On and after the Effective Date, the Charter of
the Association as in effect immediately prior to the Effective Date shall be
the Charter of the Surviving Association until amended in accordance with the
terms thereof and applicable law, except that the Charter shall be amended to
provide for the establishment of a liquidation account in accordance with
applicable law and regulation.
On and after the Effective Date, the Bylaws of the Association as in
effect immediately prior to the Effective Date shall be the Bylaws of the
Surviving Association until amended in accordance with the terms thereof and
applicable law.
10. SHAREHOLDER AND MEMBER APPROVALS. The affirmative votes of the
holders of Mid-Tier Holding Company Common Stock, set forth in Section 3(e) of
the Plan of Conversion and the Members set forth in Section 3(b) of the Plan of
Conversion shall be required to approve the Plan of Conversion, of which this
Plan of Merger is a part, on behalf of the Mid-Tier Holding Company and the
Mutual Holding Company, respectively. The approval of the Mid-Tier Holding
Company, as the sole holder of the Association Common Stock, shall be required
to approve the Plan of Conversion, of which this Plan of Merger, is a part, on
behalf of the Association.
11. ABANDONMENT OF AGREEMENT. This Plan of Merger may be abandoned by
either the Mid-Tier Holding Company or the Association at any time before the
Effective Date in the manner set forth in Section 29 of the Plan of Conversion.
12. AMENDMENTS. This Plan of Merger may be amended in the manner set
forth in Section 29 of the Plan of Conversion by a subsequent writing signed by
the parties hereto upon the approval of the Board of Directors of each of the
parties hereto.
13. SUCCESSORS. This Agreement shall be binding on the successors of
the Mid-Tier Holding Company and the Association.
A-4
<PAGE>
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the United States of America.
IN WITNESS WHEREOF, the Mid-Tier Holding Company and the Association
have caused this Plan of Merger to be executed by their duly authorized officers
as of the day and year first above written.
COMMUNITY SAVINGS BANKSHARES, INC.
(A FEDERAL CORPORATION)
Attest:
By:
- ------------------- -------------------------------------
Deborah M. Rousseau James B. Pittard, Jr.
Secretary President and Chief Executive Officer
COMMUNITY SAVINGS, F. A.
Attest:
By:
- ------------------- -------------------------------------
Deborah M. Rousseau James B. Pittard, Jr.
Secretary President and Chief Executive Officer
A-5
<PAGE>
ANNEX B
PLAN OF MERGER
This Plan of Merger, dated as of August 13, 1998, is between ComFed, M.
H. C. (the "Mutual Holding Company"), a federally chartered mutual holding
company and Community Savings, F. A. (the "Association" or the "Surviving
Association"), a federally chartered savings association.
WITNESSETH:
WHEREAS, the Mutual Holding Company, Community Savings Bankshares,
Inc., a federal stock corporation (the "Mid-Tier Holding Company"), and the
Association have adopted a Plan of Conversion of the Mutual Holding Company and
Agreement and Plan of Reorganization between Community Savings Bankshares, Inc.
a newly formed Delaware corporation (the "Holding Company") and the Association
(the "Plan of Conversion"), pursuant to which (i) the Mid-Tier Holding Company
will convert to a federally chartered interim stock savings association and
simultaneously merge with and into the Association (the "Mid-Tier Holding
Company Merger"); (ii) the Mutual Holding Company will convert to a federally
chartered interim stock savings association and simultaneously merge with and
into the Association; (iii) the Association and a newly-formed interim savings
association will merge, pursuant to which the Association will become a wholly
owned subsidiary of the Holding Company (the "Association Merger"), and (iv) the
Holding Company will offer shares of its common stock in the manner set forth in
the Plan of Conversion;
WHEREAS, the Mutual Holding Company, which owns 51.4% of the
outstanding common stock of the Mid-Tier Holding Company, par value $1.00 per
share ("Mid-Tier Holding Company Common Stock"), will convert to a federally
chartered interim stock savings association pursuant to the Plan of Conversion
and substantially simultaneously with the completion of the Mid-Tier Holding
Company Merger merge with and into the Association pursuant to this Plan of
Merger (the "Mutual Holding Company Merger"), pursuant to which, among other
things, all interests of members in the Mutual Holding Company and all shares of
Mid-Tier Common Stock held by the Mutual Holding Company will be canceled; and
WHEREAS, the Mutual Holding Company and the Association (the
"Constituent Associations") desire to provide for the terms and conditions of
the Mutual Holding Company Merger.
NOW, THEREFORE, the Mutual Holding Company and the Association hereby
agree as follows:
1. EFFECTIVE DATE. The Mutual Holding Company Merger shall become
effective on the date specified in the endorsement of the Articles of
Combination relating to the Mid-Tier Holding
<PAGE>
Company Merger by the Secretary of the Office of Thrift Supervision ("OTS")
pursuant to 12 C.F.R. ss. 552.13(k), or any successor thereto (the "Effective
Date").
2. THE MUTUAL HOLDING COMPANY MERGER AND EFFECT THEREOF. Subject to
the terms and conditions set forth herein and the prior approval of the OTS of
the Conversion and Reorganization, as defined in the Plan of Conversion, and the
expiration of all applicable waiting periods, the Mutual Holding Company shall
convert from the mutual form to a federal interim stock savings association and
simultaneously merge with and into the Association, which shall be the Surviving
Association. Upon consummation of the Mutual Holding Company Merger, the
Surviving Association shall be considered the same business and corporate entity
as each of the Constituent Associations and thereupon and thereafter all the
property, rights, powers and franchises of each of the Constituent Associations
shall vest in the Surviving Association and the Surviving Association shall be
subject to and be deemed to have assumed all of the debts, liabilities,
obligations and duties of each of the Constituent Associations and shall have
succeeded to all of each of their relationships, fiduciary or otherwise, as
fully and to the same extent as if such property, rights, privileges, powers,
franchises, debts, obligations, duties and relationships had been originally
acquired, incurred or entered into by the Surviving Association. In addition,
any reference to either of the Constituent Associations in any contract, will or
document, whether executed or taking effect before or after the Effective Date,
shall be considered a reference to the Surviving Association if not inconsistent
with the other provisions of the contract, will or document; and any pending
action or other judicial proceeding to which either of the Constituent
Associations is a party shall not be deemed to have abated or to have been
discontinued by reason of the Mutual Holding Company Merger, but may be
prosecuted to final judgment, order or decree in the same manner as if the
Mutual Holding Company Merger had not occurred or the Surviving Association may
be substituted as a party to such action or proceeding, and any judgment, order
or decree may be rendered for or against it that might have been rendered for or
against either of the Constituent Associations if the Mutual Holding Company
Merger had not occurred.
3. CANCELLATION OF MID-TIER HOLDING COMPANY COMMON STOCK HELD BY THE
MUTUAL HOLDING COMPANY AND MEMBER INTERESTS; LIQUIDATION ACCOUNT.
(a) On the Effective Date, (i) each share of Mid-Tier Holding Company
Common Stock issued and outstanding immediately prior to the Effective Date
(which shall be deemed to be Association Common Stock pursuant to the Mid-Tier
Holding Company Merger) and held by the Mutual Holding Company shall, by virtue
of the Mutual Holding Company Merger and without any action on the part of the
holder thereof, be canceled, (ii) the interests in the Mutual Holding Company of
any person, firm or entity who or which qualified as a member of the Mutual
Holding Company in accordance with its mutual charter and bylaws and the laws of
the United States prior to the Mutual Holding Company's conversion from mutual
to stock form (the "Members") shall, by virtue of the Mutual Holding Company
Merger which shall occur substantially simultaneously with the Mid-Tier Mutual
Holding Company Merger, and without any action on the part of the holder
thereof, be canceled, and (iii) the Association shall establish a liquidation
account on behalf of each depositor
B-2
<PAGE>
member of the Mutual Holding Company, as defined in the Plan of Conversion, in
accordance with Section 17 of the Plan of Conversion.
(b) At or after the Effective Date and prior to the Association Merger,
each certificate or certificates theretofore evidencing issued and outstanding
shares of Mid-Tier Common Stock, other than any such certificate or certificates
held by the Mutual Holding Company, which shall be canceled, shall be deemed to
represent issued and outstanding shares of Association Common Stock which shall
be exchanged as provided by the Association Merger.
4. DISSENTING SHARES. No member of the Mutual Holding Company shall
have any dissenter or appraisal rights in connection with the Mutual Holding
Company Merger. Holders of Mid-Tier Holding Company Common Stock shall not have
any dissenter or appraisal rights pursuant to 12 C.F.R.ss.552.14.
5. NAME OF SURVIVING CORPORATION. The name of the Surviving
Association shall be "Community Savings, F. A."
6. DIRECTORS OF THE SURVIVING ASSOCIATION. Upon and after the
Effective Date, until changed in accordance with the Charter and Bylaws of the
Surviving Association and applicable law, the number of directors of the
Surviving Association shall be seven. The names of those persons who, upon and
after the Effective Date, shall be directors of the Surviving Association are
set forth below. Each such director shall serve for the term which expires at
the annual meeting of shareholders of the Surviving Association in the year set
forth after his respective name, and until a successor is elected and qualified.
Name Term Expires
---- ------------
James B. Pittard, Jr. 1999
Robert F. Cromwell 1999
Karl D. Griffin 2000
Harold I. Stevenson 2000
Forest C. Beaty, Jr. 2001
Frederick A. Teed 2001
The address of each such director is c/o Community Savings, F. A., 660
U.S. Highway One, North Palm Beach, Florida 33408.
7. OFFICERS OF THE SURVIVING ASSOCIATION. Upon and after the Effective
Date, until changed in accordance with the Charter and Bylaws of the Surviving
Association and applicable law, the officers of the Association immediately
prior to the Effective Date shall be the officers of the Surviving Association.
B-3
<PAGE>
8. OFFICES. Upon the Effective Date, all offices of the Association
shall be offices of the Surviving Association. As of the Effective Date, the
home office of the Surviving Association shall remain at 660 U.S. Highway One,
North Palm Beach, Florida, 33408 and the locations of the other offices of the
Surviving Association shall be as set forth in Exhibit A hereto, except for the
addition of deposit-taking offices authorized or the deletion of deposit-taking
offices closed subsequent to the date hereof and the Effective Date.
9. CHARTER AND BYLAWS. On and after the Effective Date, the Charter of
the Association as in effect immediately prior to the Effective Date shall be
the Charter of the Surviving Association until amended in accordance with the
terms thereof and applicable law, except that the Charter shall be amended to
provide for the establishment of a liquidation account in accordance with
applicable law and regulation.
On and after the Effective Date, the Bylaws of the Association as in
effect immediately prior to the Effective Date shall be the Bylaws of the
Surviving Association until amended in accordance with the terms thereof and
applicable law.
10. SHAREHOLDER AND MEMBER APPROVALS. The affirmative votes of the
holders of Mid-Tier Holding Company Common Stock, set forth in Section 3(e) of
the Plan of Conversion and the Members set forth in Section 3(b) of the Plan of
Conversion shall be required to approve the Plan of Conversion, of which this
Plan of Merger is a part, on behalf of the Mid-Tier Holding Company and the
Mutual Holding Company, respectively. The approval of the Mid-Tier Holding
Company, as the sole holder of the Association Common Stock, shall be required
to approve the Plan of Conversion, of which this Plan of Merger, is a part, on
behalf of the Association.
11. ABANDONMENT OF AGREEMENT. This Plan of Merger may be abandoned by
either the Mutual Holding Company or the Association at any time before the
Effective Date in the manner set forth in Section 29 of the Plan of Conversion.
12. AMENDMENTS. This Plan of Merger may be amended in the manner set
forth in Section 29 of the Plan of Conversion by a subsequent writing signed by
the parties hereto upon the approval of the Board of Directors of each of the
parties hereto.
13. SUCCESSORS. This Agreement shall be binding on the successors of
the Mutual Holding Company and the Association.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the United States of America.
B-4
<PAGE>
IN WITNESS WHEREOF, the Mutual Holding Company and the Association have
caused this Plan of Merger to be executed by their duly authorized officers as
of the day and year first above written.
COMFED, M. H. C.
Attest:
By:
- ------------------- -------------------------------------
Deborah M. Rousseau James B. Pittard, Jr.
Secretary President and Chief Executive Officer
COMMUNITY SAVINGS, F. A.
Attest:
By:
- ------------------- -------------------------------------
Deborah M. Rousseau James B. Pittard, Jr.
Secretary President and Chief Executive Officer
B-5
<PAGE>
ANNEX C
PLAN OF MERGER
This Plan of Merger, dated as of August 13, 1998, is among Community
Savings, F. A. (the "Association" or the "Surviving Association"), a federally
chartered savings association, Community Savings Bankshares, Inc. (the "Holding
Company"), a Delaware corporation, and Community Interim Savings Association
("Interim"), a federally chartered interim savings association.
WITNESSETH:
WHEREAS, the Association has organized the Holding Company as a
first-tier, wholly- owned subsidiary for the purpose of becoming the stock
holding company of the Association upon completion of the Conversion and
Reorganization, as defined in the Plan of Conversion of ComFed, M. H. C. (the
"Mutual Holding Company") and Agreement and Plan of Reorganization between the
Holding Company, the Mutual Holding Company and the Association (the "Plan of
Conversion");
WHEREAS, the Mutual Holding Company, a federally chartered mutual
holding company which owns 51.4% of the common stock of Community Savings
Bankshares, Inc., a federal stock corporation (the "Mid-Tier Holding Company"),
par value $1.00 per share ("Mid-Tier Holding Company Common Stock"), will
convert to a federally chartered interim stock savings association and
simultaneously merge with and into the Association pursuant to the Plan of
Conversion and the Plan of Merger included as Annex B thereto (the "Mutual
Holding Company Merger"), pursuant to which all shares of Mid-Tier Common Stock
held by the Mutual Holding Company will be cancelled;
WHEREAS, substantially simultaneously with the Mutual Holding Company
Merger, the Mid-Tier Holding Company will convert into a federal interim stock
savings association and merge with and into the Association (the "Mid-Tier
Holding Company Merger") and the shares of Mid-Tier Holding Company Common Stock
held by other than the Mutual Holding Company will be deemed to represent shares
of Association common stock, $1.00 par value per share ("Association Common
Stock");
WHEREAS, the formation of a stock holding company by the Association
will be facilitated by causing the Holding Company to become the sole
shareholder of a newly-formed interim federally chartered stock savings
association and then merging the interim savings association with and into the
Association (the "Association Merger"), pursuant to which the Association will
become a wholly owned subsidiary of the Holding Company and, in connection
therewith, all outstanding shares of Mid-Tier Common Stock will be converted
automatically into and become shares of common stock of the Holding Company, par
value $1.00 per share ("Holding Company Common Stock");
WHEREAS, Interim is being organized by the officers of the Association
as an interim federally chartered stock savings association with the Holding
Company as its sole shareholder in order to effect the Association Merger; and
C-1
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WHEREAS, the Association and Interim (the "Constituent Associations")
desire to provide for the terms and conditions of the Association Merger.
NOW, THEREFORE, the Association, the Holding Company and Interim hereby
agree as follows:
1. EFFECTIVE DATE. The Association Merger shall become effective on
the date specified in the endorsement of the Articles of Combination relating to
the Association Merger by the Secretary of the Office of Thrift Supervision
("OTS") pursuant to 12 C.F.R. ss.552.13(k), or any successor thereto (the
"Effective Date").
2. THE ASSOCIATION MERGER AND EFFECT THEREOF. Subject to the terms and
conditions set forth herein and the prior approval of the OTS of the Conversion
and the Reorganization, as defined in the Plan of Conversion, and the expiration
of all applicable waiting periods, Interim shall merge with and into the
Association, which shall be the Surviving Association. Upon consummation of the
Association Merger, the Surviving Association shall be considered the same
business and corporate entity as each of the Constituent Associations and
thereupon and thereafter all the property, rights, powers and franchises of each
of the Constituent Associations shall vest in the Surviving Association and the
Surviving Association shall be subject to and be deemed to have assumed all of
the debts, liabilities, obligations and duties of each of the Constituent
Associations and shall have succeeded to all of each of their relationships,
fiduciary or otherwise, as fully and to the same extent as if such property,
rights, privileges, powers, franchises, debts, obligations, duties and
relationships had been originally acquired, incurred or entered into by the
Surviving Association. In addition, any reference to either of the Constituent
Associations in any contract, will or document, whether executed or taking
effect before or after the Effective Date, shall be considered a reference to
the Surviving Association if not inconsistent with the other provisions of the
contract, will or document; and any pending action or other judicial proceeding
to which either of the Constituent Associations is a party shall not be deemed
to have abated or to have been discontinued by reason of the Association Merger,
but may be prosecuted to final judgment, order or decree in the same manner as
if the Association Merger had not occurred or the Surviving Association may be
substituted as a party to such action or proceeding, and any judgment, order or
decree may be rendered for or against it that might have been rendered for or
against either of the Constituent Associations if the Association Merger had not
occurred.
3. CONVERSION OF STOCK.
(a) On the Effective Date, (i) each share of Mid-Tier Common Stock
issued and outstanding immediately prior to the Effective Date shall, by virtue
of the Association Merger and without any action on the part of the holder
thereof, be converted into the right to receive Holding Company Common Stock
based on the Exchange Ratio, as defined in the Plan of Conversion, plus the
right to receive cash in lieu of any fractional share interest, as determined in
accordance with Section 3(c) hereof, (ii) each share of common stock, par value
$1.00 per share, of Interim ("Interim Common Stock") issued and outstanding
immediately prior to the Effective Date shall, by virtue of the Association
Merger and without any action on the part of the holder thereof, be converted
into one share of Association Common Stock, and (iii) each share of Holding
Company Common Stock
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<PAGE>
issued and outstanding immediately prior to the Effective Date shall, by virtue
of the Association Merger and without any action on the part of the holder
thereof, be cancelled. By voting in favor of this Plan of Merger, the Holding
Company, as the sole shareholder of Interim, shall have agreed (i) to issue
shares of Holding Company Common Stock in accordance with the terms hereof and
(ii) to cancel all previously issued and outstanding shares of Holding Company
Common Stock upon the effectiveness of the Association Merger.
(b) On and after the Effective Date, there shall be no registrations of
transfers on the stock transfer books of Interim, the Mid-Tier Holding Company
or the Association of shares of Interim Common Stock, Mid-Tier Holding Company
Common Stock or Association Common Stock which were outstanding immediately
prior to the Effective Date.
(c) Notwithstanding any other provision hereof, no fractional shares of
Holding Company Common Stock shall be issued to holders of Mid-Tier Holding
Company Common Stock. In lieu thereof, each holder of shares of Mid-Tier Holding
Company Common Stock entitled to a fraction of a share of Holding Company Common
Stock shall, at the time of surrender of the certificate or certificates
representing such holder's shares, receive an amount of cash equal to the
product arrived at by multiplying such fraction of a share of Holding Company
Common Stock by the Actual Purchase Price, as defined in the Plan of Conversion.
No such holder shall be entitled to dividends, voting rights or any other rights
in respect of any fractional share.
4. EXCHANGE OF SHARES.
(a) At or after the Effective Date, each holder of a certificate or
certificates theretofore evidencing issued and outstanding shares of Mid-Tier
Common Stock, upon surrender of the same to an agent, duly appointed by the
Holding Company ("Exchange Agent"), shall be entitled to receive in exchange
therefor a certificate or certificates representing the number of full shares of
Holding Company Common Stock for which the shares of Mid-Tier Holding Company
Common Stock theretofore represented by the certificate or certificates so
surrendered shall have been converted as provided in Section 3(a) hereof. The
Exchange Agent shall mail to each holder of record of an outstanding certificate
which immediately prior to the Effective Date evidenced shares of Mid-Tier
Holding Company Common Stock, and which is to be exchanged for Holding Company
Common Stock as provided in Section 3(a) hereof, a form of letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to such certificate shall pass, only upon delivery of such certificate to the
Exchange Agent) advising such holder of the terms of the exchange effected by
the Association Merger and of the procedure for surrendering to the Exchange
Agent such certificate in exchange for a certificate or certificates evidencing
Holding Company Common Stock.
(b) No holder of a certificate theretofore representing shares of
Mid-Tier Holding Company Common Stock shall be entitled to receive any dividends
in respect of the Holding Company Common Stock into which such shares shall have
been converted by virtue of the Association Merger until the certificate
representing such shares of Mid-Tier Holding Company Common Stock is surrendered
in exchange for certificates representing shares of Holding Company Common
Stock. In the event that dividends are declared and paid by the Holding Company
in respect of Holding Company Common Stock after the Effective Date but prior to
surrender of
C-3
<PAGE>
certificates representing shares of Mid-Tier Holding Company Common Stock,
dividends payable in respect of shares of Holding Company Common Stock not then
issued shall accrue (without interest). Any such dividends shall be paid
(without interest) upon surrender of the certificates representing such shares
of Mid-Tier Holding Company Common Stock. The Holding Company shall be entitled,
after the Effective Date, to treat certificates representing shares of Mid-Tier
Holding Company Common Stock as evidencing ownership of the number of full
shares of Holding Company Common Stock into which the shares of Mid-Tier Holding
Company Common Stock represented by such certificates shall have been converted,
notwithstanding the failure on the part of the holder thereof to surrender such
certificates.
(c) The Holding Company shall not be obligated to deliver a certificate
or certificates representing shares of Holding Company Common Stock to which a
holder of Mid-Tier Holding Company Common Stock would otherwise be entitled as a
result of the Association Merger until such holder surrenders the certificate or
certificates representing the shares of Mid-Tier Holding Company Common Stock
for exchange as provided in this Section 4, or, in default thereof, an
appropriate Affidavit of Loss and Indemnity Agreement and/or a bond as may be
required in each case by the Holding Company. If any certificate evidencing
shares of Holding Company Common Stock is to be issued in a name other than that
in which the certificate evidencing Mid-Tier Holding Company Common Stock
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that the certificate so surrendered shall be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange pay to the Exchange Agent any transfer or other tax required by reason
of the issuance of a certificate for shares of Holding Company Common Stock in
any name other than that of the registered holder of the certificate surrendered
or otherwise establish to the satisfaction of the Exchange Agent that such tax
has been paid or is not payable.
(d) If, between the date hereof and the Effective Date, the shares of
Mid-Tier Holding Company Common Stock shall be changed into a different number
or class of shares by reason of any reclassification, recapitalization,
split-up, combination, exchange of shares or readjustment, or a stock dividend
thereon shall be declared with a record date within said period, the Exchange
Ratio specified in Section 3(a) hereof shall be adjusted accordingly.
5. DISSENTING SHARES. No holders of shares of Mid-Tier Holding Company
Common Stock shall have dissenter and appraisal rights in connection with the
Association Merger pursuant to 12 C.F.R. ss.552.14.
6. NAME OF SURVIVING ASSOCIATION. The name of the Surviving Mid-Tier
Holding Company shall be "Community Savings, F. A."
7. DIRECTORS OF THE SURVIVING ASSOCIATION. Upon and after the
Effective Date, until changed in accordance with the Charter and Bylaws of the
Surviving Association and applicable law, the number of directors of the
Surviving Association shall be seven. The names of those persons who, upon and
after the Effective Date, shall be directors of the Surviving Association are
set forth below. Each such director shall serve for the term which expires at
the annual meeting of
C-4
<PAGE>
shareholders of the Surviving Association in the year set forth after his
respective name, and until a successor is elected and qualified.
Name Term Expires
---- ------------
James B. Pittard, Jr. 1999
Robert F. Cromwell 1999
Karl D. Griffin 2000
Harold I. Stevenson 2000
Forest C. Beaty, Jr. 2001
Frederick A. Teed 2001
The address of each such director is c/o Community Savings, F. A., 660
U.S. Highway One, North Palm Beach, Florida 33408.
