<PAGE>
As filed with the Securities and Exchange Commission on September 1, 1999
Registration No. 333-_________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
____________________________________
UNION FINANCIAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C> <C>
Delaware 6035 57-1001177
(State or Other Jurisdiction (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification
of Incorporation or Organization) Number)
</TABLE>
203 WEST MAIN STREET
UNION, SOUTH CAROLINA 29379
(864) 427-9000
(Address, including Zip Code and Telephone Number,
including Area Code, of Registrant's Principal Executive Offices)
DWIGHT V. NEESE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
203 WEST MAIN STREET
UNION, SOUTH CAROLINA 29379
(864) 427-9000
(Name, Address, including Zip Code and Telephone Number,
including Area Code, of Agent for Service)
_____________________________________
Copies to:
PAUL M. AGUGGIA, ESQ. JOHN J. GORMAN, ESQ.
JOHN R. HALL, ESQ. ALAN SCHICK, ESQ.
MULDOON, MURPHY & FAUCETTE LLP LUSE LEHMAN GORMAN POMERENK & SCHICK, P.C.
5101 WISCONSIN AVENUE, N.W. 5335 WISCONSIN AVENUE, N.W., SUITE 400
WASHINGTON, D.C. 20016 WASHINGTON, D.C. 20015
(202) 362-0840 (202) 274-2000
_____________________________________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of the Registration Statement and the
satisfaction or waiver of all other conditions to the Merger described in the
Joint Proxy Statement/Prospectus.
If the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
_____________________________________
Calculation of Registration Fee
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<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum
Title of Each Class of Amount Offering Aggregate Amount of
Securities Being To Be Price Offering Registration
Registered Registered(1) Per share Price (2) Fee (2)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par
value $.01 per share 582,384 N/A $8,444,568 $1,454
("Common Stock")
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon the estimated maximum number of shares of Common Stock that
the Registrant may be required to issue in connection with the merger of
Union Financial Bancshares, Inc. and South Carolina Community Bancshares,
Inc.
(2) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act of 1933, as amended, and
computed pursuant to Rule 457(c) and Rule 457(f)(1) based on the market
value of South Carolina Community common stock as reported on the Nasdaq
SmallCap Market System on August 26, 1999 and the estimated maximum
number of shares of South Carolina Community common stock, including
shares issuable upon the exercise of outstanding stock options under the
1994 Recognition and Retention Plan and shares outstanding, that may be
exchanged for the securities being registered. Pursuant to Rule
457(f)(3), the cash portion of the merger consideration, assuming an
effective date of August 26, 1999, i.e. $3,214,996 as calculated in
accordance with the merger agreement, that is to be paid by the
Registrant in connection with the exchange was deducted from the Proposed
Maximum Aggregate Offering Price in order to calculate the Amount of
Registration Fee.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment that specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
[Union Financial Logo Here] [South Carolina Community
Bancshares Logo Here]
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Union Financial Bancshares, Inc. and South Carolina
Community Bancshares, Inc. have agreed to a merger through which Union Financial
will acquire South Carolina Community. In the merger, South Carolina Community
will merge with and into Union Financial, and South Carolina Community's
subsidiary, Community Federal Savings Bank, will merge with and into Union
Financial's subsidiary, Provident Community Bank. As a result of the merger,
South Carolina Community shareholders will receive a combined payment of cash
and Union Financial common stock for each share of South Carolina Community
stock they own. The amount of cash and stock you receive, referred to as the
merger consideration, will depend on the average market price of Union Financial
stock over a certain period of time prior to the merger's closing date. In all
circumstances, the cash portion of the merger consideration must be at least
----
$5.25. The stock portion of the merger consideration must be at least 0.817
-----
shares, and can be no more than 0.980 shares, of Union Financial stock. If
Union Financial's average market price per share during this period is between
$12.50 and $15.00, the total merger consideration will be $17.50 per South
Carolina Community share. If Union Financial's average market price per share
is more than $15.00, the total merger consideration will be at least $17.51 per
South Carolina Community share. If the average market price per share is
between $12.00 and $12.49, the total merger consideration will be between $17.01
and $17.49 per South Carolina Community share. If the average market price per
share is less than $12.00, the total merger consideration will be $17.00 per
South Carolina Community share. As of ________, the value of the merger
consideration would have been $_____ per share; $______ in cash plus ________
shares of Union Financial stock. For United States federal income tax purposes,
your exchange of shares of South Carolina Community common stock may cause you
to recognize a gain. Please consult with your tax advisor to understand your
own tax obligations. After the merger, South Carolina Community shareholders
will no longer own any stock or have any interest in South Carolina Community.
We cannot complete the merger without the approval of the Union Financial and
South Carolina Community shareholders. Each of us will hold a meeting of our
shareholders to vote on the merger agreement. Whether or not you plan to attend
your shareholders' meeting, please take the time to vote by completing and
mailing to us the enclosed proxy card. If you fail to vote, it will have the
same effect as a vote against approval of the merger agreement. If you are a
shareholder of record and do attend, you may, if you wish, revoke your proxy and
vote your shares in person at the meeting. The dates, times and places of the
meetings are as follows:
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For Union Financial Shareholders: For South Carolina Community
Shareholders:
___________________, 1999 __________________, 1999
:00 a.m., local time :00 a.m., local time
Community Room, University of South Carolina _______________________________
Academy and North Mountain Streets _______________________________
Union, South Carolina [_____] _______________________________
</TABLE>
This document contains a more complete description of the meetings and the terms
of the merger. We urge you to review this entire document carefully. You may
also obtain information about Union Financial and South Carolina Community from
documents each company has filed with the Securities and Exchange Commission.
We enthusiastically support this combination of our companies and join with the
other members of our boards of directors in recommending that you vote in favor
of the merger.
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Dwight V. Neese Alan W. Pullen
President and Chief Executive Officer President and Chief Executive
Officer
</TABLE>
-----------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved the securities to be issued under this Joint Proxy
Statement/Prospectus or determined if this Joint Proxy Statement/Prospectus
is accurate or adequate. Any representation to the contrary is a criminal
offense. The securities we are offering through this document are not
savings or deposit accounts or other obligations of any bank or non-bank
subsidiary of either of our companies, and they are not insured by the
Federal Deposit Insurance Corporation, the Savings Association Insurance
Fund, the Bank Insurance Fund or any other governmental agency.
-----------------------------------------------------------------------------
Union Financial's and South Carolina Community's common stock are both traded on
the Nasdaq SmallCap Market of the Nasdaq Stock Market. The trading symbol for
Union Financial is "UFBS." The trading symbol for South Carolina Community is
"SCCB."
Joint Proxy Statement/Prospectus dated __________, 1999 and first mailed to
shareholders on or about __________, 1999
<PAGE>
Union Financial Bancshares, Inc.
203 West Main Street
Union, South Carolina 29379
(864) 427-9000
_______________________________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON __________, 1999
_______________________________________
NOTICE IS HEREBY GIVEN that the special meeting of shareholders of Union
Financial Bancshares, Inc. will be held in the Community Room at the University
of South Carolina, Union Campus, at Academy and North Mountain Streets, Union,
South Carolina on ___________________, _______________________ at __:00 a.m.,
local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of July 1, 1999, by and between
Union Financial Bancshares, Inc. and South Carolina Community
Bancshares, Inc., pursuant to which South Carolina Community will
merge with and into Union Financial, and each share of common stock of
South Carolina Community, par value $0.01 per share, will be converted
into the right to receive at least $5.25 in cash and at least 0.817
shares of Union Financial common stock, par value $0.01 per share, in
accordance with the terms and conditions of the merger agreement. The
total value of the consideration to be received by shareholders of
South Carolina Community will be based upon the average market price
of Union Financial common stock during the 25 trading day period that
ends on the trading day that immediately precedes the third day prior
to the merger's closing. If Union Financial's average market price per
share during this period is between $12.50 and $15.00, the total
merger consideration will be $17.50 per South Carolina Community
share. If Union Financial's average market price per share is more
than $15.00, the total merger consideration will be at least $17.51
per South Carolina Community share. If the average market price per
share is between $12.00 and $12.49, the total merger consideration
will be between $17.01 and $17.49 per South Carolina Community share.
If the average market price per share is less than $12.00, the total
merger consideration will be $17.00 per South Carolina Community
share; and
2. To transact such other business as may properly come before the
meeting or any adjournment or postponement.
Only shareholders of record at the close of business on __________, 1999
will be entitled to notice of and to vote at the meeting and at any adjournment
or postponement.
In the event that there are not sufficient votes to approve the foregoing
proposal at the time of the meeting, the meeting may be adjourned in order to
permit further solicitation by Union Financial.
By Order of the Board of Directors
Wanda J. Wells
Vice President - Corporate Secretary
Union, South Carolina
__________, 1999
The board of directors unanimously recommends that you vote "FOR" the
proposal to approve and adopt the merger agreement.
Whether or not you plan to attend the meeting, please complete, sign, date
and return the enclosed proxy in the accompanying pre-addressed postage-paid
envelope.
<PAGE>
South Carolina Community Bancshares, Inc.
110 South Congress Street
Winnsboro, South Carolina 29180
(803) 635-5536
_______________________________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON __________, 1999
_______________________________________
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of South
Carolina Community Bancshares, Inc. will be held at
__________________________________________________________________, Winnsboro,
South Carolina on ___________________, ________________________ at __:00 a.m.,
local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of July 1, 1999, by and between Union
Financial Bancshares, Inc. and South Carolina Community Bancshares,
Inc., pursuant to which South Carolina Community will merge with and
into Union Financial, and each share of common stock of South Carolina
Community, par value $0.01 per share, will be converted into the right
to receive at least $5.25 in cash and at least 0.817 shares of Union
Financial common stock, par value $0.01 per share in accordance with the
terms and conditions of the merger agreement. The total value of the
consideration to be received by shareholders of South Carolina Community
will be based upon the average market price of Union Financial common
stock during the 25 trading day period that ends on the trading day that
immediately precedes the third day prior to the merger's closing. If
Union Financial's average market price per share is more than $15.00,
the total merger consideration will be at least $17.51 per South
Carolina Community share. If the average market price per share is
between $12.00 and $12.49, the total merger consideration will be
between $17.01 and $17.49 per South Carolina Community share. If the
average market price per share is less than $12.00, the total merger
consideration will be $17.00 per South Carolina Community share; and
2. To transact such other business as may properly come before the meeting
or any adjournment or postponement.
Only shareholders of record at the close of business on __________, 1999
will be entitled to notice of and to vote at the meeting and at any adjournment
or postponement.
South Carolina Community shareholders have the right to dissent from the
merger and obtain payment in cash of the fair value of their shares of South
Carolina Community common stock under applicable provisions of Delaware law. In
order to perfect dissenters' rights, South Carolina Community shareholders must
give written demand for appraisal of their shares before the taking of the vote
on the merger at the special meeting and must not vote in favor of the merger. A
copy of the applicable Delaware statutory provisions is included as Appendix D
to the accompanying proxy statement and a summary of the provisions can be found
under "The Merger--You Have Appraisal Rights in the Merger."
In the event that there are not sufficient votes to approve the foregoing
proposal at the time of the meeting, the meeting may be adjourned in order to
permit further solicitation by South Carolina Community.
By Order of the Board of Directors
Terri C. Robinson
Corporate Secretary - Controller
Winnsboro, South Carolina
__________, 1999
The board of directors unanimously recommends that you vote "FOR" the
proposal to approve and adopt the merger agreement.
Whether or not you plan to attend the meeting, please complete, sign, date
and return the enclosed proxy in the accompanying pre-addressed postage-paid
envelope.
<PAGE>
Proxy Statement
Table of Contents
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<S> <C>
SUMMARY.................................................................. 1
THE COMPANIES......................................................... 1
Union Financial Bancshares, Inc................................... 1
South Carolina Community Bancshares, Inc.......................... 1
THE UNION FINANCIAL SHAREHOLDERS'
MEETING........................................................... 1
THE SOUTH CAROLINA COMMUNITY
SHAREHOLDERS' MEETING............................................. 2
THE MERGER............................................................ 2
THE MERGER AGREEMENT.................................................. 6
COMPARATIVE PER SHARE DATA............................................... 8
SELECTED FINANCIAL DATA OF
UNION FINANCIAL....................................................... 9
SELECTED FINANCIAL DATA OF SOUTH CAROLINA
COMMUNITY............................................................. 11
SUMMARY COMBINED SELECTED PRO FORMA
FINANCIAL INFORMATION................................................. 13
MARKET PRICE AND DIVIDEND INFORMATION.................................... 14
MEETING OF UNION FINANCIAL SHAREHOLDERS.................................. 16
Place, Date and Time.................................................. 16
Purpose of the Meeting................................................ 16
Who Can Vote at the Meeting........................................... 16
Attending the Meeting................................................. 16
Vote Required......................................................... 16
Voting by Proxy....................................................... 17
Independent Public Accountants........................................ 18
MEETING OF SOUTH CAROLINA COMMUNITY
SHAREHOLDERS.......................................................... 18
Place Date and Time................................................... 18
Purpose of the Meeting................................................ 18
Who Can Vote at the Meeting........................................... 18
Attending the Meeting................................................. 18
Vote Required......................................................... 18
Voting by Proxy....................................................... 19
Participants in Community Federal's ESOP.............................. 20
Independent Public Accountants........................................ 20
OWNERSHIP OF UNION FINANCIAL
COMMON STOCK.......................................................... 21
OWNERSHIP OF SOUTH CAROLINA COMMUNITY
COMMON STOCK.......................................................... 22
THE MERGER............................................................... 23
The Parties to the Merger............................................. 23
Overview of the Transaction; What
South Carolina Community's
Shareholders Will Receive......................................... 23
Tax Considerations for South Carolina
Community's Shareholders.......................................... 25
Background of the Merger.............................................. 27
Recommendation of the Union
Financial Board; Union Financial's
Reasons for the Merger............................................. 30
Recommendation of the South Carolina
Community Board; South Carolina
Community's Reasons for the
Merger............................................................. 31
Union Financial's Financial Advisor
Says the Merger Consideration is
Fair to Union Financial's
Shareholders From a Financial
Point of View...................................................... 31
Opinion of Union Financial's Financial
Advisor............................................................ 32
South Carolina Community's Financial
Advisor Says the Merger
Consideration is Fair to South
Carolina Community's
Shareholders From a Financial
Point of View...................................................... 36
Opinion of South Carolina
Community's Financial Advisor...................................... 37
South Carolina Community
Shareholders Have Appraisal
Rights in the Merger............................................... 42
Interests of South Carolina
Community's Directors and
Officers in the Merger that Differ
From Your Interests................................................ 44
Regulatory Approvals Needed to
Complete the Merger................................................ 47
Accounting Treatment of the Merger.................................... 48
Listing of Union Financial Common
Stock.............................................................. 48
Resale of Union Financial Common
Stock.............................................................. 48
THE MERGER AGREEMENT..................................................... 49
Terms of the Merger................................................... 49
Management and Operations Following the Merger........................ 50
Stock Options......................................................... 50
Bank Merger........................................................... 50
When the Merger Will be Completed..................................... 50
Procedures for Exchanging Your Stock Certificates..................... 51
Conditions to Completing the Merger................................... 51
Conduct of Business Prior to the Merger............................... 52
Covenants of Union Financial and South Carolina Community in the
Merger Agreement.................................................. 54
Representations and Warranties Made by Union Financial and South
Carolina Community in the Merger Agreement........................ 57
Terminating the Merger Agreement...................................... 57
</TABLE>
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Expenses and Termination Fees........................................ 58
Changing the Terms of the Merger Agreement........................... 58
PRO FORMA FINANCIAL INFORMATION......................................... 59
A WARNING ABOUT FORWARD-LOOKING
STATEMENTS........................................................... 66
DESCRIPTION OF UNION FINANCIAL
Common Stock......................................................... 67
General.............................................................. 67
Common Stock......................................................... 67
Preferred Stock...................................................... 67
COMPARISON OF CERTAIN RIGHTS OF
SHAREHOLDERS......................................................... 68
SELECTED PROVISIONS IN THE CERTIFICATE OF
INCORPORATION AND BYLAWS OF UNION
FINANCIAL............................................................ 76
Business Combinations with Related Persons........................... 76
Limitation on Voting Rights.......................................... 77
Board of Directors................................................... 77
Special Meetings of Shareholders..................................... 77
Advance Notice Provisions for Shareholder Nominations and
Proposals........................................................ 77
Preferred Stock...................................................... 78
Amendment of Certificate of Incorporation............................ 78
REGULATION AND SUPERVISION OF UNION
FINANCIAL............................................................ 78
General.............................................................. 78
Holding Company Regulation........................................... 79
Federal Savings Institution Regulation............................... 80
Federal Reserve System............................................... 84
EXPERTS................................................................. 84
WHERE YOU CAN FIND MORE INFORMATION..................................... 85
SHAREHOLDER PROPOSALS................................................... 86
Union Financial Shareholder Proposals for its Annual Meeting......... 86
South Carolina Community Shareholder Proposals....................... 87
</TABLE>
APPENDIX A Agreement and Plan of Merger, dated as of July 1, 1999, by and
between Union Financial Bancshares, Inc. and South Carolina
Community Bancshares, Inc.
APPENDIX B Fairness Opinion of Wheat First Securities
APPENDIX C Fairness Opinion of Trident Financial Corporation
APPENDIX D Section 262 of the Delaware General Corporation Law
APPENDIX E Union Financial 1998 Annual Report to Shareholders
APPENDIX F Union Financial Quarterly Report on Form 10-QSB For the Nine Months
Ended June 30, 1999
APPENDIX G South Carolina Community Annual Report on Form 10-KSB For the Year
Ended June 30, 1999 [to be filed as part of a pre-effective
amendment when available]
<PAGE>
SUMMARY
This summary does not contain all of the information that is important to
you. You should carefully read the entire joint proxy statement/prospectus to
fully understand the merger.
THE COMPANIES
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Union Financial Bancshares, Inc. Union Financial is the savings and loan holding company for
203 West Main Street Provident Community Bank, based in Union, South Carolina.
c/o Provident Community Bank Union Financial operates through its main office and three
Union, South Carolina 29379 full service branch offices in Union, Laurens and
(864) 427-9000 Jonesville, South Carolina. At June 30, 1999, Union
Financial had total assets of $204.3 million, deposits of
$144.5 million and shareholders' equity of $14.9 million.
South Carolina Community South Carolina Community is the savings and loan
Bancshares, holding company for Community Federal Savings Bank.
Inc. Community Federal Savings Bank operates two offices
110 South Congress Street in Winnsboro, South Carolina. At June 30, 1999, South
Winnsboro, South Carolina 29180 Carolina Community had total assets of $45.4 million,
(803) 635-5536 deposits of $35.9 million, and shareholders' equity of
$9.0 million.
THE UNION FINANCIAL SHAREHOLDERS' MEETING
Place, Date and Time (page__) Union Financial's special meeting will be held in the
Community Room at the University of South Carolina, Union
Campus, at Academy and North Mountain Streets, Union, South
Carolina, __________, 1999 at __:00 a.m., local time.
Purpose of the Meeting (page__) At the special meeting, you will be asked to approve a
merger agreement that provides for the merger of Union
Financial with South Carolina Community.
Who Can Vote At the Meeting You can vote at the meeting of Union Financial share-
(page__) holders if you owned Union Financial common stock at the
close of business on __________, 1999. You will be able to
cast one vote for each share of Union Financial common stock
you owned at that time. As of __________, 1999, there were
shares _____________ of Union Financial common stock
outstanding.
What Vote is Required for Approval of In order to approve the merger agreement, the holders
the Merger Agreement (page__) of a majority of the outstanding shares of Union Financial
common stock entitled to vote must vote in its favor. You
can vote your shares by attending the meeting and voting in
person or by mailing the enclosed proxy card.
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1
<PAGE>
THE SOUTH CAROLINA COMMUNITY SHAREHOLDERS' MEETING
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Place, Date and Time (page__) The special meeting will be held at __________________,
Winnsboro, South Carolina on __________, 1999 at __:00 a.m.,
local time.
Purpose of the Meeting (page__) At the special meeting, you will be asked to approve a
merger agreement that provides for the merger of South
Carolina Community with Union Financial.
Who Can Vote At the Meeting You can vote at the meeting of South Carolina Community
(page__) shareholders if you owned South Carolina Community common
stock at the close of business on __________, 1999. You will
be able to cast one vote for each share of South Carolina
Community common stock you owned at that time. As of
__________, 1999, there were shares of South Carolina
Community common stock outstanding.
What Vote is Required for Approval of In order to approve the merger agreement, the holders of
the Merger Agreement (page__) a majority of the outstanding shares of South Carolina
Community common stock entitled to vote must vote in its
favor. You can vote your shares by attending the meeting and
voting in person or by mailing the enclosed proxy card.
THE MERGER
Overview of the Transaction South Carolina Community has agreed to merge with Union
(page __) Financial, with Union Financial being the surviving
corporation. Immediately after this merger, Community
Federal Savings Bank will merge with Provident Community
Bank, with Provident Community Bank being the surviving
institution. As a result of this transaction, South Carolina
Community and Community Federal Savings Bank will no longer
exist. Union Financial intends to operate Community
Federal's offices as branches of Provident Community Bank.
What South Carolina Community As a South Carolina Community shareholder, each of your
Shareholders Will Receive (page __) shares of South Carolina Community common stock will
automatically become exchangeable for Union Financial common
stock and a cash payment. The amount of cash and stock you
receive, referred to as the merger consideration, will
depend on the average market price of Union Financial stock
over a certain period of time prior to the merger's closing
date. In all circumstances, the cash portion of the merger
----
consideration must be at least $5.25. The stock portion of
-----
the merger consideration must be at least 0.817 shares, and
can be no more than 0.980 shares of Union Financial stock.
If Union Financial's average market price per share during
this period is between $12.50 and $15.00, the total merger
consideration will be $17.50 per South Carolina Community
share. If Union Financial's average market price per share
is more than $15.00, the
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2
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total merger consideration will be at least $17.51 per South
Carolina Community share. If the average market price per
share is between $12.00 and $12.49, the total merger
consideration will be between $17.01 and $17.49 per South
Carolina Community share. If the average market price per
share is less than $12.00, the total merger consideration
will be $17.00 per South Carolina Community share. As of
______________________, the value of the merger
consideration would have been $_______ per share; $_____ in
cash plus ________ shares of Union Financial stock. You will
have to surrender your South Carolina Community stock
certificates to receive the cash payment and new stock
certificates. Union Financial will send you written
instructions for surrendering your certificates after we
have completed the merger. For more information on how this
exchange procedure works and the possible adjustment of the
amount exchanged for your stock, see page __ of this
document.
Shares of South Carolina Community are quoted on the Nasdaq
SmallCap Market. On July 1, 1999, which was the last trading
day before we announced the merger, South Carolina Community
common stock closed at $14.25 per share.
Taxable Transaction for South For United States federal income tax purposes, your exchange
Carolina Community Shareholders of shares of South Carolina Community common stock
(page__) for shares of Union Financial common stock generally will
not cause you to recognize any gain or loss. However, you
should recognize gain equal to the amount of cash you
receive - not counting cash instead of a fractional share of
Union Financial stock - or the amount of gain you realize,
whichever is lower. The amount of gain you realize equals
the amount of cash you receive plus the fair market value of
----
the Union Financial stock you receive minus your adjusted
-----
tax basis in the shares of South Carolina Community stock
you surrender. The gain generally should be a capital gain,
but part or all of it may be treated as ordinary income if
the exchange has the effect of a dividend to you.
In addition, if you receive cash instead of a fractional
share of Union Financial stock, you should generally
recognize gain or loss measured by the difference between
the amount of cash and the portion of the basis of your
shares of South Carolina Community stock allocated to the
fractional share. If you recognize gain, under this rule,
the gain should generally be capital gain, but part or all
of the cash you receive may be ordinary income for tax
purposes if your receipt of the cash has the effect of a
dividend to you. You should consult
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3
<PAGE>
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your own tax advisor for a full understanding of the
merger's tax consequences that are particular to you.
Recommendations to Shareholders The boards of directors of Union Financial and South
(page__) Carolina Community believe that the merger is advisable and
fair to the shareholders of both companies, and unanimously
recommend that you vote "FOR" the proposal to approve the
merger agreement.
For a discussion of the history of the merger and the
factors considered by the boards of directors in approving
the merger agreement, please see pages __ through __.
The Transaction is Fair to Trident Securities, a division of McDonald Investments, Inc.
Stockholders According to the ("Trident"), has delivered to the South Carolina Community
Companies' Financial Advisors board of directors its opinion that, as of the date of
(page__) this document, the merger consideration is fair to the South
Carolina Community shareholders from a financial point of
view. Wheat First Securities has delivered to the Union
Financial board of directors its opinion that, as of the
date of this document, the merger consideration being paid
to South Carolina Community's shareholders is fair to Union
Financial's shareholders from a financial point of view.
Copies of these opinions are provided as Appendices B and C
to this document, respectively. You should read these
opinions completely to understand the procedures followed,
assumptions made, matters considered, qualifications and
limitations on the review made by Wheat First Securities and
Trident in providing these opinions. Wheat First Securities
estimates that it will receive professional fees totaling
approximately $100,000 from Union Financial in connection
with the merger. Trident estimates that it will receive
professional fees totaling approximately $91,500 from South
Carolina Community for its services in connection with the
merger.
South Carolina Community Shareholders Delaware law provides you with dissenters' appraisal rights
Have Appraisal Rights in the Merger in the merger. This means that if you are not satisfied
(page__) with the amount you are receiving in the merger, you are
legally entitled to have the value of your shares
independently determined and to receive payment based on
that valuation. To exercise your dissenters' rights you
must, among other things, deliver a written objection to the
merger to South Carolina Community at or before the special
meeting and you must not vote in favor of the merger.
Objections to the merger should be addressed to South
Carolina Community's Corporate Secretary and sent to South
Carolina Community Bancshares, Inc., 110 South Congress
Street, Winnsboro, South Carolina 29180. Your failure to
follow exactly the procedures specified under Delaware law
will result in the loss of your dissenters' rights. A copy
of the dissenters' rights
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
provisions of Delaware law is provided as Appendix D to this
document.
Interests of South Carolina Some of South Carolina Community's directors and officers
Community's Directors and Officers have interests in the merger that are different from, or
in the Merger that Differ From Your are in addition to, their interests as shareholders in
Interests (page__) South Carolina Community. The members of South Carolina
Community's board of directors knew about these additional
interests, and considered them, when they approved the
agreement and the merger. These include:
. shares of restricted stock will vest as a result of the
consummation of the merger;
. the President and Chief Executive Officer of South
Carolina Community will enter into an employment agreement
with Union Financial when the merger closes;
. Union Financial will increase its board to allow for
the appointment of three members of the South Carolina
Community board;
. receipt of a cash payment by certain directors and
officers in exchange for the cancellation of options to
purchase South Carolina Community common stock. This payment
will only be made to the extent the value of the merger
consideration exceeds the price at which each such option
may be exercised; and
. the merger agreement provides for protection of
directors and officers against claims.
Differences in the Rights of Union After the merger is completed, South Carolina Community's
Financial's and South Carolina shareholders will automatically become shareholders of
Community's Shareholders (page ___) Union Financial. Their rights as shareholders of Union
Financial will be governed by Delaware General Corporation
Law and by Union Financial's Certificate of Incorporation
and bylaws. The rights of Union Financial's shareholders, as
defined by Union Financial's Certificate of Incorporation
and bylaws, do not materially differ from South Carolina
Community's shareholders.
Regulatory Approvals Needed to We cannot complete the merger unless it is approved by the
Complete the Merger (page__) Office of Thrift Supervision. Union Financial has filed or
soon will file all of the required applications. As of the
date of this proxy statement, Union Financial has not
received any of the required approvals. While we do not know
of any reason why Union Financial would not be able to
obtain the necessary approvals in a timely manner, we cannot
be certain when or if Union Financial will receive them.
</TABLE>
5
<PAGE>
THE MERGER AGREEMENT
A copy of the merger agreement is provided as Appendix A to this joint
proxy statement/prospectus. Please read the agreement. It is the legal document
that governs the merger.
<TABLE>
<S> <C>
Conditions to Completing the Merger The completion of the merger depends on a number of
(page__) conditions being met. In addition to the parties complying
with the merger agreement, these include:
. approval of the merger agreement by Union Financial's
and South Carolina Community's shareholders;
. approval of the merger by federal and state regulatory
authorities;
. the absence of any injunction or legal restraint
blocking the merger or government proceedings trying to
block the merger;
. the absence of any law or regulation that makes the
merger illegal;
. South Carolina Community shareholders representing no
more than 10% of the outstanding South Carolina Community
shares having exercised dissenters' rights;
. the listing by Union Financial of the shares of Union
Financial common stock to be issued in exchange for shares
of South Carolina Community common stock on the stock market
on which Union Financial stock is traded; and
. receipt by Union Financial of letters from South
Carolina Community "affiliates," including South Carolina
Community's officers and directors, agreeing to vote in
favor of the merger at the South Carolina Community special
meeting.
Where the law permits, Union Financial and South Carolina
Community could decide to complete the merger even though
one or more of these conditions has not been met. We cannot
be certain when or if the conditions to the merger will be
satisfied or waived, or that the merger will be completed.
Terminating the Merger Agreement Union Financial and South Carolina Community can agree at
(page __) any time to terminate the merger agreement without
completing the merger, even if the shareholders have
approved it. Also, either of us can decide, without the
consent of the other, to terminate the agreement if:
. Union Financial or South Carolina Community's
shareholders do not approve the merger agreement;
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
. a required regulatory approval is denied or a
governmental authority blocks the merger;
. we do not complete the merger by March 31, 2000;
. the other party breaches a representation, warranty or
covenant that would have a material adverse effect on the
party seeking to terminate; or
. the board of directors of Union Financial or South
Carolina Community withdraws its recommendation of the
merger.
In addition, South Carolina Community may terminate the
merger agreement if South Carolina Community's board of
directors determines that it must accept a superior offer
from a third party in the exercise of its fiduciary duties.
Termination Fees (page __) If South Carolina Community terminates the merger agreement
in order to accept a superior offer, South Carolina
Community will pay Union Financial a termination fee of
$500,000.
If either party terminates the merger agreement because the
other party is in material noncompliance with the merger
agreement or breaches a representation, warranty or
covenant, which breach is expected to have a material
adverse effect, and the material adverse effect cannot be
cured within 30 calendar days, the breaching party will pay
in cash the lesser of all documented expenses and fees
incurred by the non-breaching party, or $125,000.
If either party terminates the merger agreement because the
other party has willfully breached a representation,
warranty or covenant, then the breaching party will pay the
non-breaching party's expenses related to the merger. The
non-breaching party may also pursue appropriate legal and
equitable remedies against the breaching party.
Changing the Terms of the Merger We can agree to amend the merger agreement, and each of
Agreement (page __) us can waive our right to require the other party to adhere
to the terms and conditions of the agreement, where the law
allows. However, South Carolina Community shareholders would
have to approve any amendment or waiver that reduces or
changes the consideration to be received by them.
</TABLE>
7
<PAGE>
COMPARATIVE PER SHARE DATA
The following table shows information about our income per common share,
dividends per share and book value per share, and similar information reflecting
the merger (which we refer to as "pro forma" information). In presenting the
comparative pro forma information for certain time periods, we assumed that we
had been merged throughout those periods.
The merger will be accounted for as a "purchase," which means that the
purchase price will be allocated to assets acquired and liabilities assumed
based on their estimated fair values at the time the companies are combined. The
information listed as "South Carolina Community pro forma equivalent" was
obtained by multiplying the pro forma amounts by the market value of _______
shares of Union Financial common stock on _____________, the last practicable
trading date prior to the mailing of this document, and adding $_________, in
accordance with the formula prescribed in the merger agreement. We present this
information to reflect the fact that South Carolina Community shareholders will
receive ____ shares of Union Financial common stock and cash in accordance with
the formula, for each share of South Carolina Community common stock exchanged
in the merger. We expect that we will incur merger and integration charges as a
result of combining our companies. We also anticipate that the merger will
provide the new company with financial benefits that include reduced operating
expenses and the opportunity to earn more revenue. The pro forma information,
while helpful in illustrating the financial characteristics of the new company
under one set of assumptions, does not reflect these expenses or benefits and,
accordingly, does not attempt to predict or suggest future results. It also does
not necessarily reflect what the historical results of the combined company
would have been had our companies been combined.
Because Union Financial's fiscal year ends on September 30 and South
Carolina Community's ends on June 30, the financial data used in these tables
for "Year Ended September 30, 1998" presents information for Union Financial at
or for its year ended September 30, 1998, but the financial information used in
these tables for "Year Ended September 30, 1998" for South Carolina Community is
for its year end, which is June 30, 1998. By the same token, the financial data
---
used for Union Financial's financial information for "Nine Months Ended June 30,
1999" reflects financial data for June 30, 1999, but the financial data used for
South Carolina Community's financial information is for its nine months ended
March 31, 1999.
The information in the following table is based on, and should be read
together with, the historical financial information that Union Financial and
South Carolina Community have presented in their prior Securities and Exchange
Commission filings. This material either accompanies this document or is
incorporated into this document by reference. See "Where You Can Find More
Information" on page ___.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
June 30, 1999 September 30, 1998
----------------- ------------------
<S> <C> <C>
Book Value Per Share:
Union Financial historical.................... $ 11.03 $ 11.97
South Carolina Community historical........... 16.86 16.24
Pro forma combined............................ 12.74
South Carolina Community pro
forma equivalent............................. 12.90
Cash Dividends Declared Per Share:
Union Financial historical.................... $ 0.28 $ 0.37
South Carolina Community historical........... 0.34 0.64
Pro forma combined............................ 0.28 0.37
South Carolina Community pro
forma equivalent.....
Diluted Net Income Per Share:
Union Financial historical.................... $ 0.86 $ 1.17
South Carolina Community historical........... 0.60 0.68
Pro forma combined............................ 0.77 1.01
South Carolina Community pro
forma equivalent....
</TABLE>
8
<PAGE>
SELECTED FINANCIAL DATA OF UNION FINANCIAL
The following tables show summarized historical financial data for Union
Financial. The information in the following tables is based on historical
financial information that either Union Financial has presented in its prior
filings with the SEC or that Provident Community Bank has presented in its prior
filings with the Office of Thrift Supervision. You should read this summary
financial information in connection with this historical financial information.
The audited financial statements of Union Financial relating to information
provided at September 30, 1998-1995 are included in Union Financial's 1998
annual report to shareholders, which is included as Appendix E. The unaudited
financial statements of Union Financial containing the information at June 30,
1999 and 1998 is included in Union Financial's quarterly report on Form 10-QSB
for the nine month period ended June 30, 1999 which is included as Appendix F.
Union Financial's unaudited financial statements for the nine months ended June
30, 1999 and 1998 included normal, recurring adjustments necessary to fairly
present the data for these periods. The unaudited data is not necessarily
indicative of expected results of a full year's operation.
<TABLE>
<CAPTION>
At June 30, At September 30,
------------------ -----------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets.................................... $204,362 $183,066 $189,286 $171,244 $128,133 $120,879 $122,313
Loans receivable, net........................... 143,047 148,527 142,202 129,957 85,997 73,431 71,006
Securities, held to maturity.................... 799 2,810 2,699 7,811 11,622 12,682 14,579
Securities available for sale................... 38,927 15,464 26,856 15,855 22,174 27,198 28,562
Cash and interest-bearing deposits.............. 4,688 3,700 3,593 7,821 3,685 3,805 3,223
Deposits........................................ 144,582 129,997 129,873 117,914 93,715 94,750 97,310
Advances from FHLB.............................. 42,825 36,468 41,441 37,979 20,488 13,080 13,400
Shareholders' equity, substantially restricted.. 14,930 14,747 15,300 13,527 12,254 11,856 10,693
</TABLE>
<TABLE>
<CAPTION>
At or For the
Nine Months
Ended
June 30, At or For the Year Ended September 30,
------------------ ---------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income...................... $ 10,223 $ 9,936 $ 13,405 $ 11,855 $ 9,004 $ 9,265 $ 8,767
Interest expense..................... 5,664 5,570 7,549 6,647 5,050 5,260 3,888
-------- -------- -------- -------- -------- -------- --------
Net interest income.................. 4,559 4,366 5,856 5,208 3,954 4,005 4,879
Provision for loan losses............ 70 108 -- 243 -- 105 335
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision 4,489 4,258 5,856 4,965 3,954 3,900 4,544
for loan losses...................
Non-interest income.................. 1,000 874 1,038 953 506 381 275
Non-interest expense................. 3,585 3,294 4,447 3,616 3,224 2,588 2,727
-------- -------- -------- -------- -------- -------- --------
Income before income taxes........... 1,904 1,838 2,447 2,302 1,236 1,693 2,092
Income taxes......................... 689 675 897 858 374 639 776
-------- -------- -------- -------- -------- -------- --------
Net income........................... $ 1,215 $ 1,163 $ 1,550 $ 1,444 $ 862 $ 1,054 1,316
======== ======== ======== ======== ======== ======== ========
Per Share Data:
Basic net income..................... $ 0.92 $ 0.92 $ 1.23 $ 1.17 $ 0.71 $ 0.89 $ 1.28
======== ======== ======== ======== ======== ======== ========
Diluted net income................... $ 0.86 $ 0.86 $ 1.15 $ 1.09 $ 0.69 $ 0.89 $ 1.28
======== ======== ======== ======== ======== ======== ========
Dividends............................ $ 0.28 $ 0.27 $ 0.37 $ 0.35 $ 0.33 $ 0.33 $ 0.38
======== ======== ======== ======== ======== ======== ========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
At or For the
Nine Months
Ended
June 30, At or For the Year Ended September 30,
------------------------- ---------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ----------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Consolidated Financial
Ratios and Other Data:
Return on average assets/(1)/............... 0.84% 0.89% 0.87% 0.92% 0.73% 0.83% 1.30%
Return on average equity/(2)/............... 10.52 10.97 10.77 11.21 7.01 9.38 14.56
Interest rate spread during period/(3)/..... 3.34 3.38 3.11 3.16 3.01 2.96 4.04
Net interest margin/(4)/.................... 3.64 3.68 3.42 3.44 3.46 3.27 4.29
Non-interest expenses to average assets..... 2.47 2.52 2.52 2.31 2.73 2.05 2.33
Non-performing assets to total assets/(5)/.. 0.08 0.49 0.36 0.45 0.88 0.28 0.27
Allowance for loan losses to total loans.... 0.60 0.79 0.79 0.81 0.93 1.19 1.06
Dividend payout ratio/(6)/.................. 24.28 24.93 30.08 30.13 46.87 37.40 29.92
</TABLE>
____________________
(1) Calculated by dividing net income by average outstanding assets.
(2) Calculated by dividing net income by average shareholders' equity.
(3) Represents the difference between the weighted average yield on average
interest-earning assets and the weighted average cost of average interest-
bearing liabilities.
(4) Represents net interest income as a percent of average interest-earning
assets.
(5) Non-performing assets consist of nonaccrual loans and foreclosed real
estate.
(6) Dividend payout ratio is calculated by dividing cash dividends by net
income.
10
<PAGE>
SELECTED FINANCIAL DATA OF SOUTH CAROLINA COMMUNITY
The following tables show summarized historical financial data for South
Carolina Community. The information in the following tables is based on
historical financial information that either South Carolina Community has
presented in its prior filings with the SEC or Community Federal has presented
in its prior filings with the OTS. You should read this summary financial
information in connection with this historical financial information. The
audited financial statements of South Carolina Community and the unaudited
financial statements of South Carolina Community relating to information for the
years ended June 30, 1999-1995 are included in South Carolina Community's annual
report on Form 10-KSB which is included as Appendix G to this document.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets............................................ $ 45,433 $ 47,992 $ 46,598 $ 44,172 $ 43,947
Loans receivable, net................................... 39,565 36,007 35,955 33,338 33,047
Securities, held to maturity............................ 2,711 1,890 3,829 5,240 6,690
Securities available for sale........................... 66 47 -- -- --
Cash and interest-bearing deposits...................... 1,704 8,678 5,678 4,587 3,149
Deposits................................................ 35,864 37,997 34,024 31,273 30,106
Advances from FHLB...................................... -- -- -- -- --
Shareholders' equity, substantially restricted.......... 9,037 9,414 11,962 12,309 13,350
</TABLE>
<TABLE>
<CAPTION>
At or For The Year Ended June 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income......................................... $ 3,426 $ 3,519 $ 3,500 $ 3,405 $ 3,429
Interest expense........................................ 1,664 1,715 1,635 1,643 1,351
-------- -------- -------- -------- --------
Net interest income..................................... 1,762 1,804 1,865 1,763 2,078
Provision for loan losses............................... -- -- -- -- --
-------- -------- -------- -------- --------
Net interest income after provision 1,762 1,804 1,865 1,763 2,078
for loan losses......................................