8. OFFICERS OF THE SURVIVING ASSOCIATION. Upon and after the Effective
Date, until changed in accordance with the Charter and Bylaws of the Surviving
Association and applicable law, the officers of the Association immediately
prior to the Effective Date shall be the officers of the Surviving Association.
9. OFFICES. Upon the Effective Date, all offices of the Association
shall be offices of the Surviving Association. As of the Effective Date, the
home office of the Surviving Association shall remain at 660 U.S. Highway One,
North Palm Beach, Florida 33408 and the locations of the other offices of the
Surviving Association shall be as set forth in Exhibit A hereto, except for the
addition of deposit-taking offices authorized or the deletion of deposit-taking
offices closed subsequent to the date hereof and the Effective Date.
10. CHARTER AND BYLAWS. On and after the Effective Date, the Charter
and Bylaws of the Association as in effect immediately prior to the Effective
Date shall be the Charter and Bylaws of the Surviving Association until amended
in accordance with the terms thereof and applicable law.
11. SAVINGS ACCOUNTS. Upon the Effective Date, any savings accounts of
Interim, without reissue, shall be and become savings accounts of the Surviving
Association without change in their respective terms, including, without
limitation, maturity, minimum required balances or withdrawal value.
12. STOCK COMPENSATION PLANS. By voting in favor of this Agreement, the
Holding Company shall have approved adoption of the Mid-Tier Holding Company's
existing 1995 Recognition and Retention Plan for Employees and Outside Directors
and the 1995 Stock Option Plan (collectively the "Plans") as plans of the
Holding Company and shall have agreed to issue Holding Company Common Stock in
lieu of Mid-Tier Holding Company Common Stock pursuant to the terms of such
Plans. As of the Effective Date, rights outstanding under the Plans shall be
assumed by the Holding Company and thereafter shall be rights only for shares of
Holding Company Common Stock, with each such right being for a number of shares
of Holding Company Common Stock equal to the number of shares of Association
Common Stock that were available thereunder
C-5
<PAGE>
immediately prior to the Effective Date times the Exchange Ratio, as defined in
the Plan of Conversion, and the price of each such right shall be adjusted to
reflect the Exchange Ratio and so that the aggregate purchase price of the right
is unaffected, but with no change in any other term or condition of such right.
The Holding Company shall make appropriate amendments to the Plans to reflect
the adoption of the Plans by the Holding Company without adverse effect upon the
rights outstanding thereunder, including changing references to the Mid-Tier
Holding Company (or the Association) in the Plans to the Holding Company where
appropriate.
13. SHAREHOLDER APPROVAL. The affirmative votes of the holders of
Mid-Tier Holding Company Common Stock set forth in Section 3 of the Plan of
Conversion shall be required to approve the Plan of Conversion, of which this
Plan of Merger is a part, on behalf of the Mid-Tier Holding Company. The
approval of the Holding Company, as the sole holder of the Interim Common Stock,
shall be required to approve the Plan of Conversion, of which this Plan of
Merger is a part, on behalf of Interim. The approval of the Mid-Tier Holding
Company, as the sole holder of the Association Common Stock, shall be required
to approve the Plan of Conversion, of which this Plan of Merger is a part, on
behalf of the Association.
14. REGISTRATION; OTHER APPROVALS. In addition to the approvals set
forth in Sections 1 and 13 hereof and the Plan of Conversion, the parties'
obligations to consummate the Association Merger shall be subject to the Holding
Company Common Stock to be issued hereunder in exchange for Mid-Tier Holding
Company Common Stock being registered under the Securities Act of 1933, as
amended, and registered or qualified under applicable state securities laws, as
well as the receipt of all other approvals, consents or waivers as the parties
may deem necessary or advisable.
15. ABANDONMENT OF AGREEMENT. This Plan of Merger may be abandoned by
either the Association or Interim at any time before the Effective Date in the
manner set forth in Section 29 of the Plan of Conversion.
16. AMENDMENTS. This Plan of Merger may be amended in the manner set
forth in Section 29 of the Plan of Conversion by a subsequent writing signed by
the parties hereto upon the approval of the Board of Directors of each of the
parties hereto.
17. SUCCESSORS. This Agreement shall be binding on the successors of
the Association and Interim.
18. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the United States of America.
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<PAGE>
IN WITNESS WHEREOF, the Association, the Holding Company and Interim
have caused this Plan of Merger to be executed by their duly authorized officers
as of the day and year first above written.
COMMUNITY SAVINGS, F. A.
Attest:
By:
- ------------------- -------------------------------------
Deborah M. Rousseau James B. Pittard, Jr.
Secretary President and Chief Executive Officer
COMMUNITY SAVINGS BANKSHARES, INC.
(a Delaware Corporation)
Attest:
By:
- ------------------- -------------------------------------
Deborah M. Rousseau James B. Pittard, Jr.
Secretary President and Chief Executive Officer
COMMUNITY INTERIM SAVINGS
ASSOCIATION (In Organization)
Attest:
By:
- ------------------- -------------------------------------
Deborah M. Rousseau James B. Pittard, Jr.
Secretary President and Chief Executive Officer
C-7
CERTIFICATE OF INCORPORATION OF
COMMUNITY SAVINGS BANKSHARES, INC.
ARTICLE 1. NAME. The name of the corporation is Community Savings
Bankshares, Inc. (hereinafter referred to as the "Corporation").
ARTICLE 2. REGISTERED OFFICE AND REGISTERED AGENT. The address of the
registered office of the Corporation in the State of Delaware is 1209 Orange
Street, in the city of Wilmington, county of New Castle. The name of the
registered agent at such address is The Corporation Trust Company.
ARTICLE 3. NATURE OF BUSINESS. The purpose of the Corporation is to
engage in any lawful act or activity for which a corporation may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE 4. CAPITAL STOCK. The total number of shares of capital stock
which the Corporation has authority to issue is 70,000,000 of which 10,000,000
shall be preferred stock, $1.00 par value per share (hereinafter the "Preferred
Stock"), and 60,000,000 shall be common stock, par value $1.00 per share
(hereinafter the "Common Stock").
The Board of Directors is hereby expressly authorized, by resolution or
resolutions to provide, out of the unissued shares of Preferred Stock, for
series of Preferred Stock. Before any shares of any such series are issued, the
Board of Directors shall fix, and hereby is expressly empowered to fix, by
resolution or resolutions, the following provisions of the shares thereof:
(a) the designation of such series, the number of shares to constitute
such series and the stated value thereof if different from the par value
thereof;
(b) whether the shares of such series shall have voting rights,
including any authority to elect directors, in addition to any voting rights
provided by law, and, if so, the terms of such voting rights, which may be
general or limited;
(c) the dividends, if any, payable on such series, whether any such
dividends shall be cumulative, and, if so, from what dates, the conditions and
dates upon which such dividends shall be payable, and the preference or relation
which such dividends shall bear to the dividends payable on any shares of stock
of any other class or any other series of this class;
(d) whether the shares of such series shall be subject to redemption by
the Corporation, and, if so, the times, prices and other conditions of such
redemption;
(e) the amount or amounts payable upon shares of such series upon, and
the rights of the holders of such series in, the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, or upon any
distribution of the assets of the Corporation;
<PAGE>
(f) whether the shares of such series shall be subject to the operation
of a retirement or sinking fund and, if so, the extent to and manner in which
any such retirement or sinking fund shall be applied to the purchase or
redemption of the shares of such series for retirement or other corporate
purposes and the terms and provisions relative to the operation thereof;
(g) whether the shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or any other series of this
class or any other securities, and, if so, the price or prices or the rate or
rates of conversion or exchange and the method, if any, of adjusting the same,
and any other terms and conditions of conversion or exchange;
(h) the limitations and restrictions, if any, to be effective while any
shares of such series are outstanding upon the payment of dividends or the
making of other distributions on, and upon the purchase, redemption or other
acquisition by the Corporation of, the Common Stock or shares of stock of any
other class or any other series of this class;
(i) the conditions or restrictions, if any, upon the creation of
indebtedness of the Corporation or upon the issue of any additional stock,
including additional shares of such series or of any other series of this class
or of any other class; and
(j) any other powers, preferences and relative, participating, optional
and other special rights, and any qualifications, limitations and restrictions
thereof.
The powers, preferences and relative, participating, optional and other
special rights of each series of Preferred Stock, and the qualifications,
limitations or restrictions thereof, if any, may differ from those of any and
all other series at any time outstanding. All shares of any one series of
Preferred Stock shall be identical in all respects with all other shares of such
series, except that shares of any one series issued at different times may
differ as to the dates from which dividends thereon shall accrue and/or be
cumulative.
ARTICLE 5. INCORPORATOR. The name and mailing address of the sole
incorporator is as follows:
Name Address
---- -------
Community Savings, F. A. 660 U.S. Highway One
North Palm Beach, FL 33408
ARTICLE 6. PREEMPTIVE RIGHTS. No holder of the capital stock of the
Corporation shall be entitled as such, as a matter of right, to subscribe for or
purchase any part of any new or additional issue of stock of any class
whatsoever of the Corporation, or of securities convertible into stock of any
class whatsoever, whether now or hereafter authorized, or whether issued for
cash or other consideration or by way of a dividend.
2
<PAGE>
ARTICLE 7. DIRECTORS. The business and affairs of the Corporation
shall be managed by or under the direction of a Board of Directors. Except as
otherwise fixed pursuant to the provisions of Article 4 hereof relating to the
rights of the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation to elect additional
directors, the number of directors shall be determined as stated in the
Corporation's Bylaws, as may be amended from time to time.
A. CLASSIFICATION AND TERM. The Board of Directors, other than those who
may be elected by the holders of any class or series of stock having preference
over the Common Stock as to dividends or upon liquidation, shall be divided into
three classes as nearly equal in number as possible, with one class to be
elected annually. The term of office of the initial directors shall be as
follows: the term of directors of the first class shall expire at the first
annual meeting of shareholders after the effective date of this Certificate of
Incorporation; the term of office of the directors of the second class shall
expire at the second annual meeting of shareholders after the effective date of
this Certificate of Incorporation; and the term of office of the third class
shall expire at the third annual meeting of shareholders after the effective
date of this Certificate of Incorporation; and, as to directors of each class,
when their respective successors are elected and qualified. At each annual
meeting of shareholders, directors elected to succeed those whose terms are
expiring shall be elected for a term of office to expire at the third succeeding
annual meeting of shareholders, unless a different term of office is necessary
to comply with the requirements of the first sentence of this Article 7.A., and
until their respective successors are elected and qualified. Shareholders of the
Corporation shall not be permitted to cumulate their votes for the election of
directors.
B. VACANCIES. Except as otherwise fixed pursuant to the provisions of
Article 4 hereof relating to the rights of the holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation to elect directors, any vacancy occurring in the Board of Directors,
including any vacancy created by reason of an increase in the number of
directors, may be filled by a majority vote of the directors then in office,
whether or not a quorum is present, or by a sole remaining director, and any
director so chosen shall hold office for the remainder of the term to which the
director has been selected and until such director's successor shall have been
elected and qualified. When the number of directors is changed, the Board of
Directors shall determine the class or classes to which the increased or
decreased number of directors shall be apportioned, provided that no decrease in
the number of directors shall shorten the term of any incumbent director.
C. REMOVAL. Subject to the rights of any class or series of stock having
preference over the Common Stock as to dividends or upon liquidation to elect
directors, any director (including persons elected by directors to fill
vacancies in the Board of Directors) may be removed from office only with cause
by an affirmative vote of not less than 80% of the Voting Shares (as defined in
Article 12 hereof and after giving effect to Article 12.D. hereof) at a duly
constituted meeting of shareholders called expressly for such purpose. Cause for
removal shall exist only if the director whose removal is proposed has been
either declared incompetent by an order of a court, convicted of a felony or of
an offense punishable by imprisonment for a term of more than one year by a
court of competent
3
<PAGE>
jurisdiction, or deemed liable by a court of competent jurisdiction for gross
negligence or misconduct in the performance of such director's duties to the
Corporation. At least 30 days prior to such meeting of shareholders, written
notice shall be sent to the director whose removal will be considered at the
meeting.
D. EVALUATION OF ACQUISITION PROPOSALS. The Board of Directors of the
Corporation, when evaluating any offer to the Corporation or to the shareholders
of the Corporation from another party to (a) purchase for cash, or exchange any
securities or property for, any outstanding equity securities of the
Corporation, (b) merge or consolidate the Corporation with another corporation
or (c) purchase or otherwise acquire all or substantially all of the properties
and assets of the Corporation, may, consistent with the exercise of its
fiduciary duties and in connection with the exercise of its judgment in
determining what is in the best interest of the Corporation and its
shareholders, give due consideration to the extent permitted by law not only to
the price or other consideration being offered, but also to all other relevant
factors including, without limitation, the financial and managerial resources
and future prospects of the other party, the possible effects on the business of
the Corporation and its subsidiaries and on the employees, customers, suppliers
and creditors of the Corporation and its subsidiaries, the effects on the
ability of the Corporation to fulfill its corporate objectives as a holding
company and on the ability of its subsidiary savings and loan association to
fulfill its objectives as a savings and loan association, and the effects on the
communities in which the Corporation's and its subsidiaries' facilities are
located.
ARTICLE 8. MEETINGS OF SHAREHOLDERS. Any action required or permitted
by the General Corporation Law of the State of Delaware or this Certificate of
Incorporation to be approved by or consented to by the shareholders of the
Corporation, must be effected at a duly called annual or special meeting of
shareholders and may not be effected by written consent by such shareholders in
lieu of a meeting of shareholders. Except as otherwise required by law and
subject to the rights of the holders of any class or series of Preferred Stock,
special meetings of the shareholders may be called only by the Board of
Directors pursuant to a resolution approved by the affirmative vote of at least
three-fourths of the directors then in office.
ARTICLE 9. LIABILITY OF DIRECTORS AND OFFICERS. The personal liability
of the directors and officers of the Corporation for monetary damages shall be
eliminated to the fullest extent permitted by the General Corporation Law of the
State of Delaware as it exists on the effective date of this Certificate of
Incorporation or as such law may be thereafter in effect. No amendment,
modification or repeal of this Article 9 shall adversely affect the rights
provided hereby with respect to any claim, issue or matter in any proceeding
that is based in any respect on any alleged action or failure to act prior to
such amendment, modification or repeal.
ARTICLE 10. INDEMNIFICATION. The Corporation shall indemnify its
directors, officers, employees, agents and former directors, officers, employees
and agents, and any other persons serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, association,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees, judgments, fines and amounts paid in settlement)
incurred in connection
4
<PAGE>
with any pending or threatened action, suit or proceeding, whether civil,
criminal, administrative or investigative, with respect to which such director,
officer, employee, agent or other person is a party, or is threatened to be made
a party, to the full extent permitted by the General Corporation Law of the
State of Delaware, provided, however, that the Corporation shall not be liable
for any amounts which may be due to any person in connection with a settlement
of any action, suit or proceeding effected without its prior written consent or
any action, suit or proceeding initiated by any person seeking indemnification
hereunder without its prior written consent. The indemnification provided herein
(i) shall not be deemed exclusive of any other right to which any person seeking
indemnification may be entitled under any bylaw, agreement or vote of
shareholders or disinterested directors or otherwise, both as to action in his
or her official capacity and as to action in any other capacity, and (ii) shall
inure to the benefit of the heirs, executors and administrators of any such
person. The Corporation shall have the power, but shall not be obligated, to
purchase and maintain insurance on behalf of any person or persons enumerated
above against any liability asserted against or incurred by them or any of them
arising out of their status as corporate directors, officers, employees, or
agents whether or not the Corporation would have the power to indemnify them
against such liability under the provisions of this Article 10.
ARTICLE 11. SHAREHOLDER APPROVAL OF CERTAIN ACTIONS. Except as set
forth in the following sentence, any action required or permitted to be taken by
the shareholders of the Corporation pursuant to Subchapter IX (Merger or
Consolidation) and Subchapter X (Sale of Assets, Dissolution and Winding Up) of
the General Corporation Law of the State of Delaware, or any successors thereto,
shall be taken upon the affirmative vote of at least 80% of the Voting Shares
(as defined in Article 12 hereof and after giving effect to Article 12.D.
hereof), as well as such additional vote of the Preferred Stock as may be
required by the provisions of any series thereof. Notwithstanding the preceding
sentence, if any such action is recommended by at least two thirds of the entire
Board of Directors (including any vacancies), the 80% shareholder vote set forth
in the preceding sentence will not be applicable, and, in such event, the action
will require only such affirmative vote as is required by law.
ARTICLE 12. RESTRICTIONS ON OFFERS AND ACQUISITIONS OF THE
CORPORATION'S EQUITY SECURITIES.
A. DEFINITIONS.
(a) ACQUIRE. The term "Acquire" includes every type of
acquisition, whether effected by purchase, exchange, operation of law or
otherwise.
(b) ACTING IN CONCERT. The term "Acting in Concert" means (i)
knowing participation in a joint activity or conscious parallel action towards a
common goal whether or not pursuant to an express agreement, or (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise.
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(c) AFFILIATE. An "Affiliate" of, or a Person "affiliated with",
a specified Person, means a Person that directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is under common control
with, the Person specified.
(d) ASSOCIATE. The term "Associate" used to indicate a
relationship with any Person means:
(i) Any corporation or organization (other than the
Corporation or a Subsidiary of the Corporation), or any
subsidiary or parent thereof, of which such Person is a director,
officer or partner or is, directly or indirectly, the Beneficial
Owner of 10% or more of any class of equity securities;
(ii) Any trust or other estate in which such Person has
a 10% or greater beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity, provided,
however, such term shall not include any employee stock benefit
plan of the Corporation or a Subsidiary of the Corporation in
which such Person has a 10% or greater beneficial interest or
serves as a trustee or in a similar fiduciary capacity;
(iii) Any relative or spouse of such Person (or any
relative of such spouse) who has the same home as such Person or
who is a director or officer of the Corporation or a Subsidiary
of the Corporation (or any subsidiary or parent thereof); or
(iv) Any investment company registered under the
Investment Company Act of 1940 for which such Person or any
Affiliate or Associate of such Person serves as investment
advisor.
(e) BENEFICIAL OWNER (INCLUDING BENEFICIALLY OWNED). A Person
shall be considered the "Beneficial Owner" of any shares of stock (whether or
not owned of record):
(i) With respect to which such Person or any Affiliate
or Associate of such Person directly or indirectly has or shares
(A) voting power, including the power to vote or to direct the
voting of such shares of stock, and/or (B) investment power,
including the power to dispose of or to direct the disposition of
such shares of stock;
(ii) Which such Person or any Affiliate or Associate of
such Person has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or understanding or upon
the exercise of conversion rights, exchange rights, warrants or
options, or otherwise, and/or (B) the right to vote pursuant to
any agreement, arrangement or understanding (whether such right
is exercisable immediately or only after the passage of time); or
(iii) Which are Beneficially Owned within the meaning of
(i) or (ii) of this Article 12.A.(e) by any other Person with
which such first-mentioned Person or any of its
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Affiliates or Associates either (A) has any agreement,
arrangement or understanding, written or oral, with respect to
acquiring, holding, voting or disposing of any shares of stock of
the Corporation or any Subsidiary of the Corporation or
acquiring, holding or disposing of all or substantially all, or
any Substantial Part, of the assets or business of the
Corporation or a Subsidiary of the Corporation, or (B) is Acting
in Concert. For the purpose only of determining whether a Person
is the Beneficial Owner of a percentage specified in this Article
10 of the outstanding Voting Shares, such shares shall be deemed
to include any Voting Shares which may be issuable pursuant to
any agreement, arrangement or understanding or upon the exercise
of conversion rights, exchange rights, warrants, options or
otherwise and which are deemed to be Beneficially Owned by such
Person pursuant to the foregoing provisions of this Article
12.A.(e), but shall not include any other Voting Shares which may
be issuable in such manner.
(f) OFFER. The term "Offer" shall mean every offer to buy or
acquire, solicitation of an offer to sell, tender offer or request or invitation
for tender of, a security or interest in a security for value; provided that the
term "Offer" shall not include (i) inquiries directed solely to the management
of the Corporation and not intended to be communicated to shareholders which are
designed to elicit an indication of management's receptivity to the basic
structure of a potential acquisition with respect to the amount of cash and or
securities, manner of acquisition and formula for determining price, or (ii)
non-binding expressions of understanding or letters of intent with the
management of the Corporation regarding the basic structure of a potential
acquisition with respect to the amount of cash and or securities, manner of
acquisition and formula for determining price.
(g) PERSON. The term "Person" shall mean any individual,
partnership, corporation, limited liability company, association, trust, group
or other entity. When two or more Persons act as a partnership, limited
partnership, syndicate, association or other group for the purpose of acquiring,
holding or disposing of shares of stock, such partnership, syndicate, associate
or group shall be deemed a "Person."
(h) SUBSTANTIAL PART. The term "Substantial Part" as used with
reference to the assets of the Corporation or of any Subsidiary means assets
having a value of more than 10% of the total consolidated assets of the
Corporation and its Subsidiaries as of the end of the Corporation's most recent
fiscal year ending prior to the time the determination is being made.
(i) SUBSIDIARY. "Subsidiary" means any corporation of which a
majority of any class of equity security is owned, directly or indirectly, by
the Person in question.
(j) VOTING SHARES. "Voting Shares" shall mean shares of the
Corporation entitled to vote generally in an election of directors.
(k) CERTAIN DETERMINATIONS WITH RESPECT TO ARTICLE 12. A majority
of the directors shall have the power to determine for the purposes of this
Article 12, on the basis of information known to them and acting in good faith:
(i) the number of Voting Shares of which any Person is the
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Beneficial Owner, (ii) whether a Person is an Affiliate or Associate of another
Person, (iii) whether a Person has an agreement, arrangement or understanding
with another as to the matters referred to in the definition of "Beneficial
Owner" as hereinabove defined, and (iv) such other matters with respect to which
a determination is required under this Article 12. Any such determinations made
by the Board of Directors of the Corporation pursuant to this Article 12 shall
be conclusive and binding upon the Corporation and its shareholders. In order to
carry out its responsibilities under this Article 12, the Board of Directors
shall have the right to demand that any person who is reasonably believed to be
the Beneficial Owner of Excess Shares shall supply the Corporation with complete
information as to (x) the record owners of all shares of equity securities
Beneficially Owned by such Person and (y) any other factual matter relating to
the applicability or effect of this Article 12 as may be reasonably requested by
the Board of Directors.
(l) DIRECTORS, OFFICERS OR EMPLOYEES. Directors, officers or
employees of the Corporation or any Subsidiary thereof shall not be deemed to be
a group with respect to their individual acquisitions of any class of equity
securities of the Corporation solely as a result of their capacities as such.
B. RESTRICTIONS. Upon the effective date of the reorganization of
Community Savings, F. A. as a subsidiary of the Corporation, no Person shall
directly or indirectly Offer to Acquire or Acquire the Beneficial Ownership of
(i) more than 10% of the issued and outstanding shares of any class of an equity
security of the Corporation, or (ii) any securities convertible into, or
exercisable for, any equity securities of the Corporation if, assuming
conversion or exercise by such Person of all securities of which such Person is
the Beneficial Owner which are convertible into, or exercisable for, such equity
securities (but of no securities convertible into, or exercisable for, such
equity securities of which such Person is not the Beneficial Owner), such Person
would be the Beneficial Owner of more than 10% of any class of an equity
security of the Corporation.
C. EXCLUSIONS. The foregoing restrictions shall not apply to (i) any
Offer with a view toward public resale made exclusively to the Corporation by
underwriters or a selling group acting on its behalf, (ii) any tax-qualified
employee benefit plan or arrangement established by the Corporation and any
trustee of such a plan or arrangement, and (iii) any other Offer or acquisition
approved in advance by the affirmative vote of two-thirds of the Corporation's
entire Board of Directors (including any vacancies).