Non-interest income..................................... 106 132 88 35 110
Non-interest expense.................................... 1,168 1,266 1,272 991 705
-------- -------- -------- -------- --------
Income before income taxes.............................. 700 670 681 807 1,483
Income taxes............................................ 277 262 258 319 556
-------- -------- -------- -------- --------
Net income.............................................. $ 423 $ 408 $ 423 $ 488 $ 927
======== ======== ======== ======== ========
Per Share Data:
Basic net income........................................ $ 0.80 $ 0.70 $ 0.62 $ 0.67 $ 1.28
======== ======== ======== ======== ========
Diluted net income...................................... $ 0.79 $ 0.68 $ 0.62 $ 0.67 $ 1.28
======== ======== ======== ======== ========
Dividends............................................... $ 0.68 $ 0.64 $ 0.60 $ 0.60 $ 0.50
======== ======== ======== ======== ========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
---------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Selected Consolidated Financial
Ratios and Other Data:
Return on average assets/(1)/........................... 0.92% 0.88% 0.93% 1.11% 2.10%
Return on average equity/(2)/........................... 4.52 4.00 3.46 3.77 7.07
Interest rate spread during period/(3)/................. 3.05 2.95 2.91 2.59 3.55
Net interest margin/(4)/................................ 3.99 4.02 4.21 4.11 4.83
Non-performing assets to total assets/(5)/.............. 1.57 1.87 1.06 1.44 1.01
Non-interest expenses to average assets................. 2.55 2.74 2.78 2.25 1.60
Allowance for loan losses to total loans................ 0.74 0.81 0.81 0.87 0.88
Dividend payout ratio/(6)/.............................. 83.69 84.31 92.43 86.68 40.45
</TABLE>
________________________
(1) Calculated by dividing net income by average outstanding assets.
(2) Calculated by dividing net income by average shareholders' equity.
(3) Represents the difference between the weighted average yield on average
interest-earning assets and the weighted average cost of average
interest-bearing liabilities.
(4) Represents net interest income as a percent of average interest-earning
assets.
(5) Non-performing assets consist of nonaccrual loans and foreclosed real
estate.
(6) Dividend payout ratio is calculated by dividing cash dividends by net
income.
12
<PAGE>
SUMMARY COMBINED SELECTED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined selected financial information
combine Union Financial's historical results with South Carolina Community's
historical results as if the merger had become effective as of the dates
indicated in the case of the balance sheet information presented, and as if the
merger had become effective at the beginning of the periods indicated in the
case of the income statement and per share information presented. The pro
forma information reflects the purchase method of accounting.
Because Union Financial's fiscal year ends on September 30 and South
Carolina Community's ends on June 30, the financial data used in these tables
for "At or For the Year Ended September 30, 1998" presents information for Union
Financial at or for its year ended September 30, 1998, but the financial
information used in these tables for "At or For the Year Ended September 30,
1998" for South Carolina Community is for its year end, which is June 30, 1998.
By the same token, the rule requires that the financial data used for Union
Financial's financial information for "At June 30, 1999" reflects financial data
for June 30, 1999, but the financial data used for South Carolina Community's
financial information is for its nine months ended March 31, 1999.
When reviewing these tables, you should also read the historical financial
statements, including their notes, of Union Financial and South Carolina
Community. See "Where You Can Find More Information" on page __ of this
document. You should also read the more detailed pro forma financial
information, including their notes, that are found on page ___ of this document.
This information is presented for informational purposes only. You should
not assume that the parties would have achieved the combined pro forma results
if they had actually been combined during the periods shown.
There may be certain cost savings and/or revenue enhancements that will
result from the merger. The information furnished in these tables does not
reflect either the cost savings or the revenue enhancements.
<TABLE>
<CAPTION>
At or For the At or For
Nine Months the Year Ended
Ended June 30, September 30,
1999 1998
--------------- ----------------------
(In thousands,
except per share data)
<S> <C> <C>
Pro Forma Consolidated Income Statement Data:
Interest income......................................... $ 12,742 $ 16,849
Interest expense........................................ 6,956 9,300
--------------- ----------------------
Net interest income..................................... 5,786 7,549
Provision for loan losses............................... 70 0
--------------- ----------------------
Net interest income after provision for loan losses..... 5,716 7,549
Non-interest income..................................... 1,093 1,170
Non-interest expense.................................... 4,454 5,715
--------------- ----------------------
Income before income taxes.............................. 2,355 3,004
Income Taxes............................................ 867 1,117
--------------- ----------------------
Net income.............................................. $ 1,488 $ 1,887
=============== ======================
Pro Forma Consolidated Balance Sheet Data:
Total assets............................................ $ 250,573
Loans receivable, net................................... 182,262
Deposits................................................ 180,288
Total shareholders' equity.............................. 24,546
Pro Forma Per Share Data:
Basic net income........................................ $ 1,488 $ 1,887
Diluted net income...................................... .77 1.01
Dividends declared...................................... 0.28 0.37
</TABLE>
13
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
Union Financial common stock is listed on the Nasdaq SmallCap Market under
the symbol "UFBS." South Carolina Community common stock is listed on the
Nasdaq SmallCap Market under the symbol "SCCB."
The following table lists the high and low prices per share for Union
Financial common stock as reported on the Nasdaq SmallCap Market and the
quarterly cash dividends declared by Union Financial for the periods indicated.
Union Financial common stock was not traded on the Nasdaq SmallCap Market until
July 10, 1998.
<TABLE>
<CAPTION>
Union Financial Common
Stock
---------------------------------------
High Low Dividends
--------- --------- ---------
<S> <C> <C> <C>
1997
Quarter ended March 31, 1997........................ N/A N/A $ 0.135
Quarter ended June 30, 1997......................... N/A N/A 0.135
Quarter ended September 30, 1997.................... N/A N/A 0.135
Quarter ended December 31, 1997..................... N/A N/A 0.140
1998
Quarter ended March 31, 1998........................ N/A N/A 0.093
Quarter ended June 30, 1998......................... N/A N/A 0.093
Quarter ended September 30, 1998.................... 16.67 13.33 0.093
Quarter ended December 31, 1998..................... 14.29 12.86 0.093
1999
Quarter ended March 31, 1999........................ 14.50 12.00 0.093
Quarter ended June 30, 1999......................... 14.00 10.00 0.093
Quarter ended September 30, 1999 (through _______)..
</TABLE>
<TABLE>
<CAPTION>
South Carolina Community
Common Stock
---------------------------------------
High Low Dividends
--------- --------- ---------
<S> <C> <C> <C>
1997
Quarter ended March 31, 1997........................ $ 19.75 $ 16.50 N/A
Quarter ended June 30, 1997......................... 19.25 17.50 0.30
Quarter ended September 30, 1997.................... 25.25 18.50 N/A
Quarter ended December 31, 1997..................... 24.50 21.50 0.32
1998
Quarter ended March 31, 1998........................ 23.63 21.50 N/A
Quarter ended June 30, 1998......................... 21.88 21.00 0.32
Quarter ended September 30, 1998.................... 22.88 18.25 N/A
Quarter ended December 31, 1998..................... 17.50 13.25 0.34
1999
Quarter ended March 31, 1999........................ 15.00 13.25 N/A
Quarter ended June 30, 1999......................... 14.75 12.50 0.34
Quarter ended September 30, 1999 (through _______)..
</TABLE>
14
<PAGE>
The following table shows the closing price per share of Union Financial
common stock, and the equivalent per share price for South Carolina Community
common stock giving effect to the merger on (1) June 30, 1999, which is the last
business day preceding the public announcement of the proposed merger; and (2)
_________, 1999, which is the last practicable trading day prior to the mailing
of this document. The equivalent per share price of South Carolina Community
common stock was determined by ascertaining the total value of the merger
consideration (cash and stock) to which each share of South Carolina Community
common stock would be exchanged based on the formula explained on page __, as of
July 1, 1999 and the last practicable trading date prior to the mailing of this
document.
<TABLE>
<CAPTION>
Equivalent
Price Per
Share Of
South South
Carolina Carolina
Union Financial Community Community
Common Stock Common Stock Stock
--------------- -------------- ------------
<S> <C> <C> <C>
June 30, 1999............ $ 12.25 $ 14.25 $ 17.50
__________, 1999......... $ $ $
</TABLE>
You should obtain current market quotations for Union Financial and South
Carolina Community common stock as their market prices will fluctuate between
the date of this document and the date on which the merger is completed, and
thereafter.
As of __________, 1999, there were approximately ___ holders of record of
South Carolina Community common stock. This number does not reflect the number
of persons or entities who may hold their stock in nominee or "street" name
through brokerage firms.
15
<PAGE>
MEETING OF UNION FINANCIAL SHAREHOLDERS
Place, Date and Time
The meeting will be held in the Community Room at the University of South
Carolina, Union Campus, at Academy and North Mountain Streets, Union, South
Carolina on _______, __________, 1999, at __:00 a.m., local time.
Purpose of the Meeting
The purpose of the meeting is:
1. to consider and vote on a proposal to approve and adopt the merger
agreement; and
2. to act on any other matters brought before the meeting.
Who Can Vote at the Meeting
You are entitled to vote your Union Financial common stock if the records
of Union Financial showed that you held your shares as of the close of business
on __________, 1999. As of the close of business on that date, a total of
_________ shares of Union Financial common stock were outstanding. Each share of
common stock has one vote. As provided in Union Financial's Certificate of
Incorporation, record holders of Union Financial common stock who beneficially
own, either directly or indirectly, in excess of 10% of Union Financial's
outstanding shares are not entitled to any vote in respect of the shares held in
excess of the 10% limit.
Attending the Meeting
If you are a beneficial owner of Union Financial common stock held by a
broker, bank or other nominee (i.e., in "street name"), you will need proof of
ownership to be admitted to the meeting. A recent brokerage statement or letter
from a bank or broker are examples of proof of ownership. If you want to vote
your shares of Union Financial common stock held in street name in person at the
meeting, you will have to get a written proxy in your name from the broker, bank
or other nominee who holds your shares.
Vote Required
The special meeting will be held if a majority of the outstanding shares of
common stock entitled to vote is represented at the meeting. If you return valid
proxy instructions or attend the meeting in person, your shares will be counted
for purposes of determining whether there is a quorum, even if you abstain from
voting. Broker non-votes also will be counted for purposes of determining the
existence of a quorum. A broker non-vote occurs when a broker, bank or other
nominee holding shares for a beneficial owner does not vote on a particular
proposal because the nominee does not have discretionary voting power with
respect to that item and has not received voting instructions from the
beneficial owner. Under applicable rules, brokers, banks and other nominees may
not exercise their voting discretion on the proposal to approve and adopt the
merger agreement and, for this reason, may not vote shares held for beneficial
owners without specific instructions from the beneficial owners.
The approval and adoption of the merger agreement will require the
affirmative vote of the holders of at least a majority of the outstanding shares
of common stock entitled to vote at the meeting. Failure to
16
<PAGE>
return a properly executed proxy card or to vote in person will have the same
effect as a vote against the merger agreement. Abstentions and broker non-votes
also will have the same effect as a vote against the merger agreement.
As of June 30, 1999, directors and executive officers of Union Financial,
and persons closely associated with them, beneficially owned 322,848 shares of
Union Financial common stock, not including shares that may be acquired upon the
exercise of stock options. This equals approximately 21% of the outstanding
shares of Union Financial common stock. As of the same date, neither South
Carolina Community nor any of its directors and executive officers owned any
shares of Union Financial common stock.
Voting by Proxy
This proxy statement is being sent to you by the board of directors of
Union Financial for the purpose of requesting that you allow your shares of
Union Financial common stock to be represented at the special meeting by the
persons named in the enclosed proxy card. All shares of Union Financial common
stock represented at the meeting by properly executed proxies will be voted in
accordance with the instructions indicated on the proxy card. If you sign and
return a proxy card without giving voting instructions, your shares will be
voted as recommended by Union Financial's board of directors. The board
recommends a vote "FOR" approval of the merger agreement.
If any matters not described in this proxy statement are properly presented
at the special meeting, the persons named in the proxy card will use their own
judgment to determine how to vote your shares. This includes a motion to adjourn
or postpone the meeting in order to solicit additional proxies. However, no
proxy voted against the proposal to approve the merger agreement will be voted
in favor of an adjournment or postponement to solicit additional votes in favor
of the merger agreement. Union Financial does not know of any other matters to
be presented at the meeting.
You may revoke your proxy at any time before the vote is taken at the
meeting. To revoke your proxy you must either advise the Corporate Secretary of
Union Financial in writing before your common stock has been voted at the
special meeting, deliver later proxy instructions, or attend the meeting and
vote your shares in person. Attendance at the special meeting will not in itself
constitute revocation of your proxy.
If your Union Financial common stock is held in street name, you will
receive instructions from your broker, bank or other nominee that you must
follow in order to have your shares voted. Your broker or bank may allow you to
deliver your voting instructions via the telephone or the Internet. Please see
the instruction form that accompanies this proxy statement.
Union Financial will pay the cost of this proxy solicitation. In addition
to soliciting proxies by mail, directors, officers and employees of Union
Financial may solicit proxies personally and by telephone. None of these persons
will receive additional or special compensation for soliciting proxies. Union
Financial will, upon request, reimburse brokers, banks and other nominees for
their expenses in sending proxy materials to their customers who are beneficial
owners and obtaining their voting instructions. Union Financial has retained
__________________ to assist in soliciting proxies for a fee of $_____ plus
reimbursable expenses up to $_____.
17
<PAGE>
Independent Public Accountants
Elliott, Davis & Company, LLP has served as Union Financial's independent
auditors since June 1996. A representative of Elliott, Davis is expected to be
present at the special meeting and will have an opportunity to make a statement
if he or she desires and will be able to respond to appropriate questions.
MEETING OF SOUTH CAROLINA COMMUNITY SHAREHOLDERS
Place, Date and Time
The meeting will be held at _____________________________________,
Winnsboro, South Carolina on _______, __________, 1999, at __:00 a.m., local
time.
Purpose of the Meeting
The purpose of the meeting is:
1. to consider and vote on a proposal to approve and adopt the merger
agreement; and
2. to act on any other matters brought before the meeting.
Who Can Vote at the Meeting
You are entitled to vote your South Carolina Community common stock if the
records of South Carolina Community show that you held your shares as of the
close of business on __________, 1999. As of the close of business on that date,
a total of ________ shares of South Carolina Community common stock were
outstanding. Each share of common stock has one vote. As provided in South
Carolina Community's Certificate of Incorporation, record holders of South
Carolina Community common stock who beneficially own, either directly or
indirectly, in excess of 10% of South Carolina Community's outstanding shares
are not entitled to any vote in respect of the shares held in excess of the 10%
limit.
Attending the Meeting
If you are a beneficial owner of South Carolina Community common stock held
by a broker, bank or other nominee (i.e., in "street name"), you will need proof
of ownership to be admitted to the meeting. A recent brokerage statement or
letter from a bank or broker are examples of proof of ownership. If you want to
vote your shares of South Carolina Community common stock held in street name in
person at the meeting, you will have to get a written proxy in your name from
the broker, bank or other nominee who holds your shares.
Vote Required
The special meeting will be held if a majority of the outstanding shares of
common stock entitled to vote is represented at the meeting. If you return valid
proxy instructions or attend the meeting in person, your shares will be counted
for purposes of determining whether there is a quorum, even if you abstain from
voting. Broker non-votes also will be counted for purposes of determining the
existence of a quorum. A broker non-vote occurs when a broker, bank or other
nominee holding shares for a beneficial owner does not vote on a particular
proposal because the nominee does not have discretionary voting power with
respect to that item and has not received voting instructions from the
beneficial owner. Under applicable rules, brokers,
18
<PAGE>
banks and other nominees may not exercise their voting discretion on the
proposal to approve and adopt the merger agreement and, for this reason, may not
vote shares held for beneficial owners without specific instructions from the
beneficial owners.
The approval and adoption of the merger agreement will require the
affirmative vote of the holders of at least a majority of the outstanding shares
of common stock entitled to vote at the meeting. Failure to return a properly
executed proxy card or to vote in person will have the same effect as a vote
against the merger agreement. Abstentions and broker non-votes also will have
the same effect as a vote against the merger agreement.
As of June 30, 1999, directors and executive officers of South Carolina
Community, and persons closely associated with them, beneficially owned 118,658
shares of South Carolina Community common stock, not including shares that may
be acquired upon the exercise of stock options. This equals approximately 22.0%
of the outstanding shares of South Carolina Community common stock. Under the
terms of the merger agreement, these persons will execute a letter to Union
Financial agreeing to be present, in person or by proxy, and to vote in favor of
the merger at South Carolina Community's special meeting. As of the same date,
neither Union Financial nor any of its directors and executive officers owned
any shares of South Carolina Community common stock.
Voting by Proxy
This proxy statement is being sent to you by the board of directors of
South Carolina Community for the purpose of requesting that you allow your
shares of South Carolina Community common stock to be represented at the special
meeting by the persons named in the enclosed proxy card. All shares of South
Carolina Community common stock represented at the meeting by properly executed
proxies will be voted in accordance with the instructions indicated on the proxy
card. If you sign and return a proxy card without giving voting instructions,
your shares will be voted as recommended by South Carolina Community's board of
directors. The board recommends a vote "FOR" approval of the merger agreement.
If any matters not described in this proxy statement are properly presented
at the special meeting, the persons named in the proxy card will use their own
judgment to determine how to vote your shares. This includes a motion to adjourn
or postpone the meeting in order to solicit additional proxies. However, no
proxy voted against the proposal to approve the merger agreement will be voted
in favor of an adjournment or postponement to solicit additional votes in favor
of the merger agreement. South Carolina Community does not know of any other
matters to be presented at the meeting.
You may revoke your proxy at any time before the vote is taken at the
meeting. To revoke your proxy you must either advise the Corporate Secretary of
South Carolina Community in writing before your common stock has been voted at
the special meeting, deliver later proxy instructions, or attend the meeting and
vote your shares in person. Attendance at the special meeting will not in itself
constitute revocation of your proxy.
If your South Carolina Community common stock is held in street name, you
will receive instructions from your broker, bank or other nominee that you must
follow in order to have your shares voted. Your broker or bank may allow you to
deliver your voting instructions via the telephone or the Internet. Please see
the instruction form that accompanies this proxy statement.
South Carolina Community will pay the cost of this proxy solicitation. In
addition to soliciting proxies by mail, directors, officers and employees of
South Carolina Community may solicit proxies
19
<PAGE>
personally and by telephone. None of these persons will receive additional or
special compensation for soliciting proxies. South Carolina Community will, upon
request, reimburse brokers, banks and other nominees for their expenses in
sending proxy materials to their customers who are beneficial owners and
obtaining their voting instructions. South Carolina Community has retained
_______________ to assist in soliciting proxies for a fee of $______________
plus reimbursable expenses up to $________.
Participants in Community Federal's ESOP
If you participate in the Community Federal Savings Bank Employee Stock
Ownership Plan ("ESOP"), the proxy card represents a voting instruction to the
trustees of the ESOP as to the number of shares in your plan account. Each
participant in the ESOP may direct the trustees as to the manner in which shares
of common stock allocated to the participant's plan account are to be voted.
Unallocated shares of common stock held by the ESOP and allocated shares for
which no voting instructions are received will be voted by the trustees in the
same proportion as shares for which the trustees have received voting
instructions, subject to the trustees' exercise of their fiduciary obligations.
Independent Public Accountants
Crisp Hughes Evans, LLP has served as South Carolina Community's
independent auditors since June 1994. A representative of Crisp Hughes is
expected to be present at the special meeting and will have an opportunity to
make a statement if he or she desires and will be able to respond to appropriate
questions.
20
<PAGE>
OWNERSHIP OF UNION FINANCIAL COMMON STOCK
The following table provides information as of June 30, 1999 with respect
to persons known to Union Financial that may be considered to own more than 5%
of Union Financial's outstanding common stock. A person may be considered to
own any shares of common stock over which he has, directly or indirectly, sole
or shared voting or investing power.
<TABLE>
<CAPTION>
Number of Percent of Common
Name and Address Shares Owned Stock Outstanding
- --------------------- ------------------ -----------------------
<S> <C> <C>
A. Foster Jordan 72,443 5.35%
537 Thompson Boulevard
Union, South Carolina 29379
Dwight V. Neese 80,009 5.62%
203 West Main Street
Union, South Carolina 29379
</TABLE>
The following table provides information about the shares of Union
Financial common stock that may be considered to be owned by each director of
Union Financial and by all directors and executive officers of Union Financial
as a group as of June 30, 1999.
<TABLE>
<CAPTION>
Percent of
Number of Common Stock
Name/Title Shares Owned(1) Outstanding
------------------------------------------- ------------------- -----------------
<S> <C> <C>
Dwight V. Neese
President, Chief Executive Officer and
Director 80,009/(2)/ 5.62%
Carl L. Mason
Chairman of the Board 11,967/(3)/ 0.8%
David G. Russell
Director 17,796/(6)/ 1.31%
William M. Graham
Director 16,503/(3)/ 1.21%
Louis M. Jordan
Director 62,117/(3)/ 4.56%
Mason G. Alexander
Director 13,756/(4)/ 1.01%
James W. Edwards
Director 8,133/(3)/ 0.6%
All directors and executive officers as a
group (14 persons) 322,848/(5)/ 21.0%
</TABLE>
______________________________
(1) In accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as
amended ("Exchange Act"), a person is deemed to be the beneficial owner,
for purposes of this table, of any shares of Union Financial common stock
if he or she has voting or investment power with respect to such security.
The table includes shares owned by spouses, other immediate family members
in trust, shares held in retirement accounts or funds for the benefit of
the named individuals, and other forms of ownership over which the persons
named in the table possess voting and/or investment power.
(2) Includes 70,613 shares that may be acquired pursuant to presently
exercisable options.
(3) Includes 6,825 shares that may be acquired pursuant to presently
exercisable options.
(4) Includes 3,675 shares that may be acquired pursuant to presently
exercisable options.
(5) Includes 181,968 shares that may be acquired pursuant to presently
exercisable options.
(6) Includes 4,725 shares that may be acquired pursuant to presently
exercisable options.
21
<PAGE>
OWNERSHIP OF SOUTH CAROLINA COMMUNITY COMMON STOCK
The following table provides information as of June 30, 1999 with respect
to persons known to South Carolina Community that may be considered to own more
than 5% of South Carolina Community's outstanding common stock. A person may be
considered to own any shares of common stock over which he or she has, directly
or indirectly, sole or shared voting or investing power.
<TABLE>
<CAPTION>
Number of Shares Percent of Common
Name and Address Beneficially Owned Stock Outstanding
- ----------------------- ------------------------ ------------------------
<S> <C> <C>
Community Federal 62,422/(1)/ 11.59%
Savings Bank ESOP
110 South Congress Street
Winnsboro, South Carolina 29180
Quay W. McMaster
318 Evans Street 36,226 6.72%
Winnsboro, South Carolina 29180
Alan W. Pullen 32,034 5.95%
1735 Center Creek Road
Ridgeway, South Carolina 29130
</TABLE>
______________________________
(1) Under the Community Federal ESOP, shares allocated to participants'
accounts are voted in accordance with the participants' directions. As
of November 30, 1998, 25,493 shares of stock had been allocated to the
accounts of employees under the ESOP. Unallocated shares held by the
ESOP are voted by the Trustees in the same proportion as shares for which
the trustees have received voting instructions from participants. The
trustees of the ESOP are the directors of South Carolina Community.
The following table provides information about the shares of South Carolina
Community common stock that may be considered to be owned by each director of
South Carolina Community and by all directors and executive officers of South
Carolina Community as a group as of June 30, 1999.
<TABLE>
<CAPTION>
Percent Of
Number of Common Stock
Name/Title Shares Owned Outstanding
------------------------------------------- ------------------ -----------------
<S> <C> <C>
Richard H. Burton 9,680/(1)/ 1.80%
Director
George R. Lauderdale 19,680/(1)/ 3.65%
Director
Alan W. Pullen 32,034/(2)(5)/ 5.95%
President, Chief Executive Officer and
Director
Philip C. Wilkins 4,752/(3)/ 0.88%
Director
Quay W. McMaster 36,226/(1)/ 6.72%
Chairman of the Board
John S. McMeekin 6,318/(1)/ 1.17%
Director
Terri C. Robinson 9,968/(4)(5)/ 1.85%
Corporate Secretary-Controller and
Chief Financial Officer
All directors and executive officers as a group 118,658/(6)/ 22.02%
(seven persons)
</TABLE>
______________________________
(1) Includes 3,120 shares that may be acquired pursuant to presently
exercisable options.
(2) Includes 15,604 shares that may be acquired pursuant to presently
exercisable options.
(3) Includes 1,560 shares that may be acquired pursuant to presently
exercisable options.
(4) Includes 4,800 shares that may be acquired pursuant to presently
exercisable options.
(5) Includes 7,009 shares and 3,688 shares allocated to Mr. Pullen and Ms.
Robinson, respectively, under the Community Federal ESOP.
(6) Excludes 36,929 shares of common stock, or 6.86% of the shares of common
stock outstanding, owned by the Community Federal ESOP for the benefit of
the employees of Community Federal.
22
<PAGE>
THE MERGER
The following discussion of the merger is qualified by reference to the
merger agreement, which is attached to this document as Appendix A. You should
read the entire merger agreement carefully.
The Parties to the Merger
Union Financial Bancshares, Inc.
Union Financial Bancshares, Inc. was incorporated in 1994 as a Delaware
corporation and is the savings and loan holding company for Provident Community
Bank. As a savings and loan holding company, it is regulated by the OTS.
Provident Community Bank operates a main office in Union, South Carolina
and three full service branch offices located in Union, Jonesville and Laurens,
South Carolina. The business of Provident Community Bank consists primarily of
attracting deposits from the general public and originating mortgage loans on
residential properties located in Union County, South Carolina. Provident
Community Bank also makes commercial real estate, construction and consumer
loans and invests in the obligations of the federal government and its agencies
and of state and local municipalities.
For additional information about the financial condition and recent results
of operations of Union Financial and Provident Community Bank, please see Union
Financial's 1998 annual report to shareholders which is included as Appendix E
to this document, and the Form 10-QSB for the quarter ended June 30, 1999, which
is included as Appendix F to this document.
South Carolina Community Bancshares, Inc.
South Carolina Community Bancshares, Inc. was organized in 1994 as a
Delaware corporation and is the savings and loan holding company for Community
Federal Savings Bank. South Carolina Community is subject to regulation by the
OTS. The primary business activity of South Carolina Community consists of the
operations of Community Federal.
Community Federal, which was founded in 1934, is a federally chartered
savings bank that conducts its operations from two facilities located in
Winnsboro, South Carolina. The bank is a community-oriented savings institution
that is primarily engaged in the business of attracting deposits from the
general public in its market area, and investing such funds in fixed-rate and
adjustable rate mortgage loans secured by one-to four-family residences, and, to
a lesser extent, investment securities. South Carolina Community also invests in
United States government and agency obligations and interest-earning deposits in
other financial institutions.
For additional information about the financial condition and recent results
of operations of South Carolina Community and Community Federal, please see
South Carolina Community's annual report on Form 10-KSB for the year ended June
30, 1999, which is included as Appendix G to this document.
Overview of the Transaction; What South Carolina Community's Shareholders Will
Receive
The boards of directors of South Carolina Community and Union Financial
have each unanimously approved the merger agreement that provides that South
Carolina Community will merge with Union Financial, with Union Financial being
the surviving corporation. Upon completion of the merger, each share of South
Carolina Community common stock will be converted into the right to receive a
combination of at least $5.25 cash and at least 0.817 shares of Union Financial
common stock. Additionally, to the extent
23
<PAGE>
you are entitled to receive a fraction of a share, you will also receive the
"market value" of that fraction in cash. The total value of the merger
consideration received in exchange for each share of South Carolina Community
common stock will depend on the average closing price of Union Financial stock
for the 25 consecutive trading days ending on the trading day that immediately
precedes the third day prior to the merger's closing. This is referred to as the
"market value" in the merger agreement. As the "market value" changes, so will
the merger consideration you receive. The following table explains what you will
receive in exchange for your South Carolina Community stock.
If the market value of Each share of South Carolina Community
Union Financial common stock is: stock is exchanged for:
------------------------------- ----------------------
. more than $15.00 . $5.25 cash and
. 0.817 shares of Union Financial stock
. $12.50 to $14.99 . $5.25 cash and
. number of shares of Union Financial
stock equal to $12.25 (i.e., between
0.817 and 0.980 shares of Union
Financial stock)
. $12.00 to $12.49 . $5.25 in cash and
. 0.980 shares of Union Financial stock
. less than $12.00 . 0.980 shares of Union Financial stock
and
. cash equal to $17.00 minus the value
of 0.980 shares of Union Financial
stock
For example, assume the merger closes on March 1, 2000. The "market value"
would be the average of Union Financial stock's closing prices for the 25
trading day period between January 21, 2000 through February 25, 2000. Assume
that the average of the closing prices during this period was $12.75, and that
you own 10 shares of South Carolina Community stock. This would mean that for
each share of South Carolina Community stock you own, you would be entitled to
- ----
receive:
. $5.25 in cash, plus
. (12.25 / 12.75) = .961 shares of Union Financial stock
Therefore, in exchange for your 10 shares of South Carolina Community stock, you
would receive:
. $52.50 in cash;
. nine shares of Union Financial stock; and
. an additional cash payment of $7.78 in exchange for your
fractional share interest (i.e., .61 x $12.75 = $7.78)
Accordingly, the total value of the merger consideration you would receive is
$17.50 per share, or $175.00 for your 10 shares.
24
<PAGE>
Tax Considerations for South Carolina Community's Shareholders
The following discussion is a summary of the anticipated material U.S.
federal income tax consequences of the merger to a holder of South Carolina
Community common stock. This discussion is based on laws, regulations, rulings
and judicial decisions as they exist on the date of this proxy
statement/prospectus. These authorities are all subject to change and such
change may be made with retroactive effect. This discussion is not a complete
description of the U.S. federal income tax consequences of the merger and may
not apply to a South Carolina Community shareholder subject to special treatment
under the Internal Revenue Code of 1986, as amended (the "IRC"), such as a
shareholder that is a financial institution, an insurance company, a dealer in
securities or foreign currencies, a trader in securities, a tax-exempt
organization or a person who acquired shares of South Carolina Community common
stock pursuant to the exercise of an employee stock option or otherwise as
compensation. In addition, the discussion applies only to a holder of South
Carolina Community common stock holding such stock as a capital asset and who is
a U.S. citizen (as defined in the IRC). No ruling will be requested from the
IRS regarding the tax consequences of the merger. Moreover, this discussion is
not binding on the IRS and would not prevent the Internal Revenue Service from
challenging the U.S. federal income tax treatment of the merger. In addition,
this discussion does not address the state, local or foreign tax consequences of
the merger.
Because of the complexities of the tax laws in general, and the
complexities of the tax consequences associated with the receipt of cash in the
merger in particular, you should consult your tax advisor with respect to the
federal, state, local and foreign tax consequences of the merger as they apply
to your specific situation.
Consummation of the merger is conditioned upon the receipt by Union
Financial and South Carolina Community of an opinion of Muldoon, Murphy &
Faucette LLP and Luse Lehman Gorman Pomerenk & Schick, P.C., special counsel to
Union Financial and South Carolina Community, respectively, dated as of the
effective date, substantially to the effect that the merger should be treated
for U.S. federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the IRC. The opinion will also confirm certain of the U.S.
federal income tax consequences of the merger to a South Carolina Community
shareholder that are discussed below. Although the condition that such opinion
be delivered can be waived, the parties do not intend to waive this condition.
If, however, this condition is waived, South Carolina Community will resolicit
its shareholders with respect to the merger. The opinion will not be binding on
the IRS and would not prevent the IRS from challenging the U.S. federal income
tax treatment of the merger.
Consequences to South Carolina Community's Shareholders
For U.S. federal income tax purposes, it appears that South Carolina
Community's shareholders receiving a combination of Union Financial common stock
and cash must allocate each form of consideration received pro rata among all
shares of South Carolina Community common stock surrendered in the merger,
rather than, for example, allocating solely cash to some shares of surrendered
South Carolina Community stock and solely Union Financial common stock to other
shares of surrendered South Carolina Community common stock.
You should generally recognize gain, but not loss, with respect to the
South Carolina Community stock surrendered in an amount equal to the lesser of
(1) the total amount of gain realized (calculated as described in the next two
sentences) and (2) the total amount of cash received (excluding, for this
purpose, cash received instead of a fractional share of Union Financial stock,
the treatment of which is discussed below). For this purpose, gain or loss must
be calculated by a shareholder separately for each identifiable block of shares
surrendered in the exchange, and is equal to the sum of the amount of cash and
the fair market value of Union Financial stock received minus the shareholder's
-----
adjusted tax basis in that block of shares. In addition, a loss realized on one
block of shares may not be used to offset a gain realized on
25
<PAGE>
another block of shares. Any recognized gain should generally be long-term
capital gain if the shareholder's holding period with respect to the stock is
more than one year. See "--Treatment of Long-Term Capital Gain" below. If,
however, the cash received has the effect of the distribution of a dividend, the
gain would be treated as a dividend to the extent of the shareholder's ratable
share of South Carolina Community's accumulated earnings and profits.
The aggregate tax basis of Union Financial stock received by a South
Carolina Community shareholder who exchanges their shares of South Carolina
Community common stock for a combination of Union Financial common stock and
cash pursuant to the merger should be the same as the aggregate adjusted tax
basis of the shares of South Carolina Community common stock surrendered
therefor, decreased by the total amount of cash received, and increased by any
recognized gain (whether capital gain or ordinary income). The holding period
of such Union Financial stock should include the holding period of the shares of
South Carolina Community stock surrendered therefor.
In general, the determination of whether any gain recognized in the
exchange should be treated as capital gain or has the effect of a distribution
of a dividend depends upon whether, and to what extent, the exchange reduces the
shareholder's deemed percentage stock ownership of Union Financial. For
purposes of this determination, the South Carolina Community shareholder is
treated as if it first exchanged all of its shares of South Carolina Community
common stock solely for Union Financial common stock and then immediately
redeemed (in a "deemed redemption") a portion of such stock in exchange for the
cash the shareholders actually received. The gain recognized in the exchange
followed by a deemed redemption should be treated as capital gain if the deemed
redemption (1) is "substantially disproportionate" with respect to the
shareholder or (2) is "not essentially equivalent to a dividend."
The deemed redemption should generally be "substantially disproportionate"
with respect to a shareholder if the percentage described in (2) below is less
than 80% of the percentage described in (1) below. Whether the deemed
redemption is "not essentially equivalent to a dividend" with respect to a
shareholder will depend upon the shareholder's particular circumstances. At a
minimum, however, in order for the deemed redemption to be "not essentially
equivalent to a dividend," the deemed redemption must result in a "meaningful
reduction" in the shareholder's deemed actual and constructive percentage stock
ownership of Union Financial. In general, that determination requires a
comparison of (1) the percentage of the outstanding stock of Union Financial the
shareholder is deemed actually and constructively to own immediately before the
deemed redemption and (2) the percentage of the outstanding stock of Union
Financial the shareholder actually and constructively owns immediately after the
deemed redemption. In calculating these percentages, a shareholder is deemed to
own stock owned and, in some cases, constructively owned by certain family
members, by certain estates and trusts of which the shareholder is a
beneficiary, and by certain affiliated entities, as well as stock subject to an
option actually or constructively owned by the shareholder or such other
persons. As these rules are complex, each shareholder that may be subject to
these rules should consult their tax advisor. The IRS has ruled that a
relatively minor reduction in the percentage stock ownership of a minority
shareholder in a publicly held corporation whose relative stock interest is
minimal and who exercises no control with respect to corporate affairs is
a "meaningful reduction."
Cash Received Instead of a Fractional Share
Cash received by a South Carolina Community shareholder instead of a
fractional share of Union Financial common stock should be treated as received
in exchange for the fractional share, and gain or loss should be recognized,
measured by the difference between the amount of cash received and the portion
of the basis of the shares of South Carolina Community stock allocable to the
fractional interest. The gain or loss generally should be long-term capital
gain or loss if the holding period for the shares of South Carolina Community
stock was more than one year. See "--Treatment of Long-Term Capital Gain"
below. If,
26
<PAGE>
however, the cash received has the effect of the distribution of a dividend with
respect to a shareholder, part or all of the cash received may be treated as a
dividend.
Treatment of Long-Term Capital Gain
Federal income tax rates on long-term capital gain received by a taxpayer
vary based on the taxpayer's status and taxable income. South Carolina
Community shareholders should contact their tax advisors for information on the
tax rate applicable to them in their particular circumstances.
Backup Withholding
Unless an exemption applies under the applicable law and regulations, the
exchange agent will be required to withhold 31% of any cash payments to which a
South Carolina Community shareholder or other payee is entitled under the merger
unless the shareholder or other payee provides its taxpayer identification
number (social security number or employee identification number) and certifies,
among other things, that such number is correct. Each shareholder and, if
applicable, each other payee should complete and sign the substitute Form W-9
included as part of the transmittal letter that accompanies the election form,
so as to provide the information and certification necessary to avoid backup
withholding, unless an applicable exemption exists and is established in a
manner satisfactory to the exchange agent.
The tax consequences of the merger to you may vary depending upon your
particular circumstances. Therefore, you should consult your tax advisor to
determine the particular tax consequences of the merger to you, including those
relating to state and/or local taxes.
Background of the Merger
The History of Union Financial's Strategic Plan
In 1987, Provident Community Bank (then "Union Federal Savings and Loan
Association") converted to stock form and in 1994 it reorganized into the
holding company form of ownership with the incorporation of Union Financial as
its holding company. These actions were taken because, among other reasons,
they provided greater ability to expand Provident Community Bank's operations
and market area through a variety of methods, including potential acquisitions
of other institutions. Consistent with this strategy and, as a result of the
continued consolidation of the financial institutions industry as a whole, the
Union Financial board of directors authorized its Long Range Planning Committee
and its President and Chief Executive Officer, Dwight V. Neese, to entertain
potential transactions of this nature.
The History of South Carolina Community's Strategic Plan
As part of its ongoing strategic planning, at a regular meeting on August
19, 1998, the board of directors reviewed with Trident the merger and
acquisition market as a possible means of delivering value to South Carolina
Community's shareholders. The board reviewed with Trident the continuing
consolidation activity taking place in the banking industry, and the factors
which would affect the terms of an acquisition of South Carolina Community. At
a regular board meeting on November 23, 1998, Trident met with the board to
discuss Trident's examination of the business and operations of South Carolina
Community. Trident provided suggestions for actions to improve South Carolina
Community's value to stockholders, including expansion through internal growth
or acquisitions, or an affiliation with another company in a merger transaction.
After this presentation, the board discussed the information presented by
Trident, and authorized Trident to contact two potential merger partners
suggested by Trident. Trident contacted these two companies in December of
1998, and confidentiality agreements were executed.
27
<PAGE>
The Parties Begin Discussions of a Possible Combination
At a regularly scheduled meeting on January 20, 1999, Trident recommended,
and received, authorization from the board to contact Union Financial. On
January 21, 1999, representatives of Trident contacted Union Financial to
determine if Union Financial would consider pursuing discussions regarding the
potential acquisition of South Carolina Community. Following discussions
among Union Financial's financial advisor, Wheat First Securities, Mr. Neese,
and the members of the Long Range Planning Committee, Wheat First Securities
advised Mr. Neese that it would continue to review the prospective transaction
with management and, when appropriate, with Union Financial's board of
directors. As a result, Union Financial entered into a confidentiality
agreement with South Carolina Community.
At a meeting with Union Financial management held on February 5, 1999,
representatives of Wheat First Securities met with Union Financial management to
review the possible acquisition of South Carolina Community. Based on the
results of these detailed discussions, Union Financial management instructed
Wheat First Securities to prepare for it further information outlining Union
Financial's potential acquisition of South Carolina Community.
On February 10, 1999, Wheat First Securities made a detailed presentation
to the Union Financial board of directors which involved a proposal pursuant to
which Union Financial would offer to acquire all of the outstanding common stock
of South Carolina Community. Following this presentation and after consultation
with Muldoon, Murphy & Faucette LLP, Union Financial's special legal counsel,
regarding the board's duties in an acquisition context, the board voted to
authorize Mr. Neese to present an offer to South Carolina Community.
At a meeting of the South Carolina Community board of directors held on
February 12, 1999, Mr. Neese presented Union Financial's offer to the South
Carolina Community board, representatives of Trident, and Luse Lehman Gorman
Pomerenk & Schick, P.C., South Carolina Community's legal advisors. The two
other companies contacted by Trident had declined to submit an indication of
interest.
At a regularly scheduled meeting on February 17, 1999, the board determined
not to act at that time on the Union Financial bid, and determined to
reconsider, among other alternatives, long range planning as the primary means
of enhancing shareholder value. A representative of Trident advised Union
Financial management of the South Carolina Community board's decision on
February 18, 1999.
South Carolina Community Explores All Available Options
At a special meeting on March 3, 1999, Trident again reviewed with the
board the merger and acquisition market and the possible merger possibilities
for South Carolina Community, and the board authorized Trident to contact five
new potential acquirers. On April 6, 1999, President Pullen was contacted by
Dwight Neese, President of Union Financial, who expressed Union Financial's
continued interest in acquiring South Carolina Community. Mr. Neese and
Provident Community's Chief Operating Officer, Gerald Bolin, met with the South
Carolina Community board at a special meeting on April 14, 1999 to discuss Union
Financial's interest in acquiring South Carolina Community through a merger.
Also at this meeting, the board was informed that, of the five new potential
acquirers contacted by Trident, four had entered into confidentiality
agreements, but none expressed an interest in submitting a bid for South
Carolina Community.
Over the next few weeks, Trident continued discussions with Wheat First
Securities, and Mr. Pullen continued discussions with Mr. Neese. During this
period, President Pullen was contacted by the president of a financial
institution holding company that was interested in expanding through an
acquisition of South
28
<PAGE>
Carolina Community. At a special meeting on April 27, 1999, the board reviewed
the status of the interests of third parties in South Carolina Community,
including that of Union Financial which had resubmitted its original proposal on
that date, and counsel discussed the fiduciary duties of a board in connection
with merger and acquisition transactions.
On May 3, 1999, Mr. Neese, together with two other members of Union
Financial's board, had a dinner meeting with Quay McMaster, South Carolina
Community's Chairman of the Board, and Mr. Pullen, to further discuss the
possible business combination. At a special meeting on May 5, 1999, the South
Carolina Community board agreed to submit information to both the company that
had contacted President Pullen as well as a new potential acquirer that had
contacted Trident directly, and to continue discussions with Union Financial.
Both new companies executed confidentiality agreements, and at a special meeting
of the South Carolina Community board held May 10, the president of one of these
companies made a presentation to the board.
Union Financial Increases Its Offer and an Agreement is Negotiated Between
the Parties
At a special meeting held June 2, 1999, the South Carolina Community board
reviewed the three indications of interest that had been submitted, including
Union Financial's. It was determined to continue discussions with Union
Financial regarding its bid. On June 7, 1999, representatives of South Carolina
Community and Union Financial, as well as each of their counsel, and Trident,
held discussions regarding the potential merger of South Carolina Community and
Union Financial. During these discussions, pursuant to prior board
authorization, Union Financial revised its offer. At a special meeting held June
10, 1999, the South Carolina Community board discussed this offer, reviewing in
detail the financial and non-financial aspects of a potential merger with Union
Financial, and comparing Union Financial's offer with the two indications of
interest previously received by South Carolina Community. Counsel again
discussed the fiduciary duties of a board in connection with merger and
acquisition transactions, and specifically in connection with transactions in
which the consideration to be paid is part cash and part stock. Following these
discussions, the board determined to accept Union Financial's offer, and
authorized President Pullen, Trident and counsel to negotiate a merger agreement
based on terms discussed by the board, and to conduct a due diligence
investigation of Union Financial.
At a regularly scheduled meeting of the Union Financial board of directors
held on June 15, 1999, Wheat First Securities provided an updated detailed
financial presentation on the current acquisition proposal pursuant to which
Union Financial had offered to acquire all of the outstanding shares of South
Carolina Community common stock in exchange for combined consideration of Union
Financial stock and cash as discussed in this document. Pending its receipt of
a fairness opinion on the proposal from Wheat First Securities and the results
of its due diligence review of South Carolina Community, the board voted to
ratify its updated offer.
Union Financial conducted a due diligence review of South Carolina
Community on June 15 and 16, 1999. South Carolina Community conducted its due
diligence review on June 23, 1999. Both reviews included reviews of the other
party's operational matters, including loans, investments, contractual
obligations, regulatory relations and the status of each party's preparations
for Year 2000 compliance.
On June 18, 1999, a draft merger agreement was delivered by Union
Financial's special legal counsel to South Carolina Community's special legal
counsel. On June 24, 1999, the South Carolina Community board reviewed the
preliminary draft of the merger agreement as presented by Union Financial's
counsel. The parties negotiated the terms of the merger agreement, and at a
special meeting on June 28, 1999, South Carolina Community's counsel and the
board reviewed the revised merger agreement. The South Carolina Community board
discussed the issues which remained outstanding at that time, and authorized
counsel and Mr. Pullen to continue negotiations.
29
<PAGE>
At a special meeting held on June 30, 1999, members of Union Financial's
senior management, together with its legal and financial advisors, reviewed with
the board, among other things, the background of the proposed transaction, the
potential benefits of the transaction, including the strategic rationale for the
transaction, a summary of their due diligence findings, financial and valuation
analyses of the transaction, and the terms of the proposed agreements.
Additionally, Wheat First Securities presented its opinion that the proposed
transaction was fair from a financial point of view to Union Financial's
shareholders. The Union Financial board then unanimously approved the merger and
all related transactions and the merger agreement substantially as presented in
Appendix A.
South Carolina Community also held a special meeting on June 30, 1999, at
which the South Carolina Community board was advised of the favorable results of
the due diligence review of Union Financial. The board agreed to merge with
Union Financial, subject to the continued negotiation of an acceptable
definitive merger agreement. At a special meeting on July 1, 1999, the board
reviewed and approved the merger agreement and Trident issued its opinion
regarding the fairness of the transaction from a financial point of view. The
board authorized Alan Pullen to execute the merger agreement on behalf of South
Carolina Community, and the parties issued a press release announcing the
transaction.
Recommendation of the Union Financial Board; Union Financial's Reasons for the
Merger
Union Financial's board of directors has unanimously approved the merger
agreement and recommends that Union Financial shareholders vote "FOR" the
approval of the merger agreement.
Union Financial's board has determined that the merger and the merger
agreement are advisable and are fair to, and in the best interests of, Union
Financial and its shareholders. In reaching this determination, the Union
Financial board consulted with special legal counsel as to its legal duties and
the terms of the merger agreement, and with its financial advisor with respect
to the financial aspects and fairness of the transaction. In arriving at its
determination, the Union Financial board also considered a number of factors
including, but not limited to, the following, which include all material factors
considered by the Union Financial board:
. information concerning the businesses, earnings, operations, financial
condition and prospects of South Carolina Community and Union
Financial, both individually and as combined;
. the financial advice rendered by Wheat First Securities, as financial
advisors to Union Financial, that the merger consideration is fair,
from a financial standpoint, to the Union Financial shareholders. (See
"--Union Financial's Financial Advisor Says the Merger Consideration
is Fair to Union Financial Shareholders From a Financial Point of
View");
. the terms of the merger agreement;
. the historical trading prices for Union Financial common stock;
. the current and prospective economic, competitive and regulatory
environment facing South Carolina Community, Union Financial and the
financial services industry; and;
. the results of the due diligence investigation of South Carolina
Community.
In reaching its determination to approve and recommend the merger, the
Union Financial board did not assign any specific or relative weights to any of
the foregoing factors, and individual directors may have weighed factors
differently.
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<PAGE>
Recommendation of the South Carolina Community Board; South Carolina Community's
Reasons for the Merger
South Carolina Community's board of directors has unanimously approved the
merger agreement and recommends that South Carolina Community shareholders vote
"FOR" the approval of the merger agreement.
South Carolina Community's board has determined that the merger and the
merger agreement are advisable and are fair to, and in the best interests of,
South Carolina Community and its shareholders. In reaching this determination,
the South Carolina Community board consulted with special legal counsel as to
its legal duties and the terms of the merger agreement, and with its financial
advisor with respect to the financial aspects and fairness of the transaction.
In arriving at its determination, the South Carolina Community board also
considered a number of factors including, but not limited to, the following,
which include all material factors considered by the South Carolina Community
board
. information concerning the businesses, earnings, operations, financial
condition and prospects of South Carolina Community and Union
Financial, both individually and as combined
. the financial advice rendered by Trident, as financial advisors to
South Carolina Community, that the merger consideration is fair, from
a financial standpoint, to the South Carolina Community shareholders.
(See "--South Carolina Community's Financial Advisor Says the Merger
Consideration is Fair to South Carolina Community's Shareholders From
a Financial Point of View");
. the terms of the merger agreement;
. the historical trading prices for Union Financial common stock;
. the current and prospective economic, competitive and regulatory
environment facing South Carolina Community, Union Financial and the
financial services industry;
. the results of the due diligence investigation of Union Financial;
. the nature and compatibility of the management and business
philosophies of Union Financial and South Carolina Community; and
. the ability of South Carolina Community to continue to shape the
policies of the combined entity through its three member
representation on the combined entity's board of directors.
In reaching its determination to approve and recommend the merger, the
South Carolina Community board did not assign any specific or relative weights
to any of the foregoing factors, and individual directors may have weighed
factors differently.
Union Financial's Financial Advisor Says the Merger Consideration is Fair to
Union Financial's Shareholders From a Financial Point of View
As described above, Wheat First Securities' opinion and presentation to the
Union Financial board was one of many factors taken into consideration by the
Union Financial board in making its determination to approve the merger
agreement and the transactions contemplated thereby. Although the following
summary describes the material components of the analyses presented by Wheat
First Securities to the Union
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<PAGE>
Financial board on June 30, 1999, and updated as of the date of this proxy
statement, in connection with its opinion as of these dates, it does not purport
to be a complete description of all the analyses performed by Wheat First Union
and is qualified by reference to the written opinion of Wheat First Securities.
Opinion of Union Financial's Financial Advisor
Union Financial retained Wheat First Securities, a division of First Union
Capital Markets Corp., to render its opinion to the Union Financial board as to
the fairness, from a financial point of view, of the merger consideration to the
holders of Union Financial common stock. Wheat First is a nationally recognized
investment banking firm regularly engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. The Union Financial board selected Wheat First to render its
opinion in connection with the merger on the basis of such firm's expertise.
Wheat First regularly publishes research reports regarding the financial
services industry and the businesses and securities of publicly owned companies
in that industry. In the ordinary course of its business, Wheat First and its
affiliates may actively trade in the equity securities of Union Financial or
South Carolina Community for its account and the accounts of its customers, and
therefore may from time to time hold long or short positions in such securities.
Representatives of Wheat First participated in the meeting of the Union
Financial board on June 30, 1999, at which the merger agreement was considered
and approved. At the meeting, Wheat First issued a written opinion that, as of
such date, the merger consideration was fair, from a financial point of view, to
the holders of Union Financial common stock.
The full text of Wheat First's written opinion, which sets forth certain
assumptions made, matters considered and limitations on review undertaken is
attached as Appendix B to this Joint Proxy Statement/Prospectus, is incorporated
herein by reference, and should be read in its entirety in connection with this
document. The summary of the opinion of Wheat First set forth in this document
is qualified in its entirety by reference to the opinion. No limitations were
imposed by the Union Financial board upon Wheat First with respect to the
investigations made or procedures followed by it in rendering the Union
Financial fairness opinion. Wheat First's opinion has been furnished to the
Union Financial board for its benefit and use. Wheat First's opinion is
directed only to the fairness, from a financial point of view, of the merger
consideration to the holders of Union Financial common stock and does not
constitute a recommendation to any shareholder of Union Financial as to how such
shareholder should vote on the merger.
In arriving at its opinion dated as of June 30, 1999, Wheat First reviewed
certain publicly available business and financial information relating to Union
Financial and South Carolina Community and certain other information provided to
it, including the following:
. Union Financial's annual reports to shareholders, annual reports on
Form 10-KSB and related financial information for the three fiscal
years ended September 30, 1998;
. Union Financial's quarterly reports on Form 10-QSB and related
financial information for the quarterly periods ended December 31,
1998 and March 31, 1999;
. South Carolina Community's annual reports to shareholders, Annual
Reports on Form 10-KSB and related financial information for the three
fiscal years ended June 30, 1998;
. South Carolina Community's quarterly reports on Form 10-QSB and
related financial information for the quarterly periods ended
September 30, 1998, December 31, 1998 and
32
<PAGE>
March 31, 1999, and certain financial information made available by
the management of South Carolina Community for the monthly periods
ended April 30, 1999, and May 31, 1999;
. certain publicly available information with respect to historical
market prices and trading activities for Union Financial common stock
and South Carolina Community common stock and for certain publicly
traded financial institutions which Wheat First deemed relevant;
. certain publicly available information with respect to similar
financial institutions and the financial terms of certain other
mergers and acquisitions which Wheat First deemed relevant;
. the merger agreement;
. certain estimates of the cost savings and revenue enhancements
projected by Union Financial for the combined company;
. other financial information concerning the businesses and operations
of Union Financial and South Carolina Community, including certain
audited and unaudited financial information and certain internal
financial analyses and forecasts for Union Financial and South
Carolina Community prepared by senior managements of these companies;
and
. such financial studies, analyses, inquiries and other matters as Wheat
First deemed necessary. In addition, Wheat First conferred with
members of the senior managements of Union Financial and South
Carolina Community to discuss the business and prospects of each
company.
In connection with its review, Wheat First relied upon and assumed the
accuracy and completeness of all of the foregoing information provided to it or
publicly available, including representations and warranties of Union Financial
and South Carolina Community included in the Agreement, and Wheat First has not
assumed any responsibility for independent verification of such information.
Wheat First relied upon the management of Union Financial as to the
reasonableness and achievability of its financial and operational forecasts and
projections, and the assumptions and bases therefor, provided to Wheat First,
and assumed that such forecasts and projections reflect the best currently
available estimates and judgments of such management and that such forecasts and
projections will be realized in the amounts and in the time periods currently
estimated by such management. Wheat First also assumed, without independent
verification, that the aggregate allowances for loan losses and other
contingencies for Union Financial and South Carolina Community are adequate to
cover such losses. Wheat First did not review any individual credit files of
Union Financial and South Carolina Community, nor did it make an independent
evaluation or appraisal of the assets or liabilities of Union Financial and
South Carolina Community. Wheat First also assumed that the merger will be
consummated in accordance with the terms and conditions of the merger agreement
in due course without unnecessary delay.
Additionally, Wheat First considered certain financial and stock market
data of Union Financial and South Carolina Community and compared that data with
similar data for certain publicly-held financial institutions and considered the
financial terms of certain other comparable transactions that recently have been
announced or effected, as further discussed below.
In connection with rendering its opinion, Wheat First performed a variety
of financial analyses. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and,
33
<PAGE>
therefore, such an opinion is not readily susceptible to partial analysis or
summary description. Moreover, the evaluation of the fairness, from a financial
point of view, of the merger consideration to holders of Union Financial common
stock was to some extent a subjective one based on the experience and judgment
of Wheat First and not merely the result of mathematical analysis of financial
data. Accordingly, notwithstanding the separate factors summarized below, Wheat
First believes that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying its opinion. The ranges of valuations resulting
from any particular analysis described below should not be taken to be Wheat
First's view of the actual value of Union Financial or South Carolina Community.
In performing its analyses, Wheat First made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of Union Financial or South
Carolina Community. The analyses performed by Wheat First are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by such analyses. Additionally, analyses
relating to the values of businesses do not purport to be appraisals or to
reflect the prices at which businesses actually may be sold. In rendering its
opinion, Wheat First assumed that, in the course of obtaining the necessary
regulatory approvals for the merger, no conditions will be imposed that will
have a material adverse effect on the contemplated benefits of the merger, on a
pro forma basis, to Union Financial.
Wheat First's opinion is just one of the many factors taken into
consideration by the Union Financial board in determining to approve the merger
agreement. Wheat First's opinion does not address the relative merits of the
merger as compared to any alternative business strategies that might exist for
Union Financial, nor does it address the effect of any other business
combination in which Union Financial might engage.
The following is a summary of the analyses performed by Wheat First in
connection with its opinion delivered to the Union Financial board on June 30,
1999:
Analysis of Selected Transactions
Wheat First performed an analysis of premiums paid in thirteen selected
transactions (the "selected transactions"). Wheat First compiled the selected
transactions by researching acquisitions of thrifts or thrift holding companies
headquartered in Florida, Georgia, North Carolina, South Carolina and Virginia
which were announced between January 1, 1998 and June 11, 1999, which had deal
values up to $25 million. Wheat First compared valuation multiples for the
selected transactions to the multiples implied by the merger consideration
offered to South Carolina Community in the merger. The selected transactions
included the following pending and completed transactions: PAB Bankshares,
Inc./Baxley Federal Savings Bank; FNB Financial Services Corp./Black Diamond
Savings Bank; FLAG Financial Corp./Thomaston Federal Savings Bank; Manufacturers
Bank of FL/Partners Bank of Florida FSB; First National Bank of Shelby/First
Carolina FSB; Capital Bank/Home Savings Bank of Siler City; Centura Banks
Inc./Scotland Bancorp Inc.; First Western Bank/Mitchell Bancorp; Carolina First
Corp./Poinsett Financial Corp.; FLAG Financial Corp./The Brown Bank; Republic
Bancshares/Lochaven FS&LA; Republic Security/UniFirst FSB; Republic
Bancshares/Bankers Savings Bank.
34
<PAGE>
Based on the market value of Union Financial common stock on June 29, 1999,
and financial data for South Carolina Community as of March 31, 1999, the
analysis of the implied value based on the merger consideration offered by Union
Financial to South Carolina Community yielded the following values, excluding
certain values from the selected transactions that were deemed not meaningful:
<TABLE>
<CAPTION>
Union
Financial's Comparable Transactions
---------------------------
Offer Average Minimum Maximum
----------- ------- ------- -------
<S> <C> <C> <C> <C>
Price/Book Value..................... 102.3% 194.1% 127.2% 319.7%
Price/Latest Quarter Annualized EPS.. 21.6x 26.6x 9.1x 43.9x
Premium to Market Price.............. 21.1% 46.4% 24.0% 98.3%
</TABLE>
The table below compares the financial ratios of South Carolina Community
with the acquirees in the selected transactions, based on financial data as of
and for the three-month reporting period ended March 31, 1999, for South
Carolina Community and the twelve month reporting period prior to the
announcement of each transaction for each acquiree in the selected transactions,
excluding certain values for acquirees in the selected transactions that were
deemed not meaningful:
<TABLE>
<CAPTION>
Comparable Acquirees
---------------------------
South
Carolina
Community Average Minimum Maximum
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Interest Margin....... 3.89% 3.42% 2.51% 4.77%
Efficiency Ratio.......... 61.51 69.38 47.51 90.22
Return on Average Assets.. 0.95 0.67 0.21 1.28
Return on Average Equity.. 4.69 6.03 2.53 13.88
</TABLE>
Impact Analysis
Wheat First estimated the potential impact of the transaction to Union
Financial's book value on a static basis, assuming the transaction had occurred
at the beginning of Union Financial's 1999 fiscal year. Utilizing financial
data as of March 31, 1999 for both Union Financial and South Carolina Community,
and assuming certain adjustments to the equity of South Carolina Community,
Wheat First noted that the merger could result in 2.1% accretion to Union
Financial's book value per share. Wheat First also noted that, based on the
closing price for Union Financial stock on June 29, 1999, assuming the merger
were closed during the fourth calendar quarter of 1999, the merger would result
in initial dilution to Union Financial's reported fiscal 2000 estimated earnings
per share due to the phasing in of revenue and expense synergies, but would
result in accretion to Union Financial's earnings per share beginning in fiscal
2001.
Comparison of Selected Companies
Wheat First also compared the financial performance and market trading
information of Union Financial to that of a group of regional thrift holding
companies. This group included: Bedford Bancshares, Inc., Carolina Fincorp,
Inc., Century Bancorp, Inc., Community Financial Corporation, Cooperative
Bankshares, Inc., Essex Bancorp, Inc., First Georgia Holding, Inc., First
Savings Bancorp, Inc., Great Pee Dee Bancorp, Green Street Financial Corp.,
Haywood Bancshares, Inc., Heritage Bancorp, Inc., Innes Street Financial Corp.,
Piedmont Bancorp, Inc., South Street Financial Corp., and SouthBanc Shares, Inc.
The following table is based on the market values as of June 29, 1999, and
financial data as of March 31, 1999:
35
<PAGE>
<TABLE>
<CAPTION>
Peer Group
----------------------------
UFBS Average Minimum Maximum
------ -------- -------- --------
<S> <C> <C> <C> <C>
Price/Book Value....................... 107.6% 99.9% 76.6% 140.6%
Price/Latest Quarter Annualized EPS.... 10.6x 16.2x 11.3x 22.1x
</TABLE>
Discounted Dividends Analysis
Using discounted dividends analysis, Wheat First estimated the present
value of the future stream of dividends that South Carolina Community could
produce over the next five years, assuming the company performed in accordance
with the earnings forecasts of management, maintained consistent capital ratios
at the bank level, and that assumed levels of expense savings and revenue
enhancements were achieved. Wheat First then estimated the terminal values for
South Carolina Community at the end of the period by applying multiples ranging
from 10 times to 14 times earnings projected in year five. The dividend streams
and terminal values were then discounted to present values using different
discount rates (ranging from 13% to 15%) chosen to reflect different assumptions
regarding the required rates of return to holders or prospective buyers of Union
Financial common stock. This discounted dividend analysis indicated reference
ranges of between $16.74 and $20.57 per share for South Carolina Community
common stock. These values compare to the implied offer by Union Financial to
South Carolina Community of $17.26.
No company or transaction used as a comparison in the above analysis is
identical to Union Financial, South Carolina Community or the merger.
Accordingly, an analysis of the results of the foregoing necessarily involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the companies and other factors that could affect
the public trading value of the companies used for comparison in the above
analysis.
Wheat First's written opinion dated as of June 30, 1999 is based solely
upon the information available to Wheat First and the economic, market and other
circumstances as they existed as of such date. Events occurring after that date
could materially affect the assumptions and conclusions contained in Wheat
First's opinion. Wheat First has not undertaken to reaffirm or revise its
opinion or otherwise comment on any events occurring after the date of its
opinion.
As compensation for Wheat First's services, Union Financial has agreed to
pay Wheat First total fees equal to $100,000. Union Financial has agreed also
to reimburse Wheat First for its out-of-pocket expenses incurred in connection
with the activities contemplated by its engagement, regardless of whether the
merger is consummated. Union Financial has further agreed to indemnify Wheat
First against certain liabilities, including certain liabilities under federal
securities laws. The payment of the above fees is not contingent upon Wheat
First rendering a favorable opinion with respect to the merger.
South Carolina Community's Financial Advisor Says the Merger Consideration is
Fair to South Carolina Community's Shareholders From a Financial Point of View
As described above, Trident's opinion and presentation to the South
Carolina Community board was one of many factors taken into consideration by the
South Carolina Community board in making its determination to approve the merger
agreement and the transactions contemplated thereby. Although the foregoing
summary describes the material components of the analyses presented by Trident
to the South Carolina Community board on July 1, 1999, and updated as of the
date of this joint proxy statement/prospectus, in connection with its opinion as
of these dates, it does not purport to be a complete description of all the
analyses
36
<PAGE>
performed by Trident and is qualified by reference to the written opinion of
Trident set forth as Appendix C hereto, which you should read in its entirety.
Opinion of South Carolina Community's Financial Advisor
In October 1998, South Carolina Community retained Trident to act as its
financial advisor and to render a fairness opinion in connection with a possible
merger. The engagement provided for Trident to prepare a financial analysis of
South Carolina Community in an acquisition context and to advise the board of
directors with regard to strategic alternatives. On November 23, 1998, Trident
presented its report to the board of directors. Upon receipt and review of the
report, Trident was authorized to assist South Carolina Community in exploring
the possibility of a merger with another financial institution.
On July 1, 1999, Trident presented a report to South Carolina Community's
board of directors summarizing the financial terms of the merger and providing
updated market information with respect to thrift mergers and acquisitions.
Trident also analyzed the advantages and disadvantages of the merger from a
financial point of view and presented the results of its due diligence
investigation of Union Financial. In addition, Trident rendered its written
opinion to South Carolina Community's board of directors to the effect that, as
of that date, the consideration to be received by South Carolina Community's
shareholders pursuant to the merger agreement was fair to them from a financial
point of view. A copy of the opinion (updated as of _______), which sets forth
certain assumptions made, matters considered and limitations on the reviews
undertaken, is attached to this joint proxy statement/prospectus as Appendix C.
Trident has consented to the inclusion of such opinion and a summary of the
matters considered in forming its opinion in this joint proxy
statement/prospectus.
Trident's opinion is directed to the board of directors of South Carolina
Community and is directed only to the fairness, from a financial point of view,
of the consideration to be received by South Carolina Community's shareholders
based on conditions as they existed and could be evaluated as of the date of the
opinion. Trident's opinion does not constitute a recommendation to any South
Carolina Community shareholder as to how such shareholder should vote at the
special meeting, nor does Trident's opinion address the underlying business
decision to effect the merger. This summary of Trident's opinion is qualified in
its entirety by reference to the full text of such opinion, which is attached to
this joint proxy statement/prospectus as Appendix C. Shareholders are urged to
read Trident's opinion in its entirety for a description of the assumptions made
and matters considered and the limits on the review undertaken in rendering such
opinion.
In connection with rendering its opinion, Trident reviewed and analyzed,
among other things, the following:
. the merger agreement;
. certain publicly available information concerning South Carolina
Community, including the audited financial statements of South
Carolina Community for each of the years in the three-year period
ended June 30, 1998 and the unaudited financial statements of South
Carolina Community for the nine months ended March 31, 1999;
. certain publicly available information concerning Union Financial,
including the audited financial statements of Union Financial for each
of the years in the three-year period ended September 30, 1998 and the
unaudited financial statements of Union Financial for the six months
ended March 31, 1999;
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. certain other internal information, primarily financial in nature,
concerning the business and operations of South Carolina Community and
Union Financial furnished to Trident by South Carolina Community and
Union Financial for purposes of Trident's analysis;
. information with respect to the trading markets for South Carolina
Community common stock and for Union Financial common stock;
. certain publicly available information with respect to other companies
that Trident believed to be comparable to South Carolina Community and
Union Financial and the trading markets for such other companies'
securities; and
. certain publicly available information concerning the nature and terms
of other transactions that Trident considered relevant to its inquiry.
Trident also met with certain officers and employees of South Carolina
Community and Union Financial to discuss the foregoing, as well as other
matters, which it believed relevant to its inquiry. No limitations were imposed
by either South Carolina Community or its board of directors or management with
respect to the investigation made or procedures followed by Trident.
In its review and analysis and in arriving at its opinion, Trident assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to it by South Carolina Community, or that was publicly
available, the accuracy of the representations and warranties of the officers
and the employees of South Carolina Community and Union Financial with whom
Trident held discussions, and the accuracy of the representations and warranties
of South Carolina Community and Union Financial in the merger agreement, and did
not attempt independently to verify any such information. Trident further
assumed that there are no conditions in the regulatory approvals of the merger
agreement that will have a material adverse effect upon the contemplated
economic benefits of the merger. The financial information provided to Trident
by South Carolina Community was of the type normally produced by the management
of South Carolina Community and reviewed by South Carolina Community's board of
directors at its regular meetings and the board of directors and management of
South Carolina Community have represented to Trident that they have no reason to
believe that Trident's reliance thereon was unreasonable. Trident did not
conduct a physical inspection of the properties or facilities of South Carolina
Community, nor did they make or obtain any independent evaluations or appraisals
of any of such properties or facilities.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial or summary description. Trident believes
that its analyses and the summary set forth below must be considered as a whole,
and that selecting portions of its analyses without considering all of the
analyses, or reviewing the summary without considering all factors and analyses,
would create an incomplete view of the processes underlying the analyses set
forth in Trident's reports and its opinion. In performing its analyses, Trident
made numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the control
of South Carolina Community. The results of the specific analyses performed by
Trident may differ from South Carolina Community's actual values or actual
future results as a result of changing economic conditions, changes in company
strategy and policies, as well as a number of other factors. Such individual
analyses were prepared to provide valuation guidance solely as part of Trident's
overall valuation analysis and the determination of the fairness of the
consideration to be paid to South Carolina Community's shareholders. The
analyses do not purport to be appraisals or to reflect the prices at which a
company might actually be sold or the prices at which any securities may trade
at the present time or at any time in the future. In addition, as described
above, Trident's opinion and presentations to South Carolina Community's board
of directors were among the many factors taken into consideration by South
Carolina Community's board of directors in making its determination to approve
the merger agreement.
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The summaries below reflect all the material analyses, factors and
assumptions considered by Trident and the material valuation methods used by
Trident in arriving at its opinion as to fairness.
State of the Market
Trident reviewed the current and historical trading market for thrift and
bank equities, and current and historical trends in the acquisition markets for
banks and thrifts. Trident focused on the acquisition market for thrifts with
particular attention to the segments of the market which it believed to be the
most relevant to South Carolina Community, such as thrifts of similar size and
profitability, thrifts with similar capital structures and asset quality, and
thrifts located in the same geographic region. Trident also studied the trading
market for South Carolina Community common stock and compared the performance of
South Carolina Community common stock over the preceding 12 months to the
performance of the Standard and Poor's 500 Index and an index of thrift stocks.
Financial Analysis of South Carolina Community
Trident examined South Carolina Community's financial performance for the
period September 30, 1995 through March 31, 1999 by analyzing the composition of
its balance sheet, adjusting and normalizing its earnings, and calculating a
variety of operating and financial ratios for South Carolina Community. Trident
compared South Carolina Community's deposit market share with other financial
institutions operating in the same market.
Comparison to Actively-Traded Thrifts
Trident evaluated South Carolina Community's strengths and weaknesses by
comparing the financial performance of South Carolina Community to that of the
following groups of actively-traded thrifts:
. all U.S. thrifts;
. Southeast thrifts;
. South Carolina thrifts;
. thrifts with tangible capital between 15% and 25%;
. thrifts with a return on equity during the trailing four quarters
between 4% and 6%;
. thrifts with a return on assets during the trailing four quarters
between 0.90% and 1.10%;
. thrifts with total assets between $20 million and $70 million; and
. 11 actively-traded thrifts Trident believed were most similar to
South Carolina Community in terms of size, capital structure,
profitability and asset quality.
Trident compared South Carolina Community to the aforementioned groups of
actively-traded thrifts on the basis of its stock pricing, balance sheet
composition, capital ratios, asset quality and reserve coverage, asset and
deposit growth, return on average assets, return on average equity, and the
components of earnings during the trailing four quarters.
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Strategic Alternatives
Trident presented a list of advantages and disadvantages of various
strategic alternatives available to South Carolina Community:
. remain independent;
. enter into a merger of equals; and
. merge with a larger financial institution.
Trident projected future trading prices and acquisition values for South
Carolina Community common stock based on South Carolina Community's business
plan. Trident also compared the present values and rates of return for
remaining independent with the expected present value and rate of return that
might be realized in a merger transaction.
Prospective Acquirors
Trident presented South Carolina Community with a list of other financial
institutions with operations in the Southeast region that it believed to be
prospective acquirors. These prospective acquirors were categorized based on
Trident's perceived level of interest from the prospective acquiror and "fit"
with South Carolina Community.
Process
Trident reviewed the process that led to the merger agreement. Trident
presented a list of the financial institutions that were contacted regarding a
possible business combination with South Carolina Community, and the response
from each company contacted.
Guideline Transactions
Trident presented the pricing ratios for 12 pending or completed thrift
merger transactions in which the target thrift was of similar size and capital
structure as South Carolina Community. Trident then compared a number of
financial ratios for South Carolina Community to those of the target thrift
institutions.
<TABLE>
<CAPTION>
South Carolina
Community Low Median High
-------------------------------------------------
<S> <C> <C> <C> <C>
Price/Earnings 23.7x 16.5x 24.0x 30.6x
Price/Book Value 102.5% 102.1% 126.6% 151.1%
Price/T. Book Value 103.0% 102.1% 126.6% 151.1%
Price/Assets 21.7% 15.0% 24.6% 37.2%
Core Deposit Premium 1.0% 2.6% 7.3% 18.2%
</TABLE>
Trident gave significant weight to the price/earnings ratio because
acquirors are most concerned with the earnings contribution from a target.
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Review of Due Diligence Examination of Union Financial
Trident presented a summary of its on-site due diligence examination of
Union Financial. Union Financial's historical balance sheets and income
statements were presented, along with a variety of financial ratios and graphs
that analyzed Union Financial's financial condition and operating results
through March 31, 1999. Trident discussed Union Financial's business strategy,
strengths and weaknesses, profitability, growth, net interest margin, non-
interest income, operating expenses, intangible assets, borrowed funds, market
area, capital, asset quality and reserve coverage, concentrations of credit and
loan portfolio composition, use of derivatives, interest-rate risk, year 2000
preparations, regulatory exam results, subsidiary activities, culture,
technological expertise, stock pricing, and other issues.
Contribution Analysis
Trident analyzed the contribution of each company to the pro forma company
relative to the approximate ownership of the pro forma company. The analysis
indicated that South Carolina Community shareholders would hold approximately
27.8% of the pro forma diluted shares. South Carolina Community's approximate
contributions are listed below by category:
<TABLE>
<CAPTION>
South Carolina Community Union Financial
------------------------ ---------------
<S> <C> <C>
Assets 18.2% 81.8%
Equity 29.3% 70.7%
Tangible Equity 32.8% 67.2%
Net Income 27.5% 72.5%
</TABLE>
Summary of Proposed Transaction
Trident presented a summary of the financial terms of the merger. Trident
discussed the advantages and disadvantages of the merger from a financial point
of view. Trident also presented a pro forma financial statement for the
combined company and discussed the possible affects of earnings dilution and
accretion on Union Financial's common stock price.
Trident reported that during its investigation, Trident did not discover
any conditions that would prevent it from rendering its fairness opinion to
South Carolina Community's board of directors. As discussed above, Trident
relied, without independent verification, upon the accuracy and completeness of
all of the financial and other information provided by South Carolina Community
and Union Financial.
Trident, as part of its investment banking business, is continually engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwriting, and valuations for corporate and
other purposes. Trident has extensive experience with the valuation of
financial institutions. Trident served as South Carolina Community's sales
agent in its mutual-to-stock conversion in 1994. In addition, in the ordinary
course of business, Trident may trade the securities of South Carolina Community
for its own account and for the accounts of its customers and, accordingly, may
at any time hold a long or short position in such securities. The board of
directors selected Trident as its financial advisor because of its previous
experience with Trident, because Trident is a nationally recognized investment
banking firm specializing in financial institutions, and because of its
substantial experience in transactions similar to the merger. Trident is not
affiliated with the South Carolina Community or Union Financial.
For its services as financial advisor, South Carolina Community paid
Trident $5,000 as a retainer and $10,000 upon delivery of a financial and
strategic analysis report. South Carolina Community paid Trident a fee of
$25,000 upon execution of the merger agreement. An additional fee equal to
1.25% of the
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total merger consideration, less $25,000, will be payable to Trident upon
consummation of the merger (a balance due of approximately $91,500) based on the
total merger consideration and the aforementioned fee structure. South Carolina
Community has also agreed to reimburse Trident for its reasonable out-of-pocket
expenses and to indemnify Trident against certain liabilities, including certain
liabilities under federal securities laws.
South Carolina Community Shareholders Have Appraisal Rights in the Merger
If you do not wish to accept the merger consideration provided for in the
merger agreement you have the right to dissent from the merger and to receive
payment in cash for the fair value of your South Carolina Community common
stock. South Carolina Community shareholders electing to exercise dissenters'
rights must comply with the provisions of Section 262 of the Delaware General
Corporation Law ("DGCL") in order to perfect their rights. South Carolina
Community will require strict compliance with the statutory procedures. A copy
of Section 262 is attached as Appendix D.
The following is intended as a brief summary of the material provisions of
the Delaware statutory procedures required to be followed by a shareholder in
order to dissent from the merger and perfect the shareholder's dissenters'
rights. This summary, however, is not a complete statement of all applicable
requirements and is qualified in its entirety by reference to Section 262 of the
DGCL, the full text of which appears in Appendix D of this joint proxy
statement/prospectus.
Section 262 requires that shareholders be notified that dissenters'
appraisal rights will be available at least 20 days before the special meeting
to vote on the merger. A copy of Section 262 must be included with such notice.
This proxy statement/prospectus constitutes South Carolina Community's notice to
its shareholders of the availability of dissenters' rights in connection with
the merger, in compliance with the requirements of Section 262. If you wish to
consider exercising your dissenters' rights you should carefully review the text
of Section 262 contained in Appendix D because failure to timely and properly
comply with the requirements of Section 262 will result in the loss of your
dissenters' rights under Delaware law.
If you elect to demand appraisal of your shares, you must satisfy each of
the following conditions:
. You must deliver to South Carolina Community a written demand for
appraisal of your shares before the vote with respect to the merger is
taken. This written demand for appraisal must be in addition to and
separate from any proxy or vote abstaining from or against the merger.
Voting against or failing to vote for the merger by itself does not
constitute a demand for appraisal within the meaning of Section 262.
. You must not vote in favor of the merger. An abstention or failure to
vote will satisfy this requirement, but a vote in favor of the merger,
by proxy or in person, will constitute a waiver of your dissenters'
rights in respect of the shares so voted and will nullify any
previously filed written demands for appraisal.
If you fail to comply with either of these conditions and the merger is
completed, you will be entitled to receive the cash payment for your shares of
South Carolina Community common stock as provided for in the merger agreement,
but you will have no dissenters' rights with respect to your shares of South
Carolina Community common stock.
All demands for appraisal should be addressed to the Corporate Secretary,
South Carolina Community Bancshares, Inc., 110 South Congress Street, Winnsboro,
South Carolina 29180, before the vote on the merger is taken at the special
meeting and should be executed by, or on behalf of, the record holder of the
shares of South Carolina Community common stock. The demand must reasonably
inform South
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Carolina Community of the identity of the shareholder and the intention of the
shareholder to demand appraisal of his or her shares.
To be effective, a demand for appraisal by a holder of South Carolina
Community common stock must be made by or in the name of such registered
shareholder, fully and correctly, as the shareholder's name appears on his or
her stock certificate(s) and cannot be made by the beneficial owner if he or she
does not also hold the shares of record. The beneficial holder must, in such
cases, have the registered owner submit the required demand in respect of such
shares.
If shares are owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, execution of a demand for appraisal should be
made in such capacity; and if the shares are owned of record by more than one
person, as in a joint tenancy or tenancy in common, the demand should be
executed by or for all joint owners. An authorized agent, including one for two
or more joint owners, may execute the demand for appraisal for a shareholder of
record; however, the agent must identify the record owner or owners and
expressly disclose the fact that, in executing the demand, he or she is acting
as agent for the record owner. A record owner, such as a broker, who holds
shares as a nominee for others, may exercise his or her right of appraisal with
respect to the shares held for one or more beneficial owners, while not
exercising this right for other beneficial owners. In such case, the written
demand should state the number of shares as to which appraisal is sought. Where
no number of shares is expressly mentioned, the demand will be presumed to cover
all shares held in the name of such record owner.
If you hold your shares of South Carolina Community common stock in a
brokerage account or in other nominee form and you wish to exercise appraisal
rights, you should consult with your broker or such other nominee to determine
the appropriate procedures for the making of a demand for appraisal by such
nominee.
Within 10 days after the effective date of the merger, Union Financial must
give written notice that the merger has become effective to each South Carolina
Community shareholder who has properly filed a written demand for appraisal and
who did not vote in favor of the merger. Within 120 days after the effective
date, either Union Financial or any shareholder who has complied with the
requirements of Section 262 may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of the shares held by all
shareholders entitled to appraisal. Union Financial does not presently intend to
file such a petition in the event there are dissenting shareholders and has no
obligation to do so. Accordingly, the failure of a shareholder to file such a
petition within the period specified could nullify such shareholder's previously
written demand for appraisal.
At any time within 60 days after the effective date, any shareholder who
has demanded an appraisal has the right to withdraw the demand and to accept the
cash payment specified by the merger agreement for his or her shares of South
Carolina Community common stock. If a petition for appraisal is duly filed by a
shareholder and a copy of the petition is delivered to Union Financial, Union
Financial will then be obligated within 20 days after receiving service of a
copy of the petition to provide the Chancery Court with a duly verified list
containing the names and addresses of all shareholders who have demanded an
appraisal of their shares. After notice to dissenting shareholders, the
Chancery Court is empowered to conduct a hearing upon the petition, to determine
those shareholders who have complied with Section 262 and who have become
entitled to the appraisal rights provided thereby. The Chancery Court may
require the shareholders who have demanded payment for their shares to submit
their stock certificates to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any shareholder fails to comply
with such direction, the Chancery Court may dismiss the proceedings as to such
shareholder.
After determination of the shareholders entitled to appraisal of their
shares of South Carolina Community common stock, the Chancery Court will
appraise the shares, determining their fair value
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exclusive of any element of value arising from the accomplishment or expectation
of the merger, together with a fair rate of interest. When the value is
determined, the Chancery Court will direct the payment of such value, with
interest thereon accrued during the pendency of the proceeding if the Chancery
Court so determines, to the shareholders entitled to receive the same, upon
surrender by such holders of the certificates representing such shares.
In determining fair value, the Chancery Court is required to take into
account all relevant factors. You should be aware that the fair value of your
shares as determined under Section 262 could be more, the same, or less than the
value that you are entitled to receive pursuant to the merger agreement.
Costs of the appraisal proceeding may be imposed upon Union Financial and
the shareholders participating in the appraisal proceeding by the Chancery Court
as the Chancery Court deems equitable in the circumstances. Upon the
application of a shareholder, the Chancery Court may order all or a portion of
the expenses incurred by any shareholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, to be charged pro rata against the value of all
shares entitled to appraisal. Any shareholder who demanded appraisal rights
will not, after the effective date, be entitled to vote shares subject to such
demand for any purpose or to receive payments of dividends or any other
distribution with respect to such shares (other than with respect to payment as
of a record date prior to the effective date); however, if no petition for
appraisal is filed within 120 days after the effective date, or if such
shareholder delivers a written withdrawal of his or her demand for appraisal and
an acceptance of the merger within 60 days after the effective date, then the
right of such shareholder to appraisal will cease and such shareholder will be
entitled to receive the cash payment for shares of his or her South Carolina
Community common stock pursuant to the merger agreement. Any withdrawal of a
demand for appraisal made more than 60 days after the effective date of the
merger may only be made with the written approval of the surviving corporation
and must, to be effective, be made within 120 days after the effective date.
In view of the complexity of Section 262, South Carolina Community
shareholders who may wish to dissent from the merger and pursue appraisal rights
should consult their legal advisors.
Interests of South Carolina Community's Directors and Officers in the Merger
that Differ From Your Interests
Some members of South Carolina Community's management and the South
Carolina Community board may have interests in the merger that are in addition
to, or different from, the interests of shareholders. The South Carolina
Community board was aware of these interests and considered them in approving
the merger agreement.