D. REMEDIES. In the event that shares are Acquired in violation of
this Article 12, all shares Beneficially Owned by any Person in excess of 10%
shall be considered "Excess Shares" and (i) shall not be counted as shares
entitled to vote and shall not be voted by any Person or counted as Voting
Shares in connection with any matters submitted to shareholders for a vote, (ii)
the Corporation is authorized to refuse to recognize a transfer or attempted
transfer of any shares of the Corporation's equity securities to any Person who
is the Beneficial Owner, or as the result of such transfer would become the
Beneficial Owner, of Excess Shares and (iii) the Board of Directors may cause
such Excess Shares to be transferred to an independent trustee for sale on the
open market or otherwise, with the expenses of such trustee to be paid out of
the proceeds of the sale.
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For purposes of ensuring compliance with Article 12.B., in the event any
partnership, corporation, limited liability company, association or trust is
deemed to Beneficially Own more than 5% of any class of the Corporation's stock,
either by itself or together with one or more other Persons who is an Affiliate
of or Acting in Concert with such entity or who is a member of any group with
such entity with respect to the Corporation's stock, then the Corporation shall
be entitled upon written request to such entity to receive information regarding
the name and address of, and the class and number of shares of Corporation stock
which are Beneficially Owned by, each partner in such partnership, each
director, executive officer and shareholder in such corporation, each member in
such limited liability company or association, and each trustee and beneficiary
of such trust, and in each case each Person controlling such entity and each
partner, director, executive officer, shareholder, member or trustee of any
entity which is ultimately in control of such partnership, corporation, limited
liability company, association or trust.
E. SEVERABILITY. In the event any provision (or portion thereof) of
this Article 12 shall be found to be invalid, prohibited or unenforceable for
any reason, the remaining provisions (or portions thereof) of this Article 12
shall remain in full force and effect, and shall be construed as if such
invalid, prohibited or unenforceable provision had been stricken herefrom or
otherwise rendered inapplicable, it being the intent of this Corporation and its
shareholders that each such remaining provision (or portion thereof) of this
Article 12 remain, to the fullest extent permitted by law, applicable and
enforceable as to all shareholders.
ARTICLE 13. AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS.
A. CERTIFICATE OF INCORPORATION. The Corporation reserves the right
to amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by law, and all rights
conferred upon shareholders herein are granted subject to this reservation. No
amendment, addition, alteration, change or repeal of this Certificate of
Incorporation shall be made unless it is first approved by the Board of
Directors of the Corporation pursuant to a resolution adopted by the affirmative
vote of a majority of the directors then in office, and is thereafter approved
by the holders of at least 80% of Voting Shares (as defined in Article 12 hereof
and after giving effect to Article 12.D. hereof), voting together as a single
class, as well as such additional vote of the Preferred Stock as may be required
by the provisions of any series thereof. Notwithstanding the preceding sentence,
any amendment to this Certificate of Incorporation recommended for adoption by
at least two thirds of the entire Board of Directors (including any vacancies)
shall, to the extent the General Corporation Law of the State of Delaware
requires shareholder approval of such amendment, require the affirmative vote of
a majority of the Voting Shares (as defined in Article 12 hereof and after
giving effect to Article 12.D. hereof), voting together as a single class, as
well as such additional vote of the Preferred Stock as may be required by the
provisions of any series thereof.
B. BYLAWS. The Board of Directors or shareholders may adopt, alter,
amend or repeal the Bylaws of the Corporation. Such action by the Board of
Directors shall require the affirmative vote of a majority of the directors then
in office at any regular or special meeting of the Board of
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Directors. Such action by the shareholders shall require the affirmative vote of
at least a majority of the Voting Shares (as defined in Article 12 hereof and
after giving effect to Article 12.D. hereof), as well as such additional vote of
the Preferred Stock as may be required by the provisions of any series thereof
provided, however, that the affirmative vote of at least 80% of the Voting
Shares (as defined in Article 12 hereof and after giving effect to Article 12.D.
hereof), voting together as a single class, as well as such additional vote of
the Preferred Stock as may be required by the provisions of any series thereof,
shall be required to amend, alter, change or repeal any provision of, or adopt
any provision inconsistent with, Sections 2.4, 2.14, 4.1, 4.2, 4.3, 4.4, 4.5 and
4.15 and Article VI of the Bylaws.
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COMMUNITY SAVINGS, F. A., being the sole Incorporator herein before
named, for the purpose of forming a corporation pursuant to the General
Corporation Law of the State of Delaware, does make this Certificate, hereby
declaring and certifying that this is the Incorporator's act and deed and that
the facts herein stated are true, and accordingly has caused this Certificate to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
6th of August 1998.
COMMUNITY SAVINGS, F. A.
By: /s/ JAMES B. PITTARD, JR.
--------------------------------------------
Name: James B. Pittard, Jr.
Title: President and Chief Executive Officer
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BYLAWS
OF
COMMUNITY SAVINGS BANKSHARES, INC.
ARTICLE I. OFFICES
1.1 REGISTERED OFFICE AND REGISTERED AGENT. The registered office of
Community Savings Bankshares, Inc. (the "Corporation") shall be located in the
State of Delaware at such place as may be fixed from time to time by the Board
of Directors upon filing of such notices as may be required by law, and the
registered agent shall have a business office identical with such registered
office.
1.2 OTHER OFFICES. The Corporation may have other offices within or
without the State of Delaware at such place or places as the Board of Directors
may from time to time determine.
ARTICLE II. SHAREHOLDERS' MEETINGS
2.1 MEETING PLACE. All meetings of the shareholders shall be held at
the principal place of business of the Corporation, or at such other place
within or without the State of Delaware as shall be determined from time to time
by the Board of Directors, and the place at which any such meeting shall be held
shall be stated in the notice of the meeting.
2.2 ANNUAL MEETING. The annual meeting of the shareholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held each year on such date and time
as determined by the Board of Directors and stated in the notice of such
meeting.
2.3 ORGANIZATION. Each meeting of the shareholders shall be presided
over by the Chairman of the Board, or in his absence by the President, or in
their absences, any other individual selected by the Board of Directors. The
Secretary, or in his absence a temporary Secretary, shall act as secretary of
each meeting of the shareholders. In the absence of the Secretary and any
temporary Secretary, the chairman of the meeting may appoint any person present
to act as secretary of the meeting. The chairman of any meeting of the
shareholders shall announce the date and time of the opening and the closing of
the polls for each matter upon which the shareholders will vote at a meeting
and, unless prescribed by law or regulation or unless the Board of Directors has
otherwise determined, shall determine the order of the business and the
procedure at the meeting, including such regulation of the manner of voting and
the conduct of discussions as seem to him in order.
2.4 SPECIAL MEETINGS. Except as otherwise required by law and subject
to the rights of the holders of any class or series of Preferred Stock, special
meetings of the shareholders may be called only by the Board of Directors
pursuant to a resolution approved by the affirmative vote of at least
three-fourths of the directors then in office.
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2.5 NOTICE.
(a) Notice of the time and place of the annual meeting of shareholders
shall be given by delivering personally or by mailing a written notice of the
same, not less than ten days and not more than sixty days prior to the date of
the meeting, to each shareholder of record entitled to vote at such meeting.
When any shareholders' meeting, either annual or special, is adjourned for
thirty days or more, or if a new record date is fixed for an adjourned meeting
of shareholders, notice of the adjourned meeting shall be given as in the case
of an original meeting. It shall not be necessary to give any notice of the time
and place of any meeting adjourned for less than thirty days (unless a new
record date is fixed therefor), other than an announcement at the meeting at
which such adjournment is taken. At the adjourned meeting the Corporation may
transact any business which might have been transacted at the original meeting.
(b) Not less than ten days and not more than sixty days prior to the
meeting, a written notice of each special meeting of shareholders, stating the
place, day and hour of such meeting, and the purpose or purposes for which the
meeting is called, shall be either delivered personally or mailed to each
shareholder of record entitled to vote at such meeting.
2.6 RECORD LIST OF SHAREHOLDERS. At least ten days before each
meeting of shareholders, a complete record of the shareholders entitled to vote
at such meeting, or any adjournment thereof, shall be made, arranged in
alphabetical order, with the address of and number of shares registered in the
name of each, which record shall be kept open to the examination of any
shareholder, for a purpose germane to the meeting, in accordance with the
General Corporation Law ("GCL") of the State of Delaware. The record also shall
be kept open at the time and place of such meeting for the inspection of any
shareholder.
2.7 QUORUM; ACTIONS OF SHAREHOLDERS. Except as otherwise required by
law or the Corporation's Certificate of Incorporation:
(a) A quorum at any annual or special meeting of shareholders shall
consist of shareholders representing, either in person or by proxy, a majority
of the outstanding capital stock of the Corporation entitled to vote at such
meeting.
(b) In all matters other than the election of directors, the affirmative
vote of the majority of shares present in person or represented by proxy at the
meeting and entitled to vote on the subject matter shall be the act of the
shareholders. Directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. If, at any meeting of the shareholders, due
to a vacancy or vacancies or otherwise, directors of more than one class of the
Board of Directors are to be elected, each class of directors to be elected at
the meeting shall be elected in a separate election by a plurality vote.
2.8 VOTING OF SHARES. Except as otherwise provided in these Bylaws or
to the extent that voting rights of the shares of any class or classes are
limited or denied by the Certificate of
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Incorporation, each shareholder, on each matter submitted to a vote at a meeting
of shareholders, shall have one vote for each share of stock registered in his
name on the books of the Corporation.
2.9 CLOSING OF TRANSFER BOOKS AND FIXING OF THE RECORD DATE. For the
purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders, or any adjournment thereof, or entitled to receive
payment of any dividend, the Board of Directors may provide that the stock
transfer books shall be closed for a stated period not to exceed 60 days nor
less than ten days preceding such meeting. In lieu of closing the stock transfer
books, the Board of Directors may fix in advance a record date for any such
determination of shareholders, which record date shall not precede the date upon
which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than sixty days and, in case
of a meeting of shareholders, not less than ten days prior to the date on which
the particular action requiring such determination of shareholders is to be
taken.
2.10 PROXIES. A shareholder may vote either in person or by proxy
executed in writing by the shareholder or his duly authorized attorney-in-fact.
Without limiting the manner in which a shareholder may authorize another person
or persons to act for him as proxy, a shareholder may grant such authority in
the manner specified in Section 212(c) of the GCL (or any successor thereto). No
proxy shall be valid after three years from the date of its execution, unless
otherwise provided in the proxy.
2.11 WAIVER OF NOTICE. A waiver of any notice required to be given any
shareholder, signed by the person or persons entitled to such notice, whether
before or after the time stated therein for the meeting, shall be equivalent to
the giving of such notice. The attendance of any shareholder at a meeting, in
person or by proxy, shall constitute a waiver of notice by such shareholder,
except where a shareholder attends a meeting for the express purpose of
objecting at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or commenced.
2.12 VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS. When
ownership stands in the name of two or more persons, whether fiduciaries,
members of a partnership, joint tenants, tenants in common, tenants by the
entirety or otherwise, or if two or more persons have the same fiduciary
relationship respecting the same shares, unless the Secretary of the Corporation
is given written notice to the contrary and is furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it is
so provided, at any meeting of the shareholders of the Corporation any one or
more of such shareholders may cast, in person or by proxy, all votes to which
such ownership is entitled. In the event an attempt is made to cast conflicting
votes, in person or by proxy, by the several persons in whose names shares of
stock stand, the vote or votes to which those persons are entitled shall be cast
as directed by a majority of those holding such stock and present in person or
by proxy at such meeting, but no votes shall be cast for such stock if a
majority cannot agree, except to the extent provided in Section 217(b)(3) of the
GCL (or any successor thereto).
2.13 VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the name
of another corporation may be voted by an officer, agent or proxy as the bylaws
of such corporation may
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prescribe, or, in the absence of such provision, as the Board of Directors of
such corporation may determine. Shares held by an administrator, executor,
guardian or conservator may be voted by him, either in person or by proxy,
without a transfer of such shares into his name. Shares standing in the name of
a trustee may be voted by him, either in person or by proxy, but no trustee
shall be entitled to vote shares held by him without a transfer of such shares
into his name. Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his name if authority to do so
is contained in an appropriate order of the court or other public authority by
which such receiver was appointed. A shareholder whose shares are pledged shall
be entitled to vote such shares until the shares have been transferred into the
name of the pledgee, and thereafter the pledgee shall be entitled to vote the
shares so transferred.
2.14 PROPOSALS. At an annual meeting of the shareholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, or (b) otherwise properly brought
before the meeting by a shareholder. For business to be properly brought before
an annual meeting by a shareholder, the shareholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not later than 120 days prior to
the anniversary date of the mailing of proxy materials by the Corporation in
connection with the immediately preceding annual meeting of shareholders of the
Corporation or, in the case of the first annual meeting of shareholders of the
Corporation following its acquisition of all of the outstanding capital stock of
Community Savings, F. A., North Palm Beach, Florida (the "Association"), which
meeting is expected to be held in April 1999, notice by the shareholder must be
so delivered and received no later than the close of business on December 15,
1998, notwithstanding a determination by the Corporation to schedule such first
annual meeting later than April 1999. A shareholder's notice to the Secretary
shall set forth as to each matter the shareholder proposes to bring before the
annual meeting (a) a description of the business desired to be brought before
the annual meeting, (b) the name and address, as they appear on the
Corporation's books, of the shareholder proposing such business, (c) the class
and number of shares of Corporation stock which are Beneficially Owned (as
defined in Article 12.A(e) of the Corporation's Certificate of Incorporation) by
the shareholder submitting the notice, by any Person who is Acting in Concert
with or who is an Affiliate or Associate of such shareholder (as such
capitalized terms are defined in Article 12.A of the Corporation's Certificate
of Incorporation), by any Person who is a member of any group with such
shareholder with respect to the Corporation stock or who is known by such
shareholder to be supporting such proposal on the date the notice is given to
the Corporation, and by each Person who is in control of, is controlled by or is
under common control with any of the foregoing Persons (if any of the foregoing
Persons is a partnership, corporation, limited liability company, association or
trust, information shall be provided regarding the name and address of, and the
class and number of shares of Corporation stock which are Beneficially Owned by,
each partner in such partnership, each director, executive officer and
shareholder in such corporation, each member in such limited liability company
or association, and each trustee and beneficiary of such trust, and in each case
each Person controlling such entity and
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each partner, director, executive officer, shareholder, member or trustee of any
entity which is ultimately in control of such partnership, corporation, limited
liability company, association or trust), (d) the identification of any person
retained or to be compensated by the shareholder submitting the proposal, or any
person acting on his or her behalf, to make solicitations or recommendations to
shareholders for the purpose of assisting in the passage of such proposal and a
brief description of the terms of such employment, retainer or arrangement for
compensation, and (e) any material interest of the shareholder in such business.
The chairman of an annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Article II, Section 2.14, and if he
should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted. This provision
is not a limitation on any other applicable laws and regulations.
2.15 INSPECTORS. For each meeting of shareholders, the Board of
Directors shall appoint one or more inspectors of election, who shall make a
written report of such meeting. If for any meeting the inspector(s) appointed by
the Board of Directors shall be unable to act or the Board of Directors shall
fail to appoint any inspector, one or more inspectors shall be appointed at the
meeting by the chairman thereof. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector with strict impartiality and according to the best of his
ability. An inspector or inspectors shall (i) ascertain the number of shares
outstanding and the voting power of each, (ii) determine the shares represented
at a meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors and
(v) certify their determination of the number of shares represented at the
meeting and their count of all votes and ballots. The date and time of the
opening and the closing of the polls for each matter upon which the shareholders
will vote at a meeting shall be announced at the meeting by the chairman
thereof. An inspector or inspectors shall not accept a ballot, proxy or vote,
nor any revocations thereof or changes thereto, after the closing of the polls
(unless the Court of Chancery of the State of Delaware upon application by a
shareholder shall determine otherwise) and may appoint or retain other persons
or entities to assist them in the performance of their duties. Inspectors need
not be shareholders and may not be nominees for election as directors.
ARTICLE III. CAPITAL STOCK
3.1 CERTIFICATES. Certificates of stock shall be issued in numerical
order, and each shareholder shall be entitled to a certificate signed by the
Chairman of the Board or the President, and the Secretary or the Treasurer, and
may be sealed with the seal of the Corporation or facsimile thereof. The
signatures of such officers may be facsimiles if the certificate is manually
signed on behalf of a transfer agent, or registered by a registrar, other than
the Corporation itself or an employee of the Corporation. If an officer who has
signed or whose facsimile signature has been placed upon such certificate ceases
to be an officer before the certificate is issued, it may be issued
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by the Corporation with the same effect as if the person were an officer on the
date of issue. Each certificate of stock shall state:
(a) that the Corporation is organized under the laws of the State of
Delaware;
(b) the name of the person to whom issued;
(c) the number and class of shares and the designation of the series,
if any, which such certificate represents; and
(d) the par value of each share represented by such certificate, or a
statement that such shares are without par value.
3.2 TRANSFERS.
(a) Transfers of stock shall be made only upon the stock transfer
books of the Corporation, kept at the registered office of the Corporation or at
its principal place of business, or at the office of its transfer agent or
registrar, and before a new certificate is issued, the old certificate shall be
surrendered for cancellation. The Board of Directors may, by resolution, open a
share register in any state of the United States, and may employ an agent or
agents to keep such register, and to record transfers of shares therein.
(b) Shares of stock shall be transferred by delivery of the
certificates therefor, accompanied either by an assignment in writing on the
back of the certificate or an assignment separate from the certificate, or by a
written power of attorney to sell, assign and transfer the same, signed by the
holder of said certificate. No shares of stock shall be transferred on the books
of the Corporation until the outstanding certificates therefor have been
surrendered to the Corporation.
(c) A written restriction on the transfer or registration of transfer
of a certificate evidencing stock of the Corporation, if permitted by the GCL
and noted conspicuously on such certificate, may be enforced against the holder
of the restricted certificate or any successor or transferee of the holder,
including an executor, administrator, trustee, guardian or other fiduciary
entrusted with like responsibility for the person or estate of the holder.
3.3 REGISTERED OWNER. Registered shareholders shall be treated by the
Corporation as the holders in fact of the stock standing in their respective
names and the Corporation shall not be bound to recognize any equitable or other
claim to or interest in any share on the part of any other person, whether or
not it shall have express or other notice thereof, except as expressly provided
by the laws of the State of Delaware.
3.4 LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may issue
a new certificate of stock in place of any certificate previously issued by it
which is alleged to have been lost, stolen or destroyed, and the Corporation may
require the owner of the lost, stolen or destroyed certificate, or
6
<PAGE>
his legal representative, to give the Corporation a bond sufficient to indemnify
it against any claim that may be made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.
3.5 FRACTIONAL SHARES OR SCRIP. The Corporation may (a) issue
fractions of a share which shall entitle the holder to exercise voting rights,
to receive dividends thereon and to participate in any of the assets of the
Corporation in the event of liquidation; (b) arrange for the disposition of
fractional interests by those entitled thereto; (c) pay in cash the fair value
of fractions of a share as of the time when those entitled to receive such
shares are determined; or (d) issue scrip in registered or bearer form which
shall entitle the holder to receive a certificate for a full share upon the
surrender of such scrip aggregating a full share.
3.6 SHARES OF ANOTHER CORPORATION. Shares owned by the Corporation in
another corporation, domestic or foreign, may be voted by such officer, agent or
proxy as the Board of Directors may determine or, in the absence of such
determination, by the President of the Corporation.
ARTICLE IV. BOARD OF DIRECTORS
4.1 POWERS. The business and affairs of the Corporation shall be
managed by or under the direction of a Board of Directors, which may exercise
all such authority and powers of the Corporation and do all such lawful acts and
things as are not by law, the Certificate of Incorporation or these Bylaws
directed or required to be exercised or done by the shareholders.
4.2 CLASSIFICATION, TERM AND QUALIFICATIONS. The Board of Directors
shall be divided into three classes as provided in Article 7.A. of the
Corporation's Certificate of Incorporation.
4.3 NUMBER OF DIRECTORS. The initial Board of Directors shall consist
of six (6) persons. The number of directors may at any time be increased or
decreased by a vote of a majority of the Board of Directors, provided that no
decrease shall have the effect of shortening the term of any incumbent director.
Notwithstanding anything to the contrary contained within these Bylaws, the
number of directors may not be less than five nor more than 20.
4.4 VACANCIES. All vacancies in the Board of Directors shall be
filled in the manner provided in the Corporation's Certificate of Incorporation.
4.5 REMOVAL OF DIRECTORS. Directors may be removed in the manner
provided in the Corporation's Certificate of Incorporation.
4.6 REGULAR MEETINGS. Regular meetings of the Board of Directors or
any committee thereof may be held at the principal place of business of the
Corporation or at such other place or places, either within or without the State
of Delaware, as the Board of Directors or such committee, as the case may be,
may from time to time designate. Notice of such meetings shall be provided to
directors in accordance with the provisions of the GCL. Unless otherwise
determined by the Board of
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Directors, the annual meeting of the Board of Directors shall be held
immediately after the adjournment of the annual meeting of shareholders.
4.7 SPECIAL MEETINGS.
(a) Special meetings of the Board of Directors may be called at any
time by the Chairman of the Board, the President or by a majority of the
authorized number of directors, to be held at the principal place of business of
the Corporation or at such other place or places as the Board of Directors or
the person or persons calling such meeting may from time to time designate.
Notice of all special meetings of the Board of Directors shall be given to each
director at least twenty-four (24) hours prior to such meeting if notice is
given in person or by telephone, telegraph, telex, facsimile or other electronic
transmission and at least five (5) days prior to such meeting if notice is given
in writing and delivered by courier or by postage prepaid mail. Such notice need
not specify the business to be transacted at, nor the purpose of, the meeting.
Any director may waive notice of any meeting by submitting a signed waiver of
notice with the Secretary, whether before or after the meeting. The attendance
of a director at a meeting shall constitute a waiver of notice of such meeting,
except where a director attends a meeting for the express purpose of objecting
at the beginning of the meeting to the transaction of any business because the
meeting is not lawfully called or convened.
(b) Special meetings of any committee of the Board of Directors may
be called at any time by such person or persons and with such notice as shall be
specified for such committee by the Board of Directors, or in the absence of
such specification, in the manner and with the notice required for special
meetings of the Board of Directors.
4.8 WAIVER OF NOTICE. Attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends
for the express purpose of objecting to the transaction of any business because
the meeting is not lawfully called or convened. A waiver of notice signed by the
director or directors, whether before or after the time stated for the meeting,
shall be equivalent to the giving of notice.
4.9 QUORUM; ACTIONS OF THE BOARD OF DIRECTORS. Except as may be
otherwise specifically provided by law, the Certificate of Incorporation or
these Bylaws, at all meetings of the Board of Directors, a majority of the
entire Board of Directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present.
4.10 ACTION BY DIRECTORS WITHOUT A MEETING. Any action required or
which may be taken at a meeting of the directors, or of a committee thereof, may
be taken without a meeting if a consent in writing, setting forth the action so
taken or to be taken, shall be signed by all of the directors, or all of the
members of the committee, as the case may be, and such consents are filed with
the minutes
8
<PAGE>
of proceedings of the Board of Directors or committee, as the case may be. Such
consent shall have the same effect as a unanimous vote.
4.11 ACTION BY DIRECTORS BY COMMUNICATIONS EQUIPMENT. Any action
required or which may be taken at a meeting of directors, or of a committee
thereof, may be taken by means of a conference telephone or similar
communications equipment subject to any applicable provisions of the GCL.
4.12 REGISTERING DISSENT. A director who is present at a meeting of
the Board of Directors at which action on a corporate matter is taken shall be
presumed to have assented to such action unless his dissent shall be entered in
the minutes of the meeting, or unless he shall file his written dissent to such
action with the person acting as the secretary of the meeting, before the
adjournment thereof, or shall forward such dissent by registered mail to the
Secretary of the Corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a director who voted in favor of such
action.
4.13 EXECUTIVE AND OTHER COMMITTEES. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees which in each case consist of one or more directors of the
Corporation, and may from time to time invest such committees with such powers
as it may see fit, subject to such conditions as may be prescribed by the Board.
An Executive Committee may be appointed by resolution passed by a majority of
the full Board of Directors. It shall have and exercise all of the authority of
the Board of Directors, except in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation or plan of
voluntary liquidation, recommending to the shareholders the sale, lease or
exchange or other disposition of all or substantially all the property and
assets of the Corporation, declaring a dividend on the Corporation's capital
stock or amending these Bylaws. The designation of any such committee, and the
delegation of authority thereto, shall not relieve the Board of Directors, or
any member thereof, of any responsibility imposed by law.
4.14 REMUNERATION. The directors may be paid their expenses, if any,
of attendance at each meeting of the Board of Directors and may be paid a fixed
sum for attendance at each meeting of the Board of Directors, a stated salary as
director and/or such other compensation as may be fixed by the Board of
Directors. Members of special or standing committees may be allowed like
compensation for serving on committees of the Board of Directors. No such
payments shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor.
4.15 NOMINATIONS OF DIRECTORS. Subject to the rights of holders of any
class or series of stock having a preference over the common stock as to
dividends or upon liquidation, nominations for the election of directors may be
made by the Board of Directors or committee appointed by the Board of Directors
or by any shareholder entitled to vote generally in an election of directors.
However, any shareholder entitled to vote generally in an election of directors
may nominate one or more persons for election as directors at a meeting only if
written notice of such shareholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid to the Secretary of the Corporation, which notice is
delivered to or received
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by the Secretary not later than (i) 120 days prior to the anniversary date of
the mailing of proxy materials by the Corporation in connection with the
immediately preceding annual meeting of shareholders of the Corporation or, in
the case of the first annual meeting of shareholders of the Corporation
following its acquisition of all of the outstanding capital stock of the
Association, which is expected to be held in April 1999, any such nomination by
a shareholder must be so delivered or received no later than the close of
business on December 15, 1998, notwithstanding a determination by the
Corporation to schedule such first Annual Meeting later than April 1999, and
(ii) with respect to an election to be held at a special meeting of shareholders
for the election of directors, the close of business on the tenth day following
the date on which notice of such meeting is first given to shareholders. Each
such notice shall set forth: (a) the name, age, business address and residence
address of the shareholder who intends to make the nomination and of the person
or persons to be nominated; (b) the principal occupation or employment of the
shareholder submitting the notice and of each person being nominated; (c) the
class and number of shares of Corporation stock which are Beneficially Owned (as
defined in Article 12.A.(e) of the Corporation's Certificate of Incorporation)
by the shareholder submitting the notice, by any Person who is Acting in Concert
with or who is an Affiliate or Associate of such shareholder (as such
capitalized terms are defined in Article 12.A. of the Corporation's Certificate
of Incorporation), by any Person who is a member of any group with such
shareholder with respect to the Corporation stock or who is known by such
shareholder to be supporting such nominee(s) on the date the notice is given to
the Corporation, by each person being nominated, and by each Person who is in
control of, is controlled by or is under common control with any of the
foregoing Persons (if any of the foregoing Persons is a partnership,
corporation, limited liability company, association or trust, information shall
be provided regarding the name and address of, and the class and number of
shares of Corporation stock which are Beneficially Owned by, each partner in
such partnership, each director, executive officer and shareholder in such
corporation, each member in such limited liability company or association, and
each trustee and beneficiary of such trust, and in each case each Person
controlling such entity and each partner, director, executive officer,
shareholder, member or trustee of any entity which is ultimately in control of
such partnership, corporation, limited liability company, association or trust);
(d) a representation that the shareholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (e) a description of all arrangements or understandings between the
shareholder and each nominee and any arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholder; (f) such other information regarding the shareholder submitting
the notice and each nominee proposed by such shareholder as would be required to
be included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission; and (g) the consent of each nominee to serve
as a director of the Corporation if so elected. The presiding officer of the
meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedures.
10
<PAGE>
ARTICLE V. OFFICERS
5.1 DESIGNATIONS. The officers of the Corporation shall be a Chairman
of the Board, a President, a Secretary and a Treasurer appointed by the Board of
Directors, as well as such Executive Vice Presidents, Vice Presidents, Assistant
Vice Presidents, Assistant Secretaries, Assistant Treasurers and such other
officers as the Board of Directors or the Chairman of the Board and President
may designate. Officers of the Corporation shall be elected for one year by the
directors at their first meeting after the annual meeting of shareholders, and
officers of the Corporation shall hold office until their successors are elected
and qualified. Any two or more offices may be held by the same person, except
the offices of President and Secretary may not be held by the same person.
5.2 POWERS AND DUTIES. The officers of the Corporation shall have
such authority and perform such duties as the Board of Directors or, in the case
of officers with a title of Vice President or lower, the Chairman of the Board
and President, may from time to time authorize or determine. In the absence of
action by the Board of Directors or the Chairman of the Board and President, as
applicable, the officers shall have such powers and duties as generally pertain
to their respective offices.
5.3 DELEGATION. In the case of absence or inability to act of any
officer of the Corporation and of any person herein authorized to act in his
place, the Board of Directors may from time to time delegate the powers or
duties of such officer to any other officer or any director or other person whom
it may select.
5.4 VACANCIES. Vacancies in any office arising from any cause may be
filled by the Board of Directors at any regular or special meeting of the Board.
5.5 TERM - REMOVAL. The officers of the Corporation shall hold office
until their successors are chosen and qualified. Any officer or agent elected or
appointed by the Board of Directors or by the Chairman and the President may be
removed at any time, with or without cause, by the affirmative vote of a
majority of the whole Board of Directors, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed.
5.6 BONDS. The Board of Directors may, by resolution, require any and
all of the officers to give bonds to the Corporation, with sufficient surety or
sureties, conditions for the faithful performance of the duties of their
respective offices, and to comply with such other conditions as may from time to
time be required by the Board of Directors.
ARTICLE VI. INDEMNIFICATION, ETC. OF DIRECTORS,
OFFICERS AND EMPLOYEES
11
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6.1 INDEMNIFICATION. The Corporation shall provide indemnification to
its directors, officers, employees, agents and former directors, officers,
employees and agents and to others in accordance with the Corporation's
Certificate of Incorporation.
6.2 ADVANCEMENT OF EXPENSES. Reasonable expenses (including
attorneys' fees) incurred by a director, officer or employee of the Corporation
in defending any civil, criminal, administrative or investigative action, suit
or proceeding described in Section 6.1 may be paid by the Corporation in advance
of the final disposition of such action, suit or proceeding as authorized by the
Board of Directors only upon receipt of an undertaking by or on behalf of such
person to repay such amount if it shall ultimately be determined that the person
is not entitled to be indemnified by the Corporation.
6.3 OTHER RIGHTS AND REMEDIES. The indemnification and advancement of
expenses provided by, or granted pursuant to, this Article VI shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under the Corporation's Certificate of
Incorporation, any agreement, vote of shareholders or disinterested directors or
otherwise, both as to actions in their official capacity and as to actions in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer or employee and shall inure to the
benefit of the heirs, executors and administrators of such person.
6.4 INSURANCE. Upon resolution passed by the Board of Directors, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer of employee of the Corporation, or is or was serving
at the request of the corporation as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise, against any
liability asserted against him or incurred by him in any such capacity or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of its
Certificate of Incorporation or this Article VI.
6.5 MODIFICATION. The duties of the Corporation to indemnify and to
advance expenses to a director, officer or employee provided in this Article VI
shall be in the nature of a contract between the Corporation and each such
person, and no amendment or repeal of any provision of this Article VI shall
alter, to the detriment of such person, the right of such person to the advance
of expenses or indemnification related to a claim based on an act or failure to
act which took place prior to such amendment or repeal.
ARTICLE VII. DIVIDENDS; FINANCE; AND FISCAL YEAR
7.1 DIVIDENDS. Subject to the applicable provisions of the General
Corporation Law of the State of Delaware, dividends upon the capital stock of
the Corporation may be declared by the Board of Directors at any regular or
special meeting, and may be paid in cash, in property or in shares of the
capital stock of the Corporation. Before payment of any dividend, there may be
set aside out of any funds of the Corporation available for dividends such sum
or sums as the Board of Directors from time to time, in its absolute discretion,
may deem proper as a reserve or reserves to meet
12
<PAGE>
contingencies, or for dividends, or for repairing or maintaining any property of
the Corporation, or for any other proper purpose, and the Board of Directors may
modify or abolish any such reserve.
7.2 DISBURSEMENTS. All checks or demand for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
7.3 DEPOSITORIES. The monies of the Corporation shall be deposited in
the name of the Corporation in such bank or banks, savings institution or
savings institutions or trust company or trust companies as the Board of
Directors shall designate, and shall be drawn out only by check or other order
for payment of money signed by such persons and in such manner as may be
determined by resolution of the Board of Directors.
7.4 FISCAL YEAR. The fiscal year of the Corporation shall end on the
31st day of December of each year.
ARTICLE VIII. NOTICES
Except as may otherwise be required by law, any notice to any
shareholder or director may be delivered personally or by mail. If mailed, the
notice shall be deemed to have been delivered when deposited in the United
States mail, addressed to the addressee at his last known address in the records
of the Corporation, with postage thereon prepaid.
ARTICLE IX. SEAL
The corporate seal of the Corporation shall be in such form and bear
such inscription as may be adopted by resolution of the Board of Directors, or
by usage of the officers on behalf of the Corporation.
ARTICLE X. BOOKS AND RECORDS
The Corporation shall keep correct and complete books and records of
account and shall keep minutes of meetings and proceedings of its shareholders
and Board of Directors (including committees thereof); and it shall keep at its
registered office or principal place of business, or at the office of its
transfer agent or registrar, a record of its shareholders, giving the names and
addresses of all shareholders and the number and class of the shares held by
each. Any books, records and minutes may be in written form or any other form
capable of being converted into written form within a reasonable time.
13
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ARTICLE XI. AMENDMENTS
11.1 AMENDMENTS. These Bylaws may be altered, amended or repealed only
as set forth in the Corporation's Certificate of Incorporation, which provisions
are incorporated herein with the same effect as if they were set forth herein.
11.2 EMERGENCY BYLAWS. The Board of Directors may adopt emergency
Bylaws, subject to repeal or change by action of the shareholders, which shall
be operative during any national or local emergency.
ARTICLE XII. USE OF PRONOUNS
Use of the masculine gender in these Bylaws shall be considered to
represent either masculine or feminine gender whenever appropriate.
14
(FORM OF STOCK CERTIFICATE - FRONT SIDE)
NUMBER SHARES
COMMON STOCK CUSIP
See reverse for
certain definitions
COMMUNITY SAVINGS BANKSHARES, INC.
INCORPORATED UNDER THE LAWS OF DELAWARE
This certifies that ___________________________________ is the
registered holder of _________________ fully paid and non-assessable shares of
the Common Stock, par value $1.00 per share, of Community Savings Bankshares,
Inc., North Palm Beach, Florida (the "Corporation"), incorporated under the laws
of the State of Delaware.
The shares evidenced by this Certificate are transferable only on the
books of the Corporation by the holder hereof, in person or by a duly authorized
attorney or legal representative, upon surrender of this Certificate properly
endorsed. This Certificate and the shares represented hereby are subject to all
the provisions of the Certificate of Incorporation and Bylaws of the Corporation
and any and all amendments thereto. THE SHARES REPRESENTED BY THIS CERTIFICATE
ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT FEDERALLY INSURED OR GUARANTEED. This
Certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused its facsimile seal to be affixed hereto.
Dated:
- ------------------- (SEAL) -------------------------------------
Deborah M. Rousseau James B. Pittard, Jr.
Corporate Secretary President and Chief Executive Officer
<PAGE>
(FORM OF STOCK CERTIFICATE - BACK SIDE)
The Corporation is authorized to issue more than one class of stock,
including a class of preferred stock which may be issued in one or more series.
The Corporation will furnish to any stockholder, upon written request and
without charge, a full statement of the designations, preferences, limitations
and relative rights of the shares of each class authorized to be issued and,
with respect to the issuance of any preferred stock to be issued in series, the
relative rights, preferences and limitations between the shares of each series
so far as the rights, preferences and limitations have been fixed and determined
and the authority of the Board of Directors to fix and determine the relative
rights, preferences and limitations of subsequent series.
The Certificate of Incorporation of the Corporation includes a
provision which generally prohibits any person (including an individual, company
or group acting in concert) from directly or indirectly offering to acquire or
acquiring the beneficial ownership of more than 10% of any class of equity
securities of the Corporation. In the event that stock is acquired in violation
of this 10% limitation, the excess shares will no longer be counted in
determining the total number of outstanding shares for purposes of any matter
involving stockholder action and the Board of Directors of the Corporation may
cause such excess shares to be transferred to an independent trustee for sale in
the open market or otherwise, with the expenses of such sale to be paid out of
the proceeds of the sale.
The Certificate of Incorporation of the Corporation contains provisions
that the affirmative vote of at least 80% of the Voting Shares (as defined) may
be required to approve certain business combinations and other actions.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not
as tenants in common
UNIF GIFT MIN ACT - Custodian under
------------------------ -------------------
(Cust) (Minor)
Uniform Gifts to Minors Act
---------------------
(State)
Additional abbreviations may also be used though not in the above list.
<PAGE>
For value received, hereby sell, assign and transfer unto
--------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------------
- -------------------------------------------------
- --------------------------------------------------------------------------------
(Please print or typewrite name and address including postal zip code of
assignee)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
_________________shares of Common Stock represented by this Certificate, and do
hereby irrevocably constitute and appoint _______________ as Attorney, to
transfer the said shares on the books of the within named Corporation, with full
power of substitution.
Dated __________,
------------------------
Signature
------------------------
Signature
NOTICE: The signature(s) to this assignment must correspond with the name(s) as
written upon the face of this Certificate in every particular, without
alteration or enlargement, or any change whatever. The signature(s) should be
guaranteed by an eligible guarantor institution (bank, stockbroker, savings and
loan association or credit union) with membership in an approved signature
medallion program, pursuant to S.E.C. Rule 17Ad-15.
[FINPRO LETTERHEAD LOGO] 26 Church Street o P.O. Box 343
Liberty Corner, NJ 07938
(908) 604-9336 o (908) 604-5951 (FAX)
[email protected] o www.finpronj.com
================================================================================
August 21, 1998
Board of Directors
Community Savings Bankshares, Inc.
660 U.S. Highway 1
North Palm Beach, Florida 33408
Dear Board Members:
All capitalized terms not otherwise defined in this letter have the meanings
given such terms in the Plan of Conversion and Agreement and Plan of
Reorganization (the "Plan") adopted by the Board of Directors of Community
Savings, F.A. (the "Association"), Community Savings Bankshares, Inc. (the
"Mid-Tier Holding Company"), and ComFed, M.H.C. (the "MHC") whereby the
Association, the Mid-Tier Holding Company and the MHC will reorganize into the
stock holding company structure form of organization, and issue shares of Common
Stock of a newly formed Delaware - chartered holding company, Community Savings
Bankshares, Inc. (the "Company") in a Subscription Offering, Eligible Public
Shareholders Offering and a Community Offering.
We understood that in accordance with the Plan, Subscription Rights to purchase
shares of the Company's Common Stock are to be issued to (i) Eligible Account
Holders; (ii) the ESOP; (iii) Supplemental Eligible Account Holders; (iv) Other
Members; and (v) directors, officers and employees of the Association,
collectively referred to as the "Recipients". Based solely on our observation
that the Subscription Rights will be available to such Recipients without cost,
will be legally non-transferable and of short duration, and will afford the
Recipients the right only to purchase shares of Common Stock at the same price
as will be paid by members of the general public in the Eligible Public
Shareholders and Community Offerings, but without undertaking any independent
investigation of state or federal law or the position of the Internal Revenue
Service with respect to this issue, we are of the opinion that:
(1) the Subscription Rights will have no ascertainable market value; and
(2) the price at which the Subscription Rights are exercisable will not be more
or less than the pro forma market value of the shares upon issuance.
Changes in the local and national economy, the legislative and regulatory
environment, the stock market, interest rates, and other external forces (such
as natural disasters or significant world events) may occur from time to time,
often with great unpredictability and may materially impact the value of thrift
stocks as a whole or the Company's value alone. Accordingly, no assurance can be
given that persons who subscribe to shares of Common Stock in the offering will
thereafter be able to buy or sell such shares at the same price paid in the
Subscription Offering.
Very Truly Yours,
FinPro, Inc.
/s/ DONALD J. MUSSO
-------------------------
Donald J. Musso
President
COMMUNITY SAVINGS, F.A.
1995 STOCK OPTION PLAN
1. PURPOSE
The purpose of the Community Savings, F. A. 1995 Stock Option Plan (the
"Plan") is to advance the interests of Community Savings, F. A. (the
"Association") and its shareholders by providing Employees of the Association
and its affiliates, including ComFed, M. H. C., the mutual holding company of
the Association (the "Company"), upon whose judgment, initiative and efforts the
successful conduct of the business of the Association and its affiliates largely
depends, with an additional incentive to perform in a superior manner as well as
to attract people of experience and ability.
2. DEFINITIONS
"AFFILIATE" means any "parent corporation" or "subsidiary corporation"
of the Association, as such terms are defined in Section 424(e) or 424(f),
respectively, of the Internal Revenue Code of 1986, as amended.
"AWARD" means an Award of Nonstatutory Stock Options, Incentive Stock
Options, and/or Limited Rights granted under the provisions of the Plan.
"BENEFICIARY" means the person or persons designated by a Recipient to
receive any benefits payable under the Plan in the event of such Recipient's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, his estate.
"BOARD OF DIRECTORS" means the Board of Directors of the Association.
"CHANGE IN CONTROL" means:
(1) a reorganization, merger, merger conversion, consolidation or sale
of all or substantially all of the assets of the Association, the Company or the
Stock Holding Company, or a similar transaction in which the Association, the
Company or the Stock Holding Company is not the resulting entity;
(2) individuals who constitute the Incumbent Board of the Association,
the Company, or the Stock Holding Company cease for any reason to constitute a
majority thereof; or
(3) a change in control within the meaning of 12 C.F.R. ss. 574.4, as
determined by the board of directors of the Association or the Company;
(4) In the event that the Company converts to the Stock Holding Company
on a stand-alone basis, a "change in control" of the Association or the Stock
Holding Company (a) shall mean an event of a nature that would be required to be
reported in response to Item 1a of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"), or results in a Change in Control of the
Association or the Stock Holding Company within the meaning of the Home Owners'
Loan Act of 1933 and the Rules and Regulations promulgated by the Office of
Thrift Supervision (or its predecessor agency), as in effect on the date hereof,
(b) without limitation shall be deemed to have occurred at such time as (i) any
"person" (as the term is used in Section 13(d) and 14(d) of the Exchange Act)
other than the Stock Holding
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Company is or becomes a "beneficial owner" (as defined in Rule 13-d under the
Exchange Act) directly or indirectly, of securities of the Association
representing 25% or more of the Association's outstanding securities ordinarily
having the right to vote at the election of directors except for any securities
of the Association received by the Stock Holding Company in connection with the
Reorganization and any securities purchased by the Association's employee stock
ownership plan and trust shall not be counted in determining whether such plan
is the beneficial owner of more than 25% of the Association's securities, (ii) a
proxy statement soliciting proxies from stockholders of the Association, by
someone other than the current management of the Association, seeking
stockholder approval of a plan of reorganization, merger or consolidation of the
Stock Holding Company of the Association or similar transaction with one or more
corporations as a result of which the outstanding shares of the class of
securities then subject to the plan or transaction are exchanged or converted
into cash or property or securities not issued by the Association or the Stock
Holding Company, or (iii) a tender offer is made for 25% or more of the voting
securities of the Association and the shareholders owning beneficially or of
record 25% or more of the outstanding securities of the Association have
tendered or offered to sell their shares pursuant to such tender offer and such
tendered shares have been accepted by the tender offeror.
Notwithstanding, the foregoing, a "Change in Control" of the
Association or the Company shall not be deemed to have occurred if the Company
ceases to own at least 51% of all outstanding shares of stock of the Association
in connection with a conversion of the Company from mutual to stock form.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the Stock Benefits Committee of the Board of
Directors consisting of at least three Outside Directors of the Association or
the Company, and all of whom are and must be "disinterested directors" as that
term is defined under Rule 16b-3 under the Securities Exchange Act of 1934, as
amended.
"COMMON STOCK" means the common stock of the Association, par value
$1.00 per share.
"CONVERSION TRANSACTION" means the conversion of the Company from the
mutual to stock form of organization either on a stand-alone basis or in the
context of a merger conversion, as contemplated by regulations of the OTS or any
successor thereof.
"DATE OF GRANT" means the actual date on which an Award is granted by
the Committee.
"DIRECTOR" means a member of the Board of Directors.
"DISABILITY" means the permanent and total inability by reason of
mental or physical infirmity, or both, of an employee to perform the work
customarily assigned to him. Additionally, a medical doctor selected or approved
by the Board of Directors must advise the Committee that it is either not
possible to determine when such Disability will terminate or that it appears
probable that such Disability will be permanent during the remainder of such
employee's lifetime.
"EMPLOYEE" means any person who is currently employed by the
Association or an Affiliate, including officers.
"FAIR MARKET VALUE" means, when used in connection with the Common
Stock on a certain date, the reported closing price of the Common Stock as
reported by the National Association of Securities Dealers Automated Quotation
("Nasdaq") National Market (as published by the WALL STREET JOURNAL, if
published) on the day prior to such date, or if the Common Stock was not traded
on such date, on the next preceding day on which the Common Stock was traded
thereon; PROVIDED, HOWEVER, that if the Common Stock is not reported on the
Nasdaq National Market, Fair Market Value shall mean the average sale price of
all shares of Common Stock sold during the 30-day period immediately preceding
the date on which such stock option was granted, and if no shares of stock
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have been sold within such 30-day period, the average sale price of the last
three sales of Common Stock sold during the 90-day period immediately preceding
the date on which such stock option was granted. In the event Fair Market Value
cannot be determined in the manner described above, then Fair Market Value shall
be determined by the Committee. The Committee shall be authorized to obtain an
independent appraisal to determine the Fair Market Value of the Common Stock.
"INCENTIVE STOCK OPTION" means an Option granted by the Committee to a
Participant, which Option is designated as an Incentive Stock Option pursuant to
Section 8.
"INCUMBENT BOARD" means, in the case of (i) the Company or the Stock
Holding Company, or (ii) the Association, the Board of Directors of the Company
or the Association, respectively, on the date hereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by members or stockholders was approved
by the same nominating committee serving under an Incumbent Board, shall be
considered as though he were a member of the Incumbent Board.
"LIMITED RIGHT" means the right to receive an amount of cash based upon
the terms set forth in Section 9.
"NONSTATUTORY STOCK OPTION" means an Option granted by the Committee to
(i) an Outside Director or (ii) to any other Participant and such option is
either (A) not designated by the Committee as an Incentive Stock Option, or (B)
fails to satisfy the requirements of an Incentive Stock Option as set forth in
Section 422 of the Code and the regulations thereunder.
"OFFERING" means the initial public offering of the Common Stock of the
Association.
"OPTION" means Award granted under Section 7 or Section 8.
"OUTSIDE DIRECTOR" means a Director who is not also an employee.
"PARTICIPANT" means an Outside Director or an Employee of the
Association or its Affiliates chosen by the Committee to participate in the
Plan.
"REORGANIZATION" means the reorganization of Community Savings, F. A.
as a stock savings association and the establishment of the Company as its
mutual holding company parent.
"STOCK HOLDING COMPANY" means the holding company resulting from a
stock conversion of the Company in a conversion transaction.