Employment Contracts
Community Federal Savings Bank is a party to an employment agreement with
its President and Chief Executive Officer, Alan W. Pullen, which requires that
Mr. Pullen be paid a severance payment totaling approximately $417,000 if he is
terminated following a "change in control" of Community Federal Savings Bank or
South Carolina Community. The merger will constitute a change in control of
South Carolina Community. In addition, South Carolina Community is a party to a
supplemental executive agreement with Mr. Pullen which would provide Mr. Pullen
with any compensation that might be cut-back under his employment agreement in
the event that the total of all payments to Mr. Pullen as the result of a change
in control would cause Mr. Pullen to have an "excess parachute payment" as
defined in Section 280G of the Internal Revenue Code. In addition, the
supplemental agreement would provide Mr. Pullen an additional amount sufficient
to pay any excise taxes applicable to such payment and any taxes due on the
excise tax gross-up payment. Nevertheless, Mr. Pullen has agreed to forego his
rights to payment under the
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employment agreement and supplemental executive agreement and will enter into an
employment agreement with a three year term and automatic renewal features with
Union Financial and Provident Community Bank.
Under the terms of the employment agreement, Mr. Pullen will serve as
Senior Vice President/City Executive of Provident Community Bank for a base
salary of $70,000 per year. In addition, Mr. Pullen will be entitled to
incentive compensation and bonuses provided under any plan for which he is
eligible. In the event of Mr. Pullen's termination of employment by Provident
Community Bank for reasons other than retirement, death, disability, a change in
control, or termination for cause or in the event of Mr. Pullen's voluntary
resignation following certain actions by Provident Community Bank, Mr. Pullen
will be entitled to a severance payment equal to the base salary, bonuses and
other cash or deferred compensation paid or to be paid for the remaining term of
the agreement. In the event of Mr. Pullen's termination of employment following
a change in control, Mr. Pullen will be entitled to a severance benefit equal to
2.99 times his "base amount" within the meaning of Section 280G(b)(3) of the
Code. The employment agreement also provides for a disability benefit if Mr.
Pullen's employment is terminated as a result of his disability. As the result
of Mr. Pullen's agreeing to accept employment with Union Financial and entering
into the employment agreement, Union Financial does not expect to pay to Mr.
Pullen the severance payments payable under the Community Federal Savings Bank
and South Carolina Community employment and supplemental executive agreements.
The employment agreement also provides Mr. Pullen with the opportunity to
terminate employment on a voluntary basis during a 30-day window beginning after
the first nine months of the initial term and receive a severance payment equal
to $140,000. In the event of his voluntary termination, Mr. Pullen would be
subject to a six-month restriction on his ability to compete with Provident
Community Bank in Winnsboro, South Carolina and the surrounding area.
Community Federal Savings Bank is also a party to a severance agreement
with its Chief Financial Officer and Corporate Secretary-Controller, Terri C.
Robinson, which requires that Ms. Robinson be paid a severance payment totaling
approximately $186,000 and continuation of her other employee benefits if she is
terminated following a "change in control" of South Carolina Community. However,
the severance agreement limits Ms. Robinson's payment to an amount that
does not result in an "excess parachute payment" under applicable provisions of
federal tax law. Accordingly, South Carolina Community has entered into a
supplemental executive agreement with Ms. Robinson that would provide her with
additional compensation in the form of benefits not otherwise payable under her
severance agreement with Community Federal Savings Bank and a tax
indemnification payment in the event that the total of all payments to Ms.
Robinson as a result of the change in control would cause her to have an "excess
parachute payment." The merger will constitute a change in control of South
Carolina Community. Accordingly, under the severance agreement and the
supplemental executive agreement, Ms. Robinson would be entitled to total
payments of $294,000. Community Federal Savings Bank also is a party to a
severance agreement with Michael C. Hough, its Chief Operating Officer, which
requires that he be paid a severance payment of approximately $52,000 and
continuation of his other employee benefits if he is terminated following a
change in control. Unless Ms. Robinson or Mr. Hough enters into an employment
contract or other agreement with Union Financial, they will be paid a severance
payment in accordance with their agreements.
Appointment of South Carolina Community Directors to Union Financial Board
Union Financial and Provident Community Bank have agreed to appoint three
South Carolina Community directors, namely, Philip C. Wilkins, John S. McMeekin
and Quay McMaster to their boards of directors. In accordance with the merger
agreement, the term for Mr. McMaster will expire in the year 2000 and the terms
for Messrs. Wilkins and McMeekin shall expire in their respective classes, which
are yet to be determined.
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Vesting of Restricted Stock
Directors and officers of South Carolina Community received grants of
restricted stock under South Carolina Community's 1994 Management Recognition
and Retention Plan (the "MRRP"), with vesting of the shares to occur over a
period of five years. Under the terms of the MRRP, all unvested restricted
shares of South Carolina Community common stock will become vested upon a change
in control of South Carolina Community. The merger will constitute a change in
control of South Carolina Community. The directors and executive officers of
South Carolina Community currently hold a total of 3,980 shares of unvested
restricted stock, which will be converted into the right to receive the merger
consideration. The following table reflects the number of shares of unvested
restricted stock held by each director and executive officer of South Carolina
Community and merger consideration payment each will receive in exchange for
such shares.
<TABLE>
<CAPTION>
Total Merger
Number of Unvested Consideration for
Shares of Restricted Unvested Shares of
Name And Title Stock Restricted Stock
-------------- -------------------- ------------------
<S> <C> <C>
Quay W. McMaster, Chairman 390
Richard H. Burton, Vice Chairman 390
George R. Lauderdale, Jr., Treasurer 390
W. Lindsay Wylie, Director Emeritus 390
Alan W. Pullen, President 1,920
Terri C. Robinson, Secretary-Controller 500
</TABLE>
Stock Options
So long as the merger consideration to be paid for each share of South
Carolina Community common stock is greater than the price at which persons
holding options to purchase South Carolina Community common stock may exercise
such options, each outstanding and unexercised option to purchase South Carolina
Community common stock will be cashed out. In exchange for each option to
purchase a share of South Carolina Community common stock, vested or unvested,
option holders will receive cash equal to the product of:
. the number of shares of South Carolina Community common stock subject
to those options and
. an amount of cash equal to the excess of the cash value of the merger
consideration over the exercise price of the options;
. less the amount that must be withheld for tax purposes.
The cash value of the merger consideration will be determined using the
market value formula described on page _____. For example, assume that the
market value of the merger consideration to be exchanged for each share of South
Carolina Community common stock is $17.50. Also, assume that you have an option
to purchase 10 shares of South Carolina Community common stock at $16.50. In
exchange for these options, you would be entitled to receive a cash payment of:
----
. $17.50 - $16.50 = $1.00, times
. 10
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Therefore, in exchange for your options to purchase 10 shares of South
Carolina Community common stock, you would receive $10.00, less any amount
required to be withheld for tax purposes.
Protection of South Carolina Community Directors and Officers Against
Claims
Union Financial has agreed to indemnify and hold harmless each present and
former director and officer of South Carolina Community for a period of six
years from liability and expenses arising out of matters existing or occurring
at or prior to the consummation of the merger to the fullest extent allowed
under Delaware law as in effect at the time of closing. This indemnification
extends to liability arising out of the transactions contemplated by the merger
agreement. Union Financial has also agreed to advance any costs to each of
these persons as they are incurred. Union Financial has also agreed that it
will maintain a policy of directors' and officers' liability insurance coverage
for the benefit of South Carolina Community's directors and officers for three
years following consummation of the merger.
Regulatory Approvals Needed to Complete the Merger
Completion of the merger and the bank merger are subject to prior approval
by the OTS under the Home Owners' Loan Act of 1933, as amended ("HOLA").
Section 10(e) of HOLA requires that the application be evaluated by taking into
consideration the financial and managerial resources and future prospects of
Union Financial and South Carolina Community, the risks to the federal deposit
insurance funds and the convenience and needs of relevant communities. In
addition, Section 10(e)(2) of HOLA requires that the Director of the OTS not
approve any proposed acquisition which would: (1) result in a monopoly, or
further any combination or conspiracy to monopolize the savings and loan
business in any part of the United States; or (2) substantially lessen
competition or restrain trade, unless the OTS finds that the anti-competitive
effects of the proposed acquisition are clearly outweighed by the convenience
and needs of the communities to be served. The OTS has the authority to deny an
application if it concludes that the combined organization would have an
inadequate capital position. Furthermore, the OTS must also assess the records
of the bank subsidiaries of Union Financial and South Carolina Community under
the Community Reinvestment Act of 1977, as amended ("CRA"). The CRA requires
that the OTS analyze and take into account each bank's record of meeting the
credit needs of its local communities, including low- and moderate-income
neighborhoods, consistent with safe and sound operation. The OTS may also
request additional information from applicants.
Under HOLA, the merger may not be consummated until up to 30 days, and in
no event less than 15 days, following the date of OTS approval, during which
time the Department of Justice may challenge the merger on antitrust grounds.
The commencement of an antitrust action would stay the effectiveness of OTS
approval, unless a court specifically orders otherwise. HOLA provides for the
publication of notice and public comment on applications and authorizes OTS to
permit interested parties to intervene in the proceedings.
Under HOLA, the OTS is required to act on the application within the 90 day
period that begins on the date of submission to the OTS of a complete record of
the application (a period that will be tolled by any public comments or other
circumstances that may trigger further requests for information from the OTS).
Union Financial filed its application with the OTS on August 23, 1999.
There can be no assurance that the OTS will approve the merger, and if the
merger is approved, there can be no assurance as to the date of such approval.
There can likewise be no assurance that the Department of Justice will not
challenge the merger, or if such a challenge is made, as to the result. The
merger and the bank merger cannot proceed in the absence of the requisite
regulatory approvals. See "THE MERGER AGREEMENT--Conditions to Completing the
Merger" and "--Terminating the Merger Agreement."
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A copy of the application filed with the OTS was also filed with the Board
of Financial Institutions of the State of South Carolina for its review. Union
Financial is not aware of other regulatory approvals that would be required for
completion of the merger, except as described above. Should other approvals be
required, it is presently contemplated that such approvals would be sought.
There can be no assurance that Union Financial will be able to obtain other
approvals, if required.
The approval of any application merely implies the satisfaction of
regulatory criteria for approval, which does not include review of the merger
from the standpoint of the adequacy of the consideration to be received by South
Carolina Community shareholders. Furthermore, regulatory approvals do not
constitute an endorsement or recommendation of the merger.
Accounting Treatment of the Merger
Union Financial will account for the merger under the purchase method of
accounting. This means that Union Financial and South Carolina Community will
be treated as one company as of the date of the merger and Union Financial will
record the fair market value of South Carolina Community's assets less
liabilities on its financial statements. Union Financial will record any
difference between the purchase price and the fair value of South Carolina
Community's identifiable net assets as goodwill.
Listing of Union Financial Common Stock
Union Financial stock is listed on the Nasdaq SmallCap Market, yet has
applied to upgrade its listing to the Nasdaq National Market. Union Financial
has agreed to use reasonable efforts to cause the shares of its common stock
that will be issued in the merger to be approved for quotation on the Nasdaq
SmallCap Market, or such other stock market upon which its shares are listed,
prior to or at the completion of the merger. The obligations of the parties to
complete the merger are subject to the approval for quotation on the Nasdaq of
such shares. See "THE MERGER AGREEMENT--Conditions to Completing the Merger."
Resale of Union Financial Common Stock
The shares of Union Financial common stock to be issued to shareholders of
South Carolina Community upon consummation of the merger have been registered
under the Securities Act. Such shares may be traded freely and without
restriction by those shareholders not deemed to be "affiliates" of South
Carolina Community or Union Financial as that term is defined in the rules under
the Securities Act. Union Financial common stock received by those shareholders
of South Carolina Community who are deemed to be "affiliates" of South Carolina
Community on the date of the special meeting may be resold without registration
only to the extent provided for by Rule 145, or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of South Carolina
Community generally include individuals or entities that control, are controlled
by or are under common control with, South Carolina Community, and may include
the executive officers and directors of South Carolina Community and certain of
their affiliates as well as certain principal shareholders of South Carolina
Community. In the merger agreement, South Carolina Community has agreed to use
its best efforts to cause each person who may be deemed to be an affiliate of
South Carolina Community to enter into an agreement with Union Financial
providing that such affiliate will not sell, transfer, or otherwise dispose of
the shares of Union Financial common stock to be received by such person in the
merger except in compliance with the applicable provisions of the Securities Act
and the rules and regulations promulgated thereunder. This joint proxy
statement/prospectus does not cover any resales of Union Financial common stock
received by affiliates of South Carolina Community.
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THE MERGER AGREEMENT
The following describes material provisions of the merger agreement. This
description does not purport to be complete and is qualified by reference to the
merger agreement, which is attached as Appendix A and is incorporated into this
joint proxy statement/prospectus by reference.
Terms of the Merger
The merger agreement provides for a business combination in which South
Carolina Community will merge with Union Financial, and Union Financial will be
the surviving corporation in the merger. After closing of the merger, the
separate corporate existence of South Carolina Community will cease. The
directors of Union Financial will consist of the directors of Union Financial
serving immediately prior to the closing date plus three former directors of
South Carolina Community. Union Financial will continue to be governed by the
laws of the State of Delaware and its name and corporate existence will be
unaffected by the merger. Under the merger agreement, Union Financial has the
right to revise the structure of the transaction so long as the revised
structure does not:
. change the amount or kind of consideration being paid to South
Carolina Community shareholders;
. diminish the benefits of the transaction to South Carolina Community
shareholders, directors, officers and employees; or
. materially delay or impede the receipt of any required regulatory
approval.
As previously explained on page __, each share of South Carolina Community
common stock will be converted into the right to receive cash and Union
Financial stock. The merger agreement requires that each share of South
Carolina Community stock be exchanged for:
. cash equal to $5.25 and stock equal to 0.817 of a share of Union
Financial stock for each South Carolina Community share, if the Union
Financial market value (as previously defined) is greater than $15.00
per share;
. cash equal to $5.25 and shares of Union Financial stock such that the
total value received is equal to $17.50 for each South Carolina
Community share, if the Union Financial market value is greater than
or equal to $12.50 per share and less than or equal to $15.00 per
share;
. cash equal to $5.25 and stock equal to 0.980 of a share of Union
Financial stock for each South Carolina Community share, if the Union
Financial market value is greater than or equal to $12.00 per share
and less than $12.50 per share; or
. stock equal to 0.980 of a share of Union Financial stock and
additional cash equal to the difference between the Union Financial
market value of 0.980 of a share of Union Financial stock and $17.00,
if the Union Financial market value is less than $12.00 per share.
SCCB shareholders will also receive cash in lieu of fractional shares of
Union Financial stock to which they would otherwise be entitled.
If there is a change in the capitalization of Union Financial as a result
of a stock split, stock dividend, reclassification, recapitalization or other
similar transaction, the amount of the merger consideration will be equitably
adjusted. Shares held directly or indirectly by Union Financial and shares held
by South Carolina
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Community as treasury stock will be cancelled and retired upon completion of the
merger, and no payment will be made for them. Cancelled shares will not include
shares held by either South Carolina Community or Union Financial in a fiduciary
capacity or in satisfaction of a debt previously contracted. Holders of shares
for which dissenters' rights have been exercised will be entitled only to the
rights granted by Section 262 of the DGCL.
Management and Operations Following the Merger
Effective as of the closing of the merger, Union Financial will enter into
an employment agreement with South Carolina Community's President and CEO, Alan
Pullen. Under the terms of this agreement, Mr. Pullen will become Senior Vice
President/City Executive of Provident Community Bank. His agreement has a term
of three years and requires him to be paid at least $70,000 per year.
Additionally, Union Financial has agreed to increase the size of its board
of directors and Provident Community Bank's board to permit for the appointment
of Philip C. Wilkins, John S. McMeekin and Quay McMaster to the board. Messrs.
Wilkins, McMeekin and McMaster are currently serving on South Carolina
Community's and Community Federal's boards of directors. The merger agreement
requires that Mr. McMaster's term on the Union Financial and Provident Community
Bank boards expire in 2000.
Stock Options
Under the merger agreement, each outstanding and unexercised stock option
granted under the South Carolina Community Bancshares 1994 Stock Option Plan
will be cancelled. The holders of such options will be paid in cash an amount
equal to the number of shares of South Carolina Community common stock subject
to such options at the closing date, multiplied by an amount equal to the excess
of the cash value of the merger consideration over the exercise price per share
of such option, minus any applicable federal or state withholding taxes. If an
option exercise price is greater than the merger consideration, each outstanding
stock option will be cancelled without any payment upon completion of the
merger.
Bank Merger
In connection with the merger, Provident Community Bank and Community
Federal will merge pursuant to a Plan of Bank Merger, with Provident Community
Bank being the surviving bank. It is the intention of Union Financial to
operate the former offices of Community Federal as branch offices of Provident
Community Bank. The bank merger agreement may be terminated by mutual consent
in writing of the parties, if the majority of the boards of directors of both
banks vote to terminate the agreement. The agreement will be terminated
automatically in the event the merger agreement is terminated.
When the Merger Will be Completed
The closing of the merger will take place on a date designated by Union
Financial that is no later than five business days following the date on which
the last waiting period under the required regulatory approvals expires and all
of the conditions to the merger contained in the merger agreement are satisfied
or waived, unless Union Financial and South Carolina Community agree to another
date. See "--Conditions to Completing the Merger." On the date of the closing,
Union Financial and South Carolina Community will execute, and Union Financial
will file, a certificate of merger with the Delaware Secretary of State merging
South Carolina Community into Union Financial. The merger will become effective
at the time stated in the certificate of merger.
We expect to complete the merger in the fourth calendar quarter of 1999.
However, we cannot guarantee when or if the required regulatory approvals will
be obtained. See "--Regulatory Approvals
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Needed to Complete the Merger." Furthermore, either party may terminate the
merger agreement if, among other reasons, the merger has not been completed on
or before March 31, 2000, unless failure to complete the merger by that time is
due to the breach of any representation, warranty or covenant by the party
seeking to terminate. See "--Terminating the Merger Agreement."
Procedures for Exchanging Your Stock Certificates
Union Financial will appoint an exchange agent to handle the exchange of
South Carolina Community stock certificates for Union Financial stock, cash and
cash in lieu of fractional shares of Union Financial stock. Within five
business days after the completion of the merger, Union Financial or the
exchange agent will mail to each former holder of record of South Carolina
Community common stock a letter explaining how to exchange South Carolina
Community stock certificates for the merger consideration. Holders of South
Carolina Community stock that surrender their certificates as directed, together
with a properly completed letter of transmittal, will receive the appropriate
merger consideration. Holders of unexchanged South Carolina Community
certificates will not be entitled to receive any dividends or other
distributions payable by Union Financial after the closing until their
certificates are surrendered.
Please do not send in your South Carolina Community stock certificates
until you receive the letter of transmittal and instructions from Union
Financial. Do not return your stock certificates with the enclosed proxy.
After the completion of the merger, there will be no further transfers of
South Carolina Community common stock. South Carolina Community stock
certificates presented for transfer after the completion of the merger will be
cancelled and exchanged for the merger consideration.
If your South Carolina Community stock certificates have been lost, stolen
or destroyed, you will have to prove your ownership of these certificates and
that they were lost, stolen or destroyed before you receive any consideration
for your shares. Union Financial will send you instructions on how to provide
such evidence.
Conditions to Completing the Merger
The obligations of Union Financial and South Carolina Community to
consummate the merger are conditioned on the following:
. the approval of the merger agreement by Union Financial's and South
Carolina Community's shareholders;
. the receipt of all required regulatory approvals and the expiration of
all statutory waiting periods;
. no party to the merger being subject to any legal order that prohibits
consummating any part of the transaction and no governmental entity
having instituted any proceeding for the purpose of blocking the
transaction;
. the absence of any statute, rule or regulation that prohibits
completion of any part of the transaction;
. each party having performed in all material respects its obligations
under the merger agreement, each party's representations and
warranties being true and correct as of the date
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of the merger agreement and as of the closing date, and receipt of a
certificate signed by each party's chief executive officer and chief
financial officer to such effect;
. the delivery to Union Financial by South Carolina Community of
affiliate letters pursuant to which South Carolina Community's
affiliates agree to comply with Rule 145 of the Securities Act with
regard to any shares of Union Financial stock they receive in the
merger;
. the listing on the Nasdaq SmallCap Market or such other market as the
shares of Union Financial shall then be trading, of the shares of
Union Financial stock issued to the South Carolina Community
shareholders in exchange for their South Carolina Community stock; and
. the receipt by each party of a legal opinion that the merger will be
treated as a reorganization for federal income tax purposes.
The obligations of Union Financial to complete the merger are also
conditioned on the number of shares for which dissenters' rights have been
exercised not exceeding 10% of the outstanding shares of South Carolina
Community common stock.
The obligations of South Carolina Community to complete the merger are also
conditioned on Union Financial having deposited the funds to pay the merger
consideration in a segregated account with a bank or trust company selected by
Union Financial to act as exchange agent.
South Carolina Community cannot guarantee whether all of the conditions to
the merger will be satisfied or waived by the party permitted to do so. If the
merger is not completed on or before March 31, 2000, the merger agreement may be
terminated by a vote of a majority of the board of directors of either Union
Financial or South Carolina Community.
Conduct of Business Prior to the Merger
South Carolina Community has agreed that, until the completion of the
merger, South Carolina Community will use its best efforts to:
. conduct its business in the regular, ordinary and usual course
consistent with past practice;
. maintain and preserve intact its business organization, properties,
leases, employees and advantageous business relationships and retain
the services of its officers and key employees;
. take no action which would interfere with the ability of South
Carolina Community or Union Financial to perform their respective
covenants and agreements on a timely basis under the merger agreement;
. take no action which would interfere with any party's ability to
obtain any necessary approvals, consents or waivers of any
governmental authority required for the transactions contemplated by
the merger agreement; and
. take no action that results in or is reasonably likely to have a
material adverse effect on South Carolina Community or Community
Federal.
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Further, except as otherwise provided in the merger agreement, until the
completion of the merger, South Carolina Community has agreed that it will not
take certain actions unless permitted to do so by Union Financial. South
Carolina Community has agreed that it will not:
. amend its Certificate of Incorporation, bylaws, or similar governing
documents, or those of Community Federal Savings Bank's;
. issue any shares of its capital stock or any securities convertible or
exercisable for any shares of its capital stock other than shares
issued upon the exercise of outstanding stock options; change the
terms of any of its outstanding stock options or issue any option; or
change its capitalization;
. except for $.17 per share quarterly cash dividends, pay any cash or
stock dividends;
. dispose of any of its material assets other than in the ordinary
course of business consistent with past practice;
. increase the compensation or fringe benefits of any of its employees
or directors, by more than 2% of the employee's previous year's
compensation, other than general increases in compensation for non-
executive officer employees in the ordinary course of business
consistent with past practice that do not exceed 10% of such person's
compensation at March 31, 1999; adopt, establish or amend any South
Carolina Community employee benefit plan unless required by the merger
agreement or by law; hire any employee with an annual total
compensation in excess of $20,000; or enter into any employment
contract or other agreement with any director, officer or other
employee;
. change its method of accounting as in effect at June 30, 1998, except
as required by changes in generally accepted accounting practices
("GAAP");
. settle any claim against South Carolina Community or Community Federal
Savings Bank for more than $25,000 or agree to material restrictions
on the operations of South Carolina Community or Community Federal
Savings Bank;
. acquire any business or assets of another business that would be
material to South Carolina Community;
. make any real estate loans other than in the ordinary course of
business secured by undeveloped land or non-residential real estate
located outside of South Carolina or make any non-residential
construction loans outside of South Carolina, except pursuant to
existing loan commitments;
. take any action that would prevent the merger from being treated as a
tax-free reorganization;
. open any new branches or office facilities other than those for which
all regulatory approvals have been obtained;
. make any investment other than in the ordinary course of business
consistent with past practice in individual amounts not to exceed
$10,000, other than certain debt securities;
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. make any investment in any debt security (including mortgage-backed
and mortgage-related securities), except for short- to intermediate-
term U.S. government and agency securities, mortgage-backed or
mortgage-related securities which would not be considered "high risk"
securities by the OTS, or securities of the Federal Home Loan Bank
("FHLB"), or materially restructure or change its investment
securities portfolio;
. enter into, renew, amend or terminate any contract, or make any change
in any of its leases or contracts, other than with respect to those
involving the payment of less than $20,000 per year;
. make, grant or purchase any loan in excess of $10,000 to any
individual borrower, unless such loan is fully secured by real estate,
personal property, or liquid collateral and is in conformity with
existing lending procedures; or to renew any outstanding loans above
$10,000 unless the loan has a satisfactory payment history and the
renewal amount does not exceed the original loan principal amount;
. incur any additional borrowings other than short-term (six months or
less) FHLB borrowings and reverse repurchase agreements consistent
with past practice, or pledge any of its assets to secure any
borrowings other than as required pursuant to the terms of borrowings
currently in effect or in connection with borrowings or reverse
repurchase agreements permitted under the merger agreement;
. make any capital expenditures in excess of $10,000 per expenditure
other than pursuant to binding commitments and other than expenditures
necessary to maintain existing assets in good repair or to make
payment of necessary taxes;
. organize, capitalize, lend to, or otherwise invest in any subsidiary,
or acquire any equity or voting interest in any business (other than
securities of the FHLB purchased in the ordinary course of business);
. elect any new senior executive officer or director;
. accept any proposed deposits by any municipality or government agency
for terms exceeding 90 days; or
. take or omit to take any action that is intended or may reasonably be
expected to result in any of South Carolina Community's
representations and warranties contained in the merger agreement being
or becoming untrue in any material respect.
Covenants of Union Financial and South Carolina Community in the Merger
Agreement
Agreement Not to Solicit Other Offers
South Carolina Community has agreed not to seek to have an outside third
party try to buy a material interest in South Carolina Community or its
subsidiaries. Generally, an effort by South Carolina Community to obtain an
offer to engage in a merger or similar business combination, buy at least 10% of
South Carolina Community's assets or 10% of South Carolina Community's stock, or
a public announcement to enter into an agreement to do any of these things,
would violate this covenant.
Despite South Carolina Community's agreement not to solicit other offers,
the South Carolina Community board may generally enter into discussions or
negotiations with anyone who makes an
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unsolicited, written bona fide proposal to acquire South Carolina Community that
is a financially superior proposal to that of Union Financial. A proposal of
this nature is one about which South Carolina Community's financial advisors
opine in writing is superior to this merger from a financial point of view to
South Carolina Community's shareholders. For the South Carolina Community board
to enter into negotiations on a superior proposal, it would also have to first
determine that the board members' fiduciary duties obligate them to do so. If
South Carolina Community does enter into negotiations with a third party
regarding a superior proposal, it has to notify Union Financial and provide
Union Financial with information about the other party and its proposal.
The South Carolina Community board may also withdraw or modify its
recommendation for the merger and enter into a business combination with a third
party if, after consulting with independent legal counsel, the board determines
in good faith that doing so is necessary for it to comply with its fiduciary
duties to shareholders.
Employee Matters
Each Community Federal employee whose employment is not specifically
terminated will become an employee of Provident Community Bank. Union Financial
will use its best efforts to retain all Community Federal employees, subject to
their qualifications and the needs of Provident Community Bank.
Appropriate steps will be taken to terminate all of South Carolina
Community's employee benefit plans around the time the merger closes. All
former employees of Community Federal who continue as employees of Provident
Community Bank will be eligible to participate in Union Financial's employee
benefit plans on the same basis as any newly-hired employee of Union Financial
or Provident Community Bank. However, service with Community Federal will also
be treated as service with Union Financial or Provident Community Bank for
purposes of determining eligibility to participate and vesting with respect to
each Union Financial benefit plan. Service with South Carolina Community or
Community Federal also will be treated as service with Union Financial or
Provident Community Bank for purposes of satisfying any waiting periods,
evidence of insurability requirements or the application of any preexisting
condition limitation with respect to any Union Financial or Provident Community
welfare benefit plan.
When the merger closes, each South Carolina Community employee who is a
participant in the South Carolina Community 401(k) Plan will become fully vested
in his or her account balance. The South Carolina Community 401(k) Plan will
either be merged with Union Financial's 401(k) Plan or be terminated and
replaced by Union Financial's 401(k) Plan. Additionally, all unvested shares of
restricted stock in South Carolina Community's MRRP will become vested and
converted to the right to receive the merger consideration.
Further, at or prior to the consummation of the merger, South Carolina
Community will terminate its ESOP. After consummation of the merger, the ESOP
will repay the outstanding balance of its loan and allocate any surplus cash or
Union Financial shares to the accounts of ESOP participants in proportion to
their account balances, to the extent allowed under applicable law and the
governing documents of the ESOP.
Indemnification of South Carolina Community Officers and Directors
Union Financial has agreed to indemnify and hold harmless each present and
former director and officer of South Carolina Community for a period of six
years from liability and expenses arising out of matters existing or occurring
at or prior to the consummation of the merger to the fullest extent allowed
under Delaware law as in effect at the time of closing. Union Financial has
also agreed that it will maintain a policy of directors' and officers' liability
insurance coverage, or provide a policy providing comparable coverage and
amounts on terms no less favorable than South Carolina Community's current
policy, for the
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benefit of South Carolina Community's directors and officers for three years
following the consummation of the merger.
Certain Other Covenants
The merger agreement also contains other agreements relating to the conduct
of the parties prior to the consummation of the merger, including the following
representations:
. After all required regulatory and shareholder approvals have been
received, South Carolina Community will cause Community Federal to
revise its loan, litigation and real estate valuation policies and
practices, and investment and asset/liability management policies and
practices to conform to those of Provident Community Bank, provided
such policies do not violate GAAP or other applicable laws and
regulations. South Carolina Community shall not be required to take
such action more than five business days prior to closing. However,
Union Financial must first confirm in writing that it is not aware of
any fact that would prevent the completion of the merger.
. South Carolina Community will give Union Financial reasonable access
during normal business hours to its property, books, contracts,
records, and personnel and furnish to Union Financial all information
it may reasonably request.
. Between the time Union Financial files its regulatory applications for
the bank merger and the closing of the merger (but in no event earlier
than 30 days prior to closing), South Carolina Community will provide
Union Financial with full after business hours' access to South
Carolina Community's branch offices in order to install necessary
wiring and equipment.
. South Carolina Community will take any necessary action to exempt the
parties and this transaction from any antitakeover provisions
contained in South Carolina Community's Certificate of Incorporation,
bylaws and federal or state law.
. Union Financial and South Carolina Community will use their respective
reasonable best efforts to obtain all required approvals and to
consummate the merger.
. Union Financial and South Carolina Community will consult with each
other regarding any public statements about the merger and in making
any governmental or other filings in connection with the merger.
. Union Financial and South Carolina Community will notify each other of
any need to obtain third party consent to the merger and of any event
that would be reasonably likely to cause any representation or
warranty in the merger agreement to be untrue or to cause any covenant
or condition in the merger agreement not to be complied with.
. Union Financial and South Carolina Community have agreed to promptly
hold, and coordinate the date of, shareholder meetings to consider and
vote on the merger agreement. The parties have agreed to promote the
approval of the merger consistent with their fiduciary duties to
shareholders.
. Union Financial and South Carolina Community have agreed to cooperate
in the filing of this joint proxy statement/prospectus, and to file a
registration statement to register with the SEC the shares of Union
Financial stock to be exchanged as merger consideration. In this
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connection, each party has agreed to obtain from its independent
accountant the "comfort letters" that are customarily issued in
connection with these transactions.
Representations and Warranties Made by Union Financial and South Carolina
Community in the Merger Agreement
Both Union Financial and South Carolina Community have made certain
customary representations and warranties to each other relating to their
businesses. For information on these representations and warranties, please
refer to the merger agreement attached as Appendix A. The representations and
warranties must be true in all material respects through the completion of the
merger unless the change does not have a material negative impact on a party's
business, financial condition or results of operations. See "--Conditions to
Completing the Merger."
Terminating the Merger Agreement
The merger agreement may be terminated at or prior to the completion of the
merger, either before or after approval of the merger agreement by the
shareholders of South Carolina Community by:
. the mutual consent of Union Financial and South Carolina Community, if
a majority of the board of directors of each votes for termination;
. either party if Union Financial's or South Carolina Community's
shareholders fail to approve the merger agreement, if a majority of
the board of directors of either votes for termination;
. either party if a required regulatory approval is denied or any
governmental entity prohibits the merger or bank merger;
. either party if the merger is not consummated by March 31, 2000, if a
majority of the board of directors of either votes for termination;
. either party if the other party breaches a representation, warranty or
covenant that would have a material adverse effect on the party
seeking to terminate;
. either party if South Carolina Community does not publicly recommend
South Carolina Community shareholders approve the merger in this
document, or if after recommending approval, either board withdraws or
modifies its recommendation and such action has a materially adverse
effect on the other party;
. either party, if there occurs an event, condition, change, or
occurrence that could have a material adverse effect on the party
seeking to terminate, provided the other party is given 30 days notice
and has not remedied the condition that could result in a material
adverse effect; and
. South Carolina Community if its board of directors determines that it
must accept a superior offer from a third party in the exercise of its
fiduciary duties, and if Union Financial's financial and legal
advisers cannot renegotiate the merger agreement in a manner that
would permit the merger to close consistently with the directors'
fiduciary obligations.
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Expenses and Termination Fees
The party incurring the expense will pay all costs and expenses incurred in
connection with the merger.
If South Carolina Community terminates the merger agreement in order to
accept a superior offer, South Carolina Community will pay Union Financial a
termination fee of $500,000 no later than five business days after Union
Financial receives notice of the termination.
If either party terminates the agreement because of a change that would
result in a material adverse effect if the merger was consummated, the
terminating party shall pay the lesser of all documented expenses and fees of
the non-breaching party or $125,000.
If either party wilfully breaches a representation, warranty or covenant,
the other party shall not be limited to repayment of $125,000 and may pursue any
available legal or equitable remedies to recover additional sums.
Changing the Terms of the Merger Agreement
Prior to the completion of the merger, any provision of the merger
agreement may be waived, amended or modified by the parties. However, after the
vote by the shareholders of South Carolina Community, no amendment or
modification may be made that would reduce the consideration to be received by
South Carolina Community's shareholders under the terms of the merger.
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PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined consolidated balance
sheet as of June 30, 1999, the unaudited pro forma condensed combined
consolidated statements of income for the nine month period ended June 30, 1999
and for the year ended September 30, 1998 give effect to the pending merger
applying the purchase method of accounting.
The pro forma condensed combined consolidated statements of income assume
the merger was completed on the first day of each of the periods presented.
Because Union Financial and South Carolina Community have different fiscal year
ends, the pro forma condensed combined consolidated statement of income for the
year ended September 30, 1998 reflect the combination of Union Financial's
September 30, 1998 year end with South Carolina Community's June 30, 1998 year
end. By the same token, the pro forma condensed combined consolidated statement
of income for the nine months ended June 30, 1999 reflects the combination of
Union Financial's nine months ended June 30, 1999 with South Carolina
Community's nine months ended March 31, 1999. Accordingly, the pro forma
condensed combined consolidated balance sheet at June 30, 1999 reflects the
combination of Union Financial's balance sheet at June 30, 1999 with South
Carolina Community's balance sheet at March 31, 1999.
The unaudited pro forma condensed combined consolidated financial
information is based on the historical consolidated financial statements of
Union Financial and South Carolina Community under the assumptions and
adjustments set forth in the accompanying notes to the unaudited pro forma
condensed combined consolidated financial statements. The unaudited pro forma
condensed combined financial statements do not give effect to any cost savings
that may result from the merger.
The unaudited pro forma condensed combined consolidated financial
statements should be read in conjunction with the consolidated historical
financial statements of Union Financial and South Carolina Community, including
the respective notes to those statements. The pro forma information is not
necessarily indicative of the combined financial position or the results of
operations in the future, or of the combined financial position or the results
of operations which would have been realized had the merger been consummated
during the periods or as of the dates for which the pro forma information is
presented.
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UNION FINANCIAL BANCSHARES, INC.
SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
BALANCE SHEET
AT JUNE 30, 1999
<TABLE>
<CAPTION>
South Carolina
Union Financial Community Pro Forma Pro Forma
Bancshares, Inc. Bancshares, Inc. Adjustment Combined
---------------- ---------------- ---------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Assets:
Cash............................................. $ 2,154 $ 273 $ -- $ 2,427
Short-term interest-bearing deposits............. 2,534 2,718 -- 5,252
-------- -------- -------- --------
Total cash and cash equivalents.................. 4,688 2,991 -- 7,679
-------- -------- -------- --------
Investment and mortgage-backed securities:
Held to maturity................................. 799 2,509 -- 3,308
Available for sale............................... 38,927 66 -- 38,993
-------- -------- -------- --------
Total investment and mortgage-backed securities..... 39,726 2,575 -- 42,301
Loans receivable:
Real estate mortgage loans held for sale......... 3,361 -- -- 3,361
Real estate mortgage loans held for investment... 110,033 35,120 750 145,903
Other loans...................................... 30,483 3,585 -- 34,068
Less allowance for loan losses................... (830) (240) -- (1,070)
-------- -------- -------- --------
Total loans receivable, net......................... 143,047 38,465 750 182,262
Office properties and equipment, net................ 4,352 504 32 4,888
FHLB stock, at cost................................. 2,029 330 -- 2,359
Accrued interest receivable......................... 1,618 328 -- 1,946
Mortgage servicing rights........................... 3,657 -- -- 3,657
Other real estate owned............................. -- 118 -- 118
Other assets........................................ 5,245 118 -- 5,363
-------- -------- -------- --------
Total assets..................................... $204,362 $ 45,429 $ 782 $250,573
======== ======== ======== ========
Liabilities:
Deposit accounts................................. $144,582 $ 36,061 $ (355) $180,288
Securities sold under repurchase agreements...... 845 845
Advances from the FHLB
and other borrowings.......................... 42,825 -- -- 42,825
Accrued interest on deposits..................... 245 127 -- 372
Advances from borrowers for taxes and insurance.. 346 31 -- 377
Other liabilities................................ 589 125 606 1,320
-------- -------- -------- --------
Total liabilities............................. 189,432 36,344 251 226,027
Shareholders' equity................................ 14,930 9,085 531 24,546
-------- -------- -------- --------
Total liabilities and shareholders' equity.......... $204,362 $ 45,429 $ 782 $250,573
======== ======== ======== ========
</TABLE>
See "Notes to Unaudited Pro Forma Condensed Combined
Consolidated Financial Statements."
60
<PAGE>
UNION FINANCIAL BANCSHARES, INC.
SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF INCOME
FOR THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
South Carolina
Union Financial Community Pro Forma Pro Forma
Bancshares, Inc. Bancshares, Inc. Adjustment Combined
---------------- ---------------- ---------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest Income:
Loans................................. $ 11,865 $ 2,996 $ (75) $ 14,786
Deposits and federal funds sold....... 110 248 -- 358
Mortgage-backed securities............ 599 3 -- 602
Interest and dividends on investment
securities......................... 831 272 -- 1,103
---------- -------- -------- ---------
Total interest income........... 13,405 3,519 (75) 16,849
---------- -------- -------- ---------
Interest Expense:
Deposit accounts...................... 5,544 1,715 (36) 7,295
Advances from the FHLB and other
borrowings......................... 2,005 -- -- 2,005
---------- -------- -------- ---------
Total interest expense.......... 7,549 1,715 (36) 9,300
---------- -------- -------- ---------
Net Interest Income...................... 5,856 1,804 (111) 7,549
Provision for loan losses............. -- -- -- --
---------- -------- -------- ---------
Net interest income after provision for
loan losses........................... 5,856 1,804 (111) 7,549
---------- -------- -------- ---------
Non-interest income:
Fees for financial services........... 791 132 -- 923
Loan servicing fees................... (111) -- -- (111)
Gains (losses) on sale of loans....... 358 -- -- 358
---------- -------- -------- ---------
Total non-interest income....... 1,038 132 -- 1,170
---------- -------- -------- ---------
Non-Interest Expense:
Compensation and employee benefits.... 2,301 701 -- 3,002
Occupancy and equipment............... 972 174 2 1,148
Deposit insurance premiums............ 54 21 -- 75
Professional services................. 275 -- -- 275
Real estate operations................ 10 -- -- 10
Other................................. 835 370 -- 1,205
---------- -------- -------- ---------
Total non-interest expense...... 4,447 1,266 2 5,715
---------- -------- -------- ---------
Income before income taxes............... 2,447 670 (113) 3,004
Income tax expense....................... 897 262 (42) 1,117
---------- -------- -------- ---------
Net income............................... $ 1,550 $ 408 $ (71) $ 1,887
========== ======== ======== =========
Basic net income per common share........ $ 1.23 $ 0.70 $ 1.05
========== ======== =========
Diluted net income per common share...... $ 1.15 $ 0.68 $ 1.01
========== ======== =========
Weighted average number of common
shares outstanding:
Basic.................................... 1,264,615 581,000 1,796,751
Diluted.................................. 1,343,008 599,000 1,875,144
</TABLE>
See "Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial
Statements."
61
<PAGE>
UNION FINANCIAL BANCSHARES, INC.
SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF INCOME
NINE MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
South Carolina
Union Financial Community Pro Forma Pro Forma
Bancshares, Inc. Bancshares, Inc. Adjustment Combined
---------------- ---------------- ---------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest Income:
Loans................................. $ 8,311 $ 2,293 $ (56) $ 10,548
Deposits and federal funds sold....... 67 149 -- 216
Mortgage-backed securities............ 1,132 2 -- 1,134
Interest and dividends on investment
securities......................... 713 131 -- 844
---------- -------- -------- ---------
Total interest income........... 10,223 2,575 (56) 12,742
---------- -------- -------- ---------
Interest Expense:
Deposit accounts...................... 4,288 1,265 27 5,580
Advances from the FHLB and other
borrowings......................... 1,376 -- -- 1,376
---------- -------- -------- ---------
Total interest expense.......... 5,664 1,265 27 6,956
---------- -------- -------- ---------
Net Interest Income...................... 4,559 1,310 (83) 5,786
Provision for loan losses............. 70 -- -- 70
---------- -------- -------- ---------
Net interest income after provision for
loan losses........................... 4,489 1,310 (83) 5,716
---------- -------- -------- ---------
Non Interest Income
Fees for financial services........... 635 93 -- 728
Loan servicing fees................... (135) -- -- (135)
Gains (losses) on sale of investment
and mortgage-backed securities
available for sale................. 7 -- -- 7
Gains (losses) on sale of loans....... 493 -- -- 493
---------- -------- -------- ---------
Total non-interest income....... 1,000 93 -- 1,093
---------- -------- -------- ---------
Non-Interest Expense:
Compensation and employee benefits.... 1,774 490 -- 2,264
Occupancy and equipment............... 828 131 1 960
Deposit insurance premiums............ 59 17 -- 76
Professional services................. 206 -- -- 206
Real estate operations................ 3 -- -- 3
Other................................. 715 230 -- 945
---------- -------- -------- ---------
Total non-interest expense...... 3,585 868 1 4,454
---------- -------- -------- ---------
Income before income taxes............... 1,904 535 (84) 2,355
Income tax expense....................... 689 209 (31) 867
---------- -------- -------- ---------
Net income............................... $ 1,215 $ 326 $ (53) $ 1,488
========== ======== ======== =========
Basic net income per common share........ $ 0.92 $ 0.60 $ 0.80
========== ======== =========
Diluted net income per common share...... $ 0.86 $ 0.60 $ 0.77
========== ======== =========
Weighted average number of common
shares outstanding:
Basic.................................... 1,319,069 540,000 1,851,205
Diluted.................................. 1,407,385 547,000 1,939,521
</TABLE>
See "Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial
Statements."
62
<PAGE>
Notes to the Unaudited Pro Forma Condensed
Combined Consolidated Financial Statements
Note 1. Basis of Presentation
The pro forma information presented is not necessarily indicative of the
results of operations or the combined financial position that would have
resulted had the merger been consummated at the beginning of the periods
indicated, nor is it necessarily indicative of the results of operations in
future periods or the future financial position of the combined company. The
pro forma adjustments were computed as of June 30, 1999 and were used to adjust
historical and current balance sheet and income statement information of Union
Financial and South Carolina Community. It is anticipated that the merger will
be completed in the last calendar quarter of 1999.
Under GAAP, the transaction will be accounted for under the purchase method
of accounting. Certain reclassifications have been included in the unaudited pro
forma condensed combined balance sheet and unaudited pro forma condensed
combined statements of income to conform presentation.
Assumptions relating to the pro forma adjustments set forth in the
Unaudited Pro Forma Condensed Combined Consolidated Financial Statements are
summarized as follows:
Estimated fair values for the assets and liabilities of South Carolina
Community were obtained as follows:
Cash and Short-Term Instruments. The carrying amounts of cash and
short-term instruments approximate their fair value.
Investment and Mortgage-Backed Securities. Fair values for securities
are based on quoted market prices.
Loans. Fair values for loans held for investment and other loans are
estimated by segregating the portfolio by type of loan and discounting
scheduled cash flows using interest rates currently being offered for loans
with similar terms, reduced by an estimate of credit losses inherent in the
portfolio. A prepayment assumption is used as an estimate of the portion of
loans that will be repaid prior to their scheduled maturity.
FHLB Stock. No ready market exists for this stock and it has no quoted
market value. However, redemption of this stock has historically been at
par value. Accordingly, the carrying amount is deemed to be a reasonable
estimate of fair value.
Office Properties and Equipment. Fair values were obtained by recent
informal appraisals of the assets containing the most significant values
relative to total value.
Deposits. The fair values for demand deposits are, equal to the
amounts payable on demand at the reporting date (i.e., their stated
amounts). The fair value of certificates of deposit are estimated by
discounting the amounts payable at the certificate rates using the rates
currently offered for deposits of similar remaining maturities.
Other Assets and Other Liabilities. Because these financial
instruments will typically be received or paid within three months, the
carrying amounts of such instruments are deemed to be a reasonable estimate
of fair value.
63
<PAGE>
The resulting net premium on loans, for purposes of these pro forma financial
statements, is being amortized to interest income on a straight-line basis over
10 years. The actual premium will be amortized to interest income to produce a
constant yield to maturity. The increase in estimated market value for office
properties and equipment is being amortized to occupancy expense on a straight-
line basis over 20 years. The resulting net premium on deposits is being
amortized into interest expense on a straight-line basis over the remaining
estimated lives of 10 years.
Note 2. The cost to acquire South Carolina Community has been allocated as
described in the table below:
<TABLE>
<S> <C>
Value of Union Financial common stock issued to acquire South Carolina Community
common stock. This assumes that there will be 542,996 shares of South Carolina Community
common stock entitled to be exchanged for .98 shares of Union Financial common stock at the
time the merger closes, the maximum number of shares of Union Financial common stock that
can be exchanged for each share of South Carolina Community common stock under the terms
of the merger agreement....................................................................... $ 6,519
Cash payment to South Carolina Community stockholders at $5.25 per share for the 542,996
shares of South Carolina Community common stock outstanding................................... 2,850
Cash payment to holders of stock options of South Carolina Community common stock............. 199
Acquisition - related costs:
Transaction costs incurred by Union Financial and South Carolina Community.................... 800
-------
Total costs................................................................................... $10,368
=======
</TABLE>
Note 3. Purchase accounting adjustments recorded for the South Carolina
Community transaction were as follows (in thousands)
<TABLE>
<S> <C>
South Carolina Community net assets at June 30, 1999.......................................... $ 9,037
Adjustments to South Carolina Community's statement of financial condition:
Elimination of unearned compensation due to the termination of South Carolina
Community's ESOP and MRRP plans, net of income taxes..................................... 194
-------
Adjusted net assets acquired................................................................ $ 9,231
=======
</TABLE>
Note 4. Excess of cost over book value of net assets acquired for the merger
was calculated as follows (in thousands):
<TABLE>
<S> <C>
Total cost.................................................................................... $10,368
Net assets acquired........................................................................... 9,231
-------
Total excess of cost over book value of net assets acquired $ 1,137
generated from the merger............................................................... =======
</TABLE>
The excess of cost over book value of net assets acquired of $864 was
allocated to assets and liabilities on a pro-rata basis after estimating market
value as described in Note 1:
<TABLE>
<S> <C>
Loans held for investment..................................................................... $ 750
Office properties and equipment............................................................... 32
Deposits...................................................................................... 355
-------
$ 1,137
=======
</TABLE>
For purposes of the pro forma financial statement premiums on loans and
deposits are amortized by the straight-line method over 10 years, office
properties and equipment are amortized by the straight-line method over 20
years.
64
<PAGE>
Note 5. Pro forma adjustments were calculated for the merger as follows (in
thousands):
<TABLE>
<CAPTION>
For the Fiscal For the Nine
Year Ended Months
September Ended
30, June 30,
1998 1999
-------------- ------------
<S> <C> <C>
Amortization of premium on fixed assets (20 years)
(occupancy and equipment)........................ $ 2 $ 1
Amortization of premium on loans (10 years)
(interest income)................................ 75 56
Amortization of premium on deposits (10 years)
(interest income)................................ 36 27
----- -----
Total adjustments.......................... $113 $ 84
===== =====
</TABLE>
Note 6. Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding over the period
of the income statements presented. Diluted earnings per common share
is calculated using the same method as basic earnings per common
share, but reflects potential dilution of common stock equivalents.
Basic and diluted weighted average number of common stock and common
stock equivalents utilized for the calculation of earnings per share
for the periods presented were calculated using Union Financial's
historical weighted average common stock and common stock equivalents
plus 532,136 shares of common stock assuming the maximum number of
shares of Union Financial common stock that could be issued to South
Carolina Community shareholders under the terms of the merger.
Note 7: The following table summarizes the estimated impact of the accretion
of the purchase accounting adjustments made in connection with the
merger on Union Financial's results of operations:
Projected Future Amortized
Amounts For The And Net
Fiscal Years Decrease
Ended In Income
September 30, Before Taxes
----------------------------------------------------------
(in thousands)
2000 $113
2001 113
2002 113
2003 113
2004 113
2005 and thereafter $572
65
<PAGE>
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus contains forward-looking statements
with respect to the financial condition, results of operations and business of
Union Financial following the completion of the merger. Union Financial and
South Carolina Community caution that these forward-looking statements are
subject to numerous assumptions, risks and uncertainties, and that statements
for periods after 1999 are subject to greater uncertainty because of the
increased likelihood of changes in underlying factors and assumptions. Actual
results could differ materially from those expressed in forward-looking
statements. In addition to factors disclosed by Union Financial and South
Carolina Community in documents incorporated by reference in this joint proxy
statement/prospectus and factors identified elsewhere in this document, the
following factors could cause actual results to differ materially from those
expressed in forward-looking statements:
. expected cost savings from the merger cannot be fully realized or
cannot be realized within the expected time frame;
. revenues following the merger are lower than expected;
. competitive pressure among financial services institutions increases
significantly;
. costs of difficulties related to the integration of the business of
Union Financial and South Carolina Community are greater than
expected;
. changes in the interest rate environment reduce interest margins;
. general economic conditions, whether nationally or in the markets in
which the combined company will do business, are less favorable than
expected;
. legislation or regulatory requirements or changes adversely affect the
business in which the combined company will be engaged; and
. other "future factors" enumerated in the documents incorporated by
reference in this joint proxy statement/prospectus.
Union Financial and South Carolina Community's forward-looking statements
speak only as of the dates on which they are made. By making forward-looking
statements, Union Financial and South Carolina Community assume no duty to
update them to reflect new, changing or unanticipated events or circumstances,
except as may be required by applicable law or regulation.
66
<PAGE>
DESCRIPTION OF UNION FINANCIAL COMMON STOCK
General
Union Financial is authorized to issue 3,000,000 shares of common stock
having a par value of $.01 per share and 500,000 shares of preferred stock
having a par value of $.01 per share. Each share of Union Financial's common
stock has the same relative rights as, and is identical in all respects with,
each other share of common stock.
Common Stock
Dividends
Union Financial can pay dividends out of statutory surplus or from certain
net profits if, as and when declared by its board of directors. The payment of
dividends by Union Financial is subject to limitations which are imposed by law
and applicable regulation. Union Financial shareholders will be entitled to
receive and share equally in such dividends as may be declared by the board of
directors of Union Financial out of funds legally available for that purpose.
If Union Financial issues preferred stock, the holders thereof may have a
priority over the holders of the common stock with respect to dividends.
Voting Rights
Union Financial shareholders have exclusive voting rights in Union
Financial. They elect Union Financial's board of directors and act on such
other matters as are required to be presented to them under federal law or as
are otherwise presented to them by the board of directors. Except as discussed
in "COMPARISON OF CERTAIN RIGHTS OF SHAREHOLDERS" each holder of common stock is
entitled to one vote per share and does not have any right to cumulate votes in
the election of directors. If Union Financial issues preferred stock, holders
of preferred stock may also possess voting rights. Certain matters require a
vote of 80% of the outstanding shares entitled to vote thereon. See "COMPARISON
OF CERTAIN RIGHTS OF SHAREHOLDERS."
Liquidation
In the event of liquidation, dissolution or winding up of Union Financial,
the holders of its common stock would be entitled to receive, after payment or
provision for payment of all its debts and liabilities, all of the assets of
Union Financial available for distribution. If Union Financial issues preferred
stock, the holders thereof may have a priority over the holders of the common
stock in the event of liquidation or dissolution.
Preemptive Rights
Holders of the common stock of Union Financial are not entitled to
preemptive rights with respect to any shares that may be issued. The common
stock is not subject to redemption.
Preferred Stock
Union Financial may issue preferred stock with such designations, powers,
preferences and rights 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 that
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. None of the shares of the authorized preferred stock will be issued in
the conversion and there are no plans to issue preferred stock.
67
<PAGE>
COMPARISON OF CERTAIN RIGHTS OF SHAREHOLDERS
Union Financial's shareholders' rights are governed by Union Financial's
Certificate of Incorporation, bylaws and applicable provisions of the DGCL.
South Carolina Community shareholders' rights are currently governed by South
Carolina Community's Certificate of Incorporation, bylaws and the same
provisions of the DGCL. If we complete the merger, South Carolina Community
shareholders who receive Union Financial common stock will become Union
Financial shareholders and their rights will be governed by the Union Financial
Certificate and Union Financial bylaws.
Because Union Financial and South Carolina Community are both organized
under the laws of the State of Delaware, any differences in your rights as a
shareholder of South Carolina Community and Union Financial will arise solely
from differences in the certificates of incorporation and bylaws of Union
Financial and South Carolina Community rather than from differences of law.
This summary is not a complete discussion of the Union Financial and South
Carolina Community Certificates of Incorporation and bylaws, and it is qualified
in its entirety by reference to those documents. Copies are on file with the
SEC.
Authorized Stock
<TABLE>
Union Financial South Carolina Community
<S> <C>
. The Union Financial Certificate of . The South Carolina Community
Incorporation authorizes 3,000,000 shares Certificate of Incorporation
of capital stock, consisting of 2,500,000 authorizes 1,600,000 shares
shares of consisting of 1,400,000 shares of capital stock, common stock,
of common stock, $.01 par value, and $.01 par value, and 200,000
500,000 shares of serial preferred stock, shares of serial preferred
$.01 par value. stock, $.01 par value.
. As of June 30, 1999, there were . As of June 30, 1999, there were
1,352,492 shares of Union Financial 538,716 shares of South Carolina
common stock issued and outstanding. Community common stock issued
and outstanding.
. As of June 30, 1999, there were no shares
of preferred stock issued or outstanding. . Same.
Voting Rights
Union Financial South Carolina Community
. The holders of the common stock . Same.
exclusively possess all voting power,
subject to the authority of the board of
directors to offer voting rights to the
holders of preferred stock.
. Each share of common stock is entitled to . Same.
one vote. Beneficial owners of 10% or
more of the outstanding stock are subject
to 10% voting limitations.
</TABLE>
68
<PAGE>
Required Vote For Authorization of Certain Actions
<TABLE>
Union Financial South Carolina Community
<S> <C>
. The Union Financial Certificate of . Same.
Incorporation requires the approval of a
simple majority (50.1%) of the board of
directors and at least an 80% majority of
the outstanding shares entitled to vote
for certain business combinations, which
include mergers or other consolidations
and sales, leases and transfers of more
than 25% of Union Financial's assets.
. However, if a 2/3 majority of the board of . A simple majority (50.1%)
directors approves the business vote of the board of
combination, a simple majority (50.1%) directors and of the
of the outstanding shares is sufficient to outstanding shares entitled
approve a business combination. to vote will be sufficient
to approve certain business
combinations that do not
involve cash or other
consideration being received
by the South Carolina
Community shareholders.
Dividends
Union Financial South Carolina Community
. The Union Financial bylaws allow the . The South Carolina Community
board of directors to declare dividends on Certificate of Incorporation
Union Financial's capital stock at any allows the board of directors
regular or special meeting. Dividends to declare dividends from
may be paid in cash, in property, or in time to time, in accordance
Union Financial stock. with applicable law.
. Holders of preferred stock, if any, would
receive preference over holders of
common stock in the payment of
dividends. Dividends on the common
stock may be paid out of any assets
legally available for that purpose, upon
declaration by the board of directors.
</TABLE>
69
<PAGE>
Shareholders' Meetings
<TABLE>
Union Financial South Carolina Community
<S> <C>
. The board of directors determines the . Same.
dates, times and locations for annual and
special meetings.
. Union Financial must mail notice of the . Same.
meeting and a description of its purpose
no fewer than 10 days and no more
than 60 days before the meeting to
each shareholder entitled to vote.
. The Chairman of the Board or the . The board of directors may designate a
President will chair the meeting. chairperson of the meeting. In that
person's absence, the Chairman of the
Board will chair the meeting. In the
Chairman of the Board's absence, the
majority of shares entitled to vote and
present at the meeting shall elect a
meeting chair.
. The board of directors or any shareholder . Same.
may nominate directors for election or
propose new business.
. To nominate a director or propose new . Shareholders must give written notice of
business, shareholders must give written their intent to nominate a director or
notice to the Corporate Secretary of propose new business to the Corporate
Union Financial not less than 30 days nor Secretary of South Carolina Community
more than 60 days prior to the meeting. not less than 90 days prior to the meeting.
However, if Union Financial gives less However, if South Carolina Community
than 31 days notice of the meeting to the gives less than 100 days' notice of the
shareholders, written notice of the meeting to shareholders, written notice
shareholder proposal or nomination must must be delivered to the Corporate
be delivered to the Corporate Secretary Secretary within 10 days of the date
within 10 days of the date notice of the notice of the meeting was mailed to
meeting was mailed to shareholders. shareholders. The notice requirements
Each notice given by a shareholder with with respect to a nomination to the board
respect to a nomination to the board of of directors are the same as for Union
directors must include: Financial.
. the name, age, business and
home address of the nominee;
. the principal employment of the
</TABLE>
70
<PAGE>
<TABLE>
<S> <C>
nominee;
. any other information required
by Regulation 14A of the
Securities Exchange Act;
. the number of shares of stock
beneficially owned by the
nominee; and
. other information that may be
reasonably requested by the
Union Financial board.
. The Chairperson of the annual or special . Same.
shareholders' meeting may, if the facts
warrant, declare that a nomination or
proposal was not made in accordance
with the proper procedures and may
declare that the nomination or proposal
be disregarded and laid over for action at
the next special or annual meeting.
However, no special shareholders'
meeting is required to consider a
defective nomination or proposal.
Action by Shareholders Without a Meeting
Union Financial South Carolina Community
. Any action that requires the approval of . Same.
the shareholders must be taken at an
annual or special shareholders meeting.
Union Financial shareholders may not
consent in writing to actions requiring
shareholder approval without such a
meeting.
Board of Directors
Union Financial South Carolina Community
. The Union Financial bylaws provide that . The South Carolina Community
the maximum number of directors is bylaws allow the board of
seven. directors to adopt periodic
resolutions to fix the
maximum number of directors.
</TABLE>
71
<PAGE>
<TABLE>
<S> <C>
. There are currently seven members of the . There are currently seven
Union Financial board of directors. members of the South Carolina
Following the merger, three members of Community board of directors.
the South Carolina Community board Following the merger, three
will become members of the Union former South Carolina Community
Financial board. directors will join the Union
Financial board. The service
of the remaining four board
members will terminate.
. Union Financial will amend its bylaws to
increase its maximum number of
directors prior to completion of the
merger.
Indemnification of Directors And Officers
Union Financial South Carolina Community
. Union Financial may indemnify a current . South Carolina Community
or former director, officer, employee, or indemnifies certain directors,
agent who successfully defends himself officers, employees and agents
in a legal proceeding to which he was a subject to legal proceedings,
party by virtue of his position with Union whether or not the disputes
Financial against expenses (including arose due to professional
attorney fees but excluding settlement undertakings, to the fullest
amounts) reasonably incurred in extent authorized by the DGCL.
connection with the defense or settlement Parties are indemnified against
of the lawsuit. all expenses, liability and
loss, including attorneys'
fees, judgments, fines, ERISA
excise taxes, and penalties
or amounts paid in settlement.
. In the case of a shareholder derivative . If South Carolina Community
suit, Union Financial will provide does not pay a properly filed
indemnification only to the extent a party indemnification claim within
is successful on the merits and has acted 60 days, a claimant may sue
in good faith in the disputed transaction. South Carolina Community to
Union Financial will provide no recover unpaid claim amounts.
indemnification for a party held liable to If the claimant is successful,
the corporation unless required to do so South Carolina Community will
by the court. also pay the expenses of the
suit for recovery.
. Expenses incurred by a party in . South Carolina Community
defending a civil or criminal proceeding may also bring suit to
may be paid by Union Financial if the recover any expenses that
party is successful on the merits and has it has advanced if a party
acted in good faith in the disputed has not met the standards
transaction. of the DGCL.
. If it is determined that a director acted in
</TABLE>
72
<PAGE>
good faith in respect to some matters and
not to others, Union Financial may
reasonably prorate indemnification
amounts.
. Union Financial may advance any . Same.
expenses subject to indemnification if
authorized to do so by the board of
directors and if a party undertakes in
writing to repay any sums advanced if
subsequently found unentitled to
indemnification.
. Union Financial may purchase and . Same.
maintain insurance on behalf of any
person who holds a position subject to
indemnification.
. If any of the above indemnification . Same.
provisions is or becomes invalid, Union
Financial will indemnify its directors,
officers, and employees to the fullest
extent permitted by the DGCL.
Elimination of Directors' Liability
Union Financial South Carolina Community
. The Union Financial Certificate . Same.
eliminates personal financial liability of a
director for breach of fiduciary duty,
except for the following:
. a breach of the director's duty of
loyalty, which prohibits self-dealing;
. acts or omissions not made in
good faith or involving
intentional misconduct or legal
violations;
. acts pursuant to Section 174 of
the DGCL, which covers
unlawful payment of dividends,
unlawful stock purchases and
transactions through which a
73
<PAGE>
<TABLE>
<S> <C>
director derives an improper
personal benefit.
Amendment of Bylaws
Union Financial South Carolina Community
. A 2/3 majority of the board of directors . A simple majority (50.1%)
must approve a measure to repeal, amend of the South Carolina
or rescind the Union Financial bylaws. Community board must approve
a measure to repeal, amend
. An 80% majority of the outstanding or rescind the bylaws.
shares of capital stock entitled to vote
for the election of directors must . Same.
approve a measure to repeal, amend or
rescind the Union Financial bylaws at
a meeting of the shareholders for that
purpose.
Amendment of Certificate of Incorporation
Union Financial South Carolina Community
. Under the DGCL, a certificate of . The same provisions of the DGCL
incorporation may be amended upon apply to South Carolina
approval by a simple majority (50.1%) of Community.
the total outstanding shares of each class
entitled to vote for the election of
directors, unless otherwise provided for
in the document.
. Under the Union Financial Certificate, . Same, except that an 80%
certain amendments require approval by majority is required to
an 80% majority vote of the outstanding amend, alter, or repeal:
shares of capital stock entitled to vote
generally in the election of directors, cast . Article FOURTH,
at a meeting of the shareholders for that Section C, relating to
purpose. An 80% majority is required to the stock authorization
amend, alter, or repeal: and proportional voting
limitations for beneficial
. Article X, outlining procedures owners or more than 10% of
for shareholders meetings and the outstanding shares of
prohibiting cumulative voting by common stock;
shareholders;
. Article FIFTH, Sections C
. Article XI, concerning notice and D, requiring shareholder
procedures for shareholder action to be taken at a duly
proposals of new business and called meeting and
authorizing the board of
directors to declare such
meetings;
</TABLE>
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<TABLE>
<S> <C>
board nominees; . Article SIXTH, setting forth the
number, terms, and removal
procedures for members of the
. Articles XII and XIII, setting board;
forth the number, terms and
classification, election and . Article SEVENTH, describing
removal procedures for members procedures to amend the South
of the board of directors; Carolina Community bylaws;
. Article XIV, concerning the . Article EIGHTH, requiring
acquisition of capital stock and shareholder approval of certain
voting restrictions applicable to business combinations; and
beneficial owners of 10% or
more of the voting stock; . Article TWELFTH, describing
procedures to amend the South
. Article XV, requiring shareholder Carolina Community Certificate
approval of certain business of Incorporation.
combinations;
. Article XVI, requiring the board
of directors to consider certain
social and economic factors when
evaluating a proposed business
combination;
. Article XVII, indemnifying
directors, officers, employees and
agents of Union Financial;
. Article XVIII, limiting the
personal liability of directors to
Union Financial or its
shareholders, except in certain
circumstances;
. Article XIX, describing
procedures to amend the Union
Financial bylaws; and
. Article XX, describing
procedures to amend the Union
Financial Certificate.
</TABLE>
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SELECTED PROVISIONS IN THE CERTIFICATE OF INCORPORATION
AND BYLAWS OF UNION FINANCIAL
Union Financial's Certificate of Incorporation and bylaws contain certain
provisions that could make more difficult an acquisition of Union Financial by
means of a tender offer, proxy context or otherwise. Certain provisions will
also render the removal of the incumbent board of directors or management of
Union Financial more difficult. These provisions may have the effect of
deterring a future takeover attempt that is not approved by the Union Financial
board, but which Union Financial 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 the opportunity to do
so. The following description of these provisions is only a summary and does not
provide all of the information contained in Union Financial's Certificate of
Incorporation and bylaws. See "Where You Can Find More Information" as to where
to obtain a copy of these documents.
Business Combinations with Related Persons
The Certificate of Incorporation requires the approval of the holders of at
least 80% of Union Financial's outstanding shares of voting stock to approve
certain "business combinations" involving a "related person" except in cases
where the proposed transaction has been approved in advance by a two-thirds vote
of those members of Union Financial's board of directors who are unaffiliated
with the related person and were directors prior to the time when the related
person became a related person.
The term "related person" includes any individual or entity that owns
beneficially or controls, directly or indirectly, 10% or more of the outstanding
shares of voting stock of Union Financial or an affiliate of such person or
entity.
A "business combination" includes:
. any merger or consolidation of Union Financial with or into any
related person;
. any sale, lease, exchange, mortgage, transfer, or other disposition
of 25% or more of the assets of Union Financial or combined assets of
Union Financial and its subsidiaries to a related person;
. any merger or consolidation of a related person with or into Union
Financial or a subsidiary of Union Financial;
. any sale, lease, exchange, transfer, or other disposition of 25% or
more of the assets of a related person to Union Financial or a
subsidiary of Union Financial;
. the issuance of any securities of Union Financial or a subsidiary of
Union Financial to a related person;
. the acquisition by Union Financial or a subsidiary of Union Financial
of any securities of a related person;
. any reclassification of common stock of Union Financial or any
recapitalization involving the common stock of Union Financial; or
. any agreement or other arrangement providing for any of the foregoing.
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Limitation on Voting Rights
The Certificate of Incorporation of Union Financial provides that no record
owner of any outstanding Union Financial common stock which is beneficially
owned, directly or indirectly, by a person who beneficially owns in excess of
10% of the then outstanding shares of Union Financial common stock will be
entitled or permitted to any vote in respect of the shares held in excess of the
10% limit, unless permitted by a resolution adopted by a majority of the board
of directors. Beneficial ownership is determined pursuant to the federal
securities laws and includes shares beneficially owned by such person or any of
his or her affiliates (as defined in the Certificate of Incorporation), shares
which such person or his or her affiliates have the right to acquire upon the
exercise of conversion rights or options and shares as to which such person and
his or her affiliates have or share investment or voting power, but does not
include shares beneficially owned by directors, officers and employees of
Provident Community Bank or Union Financial or shares that are subject to a
revocable proxy and that are not otherwise beneficially, or deemed by Union
Financial to be beneficially, owned by such person and his or her affiliates.
Board of Directors
Classified Board
The board of directors of Union Financial is divided into three classes,
each of which contains approximately one-third of the number of directors.
After their initial election at Union Financial's first annual meeting, the
shareholders will elect one class of directors each year for a term of three
years. The classified board makes it more difficult and time consuming for a
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 Union
Financial.
Filling of Vacancies; Removal
The Certificate of Incorporation provides that any vacancy occurring in the
Union Financial board, including a vacancy created by an increase in the number
of directors, may be filled by a vote of a majority of the directors then in
office. The Certificate of Incorporation of Union Financial provides that a
director may be removed from the board of directors prior to the expiration of
his or her term only for cause and only upon the vote of two-thirds of the
outstanding shares of voting stock. These provisions make it more difficult for
shareholders to remove directors and replace them with their own nominees.
Special Meetings of Shareholders
The Certificate of Incorporation provides that only the Chairman or a
majority of the board of directors of Union Financial may call special meetings
of the shareholders of Union Financial. Shareholders are not able to call a
special meeting or require that the board do so. At a special meeting,
shareholders may consider only the business specified in the notice of meeting
given by Union Financial. This provision prevents shareholders from forcing
shareholder consideration of a proposal between annual meetings over the
opposition of the Chairman and the Union Financial board by calling a special
meeting of shareholders.
Advance Notice Provisions for Shareholder Nominations and Proposals
The Union Financial bylaws establish an advance notice procedure for
shareholders to nominate directors or bring other business before an annual
meeting of shareholders of Union Financial. A person may not be nominated for
election as a director unless that person is nominated by or at the direction of
the Union
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Financial board or by a shareholder who has given appropriate notice to Union
Financial before the meeting. Similarly, a shareholder may not bring business
before an annual meeting unless the shareholder has given Union Financial
appropriate notice of its intention to bring that business before the meeting.
Union Financial's Corporate Secretary must receive notice of the nomination or
proposal not less than 30 nor more than 60 days prior to the annual meeting. A
shareholder who desires to raise new business must provide certain information
to Union Financial concerning the nature of the new business, the shareholder
and the shareholder's interest in the business matter. Similarly, a shareholder
wishing to nominate any person for election as a director must provide Union
Financial with certain information concerning the nominee and the proposing
shareholder.
Advance notice of nominations or proposed business by shareholders gives
the Union Financial board time to consider the qualifications of the proposed
nominees, the merits of the proposals and, to the extent deemed necessary or
desirable by the Union Financial board, to inform shareholders and make
recommendations about those matters.
Preferred Stock
The Certificate of Incorporation authorize the Union Financial board to
establish one or more series of preferred stock and, for any series of preferred
stock, to determine the terms and rights of the series, including voting rights,
conversion rates, and liquidation preferences. Although the Union Financial
board has no intention at the present time of doing so, it could issue a series
of preferred stock that could, depending on its terms, impede a merger, tender
offer or other takeover attempt. The Union Financial board will make any
determination to issue shares with those terms based on its judgment as to the
best interests of Union Financial and its shareholders.
Amendment of Certificate of Incorporation
Union Financial's Certificate of Incorporation require the affirmative vote
of at least two-thirds of the outstanding voting stock entitled to vote to amend
or repeal certain provisions of the Certificate of Incorporation, including the
provision limiting voting rights, the provisions relating to approval of
business combinations with related persons, calling special meetings, the number
and classification of directors, director and officer indemnification by Union
Financial and amendment of Union Financial's bylaws and Certificate of
Incorporation. These supermajority voting requirements make it more difficult
for the shareholders to amend these provisions of the Union Financial
Certificate of Incorporation.
REGULATION AND SUPERVISION OF UNION FINANCIAL
General
As a savings and loan holding company, Union Financial is required by
federal law to file reports with, and otherwise comply with, the rules and
regulations of the OTS. Provident Community Bank is subject to extensive
regulation, examination and supervision by the OTS, as its primary federal
regulator, and the FDIC, as the deposit insurer. Provident Community Bank is a
member of the FHLB and its deposit accounts are insured up to applicable limits
by the SAIF managed by the FDIC. Provident Community Bank must file reports with
the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test
Provident Community Bank's safety and soundness and compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory
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structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress, could have a material adverse impact on Union Financial,
Provident Community Bank and their operations. Certain of the regulatory
requirements applicable to Provident Community Bank and to Union Financial are
referred to below or elsewhere herein. The description of statutory provisions
and regulations applicable to savings institutions and their holding companies
set forth in this proxy statement does not purport to be a complete description
of such statutes and regulations and their effects on Union Financial and
Provident Community Bank.
Holding Company Regulation
Union Financial is a nondiversified unitary savings and loan holding
company within the meaning of federal law. As a unitary savings and loan holding
company, Union Financial generally is not restricted under existing laws as to
the types of business activities in which it may engage, provided that Provident
Community Bank continues to be a qualified thrift lender. See "Federal Savings
Institution Regulation--QTL Test." Upon any non-supervisory acquisition by Union
Financial of another savings institution or savings bank that meets the
qualified thrift lender test and is deemed to be a savings institution by the
OTS, Union Financial would become a multiple savings and loan holding company
(if the acquired institution is held as a separate subsidiary) and would
generally be limited to activities permissible for bank holding companies under
Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval
of the OTS, and certain activities authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (1) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (2) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. Provident Community Bank
must notify the OTS 30 days before declaring any dividend to Union Financial. In
addition, the financial impact of a holding company on its subsidiary
institution is a matter that is evaluated by the OTS and the agency has
authority to order cessation of activities or divestiture of subsidiaries deemed
to pose a threat to the safety and soundness of the institution.
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<PAGE>
Federal Savings Institution Regulation
Business Activities
The activities of federal savings institutions are governed by federal law
and regulations. These laws and regulations delineate the nature and extent of
the activities in which federal associations may engage. In particular, many
types of lending authority for federal associations, e.g., commercial, non-
residential real property loans and consumer loans, are limited to a specified
percentage of the institution's capital or assets.
Capital Requirements
The OTS capital regulations require savings institutions to meet three
minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio
and an 8% risk-based capital ratio. In addition, the prompt corrective action
standards discussed below also establish, in effect, a minimum 2% tangible
capital standard, a 4% leverage ratio (3% for institutions receiving the highest
rating on the CAMEL financial institution rating system), and, together with the
risk-based capital standard itself, a 4% Tier I risk-based capital standard. The
OTS regulations also require that, in meeting the tangible, leverage and risk-
based capital standards, institutions must generally deduct investments in and
loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Tier I (core) capital is defined as
common shareholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair values. Overall, the amount of supplementary capital included
as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk component. At June 30, 1999, Provident Community Bank
met each of its capital requirements.
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The following table presents Provident Community Bank's capital position at
June 30, 1999.
<TABLE>
<CAPTION>
Capital
------------------
Excess
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
------- -------- ------------ ------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Tangible 13,288 8,114 5,174 6.55 4.00
Core (Leverage) 13,288 8,114 5,174 6.55 4.00
Risk-based 14,118 9,054 5,064 12.47 8.00
</TABLE>
Prompt Corrective Regulatory Action
The OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
that has a ratio of total capital to risk-weighted assets of less than 8%, a
ratio of Tier I (core) capital to risk-weighted assets of less than 4% or a
ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts
Deposits of Provident Community Bank are presently insured by the SAIF. The
FDIC maintains a risk-based assessment system by which institutions are assigned
to one of three categories based on their capitalization and one of three
subcategories based on examination ratings and other supervisory information. An
institution's assessment rate depends upon the categories to which it is
assigned. Assessment rates for SAIF member institutions are determined
semiannually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998,
FICO payments for SAIF members, including Provident Community Bank, approximated
6.10 basis points, while Bank Insurance Fund ("BIF") members paid 1.22 basis
points. By law, there will be equal sharing of FICO payments between SAIF and
BIF members on the earlier of January 1, 2000 or the date the SAIF and BIF are
merged. The FDIC has authority to increase insurance assessments. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating
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expenses and results of operations of Provident Community Bank. Management
cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of Provident Community Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation
Legislation enacted in 1996 provided that the BIF and SAIF were to have
merged on January 1, 1999 if there were no more savings associations as of that
date. Various proposals to eliminate the federal savings association charter,
create a uniform financial institutions charter, abolish the OTS and restrict
savings and loan holding company activities have been introduced in Congress.
Provident Community Bank is unable to predict whether such legislation will be
enacted or the extent to which the legislation would restrict or disrupt its
operations.
Loans to One Borrower
Federal law provides that savings institutions are generally subject to the
limits on loans to one borrower applicable to national banks. A savings
institution may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of its unimpaired capital and surplus. An additional
amount may be lent, equal to 10% of unimpaired capital and surplus, if secured
by specified readily-marketable collateral. At June 30, 1999, Provident
Community Bank's limit on loans to one borrower was $2.03 million, and Provident
Community Bank's largest aggregate outstanding balance of loans to one borrower
was $1.27 million.
QTL Test
The HOLA requires savings institutions to meet a qualified thrift lender
test. Under the test, a savings association is required to either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" (total assets less: (1)
specified liquid assets up to 20% of total assets; (2) intangibles, including
goodwill; and (3) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least nine
months out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of June 30, 1999, Provident Community Bank met the qualified
thrift lender test. Recent legislation has expanded the extent to which
education loans, credit card loans and small business loans may be considered
"qualified thrift investments."
Limitation on Capital Distributions
Under the OTS capital distribution regulations effective April 1, 1999, an
application to and the prior approval of the OTS will be required prior to any
capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (i.e., generally,
examination ratings in the two top categories), the total capital distributions
for the calendar year exceed net income for that year plus the amount of
retained net income for the preceding two years, the institution would be
undercapitalized
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following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with OTS. If an application is not required,
the institution must still provide prior notice to OTS of the capital
distribution. In the event Provident Community Bank's capital fell below its
regulatory requirements or the OTS notified it that it was in need of more than
normal supervision, Provident Community Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Liquidity
Provident Community Bank is required to maintain an average daily balance
of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the OTS to any amount within the range of 4% to 10%. Monetary
penalties may be imposed for failure to meet these liquidity requirements.
Provident Community Bank has never been subject to monetary penalties for
failure to meet its liquidity requirements.
Assessments
Savings institutions are required to pay assessments to the OTS to fund the
agency's operations. The general assessments, paid on a semi-annual basis, are
computed upon the savings institution's total assets, including consolidated
subsidiaries, as reported in Provident Community Bank's latest quarterly thrift
financial report.
Transactions with Related Parties
Provident Community Bank's authority to engage in transactions with
"affiliates" (e.g., any company that controls or is under common control with an
institution, including the Company and its non-savings institution subsidiaries)
is limited by federal law. The aggregate amount of covered transactions with any
individual affiliate is limited to 10% of the capital and surplus of the savings
institution. The aggregate amount of covered transactions with all affiliates is
limited to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in federal law. The purchase of low quality
assets from affiliates is generally prohibited. The transactions with affiliates
must be on terms and under circumstances that are at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
Provident Community Bank's authority to extend credit to executive
officers, directors and 10% shareholders ("insiders"), as well as entities such
persons control, is also governed by federal law. Such loans are required to be
made on terms substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of repayment. Recent
legislation created an exception for loans made pursuant to a benefit or
compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other employees. The
law limits both the individual and aggregate amount of loans Provident Community
Bank may make to insiders based, in part, on Provident Community Bank's capital
position and requires certain board approval procedures to be followed.
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Enforcement
The OTS has primary enforcement responsibility over savings institutions
and has the authority to bring actions against the institution and all
institution-affiliated parties, including shareholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
Standards for Safety and Soundness
The federal banking agencies have adopted Interagency Guidelines
prescribing Standards for Safety and Soundness. The guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. If the OTS determines that a savings institution fails to meet any
standard prescribed by the guidelines, the OTS may require the institution to
submit an acceptable plan to achieve compliance with the standard.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally
provide that reserves be maintained against aggregate transaction accounts as
follows: for accounts aggregating $46.5 million or less (subject to adjustment
by the Federal Reserve Board), the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $46.5
million. The first $4.9 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. Provident Community Bank complies with the foregoing
requirements.
EXPERTS
The financial statements of Union Financial Bancshares, Inc. and
Subsidiaries as of September 30, 1998 and 1997 for each of the three years in
the period ended September 30, 1998 have been incorporated by reference herein
in reliance upon the report of Elliott, Davis & Company, LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The financial statements of South Carolina Community as of June 30, 1999
and June 30, 1998 and for the years then ended have been included herein in
reliance upon the report of Crisp Hughes Evans LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
This proxy statement/prospectus incorporates important business and
financial information about Union Financial and South Carolina Community that is
not included or delivered with this document, including annual, quarterly and
current reports that South Carolina Community and Union Financial file with the
SEC. You may read and copy any reports, statements or other information that
South Carolina Community and Union Financial file at the SEC's public reference
rooms in Washington, D.C., New York, New York, and Chicago, Illinois. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. South Carolina Community's and Union Financial's public filings are also
available to the public from commercial document retrieval services and at the
Internet World Wide Website maintained by the SEC at "http://www.sec.gov."
Union Financial has filed a registration statement to register with the SEC
the shares of Union Financial common stock to be issued to South Carolina
Community shareholders in the merger. This prospectus is a part of the
registration statement and constitutes a joint prospectus for Union Financial
and South Carolina Community, and a joint proxy statement for the Union
Financial and South Carolina Community special meetings.
The SEC allows Union Financial and South Carolina Community to "incorporate
by reference" information into this document, which means that Union Financial
and South Carolina Community can disclose important information to you by
referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this document,
except for any information superseded by information contained directly in the
document. This document incorporates by reference the documents listed below
that Union Financial and South Carolina Community have filed with the SEC. The
documents contain important information about their financial condition.
Union Financial SEC Filings (File No. 033-80808)
Quarterly Report on Form 10-QSB Three months ended June 30, 1999
Quarterly Report on Form 10-QSB Three months ended March 31, 1999
Quarterly Report on Form 10-QSB Three months ended December 31, 1998
Annual Report on Form 10-KSB Year ended September 30, 1998
South Carolina Community SEC Filings (File No. 000-24476)
Annual Report on Form 10-KSB Year Ended June 30, 1999
Union Financial and South Carolina Community also incorporate by reference
additional documents that they may file with the SEC between the date of this
prospectus and the date of their meetings. These include periodic reports, such
as Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K, and proxy
statements.