"TERMINATION FOR CAUSE" means the termination of employment caused by
the individual's personal dishonesty, willful misconduct, any breach of a
fiduciary duty involving personal profit or intentional failure to perform
stated duties, or willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, any of
which results in material loss to the Association, the Company, or one of its
Affiliates.
3. ADMINISTRATION
The Plan shall be administered by the Committee. The Committee is
authorized, subject to the provisions of the Plan, to establish such rules and
regulations as it deems necessary for the proper administration of the Plan and
to make whatever determinations and interpretations in connection with the Plan
it deems necessary or advisable. All determinations and interpretations made by
the Committee shall be binding and conclusive on all Participants in the Plan
and on their legal representatives and beneficiaries.
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The Awards of Nonstatutory Options to Outside Directors under Section 7
of the Plan are intended to comply with Rule 16b-3 under the Securities Exchange
Act of 1934. Notwithstanding any term to the contrary appearing herein, unless
permitted by Rule 16b-3(c)(2)(ii), neither the Committee nor the Board shall
have the authority to determine the amount and price of securities to be awarded
and/or timing of awards under Section 7 of the Plan to designated directors or
categories of directors, which terms shall be set forth herein. To the extent
any provision of the Plan or action by Plan administrators fails to comply with
this subsection 3, such provision or action shall be deemed null and void to the
extent permitted by law and deemed advisable by the Board.
4. TYPES OF AWARDS
Awards under the Plan may be granted in any one or a combination of (a)
Incentive Stock Options as defined in Section 7; (b) Non-Statutory Stock Options
as defined in Section 8; and (c) Limited Rights as defined herein in Section 9.
5. STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 14, the maximum number of
shares reserved for issuance under the Plan is ten percent (10%) of the shares
of Common Stock of the Association sold in connection with the Stock Offering
(or 237,986 shares). The maximum number of shares reserved for issuance to
Employees is seven and one-half percent (7.5%) of the shares of Common Stock
issued in connection with the Offering. The maximum number of shares reserved
for issuance to Outside Directors is two and one-half percent (2.5%) of the
shares of Common Stock issued in connection with the Offering.
The shares of Common Stock represented by such options may be either
authorized but unissued shares or shares previously issued and reacquired by the
Association or the Company. To the extent that options or rights granted under
the Plan are exercised, the shares covered will be unavailable for future grants
under the Plan; to the extent that options together with any related rights
granted under the Plan terminate, expire or are cancelled without having been
exercised or, in the case of Limited Rights exercised for cash, new Awards may
be made with respect to these shares.
6. ELIGIBILITY
Officers and other employees of the Association or its affiliates shall
be eligible to receive Incentive Stock Options, Non-Statutory Stock Options
and/or Limited Rights under the Plan. Directors who are not employees or
officers of the Association or its affiliates shall not be eligible to receive
Incentive Stock Options under the Plan. Outside Directors shall be eligible to
receive only Nonstatutory Stock Options.
7. NON-STATUTORY STOCK OPTIONS
7.1 GRANT OF NON-STATUTORY STOCK OPTIONS
(a) GRANTS TO OUTSIDE DIRECTORS. Each Outside Director who is serving
in such capacity on the date of the Association's Offering and at the Effective
Date of the Stock Option Plan, shall be granted Options to purchase 11,850 of
Common Stock of the Association, subject to adjustment pursuant to Section 14.
Each person who becomes an Outside Director subsequent to the Effective Date of
the Stock Option Plan, shall be granted Nonstatutory Stock Options to purchase
200 shares of the Common Stock, subject to adjustment pursuant to Section 14, to
the extent shares remain available under this Stock Option Plan. Nonstatutory
Stock Options granted under this Plan are subject to the terms and conditions
set forth in this Section 7.
(b) GRANTS TO EMPLOYEES. The Committee may, from time to time, grant
Nonstatutory Stock Options to eligible Employees and, upon such terms and
conditions as the Committee may determine, grant Nonstatutory
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Stock Options in exchange for and upon surrender of previously granted Awards
under the Plan. Nonstatutory Stock Options granted under this Plan are subject
to the terms and conditions set forth in this Section 7.
(c) OPTION AGREEMENT. Each Option shall be evidenced by a written
option agreement between the Association and the employee specifying the number
of shares of Common Stock that may be acquired through its exercise and
containing such other terms and conditions that are not inconsistent with the
terms of this grant. The maximum number of shares subject to a Nonstatutory
Option that may be awarded under the Plan to any Employee shall be 40,000.
(d) PRICE. The purchase price per share of Common Stock deliverable
upon the exercise of each Non-Statutory Stock Option shall be determined by the
Committee on the date the Option is granted. Except as provided below, such
purchase price shall not be less than 100% of the Fair Market Value of the
Association's Common Stock on the date the Option is granted. The purchase price
per share of Common Stock deliverable upon the exercise of each Non-Statutory
Stock Option granted in exchange for and upon surrender of previously granted
awards shall be not less than 100% of the Fair Market Value of the Association's
Common Stock on the date the Option is granted, but in no event may the purchase
price of any Non-Statutory Stock Option be less than the par value of the Common
Stock. Shares may be purchased only upon full payment of the purchase price.
Payment of the purchase price may be made, in whole or in part, through the
surrender of shares of the Common Stock of the Association at the Fair Market
Value of such shares determined in the manner described in Section 2.
(e) MANNER OF EXERCISE. Nonstatutory Stock Options granted under the
Stock Option Plan shall vest in a Participant at the rate of twenty percent
(20%) per year commencing one year from the date of grant. The vested Options
may be exercised from time to time, in whole or in part, by delivering a written
notice of exercise to the President or Chief Executive Officer of the
Association. Such notice is irrevocable and must be accompanied by full payment
of the purchase price in cash or shares of previously acquired Common Stock of
the Association at the Fair Market Value of such shares determined on the
exercise date by the manner described in Section 2 hereof. If previously
acquired shares of Common Stock are tendered in payment of all or part of the
exercise price, the value of such shares shall be determined as of the date of
such exercise.
(f) TERMS OF OPTIONS. The term during which each Non-Statutory Stock
Option may be exercised shall be determined by the Committee, but in no event
shall a Non-Statutory Stock Option be exercisable in whole or in part more than
10 years and one day from the Date of Grant. The Nonstatutory Options shall be
exercisable in installments, as determined by the Committee. The Committee shall
determine the date on which each installment shall become exercisable. The
shares comprising each installment may be purchased in whole or in part at any
time after such installment becomes exercisable. The Committee, in its sole
discretion, may accelerate the time at which any Non-statutory Stock Option may
be exercised in whole or in part. Notwithstanding the above, in the event of a
Change in Control of the Association, all Non-Statutory Stock Options shall
become immediately exercisable.
(g) TERMINATION OF EMPLOYMENT OR SERVICE. Upon the termination of an
Employee's employment or upon termination of an Outside Director's service for
any reason other than Disability, death or Termination for Cause, the Employee's
or Outside Director's Non-Statutory Stock Options shall be exercisable only as
to those shares that were immediately purchasable by the Employee or Outside
Directors at the date of termination and only for a period of one year following
termination. In the event of Termination for Cause, all rights under his
Non-Statutory Stock Options shall expire upon termination. In the event of the
death or Disability of any Employee or Outside Director, all Non-Statutory Stock
Options held by such Employee or Outside Director, whether or not exercisable at
such time, shall be exercisable by such person or his legal representatives or
beneficiaries for one year following the date of his death or cessation of
employment or service, applicable, due to Disability, PROVIDED that in no event
shall the period extend beyond the expiration of the Non-Statutory Stock Option
term. Notwithstanding the above, all Nonstatutory Options held by a Participant
whose employment as an Employee or service as an Outside Director terminates
following a Change in Control of the Association or the Company shall
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be deemed earned as of the last day of employment or service with the
Association or an Affiliate and shall be exercisable for one year following such
termination of employment or service.
8. INCENTIVE STOCK OPTIONS
8.1 GRANT OF INCENTIVE STOCK OPTIONS
The Committee, from time to time, may grant Incentive Stock Options to
eligible Employees. Incentive Stock Options granted pursuant to the Plan shall
be subject to the following terms and conditions:
(a) OPTION AGREEMENT. Each Option shall be evidenced by a written
option agreement between the Association and the Employee specifying the number
of shares of Common Stock that may be acquired through its exercise and
containing such other terms and conditions that are not inconsistent with the
terms of this grant.
(b) PRICE. The purchase price per share of Common Stock deliverable
upon the exercise of each Incentive Stock Option shall be not less than 100% of
the Fair Market Value of the Association's Common Stock on the date the
Incentive Stock Option is granted. However, if an Employee owns stock possessing
more than 10% of the total combined voting power of all classes of Common Stock
of the Association (or under Section 424(d) of the Code, is deemed to own stock
representing more than 10% of the total combined voting power of all classes of
stock of the Association or its Affiliates by reason of the ownership of such
classes of common stock directly or indirectly, by or for any brother, sister,
spouse, ancestor or lineal descendant of such Employee or by or for any
corporation, partnership, estate or trust of which such employee is a
shareholder, partner or beneficiary), the purchase price per share of Common
Stock deliverable upon the exercise of each Incentive Stock Option shall not be
less than 110% of the Fair Market Value of the Association's Common Stock on the
date the Incentive Stock Option is granted. Shares may be purchased only upon
payment of the full purchase price. Payment of the purchase price may be made,
in whole or in part, through the surrender of shares of the Common Stock of the
Association. If previously acquired shares of common stock are tendered in
payment of all or part of the exercise price, the value of such shares shall be
determined as of the date of exercise of the Incentive Stock Option.
(c) MANNER OF EXERCISE. Incentive Stock Options granted under the Stock
Option Plan shall vest in a Participant at the rate of twenty percent (20%) per
year commencing one year from the date of grant. The vested Options may be
exercised from time to time, in whole or in part, by delivering a written notice
of exercise to the President or Chief Executive Officer of the Association,
PROVIDED, HOWEVER, that no Options shall be exercisable prior to approval of the
Plan by stockholders. Such notice is irrevocable and must be accompanied by full
payment of the purchase price in cash or shares of previously acquired Common
Stock of the Association. If previously acquired shares of Common Stock are
tendered in payment of all or part of the exercise price, the value of such
shares shall be determined as of the date of such exercise of the Incentive
Stock Option.
(d) AMOUNT OF OPTIONS. Incentive Stock Options may be granted to any
eligible Employee in such amounts as determined by the Committee; PROVIDED that
the amount granted is consistent with the terms of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). Notwithstanding the above, the
maximum number of shares that may be subject to an Incentive Stock Option
awarded under the Plan to any Employee shall be 40,000. In granting Incentive
Stock Options the Committee shall consider the position and responsibilities of
the eligible Employee, the length and value of his or her service to the
Association, the compensation paid to the Employee and the Committee's
evaluation of the performance of the Association according to measurements that
include, among others, key financial ratios, levels of classified assets, and
independent audit findings. In the case of an option intended to qualify as an
Incentive Stock Option, the aggregate Fair Market Value (determined as of the
time the option is granted) of the Common Stock with respect to which Incentive
Stock Options granted are exercisable for the first time by the Participant
during any calendar year (under all plans of the Participant's employer
corporation and its parent and subsidiary corporations) shall not exceed
$100,000. The provisions of this
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Section 8.1(d) shall be construed and applied in accordance with Section 422(d)
of the Code and the regulations, if any, promulgated thereunder.
(e) TERM OF OPTIONS. The term during which each Incentive Stock Option
may be exercised shall be determined by the Committee, but in no event shall an
Incentive Stock Option be exercisable in whole or in part more than 10 years
from the Date of Grant. If any Employee, at the time an Incentive Stock Option
is granted to him, owns Common Stock representing more than 10% of the total
combined voting power of the Association or its Affiliates (or, under Section
424(d) of the Code, is deemed to own Common Stock representing more than 10% of
the total combined voting power of all such classes of Common Stock, by reason
of the ownership of such classes of Common Stock, directly or indirectly, by or
for any brother, sister, spouse, ancestor or lineal descendent of such Employee,
or by or for any corporation, partnership, estate or trust of which such
employee is a shareholder, partner or beneficiary), the Incentive Stock Option
granted to him shall not be exercisable after the expiration of five years from
the Date of Grant. No Incentive Stock Option granted under this Plan is
transferable except by will or the laws of descent and distribution and is
exercisable during his lifetime only by the Employee to which it is granted.
The Committee shall determine the date on which each Incentive Stock
Option shall become exercisable and may provide that an Incentive Stock Option
shall become exercisable in installments. The shares comprising each installment
may be purchased in whole or in part at any time after such installment becomes
purchasable, provided that the amount able to be first exercised in a given year
is consistent with the terms of Section 422 of the Code. To the extent required
by Section 422 of the Code, the aggregate fair market value (determined at the
time the Option is granted) of the Common Stock for which Incentive Stock
Options are exercisable for the first time by a Participant during any calendar
year (under all plans of the Association and its Affiliates) shall not exceed
$100,000. The Committee, in its sole discretion, may accelerate the time at
which any Incentive Stock Option may be exercised in whole or in part; PROVIDED
that it is consistent with the terms of Section 422 of the Code. Notwithstanding
the above, in the event of a Change in Control of the Association, all Incentive
Stock Options shall become immediately exercisable unless the fair market value
of the amount exercisable as a result of a Change in Control shall exceed
$100,000 (determined as of the date of grant). In such event, the first $100,000
of Incentive Stock Options (determined as of the date of grant) shall be
exercisable as Incentive Stock Options and any excess shall be exercisable as
Nonstatutory Stock Options.
(f) TERMINATION OF EMPLOYMENT. Upon the termination of an Employee's
employment for any reason other than Disability, Change in Control, death or
Termination for Cause, his Incentive Stock Options shall be exercisable only as
to those shares which were immediately purchasable by him at the date of
termination and only for a period of three months following termination. In the
event of Termination for Cause all rights under his Incentive Stock Options
shall expire upon termination.
In the event of death or Disability of any Employee, all Incentive
Stock Options held by such Employee, whether or not exercisable at such time,
shall be exercisable by such Employee or his legal representatives or
beneficiaries for one year following the date of his death or cessation of
employment due to Disability. Upon termination of an Employee's service due to a
Change in Control, all Incentive Stock Options held by such Employee, whether or
not exercisable at such time, shall be exercisable for a period of one year
following the date of his cessation of employment; PROVIDED, HOWEVER, that such
Option shall not be eligible for treatment as an Incentive Stock Option in the
event such Option is exercised more than three months following the date of the
Change in Control. In no event shall the exercise period extend beyond the
expiration of the Incentive Stock Option term.
(g) COMPLIANCE WITH CODE. The Options granted under this Section 8 of
the Plan are intended to qualify as Incentive Stock Options within the meaning
of Section 422 of the Code, but the Association makes no warranty as to the
qualification of any Option as an incentive stock option within the meaning of
Section 422 of the
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Code. If an Option granted hereunder fails for whatever reason to comply with
the provisions of Section 422 of the Code and such failure is not or cannot be
cured, such Option shall be a Nonstatutory Stock Option.
9. LIMITED RIGHTS
9.1 GRANT OF LIMITED RIGHTS
The Committee may grant a Limited Right simultaneously with the grant
of any Option to any Employee of the Association, with respect to all or some of
the shares covered by such Option. Limited Rights granted under this Plan are
subject to the following terms and conditions:
(a) TERMS OF RIGHTS. In no event shall a Limited Right be exercisable
in whole or in part before the expiration of six months from the date of grant
of the Limited Right. A Limited Right may be exercised only in the event of a
Change in Control of the Association.
The Limited Right may be exercised only when the underlying Option is
eligible to be exercised, provided that the Fair Market Value of the underlying
shares on the day of exercise is greater than the exercise price of the related
Option.
Upon exercise of a Limited Right, the related Option shall cease to be
exercisable. Upon exercise or termination of an Option, any related Limited
Rights shall terminate. The Limited Rights may be for no more than 100% of the
difference between the exercise price and the Fair Market Value of the Common
Stock subject to the underlying Option. The Limited Right is transferable only
when the underlying Option is transferable and under the same conditions.
(b) PAYMENT. Upon exercise of a Limited Right, the holder shall
promptly receive from the Association an amount of cash equal to the difference
between the Fair Market Value on the Date of Grant of the related Option and the
Fair Market Value of the underlying shares on the date the Limited Right is
exercised, multiplied by the number of shares with respect to which such Limited
Right is being exercised. In the event of a Change of Control in which pooling
accounting treatment is a condition to the transaction, the Limited Right shall
be exercisable solely for shares of stock of the Association, or in the event of
a merger transaction, for shares of the acquiring corporation, or its parent, as
applicable. The number of shares to be received on the exercise of such Limited
Right shall be determined by dividing the amount of cash that would have been
available under the first sentence above by the Fair Market Value at the time of
exercise of the shares underlying the Option subject to the Limited Right.
10. SURRENDER OF OPTION
In the event of a Participant's termination of employment or
termination of service as a result of death or Disability, the Participant (or
his personal representative(s), heir(s), or devisee(s)) may, in a form
acceptable to the Committee, make application to surrender all or part of the
Options held by such Participant in exchange for a cash payment from the
Association of an amount equal to the difference between the Fair Market Value
of the Common Stock on the date of termination of employment and the exercise
price per share of the Option on the Date of Grant. Whether the Association
accepts such application or determines to make payment, in whole or part, is
within its absolute and sole discretion, it being expressly understood that the
Association is under no obligation to any Participant whatsoever to make such
payments. In the event that the Association accepts such application and
determines to make payment, such payment shall be in lieu of the exercise of the
underlying Option and such Option shall cease to be exercisable.
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11. RIGHTS OF A SHAREHOLDER; NON-TRANSFERABILITY
An optionee shall have no rights as a shareholder with respect to any
shares covered by a Non-Statutory and/or Incentive Stock Option until the date
of issuance of a stock certificate for such shares. Nothing in this Plan or in
any Award granted confers on any person any right to continue in the employ of
the Association or its Affiliates or to continue to perform services for the
Association or its Affiliates or interferes in any way with the right of the
Association or its Affiliates to terminate his services as an officer or other
employee at any time.
No Award under the Plan shall be transferable by the optionee other
than by will or the laws of descent and distribution and may only be exercised
during his lifetime by the optionee, or by a guardian or legal representative.
12. AGREEMENT WITH GRANTEES
Each Award of Options, and/or Limited Rights will be evidenced by a
written agreement, executed by the Participant and the Association or its
Affiliates that describes the conditions for receiving the Awards including the
date of Award, the purchase price if any, applicable periods, and any other
terms and conditions as may be required by the Board of Directors or applicable
securities law.
13. DESIGNATION OF BENEFICIARY
A Participant, with the consent of the Committee, may designate a
person or persons to receive, in the event of death, any Option or Limited
Rights Award to which he would then be entitled. Such designation will be made
upon forms supplied by and delivered to the Association and may be revoked in
writing. If a Participant fails effectively to designate a Beneficiary, then his
estate will be deemed to be the Beneficiary.
14. DILUTION AND OTHER ADJUSTMENTS
In the event of any change in the outstanding shares of Common Stock of
the Association by reason of any stock dividend or split, recapitalization,
merger, consolidation, spin-off, reorganization, combination or exchange of
shares, or other similar corporate change, or other increase or decrease in such
shares without receipt or payment of consideration by the Association, the
Committee will make such adjustments to previously granted Awards, to prevent
dilution or enlargement of the rights of the Participant, including any or all
of the following:
(a) adjustments in the aggregate number or kind of shares of Common
Stock which may be awarded under the Plan;
(b) adjustments in the aggregate number or kind of shares of Common
Stock covered by Awards already made under the Plan;
(c) subject to Section 8.1(b) hereof, adjustments in the purchase price
of outstanding Incentive and/or Non-Statutory Stock Options, or any
Limited Rights attached to such options.
No such adjustments, however, may change materially the value of
benefits available to a Participant under a previously granted Award.
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15. LIMITATIONS UPON EXERCISE OF OPTIONS
Notwithstanding any other provision of the Plan, so long as the Company
remains in the mutual form of organization and so long as any applicable statute
or regulation requires the Company to own at least a majority of the outstanding
Common Stock of the Association, an Option granted under this Plan may not be
exercised if the exercise of such an Option would result in the Company owning
less than a majority of the Common Stock of the Association. Nothing herein
shall preclude the Association from issuing additional authorized but unissued
shares of Common Stock to the Company to allow for the exercise of options which
would otherwise have resulted in the Company owning less than a majority of the
Common Stock of the Association.
16. TREATMENT OF OPTIONS IN THE EVENT OF A CONVERSION TRANSACTION
In the event that the Company converts to stock form in a Conversion
Transaction ("Stock Holding Company"), any Options outstanding shall, at the
option of the holder, (i) be convertible into Options for Common Stock of the
Stock Holding Company, or (ii) be exercised by the holder prior to the effective
date of the Conversion Transaction and the holder shall be entitled to exchange,
in the same manner as other minority stockholders of the Association, the shares
of Common Stock of the Association received upon such exercise for shares of
Common Stock of the Stock Holding Company. If for any reason such options are
not to be converted or such shares are not exchanged, the holders of Options
under this plan shall receive cash payment for the shares of stock represented
by the Options in an amount equal to the fair market value of the underlying
Options or the initial offering price of the Common Stock of the Stock Holding
Company for which the Common Stock underlying the Option would otherwise be
exchanged, less the original exercise price of such options and, with respect to
options that have been exercised, the Stock Holding Company shall redeem such
shares for cash in the same manner as such redemption would occur for other
minority stockholders of the Association. Any exchange, conversion of Options,
or cash payment for shares shall be subject to applicable federal and state
regulations and, if necessary, subject to the approval of the appropriate
regulatory authorities.
17. WITHHOLDING
There may be deducted from each distribution of cash and/or Common
Stock under the Plan the amount of tax required by any governmental authority to
be withheld.
18. AMENDMENT OF THE PLAN
The Board of Directors may at any time, and from time to time, modify
or amend the Plan in any respect; PROVIDED, HOWEVER, that if necessary to
continue to qualify the Plan under the Securities and Exchange Commission Rule
16b-3, the approval by a majority of the shares represented in person or by
proxy shall be required for any such modification or amendment that:
(a) increases the maximum number of shares for which options may
be granted under the Plan (SUBJECT, HOWEVER, to the provisions
of Section 14 hereof);
(b) reduces the exercise price at which Awards may be granted
(SUBJECT, HOWEVER, to the provisions of Sections 8.1(a) and 14
hereof):
(c) extends the period during which options may be granted or
exercised beyond the times originally prescribed (subject,
however, to the provisions of Section 8.1(a) hereof); or
(d) changes the persons eligible to participate in the Plan.
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Failure to ratify or approve amendments or modifications to subsections
(a) through (d) of this Section 18 by shareholders shall be effective only as to
the specific amendment or modification requiring such ratification. Other
provisions, sections, and subsections of this Plan will remain in full force and
effect.
No such termination, modification or amendment may affect the rights of
a Participant under an outstanding Award.
19. APPROVAL BY STOCKHOLDERS
The Plan shall be approved by stockholders of the Association within 12
months after the Plan has been adopted. No Options granted pursuant to the Plan
shall be exercisable prior to such stockholder approval.
20. EFFECTIVE DATE OF PLAN
The Plan shall become effective upon the date adopted by the Board of
Directors, following the approval of stockholders (the "Effective Date").
21. TERMINATION OF THE PLAN
The right to grant Awards under the Plan will terminate upon the
earlier of ten (10) years after the Effective Date of the issuance of Common
Stock or the date on which the exercise of Options or related rights equaling
the maximum number of shares reserved under the Plan occurs as set forth in
Section 5 hereof. The Board of Directors has the right to suspend or terminate
the Plan at any time; PROVIDED that no such action will, without the consent of
a Participant, affect adversely his rights under a previously granted Award.
(Remainder of Page Intentionally Left Blank]
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22. APPLICABLE LAW
The Plan will be administered in accordance with the laws of the State
of Florida.
Adopted January 18, 1995
ATTEST: COMMUNITY SAVINGS, F. A.
/s/ Deborah Rousseau /s/ James B. Pittard, Jr.
- ----------------------------------- -------------------------------------
Secretary James B. Pittard, Jr., President and
Chief Executive Officer
January 18, 1995
- ------------------------------------
Date Approved by Stockholders
12
Exhibit 10.2
COMMUNITY SAVINGS, F. A.
1995 RECOGNITION AND RETENTION PLAN
FOR EMPLOYEES AND OUTSIDE DIRECTORS
1. ESTABLISHMENT OF THE PLAN
Community Savings, F. A. hereby establishes the Association 1995
Recognition and Retention Plan (the "Plan") upon the terms and conditions
hereinafter stated in this Recognition Plan.
2. PURPOSE OF THE PLAN
The purpose of the Plan is to retain Employees and Outside Directors of
experience and ability by providing such persons with a proprietary interest in
the Association as compensation for their contributions to the Association and
its Affiliates and as an incentive to make such contributions and to promote the
Association's growth and profitability in the future.
3. DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meanings set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural:
"AFFILIATE" means any "parent corporation" or "subsidiary corporation"
of the Association, as such terms are defined in Section 424(e) and (f),
respectively, of the Code.
"ASSOCIATION" means Community Savings, F. A.
"AWARD" means the grant by the Committee of Restricted Stock, as
provided in the Plan.
"BENEFICIARY" means the person or persons designated by a Recipient to
receive any benefits payable under the Plan in the event of such Recipient's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, his estate.
"BOARD" means the Board of Directors of the Association.
"CAUSE" shall mean personal dishonesty, willful misconduct, any breach
of fiduciary
<PAGE>
duty involving personal profit, intentional failure to perform stated duties, or
the willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or a final cease-and-desist order, any of which
results in a material loss to the Association or an Affiliate.
"CHANGE IN CONTROL" means:
(1) a reorganization, merger, merger conversion, consolidation
or sale of all or substantially all of the assets of the Association, the
Company or the Stock Holding Company, or a similar transaction in which the
Association, the Company or the Stock Holding Company is not the resulting
entity;
(2) individuals who constitute the Incumbent Board of the
Association, the Company, or the Stock Holding Company cease for any reason to
constitute a majority thereof; or
(3) a change in control within the meaning of 12 C.F.R. ss.
574.4, as determined by the board of directors of the Association or the
Company;
(4) In the event that the Company converts to the Stock
Holding Company on a stand-alone basis, a "change in control" of the Association
or the Stock Holding Company (a) shall mean an event of a nature that would be
required to be reported in response to Item la of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or l5(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), or results in a Change in
Control of the Association or the Stock Holding Company within the meaning of
the Home Owners' Loan Act of 1933 and the Rules and Regulations promulgated by
the Office of Thrift Supervision (or its predecessor agency), as in effect on
the date hereof, (b) without limitation shall be deemed to have occurred at such
time as (i) any "person" (as the term is used in Section 13(d) and 14(d) of the
Exchange Act) other than the Stock Holding Company is or becomes a "beneficial
owner" (as defined in Rule 13-d under the Exchange Act) directly or indirectly,
of securities of the Association representing 25% or more of the Association's
outstanding securities ordinarily having the right to vote at the election of
directors except for any securities of the Association received by the Stock
Holding Company in connection with the Reorganization and any securities
purchased by the Association's employee stock ownership plan and trust shall not
be counted in determining whether such plan is the beneficial owner of more than
25% of the Association's securities, (ii) a proxy statement soliciting proxies
from stockholders of the Association, by someone other than the current
management of the Association, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Stock Holding Company of the
Association or similar transaction with one or more corporations as a result of
which the outstanding shares of the class of securities then subject to the plan
or transaction are exchanged or converted into cash or property or securities
not issued by the Association or the Stock Holding Company, or (iii) a tender
offer is made for 25% or more of the voting securities of the Association and
the shareholders owning beneficially or
2
<PAGE>
of record 25% or more of the outstanding securities of the Association have
tendered or offered to sell their shares pursuant to such tender offer and such
tendered shares have been accepted by the tender offeror.
Notwithstanding, the foregoing, a "Change in Control" of
the Association or the Company shall not be deemed to have occurred if the
Company ceases to own at least 51 % of all outstanding shares of stock of the
Association in connection with a conversion of the Company from mutual to stock
form.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the Stock Benefits Committee of the Board which shall
consist of at least three Outside Directors of the Association, all of whom are
and must be "disinterested directors," as that term is defined under Rule 16b-3
of the Securities Exchange Act of 1934.
"COMPANY" means ComFed, M. H. C., the mutual holding company of the
Association.
"COMMON STOCK" means shares of the common stock, par value of $1.00 per
share, of the Association.
"CONTINUOUS SERVICE" means the absence of any interruption or
termination of service as an Employee of the Association. Service shall not be
considered interrupted in the case of sick leave, military leave or any other
leave of absence approved by the Association or in the case of transfers between
payroll locations of the Association or between the Association, its parent, its
subsidiaries or its successor.
"CONVERSION TRANSACTION" means the conversion of the Company from the
mutual to stock form of organization either on a stand-alone basis or in the
context of a merger conversion, as provided by regulations of the Office of
Thrift Supervision ("OTS").
"DIRECTOR" means any director of the Association or an Affiliate.
"DISABILITY" means the permanent and total inability by reason of
mental or physical infirmity, or both, of an employee to perform the work
customarily assigned to him. Additionally, a medical doctor selected or approved
by the Board must advise the Committee that it is either not possible to
determine when such Disability will terminate or that it appears probable that
such Disability will be permanent during the remainder of said Participant's
lifetime.
"EFFECTIVE DATE" shall be the date of execution of this Plan.
"EMPLOYEE" means any person who is employed by the Association or its
Affiliates,
3
<PAGE>
including officers.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"INCUMBENT BOARD" means, in the case of (i) the Company or the Stock
Holding Company, or (ii) the Association, the Board of Directors of the Company
or the Association, respectively, on the date hereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by members or stockholders was approved
by the same nominating committee serving under an Incumbent Board, shall be
considered as though he were a member of the Incumbent Board.
"OFFERING" means the initial public offering by the Association of up
to 49.9% of the number of shares of Common Stock that will be outstanding after
such Offering.
"OUTSIDE DIRECTOR" means any nonemployee director of the Association or
an Affiliate.
"PLAN" means the Community Savings, F. A. 1995 Recognition and
Retention Plan of the Association.
"RECIPIENT" means an Employee or Director of the Association who
receives a Restricted Stock Award under this Plan.
"REORGANIZATION" means the reorganization of Community Savings, F. A.
as a stock savings association and the establishment of the Company as its
mutual holding company parent.
"RESTRICTED PERIOD" means the period of time selected by the Committee
for the purpose of determining when restrictions are in effect under Section 6
hereof with respect to Restricted Stock awarded under the Plan.
"RESTRICTED STOCK" means shares which have been contingently awarded to
a Recipient by the Committee subject to the restrictions referred to in Section
6 hereof, so long as such restrictions are in effect.
"STOCK HOLDING COMPANY" means the holding company resulting from a
stock conversion of the Company in a Conversion Transaction.
4. ADMINISTRATION OF THE PLAN.
4.01 ROLE OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, which shall have all of the powers allocated to it
in this and other Sections of
4
<PAGE>
the Plan. The interpretation and construction by the Committee of any provisions
of the Plan or of any Restricted Stock Award granted hereunder shall be final
and binding. The Committee shall act by vote or written consent of a majority of
its members. Subject to the express provisions and limitations of the Plan, the
Committee may adopt such rules, regulations and procedures as it deems
appropriate for the conduct of its affairs. The Committee shall report its
actions and decisions with respect to the Plan to the Board at appropriate
times, but in no event less than one time per calendar year.
4.02 ROLE OF THE BOARD. The members of the Committee shall be
appointed or approved by, and will serve at the pleasure of, the Board. The
Board may in its discretion from time to time remove members from, or add
members to, the Committee. The Board shall have all of the powers allocated to
it in this and other Sections of the Plan, may take any action under or with
respect to the Plan which the Committee is authorized to take, and may reverse
or override any action taken or decision made by the Committee under or with
respect to the Plan, PROVIDED, HOWEVER, that except as provided in Section 6.05,
the Board may not revoke any Restricted Stock Award except in the event of
Revocation for Cause, or with respect to unearned Restricted Stock Awards in the
event a Recipient of a Restricted Stock Award voluntarily terminates employment
with the Association.
4.03 PLAN ADMINISTRATION RESTRICTIONS. This Plan is intended to
comply with Rule 16b-3 under the Securities Exchange Act of 1934.
Notwithstanding any term to the contrary appearing in this Plan, unless
permitted by Rule 16b-3(c)(2)(ii), subsequent to the establishment of the Plan,
the Committee, and the Board of Directors shall not have the authority to
determine the amount and price of securities to be awarded and/or timing of
awards to Outside Directors which terms shall be set forth in the Plan. To the
extent any provision of the Plan or action by Plan administrators fails to
comply with this Section, such provision or action shall be deemed null and void
to the extent permitted by law and deemed advisable by the Board of Directors.
4.04 LIMITATION ON LIABILITY. No member of the Board or the
Committee shall be liable for any determination made in good faith with respect
to the Plan or any Restricted Stock Awards granted under it. If a member of the
Board or the Committee is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of anything done or not
done by him in such capacity under or with respect to the Plan, the Association
shall indemnify such member against expense (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in the best interests of the
Association and its Affiliates and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful,
provided, however, that the provisions of 12 C.F.R. Section 545.121 shall apply
to any indemnification made pursuant to this Section and any such
indemnification shall be consistent therewith.
5
<PAGE>
5. ELIGIBILITY; Awards
5.01 ELIGIBILITY. Employees and Outside Directors of the
Association and its Affiliates are eligible to receive Restricted Stock Awards.
5.02 AWARDS TO EMPLOYEES. The Committee may determine which of the
Employees referenced in Section 5.01 will be granted Restricted Stock Awards and
the number of Shares covered by each Award; PROVIDED, HOWEVER, that in no event
shall any Awards be made that will violate the Plan, the Charter, Bylaws or Plan
of Reorganization from Mutual Savings Association to Mutual Holding Company and
Stock Issuance Plan of the Association or any applicable federal or state law or
regulation. Shares of Restricted Stock which are awarded by the Committee shall,
on the date of the Award, be registered in the name of the Recipient and
transferred to the Recipient, in accordance with the terms and conditions
established under this Plan. The total number of shares that will be awarded or
reserved for Employees under this Plan shall be three percent (3 %) of the
shares issued in the Offering. In the event Restricted Stock is forfeited for
any reason, the Committee, from time to time, may determine which of the
Employees referenced in Section 5.01 will be granted additional Restricted Stock
Awards to be awarded from forfeited Restricted Stock. In selecting those
Employees to whom Restricted Stock Awards will be granted and the number of
Restricted Stock covered by such Awards, the Committee shall consider the
position and responsibilities of the eligible Employees, the length and value of
their services to the Association and its Affiliates, the compensation paid to
the Employees and any other factors the Committee may deem relevant, and the
Committee may request the written recommendation of the Chief Executive Officer
and other senior executive officers of the Association and its Affiliates. All
allocations by the Committee shall be subject to review, and approval or
rejection, by the Board.
No Restricted Stock shall be earned unless the Employee maintains
Continuous Service with the Association or any Affiliate until the restrictions
lapse.
5.03 AWARDS TO OUTSIDE DIRECTORS. Each Outside Director serving on
the Board of Directors of the Association or its Affiliate on the Effective Date
shall be issued a Restricted Stock Award equal to 4,750 shares of Restricted
Stock. The total number of shares that will be awarded or reserved for Outside
Directors under this Plan shall be one percent (1%) of the shares issued in the
Offering.
Any person who becomes an Outside Director of the Association
subsequent to the date of approval of this Plan by stockholders shall receive an
Award of Restricted Stock equal to 100 shares, subject to availability.
No Restricted Stock shall be earned by an Outside Director unless the
Outside Director maintains continuous service with the Association or Affiliates
until the restrictions lapse.
6
<PAGE>
5.04 MANNER OF AWARD. As promptly as practicable after a
determination is made pursuant to Section 5.02 that a Restricted Stock Award has
been granted, the Committee shall notify the Recipient in writing of the grant
of the Award, the number of shares of Restricted Stock covered by the Award, and
the terms upon which the Restricted Stock subject to the Award may be earned.
Upon notification of an Award of Restricted Stock, the Recipient shall execute
and return to the Association a restricted stock agreement setting forth the
terms and conditions under which the Recipient shall earn the Restricted Stock
(the "Restricted Stock Agreement"), together with a stock power endorsed in
blank. Thereafter, the Recipient's Restricted Stock and stock power shall be
deposited with an escrow agent specified by the Association (the "Escrow
Agents") who shall hold such Restricted Stock under the terms and conditions set
forth in the Restricted Stock Agreement. Each certificate in respect of shares
of Restricted Stock Awarded under the Plan shall be registered in the name of
the Recipient.
5.05 TREATMENT OF FORFEITED SHARES. In the event shares of
Restricted Stock are forfeited by a Recipient hereunder, such shares shall be
returned to the Association and shall be held and accounted for by the
Association pursuant to the terms of the Plan until such time as the Committee
re-awards such shares to another Recipient, in accordance with the terms of the
Plan and the applicable state and federal laws, rules and regulations.
6. TERMS AND CONDITIONS OF RESTRICTED STOCK
The Committee shall have full and complete authority, subject to the
limitations of the Plan, to grant awards of Restricted Stock and, in addition to
the terms and conditions contained in paragraphs 6.01 through 6.09 of this
Section 6, to provide such other terms and conditions (which need not be
identical among Recipients) in respect of such Awards, and the vesting thereof,
as the Committee shall determine.
6.01 GENERAL RULES. Unless the Committee shall specifically state
to the contrary at the time a Restricted Stock Award is granted, Restricted
Stock shall be earned by an Employee at the rate of twenty percent (20%) of the
aggregate number of shares covered by the Award at the end of each full twelve
months of consecutive employment with the Association or an Affiliate after the
date of grant of the Award; PROVIDED, HOWEVER, that the Committee may provide
for a less or more rapid earnings rate than set forth herein for any or all
Awards awarded subsequent to the date of this Plan, subject to the prior written
approval of the OTS, and provided further, that no shares shall be earned for
any year in which the Association is not meeting all of its fully phased-in
capital requirements. Restricted Stock Awards granted to Outside Directors shall
be earned by an Outside Director at the rate of twenty percent (20%) of the
aggregate number of shares covered by the Award at the end of each full twelve
months of consecutive employment with the Association or an Affiliate after the
date of grant of the Award. Subject to any such other terms and conditions as
the Committee shall provide, shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered by the Recipient, except
as hereinafter provided, during the Restricted Period. The Committee shall have
the
7
<PAGE>
authority, in its discretion, to accelerate the time at which any or all of the
restrictions shall lapse with respect to shares issued to Employees, or to
remove any or all of such restrictions, whenever it may determine that such
action is appropriate by reason of changes in applicable tax or other laws or
other changes in circumstances occurring after the commencement of such
Restricted Period.
6.02 CONTINUOUS SERVICE; FORFEITURE. Except as provided in Section
6.04 hereof, if a Recipient ceases to maintain Continuous Service for any reason
(other than death or Disability as provided in Section 6.03), unless the
Committee shall otherwise determine, all shares of Restricted Stock theretofore
awarded to such Recipient and which at the time of such termination of
Continuous Service are subject to the restrictions imposed by Section 6.01 shall
upon such termination of Continuous Service be forfeited and returned to Trust.
6.03 EXCEPTION FOR TERMINATION DUE TO DEATH OR DISABILITY.
Notwithstanding the general rule contained in Section 6.01, Restricted Stock
awarded to a Recipient whose employment with the Association or an Affiliate
terminates due to death or Disability, or any part thereof that has not
theretofore been earned, shall be deemed earned as of the Recipient's last day
of employment with the Association or an Affiliate.
6.04 EXCEPTION FOR TERMINATIONS AFTER A CHANGE IN CONTROL.
Notwithstanding the general rule contained in Section 6.01, all Restricted Stock
subject to a Restricted Stock Award held by a Recipient whose employment as an
Employee or service as an Outside Director of the Association or an Affiliate
terminates following a Change in Control of the Association or the Company shall
be deemed earned as of the Recipient's last day of employment or service with
the Association or an Affiliate.
6.05 REVOCATION FOR CAUSE. Notwithstanding anything hereinafter to
the contrary, the Board may by resolution immediately revoke, rescind and
terminate any Restricted Stock Award, or portion thereof, previously awarded
under this Plan, to the extent Restricted Stock has not been redelivered by the
Escrow Agent to the Recipient, whether or not yet earned, in the case of an
Employee whose employment is terminated by the Association or an Affiliate for
Cause, or who is discovered after termination of employment to have engaged in
conduct that would have justified termination for Cause.
6.06 RESTRICTED STOCK LEGEND. Each certificate in respect of shares
of Restricted Stock awarded under the Plan shall be registered in the name of
the Recipient and deposited by the Recipient, together with a stock power
endorsed in blank, with the Escrow Agent and shall bear the following (or a
similar) legend:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) contained in the Community Savings, F. A. 1995 Recognition
and Retention Plan. Copies of such Plan are on file in the offices of
the Secretary of Community Savings, F. A., 660 North U.S. Highway One,
North Palm Beach, Florida 33408-1808. "
8
<PAGE>
6.07 PAYMENT OF DIVIDENDS. After a Restricted Stock Award has been
granted but before such Award has been earned, the Recipient shall receive any
cash dividends or stock dividend paid with respect to such shares. Unless the
Recipient has made an election under Section 83(b) of the Code, any dividends so
paid on shares which have not yet been earned by the Recipient shall be treated
as compensation income to the Recipient when paid.
6.08 VOTING OF RESTRICTED SHARES. After a Restricted Stock Award
has been granted, the Recipient as owner of such shares shall have the right to
vote such shares.
6.09 DELIVERY OF EARNED SHARES. At the expiration of the
restrictions imposed by Section 6.01, the Escrow Agent shall redeliver to the
Recipient (or where the relevant provision of Section 6.02 applies in the case
of a deceased Recipient, to his Beneficiary, the certificate(s) and stock power
deposited with it pursuant to Section 6.04 and the shares represented by such
certificate(s) shall be free of the restrictions referred to Section 6.01.
7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of any change in the outstanding shares subsequent to the
effective date of the Plan by reason of any reorganization (other than the
Reorganization), recapitalization, stock split, stock dividend, combination or
exchange of shares, merger, consolidation or any change in the corporate
structure or shares of the Association, the maximum aggregate number and class
of shares as to which Awards may be granted under the Plan shall be
appropriately adjusted by the Committee, whose determination shall be
conclusive. Any shares of stock or other securities received, as a result of any
of the foregoing, by a Recipient with respect to Restricted Stock shall be
subject to the same restrictions and the certificate(s) or other instruments
representing or evidencing such shares or securities shall be legended and
deposited with the Association in the manner provided in Section 6.06 hereof.
8. ASSIGNMENTS AND TRANSFERS
No Award nor any right or interest of a Recipient under the Plan in any
instrument evidencing any Award under the Plan may be assigned, encumbered or
transferred except, in the event of the death of a Recipient, by will or the
laws of descent and distribution.
9. EMPLOYEE RIGHTS UNDER THE PLAN
No Employee shall have a right to be selected as a Recipient nor,
having been so selected, to be selected again as a Recipient and no Employee or
other person shall have any claim or right to be granted an Award under the Plan
or under any other incentive or similar plan of the Association or any
Affiliate. Neither the Plan nor any action taken thereunder shall be construed
as giving any Employee any right to be retained in the employ of the Association
or any Affiliate.
9
<PAGE>
10. WITHHOLDING TAX
Upon the termination of the Restricted Period with respect to any
shares of Restricted Stock (or at any such earlier time, if any, that an
election is made by the Employee under Section 83(b) of the Code, or any
successor provision thereto, to include the value of such shares in taxable
income), the Association shall have the right to require the Employee or other
person receiving such shares to pay the Association the amount of any taxes
which the Association is required to withhold with respect to such shares, or,
in lieu thereof, to retain or sell without notice, a sufficient number of shares
held by it to cover the amount required to be withheld. The Association shall
have the right to deduct from all dividends paid with respect to shares of
Restricted Stock the amount of any taxes which the Association is required to
withhold with respect to such dividend payments.
11. TREATMENT OF RESTRICTED STOCK IN THE EVENT OF CONVERSION
TRANSACTION
In the event that the Company converts to stock form in a Conversion
Transaction, any Restricted Stock shall be exchanged into shares of Common Stock
of the Stock Holding Company, PROVIDED, HOWEVER, that if for any reason such
shares are not to be exchanged, the Stock Holding Company shall, simultaneously
with the closing of the Conversion Transaction, purchase Restricted Stock for
cash equal to the fair market value of such Restricted Stock or Shares. Any
exchange of shares or cash payment for shares shall be subject to applicable
federal and state regulations and, if necessary, subject to the approval of the
appropriate regulatory authorities.
12. AMENDMENT OR TERMINATION
The Board of Directors of the Association may amend, suspend or
terminate the Plan or any portion thereof at any time, but (except as provided
in Section 6 hereof) no amendment shall be made without approval of the
stockholders of the Association which shall (i) materially increase the
aggregate number of shares with respect to which Awards may be made under the
plan, (ii) materially increase the aggregate number of shares which may be
subject to Awards to Recipients who are not Employees or (iii) change the class
of persons eligible to participate in the Plan; PROVIDED, HOWEVER, that no such
amendment, suspension or termination shall impair the rights of any Recipient,
without his consent, in any Award theretofore made pursuant to the Plan.
13. GOVERNING LAW
The Plan shall be governed by the laws of the State of Florida.
14. TERM OF PLAN
The Plan shall become effective upon its adoption by the Board of
Directors of the Association, following the approval of the Plan by
stockholders. It shall continue in effect for a term of fifteen years unless
sooner terminated under Section 12 hereof.
10
[DELOITTE & TOUCHE LLP LETTERHEAD LOGO]
Consent of Independent Auditors
We consent to the use in this registration statement of Community
Savings Bankshares, Inc. on Form S-1 and the Application on Form AC of ComFed,
M. H. C. of our report dated February 20, 1998, appearing in the Prospectus,
which is part of this Registration Statement and the Application.
We also consent to the reference to us under heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------
Deloitte & Touche LLP
West Palm Beach, Florida
August 20, 1998
[FINPRO LETTERHEAD LOGO] 26 Church Street o P.O. Box 343
Liberty Corner, NJ 07938
(908) 604-9336 o (908) 604-5951 (FAX)
[email protected] o www.finpronj.com
================================================================================
August 21, 1998
Board of Directors
Community Savings Bankshares, Inc.
660 U.S. Highway 1
North Palm Beach, Florida 33408
Dear Board Members:
We hereby consent to the use of our firm's name, FinPro, Inc. ("FinPro) in the
Form S-1 Registration Statement and Amendments thereto of Community Savings
Bankshares, Inc. so filed with the Securities and Exchange Commission, the Form
AC Application for Conversion and the prospectus included therein filed by
ComFed, M.H.C. and any amendments thereto, for the Valuation Appraisal Report
("Report") regarding the valuation of Community Savings Bankshares, Inc.
provided by FinPro, and our opinion regarding subscription rights filed as
exhibits to the Form S-1 and Form AC referred to below. We also consent to the
use of our firm's name and the inclusion of, summary of and references to our
Report and Opinion in the prospectus included in the Form S-1 and any amendments
thereto.