Documents incorporated by reference are also available from the companies
without charge, excluding all exhibits unless specifically incorporated by
reference as an exhibit to this prospectus. Shareholders of Union Financial or
South Carolina Community may request documents incorporated by reference in
writing or by telephone from the appropriate company at the following addresses:
85
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Union Financial Bancshares, Inc.
203 West Main Street
Union, South Carolina 29379
Attention: Wanda J. Wells, Vice President and Corporate Secretary
(864) 427-9000
South Carolina Community Bancshares, Inc.
110 South Congress Street
Winnsboro, South Carolina 29180
Attention: Terri C. Robinson, Corporate Secretary-Controller
(803) 635-5536
If you would like to request documents from Union Financial, please do so
by ______, 1999 in order to receive them before the special meeting of
shareholders. If you would like to request documents from South Carolina
Community, please do so by ________, 1999.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the Union Financial and South
Carolina Community shareholders meetings. Union Financial and South Carolina
Community have not authorized anyone to provide you with information that is
different from what is contained in this document. This prospectus is dated
_________, 1999. You should not assume that the information contained in this
prospectus is accurate as of any other date. Neither the mailing of this
document to shareholders nor the issuance of Union Financial's securities in the
merger shall create any implication to the contrary.
We have not authorized anyone to give any information or make any
representation about the merger or our companies that is different from, or in
addition to, that contained in this document or in any of the materials that
have been incorporated into this document. Therefore, if anyone does give you
information of this sort, you should not rely upon it.
If you are in a jurisdiction where offers to exchange or sell, or
solicitations or offers to exchange or purchase, the securities offered by this
document or the solicitation of proxies is unlawful, or if you are a person to
whom it is unlawful to direct these types of activities, then the offer
presented in this document does not extend to you. The information contained in
this document speaks only as of the date of this document unless the information
specifically indicates that another date applies.
SHAREHOLDER PROPOSALS
Union Financial Shareholder Proposals for its Annual Meeting
Union Financial is holding its 1999 annual meeting of shareholders during
the first quarter of 2000. Union Financial's Certificate of Incorporation
provides that in order for a shareholder to present a proposal at Union
Financial's annual meeting, the shareholder must give advance notice to Union
Financial not less than 90 days prior to the meeting. However, if the date of an
annual meeting changes by more than 31 days from the date of the previous year's
annual meeting, the shareholder must give notice to Union Financial within 10
days following the day on which notice of the annual meeting was mailed to
shareholders. Based on the date of the 1998 annual meeting, Union Financial
anticipates that, in order to be timely, shareholder nominations or proposals
intended to be made at the 1999 annual meeting must be made by December 21,1999.
The Certificate of Incorporation specifies the information that must accompany
any such shareholder notice. Copies of the Certificate of Incorporation may be
obtained from the Corporate Secretary
86
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of Union Financial. Any such proposals shall be subject to the requirements of
the proxy rules adopted under the Exchange Act.
South Carolina Community Shareholder Proposals
If the merger is not approved by South Carolina Community's shareholders at
the special meeting, South Carolina Community expects that it would hold its
1999 annual meeting of shareholders on April 17, 2000. If a shareholder wishes
to present a proposal at South Carolina Community's annual meeting, the
shareholder must give advance notice to South Carolina Community not less than
90 days prior to the meeting. However, if the date of an annual meeting changes
by more than 30 days from the date of the previous year's annual meeting, the
shareholder must give notice to South Carolina Community within 10 days after
disclosure of the meeting date. Accordingly, advance written notice of
shareholder proposals to be brought before the 1999 annual meeting of
shareholders must be given to South Carolina Community no later than January 15,
2000. South Carolina Community's bylaws specify the information that must
accompany notice of a shareholder proposal. Copies of the bylaws may be obtained
from the Corporate Secretary of South Carolina Community. Any such proposals
shall be subject to the requirements of the proxy rules adopted under the
Exchange Act.
87
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================================================================================
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF JULY 1, 1999
BY AND BETWEEN
UNION FINANCIAL BANCSHARES, INC.
AND
SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Introductory Statement................................................................................................ 4
ARTICLE I
The Merger....................................................................................................... 4
----------
Section 1.1. Structure of the Merger.......................................................................... 4
-----------------------
Section 1.2. Effect on Outstanding Shares of SCCB Common Stock................................................ 5
-------------------------------------------------
Section 1.3. Exchange Procedures.............................................................................. 6
-------------------
Section 1.4. Stock Options.................................................................................... 8
-------------
Section 1.5. Bank Merger...................................................................................... 9
-----------
Section 1.6. Directors of UFB after Effective Time............................................................ 9
-------------------------------------
Section 1.7. Alternative Structure............................................................................ 9
---------------------
Section 1.8. Dissenters' Rights............................................................................... 9
------------------
ARTICLE II
Representations and Warranties...................................................................................10
------------------------------
Section 2.1. Disclosure Letters...............................................................................10
------------------
Section 2.2. Standards........................................................................................10
---------
Section 2.3. Representations and Warranties of SCCB...........................................................11
--------------------------------------
Section 2.4. Representations and Warranties of UFB............................................................24
-------------------------------------
ARTICLE III
Conduct Pending the Merger.......................................................................................32
--------------------------
Section 3.1. Conduct of SCCB's Business Prior to the Effective Time...........................................32
------------------------------------------------------
Section 3.2. Forbearance by SCCB..............................................................................32
-------------------
Section 3.3. Conduct of UFB's Business Prior to the Effective Time............................................36
-----------------------------------------------------
ARTICLE IV
Covenants........................................................................................................36
---------
Section 4.1. Acquisition Proposals............................................................................36
---------------------
Section 4.2. Certain Policies of SCCB.........................................................................38
------------------------
Section 4.3. Access and Information...........................................................................38
----------------------
Section 4.4. Certain Filings, Consents and Arrangements.......................................................39
------------------------------------------
Section 4.5. Antitakeover Provisions..........................................................................40
-----------------------
Section 4.6. Additional Agreements............................................................................40
-----------------------
Section 4.7. Publicity........................................................................................40
---------
Section 4.8. Stockholders Meetings............................................................................40
---------------------
Section 4.9. Proxy Statements; Comfort Letters................................................................41
---------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Section 4.10. Registration of UFB Common Stock.................................................................41
--------------------------------
Section 4.11. Affiliate Letters................................................................................42
-----------------
Section 4.12. Notification of Certain Matters..................................................................42
-------------------------------
Section 4.13. Employees, Directors and Officers................................................................42
---------------------------------
Section 4.14. Indemnification; Directors' and Officers' Insurance..............................................44
---------------------------------------------------
Section 4.15. Tax-Free Reorganization Treatment................................................................45
---------------------------------
ARTICLE V
Conditions to Consummation.......................................................................................45
--------------------------
Section 5.1. Conditions to Each Party's Obligations...........................................................45
--------------------------------------
Section 5.2. Conditions to the Obligations of UFB and UFB Bank................................................46
-------------------------------------------------
Section 5.3. Conditions to the Obligations of SCCB and SCCB Bank..............................................48
---------------------------------------------------
ARTICLE VI
Termination......................................................................................................49
-----------
Section 6.1. Termination......................................................................................49
-----------
Section 6.2. Termination Fee: Expenses........................................................................51
-------------------------
ARTICLE VII
Closing, Effective Date and Effective Time.......................................................................52
------------------------------------------
Section 7.1. Effective Date and Effective Time................................................................52
---------------------------------
Section 7.2. Deliveries at the Closing........................................................................52
-------------------------
ARTICLE VIII
Certain Other Matters............................................................................................52
---------------------
Section 8.1. Certain Definitions; Interpretation..............................................................52
-----------------------------------
Section 8.2. Survival.........................................................................................53
--------
Section 8.3. Waiver; Amendment................................................................................53
-----------------
Section 8.4. Counterparts.....................................................................................53
------------
Section 8.5. Governing Law....................................................................................53
-------------
Section 8.6. Expenses.........................................................................................53
--------
Section 8.7. Notices..........................................................................................53
-------
Section 8.8. Entire Agreement; etc............................................................................55
---------------------
Section 8.9. Assignment.......................................................................................55
----------
</TABLE>
3
<PAGE>
Agreement and Plan of Merger
----------------------------
This is an Agreement and Plan of Merger, dated as of the 1st day of
July, 1999 ("Agreement"), by and between Union Financial Bancshares, Inc., a
Delaware corporation ("UFB"), and South Carolina Community Bancshares, Inc., a
Delaware corporation ("SCCB").
Introductory Statement
The Board of Directors of each of UFB and SCCB (i) has determined that
this Agreement and the business combination and related transactions
contemplated hereby are in the best interests of UFB and SCCB, respectively, and
in the best long-term interests of their respective stockholders, (ii) has
determined that this Agreement and the transactions contemplated hereby are
consistent with, and in furtherance of, its respective business strategies and
(iii) has approved, at meetings of each of such Boards of Directors, this
Agreement.
The parties hereto intend that the merger shall qualify as a
reorganization under the provisions of Section 368(a) of the Internal Revenue
Code of 1986, as amended ("Code"), for federal income tax purposes, and the
merger shall be accounted for as a purchase.
UFB and SCCB desire to make certain representations, warranties and
agreements in connection with the business combination and related transactions
provided for herein and to prescribe various conditions to such transactions.
In consideration of their mutual promises and obligations hereunder,
the parties hereto adopt and make this Agreement and prescribe the terms and
conditions hereof and the manner and basis of carrying it into effect, which
shall be as follows:
ARTICLE I
The Merger
----------
Section 1.1. Structure of the Merger. On the Effective Date (as
-----------------------
defined in Section 7.1), SCCB will merge with and into UFB ("Merger"), with UFB
being the surviving entity, pursuant to the provisions of, and with the effect
provided in, the Delaware General Corporation Law ("DGCL"). Upon consummation
of the Merger, the separate corporate existence of SCCB shall cease. UFB shall
continue to be governed by the laws of the State of Delaware and its name and
separate corporate existence, with all of its rights, privileges, immunities,
powers and franchises, shall continue unaffected by the Merger.
4
<PAGE>
Section 1.2. Effect on Outstanding Shares of SCCB Common Stock.
-------------------------------------------------
(a) Each share of common stock, $.01 par value, of UFB ("UFB Common
Stock") that is issued and outstanding immediately prior to the Effective Time
(as defined in Section 7.1) shall continue to be an issued and outstanding share
of UFB Common Stock from and after the Effective Time; and
(b) By virtue of the Merger, each share of common stock, $.01 par
value, of SCCB ("SCCB Common Stock") that is issued and outstanding immediately
prior to the Effective Time shall cease to be outstanding, shall be deemed
surrendered and each such share shall be converted into and become the right to
receive one of the following:
(i) Cash (the "Cash Consideration") in the amount equal to
$5.25 and stock (the "Stock Consideration") equal to 0.817 of a
share (the "Exchange Ratio") of UFB stock for each SCCB share, if
the UFB Market Value (defined below) is greater than $15.00 per
share;
(ii) Cash Consideration in the amount equal to $5.25 and shares
of UFB stock such that based on the UFB Market Value, the value
of the Merger Consideration (defined below) is equal to $17.50
for each SCCB share, if the UFB Market Value is greater than or
equal to $12.50 per share and less than or equal to $15.00 per
share;
(iii) Cash Consideration in the amount equal to $5.25 and Stock
Consideration equal to 0.980 of a share of UFB stock for each
SCCB share, if the UFB Market Value is greater than or equal to
$12.00 per share and less than $12.50 per share; and
(iv) Stock Consideration equal to 0.980 of a share of UFB stock
and additional Cash Consideration equal to the difference between
the UFB Market Value of 0.980 of a share of UFB stock and $17.00,
if the UFB Market Value is less than $12.00 per share.
The aggregate of the Cash Consideration and Stock Consideration payable
and/or issuable pursuant to this Agreement at the Effective Time is sometimes
hereinafter collectively referred to as the "Merger Consideration."
As of the Effective Time, shares of SCCB Common Stock held directly or
indirectly by SCCB or directly or indirectly by UFB, in each case other than in
a fiduciary capacity or as a result of debts previously contracted, shall be
canceled and retired and shall cease to exist, and no exchange or payment shall
be made with respect thereto. In addition, no Dissenting Shares (as defined in
Section 1.8 of this Agreement) shall be converted pursuant to this Section 1.2
but shall be treated in accordance with the procedures set forth in Section 1.8
of this Agreement.
5
<PAGE>
(c) As used herein, the "UFB Market Value" shall be the average of
the closing sales prices on that day, as reported on the SmallCap Market System
of The Nasdaq Stock Market, Inc. ("Nasdaq Stock Market"), for the twenty-five
(25) consecutive trading days (whether or not UFB traded on such days)
immediately preceding the day which is three (3) days prior to the Closing Date
(as defined in Section 7.1 of this Agreement).
(d) No fraction of a whole share of UFB Common Stock and no scrip or
certificates therefor shall be issued in connection with the Merger. Any former
holder of SCCB Common Stock who would otherwise be entitled to receive a
fraction of a share of UFB Common Stock shall receive, in lieu thereof, cash in
an amount equal to such fraction of a share multiplied by the UFB Market Price
determined as of the Effective Date.
(e) Anti-Dilution Provisions. If UFB shall, at any time before the
Effective Date, (i) issue a dividend in shares of UFB Common Stock, (ii) combine
the outstanding shares of UFB Common Stock into a smaller number of shares,
(iii) subdivide the outstanding shares of UFB Common Stock, or (iv) classify the
shares of UFB Common Stock, then, in any event, the number of shares of UFB
Common Stock to be delivered to SCCB shareholders who are entitled to receive
shares of UFB Common Stock in exchange for shares of SCCB Common Stock shall be
adjusted so that each SCCB shareholder shall be entitled to receive such number
of shares of UFB Common Stock as such shareholder would have been entitled to
receive if the Effective Date had occurred immediately prior to the happening of
such event. In addition, in the event that, prior to the Effective Date, UFB
enters into an agreement pursuant to which shares of UFB Common Stock would be
converted into shares or other securities or obligations of another corporation,
proper provision shall be made in such agreement so that each SCCB shareholder
shall be entitled to receive such number of shares or other securities or amount
of obligations of such other corporation as such shareholder would be entitled
to receive if the Effective Date had occurred on the date immediately preceding
the announcement of such event.
Section 1.3. Exchange Procedures.
-------------------
(a) Appropriate transmittal materials ("Letter of Transmittal") in a
form satisfactory to UFB and SCCB, shall be mailed as soon as reasonably
practicable after the Effective Time, and in no event later than 5 business days
thereafter, to each holder of record of SCCB Common Stock as of the Effective
Time. A Letter of Transmittal will be deemed properly completed only if
accompanied by certificates representing all shares of SCCB Common Stock to be
converted thereby.
(b) At and after the Effective Time, each certificate ("SCCB
Certificate") previously representing shares of SCCB Common Stock (except as
specifically set forth in Section 1.2) shall represent only the right to receive
the Merger Consideration.
(c) Prior to the Effective Time, UFB shall deposit, or shall cause to
be deposited, either (i) in a segregated account with Provident Community Bank
or (ii) with such bank or trust company that is selected by UFB to act as
exchange agent ("Exchange Agent"), for
6
<PAGE>
the benefit of the holders of shares of SCCB Common Stock, for exchange in
accordance with this Section 1.3, an amount of cash sufficient to pay the
aggregate amount of Cash Consideration to be paid pursuant to Section 1.2 and
the aggregate amount of cash to be paid in lieu of fractional shares, and UFB
shall reserve for issuance with its Transfer Agent and Registrar a sufficient
number of shares of UFB Common Stock to provide for payment of the Stock
Consideration. At the Effective Time, UFB shall have granted the Exchange Agent
the requisite power and authority to effect for and on behalf of UFB the
issuance of the number of shares of UFB Common Stock issuable in the share
exchange.
(d) The Letter of Transmittal shall (i) specify that delivery shall
be effected, and risk of loss and title to the SCCB Certificates shall pass,
only upon delivery of the SCCB Certificates to the Exchange Agent, (ii) be in a
form and contain any other provisions as UFB may reasonably determine and (iii)
include instructions for use in effecting the surrender of the SCCB Certificates
in exchange for the Merger Consideration. Upon the proper surrender of the SCCB
Certificates to the Exchange Agent, together with a properly completed and duly
executed Letter of Transmittal, the holder of such SCCB Certificates shall be
entitled to receive in exchange therefor (m) a certificate representing that
number of whole shares of UFB Common Stock that such holder has the right to
receive pursuant to Section 1.2 and (n) a check in the amount equal to the cash
that such holder has the right to receive pursuant to Section 1.2 (including any
cash in lieu of any fractional shares of SCCB Common Stock to which such holder
is entitled and any dividends or other distributions to which such holder is
entitled pursuant to this Section 1.3). SCCB Certificates so surrendered shall
forthwith be canceled. As soon as practicable, but no later than five (5)
business days following receipt of the properly completed Letter of Transmittal
and any necessary accompanying documentation, the Exchange Agent shall
distribute UFB Common Stock and cash as provided herein. The Exchange Agent
shall not be entitled to vote or exercise any rights of ownership with respect
to the shares of UFB Common Stock held by it from time to time hereunder, except
that it shall receive and hold all dividends or other distributions paid or
distributed with respect to such shares for the account of the persons entitled
thereto. If there is a transfer of ownership of any shares of SCCB Common Stock
not registered in the transfer records of SCCB, the Merger Consideration shall
be issued to the transferee thereof if the SCCB Certificates representing such
SCCB Common Stock are presented to the Exchange Agent, accompanied by all
documents required, in the reasonable judgment of UFB and the Exchange Agent,
(x) to evidence and effect such transfer and (y) to evidence that any applicable
stock transfer taxes have been paid.
(e) No dividends or other distributions declared or made after the
Effective Date with respect to UFB Common Stock shall be remitted to any person
entitled to receive shares of UFB Common Stock hereunder until such person
surrenders his or her SCCB Certificates in accordance with this Section 1.3.
Upon the surrender of such person's SCCB Certificates, such person shall be
entitled to receive any dividends or other distributions, without interest
thereon, which theretofore had become payable with respect to shares of UFB
Common Stock represented by such person's SCCB Certificates.
7
<PAGE>
(f) From and after the Effective Time there shall be no transfers on
the stock transfer records of SCCB of any shares of SCCB Common Stock. If,
after the Effective Time, SCCB Certificates are presented to UFB, they shall be
canceled and exchanged for the Merger Consideration deliverable in respect
thereof pursuant to this Agreement in accordance with the procedures set forth
in this Section 1.3.
(g) Any portion of the aggregate amount of cash pursuant to Section
1.2, any dividends or other distributions to be paid pursuant to this Section
1.3 or any proceeds from any investments thereof that remain unclaimed by the
stockholders of SCCB for nine months after the Effective Time, shall be repaid
by the Exchange Agent to UFB upon the written request of UFB. After such request
is made, any stockholders of SCCB who have not theretofore complied with this
Section 1.3 shall look only to UFB for the Merger Consideration deliverable in
respect of each share of SCCB Common Stock such stockholder holds, as determined
pursuant to Section 1.2 of this Agreement, without any interest thereon. If
outstanding SCCB Certificates are not surrendered prior to the date on which
such payments would otherwise escheat to or become the property of any
governmental unit or agency, the unclaimed items shall, to the extent permitted
by any abandoned property, escheat or other applicable laws, become the property
of UFB (and, to the extent not in its possession, shall be paid over to it),
free and clear of all claims or interest of any person previously entitled to
such claims. Notwithstanding the foregoing, none of UFB, UFB Bank (as defined
below), the Exchange Agent or any other person shall be liable to any former
holder of SCCB Common Stock for any amount delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(h) UFB and the Exchange Agent shall be entitled to rely upon SCCB's
stock transfer books to establish the identity of those persons entitled to
receive the Merger Consideration, which books shall be conclusive with respect
thereto. In the event of a dispute with respect to ownership of stock
represented by any SCCB Certificate, UFB and the Exchange Agent shall be
entitled to deposit any Merger Consideration represented thereby in escrow with
an independent third party and thereafter be relieved with respect to any claims
thereto.
(i) If any SCCB Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such SCCB Certificate to be lost, stolen or destroyed and, if required by the
Exchange Agent, the posting by such person of a bond in such amount as the
Exchange Agent may direct as indemnity against any claim that may be made
against it with respect to such SCCB Certificate, the Exchange Agent will issue
in exchange for such lost, stolen or destroyed SCCB Certificate the Merger
Consideration deliverable in respect thereof pursuant to Section 1.2.
Section 1.4. Stock Options.
-------------
(a) At the Effective Time, each option to acquire shares of SCCB
Common Stock ("SCCB Option") granted pursuant to the SCCB Bank 1994 Stock Option
Plan (the "SCCB Option Plan") that is then outstanding and unexercised shall be
canceled, and in lieu thereof the holders of such options shall be paid in cash
an amount equal to the product of (i) the
8
<PAGE>
number of shares of SCCB Common Stock subject to such option at the Effective
Time and (ii) an amount equal to the excess of the cash value of the Merger
Consideration (determined using the UFB Market Value pursuant to Section 1.2(c))
over the exercise price per share of such option, net of any cash which must be
withheld under federal and state income and employment tax requirements. In the
event that the exercise price of a SCCB Option is greater than the Merger
Consideration, then at the Effective Time such SCCB Option shall be canceled
without any payment made in exchange therefor. At the Effective Time, the SCCB
Option Plan shall be deemed terminated. In connection with the payment made
pursuant to this Section 1.4, each option holder shall execute an acknowledgment
of the receipt and cancellation of such SCCB Option.
Section 1.5. Bank Merger. Concurrently with or as soon as
-----------
practicable after the execution and delivery of this Agreement, Provident
Community Bank ("UFB Bank"), a wholly-owned subsidiary of UFB, and Community
Federal Savings Bank ("SCCB Bank"), a wholly-owned subsidiary of SCCB, shall
enter into the Plan of Bank Merger, in the form attached hereto as Exhibit A,
pursuant to which the bank merger (the "Bank Merger") will be effected. The
parties hereto intend that the Bank Merger shall become effective on the
Effective Date. The Plan of Bank Merger shall provide that the directors of UFB
Bank as the surviving entity of the Bank Merger shall be (a) all of the
directors of UFB Bank serving immediately prior to the Bank Merger and (b) three
additional persons who shall become directors of UFB Bank in accordance with
Section 4.13. Other than as provided in Section 4.13, no director of SCCB Bank
shall become a director of UFB Bank.
Section 1.6. Directors of UFB after Effective Time. At the
-------------------------------------
Effective Time, the directors of UFB shall consist of (a) the directors of UFB
serving immediately prior to the Effective Time and (b) three additional persons
who shall become directors of UFB in accordance with Section 4.13. Other than
as provided in Section 4.13, no director of SCCB shall become a director of UFB.
Section 1.7. Alternative Structure. UFB may at any time prior to
---------------------
the Effective Time change the method of effecting the Merger and the Bank Merger
or any part thereof if and to the extent it deems such change to be necessary,
appropriate or desirable; provided, however, that no such change shall (a) alter
or change the Merger Consideration issued to holders of SCCB Common Stock as
provided for in the Agreement, (b) adversely affect the tax treatment of SCCB's
stockholders as a result of receiving the Merger Consideration, (c) materially
impede or delay consummation of the Merger, or (d) result in any representation
or warranty of any party set forth in this Agreement becoming incorrect in any
material respect.
Section 1.8. Dissenters' Rights.
------------------
(a) UFB shall pay for any dissenters' shares (the "Dissenters'
Shares") in accordance with Section 262 of the DGCL, and the holders thereof
shall not be entitled to receive any Merger Consideration; provided, that if
appraisal rights under Section 262 of the DGCL with respect to any Dissenters'
Shares shall have been effectively withdrawn or lost, such shares will
9
<PAGE>
thereupon cease to be treated as Dissenters' Shares and shall be converted into
the right to receive Merger Consideration pursuant to Section 1.2(b).
(b) SCCB shall (i) give UFB prompt written notice of the receipt of
any notice from a stockholder purporting to exercise any dissenters' rights,
(ii) not settle nor offer to settle any demand for payment without the prior
written consent of UFB and (iii) not waive any failure to comply strictly with
any procedural requirements of the DGCL.
ARTICLE II
Representations and Warranties
------------------------------
Section 2.1. Disclosure Letters. On or prior to the execution and
------------------
delivery of this Agreement, SCCB and UFB each shall have delivered to the other
a letter (each, its "Disclosure Letter") setting forth, among other things,
facts, circumstances and events the disclosure of which is required or
appropriate in relation to any or all of their respective representations and
warranties (and making specific reference to the Section of this Agreement to
which they relate), other than Section 2.3(g) and Section 2.4(g); provided, that
(a) no such fact, circumstance or event is required to be set forth in the
Disclosure Letter as an exception to a representation or warranty if its absence
is not reasonably likely to result in the related representation or warranty
being deemed untrue or incorrect under the standards established by Section 2.2
and (b) the mere inclusion of a fact, circumstance or event in a Disclosure
Letter shall not be deemed an admission by a party that such item represents a
material exception or that such item is reasonably likely to result in a
Material Adverse Effect (as defined in Section 2.2(b)).
Section 2.2. Standards.
---------
(a) No representation or warranty of SCCB or UFB contained in
Sections 2.3 or 2.4, respectively, shall be deemed untrue or incorrect, and no
party hereto shall be deemed to have breached a representation or warranty, on
account of the existence of any fact, circumstance or event unless, as a direct
or indirect consequence of such fact, circumstance or event, individually or
taken together with all other facts, circumstances or events inconsistent with
any paragraph of Sections 2.3 or 2.4, as applicable, there is reasonably likely
to exist a Material Adverse Effect. SCCB's representations, warranties and
covenants contained in this Agreement shall not be deemed to be untrue or
breached as a result of effects arising solely from actions taken in compliance
with a written request of UFB.
(b) As used in this Agreement, the term "Material Adverse Effect"
means either (i) an effect which is material and adverse to the business,
financial condition or results of operations of SCCB or UFB, as the context may
dictate; provided, however, that any such effect resulting from any (A) changes
in laws, rules or regulations or generally accepted accounting principles or
interpretations thereof that apply to both UFB and UFB Bank and SCCB and SCCB
Bank, as the case may be, or (B) changes in the general level of market interest
rates shall not be considered in determining if a Material Adverse Effect has
occurred; or (ii) the failure of (x) a
10
<PAGE>
representation or warranty contained in Section 2.3(a)(i) and (iv), Section
2.3(c), Section 2.3(d), 2.3(g)(iii), 2.4(a)(i) and (iv), Section 2.4(c),
2.4(g)(iii) or 2.4(l) to be true and correct or (y) a representation or warranty
contained in the second sentence of each of 2.3(f)(i) or 2.4(f)(i) and the first
two sentences of each of Sections 2.3(aa) or 2.4(t) to be true and correct in
all material respects.
(c) For purposes of this Agreement, "knowledge" shall mean, with
respect to a party hereto, actual knowledge of the members of the Board of
Directors of that party, its counsel or any officer of that party with the title
ranking not less than senior vice president.
Section 2.3. Representations and Warranties of SCCB. Subject to
--------------------------------------
Sections 2.1 and 2.2, SCCB represents and warrants to UFB that, except as
specifically disclosed in SCCB's Disclosure Letter:
(a) Organization. (i) SCCB is a corporation duly organized,
------------
validly existing and in good standing under the laws of the State of Delaware
and is duly registered as a savings and loan holding company under the Home
Owners' Loan Act, as amended ("HOLA"). SCCB is a federally-chartered savings
bank duly organized, validly existing and in good standing under federal law.
SCCB Bank has no Subsidiaries (as defined below). Each of SCCB and its
Subsidiaries has all requisite power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. As used in this
Agreement, unless the context requires otherwise, the term "Subsidiary" when
used with respect to any party means any corporation or other organization,
whether incorporated or unincorporated, which is consolidated with such party
for financial reporting purposes or which is controlled, directly or indirectly,
by such party.
(ii) SCCB and each of its Subsidiaries has the requisite
corporate power and authority, and is duly qualified and is in good standing, to
do business in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification necessary.
(iii) SCCB's Disclosure Letter sets forth all of SCCB's
Subsidiaries and all entities (whether corporations, partnerships or similar
organizations), including the corresponding percentage ownership, in which SCCB
owns, directly or indirectly, 5% or more of the ownership interests as of the
date of this Agreement and indicates for each of SCCB's Subsidiaries, as of such
date, its jurisdiction of organization and the jurisdiction(s) wherein it is
qualified to do business. All such Subsidiaries and ownership interests are in
compliance with all applicable laws, rules and regulations relating to direct
investments in equity ownership interests. SCCB owns, either directly or
indirectly, all of the outstanding capital stock of each of its Subsidiaries.
No Subsidiary of SCCB other than SCCB Bank is an "insured depository
institution" as defined in the Federal Deposit Insurance Act, as amended
("FDIA"), and the applicable regulations thereunder. All of the shares of
capital stock of each of the Subsidiaries held by SCCB or any of its other
Subsidiaries are fully paid, nonassessable and not subject to any preemptive
rights and are owned by SCCB or a Subsidiary of SCCB free and clear of any
claims,
11
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liens, encumbrances or restrictions (other than those imposed by applicable
federal and state securities laws), and there are no agreements or
understandings with respect to the voting or disposition of any such shares.
(iv) The deposits of SCCB Bank are insured by the Federal Deposit
Insurance Corporation ("FDIC") to the extent provided in the FDIA.
(b) Capital Structure. (i) The authorized capital stock of SCCB
-----------------
consists of 1,400,000 shares of SCCB Common Stock, par value $.01 per share, and
200,000 shares of preferred stock, par value $.01 per share ("SCCB Preferred
Stock"). As of the date of this Agreement, (A) 538,716 shares of SCCB Common
Stock were issued and outstanding, (B) no shares of SCCB Preferred Stock were
issued and outstanding, (C) no shares of SCCB Common Stock were reserved for
issuance, except that 31,211 shares of SCCB Common Stock were reserved for
issuance pursuant to the SCCB 1994 Recognition and Retention Plan (" SCCB RRP")
and 78,028 shares of SCCB Common Stock were reserved for issuance pursuant to
the SCCB Option Plan and (D) 241,559 shares of SCCB Common Stock were held by
SCCB in its treasury or by its Subsidiaries. The authorized capital stock of
SCCB Bank consists of 800,000 shares of common stock, par value $1.00 per share,
and 200,000 shares of preferred stock, par value $1.00 per share. As of the
date of this Agreement, 100 shares of such common stock were outstanding, no
shares of such preferred stock were outstanding and all outstanding shares of
such common stock were, and as of the Effective Time will be, owned by SCCB.
All outstanding shares of capital stock of SCCB and SCCB Bank are duly
authorized and validly issued, fully paid and nonassessable and not subject to
any preemptive rights and, with respect to shares held by SCCB in its treasury
or by its Subsidiaries, are free and clear of all liens, claims, encumbrances or
restrictions (other than those imposed by applicable federal and state
securities laws) and there are no agreements or understandings with respect to
the voting or disposition of any such shares. SCCB's Disclosure Letter sets
forth a complete and accurate list of all options to purchase SCCB Common Stock
that have been granted and are outstanding pursuant to the SCCB Option Plan and
all outstanding restricted stock grants under the SCCB RRP, including the dates
of grant, exercise prices, dates of vesting, dates of termination and shares
subject to each grant.
(ii) No bonds, debentures, notes or other indebtedness having
the right to vote on any matters on which stockholders may vote ("Voting Debt")
of SCCB are issued or outstanding.
(iii) As of the date of this Agreement, except for this Agreement
and as set forth in SCCB's Disclosure Letter, neither SCCB nor any of its
Subsidiaries has or is bound by any outstanding options, warrants, calls,
rights, convertible securities, commitments or agreements of any character
obligating SCCB or any of its Subsidiaries to issue, deliver or sell, or cause
to be issued, delivered or sold, any additional shares of capital stock of SCCB
or any of its Subsidiaries or obligating SCCB or any of its Subsidiaries to
grant, extend or enter into any such option, warrant, call, right, convertible
security, commitment or agreement. As of the date hereof, there are no
outstanding contractual obligations of SCCB or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of capital stock of SCCB or
any of its Subsidiaries.
12
<PAGE>
(c) Authority. Each of SCCB and SCCB Bank has all requisite corporate
---------
power and authority to enter into this Agreement and the Plan of Bank Merger,
respectively, and, subject to approval of this Agreement by the requisite vote
of SCCB's stockholders and receipt of all required regulatory or governmental
approvals, as contemplated by Section 5.1(b) of this Agreement, to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement and, subject to the approval of this Agreement by SCCB's stockholders,
the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate actions on the part of SCCB and SCCB Bank.
This Agreement has been duly executed and delivered by SCCB and constitutes a
valid and binding obligation of SCCB, enforceable in accordance with its terms
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally and subject, as to enforceability, to
general principles of equity, whether applied in a court of law or a court of
equity.
(d) Stockholder Approval; Fairness Opinion. The affirmative vote of a
--------------------------------------
majority of the outstanding shares of SCCB Common Stock entitled to vote on this
Agreement is the only vote of the stockholders of SCCB required for approval of
this Agreement and the consummation of the Merger and the related transactions
contemplated hereby. SCCB has received the written opinion of Trident Financial
Corporation to the effect that, as of the date hereof, the Exchange Ratio to be
received by SCCB's stockholders is fair, from a financial point of view, to such
stockholders.
(e) No Violations. The execution, delivery and performance of this
-------------
Agreement by SCCB do not, and the consummation of the transactions contemplated
hereby will not, constitute (i) assuming receipt of all Requisite Regulatory
Approvals (as defined below) and requisite stockholder approvals, a breach or
violation of, or a default under, any law, rule or regulation or any judgment,
decree, order, governmental permit or license, or agreement, indenture or
instrument of SCCB or any of its Subsidiaries, or to which SCCB or any of its
Subsidiaries (or any of their respective properties) is subject, (ii) a breach
or violation of, or a default under, the certificate of incorporation or bylaws
of SCCB or the similar organizational documents of any of its Subsidiaries or
(iii) a breach or violation of, or a default under (or an event which, with due
notice or lapse of time or both, would constitute a default under), or result in
the termination of, accelerate the performance required by, or result in the
creation of any lien, pledge, security interest, charge or other encumbrance
upon any of the properties or assets of SCCB or any of its Subsidiaries, under
any of the terms, conditions or provisions of any note, bond, indenture, deed of
trust, loan agreement or other agreement, instrument or obligation to which SCCB
or any of its Subsidiaries is a party, or to which any of their respective
properties or assets may be subject, and the consummation of the transactions
(including the Bank Merger) contemplated hereby (exclusive of the effect of any
changes effected pursuant to Section 1.7) will not require any approval, consent
or waiver under any such law, rule, regulation, judgment, decree, order,
governmental permit or license or the approval, consent or waiver of any other
party to any such agreement, indenture or instrument, other than (x) the
approval of the holders of a majority of the outstanding shares of SCCB Common
Stock, (y) the approval of the Office of Thrift Supervision ("OTS") under HOLA
and the approval of the appropriate regulatory authority
13
<PAGE>
under Section 18(c) of the FDIA (collectively, the "Requisite Regulatory
Approvals"), and (z) such approvals, consents or waivers as are required under
the federal and state securities or "blue sky" laws in connection with the
transactions contemplated by this Agreement. As of the date hereof, the
executive officers of SCCB know of no reason pertaining to SCCB why any of the
approvals referred to in this Section 2.3(e) should not be obtained without the
imposition of any material condition or restriction described in the proviso to
Section 5.1(b).
(f) Reports. (i) As of their respective dates, none of the reports
-------
or other statements filed by SCCB or SCCB Bank on or subsequent to June 30, 1998
with the Securities and Exchange Commission (the "SEC"), FDIC and the OTS
(collectively, "SCCB's Reports"), contained, or will contain, any untrue
statement of a material fact or omitted or will omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading. Each
of the financial statements of SCCB included in SCCB's Reports complied as to
form, as of their respective dates of filing with the SEC, in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto and have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved ("GAAP") (except as may be indicated in the
notes thereto or, in the case of the unaudited financial statements, as
permitted by the SEC). Each of the consolidated statements of condition
contained or incorporated by reference in SCCB's Reports (including in each case
any related notes and schedules) fairly presented, or will fairly present, as
the case may be (A) the financial position of the entity or entities to which it
relates as of its date and each of the consolidated statements of operations,
consolidated statements of cash flows and consolidated statements of changes in
stockholders' equity, contained or incorporated by reference in SCCB's Reports
(including in each case any related notes and schedules), and (B) the results of
operations, stockholders' equity and cash flows, as the case may be, of the
entity or entities to which it relates for the periods set forth therein
(subject, in the case of unaudited interim statements, to normal year-end audit
adjustments that are not material in amount or effect), in each case in
accordance with GAAP, except as may be noted therein. SCCB has made available
to UFB a true and complete copy of each of SCCB's Reports filed with the SEC
since June 30, 1998.
(ii) SCCB and each of its Subsidiaries have each timely filed all
material reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file since
June 30, 1995 with (A) the OTS, (B) the SEC, (C) the National Association of
Securities Dealers, Inc. ("NASD"), and (D) any other self-regulatory
organization ("SRO"), and have paid all fees and assessments due and payable in
connection therewith.
(g) Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
SCCB's Reports filed on or prior to the date of this Agreement since June 30,
1998, (i) SCCB and its Subsidiaries have not incurred any liability, except in
the ordinary course of their business consistent with past practice, (ii) SCCB
and its Subsidiaries have conducted their respective
14
<PAGE>
businesses only in the ordinary and usual course of such businesses and (iii)
there has not been any Material Adverse Effect with respect to SCCB.
(h) Absence of Claims. Except as set forth in SCCB's Disclosure
-----------------
Letter, no litigation, proceeding, controversy, claim or action before any court
or governmental agency is pending against SCCB or any of its Subsidiaries and,
to the best of SCCB's knowledge, no such litigation, proceeding, controversy,
claim or action has been threatened.
(i) Absence of Regulatory Actions. Neither SCCB nor any of its
-----------------------------
Subsidiaries is a party to any cease and desist order, written agreement or
memorandum of understanding with, or any commitment letter or similar written
undertaking to, or is subject to any action, proceeding, order or directive by,
or is a recipient of any extraordinary supervisory letter from any federal or
state governmental authority charged with the supervision or regulation of
depository institutions or depository institution holding companies or engaged
in the insurance of bank and/or savings and loan deposits ("Government
Regulators"), or has adopted any board resolutions at the request of any
Government Regulators, nor has it been advised by any Government Regulators that
it is contemplating issuing or requesting (or is considering the appropriateness
of issuing or requesting) any such action, proceeding, order, directive, written
agreement, memorandum of understanding, extraordinary supervisory letter,
commitment letter, board resolutions or similar written undertaking.
(j) Taxes. All federal, state, local and foreign tax returns required
-----
to be filed by or on behalf of SCCB or any of its Subsidiaries have been timely
filed or requests for extensions have been timely filed and any such extension
shall have been granted and not have expired, and all such filed returns are
complete and accurate in all material respects. All taxes shown on such
returns, all taxes required to be shown on returns for which extensions have
been granted and all other taxes required to be paid by SCCB or any of its
Subsidiaries have been paid in full or adequate provision has been made for any
such taxes on SCCB's balance sheet (in accordance with GAAP). For purposes of
this Section 2.3(j), the term "taxes" shall include all income, franchise, gross
receipts, real and personal property, real property transfer and gains, wage and
employment taxes. As of the date of this Agreement, there is no audit
examination, deficiency assessment, tax investigation or refund litigation with
respect to any taxes of SCCB or any of its Subsidiaries, and no claim has been
made by any authority in a jurisdiction where SCCB or any of its Subsidiaries do
not file tax returns that SCCB or any such Subsidiary is subject to taxation in
that jurisdiction. All taxes, interest, additions and penalties due with
respect to completed and settled examinations or concluded litigation relating
to SCCB or any of its Subsidiaries have been paid in full or adequate provision
has been made for any such taxes on SCCB's balance sheet (in accordance with
GAAP). Except as set forth in SCCB's Disclosure Letter, SCCB and its
Subsidiaries have not executed an extension or waiver of any statute of
limitations on the assessment or collection of any material tax due that is
currently in effect. SCCB and each of its Subsidiaries has withheld and paid all
taxes required to have been withheld and paid in connection with amounts paid or
owing to any employee, independent contractor, creditor, stockholder or other
third party, and SCCB and each of its Subsidiaries has timely complied with all
applicable information reporting requirements under Part III, Subchapter A of
15
<PAGE>
Chapter 61 of the Code and similar applicable state and local information
reporting requirements. Neither SCCB nor any of its Subsidiaries (i) has made an
election under Section 341(f) of the Code, (ii) has issued or assumed any
obligation under Section 279 of the Code, any high yield discount obligation as
described in Section 163(i) of the Code or any registration-required obligation
within the meaning of Section 163(f)(2) of the Code that is not in registered
form or (iii) is or has been a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code.