Very Truly Yours,
/s/ DONALD J. MUSSO
-------------------------
Donald J. Musso
Liberty Corner, New Jersey
August 21, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
</LEGEND>
<CIK> 0001068725
<NAME> COMMUNITY SAVINGS BANKSHARES, INC.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 16,477
<INT-BEARING-DEPOSITS> 30,948
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 91,316
<INVESTMENTS-CARRYING> 63,327
<INVESTMENTS-MARKET> 67,899
<LOANS> 527,375
<ALLOWANCE> 2,767
<TOTAL-ASSETS> 765,488
<DEPOSITS> 574,383
<SHORT-TERM> 0
<LIABILITIES-OTHER> 16,514
<LONG-TERM> 91,513
0
0
<COMMON> 5,100
<OTHER-SE> 77,978
<TOTAL-LIABILITIES-AND-EQUITY> 765,488
<INTEREST-LOAN> 19,290
<INTEREST-INVEST> 6,391
<INTEREST-OTHER> 1,146
<INTEREST-TOTAL> 26,827
<INTEREST-DEPOSIT> 11,976
<INTEREST-EXPENSE> 14,655
<INTEREST-INCOME-NET> 12,172
<LOAN-LOSSES> 213
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,846
<INCOME-PRETAX> 3,869
<INCOME-PRE-EXTRAORDINARY> 2,511
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,511
<EPS-PRIMARY> .51
<EPS-DILUTED> .49
<YIELD-ACTUAL> 7.55
<LOANS-NON> 1,366
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,700
<ALLOWANCE-OPEN> 2,662
<CHARGE-OFFS> (108)
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</TABLE>
COMFED, M. H. C.
660 U.S HIGHWAY ONE
NORTH PALM BEACH, FLORIDA 33408
(561) 881-4800
NOTICE OF SPECIAL MEETING OF MEMBERS
To Be Held on _____ __, 1998
NOTICE IS HEREBY GIVEN that a special meeting ("Special Meeting") of the
members of ComFed, M. H. C. (the "Mutual Holding Company") will be held at the
____________ located at ___________, __________, _________, Florida _____ on
______ __, 1998 at ____ p.m., Eastern Time, to consider and vote upon:
1. The approval of the Plan of Conversion of the Mutual Holding Company
and Agreement and Plan of Reorganization, as amended, between Community Savings
Bankshares, Inc., a newly formed Delaware corporation (the "Company"), the
Mutual Holding Company, Community Savings Bankshares, Inc., a federal
corporation (the "Mid-Tier Holding Company"), and Community Savings, F. A.
("Community Savings" or the "Association"), pursuant to which the Association
organized the Company and, upon consummation of the following transactions, will
become a wholly owned subsidiary of the Company: (1) the Mutual Holding Company,
which currently holds 51.34% of the outstanding shares of common stock of the
Mid-Tier Holding Company, will convert from mutual form to a federal interim
stock savings association and simultaneously merge into the Association, with
the Association being the surviving entity; (2) the Mid-Tier Holding Company,
which currently holds 100% of the common stock of the Association, will convert
to a federal interim stock savings association and simultaneously merge into the
Association, with the Association being the surviving entity; (3) the
Association will then merge with an interim institution to be formed as a wholly
owned subsidiary of the Company, with the Association being the surviving
entity; (4) the outstanding shares of Mid-Tier Holding Company common stock
(other than those held by the Mutual Holding Company, which will be cancelled)
will be converted into shares of the Company's common stock pursuant to a ratio
that will result in the holders of such shares owning in the aggregate
approximately the same percentage of the Company as they currently own of the
Mid-Tier Holding Company (as adjusted for waived dividends), before giving
effect to such shareholders purchasing additional shares in a concurrent stock
offering by the Company or receiving cash in lieu of fractional shares; and (5)
the offer and sale of shares of the Company's common stock; and
2. Such other business as may properly come before the Special Meeting
or any adjournment thereof. Except with respect to procedural matters incident
to the conduct of the meeting, management is not aware of any other such
business.
The Board of Directors has fixed ____ __, 1998 as the voting record date
for the determination of members entitled to notice of and to vote at the
Special Meeting and at any adjournment thereof. Only those members of the Mutual
Holding Company of record as of the close of business on that date will be
entitled to vote at the Special Meeting or at any such adjournment.
By Order of the Board of Directors
Deborah M. Rousseau
Secretary
North Palm Beach, Florida
_____ __, 1998
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU SIGN, DATE AND MARK THE ENCLOSED
PROXY CARD FOR ADOPTION OF THE PLAN AND RETURN IT PROMPTLY IN THE ENCLOSED
SELF-ADDRESSED STAMPED ENVELOPE. RETURNING A PROXY CARD WILL NOT PREVENT YOU
FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL MEETING. YOUR VOTE IS IMPORTANT.
NOT VOTING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE PLAN. VOTING ON THE
PLAN DOES NOT REQUIRE YOU TO PURCHASE STOCK IN THE OFFERINGS.
- --------------------------------------------------------------------------------
<PAGE>
COMFED, M. H. C.
PROXY STATEMENT
SPECIAL MEETING OF MEMBERS
TO BE HELD ON _____ _, 1998
INTRODUCTION
This Proxy Statement is being furnished to you in connection with the
solicitation by the Board of Directors of ComFed, M. H. C. (the "Mutual Holding
Company") of proxies to be voted at the Special Meeting of Members of the Mutual
Holding Company (the "Special Meeting") to be held on ____ _, 1998 at
___________________ located at _____________ , ________, Florida _____ at ___
p.m., Eastern Time, and at any adjournments thereof. This Special Meeting is
being held for the purpose of considering and voting upon a Plan of Conversion
of the Mutual Holding Company and Agreement and Plan of Reorganization, as
amended (the "Plan" or the "Plan of Conversion"), between Community Savings
Bankshares, Inc., a newly formed Delaware corporation (the "Company"), the
Mutual Holding Company, Community Savings Bankshares, Inc., a federal
corporation (the "Mid-Tier Holding Company"), and Community Savings, F. A.
("Community Savings" or the "Association"), pursuant to which the Association
organized the Company and, upon consummation of the following transactions, will
become a wholly owned subsidiary of the Company: (1) the Mutual Holding Company,
which currently owns approximately 51.34% of the outstanding common stock of the
Mid-Tier Holding Company (the "Mid-Tier Holding Company Common Stock"), will
convert from mutual form to a federal interim stock savings association and
simultaneously merge into the Association, with the Association being the
surviving entity; (2) the Mid-Tier Holding Company will convert to a federal
interim stock savings association and simultaneously merge into the Association,
with the Association being the surviving entity; (3) the Association will then
merge with an interim institution ("Interim") to be formed as a wholly owned
subsidiary of the Company, with the Association being the surviving entity; (4)
the outstanding shares of Mid-Tier Holding Company Common Stock (other than
those held by the Mutual Holding Company, which will be cancelled) (the " Public
Mid-Tier Holding Company Shares") will be converted into shares of common stock
of the Company (the "Exchange Shares") pursuant to a ratio (the "Exchange
Ratio") that will result in the holders of such shares owning in the aggregate
approximately the same percentage of the Company as they owned of the Mid-Tier
Holding Company (as adjusted for waived dividends), before giving effect to such
shareholders purchasing additional shares in a concurrent stock offering by the
Company or receiving cash in lieu of fractional shares; and (5) the offer and
sale of shares of the Company's common stock (the "Conversion Stock") pursuant
to the Plan. The offer and sale of the Conversion Stock and the reorganization
are referred to herein as the "Conversion."
VOTING IN FAVOR OF THE PLAN OF CONVERSION WILL NOT OBLIGATE ANY PERSON
TO PURCHASE CONVERSION STOCK. A COPY OF THE COMPANY'S PROSPECTUS ACCOMPANIES
THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. SEE "INCORPORATION
OF INFORMATION BY REFERENCE," "HOW TO OBTAIN ADDITIONAL INFORMATION" AND
"AVAILABLE INFORMATION."
VOTING RIGHTS AND VOTE REQUIRED FOR APPROVAL
Depositors and certain borrowers of the Association are Members of the
Mutual Holding Company under its current Charter (the "Members"). All of the
Members as of the close of business on ____ _, 1998 (the "Voting Record Date")
who continue to be Members on the date of the Special Meeting or any adjournment
thereof will be entitled to vote on the Plan of Conversion. If there are not
sufficient votes for approval of the Plan at the time of the Special Meeting,
the Special Meeting may be adjourned to permit further solicitation of proxies.
At the Special Meeting, each depositor Member will be entitled to cast
one vote for every $100, or fraction thereof, of the total withdrawal value of
all of his accounts in the Association as of the Voting Record Date up to a
<PAGE>
maximum of 1,000 votes. As of the Voting Record Date, the Association had
approximately _____ Members, the holders of which are entitled to cast a total
of approximately ______ votes at the Special Meeting.
Pursuant to Office of Thrift Supervision ("OTS") regulations,
consummation of the Conversion is conditioned upon the approval of the Plan by
the OTS, as well as (1) the approval of the holders of at least a majority of
the total number of votes eligible to be cast at the Special Meeting by the
Members as of the close of business on the Voting Record Date, and (2) the
approval of the holders of at least two-thirds of the shares of the outstanding
Mid-Tier Holding Company Common Stock held by the Mutual Holding Company and the
holders of the Public Mid-Tier Holding Company Shares (the "Public
Shareholders") (collectively, the "Shareholders") as of the Voting Record Date
at a Special Meeting of Shareholders called for the purpose of considering the
Plan (the "Shareholders' Meeting.") In addition, the Mutual Holding Company, the
Mid-Tier Holding Company, the Association and the Company (collectively, the
"Primary Parties") have conditioned the consummation of the Conversion on the
approval of the Plan by the holders of at least a majority of the votes cast, in
person or by proxy, by the Public Shareholders at the Shareholders' Meeting. The
Mutual Holding Company intends to vote its shares of Mid-Tier Holding Company
Common Stock, which amount to 51.34% of the outstanding shares, in favor of the
Plan at the Shareholders' Meeting.
This Proxy Statement and related materials are first being mailed to
Members on or about ______ __, 1998.
THE AFFIRMATIVE VOTE OF A MAJORITY OF THE TOTAL VOTES ELIGIBLE TO BE
CAST AT THE SPECIAL MEETING IS REQUIRED FOR APPROVAL OF THE PLAN OF CONVERSION.
PROXIES
The Board of Directors of the Mutual Holding Company is soliciting the
proxy which accompanies this Proxy Statement for use at the Special Meeting.
Each proxy solicited hereby, if properly executed, duly returned before the
Special Meeting and not revoked prior to or at the Special Meeting, will be
voted at the Special Meeting in accordance with the Member's instructions
indicated thereon. If no contrary instructions are given on the proxy, the
proxy, if signed, will be voted in favor of the Plan of Conversion. If you do
not return a proxy or vote at the meeting, it will have the same effect as a
vote against the Plan of the Conversion. If any other matters properly come
before the Special Meeting, the persons named as proxies will vote upon such
matters according to their discretion. Except with respect to procedural matters
incident to the conduct of the meeting, no additional matters are expected to
come before the Special Meeting.
Any Member giving a proxy may revoke it at any time before it is voted
by delivering to the Secretary of the Mutual Holding Company either a written
revocation of the proxy or a duly executed proxy bearing a later date, or by
voting in person at the Special Meeting. Proxies are being solicited only for
use at the Special Meeting and any and all adjournments thereof and will not be
used for any other meeting.
Proxies may be solicited by officers, directors and employees of the
Mutual Holding Company personally, by telephone or further correspondence
without additional compensation.
Deposits held in a trust or other fiduciary capacity may be voted by the
trustee or other fiduciary to whom voting rights are delegated under the trust
instrument or other governing document or applicable law. In the case of
individual retirement accounts and Keogh trusts established at the Association,
the beneficiary may direct the trustee's vote on the Plan of Conversion by
returning a completed proxy card to the Mutual Holding Company. FOR RETIREMENT
ACCOUNTS AND KEOGH TRUSTS, IF NO PROXY CARD IS RETURNED, THE TRUSTEE WILL VOTE
IN FAVOR OF APPROVAL OF THE PLAN OF CONVERSION ON BEHALF OF SUCH BENEFICIARY.
2
<PAGE>
THE BOARD OF DIRECTORS URGES YOU TO MARK, SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE AS SOON AS POSSIBLE,
EVEN IF YOU DO NOT INTEND TO PURCHASE COMMON STOCK. THIS WILL ENSURE THAT YOUR
VOTE WILL BE COUNTED.
INCORPORATION OF INFORMATION BY REFERENCE
The Company's Prospectus dated ____ _, 1998 is incorporated herein by
reference. The Prospectus sets forth a description of the Plan of Conversion and
the related offering of common stock by the Company under the caption "The
Conversion." Such caption also describes the effects of the Conversion on the
shareholders of the Mid-Tier Holding Company and the members of the Mutual
Holding Company, including the tax consequences of the Conversion and the
establishment of a liquidation account for the benefit of certain depositors of
the Association. Upon consummation of the Conversion, the charter of the
Association will be amended to delete current Section 8, which establishes a
priority for deposit account holders as creditors in certain situations. A new
Section 8 will be added to the charter to provide for a liquidation account.
These amendments are being voted upon by the Mid-Tier Holding Company's
shareholders to comply with applicable regulations of the OTS.
Information regarding the Company, the Association, the Mid-Tier Holding
Company and the Mutual Holding Company are set forth in the Prospectus under the
captions "Summary - Community Savings Bankshares, Inc.," "- Community Savings,
F. A," " - The Mid-Tier Holding Company" and " - ComFed, M. H. C." The
Prospectus also describes the business and financial condition of the Mid-Tier
Holding Company and the Association under the captions "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the historical financial statements of the Mid-Tier Holding
Company are included in the Prospectus. See also "Selected Financial Data" in
the Prospectus. Information regarding the use of proceeds of the offerings
conducted in connection with the Conversion, the historical capitalization of
the Mid-Tier Holding Company and the pro forma capitalization of the Company and
other pro forma data are set forth in the Prospectus under the captions "Use of
Proceeds," "Capitalization" and "Pro Forma Data," respectively.
The Prospectus sets forth certain information as to the Mid-Tier Holding
Company Common Stock beneficially owned by (i) the directors and executive
officers of the Mid-Tier Holding Company, and (ii) all directors and executive
officers of the Mid-Tier Holding Company as a group. The executive officers and
directors of the Mid-Tier Holding Company and the Association are identical. See
"Management - Beneficial Ownership of Mid -Tier Holding Company Common Stock" in
the Prospectus.
The Prospectus also provides information regarding the names, ages,
business experience and compensation of the Mid-Tier Holding Company's and
Association's directors and executive officers, as well as the benefit plans.
See "Management" in the Prospectus.
REVIEW OF OTS ACTION
Any person aggrieved by a final action of the OTS which approves, with
or without conditions, or disapproves a plan of conversion may obtain review of
such action by filing in the court of appeals of the United States for the
circuit in which the principal office or residence of such person is located, or
in the United States Court of Appeals for the District of Columbia, a written
petition praying that the final action of the OTS be modified, terminated or set
aside. Such petition must be filed within 30 days after the publication of
notice of such final action in the FEDERAL REGISTER, or 30 days after the
mailing by the applicant of the notice to members as provided for in 12 C.F.R.
ss.563b.6(c), whichever is later. The further procedure for review is as
follows: A copy of the petition is forthwith transmitted to the OTS by the clerk
of the court and thereupon the OTS files in the court the record in proceeding,
as provided in Section 2112 of Title 28 of the United States Code. Upon the
filing of the petition, the court has jurisdiction, which upon the filing of the
record is exclusive, to affirm, modify, terminate, or set aside in whole or in
part, the final action
3
<PAGE>
of the OTS. Review of such proceedings is as provided in Chapter 7 of Title 5 of
the United States Code. The judgment and decree of the court is final, except
that they are subject to review by the Supreme Court upon certiorari as provided
in Section 1254 of Title 28 of the United States Code.
HOW TO OBTAIN ADDITIONAL INFORMATION
You may request in writing a copy of the Plan of Conversion from the
Mutual Holding Company. Any such requests should be directed to Deborah M.
Rousseau, Secretary, ComFed, M. H. C., 660 U.S. Highway One, North Palm Beach,
Florida 33408. So that you have sufficient time to receive and review the
requested materials, it is recommended that any such requests be sent so that
they are received by the Mutual Holding Company by noon, Eastern Time, on ____
__, 1998.
AVAILABLE INFORMATION
The Mutual Holding Company has filed with the OTS an Application for
Conversion pursuant to which it will reorganize in accordance with the terms of
the Plan. This Proxy Statement and the Prospectus omit certain information
contained in such Application. The Application may be inspected at the offices
of the OTS, 1700 G Street, N.W., Washington, D.C. 20055 and at the office of the
Regional Director of the OTS located at 1475 Peachtree Street, Atlanta, Georgia
33309.
The Company has filed with the Securities and Exchange Commission
("SEC") a Registration Statement on Form S-1 (File No. 333-______) under the
Securities Act with respect to the Common Stock being offered in the Conversion.
This Proxy Statement and the Prospectus do not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. Such information may be
inspected at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and copies may be obtained at
prescribed rates from the Public Reference Section of the SEC at the same
address. In addition, the SEC maintains a web site that contains registration
statements and other reports regarding registrants that file electronically with
the SEC (such as the Company). The address of the SEC's web site is
http://www.sec.gov. The statements contained in the Prospectus as to the
contents of any contract or other document filed as an exhibit to the
Registration Statement are, of necessity, brief descriptions thereof and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
---------------
PLEASE REMEMBER TO MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD
IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO THAT YOUR IMPORTANT VOTE WILL BE
COUNTED AT THE SPECIAL MEETING.
---------------
THIS PROXY STATEMENT IS NEITHER AN OFFER TO SELL NOR THE SOLICITATION OF
ANY OFFER TO BUY STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.
4
<PAGE>
COMFED, M. H. C. REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF COMFED, M. H. C.
(THE "MUTUAL HOLDING COMPANY") FOR USE ONLY AT A SPECIAL MEETING OF MEMBERS TO
BE HELD ON ____ _, 1998 AND ANY ADJOURNMENT THEREOF.
The undersigned, being a member of the Mutual Holding Company, hereby
authorizes the Board of Directors of the Mutual Holding Company, or any of their
successors, as proxies, with full powers of substitution, to represent the
undersigned at the Special Meeting of Members of the Mutual Holding Company to
be held at the ___________ located at _____________, __________, Florida, _____
_, 1998, at ____ p.m., Eastern Time, and at any adjournment of said meeting, and
thereat to act with respect to all votes that the undersigned would be entitled
to cast, if then personally present, as follows:
(1) To approve and adopt a Plan of Conversion of the Mutual Holding
Company and Agreement and Plan of Reorganization between Community Savings
Bankshares, Inc., a newly formed Delaware Corporation (the "Company"), the
Mutual Holding Company, Community Savings Bankshares, Inc., a federal
corporation (the Mid-Tier Holding Company), and Community Savings, F. A. (the
"Association") (the "Plan of Conversion"), pursuant to which the Association
organized the Company and, upon consummation of the following transactions, will
become a wholly owned subsidiary of the Company: (i) the Mutual Holding Company,
which currently owns approximately 51.34% of the Mid-Tier Holding Company, will
convert from the mutual form to a federal interim stock savings association and
simultaneously merge with and into the Association, with the Association being
the surviving entity; (ii) the Mid-Tier Holding Company will convert to a
federal interim stock savings association and simultaneously merge with and into
the Association with the Association being the surviving entity; (iii) the
Association will then merge with an interim institution to be formed as a wholly
owned subsidiary of the Company, with the Association being the surviving
entity; (iv) the outstanding shares of Mid-Tier Holding Company common stock
(other than those held by the Mutual Holding Company, which will be cancelled)
will be converted into shares of the Company's common stock pursuant to a ratio
that will result in the holders of such shares owning in the aggregate
approximately the same percentage of the Company as they currently own of the
Mid-Tier Holding Company, before giving effect to such shareholders purchasing
additional shares in a concurrent stock offering by the Company or receiving
cash in lieu of fractional shares; and (v) the offer and sale of shares of the
Company's common stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxies are authorized to vote with respect to
approval of the minutes of the last meeting of members, matters incident to the
conduct of the Special Meeting, and upon such other matters as may properly come
before the Special Meeting.
(Continued and to be signed on other side)
5
<PAGE>
THIS PROXY, IF EXECUTED, WILL BE VOTED FOR ADOPTION OF THE PLAN OF
CONVERSION IF NO CHOICE IS MADE HEREIN. THIS PROXY MAY BE REVOKED AT ANY TIME
BEFORE IT IS EXERCISED.
The undersigned hereby acknowledges receipt of a Notice of Special
Meeting of the Members of ComFed, M. H. C. called for ____ _, 1998 and a Proxy
Statement for the Special Meeting prior to the signing of this Proxy.
Date: _____________________, 1998
----------------------------------
Signature
----------------------------------
Signature
Note: Please sign exactly your
name(s) appear(s) on this Proxy
Card. Only one signature is
required in the case of a joint
account. When signing in a
representative capacity, please
give title.
I/WE WILL ___ WILL NOT___ BE
ATTENDING THE SPECIAL MEETING.
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD USING THE ENCLOSED
ENVELOPE.
6
COMMUNITY SAVINGS BANKSHARES, INC.
660 U.S. HIGHWAY ONE
NORTH PALM BEACH, FLORIDA 33408
NOTICE OF SPECIAL MEETING
TO BE HELD ON ____ __, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of
Community Savings Bankshares, Inc., a federal corporation ( the "Mid-Tier
Holding Company") will be held at _______________________ located at
______________________, Florida, on _________ ___, 1998, at ____ p.m., for the
following purposes, as more completely set forth in the accompanying proxy
statement:
(1) To approve and adopt the Plan of Conversion and Agreement and Plan
of Reorganization, as amended (the "Plan" or "Plan of Conversion"), pursuant to
which (i) ComFed, M. H. C. (the "Mutual Holding Company"), which currently owns
approximately 51.34% of the Mid-Tier Holding Company common stock, will convert
from mutual form to a federal interim stock savings association and
simultaneously merge with and into Community Savings, F. A. (the "Association"),
with the Association being the surviving entity; (ii) the Mid-Tier Holding
Company will convert to a federal interim stock savings association and merge
with and into the Association with the Association being the surviving entity;
(iii) the Association will then merge into an interim institution ("Interim") to
be formed as a wholly owned subsidiary of Community Savings Bankshares, Inc., a
Delaware corporation recently formed as a wholly owned subsidiary of the
Association (the "Company"), with the Association being the surviving entity and
becoming a wholly owned subsidiary of the Company; (iv) the outstanding shares
of the Mid-Tier Holding Company common stock (other than those held by the
Mutual Holding Company, which will be cancelled) will be converted into shares
of common stock of the Company pursuant to a ratio that will result in the
holders of such shares owning in the aggregate the same percentage of the
Company as they currently own of the Mid-Tier Holding Company (as adjusted for
waived dividends), before giving effect to such shareholders purchasing
additional shares or receiving cash in lieu of fractional shares (collectively,
the "Reorganization"); and (v) the Association's charter will be amended to
include a liquidation account. In addition, the Company is offering for sale up
to 7,753,143 shares of its common stock by means of the accompanying Prospectus,
and the sale of such stock and the Reorganization are referred to herein as the
"Conversion."
(2) To transact such other business as may properly come before the
meeting. Except with respect to procedural matters incident to the conduct of
the Special Meeting, management of the Mid-Tier Holding Company is not aware of
any matters other than those set forth above which may properly come before the
meeting.
Shareholders of the Mid-Tier Holding Company do not have the right to
dissent from the Conversion and to exercise appraisal rights for their shares of
Mid-Tier Holding Company common stock.
Shareholders of record of the Mid-Tier Holding Company at the close of
business on _____ __, 1998 are entitled to notice of and to vote at the Special
Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Deborah M. Rousseau
Secretary
North Palm Beach, Florida
________ __, 1998
- --------------------------------------------------------------------------------
YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THIS MEETING, YOU MAY VOTE
EITHER IN PERSON OR BY YOUR PROXY. ANY PROXY GIVEN MAY BE REVOKED BY YOU IN
WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF.
- --------------------------------------------------------------------------------
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC., A FEDERAL CORPORATION
------------------------------------------------
PROXY STATEMENT
------------------------------------
SPECIAL MEETING OF SHAREHOLDERS
______ __, 1998
This Proxy Statement is furnished to the holders of the common stock,
par value $1.00 per share ("Mid-Tier Holding Company Common Stock"), of
Community Savings Bankshares, Inc., a federal corporation (the "Mid-Tier Holding
Company") in connection with the solicitation of proxies on behalf of the Board
of Directors, to be used at the Special Meeting of Shareholders ("Special
Meeting") to be held at __________________________________________, on ______
__, 1998, at _____ p.m., Eastern Time, and at any adjournment thereof for the
purposes set forth in the Notice of Special Meeting. This Proxy Statement is
expected to be mailed to shareholders on or about ___ ___, 1998.
Each proxy solicited hereby, if properly signed and returned to
Mid-Tier Holding Company and not revoked prior to its use, will be voted in
accordance with the instructions contained therein. IF NO CONTRARY INSTRUCTIONS
ARE GIVEN, EACH PROXY RECEIVED WILL BE VOTED IN FAVOR OF THE PLAN OF CONVERSION
AND AGREEMENT AND PLAN OF REORGANIZATION, AS AMENDED (THE "PLAN" OR "PLAN OF
CONVERSION"), AND, UPON THE TRANSACTION OF SUCH OTHER BUSINESS AS MAY PROPERLY
COME BEFORE THE MEETING, IN ACCORDANCE WITH THE BEST JUDGMENT OF THE PERSONS
APPOINTED AS PROXIES.
Any shareholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Secretary of the Mid-Tier Holding
Company written notice thereof (Deborah M. Rousseau, Secretary, Community
Savings Bankshares, Inc., 660 U.S. Highway One, North Palm Beach, Florida
33408), (ii) submitting a duly executed proxy bearing a later date, or (iii)
appearing at the Special Meeting and giving the Secretary notice of his or her
intention to vote in person. Proxies solicited hereby may be exercised only at
the Special Meeting and any adjournment thereof and will not be used for any
other meeting.
VOTING SECURITIES AND BENEFICIAL OWNERSHIP THEREOF
Only shareholders of record at the close of business on ______ __, 1998
("Voting Record Date") are entitled to notice of and to vote at the Special
Meeting. On the Voting Record Date, there were 5,103,960 shares of Mid-Tier
Holding Company Common Stock outstanding, and the Mid-Tier Holding Company had
no other class of equity securities outstanding. Each share of Mid-Tier Holding
Company Common Stock is entitled to one vote at the Special Meeting on all
matters properly presented at the Special Meeting.
A majority of the outstanding Mid-Tier Holding Company Common Stock,
represented in person or by proxy, shall constitute a quorum at the Special
Meeting. Shares as to which the "ABSTAIN" box has been marked on the proxy and
any shares held by brokers in street name for customers which are not voted in
the absence of instructions from the customers ("broker non-votes") will be
counted as present for determining if a quorum is present. Because adoption of
the Plan of Conversion must be approved by the holders of at least two-thirds of
the outstanding Mid-Tier Holding Company Common Stock, abstentions and broker
non-votes will have the same effect as a vote against such proposal. The Plan
also conditions consummation of the Conversion on the approval of the Plan by at
least a majority of the votes cast, in person or by proxy, at the Special
Meeting by the holders of Mid-Tier Holding Company Common Stock excluding the
Mutual Holding Company (the "Public Shareholders"). Abstentions and broker
non-votes will have no effect on the required vote of the Public Shareholders.
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INCORPORATION OF INFORMATION BY REFERENCE
The Prospectus of Community Savings Bankshares, Inc., a newly formed
Delaware corporation (the "Company"), is incorporated herein by reference. The
Prospectus sets forth a description of the Plan of Conversion and the related
offering of common stock by the Company under the caption "The Conversion." Such
caption also describes the effects of the Conversion on the shareholders of the
Mid-Tier Holding Company and the members of the Mutual Holding Company,
including the tax consequences of the Conversion and the establishment of a
liquidation account for the benefit of certain depositors of the Association.
Upon consummation of the Conversion, the charter of the Association will be
amended to delete current Section 8, which establishes a priority for deposit
account holders as creditors in certain situations. A new Section 8 will be
added to the charter to provide for a liquidation account. These amendments are
being adopted to comply with applicable regulations of the OTS. See Appendix A
attached hereto.
Information regarding the Company, the Association, the Mid-Tier
Holding Company and the Mutual Holding Company are set forth in the Prospectus
under the captions "Summary - Community Savings Bankshares, Inc.," " Community
Savings, F. A.", "- The Mid-Tier Holding Company" and "- ComFed, M. H. C." The
Prospectus also describes the business and financial condition of the Mid-Tier
Holding Company and the Association under the captions "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the historical financial statements of the Mid-Tier Holding
Company are included in the Prospectus. Information regarding the use of
proceeds of the offerings conducted in connection with the Conversion, the
historical capitalization of the Association and the pro forma capitalization of
the Company, and other pro forma data are set forth in the Prospectus under the
captions "Use of Proceeds," "Capitalization" and "Pro Forma Data," respectively.
The Prospectus sets forth certain information as to the Mid-Tier
Holding Company Common Stock beneficially owned by (i) the directors and
executive officers of the Mid-Tier Holding Company, and (ii) all directors and
executive officers of the Mid-Tier Holding Company as a group. See "Management -
Beneficial Ownership of Mid-Tier Holding Company Common Stock" in the
Prospectus.
COMPARISON OF STOCKHOLDER RIGHTS
At the Effective Date, the Public Shareholders automatically will
become shareholders of the Company, and their rights as shareholders will be
determined by the Delaware General Corporation Law ("DGCL") and by the Company's
Certificate of Incorporation and Bylaws. The following is a summary of material
differences between the rights of holders of Company Common Stock and the rights
of holders of Mid-Tier Holding Company Common Stock. These differences arise
from various provisions of the DGCL and federal law, including regulations of
the Office of Thrift Supervision ("OTS"), the Certificate of Incorporation and
Bylaws of the Company and the Charter and Bylaws of the Mid-Tier Holding
Company.
LIMITATION ON VOTING RIGHTS
Article 12.B of the Company's Certificate of Incorporation provides
that following the date of the Conversion, no person shall directly or
indirectly offer to acquire or acquire the beneficial ownership of (i) more than
10% of the issued and outstanding shares of any class of an equity security of
the Company, or (ii) any securities convertible into, or exercisable for, any
equity securities of the Company if, assuming conversion or exercise by such
person of all securities of which such person is the beneficial owner which are
convertible into, or exercisable for, such equity securities (but of no
securities convertible into, or exercisable for, such equity securities of which
such person is not the beneficial owner), such person would be the beneficial
owner of more than 10% of any class of an equity security of the Company. The
term "person" is broadly defined to prevent circumvention of this restriction.
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The foregoing restrictions do not apply to (i) any offer with a view
toward public resale made exclusively to the Company by underwriters or a
selling group acting on its behalf, (ii) any tax-qualified employee benefit plan
or arrangement established by the Company or the Association and any trustee of
such a plan or arrangement, and (iii) any other offer or acquisition approved in
advance by the affirmative vote of two-thirds of the Company's entire Board of
Directors. In the event that shares are acquired in violation of Article 12.B,
all shares beneficially owned by any person in excess of 10% shall be considered
"Excess Shares" and shall not be counted as shares entitled to vote and shall
not be voted by any person or counted as voting shares in connection with any
matters submitted to shareholders for a vote, and the Board of Directors may
cause such Excess Shares to be transferred to an independent trustee for sale on
the open market or otherwise, with the expenses of such trustee to be paid out
of the proceeds of sale. There are no similar provisions in the Mid-Tier Holding
Company's Charter or Bylaws.
DIRECTORS
REMOVAL. Pursuant to the Company's Certificate of Incorporation,
directors may be removed from office without cause at a duly constituted meeting
of shareholders called expressly for such purpose upon the affirmative vote of
not less than 80% of the total votes eligible to be cast by shareholders and may
be removed from office with cause by an affirmative vote of a majority of the
total votes eligible to be cast by shareholders. Cause for removal shall exist
only if the director whose removal is proposed has been either declared of
unsound mind by an order of a court of competent jurisdiction, convicted of a
felony or of an offense punishable by imprisonment for a term of more than one
year by a court of competent jurisdiction, or deemed liable by a court of
competent jurisdiction for gross negligence or misconduct in the performance of
such director's duties to the Company.
Under the Mid-Tier Holding Company's Bylaws, at a meeting of
shareholders called expressly for that purpose, any director may be removed for
cause by the vote of the holders of a majority of the shares then entitled to
vote at an election of directors.
VACANCIES. Under the Mid-Tier Holding Company's Bylaws, any vacancies
in the Board of Directors of the Mid-Tier Holding Company may be filled by the
affirmative vote of a majority of the remaining directors although less than a
quorum of the Board of Directors. Persons elected by the directors of the
Mid-Tier Holding Company to fill vacancies may only serve until the next annual
meeting of shareholders. However, under the Company's Certificate of
Incorporation, any vacancy occurring in the Board of Directors of the Company,
including any vacancy created by reason of an increase in the number of
directors, may be filled by a majority vote of the remaining directors, whether
or not a quorum is present and any director so chosen shall hold office for the
remainder of the term to which the director has been appointed and until his
successor is elected and qualified.
NOMINATION. Shareholders of both the Company and the Mid-Tier Holding
Company are required to submit to their respective companies, in writing and in
advance, any nomination of a candidate for election as a director.
The Company's Certificate of Incorporation provides that such
nominations generally must be submitted not later than 120 days prior to the
anniversary date of the initial mailing of proxy materials by the Company in
connection with the immediately preceding annual meeting of shareholders of the
Company; provided, however, that with respect to the first scheduled annual
meeting following the completion of the Conversion, notice by the shareholder
must be received no later than the close of business on Tuesday, December 15,
1998. Under the Mid-Tier Holding Company's Bylaws, shareholder nominations must
be received at least five days prior to the date of the annual meeting.
Article 9 of the Company's Certificate of Incorporation provides that
the personal liability of the directors and officers of the Company for monetary
damages shall be eliminated to the fullest extent permitted by the DGCL as it
exists on the effective date of the Certificate of Incorporation or as such law
may be thereafter in effect. Section 102(b)(7) of the DGCL currently provides
that directors (but not officers) of corporations that have adopted such a
provision will not be so liable, except or (i) any breach of the director's duty
of loyalty to the corporation or its
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shareholders, (ii) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) the payment of
certain unlawful dividends and the making of certain stock purchases or
redemptions, or (iv) any transaction from which the director derived an improper
personal benefit. This provision would absolve directors of personal liability
for negligence in the performance of their duties, including gross negligence.
It would not permit a director to be exculpated, however, for liability for
actions involving conflicts or interest or breaches of the traditional "duty of
loyalty" to the Company and its shareholders, and it would not affect the
availability of injunctive or other equitable relief as a remedy. There is no
similar provision in the Mid-Tier Holding Company's Charter or Bylaws or federal
law.
INDEMNIFICATION. The Company's Certificate of Incorporation provides
that the Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, including actions by or in the right of the Company, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person is or was a director, officer, employee or agent of the Company, or
is or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise. Such indemnification is furnished to the full extent provided by law
against expenses (including attorneys' fees), judgments, fines, amounts paid in
settlement actually and reasonably incurred in connection with such action, suit
or proceeding. The indemnification provisions also permit the Company to pay
reasonable expenses in advance of the final disposition of any action, suit or
proceeding as authorized by the Company's Board of Directors, provided that the
indemnified person undertakes to repay the Company if it is ultimately
determined that such person was not entitled to indemnification.
The rights of indemnification provided in the Company's Certificate of
Incorporation are not exclusive of any other rights which may be available under
the Company's Bylaws, any insurance or other agreement, by vote of shareholders
or directors (regardless of whether directors authorizing such indemnification
are beneficiaries thereof) or otherwise. In addition, the Certificate of
Incorporation authorizes the Company to maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Company,
whether or not the Company would have the power to provide indemnification to
such person. By action of the Board of Directors, the Company may create and
fund a trust fund or other fund or form of self-insurance arrangement of any
nature, and may enter into agreements with its officers, directors, employees
and agents for the purpose of securing or insuring in any manner its obligation
to indemnify or advance expenses provided for in the provisions in the
Certificate of Incorporation and Bylaws regarding indemnification. These
provisions are designed to reduce, in appropriate cases, the risks incident to
serving as a director, officer, employee or agent and to enable the Company to
attract and retain the best personnel available.
Under Section 545.121 of the OTS regulations, the indemnification of
officers, directors and employees of an institution for actions taken in their
capacity as such is mandatory (provided that the OTS does not object) where such
officer, director or employee has been issued a final judgment on the merits in
his or her favor. In other cases, indemnification may be made only if a majority
of the disinterested members of the Board of Directors approve such
indemnification as provided in the regulation. Indemnification may be provided
only after the OTS has been provided with 60 days advance written notice and has
failed to object to indemnification within that period.
SHAREHOLDERS
SPECIAL MEETINGS. Subject to the rights of holders of any class or
series of Preferred Stock, special meetings of the Company's shareholders may be
called only by the Board of Directors of the Company pursuant to a resolution
approved by the affirmative vote of at least three-fourths of the directors then
in office.
The Mid-Tier Holding Company's Bylaws provide that special meetings of
the shareholders, for any purpose or purposes, may be called at any time by the
Chairman of the Board, the President or a majority of the Board of Directors of
the Mid-Tier Holding Company and by written request of the holders of not less
than 10% of the issued and outstanding capital stock of the Mid-Tier Holding
Company entitled to vote at the meeting. Such written request
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must state the purpose or purposes of the meeting and be delivered to the
Mid-Tier Holding Company's home office addressed to the Chairman of the Board,
the President, or the Secretary of the Mid-Tier Holding Company.
SHAREHOLDER PROPOSALS. Article 2.14 of the Company's Bylaws provides
that for shareholder proposals to be included in the Company's proxy materials,
the shareholder must comply with all the timing and informational requirements
of Rule 14a-8 of the Securities Exchange Act of 1934, as amended ("Exchange
Act"). With respect to shareholder proposals to be considered at the annual
meeting of shareholders but not included in the Company's proxy materials, the
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Company not less than 120 days prior to the
anniversary date of the initial mailing of proxy materials by the Company in
connection with the immediately preceding annual meeting; provided, however,
that with respect to the first scheduled annual meeting following completion of
the Conversion, such written notice must be received by the Company not later
than the close of business on Tuesday, December 15, 1998. The shareholder's
notice shall set forth the information required by Article 2.14.
Under the Mid-Tier Holding Company's Bylaws, shareholder proposals must
be received by the Mid-Tier Holding Company at least five days prior to the date
of the annual meeting.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS
Article 13 of the Company's Certificate of Incorporation generally
provides that any amendment of the Certificate of Incorporation must be first
approved by a majority of the Board of Directors and thereafter approved by the
holders of 80% of the shares of the Company entitled to vote generally in an
election of directors (the "Voting Shares"), except that if the amendment is
approved by at least two-thirds of the Board of Directors, the amendment shall
only need shareholder approval if required by the DGCL and then only by the
affirmative vote of a majority of the Voting Shares. The Bylaws of the Company
may be amended by a majority of the Board of Directors or by the affirmative
vote of a majority of the Voting Shares, except that the affirmative vote of at
least 80% of the total shares entitled to vote in an election of directors shall
be required to amend, adopt, alter, change or repeal any provision inconsistent
with certain specified provisions of the Bylaws.
The Mid-Tier Holding Company's Charter provides that no amendment of
the Charter shall be made unless the amendment is proposed by the Board of
Directors, then preliminarily approved by the OTS and thereafter approved by a
majority of the total votes eligible to be cast at a legal meeting of
shareholders. The Mid-Tier Holding Company's Bylaws may be amended by a majority
of the Board of Directors or by a majority of the votes cast by the shareholders
of the Mid-Tier Holding Company at any legal meeting.
GENERAL CORPORATION LAW OF DELAWARE
Section 203 of the DGCL ("Section 203") imposes certain restrictions on
business combinations between the Company and large shareholders. Specifically,
Section 203 prohibits a "business combination" (as defined in Section 203,
generally including mergers, sales and leases of assets, issuances of securities
and similar transactions) between the Company or a subsidiary and an "interested
shareholder" (as defined in Section 203, generally the beneficial owner of 15%
or more of the Company Common Stock) within three years after the person or
entity becomes an interested shareholder, unless (i) prior to the person or
entity becoming an interested shareholder, the business combination or the
transaction pursuant to which such person or entity became an interested
shareholder shall have been approved by the Company's Board of Directors, (ii)
upon consummation of the transaction in which the interested shareholder became
such, the interested shareholder holds at least 85% of the Company Common Stock
(excluding shares held by persons who are both officers and directors and shares
held by certain employee benefit plans), or (iii) the business combination is
approved by the Company's Board of Directors and by the holders of at least
two-thirds of the outstanding Company Common Stock, excluding shares owned by
the interested shareholders.
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One of the effects of Section 203 may be to prevent highly leveraged
takeovers, which depend upon getting access to the acquired corporation's assets
to support or repay acquisition indebtedness and certain coercive acquisition
tactics. By requiring approval of the holders of two-thirds of the shares held
by disinterested shareholders for business combinations involving an interested
shareholder, Section 203 may prevent any interested shareholder from taking
advantage of its position as a substantial, if not controlling, shareholder and
engaging in transactions with the Company that may not be fair to the Company's
other shareholders or that may otherwise not be in the best interests of the
Company, its shareholders and other constituencies.
There are no similar provisions in the Mid-Tier Holding Company's
Charter or Bylaws or in the OTS regulations.
SHAREHOLDER PROPOSALS
Any proposal which a shareholder wishes to have included in the proxy
materials for the next annual meeting of shareholders of the Mid-Tier Holding
Company, which is expected to be held in April 1999, if the Conversion is not
consummated, must be received at the main office of the Mid-Tier Holding
Company, 660 U.S. Highway One, North Palm Beach, Florida 33408, no later than
November 20, 1998. If such proposal is in compliance with all of the
requirements of Rule 14a-8 of the Exchange Act, it will be included in the Proxy
Statement and set forth on the form of proxy issued for the next annual meeting
of shareholders. It is urged that any such proposals be sent by certified mail,
return receipt requested.
OTHER MATTERS
Each proxy solicited hereby also confers discretionary authority on the
Board of Directors of the Mid-Tier Holding Company, to vote the proxy with
respect to the approval of the minutes of the last meeting of stockholders,
matters incident to the conduct of the meeting, and upon such other matters as
may properly come before the Special Meeting. Management is not aware of any
business that may properly come before the Special Meeting other than those
matters described above in this Proxy Statement. However, if any other matters
should properly come before the Special Meeting, it is intended that the proxies
solicited hereby will be voted with respect to those other matters in accordance
with the judgment of the persons voting the proxies.
The cost of solicitation of the proxies will be borne by the Mid-Tier
Holding Company. In addition to solicitations by mail, the directors and
officers of the Mid-Tier Holding Company may solicit proxies personally or by
telephone without additional compensation. The Mid-Tier Holding Company will
reimburse brokerage firms and other custodians, nominees and fiduciaries for
reasonable expenses incurred by them in sending the Mid-Tier Holding Company's
proxy materials to the beneficial owners of the Association Common Stock.
YOUR VOTE IS IMPORTANT! WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY
CARD AND RETURN IT TODAY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
BY ORDER OF THE BOARD OF DIRECTORS
Deborah M. Rousseau
Secretary
______ ___, 1998
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APPENDIX A
PROPOSED AMENDMENTS TO THE CHARTER OF
COMMUNITY SAVINGS BANKSHARES, INC.
The following section will be added as new Section 8 of the Charter,
replacing the existing Section 8:
SECTION 8. LIQUIDATION ACCOUNT. Pursuant to the requirements of 12
C.F.R. Subchapter D, the association shall establish and maintain a liquidation
account for the benefit of its savings association holders who had an account
balance of at least $50.00 as of the close of business on either June 30, 1997
or ____ __, 1998 ("eligible depositors"). In the event of a complete liquidation
of the association, it shall comply with such Rules and Regulations with respect
to the amount and the priorities on liquidation of each of the association's
eligible depositor's inchoate interest in the liquidation account, to the extent
it is still in existence. An eligible depositor's inchoate interest in the
liquidation account shall not entitle such eligible depositor to any voting
rights at meetings of the association's shareholders.
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COMMUNITY SAVINGS BANKSHARES, INC. REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF COMMUNITY SAVINGS
BANKSHARES, INC. (THE "MID-TIER HOLDING COMPANY") FOR USE ONLY AT A SPECIAL
MEETING OF SHAREHOLDERS TO BE HELD ON ______ ___, 1998 AND ANY ADJOURNMENT
THEREOF.
The undersigned, being a shareholder of the Mid-Tier Holding Company as
of ____ __, 1998, hereby authorizes the Board of Directors of the Mid-Tier
Holding Company, or any of their successors, as proxies, with full powers of
substitution, to represent the undersigned at the Special Meeting of
Shareholders to be held at ______________________________________, Florida, on
_____ __, 1998, at __:__ p.m., Eastern Time, and at any adjournment of said
meeting, and thereat to act with respect to all votes that the undersigned would
be entitled to cast, if then personally present, as follows:
(1) To approve and adopt the Plan of Conversion and Agreement and Plan
of Reorganization, as amended (the "Plan" or "Plan of Conversion"), pursuant to
which (i) ComFed, M. H. C., as amended, (the "Mutual Holding Company"), which
currently owns approximately 51.34% of the Mid-Tier Holding Company Common
Stock, will convert from mutual form to a federal interim stock savings
association and simultaneously merge into Community Savings, F. A. (the
"Association"), with the Association being the surviving entity; (ii) the
Mid-Tier Holding Company will convert to a federal interim stock savings
association and merge with the Association with the Association being the
surviving entity; (iii) the Association will then merge into an interim
institution ("Interim") to be formed as a wholly owned subsidiary of Community
Savings Bankshares, Inc., a Delaware corporation recently formed as a wholly
owned subsidiary of the Association (the "Company"), with the Association being
the surviving entity and becoming a wholly owned subsidiary of the Company; (iv)
the outstanding shares of the Mid-Tier Holding Company common stock (other than
those held by the Mutual Holding Company, which will be cancelled) will be
converted into shares of common stock of the Company pursuant to a ratio that
will result in the holders of such shares owning in the aggregate the same
percentage of the Company as they currently own of the Mid-Tier Holding Company
(as adjusted for waived dividends), before giving effect to such shareholders
purchasing additional shares or receiving cash in lieu of fractional shares
(collectively, the "Reorganization"); and (v) the Association's charter will be
amended to include a liquidation account.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxies are authorized to vote with respect to
approval of the minutes of the last meeting of shareholders, matters incident to
the conduct of the meeting, and upon such other matters as may properly come
before the meeting.
THIS PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS EXERCISED. SHARES OF
COMMON STOCK OF THE MID-TIER HOLDING COMPANY WILL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE HEREIN, SHARES WILL BE VOTED FOR PROPOSAL 1.
(CONTINUED AND TO BE SIGNED ON OTHER SIDE)
<PAGE>
The undersigned hereby acknowledges receipt of a Notice of Special
Meeting of the Shareholders of Community Savings Bankshares, Inc. called for
_____ __, 1998 and a Proxy Statement for the Special Meeting prior to the
signing of this proxy.
Dated: ____________________, 1998
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Signature(s)
Please sign exactly as your
name(s) appear(s) on this proxy.
Only one signature is required in
the case of a joint account. When
signing in a representative
capacity, please give title.
I/we will ___ will not ___ be
attending the Special Meeting.
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD USING THE ENCLOSED
ENVELOPE.
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