(k) Agreements. (i) Except for arrangements made in the
----------
ordinary course of business, and except as set forth in SCCB's Disclosure
Letter, SCCB and its Subsidiaries are not bound by any material contract (as
defined in Item 601(b)(10) of Regulation S-B) to be performed after the date
hereof that has not been filed with or incorporated by reference in SCCB's
Reports. Except as disclosed in SCCB's Disclosure Letter, neither SCCB nor any
of its Subsidiaries is a party to an oral or written (A) consulting agreement
(other than data processing, software programming and licensing contracts
entered into in the ordinary course of business) not terminable on 60 days' or
less notice, (B) agreement with any executive officer or other key employee of
SCCB or any of its Subsidiaries the benefits of which are contingent, or the
terms of which are materially altered, upon the occurrence of a transaction
involving SCCB or any of its Subsidiaries of the nature contemplated by this
Agreement, (C) agreement with respect to any employee or director of SCCB or any
of its Subsidiaries providing any term of employment or compensation guarantee
extending for a period longer than 60 days or for the payment of in excess of
$20,000 per annum, (D) agreement or plan, including any stock option plan,
phantom stock or stock appreciation rights plan, restricted stock plan or stock
purchase plan, any of the benefits of which will be increased, or the vesting or
payment of the benefits of which will be accelerated, by the occurrence of any
of the transactions contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement or (E) agreement containing covenants that limit
the ability of SCCB or any of its Subsidiaries to compete in any line of
business or with any person, or that involve any restriction on the geographic
area in which, or method by which, SCCB (including any successor thereof) or any
of its Subsidiaries may carry on its business (other than as may be required by
law or any regulatory agency).
(ii) Except as set forth in SCCB's Disclosure Letter,
neither SCCB nor any of its Subsidiaries is in default under or in violation of
any provision of any note, bond, indenture, mortgage, deed of trust, loan
agreement, lease or other agreement to which it is a party or by which it is
bound or to which any of its respective properties or assets is subject.
(iii) SCCB and each of its Subsidiaries owns or possesses
valid and binding licenses and other rights to use without payment all patents,
copyrights, trade secrets, trade names, servicemarks and trademarks used in its
businesses, and neither SCCB nor any of its Subsidiaries has received any notice
of conflict with respect thereto that asserts the right of others. Each of SCCB
and its Subsidiaries has performed all the obligations required to be performed
by it and are not in default under any contract, agreement, arrangement or
commitment relating to any of the foregoing.
16
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(l) Labor Matters. Neither SCCB nor any of its Subsidiaries is or
-------------
has ever been a party to, or is or has ever been bound by, any collective
bargaining agreement, contract or other agreement or understanding with a labor
union or labor organization with respect to its employees, nor is SCCB or any of
its Subsidiaries the subject of any proceeding asserting that it has committed
an unfair labor practice or seeking to compel SCCB or any of its Subsidiaries to
bargain with any labor organization as to wages and conditions of employment,
nor is there any strike, other labor dispute or organizational effort involving
SCCB or any of its Subsidiaries pending or, to SCCB's knowledge, threatened.
SCCB and its Subsidiaries are in compliance with applicable laws regarding
employment of employees and retention of independent contractors and are in
compliance with applicable employment tax laws.
(m) Employee Benefit Plans. SCCB's Disclosure Letter contains a
----------------------
complete and accurate list of all pension, retirement, stock option, stock
purchase, stock ownership, savings, stock appreciation right, profit sharing,
deferred compensation, consulting, bonus, group insurance, severance and other
benefit plans, contracts, agreements and arrangements, including, but not
limited to, "employee benefit plans," as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), incentive and
welfare policies, contracts, plans and arrangements and all trust agreements
related thereto with respect to any present or former directors, officers or
other employees of SCCB or any of its Subsidiaries (hereinafter collectively
referred to as the "SCCB Employee Plans"). All of the SCCB Employee Plans
comply in all material respects with all applicable requirements of ERISA, the
Code and other applicable laws; there has occurred no "prohibited transaction"
(as defined in Section 406 of ERISA or Section 4975 of the Code) which is likely
to result in the imposition of any penalties or taxes under Section 502(i) of
ERISA or Section 4975 of the Code upon SCCB or any of its Subsidiaries. Neither
SCCB nor any of its Subsidiaries has provided, or is required to provide,
security to any SCCB Pension Plan or to any single-employer plan of an ERISA
Affiliate (as defined under Section 4001(b)(1) of ERISA or Section 414 of the
Code) pursuant to Section 401(a)(29) of the Code. Neither SCCB, its
Subsidiaries, nor any ERISA Affiliate has contributed to any "multiemployer
plan," as defined in Section 3(37) of ERISA, on or after September 26, 1980.
Each SCCB Employee Plan that is an "employee pension benefit plan" (as defined
in Section 3(2) of ERISA) and which is intended to be qualified under Section
401(a) of the Code (a "SCCB Qualified Plan") has received a favorable
determination letter from the Internal Revenue Service ("IRS"), and SCCB and its
Subsidiaries are not aware of any circumstances likely to result in revocation
of any such favorable determination letter. There is no pending or, to SCCB's
knowledge, threatened litigation, administrative action or proceeding relating
to any SCCB Employee Plan. There has been no announcement or commitment by SCCB
or any of its Subsidiaries to create an additional SCCB Employee Plan, or to
amend any SCCB Employee Plan, except for amendments required by applicable law
which do not materially increase the cost of such SCCB Employee Plan; and,
except as specifically identified in SCCB's Disclosure Letter, SCCB and its
Subsidiaries do not have any obligations for post-retirement or post-employment
benefits under any SCCB Employee Plan that cannot be amended or terminated upon
60 days' notice or less without incurring any liability thereunder, except for
coverage required by Part 6 of Title I of ERISA or Section 4980B of the Code, or
similar state laws, the cost of which is borne by the insured individuals.
Except as disclosed in SCCB's Disclosure Letter, the execution and
17
<PAGE>
delivery of this Agreement and the consummation of the transactions contemplated
hereby will not result in any payment or series of payments by SCCB or any of
its Subsidiaries to any person which is an "excess parachute payment" (as
defined in Section 280G of the Code), increase or secure (by way of a trust or
other vehicle) any benefits payable under any SCCB Employee Plan or accelerate
the time of payment or vesting of any such benefit. With respect to each SCCB
Employee Plan, SCCB has supplied to UFB a true and correct copy of (A) the
annual report on the applicable form of the Form 5500 series filed with the IRS
for the most recent three plan years, if required to be filed, (B) such SCCB
Employee Plan, including amendments thereto, (C) each trust agreement, insurance
contract or other funding arrangement relating to such SCCB Employee Plan,
including amendments thereto, (D) the most recent summary plan description and
summary of material modifications thereto for such SCCB Employee Plan, if the
SCCB Employee Plan is subject to Title I of ERISA, (E) the most recent actuarial
report or valuation if such SCCB Employee Plan is an SCCB Pension Plan and any
subsequent changes to the actuarial assumptions contained therein, and (F) the
most recent determination letter issued by the IRS if such SCCB Employee Plan is
an SCCB Qualified Plan.
(n) Title to Assets. SCCB and each of its Subsidiaries has good and
---------------
marketable title to its properties and assets (including any intellectual
property asset such as any trademark, service mark, tradename or copyright) and
property acquired in a judicial foreclosure proceeding or by way of a deed in
lieu of foreclosure or similar transfer, other than property as to which it is
lessee, in which case the related lease is valid and in full force and effect.
Each lease pursuant to which SCCB or any of its Subsidiaries is lessor is valid
and in full force and effect and no lessee under any such lease is in default or
in violation of any provisions of any such lease. All material tangible
properties of SCCB and each of its Subsidiaries are in a good state of
maintenance and repair, conform with all applicable ordinances, regulations and
zoning laws and are considered by SCCB to be adequate for the current business
of SCCB and its Subsidiaries.
(o) Compliance with Laws. SCCB and each of its Subsidiaries has all
--------------------
permits, licenses, certificates of authority, orders and approvals of, and has
made all filings, applications and registrations with, all federal, state, local
and foreign governmental or regulatory bodies that are required in order to
permit it to carry on its business as it is presently conducted. All such
permits, licenses, certificates of authority, orders and approvals are in full
force and effect, and, to the best knowledge of SCCB, no suspension or
cancellation of any of them is threatened. Since the date of its incorporation,
the corporate affairs of SCCB have not been conducted in violation of any law,
ordinance, regulation, order, writ, rule, decree or approval of any federal or
state regulatory authority having jurisdiction over insured depository
institutions or their holding companies, the SEC, the NASD or any other SRO
(each, a "Governmental Entity"). The businesses of SCCB and its Subsidiaries
are not being conducted in violation of any law, ordinance, regulation, order,
writ, rule, decree or condition to approval of any Governmental Entity.
(p) Fees. Other than financial advisory services performed for SCCB
----
by Trident Financial Corporation, Inc. pursuant to an agreement dated October 5,
1998, a true and complete copy of which has been previously delivered to UFB,
neither SCCB nor any of its
18
<PAGE>
Subsidiaries, nor any of their respective officers, directors, employees or
agents, has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions or finder's fees, and no
broker or finder has acted directly or indirectly for SCCB or any of its
Subsidiaries in connection with this Agreement or the transactions contemplated
hereby.
(q) Environmental Matters. (i) With respect to SCCB and each of
---------------------
its Subsidiaries:
(A) Each of SCCB and its Subsidiaries, the Participation
Facilities (as defined herein), and, to SCCB's knowledge, the Loan Properties
(as defined herein) are, and have been, in substantial compliance with, and are
not liable under, all Environmental Laws (as defined herein);
(B) There is no suit, claim, action, demand, executive or
administrative order, directive, investigation or proceeding pending or, to
SCCB's knowledge, threatened, before any court, governmental agency or board or
other forum against it or any of its Subsidiaries or any Participation Facility
(x) for alleged noncompliance (including by any predecessor) with, or liability
under, any Environmental Law or (y) relating to the presence of or release into
the environment of any Hazardous Material (as defined herein), whether or not
occurring at or on a site owned, leased or operated by it or any of its
Subsidiaries or any Participation Facility;
(C) To SCCB's knowledge, there is no suit, claim, action,
demand, executive or administrative order, directive, investigation or
proceeding pending or threatened before any court, governmental agency or board
or other forum relating to or against any Loan Property (or SCCB or any of its
Subsidiaries in respect of such Loan Property) (x) relating to alleged
noncompliance (including by any predecessor) with, or liability under, any
Environmental Law or (y) relating to the presence of or release into the
environment of any Hazardous Material, whether or not occurring at or on a site
owned, leased or operated by a Loan Property;
(D) To SCCB's knowledge, the properties currently owned or
operated by SCCB or any of its Subsidiaries (including, without limitation,
soil, groundwater or surface water on, under or adjacent to the properties, and
buildings thereon) are not contaminated with and do not otherwise contain any
Hazardous Material other than as permitted under applicable Environmental Law;
(E) Neither SCCB nor any of its Subsidiaries has received any
notice, demand letter, executive or administrative order, directive or request
for information from any federal, state, local or foreign governmental entity or
any third party indicating that it may be in violation of, or liable under, any
Environmental Law;
(F) To SCCB's knowledge, there are no underground storage tanks
on, in or under any properties owned or operated by SCCB or any of its
Subsidiaries or any Participation Facility, and no underground storage tanks
have been closed or removed from any properties owned or operated by SCCB or any
of its Subsidiaries or any Participation Facility; and
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(G) To SCCB's knowledge, during the period of (l) SCCB's or any
of its Subsidiaries' ownership or operation of any of their respective current
properties or (m) SCCB's or any of its Subsidiaries' participation in the
management of any Participation Facility, there has been no contamination by or
release of Hazardous Materials in, on, under or affecting such properties. To
SCCB's knowledge, prior to the period of (x) SCCB's or any of its Subsidiaries'
ownership or operation of any of their respective current properties or (y)
SCCB's or any of its Subsidiaries' participation in the management of any
Participation Facility, there was no contamination by or release of Hazardous
Material in, on, under or affecting such properties.
(ii) The following definitions apply for purposes of this Section
2.3(q): (w) "Loan Property" means any property in which the applicable party (or
a Subsidiary of it) holds a security interest, and, where required by the
context, includes the owner or operator of such property, but only with respect
to such property; (x) "Participation Facility" means any facility in which the
applicable party (or a Subsidiary of it) participates in the management
(including all property held as trustee or in any other fiduciary capacity) and,
where required by the context, includes the owner or operator of such property,
but only with respect to such property; (y) "Environmental Law" means any
federal, state or local law, statute, ordinance, rule, regulation, code,
license, permit, authorization, approval, consent, legal doctrine, order,
directive, executive or administrative order, judgment, decree, injunction,
legal requirement or agreement with any governmental entity relating to (i) the
protection, preservation or restoration of the environment (which includes,
without limitation, air, water vapor, surface water, groundwater, drinking water
supply, structures, soil, surface land, subsurface land, plant and animal life
or any other natural resource), or to human health or safety as it relates to
Hazardous Materials, or (ii) the exposure to, or the use, storage, recycling,
treatment, generation, transportation, processing, handling, labeling,
production, release or disposal of, Hazardous Materials, in each case as amended
and as now in effect. The term Environmental Law includes all federal, state and
local laws, rules, regulations or requirements relating to the protection of the
environment or health and safety, including, without limitation, (i) the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
the Superfund Amendments and Reauthorization Act of 1986, the Federal Water
Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Clean
Water Act, the Federal Resource Conservation and Recovery Act of 1976
(including, but not limited to, the Hazardous and Solid Waste Amendments thereto
and Subtitle I relating to underground storage tanks), the Federal Solid Waste
Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide,
Fungicide and Rodenticide Act, the Federal Occupational Safety and Health Act of
1970 as it relates to Hazardous Materials, the Federal Hazardous Substances
Transportation Act, the Emergency Planning and Community Right-To-Know Act, the
Safe Drinking Water Act, the Endangered Species Act, the National Environmental
Policy Act, the Rivers and Harbors Appropriation Act or any so-called
"Superfund" or "Superlien" law, each as amended and as now or hereafter in
effect, and (ii) any common law or equitable doctrine (including, without
limitation, injunctive relief and tort doctrines such as negligence, nuisance,
trespass and strict liability) that may impose liability or obligations for
injuries or damages due to, or threatened as a result of, the presence of or
exposure to any Hazardous Material; and (z) "Hazardous Material" means any
substance (whether solid, liquid or gas) which is or could be detrimental to
human health or safety or to the environment, currently or hereafter listed,
defined,
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designated or classified as hazardous, toxic, radioactive or dangerous,
or otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any substance containing any such substance as a component.
Hazardous Material includes, without limitation, any toxic waste, pollutant,
contaminant, hazardous substance, toxic substance, hazardous waste, special
waste, industrial substance, oil or petroleum, or any derivative or by-product
thereof, radon, radioactive material, asbestos, asbestos-containing material,
urea formaldehyde foam insulation, lead and polychlorinated biphenyl.
(r) Loan Portfolio; Allowance; Asset Quality. (i) With respect to
----------------------------------------
each loan owned by SCCB or its Subsidiaries in whole or in part (each, a
"Loan"), to the best knowledge of SCCB:
(A) the note and the related security documents are each legal,
valid and binding obligations of the maker or obligor thereof, enforceable
against such maker or obligor in accordance with their terms;
(B) neither SCCB nor any of its Subsidiaries, nor any prior
holder of a Loan, has modified the note or any of the related security documents
in any material respect or satisfied, canceled or subordinated the note or any
of the related security documents except as otherwise disclosed by documents in
the applicable Loan file;
(C) SCCB or a Subsidiary is the sole holder of legal and
beneficial title to each Loan (or SCCB's applicable participation interest, as
applicable), except as otherwise referenced on the books and records of SCCB;
(D) the note and the related security documents, copies of which
are included in the Loan files, are true and correct copies of the documents
they purport to be and have not been suspended, amended, modified, canceled or
otherwise changed except as otherwise disclosed by documents in the applicable
Loan file;
(E) there is no pending or threatened condemnation proceeding or
similar proceeding affecting the property that serves as security for a Loan,
except as otherwise referenced on the books and records of SCCB;
(F) there is no litigation or proceeding pending or threatened
relating to the property that serves as security for a Loan that would have a
Material Adverse Effect upon the related Loan; and
(G) with respect to a Loan held in the form of a participation,
the participation documentation is legal, valid, binding and enforceable.
(ii) The allowance for possible losses reflected in SCCB's
audited statement of condition at June 30, 1998 was, and the allowance for
possible losses shown on the balance sheets in SCCB's Reports for periods ending
after June 30, 1998 will be, adequate, as of
21
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the dates thereof, under generally accepted accounting principles applicable to
stock banks consistently applied.
(iii) SCCB's Disclosure Letter sets forth by category the amounts
of all loans, leases, advances, credit enhancements, other extensions of credit,
commitments and interest-bearing assets of SCCB and its Subsidiaries that have
been classified (whether regulatory or internal) as "Special Mention,"
"Substandard," "Doubtful," "Loss" or words of similar import, and SCCB and its
Subsidiaries shall promptly after the end of any month inform UFB of any such
classification arrived at any time after the date hereof. The other real estate
owned ("OREO") included in any non-performing assets of SCCB or any of its
Subsidiaries is carried net of reserves at the lower of cost or fair value, less
estimated selling costs, based on current independent appraisals or evaluations
or current management appraisals or evaluations; provided, however, that
"current" shall mean within the past 12 months.
(s) Deposits. None of the deposits of SCCB Bank is a "brokered"
--------
deposit.
(t) Antitakeover Provisions Inapplicable. SCCB and its Subsidiaries
------------------------------------
have taken all actions required to exempt SCCB, the Agreement and the Merger
from any provisions of an antitakeover nature in their organization certificates
and bylaws, and the provisions of any federal or state "antitakeover," "fair
price," "moratorium," "control share acquisition" or similar laws or
regulations.
(u) Material Interests of Certain Persons. Except as disclosed in
-------------------------------------
SCCB's Proxy Statement for its 1998 Annual Meeting of Stockholders or in SCCB's
Disclosure Letter, no officer or director of SCCB, or any "associate" (as such
term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as
amended ("Exchange Act")) of any such officer or director, has any material
interest in any material contract or property (real or personal), tangible or
intangible, used in or pertaining to the business of SCCB or any of its
Subsidiaries. No such interest has been created or modified since the date of
the last regulatory examination of SCCB or its Subsidiaries.
(v) Insurance. SCCB and its Subsidiaries are presently insured, and
---------
since December, 1994, have been insured, for reasonable amounts with financially
sound and reputable insurance companies, against such risks as companies engaged
in a similar business would, in accordance with good business practice,
customarily be insured. All of the insurance policies and bonds maintained by
SCCB and its Subsidiaries are in full force and effect, SCCB and its
Subsidiaries are not in default thereunder and all material claims thereunder
have been filed in due and timely fashion.
(w) Investment Securities; Borrowings. (i) None of the investments
---------------------------------
reflected in the consolidated balance sheet of SCCB for the year ended June 30,
1998, and none of the investment securities held by it or any of its
Subsidiaries since June 30,1998, is subject to any restriction (contractual or
statutory) that would materially impair the ability of the entity holding such
investment freely to dispose of such investment at any time.
22
<PAGE>
(ii) Except as set forth in SCCB's Disclosure Letter, neither SCCB
nor any Subsidiary is a party to or has agreed to enter into an exchange-traded
or over-the-counter equity, interest rate, foreign exchange or other swap,
forward, future, option, cap, floor or collar or any other contract that is a
derivative contract (including various combinations thereof) (each, a
"Derivatives Contract") or owns securities that (A) are referred to generically
as "structured notes," "high risk mortgage derivatives," "capped floating rate
notes" or "capped floating rate mortgage derivatives" or (B) are likely to have
changes in value as a result of interest or exchange rate changes that
significantly exceed normal changes in value attributable to interest or
exchange rate changes.
(iii) Set forth in SCCB's Disclosure Letter is a true and
complete list of SCCB's borrowed funds (excluding deposit accounts) as of the
date hereof.
(x) Indemnification. Except as provided in SCCB's Disclosure Letter,
---------------
applicable Delaware law, SCCB's Employment Agreements or the organization
certificate or bylaws of SCCB and its Subsidiaries, neither SCCB nor any
Subsidiary is a party to any indemnification agreement with any of its present,
former or future directors, officers, employees, agents or other persons who
serve or served in any other capacity with any other enterprise at the request
of SCCB (a "Covered Person"), and, except as set forth in SCCB's Disclosure
Letter, to the best knowledge of SCCB, there are no claims for which any Covered
Person would be entitled to indemnification under the organization certificate
or bylaws of SCCB or any of its Subsidiaries, under any applicable law or
regulation or under any indemnification agreement.
(y) Books and Records. The books and records of SCCB and its
-----------------
Subsidiaries on a consolidated basis have been, and are being, maintained in
accordance with applicable legal and accounting requirements and reflect in all
material respects the substance of events and transactions that should be
included therein.
(z) Corporate Documents. SCCB has delivered to UFB true and complete
-------------------
copies of its certificate of incorporation and bylaws and of SCCB Bank's
organization certificate and bylaws. The minute books of SCCB and SCCB Bank
constitute a complete and correct record of all actions taken by their
respective boards of directors (and each committee thereof) and their
stockholders. The minute books of each of SCCB's Subsidiaries constitutes a
complete and correct record of all actions taken by the respective boards of
directors (and each committee thereof) and the stockholders of each such
Subsidiary.
(aa) Tax Treatment of the Merger. As of the date hereof, SCCB has no
---------------------------
knowledge of any fact or circumstance that would prevent the transactions
contemplated by this Agreement from qualifying as a tax-free reorganization
under the Code.
(bb) Beneficial Ownership of UFB Common Stock. As of the date hereof,
----------------------------------------
SCCB beneficially owns no shares of UFB Common Stock and does not have any
option, warrant or right of any kind to acquire the beneficial ownership of any
shares of UFB Common Stock.
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<PAGE>
(cc) Year 2000 Matters. SCCB has completed a review of its computer
-----------------
systems to identify systems that could be affected by the "Year 2000" issue and
reasonably believes it has identified all such Year 2000 problems. SCCB's
management has developed and commenced implementation of a plan to respond to
this issue which is designed to complete any required initial changes to its
computer systems and to complete testing of those changes by June 30, 1999.
Between the date of this Agreement and the Effective Time, SCCB shall use
commercially practicable efforts to implement and/or continue to implement such
plan. Year 2000 issues have not had, and are not reasonably expected to have, a
Material Adverse Effect on SCCB or its Subsidiaries.
Section 2.4. Representations and Warranties of UFB. Subject to
-------------------------------------
Sections 2.1 and 2.2, UFB represents and warrants to SCCB that, except as
specifically disclosed in UFB's Disclosure Letter:
(a) Organization. (i) UFB is a corporation duly organized, validly
------------
existing and in good standing under the laws of the State of Delaware and is
duly registered as a savings and loan holding company under the HOLA. UFB Bank
is a federally-chartered savings bank duly organized, validly existing and in
good standing under federal law. Each Subsidiary of UFB Bank, if any, is a
corporation, limited liability company or partnership duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization. Each of UFB and its Subsidiaries has all
requisite power and authority to own, lease and operate its properties and to
carry on its business as now being conducted.
(ii) UFB and each of its Subsidiaries has the requisite corporate
power and authority, and is duly qualified and is in good standing, to do
business in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification necessary.
(iii) UFB's Disclosure Letter sets forth all of UFB's Subsidiaries and
all entities (whether corporations, partnerships or similar organizations),
including the corresponding percentage ownership, in which UFB owns, directly or
indirectly, 5% or more of the ownership interests as of the date of this
Agreement and indicates for each UFB's Subsidiary, as of such date, its
jurisdiction of organization and the jurisdiction(s) wherein it is qualified to
do business. All such Subsidiaries and ownership interests are in compliance
with all applicable laws, rules and regulations relating to direct investments
in equity ownership interests. UFB owns, either directly or indirectly, all of
the outstanding capital stock of each of its Subsidiaries. No Subsidiary of UFB
other than UFB Bank is an "insured depository institution" as defined in the
FDIA and the applicable regulations thereunder. All of the shares of capital
stock of each of the Subsidiaries held by UFB or any of its other Subsidiaries
are fully paid, nonassessable and not subject to any preemptive rights and are
owned by UFB or a Subsidiary of UFB free and clear of any claims, liens,
encumbrances or restrictions (other than those imposed by applicable federal and
state securities laws) and there are no agreements or understandings with
respect to the voting or disposition of any such shares.
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<PAGE>
(iv) The deposits of UFB Bank are insured by the FDIC to the extent
provided in the FDIA.
(b) Capital Structure. (i) The authorized capital stock of UFB
-----------------
consists of 2,500,000 shares of UFB Common Stock, par value $.01 per share, and
500,000 shares of preferred stock, par value $.01 per share ("UFB Preferred
Stock"). As of the date of this Agreement, (A) 1,349,153 shares of UFB Common
Stock were issued and outstanding, (B) no shares of UFB Preferred Stock were
outstanding, (C) no shares of UFB Common Stock were reserved for issuance,
except that 230,584 shares of UFB Common Stock were reserved for issuance
pursuant to the UFB 1995 Stock-Option Plan ("UFB Option Plan") and (D) no shares
of UFB Common Stock were held by UFB in its treasury or by its Subsidiaries.
The authorized capital stock of UFB Bank consists of 8,000,000 shares of common
stock, par value $1.00 per share, and 2,000,000 shares of preferred stock, par
value $1.00 per share. As of the date of this Agreement, 1,352,507 shares of
such common stock were outstanding, no shares of such preferred stock were
outstanding and all outstanding shares of such common stock were, and as of the
Effective Time will be, owned by UFB. All outstanding shares of capital stock
of UFB and UFB Bank are duly authorized and validly issued, fully paid and
nonassessable and not subject to any preemptive rights and, with respect to
shares held by UFB in its treasury or by its Subsidiaries, are free and clear of
all liens, claims, encumbrances or restrictions (other than those imposed by
applicable federal or state securities laws) and there are no agreements or
understandings with respect to the voting or disposition of any such shares.
UFB's Disclosure Letter sets forth a complete and accurate list of all options
to purchase UFB Common Stock that have been granted pursuant to the UFB Option
Plan, including the dates of grant, exercise prices, dates of vesting, dates of
termination and shares subject to each grant.
(ii) No Voting Debt of UFB is issued or outstanding.
(iii) As of the date of this Agreement, except for this Agreement and
as set forth in UFB's Disclosure Letter, neither UFB nor any of its Subsidiaries
has or is bound by any outstanding options, warrants, calls, rights, convertible
securities, commitments or agreements of any character obligating UFB or any of
its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, any additional shares of capital stock of UFB or any of its Subsidiaries
or obligating UFB or any of its Subsidiaries to grant, extend or enter into any
such option, warrant, call, right, convertible security, commitment or
agreement. As of the date hereof, there are no outstanding contractual
obligations of UFB or any of its Subsidiaries to repurchase, redeem or otherwise
acquire any shares of capital stock of UFB or any of its Subsidiaries.
(c) Authority. Each of UFB and UFB Bank has all requisite corporate
---------
power and authority to enter into this Agreement and the Plan of Bank Merger,
respectively, and subject to approval of this Agreement by the requisite vote of
UFB's stockholders and receipt of all required regulatory or governmental
approvals, as contemplated by Section 5.1(b) of this Agreement, to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement and, subject to the approval of this Agreement by UFB's stockholders,
the
25
<PAGE>
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate actions on the part of UFB and UFB Bank.
This Agreement has been duly executed and delivered by UFB and constitutes a
valid and binding obligation of UFB, enforceable in accordance with its terms
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally and subject, as to enforceability, to
general principles of equity, whether applied in a court of law or a court of
equity.
(d) Stockholder Approval. The affirmative vote of a majority of the
--------------------
outstanding shares of UFB Common Stock entitled to vote on this Agreement is the
only vote of the stockholders of UFB required for approval of this Agreement and
the consummation of the Merger and the related transactions contemplated
thereby.
(e) No Violations. The execution, delivery and performance of this
-------------
Agreement by UFB do not, and the consummation of the transactions contemplated
hereby will not, constitute (i) assuming receipt of all Requisite Regulatory
Approvals and requisite stockholder approvals, a breach or violation of, or a
default under, any law, rule or regulation or any judgment, decree, order,
governmental permit or license, or agreement, indenture or instrument of UFB or
any of its Subsidiaries, or to which UFB or any of its Subsidiaries (or any of
their respective properties) is subject, (ii) a breach or violation of, or a
default under, the certificate of incorporation or bylaws of UFB or the similar
organizational documents of any of its Subsidiaries or (iii) a breach or
violation of, or a default under (or an event which, with due notice or lapse of
time or both, would constitute a default under), or result in the termination
of, accelerate the performance required by, or result in the creation of any
lien, pledge, security interest, charge or other encumbrance upon any of the
properties or assets of UFB or any of its Subsidiaries, under, any of the terms,
conditions or provisions of any note, bond, indenture, deed of trust, loan
agreement or other agreement, instrument or obligation to which UFB or any of
its Subsidiaries is a party, or to which any of their respective properties or
assets may be subject and the consummation of the transactions (including the
Bank Merger) contemplated hereby (exclusive of the effect of any changes
effected pursuant to Section 1.7) will not require any approval, consent or
waiver under any such law, rule, regulation, judgment, decree, order,
governmental permit or license or the approval, consent or waiver of any other
party to any such agreement, indenture or instrument, other than (x) the
approval of the holders of a majority of the outstanding shares of UFB Common
Stock, (y) the Requisite Regulatory Approvals, and (z) such approvals, consents
or waivers as are required under the federal and state securities or "blue sky"
laws in connection with the transactions contemplated by this Agreement. As of
the date hereof, the executive officers of UFB know of no reason pertaining to
UFB why any of the approvals referred to in this Section 2.4(e) should not be
obtained without the imposition of any material condition or restriction
described in the proviso to Section 5.1(b).
(f) Reports. (i) As of their respective dates, none of the
-------
reports or other statements filed by UFB or UFB Bank on or subsequent to
September 30, 1998 with the SEC, the FDIC and the OTS (collectively, "UFB's
Reports"), contained, or will contain, any untrue statement of a material fact
or omitted or will omit to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading. Each of the financial statements of
UFB included in
26
<PAGE>
UFB's Reports complied as to form, as of their respective dates of filing with
the SEC, in all material respects with applicable accounting requirements and
with the published rules and regulations of the SEC with respect thereto and
have been prepared in accordance with GAAP (except as may be indicated in the
notes thereto or, in the case of unaudited financial statements, as permitted by
the SEC). Each of the consolidated statements of condition contained or
incorporated by reference in UFB's Reports (including in each case any related
notes and schedules) fairly presented, or will fairly present, as the case may
be, (A) the financial position of the entity or entities to which it relates as
of its date and each of the consolidated statements of operations, consolidated
statements of cash flows and consolidated statements of changes in stockholders'
equity, contained or incorporated by reference in UFB's Reports (including in
each case any related notes and schedules), and (B) the results of operations,
stockholders' equity and cash flows, as the case may be, of the entity or
entities to which it relates for the periods set forth therein (subject, in the
case of unaudited interim statements, to normal year-end audit adjustments that
are not material in amount or effect), in each case in accordance with GAAP,
except as may be noted therein. UFB has made available to SCCB a true and
complete copy of each of UFB's Reports filed with the SEC since September 30,
1998.
(ii) UFB and each of its Subsidiaries have each timely filed all
material reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file since
April 1994 with (A) the OTS, (B) the SEC, (C) the NASD and (D) any other SRO,
and have paid all fees and assessments due and payable in connection therewith.
(g) Absence of Certain Changes or Events. Except as disclosed in UFB's
------------------------------------
Reports filed on or prior to the date of this Agreement, since September 30,
1998, (i) UFB and its Subsidiaries have not incurred any liability, except in
the ordinary course of their business consistent with past practice, (ii) UFB
and its Subsidiaries have conducted their respective businesses only in the
ordinary and usual course of such businesses and (iii) there has not been any
Material Adverse Effect with respect to UFB.
(h) Absence of Claims. Except as set forth in UFB's Disclosure Letter, no
-----------------
litigation, proceeding, controversy, claim or action before any court or
governmental agency is pending against UFB or any of its Subsidiaries and, to
the best of UFB's knowledge, no such litigation, proceeding, controversy, claim
or action has been threatened.
(i) Absence of Regulatory Actions. Neither UFB nor any of its Subsidiaries
-----------------------------
is a party to any cease and desist order, written agreement or memorandum of
understanding with, or any commitment letter or similar written undertaking to,
or is subject to any action, proceeding, order or directive by, or is a
recipient of any extraordinary supervisory letter from any Government
Regulators, or has adopted any board resolutions at the request of any
Government Regulators, nor has it been advised by any Governmental Regulators
that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such action, proceeding, order,
directive, written agreement, memorandum of understanding,
27
<PAGE>
extraordinary supervisory letter, commitment letter, board resolutions or
similar written undertaking.
(j) Taxes. All federal, state, local and foreign tax returns required to be
-----
filed by or on behalf of UFB or any of its Subsidiaries have been timely filed
or requests for extensions have been timely filed and any such extension shall
have been granted and not have expired, and all such filed returns are complete
and accurate in all material respects. All taxes shown on such returns, all
taxes required to be shown on returns for which extensions have been granted and
all other taxes required to be paid by UFB or any of its Subsidiaries have been
paid in full or adequate provision has been made for any such taxes on UFB's
balance sheet (in accordance with GAAP). For purposes of this Section 2.4(j),
the term "taxes" shall include all income, franchise, gross receipts, real and
personal property, real property transfer and gains, wage and employment taxes.
As of the date of this Agreement, there is no audit examination, deficiency
assessment, tax investigation or refund litigation with respect to any taxes of
UFB or any of its Subsidiaries, and no claim has been made by any authority in a
jurisdiction where UFB or any of its Subsidiaries do not file tax returns that
UFB or any such Subsidiary is subject to taxation in that jurisdiction. All
taxes, interest, additions and penalties due with respect to completed and
settled examinations or concluded litigation relating to UFB or any of its
Subsidiaries have been paid in full or adequate provision has been made for any
such taxes on UFB's balance sheet (in accordance with GAAP). Except as set forth
in UFB's Disclosure Letter, UFB and its Subsidiaries have not executed an
extension or waiver of any statute of limitations on the assessment or
collection of any material tax due that is currently in effect. UFB and each of
its Subsidiaries has withheld and paid all taxes required to have been withheld
and paid in connection with amounts paid or owing to any employee, independent
contractor, creditor, stockholder or other third party, and UFB and each of its
Subsidiaries has timely complied with all applicable information reporting
requirements under Part III, Subchapter A of Chapter 61 of the Code and similar
applicable state and local information reporting requirements. Neither UFB nor
any of its Subsidiaries (i) has made an election under Section 341(f) of the
Code, (ii) has issued or assumed any obligation under Section 279 of the Code,
any high yield discount obligation as described in Section 163(i) of the Code or
any registration-required obligation within the meaning of Section 163(f)(2) of
the Code that is not in registered form or (iii) is or has been a United States
real property holding corporation within the meaning of Section 897(c)(2) of the
Code.
(k) Agreements. (i) Except for arrangements made in the ordinary
----------
course of business, and except as set forth in UFB's Disclosure Letter, UFB and
its Subsidiaries are not bound by any material contract (as defined in Item
601(b)(10) of Regulation S-B) to be performed after the date hereof that has not
been filed with or incorporated by reference in UFB's Reports. Except as
disclosed in UFB's Reports, neither UFB nor any of its Subsidiaries is a party
to an oral or written (A) consulting agreement (other than data processing,
software programming and licensing contracts entered into in the ordinary course
of business) not terminable on 60 days' or less notice, (B) agreement with any
executive officer or other key employee of UFB or any of its Subsidiaries the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction involving UFB or any of its Subsidiaries of
the nature contemplated by this Agreement, (C) agreement with respect to any
employee or director of UFB
28
<PAGE>
or any of its Subsidiaries providing any term of employment or compensation
guarantee extending for a period longer than 60 days or for the payment of in
excess of $100,000 per annum, (D) agreement or plan, including any stock option
plan, phantom stock or stock appreciation rights plan, restricted stock plan or
stock purchase plan, any of the benefits of which will be increased, or the
vesting or payment of the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement or (E) agreement containing
covenants that limit the ability of UFB or any of its Subsidiaries to compete in
any line of business or with any person, or that involve any restriction on the
geographic area in which, or method by which, UFB (including any successor
thereof) or any of its Subsidiaries may carry on its business (other than as may
be required by law or any regulatory agency).
(ii) Except as set forth in UFB's Disclosure Letter, neither UFB nor
any of its Subsidiaries is in default under or in violation of any provision of
any note, bond, indenture, mortgage, deed of trust, loan agreement, lease or
other agreement to which it is a party or by which it is bound or to which any
of its respective properties or assets is subject.
(iii) UFB and each of its Subsidiaries owns or possesses valid and
binding licenses and other rights to use without payment all patents,
copyrights, trade secrets, trade names, servicemarks and trademarks used in its
businesses, and neither UFB nor any of its Subsidiaries has received any notice
of conflict with respect thereto that asserts the right of others. Each of UFB
and its Subsidiaries has performed all the obligations required to be performed
by it and are not in default under any contract, agreement, arrangement or
commitment relating to any of the foregoing.
(l) UFB Common Stock. The shares of UFB Common Stock to be issued
----------------
pursuant to this Agreement, when issued in accordance with the terms of this
Agreement, will be duly authorized, validly issued, fully paid and non-
assessable and subject to no preemptive rights.
(m) Labor Matters. Neither UFB nor any of its Subsidiaries is or has
-------------
ever been a party to, or is or has ever been bound by, any collective bargaining
agreement, contract or other agreement or understanding with a labor union or
labor organization with respect to its employees, nor is UFB or any of its
Subsidiaries the subject of any proceeding asserting that it has committed an
unfair labor practice or seeking to compel UFB or any of its Subsidiaries to
bargain with any labor organization as to wages and conditions of employment,
nor is there any strike, other labor dispute or organizational effort involving
UFB or any of its Subsidiaries pending or, to UFB's knowledge, threatened. UFB
and its Subsidiaries are in compliance with applicable laws regarding employment
of employees and retention of independent contractors and are in compliance with
applicable employment tax laws.
(n) Employee Benefit Plans. UFB's Disclosure Letter contains a complete and
accurate list of all pension, retirement, stock option, stock purchase, stock
ownership, savings, stock appreciation right, profit sharing, deferred
compensation, consulting, bonus, group insurance, severance and other benefit
plans, contracts, agreements and arrangements, including,
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but not limited to, "employee benefit plans," as defined in Section 3(3) of
ERISA, incentive and welfare policies, contracts, plans and arrangements and all
trust agreements related thereto with respect to any present or former
directors, officers or other employees of UFB or any of its Subsidiaries
(hereinafter collectively referred to as the "UFB Employee Plans"). All of the
UFB Employee Plans comply in all material respects with all applicable
requirements of ERISA, the Code and other applicable laws; there has occurred no
"prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of
the Code) which is likely to result in the imposition of any penalties or taxes
under Section 502(i) of ERISA or Section 4975 of the Code upon UFB or any of its
Subsidiaries. Neither UFB nor any of its Subsidiaries has provided, or is
required to provide, security to any UFB Pension Plan or to any single-employer
plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the Code. Neither
UFB, its Subsidiaries, nor any ERISA Affiliate has contributed to any
"multiemployer plan" (as defined in Section 3(37) of ERISA), on or after
September 26, 1980. Each UFB Employee Plan that is an "employee pension benefit
plan" (as defined in Section 3(2) of ERISA) and which is intended to be
qualified under Section 401(a) of the Code (a "UFB Qualified Plan") has received
a favorable determination letter from the IRS, and UFB and its Subsidiaries are
not aware of any circumstances likely to result in revocation of any such
favorable determination letter. There is no pending or, to UFB's knowledge,
threatened litigation, administrative action or proceeding relating to any UFB
Employee Plan. There has been no announcement or commitment by UFB or any of its
Subsidiaries to create an additional UFB Employee Plan, or to amend any UFB
Employee Plan, except for amendments required by applicable law which do not
materially increase the cost of such UFB Employee Plan; and, except as
specifically identified in UFB's Disclosure Letter, UFB and its Subsidiaries do
not have any obligations for post-retirement or post-employment benefits under
any UFB Employee Plan that cannot be amended or terminated upon 60 days' notice
or less without incurring any liability thereunder, except for coverage required
by Part 6 of Title I of ERISA or Section 4980B of the Code, or similar state
laws, the cost of which is borne by the insured individuals. Except as disclosed
in UFB's Disclosure Letter, for the UFB Employee Plans listed in UFB's
Disclosure Letter, the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not result in any
payment or series of payments by UFB or any of its Subsidiaries to any person
which is an "excess parachute payment" (as defined in Section 280G of the Code),
increase or secure (by way of a trust or other vehicle) any benefits payable
under any UFB Employee Plan or accelerate the time of payment or vesting of any
such benefit. With respect to each UFB Employee Plan, UFB has supplied to SCCB a
true and correct copy of (A) the annual report on the applicable form of the
Form 5500 series filed with the IRS for the most recent three plan years, if
required to be filed, (B) such UFB Employee Plan, including amendments thereto,
(C) each trust agreement, insurance contract or other funding arrangement
relating to such UFB Employee Plan, including amendments thereto, (D) the most
recent summary plan description and summary of material modifications thereto
for such UFB Employee Plan, if the UFB Employee Plan is subject to Title I of
ERISA, (E) the most recent actuarial report or valuation if such UFB Employee
Plan is an UFB Pension Plan and any subsequent changes to the actuarial
assumptions contained therein and (F) the most recent determination letter
issued by the IRS if such UFB Employee Plan is a UFB Qualified Plan.
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(o) Compliance with Laws. UFB and each of its Subsidiaries has all
--------------------
permits, licenses, certificates of authority, orders and approvals of, and has
made all filings, applications and registrations with, all federal, state, local
and foreign governmental or regulatory bodies that are required in order to
permit it to carry on its business as it is presently conducted. All such
permits, licenses, certificates of authority, orders and approvals are in full
force and effect, and, to the best knowledge of UFB, no suspension or
cancellation of any of them is threatened. Since the date of its incorporation,
the corporate affairs of UFB have not been conducted in violation of any law,
ordinance, regulation, order, writ, rule, decree or approval of any Governmental
Entity. The businesses of UFB and its Subsidiaries are not being conducted in
violation of any law, ordinance, regulation, order, writ, rule, decree or
condition to approval of any Governmental Entity.
(p) Investment Securities; Borrowing. (i) Except for investments in
--------------------------------
FHLB stock and pledges to secure FHLB borrowings and reverse repurchase
agreements entered into in arms-length transactions pursuant to normal
commercial terms and conditions and entered into in the ordinary course of
business and restrictions that exist for securities to be classified as "held to
maturity," none of the investments reflected in the balance sheet of UFB Bank
for the year ended September 30, 1998, and none of the investment securities
held by UFB or any of its Subsidiaries since September 30, 1998 is subject to
any restriction (contractual or statutory) that would materially impair the
ability of the entity holding such investment freely to dispose of such
investment at any time.
(ii) Except as set forth in UFB's Disclosure Letter, neither UFB nor
any Subsidiary is a party to or has agreed to enter into any Derivatives
Contract or owns securities that (A) are referred to generically as "structured
notes," "high risk mortgage derivatives," "capped floating rate notes" or
"capped floating rate mortgage derivatives" or (B) are likely to have changes in
value as a result of interest or exchange rate changes that significantly exceed
normal changes in value attributable to interest or exchange rate changes,
except for those Derivatives Contracts and other instruments legally purchased
or entered into in the ordinary course of business, consistent with safe and
sound banking practices and regulatory guidance, and listed (as of the date
hereof) in UFB's Disclosure Letter or disclosed in UFB's Report filed on or
prior to the date hereof.
(iii) Set forth in UFB's Disclosure Letter is a true and complete list
of UFB's borrowed funds (excluding deposit accounts) as of the date hereof.
(q) Books and Records. The books and records of UFB and its Subsidiaries on
-----------------
a consolidated basis have been, and are being, maintained in accordance with
applicable legal and accounting requirements and reflect in all material
respects the substance of events and transactions that should be included
therein.
(r) Beneficial Ownership of SCCB Common Stock. As of the date hereof,
-----------------------------------------
UFB beneficially owns no shares of SCCB Common Stock and does not have any
option, warrant or right of any kind to acquire the beneficial ownership of any
shares of SCCB Common Stock.
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(s) Tax Treatment of the Merger. As of the date hereof, UFB has no
---------------------------
knowledge of any fact or circumstance that would prevent the transactions
contemplated by this Agreement from qualifying as a tax-free reorganization
under the Code.
(t) Year 2000 Matters. UFB has completed a review of its computer systems
-----------------
to identify systems that could be affected by the "Year 2000" issue and
reasonably believes it has identified all Year 2000 problems. UFB's management
has developed and commenced implementation of a plan to respond to this issue
which is designed to complete any required initial changes to its computer
systems and to complete testing of those changes by June 30, 1999. Between the
date of this Agreement and the Effective Time, UFB shall use commercially
practicable efforts to implement and/or continue to undertake such plan. Year
2000 issues have not had, and are not reasonably expected to have, a Material
Adverse Effect on UFB or its Subsidiaries.
ARTICLE III
Conduct Pending the Merger
--------------------------
Section 3.1. Conduct of SCCB's Business Prior to the Effective Time.
------------------------------------------------------
Except as expressly provided in this Agreement, during the period from the date
of this Agreement to the Effective Time, SCCB shall, and shall cause its
Subsidiaries to, use commercially reasonable efforts to (i) conduct its business
in the regular, ordinary and usual course consistent with past practice; (ii)
maintain and preserve intact its business organization, properties, leases,
employees and advantageous business relationships and retain the services of its
officers and key employees; (iii) take no action which would adversely affect or
delay the ability of SCCB or UFB to perform their respective covenants and
agreements on a timely basis under this Agreement; (iv) take no action which
would adversely affect or delay the ability of SCCB, SCCB Bank, UFB or UFB Bank
to obtain any necessary approvals, consents or waivers of any governmental
authority required for the transactions contemplated hereby or which would
reasonably be expected to result in any such approvals, consents or waivers
containing any material condition or restriction, and (v) take no action that
results in or is reasonably likely to have a Material Adverse Effect on SCCB or
SCCB Bank.
Section 3.2. Forbearance by SCCB. Without limiting the covenants set forth
-------------------
in Section 3.1 hereof, except as otherwise provided in this Agreement and except
to the extent required by law or regulation or any Government Regulators, during
the period from the date of this Agreement to the Effective Time, SCCB shall
not, and shall not permit any of its Subsidiaries to, without the prior consent
of UFB, which consent shall not be unreasonably withheld:
(a) change any provisions of the certificate of incorporation or bylaws of
SCCB or the similar governing documents of its Subsidiaries;
(b) issue any shares of capital stock or change the terms of any
outstanding stock options or warrants or issue, grant or sell any option,
warrant, call, commitment, stock appreciation right, right to purchase or
agreement of any character relating to the authorized or
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issued capital stock of SCCB except pursuant to the exercise of stock options or
warrants outstanding as of the date of this Agreement in the ordinary course of
business and consistent with past practice;
(c) make, declare or pay any cash or stock dividend or make any other
distribution on, or directly or indirectly redeem, purchase or otherwise
acquire, any shares of its capital stock or any securities or obligations
convertible into or exchangeable for any shares of its capital stock, other than
the $.34 regular semi-annual cash dividend payable by SCCB. As promptly as
practicable following the semi-annual dividend payment for the period ending
June 30, 1999, SCCB shall pay a quarterly cash dividend of $.17 per share, and,
the Board of Directors of SCCB shall cause its quarterly dividend record dates
and payment dates to be the same as UFB's regular quarterly dividend record
dates and payment dates for UFB Common Stock, and except as provided above,
thereafter SCCB shall not change its regular dividend payment dates and record
dates without the prior written consent of UFB. In no event, will SCCB's
dividends exceed the amount that would have been payable under its semi-annual
dividend schedule. Nothing contained in this Section 3.2(c) or in any other
Section of this Agreement shall be construed as to permit SCCB shareholders to
receive two dividends from either SCCB or from SCCB and UFB in any quarter or,
subject to the following sentence, to deny the SCCB shareholders the right to
receive one regular dividend in a quarter. Nothing contained in this Section
3.2(c) or in any other Section of this Agreement shall be construed as to permit
SCCB to pay in any given period a dividend that exceeds its earnings for that
quarter or semi-annual period. Subject to applicable regulatory restrictions, if
any, SCCB Bank may pay a cash dividend that is, in the aggregate, sufficient to
fund any dividend by SCCB permitted hereunder;
(d) other than in the ordinary course of business consistent with past
practice and pursuant to policies currently in effect, sell, transfer, mortgage,
encumber or otherwise dispose of any of its material properties, leases or
assets to any individual, corporation or other entity other than a direct or
indirect wholly owned Subsidiary of SCCB or cancel, release or assign any
indebtedness of any such individual, corporation or other entity, except
pursuant to contracts or agreements in force at the date of this Agreement and
which have been disclosed to UFB;
(e) except to the extent required by law or as disclosed in Section 3.2(e)
of SCCB's Disclosure Letter or specifically provided for elsewhere herein,
increase in any manner the compensation or fringe benefits of any of its
employees or directors, other than general increases in compensation for
employees in the ordinary course of business consistent with past practice that
do not cause the annualized compensation of any of SCCB's employees following
such increase to exceed by more than 2% the total annual compensation expenses
of SCCB with respect to such person for the twelve month period ended March
31,1999 and other than promotions of non-officer employees as a result of
enhanced job classification and duties, made in the ordinary course of business
which results in an increase in the compensation thereof so long as such
increase does not cause the annual rate of such individual's compensation to
increase by more than 10% of such person's compensation at March 31, 1999; pay,
unless approved in advance by UFB, any reasonable "stay in place" pay where
necessary or appropriate to retain key employees; pay any pension or retirement
allowance not required by any existing plan or
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agreement to any such employees or directors, or become a party to, amend or
commit itself to fund or otherwise establish any trust or account related to any
SCCB Employee Plan (as defined in Section 2.3(m)) with or for the benefit of any
employee or director; voluntarily accelerate the vesting of any stock options or
other compensation or benefit; make any discretionary contribution to any
Employee Plan other than payments with respect to the 401(k) plan or for the
ESOP loan consistent with past practices; hire any employee with an annual total
compensation payment in excess of $20,000 or enter into any employment contract;
terminate or increase the costs to SCCB or any Subsidiary of any Employee Plan;
(f) except as contemplated by Section 4.2, change its method of accounting
as in effect at June 30, 1998, except as required by changes in GAAP as
concurred in by SCCB's independent auditors;
(g) settle any claim, action or proceeding involving any liability of SCCB
or any of its Subsidiaries for money damages in excess of $25,000 or impose
material restrictions upon the operations of SCCB or any of its Subsidiaries;
(h) acquire or agree to acquire, by merging or consolidating with, or by
purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof or otherwise
acquire or agree to acquire any assets, in each case which are material,
individually or in the aggregate, to SCCB, except in satisfaction of debts
previously contracted;
(i) except pursuant to commitments existing at the date hereof which have
previously been disclosed to UFB, make any real estate loans secured by
undeveloped land or real estate located outside the State of South Carolina
(other than real estate secured by one-to-four family homes) or make any
construction loan (other than construction loans secured by one-to-four family
homes) outside the State of South Carolina;
(j) establish or commit to the establishment of any new branch or other
office facilities other than those for which all regulatory approvals have been
obtained except as disclosed in the SCCB Disclosure Schedule;
(k) take any action that would prevent or impede the Merger from qualifying
as a tax-free reorganization under the Code;
(l) other than in the ordinary course of business consistent with past
practice in individual amounts not to exceed $10,000 and other than investments
for SCCB's portfolio made in accordance with Section 3.2(m), make any investment
either by purchase of stock or securities, contributions to capital, property
transfers, or purchase of any property or assets of any other individual,
corporation or other entity;
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<PAGE>
(m) make any investment in any debt security, including mortgage-backed and
mortgage-related securities, other than US Government and US Government agency
securities with final maturities not greater than five years, mortgage-backed or
mortgage related securities which would not be considered "high risk" securities
pursuant to Thrift Bulletin Number 52 issued by the OTS or securities of the
Federal Home Loan Bank ("FHLB"), in each case that are purchased in the ordinary
course of business consistent with past practice;
(n) enter into or terminate any contract or agreement, or make any change
in any of its leases or contracts, other than with respect to those involving
aggregate payments of less than, or the provision of goods or services with a
market value of less than, $20,000 per annum and other than contracts or
agreements covered by Section 3.2(o);
(o) make, grant or purchase any loan or commitment to lend in excess of
$10,000 to any individual borrower, unless such loan is fully secured by real
estate, personal property or liquid collateral and conforms in all material
respects with the Bank's existing loan policy. The Bank is also permitted to
renew currently outstanding loans or amounts above $10,000 provided the loan has
a satisfactory payment history and the renewal is not in excess of the original
loan principal amount;
(p) incur any additional borrowings beyond those set forth in the SCCB
Disclosure Schedule other than short-term (six months or less) FHLB borrowings
and reverse repurchase agreements consistent with past practice, or pledge any
of its assets to secure any borrowings other than as required pursuant to the
terms of borrowings of SCCB or any Subsidiary in effect at the date hereof or in
connection with borrowings or reverse repurchase agreements permitted hereunder.
Deposits shall not be deemed to be borrowings within the meaning of this
paragraph;
(q) make any capital expenditures in excess of $10,000 per expenditure
other than pursuant to binding commitments existing on the date hereof disclosed
in the SCCB Disclosure Schedule, other than expenditures necessary to maintain
existing assets in good repair or to make payment of necessary taxes;
(r) organize, capitalize, lend to or otherwise invest in any Subsidiary, or
invest in or acquire any equity or voting interest in any firm, corporation or
business enterprise (other than securities of the FHLB that are purchased in the
ordinary course of business consistent with past practice);
(s) elect to the Board of Directors of SCCB or, except as disclosed in
SCCB's Disclosure Letter, to any office any person who is not a member of the
Board of Directors of SCCB or an officer of SCCB as of the date of this
Agreement;
(t) accept any proposed deposits by any municipality or government agency
the terms of which exceed 90 days; or
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<PAGE>
(u) agree or make any commitment to take any action that is prohibited by
this Section 3.2.
In the event that UFB does not respond in writing to SCCB within three
business days of receipt by UFB of a written request for SCCB to engage in any
of the actions for which UFB's prior written consent is required pursuant to
this Section 3.2, UFB shall be deemed to have consented to such action. Any
request by SCCB or response thereto by UFB shall be made in accordance with the
notice provisions of Section 8.7, shall note that it is a request pursuant to
this Section 3.2 and shall state that a failure to respond within three business
days shall constitute consent.
Section 3.3. Conduct of UFB's Business Prior to the Effective Time.
-----------------------------------------------------
Except as expressly provided in this Agreement, during the period from the date
of this Agreement to the Effective Time, UFB shall, and shall cause its
Subsidiaries to, use commercially reasonable efforts to (i) conduct its business
in the regular, ordinary and usual course consistent with past practice; (ii)
maintain and preserve intact its business organization, properties, leases,
employees and advantageous business relationships and retain the services of its
officers and key employees; (iii) take no action which would materially
adversely affect or delay the ability of SCCB or UFB to perform their respective
covenants and agreements on a timely basis under this Agreement; and (iv) take
no action which would adversely affect or delay the ability of SCCB, UFB, SCCB
Bank or UFB Bank to obtain any necessary approvals, consents or waivers of any
governmental authority required for the transactions contemplated hereby or
which would reasonably be expected to result in any such approvals, consents or
waivers containing any material condition or restriction.
ARTICLE IV
Covenants
---------
Section 4.1. Acquisition Proposals. From and after the date hereof
---------------------
until the termination of this Agreement, neither SCCB or SCCB Bank, nor any of
their respective officers, directors, employees, representatives, agents or
affiliates (including, without limitation, any investment banker, attorney or
accountant retained by SCCB or any of its subsidiaries), will, directly or
indirectly, initiate, solicit, encourage (including by way of furnishing non-
public information or assistance), or facilitate, any inquiries or the making of
any proposal that constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal (as defined below), or enter into or maintain or continue
discussions or negotiate with any person or entity in furtherance of such
inquiries or to obtain an Acquisition Proposal or agree to or endorse any
Acquisition Proposal, or authorize or permit any of its officers, directors or
employees or any of its subsidiaries or any investment banker, financial
advisor, attorney, accountant or other representative retained by any of its
subsidiaries to take any such action, and SCCB shall notify UFB orally (within
one business day) and in writing (as promptly as practicable) of all of the
relevant details relating to all inquiries and proposals which it or any of its
subsidiaries or any such officer, director, employee, investment banker,
financial advisor, attorney, accountant or other
36
<PAGE>
representative may receive relating to any of such matters and if such inquiry
or proposal is in writing, SCCB shall deliver to UFB a copy of such inquiry or
proposal promptly; provided, however, that nothing contained in this Section 4.1
shall prohibit the Board of Directors of SCCB from (i) furnishing information
to, or entering into discussions or negotiations with any person or entity that
makes an unsolicited written, bona fide proposal, to acquire SCCB pursuant to a
merger, consolidation, share exchange, business combination, tender or exchange
offer or other similar transaction, if, and only to the extent that, (A) the
Board of Directors of SCCB receives a written opinion from its independent
financial advisor that such proposal may be superior to the Merger from a
financial point-of-view to SCCB's stockholders, (B) the Board of Directors of
SCCB, after consultation with and based upon the advice of independent legal
counsel, determines in good faith that such action is necessary for the Board of
Directors of SCCB to comply with its fiduciary duties to stockholders under
applicable law (such proposal that satisfies (A) and (B) being referred to
herein as a "Superior Proposal") and (C) prior to furnishing such information
to, or entering into discussions or negotiations with, such person or entity,
SCCB (x) provides reasonable notice to UFB to the effect that it is furnishing
information to, or entering into discussions or negotiations with, such person
or entity and (y) receives from such person or entity an executed
confidentiality agreement in reasonably customary form; (ii) complying with Rule
14e-2 promulgated under the Exchange Act with regard to a tender or exchange
offer or (iii) failing to make or withdrawing or modifying its recommendation
and entering into a Superior Proposal if there exists a Superior Proposal and
the Board of Directors of SCCB, after consultation with and based upon the
advice of independent legal counsel, determines in good faith that such action
is necessary for the Board of Directors of SCCB to comply with its fiduciary
duties to stockholders under applicable law. For purposes of this Agreement,
"Acquisition Proposal" shall mean any of the following (other than the
transactions contemplated hereunder) involving SCCB or any of its subsidiaries
(i) any merger, consolidation, share exchange, business combination, or other
similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer
or other disposition of 10% or more of the assets of SCCB or SCCB Bank, taken as
a whole, in a single transaction or series of transactions; (iii) any tender
offer or exchange offer for 10% or more of the outstanding shares of capital
stock of SCCB or the filing of a registration statement under the Securities Act
in connection therewith or (iv) any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing.
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Section 4.2. Certain Policies of SCCB.
------------------------
(a) At the request of UFB, SCCB shall cause SCCB Bank to modify and change
its loan, litigation and real estate valuation policies and practices (including
loan classifications and levels of reserves) and investment and asset/liability
management policies and practices after the date on which all Requisite
Regulatory Approvals and stockholder approvals are received, and after receipt
of written confirmation from UFB that it is not aware of any fact or
circumstance that would prevent completion of the Merger, and prior to the
Effective Time so as to be consistent on a mutually satisfactory basis with
those of UFB Bank; provided, however, that SCCB shall not be required to take
such action more than five business days prior to the Effective Date; and
provided, further , that such policies and procedures are not prohibited by GAAP
or any applicable laws and regulations.
(b) SCCB's representations, warranties and covenants contained in this
Agreement shall not be deemed to be untrue or breached in any respect for any
purpose as a consequence of any modifications or changes undertaken solely on
account of this Section 4.2. UFB agrees to hold harmless, indemnify and defend
SCCB and its Subsidiaries, and their respective directors, officers and
employees, for any loss, claim, liability or other damage caused by or resulting
from compliance with this Section 4.2.
Section 4.3. Access and Information.
----------------------
(a) Upon reasonable notice, SCCB shall (and shall cause its Subsidiaries
to) afford to UFB and its representatives (including, without limitation,
directors, officers and employees of UFB and its affiliates and counsel,
accountants and other professionals retained by UFB) such reasonable access
during normal business hours throughout the period prior to the Effective Time
to the books, records (including, without limitation, tax returns and work
papers of independent auditors), properties, personnel and to such other
information as UFB may reasonably request; provided, however, that no
investigation pursuant to this Section 4.3 shall affect or be deemed to modify
any representation or warranty made herein. In furtherance, and not in
limitation of the foregoing, SCCB shall make available to UFB all information
necessary or appropriate for the preparation and filing of all real property and
real estate transfer tax returns and reports required by reason of the Merger or
the Bank Merger. UFB will make available to SCCB (i) such updated financial and
business information as SCCB may reasonably request and (ii) other information
as reasonably necessary for SCCB to prepare and file a Proxy Statement-
Prospectus as contemplated by Section 4.9. UFB will not, and will cause its
representatives not to, use any information obtained pursuant to this Section
4.3 for any purpose unrelated to the consummation of the transactions
contemplated by this Agreement. Subject to the requirements of applicable law,
UFB will keep confidential, and will cause its representatives to keep
confidential, all information and documents obtained pursuant to this Section
4.3 unless such information (i) was already known to UFB or an affiliate of UFB,
other than pursuant to a confidentiality agreement or other confidential
relationship; (ii) becomes available to UFB or an affiliate of UFB from other
sources not known by UFB to be bound by a confidentiality agreement or other
obligation of secrecy; (iii) is disclosed with the prior written approval of UFB
or (iv) is or becomes readily ascertainable from published information or trade
sources. In the
38
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event that this Agreement is terminated or the transactions contemplated by this
Agreement shall otherwise fail to be consummated, UFB shall promptly cause all
copies of documents or extracts thereof containing information and data as to
SCCB hereto (or an affiliate of SCCB) to be returned to SCCB.
(b) During the period of time beginning on the day application materials
for the Bank Merger are initially filed with the OTS (but in no event earlier
than 30 days prior to the Effective Time) and continuing to the Effective Time,
including weekends and holidays, SCCB shall cause SCCB Bank to provide UFB, UFB
Bank and their authorized agents and representatives full access to SCCB Bank's
offices after normal business hours for the purpose of installing necessary
wiring and equipment (at UFB's expense) to be utilized by UFB Bank after the
Effective Time; provided, that:
(i) reasonable advance notice of each entry shall be given to SCCB
Bank and SCCB Bank approves of each entry, which approval shall not be
unreasonably withheld;
(ii) SCCB Bank shall have the right to have its employees or
contractors present to inspect the work being done;
(iii) to the extent practicable, such work shall be done in a manner
that will not interfere with SCCB Bank's business conducted at any affected
branch offices;
(iv) all such work shall be done in compliance with all applicable
laws and government regulations, and UFB Bank shall be responsible for the
procurement, at UFB Bank's expense, of all required governmental or
administrative permits and approvals;
(v) UFB Bank shall maintain appropriate insurance satisfactory to
SCCB Bank in connection with any work done by UFB Bank's agents and
representatives pursuant to this Section 4.3;
(vi) UFB Bank shall reimburse SCCB Bank for any material out-of-
pocket costs or expenses incurred by SCCB Bank in connection with this
undertaking; and
(vii) in the event this Agreement is terminated in accordance with
Article VI hereof, UFB Bank, within a reasonable time period and at its sole
cost and expense, will pay SCCB for the restoration of such offices to their
condition prior to the commencement of any such installation.
Section 4.4. Certain Filings, Consents and Arrangements. UFB and SCCB
------------------------------------------
shall (a) as soon as practicable (and in any event within 45 days after the date
hereof) make, or cause to be made, any filings and applications and provide any
notices required to be filed or provided in order to obtain all approvals,
consents and waivers of governmental authorities and third parties necessary or
appropriate for the consummation of the transactions contemplated hereby; (b)
cooperate with one another in promptly (i) determining what filings and notices
are required to be
39
<PAGE>
made or approvals, consents or waivers are required to be obtained under any
relevant federal or state law or regulation or under any relevant agreement or
other document and (ii) making any such filings and notices, furnishing
information required in connection therewith and seeking timely to obtain any
such approvals, consents or waivers; and (c) deliver to the other copies of the
publicly available portions of all such filings, notices and applications
promptly after they are filed.
Section 4.5. Antitakeover Provisions. SCCB and its Subsidiaries shall take
-----------------------
all steps required by any relevant federal or state law or regulation or under
any relevant agreement or other document (i) to exempt or continue to exempt
UFB, the Agreement, the Merger and the Bank Merger from any provisions of an
antitakeover nature in SCCB's or its Subsidiaries' organization certificates and
bylaws and the provisions of any federal or state antitakeover laws, and (ii)
upon the request of UFB, to assist in any challenge to the applicability to the
Agreement, the Merger or the Bank Merger of any federal or state antitakeover
laws.
Section 4.6. Additional Agreements. Subject to the terms and conditions
---------------------
herein provided, each of the parties hereto agrees to use all reasonable efforts
to take promptly, or cause to be taken promptly, all actions and to do promptly,
or cause to be done promptly, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including the Bank Merger, as
expeditiously as possible, including using efforts to obtain all necessary
actions or non-actions, extensions, waivers, consents and approvals from all
applicable Governmental Entities, effecting all necessary registrations,
applications and filings (including, without limitation, filings under any
applicable state securities laws) and obtaining any required contractual
consents and regulatory approvals.
Section 4.7. Publicity. The initial press release announcing this
---------
Agreement shall be a joint press release and thereafter SCCB and UFB shall
consult with each other in issuing any press releases or otherwise making public
statements with respect to the Merger and any other transaction contemplated
hereby and in making any filings with any Governmental Entity or with any
national securities exchange with respect thereto.
Section 4.8. Stockholders Meetings. UFB and SCCB shall take all action
---------------------
necessary, in accordance with applicable law and their respective corporate
documents, to convene a meeting of their respective stockholders (each, a
"Stockholder Meeting") as promptly as practicable for the purpose of considering
and voting on approval and adoption of the transactions provided for in this
Agreement. Except to the extent legally required for the discharge by the Board
of Directors of its fiduciary duties as advised by such Board's counsel, the
Board of Directors of each of UFB and SCCB shall (a) recommend at its
Stockholder Meeting that the stockholders vote in favor of and approve the
transactions provided for in this Agreement and (b) use its best efforts to
solicit such approvals. UFB and SCCB, in consultation with each other, shall
each employ professional proxy solicitors to assist in contacting stockholders
in connection with soliciting favorable votes on the Merger. UFB and SCCB shall
coordinate and cooperate with respect to the timing of their respective
Stockholder Meetings.
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Section 4.9. Proxy Statements; Comfort Letters. (i) As soon as
---------------------------------
practicable after the date hereof, UFB and SCCB shall cooperate with respect to
the preparation of a Proxy Statement-Prospectus for the purpose of taking
stockholder action on the Merger and this Agreement and file the Proxy
Statement-Prospectus with the SEC, respond to comments of the staff of the SEC
and, promptly after the Registration Statement is declared effective by the SEC,
mail the Proxy Statement-Prospectus to the respective holders of record (as of
the applicable record date) of shares of voting stock of each of SCCB and UFB.
UFB and SCCB each covenants to the other that the Proxy Statement-Prospectus,
and any amendment or supplement thereto, with respect to the information
pertaining to it or its Subsidiaries at the date of mailing to its stockholders
and the date of its Stockholder Meeting will be in compliance with the Exchange
Act and all relevant rules and regulations of the SEC and will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(ii) UFB shall cause Elliott, Davis & Company, LLP, its independent
public accounting firm, to deliver to SCCB, and SCCB shall cause Crisp Hughes
Evans LLP, its independent public accounting firm, to deliver to UFB and to its
officers and directors who sign the Registration Statement for this transaction,
a "comfort letter" or "agreed upon procedures" letter, in the form customarily
issued by such accountants at such time in transactions of this type, dated (a)
the date of the mailing of the Proxy Statement-Prospectus for the Stockholders
Meeting of SCCB and the date of mailing of the Proxy Statement for the
Stockholders Meeting of UFB, respectively, and (b) a date not earlier than five
business days preceding the date of the Closing (as defined in Section 7.1).
Section 4.10. Registration of UFB Common Stock.
--------------------------------
(a) UFB shall, as promptly as practicable following the preparation
thereof, file the Registration Statement (including any pre-effective or post-
effective amendments or supplements thereto) with the SEC under the Securities
Act in connection with the transactions contemplated by this Agreement, and UFB
and SCCB shall use all reasonable efforts to have the Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing. UFB will advise SCCB promptly after UFB receives notice of the time
when the Registration Statement has become effective or any supplement or
amendment has been filed, of the issuance of any stop order or the suspension of
the qualification of the shares of capital stock issuable pursuant to the
Registration Statement, or the initiation or threat of any proceeding for any
such purpose, or of any request by the SEC for the amendment or supplement of
the Registration Statement or for additional information. UFB will provide SCCB
with as many copies of such Registration Statement and all amendments thereto
promptly upon the filing thereof as SCCB may reasonably request.
(b) UFB shall use its best efforts to obtain, prior to the effective date
of the Registration Statement, all necessary state securities laws or "blue sky"
permits and approvals required to carry out the transactions contemplated by
this Agreement.
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(c) UFB shall use its best efforts to list, prior to the Effective Time, on
the Nasdaq SmallCap or on such other exchange as UFB Common Stock shall then be
trading, subject only to official notice of issuance, the shares of UFB Common
Stock to be issued by UFB in exchange for the shares of SCCB Common Stock.
Section 4.11. Affiliate Letters. Promptly, but in any event within two
-----------------
weeks after the execution and delivery of this Agreement, SCCB shall deliver to
UFB a letter identifying all persons who, to the knowledge of SCCB, may be
deemed to be "affiliates" of SCCB under Rule 145 of the Securities Act,
including, without limitation, all directors and executive officers of SCCB.
Within two weeks after delivery of such letter, SCCB shall deliver executed
letter agreements, each substantially in the form attached hereto as Exhibit B,
executed by each such person so identified as an affiliate of SCCB agreeing (a)
to comply with Rule 145 and (b) to be present in person or by proxy and vote in
favor of the Merger at SCCB's Stockholders Meeting.
Section 4.12. Notification of Certain Matters. Each party shall give prompt
-------------------------------
notice to the others of: (a) any event or notice of, or other communication
relating to, a default or event that, with notice or lapse of time or both,
would become a default, received by it or any of its Subsidiaries subsequent to
the date of this Agreement and prior to the Effective Time, under any contract
material to the financial condition, properties, businesses or results of
operations of each party and its Subsidiaries taken as a whole to which each
party or any Subsidiary is a party or is subject; and (b) any event, condition,
change or occurrence which individually or in the aggregate has, or which, so
far as reasonably can be foreseen at the time of its occurrence, is reasonably
likely to result in a Material Adverse Event. Each of SCCB and UFB shall give
prompt notice to the other party of any notice or other communication from any
third party alleging that the consent of such third party is or may be required
in connection with any of the transactions contemplated by this Agreement.
Section 4.13. Employees, Directors and Officers.
---------------------------------
(a) All persons who are employees of SCCB Bank immediately prior to the
Effective Time (SCCB's Employees) and whose employment is not specifically
terminated at or prior to the Effective Time (a "Continuing Employee") shall, at
the Effective Time, become employees of UFB or UFB Bank, respectively; provided,
however, that in no event shall any of SCCB's Employees be officers of UFB or
UFB Bank, or have or exercise any power or duty conferred upon such an officer,
unless and until duly elected or appointed to such position in accordance with
the bylaws of UFB or UFB Bank. All of SCCB's Employees who remain following the
Effective Date shall be employed at the will of UFB or UFB Bank. No contractual
right to employment shall inure to such employees because of this Agreement.
Subject to paragraph (e) of this Section 4.13, no employee of SCCB will become a
contractual employee of UFB or UFB Bank unless such contract is in writing and
executed by the President or Chief Executive Officer of UFB or UFB Bank.
(b) Except as provided in paragraph (c) of this Section 4.13, appropriate
steps shall be taken to terminate all SCCB Employee Plans as of the Effective
Time or as promptly as
42
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practical thereafter. Except as provided in paragraph (c) of this Section 4.13,
immediately following the Effective Time, each Continuing Employee shall be
eligible to participate in UFB Employee Plans, on the same basis as any newly-
hired employee of UFB or UFB Bank (it being understood that inclusion of
Continuing Employee in UFB Employee Plans may occur at different times with
respect to different plans); provided, however, that with respect to each UFB
Employee Plan for purposes of determining eligibility to participate and
vesting, service with SCCB or SCCB Bank shall be treated as service with UFB or
UFB Bank. Such service shall also apply for purposes of satisfying any waiting
periods, evidence of insurability requirements, or the application of any
preexisting condition limitation with respect to any UFB or UFB Bank welfare
benefit plan.
(c) As of the Effective Time, each SCCB Employee who is a participant in
the SCCB 401(k) Plan (the "SCCB 401(k) Plan") shall become fully vested in his
or her account balance in the SCCB 401(k) Plan and the SCCB 401(k) Plan will
either be merged into the UFB Bank's 401(k) Savings Plan (the "UFB Bank 401(k)
Plan") effective as of a date following the Effective Time selected by UFB Bank
or, if so elected by UFB Bank, terminated immediately prior to, on, or after the
Effective Time. The determination as to whether the SCCB 401(k) Plan shall be
terminated or merged into the UFB Bank 401(k) Plan shall be made by UFB Bank.
Effective as of the date of the merger of the SCCB 401(k) Plan into the UFB
401(k) Plan or the termination of the SCCB 401(k) Plan (or the Effective Time,
if subsequent to such termination), SCCB Employees who are then participating in
the SCCB 401(k) Plan shall become participants in the UFB Bank 401(k) Plan.
(d) At or immediately prior to the Effective Time, the SCCB Employee Stock
Ownership Plan ("ESOP") shall be terminated on such terms and conditions as SCCB
shall determine, and the loan between SCCB and the ESOP shall be repaid in full
from the Cash Consideration received for unallocated shares of SCCB Common Stock
held by the ESOP (or, if such amount is insufficient to repay the loan, through
the sale of a sufficient number of shares of UFB Common Stock) upon the
conversion pursuant to the Merger of such shares of SCCB Common Stock held by
the ESOP. Any remaining Cash Consideration or UFB Common Stock received for such
unallocated shares after such repayment shall be allocated to the ESOP accounts
of those SCCB or SCCB Bank employees who are ESOP participants and beneficiaries
(the "ESOP Participants") in accordance with the terms of the ESOP as amended
with respect to such termination and as in effect on the Effective Time. All
ESOP Participants shall fully vest and have a nonforfeitable interest in their
accounts under the ESOP determined as of the Effective Time. As soon as
practicable after the receipt of a favorable determination letter from the IRS
as to the tax qualified status of the ESOP upon its termination under Section
401(a) and 4975(e) of the Code, distributions of the benefits under the ESOP
shall be made to the ESOP Participants in accordance with the provisions of the
ESOP.
(e) All unvested shares of restricted stock awarded under the SCCB RRP
shall, as of the Effective Time, become vested pursuant to the terms of the SCCB
RRP and converted into the right to receive the Merger Consideration. At the
Effective Time, the SCCB RRP shall be deemed terminated.
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(f) At the Effective Time, UFB shall enter into an employment agreement
with Alan W. Pullen, substantially in the form attached hereto as Exhibit C, in
consideration for Mr. Pullen's agreement to the cancellation of his employment
agreement and supplemental executive agreement and the waiver of any rights,
including the change in control provisions of such agreements and any payments
due under such agreements following the Merger or as a result of the Merger.
(g) UFB and UFB Bank shall cause their respective Boards of Directors to
each be increased to allow for the appointment of Philip C. Wilkins, John S.
McMeekin, and Quay McMaster. The term for Mr. McMaster on each of the respective
boards shall expire in the year 2000. Messrs. Wilkins and McMeekin shall be
appointed to respective classes as shall be mutually determined.
Section 4.14. Indemnification; Directors' and Officers' Insurance.
---------------------------------------------------
(a) From and after the Effective Time through the sixth anniversary of the
Effective Date, UFB agrees to indemnify and hold harmless each present and
former director and officer of SCCB and its Subsidiaries and each officer or
employee of SCCB and its Subsidiaries that is serving or has served as a
director or trustee of another entity expressly at SCCB's request or direction
(each, an "Indemnified Party"), against any costs or expenses (including
reasonable attorneys' fees), judgments, fines, losses, claims, damages or
liabilities (collectively, "Costs") incurred in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of matters existing or occurring at
or prior to the Effective Time (including the transactions contemplated by this
Agreement), whether asserted or claimed prior to, at or after the Effective
Time, and to advance any such Costs to each Indemnified Party as they are from
time to time incurred, in each case to the fullest extent such Indemnified Party
would have been indemnified as a director, officer or employee of SCCB and its
Subsidiaries and as then permitted under applicable law.
(b) Any Indemnified Party wishing to claim indemnification under Section
4.14(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify UFB thereof, but the failure to so notify
shall not relieve UFB of any liability it may have hereunder to such Indemnified
Party if such failure does not materially and substantially prejudice the
Indemnifying Party. In the event of any such claim, action, suit, proceeding or
investigation, (i) UFB shall have the right to assume the defense thereof with
counsel reasonably acceptable to the Indemnified Party and UFB shall not be
liable to such Indemnified Party for any legal expenses of other counsel
subsequently incurred by such Indemnified Party in connection with the defense
thereof, except that if UFB does not elect to assume such defense within a
reasonable time or counsel for the Indemnified Party at any time advises that
there are issues which raise conflicts of interest between UFB and the
Indemnified Party (and counsel for UFB does not disagree), the Indemnified Party
may retain counsel satisfactory to such Indemnified Party, and UFB shall remain
responsible for the reasonable fees and expenses of such counsel as set forth
above, to be paid promptly as statements therefor are received; provided,
however, that UFB shall be obligated pursuant to this paragraph (b) to pay for
only one firm of counsel for all Indemnified Parties in
44
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any one jurisdiction with respect to any given claim, action, suit, proceeding
or investigation unless the use of one counsel for such Indemnified Parties
would present such counsel with a conflict of interest; (ii) the Indemnified
Party will reasonably cooperate in the defense of any such matter; and (iii) UFB
shall not be liable for any settlement effected by an Indemnified Party without
its prior written consent, which consent may not be withheld unless such
settlement is unreasonable in light of such claims, actions, suits, proceedings
or investigations against, or defenses available to, such Indemnified Party.
(c) UFB shall pay all reasonable Costs, including attorneys' fees, that may
be incurred by any Indemnified Party in successfully enforcing the indemnity and
other obligations provided for in this Section 4.14 to the fullest extent
permitted under applicable law. The rights of each Indemnified Party hereunder
shall be in addition to any other rights such Indemnified Party may have under
applicable law.
(d) UFB shall use reasonable efforts (i) to obtain, after the Effective
Time, directors' and officers' liability insurance coverage for the officers and
directors of SCCB, and (ii) either (A) to cause any individual who had served as
an officer or director of SCCB or the SCCB Subsidiaries at any time during the
three years before the Effective Time to be covered for a period of three years
from the Effective Time by the directors' and officers' liability insurance
policies maintained by UFB, or to (B) substitute therefor policies of at least
the same coverage and amounts containing terms and conditions that are not less
advantageous than the policies previously maintained by SCCB and SCCB
Subsidiaries, respectively, with respect to acts or omissions occurring before
the Effective Time that were committed by such officers and directors in their
capacity as such.
Section 4.15. Tax-Free Reorganization Treatment. Prior to the Effective
---------------------------------
Time, neither UFB nor SCCB shall intentionally take, fail to take, or cause to
be taken or not taken, or cause or permit any of their respective Subsidiaries
to take, fail to take, or cause to be taken or not taken, any action within its
control that would disqualify the Merger as a reorganization within the meaning
of Section 368(a) of the Code. Subsequent to the Effective Time, UFB shall not
take any action within its control that would disqualify the Merger as a
reorganization under the Code.
ARTICLE V
Conditions to Consummation
--------------------------
Section 5.1. Conditions to Each Party's Obligations. The respective
--------------------------------------
obligations of each party to effect the Merger, the Bank Merger and any other
transactions contemplated by this Agreement shall be subject to the satisfaction
of the following conditions:
(a) this Agreement shall have been approved by the requisite vote of SCCB's
stockholders and UFB's stockholders in accordance with applicable laws and
regulations;
45
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(b) the Requisite Regulatory Approvals and any necessary regulatory
consents and waivers with respect to this Agreement and the transactions
contemplated hereby shall have been obtained and shall remain in full force and
effect, and all statutory waiting periods shall have expired; and all other
consents, waivers and approvals of any third parties which are necessary to
permit the consummation of the Merger and the other transactions contemplated
hereby shall have been obtained or made except for those the failure to obtain
would not have a Material Adverse Effect (i) on SCCB and its Subsidiaries taken
as a whole or (ii) on UFB and its Subsidiaries taken as a whole. None of the
approvals or waivers referred to herein shall contain any term or condition
which would have a Material Adverse Effect on (x) SCCB and its Subsidiaries
taken as a whole or (y) UFB and its Subsidiaries taken as a whole;
(c) no party hereto shall be subject to any order, decree or injunction of
a court or agency of competent jurisdiction which enjoins or prohibits the
consummation of the Merger, the Bank Merger or any other transactions
contemplated by this Agreement;
(d) no statute, rule or regulation shall have been enacted, entered,
promulgated, interpreted, applied or enforced by any governmental authority
which prohibits, restricts or makes illegal consummation of the Merger, the Bank
Merger or any other transactions contemplated by this Agreement;
(e) the Registration Statement shall have been declared effective by the
SEC and no proceedings shall be pending or threatened by the SEC to suspend the
effectiveness of the Registration Statement; all required approvals by state
securities or "blue sky" authorities with respect to the transactions
contemplated by this Agreement shall have been obtained;
(f) [Reserved]
(g) UFB shall have received the letter agreement referred to in Section
4.11 from each affiliate of SCCB; and
(h) UFB shall have caused to be listed on the Nasdaq SmallCap Market, or on
such other market on which shares of UFB Common Stock shall then be trading,
subject only to official notice of issuance, the shares of UFB Common Stock to
be issued by UFB in exchange for the shares of SCCB Common Stock.
Section 5.2. Conditions to the Obligations of UFB and UFB Bank. The
-------------------------------------------------
obligations of UFB and UFB Bank to effect the Merger, the Bank Merger and any
other transactions contemplated by this Agreement shall be further subject to
the satisfaction of the following additional conditions, any one or more of
which may be waived by UFB:
(a) each of the obligations of SCCB and SCCB Bank, respectively,
required to be performed by it at or prior to the Closing pursuant to the terms
of this Agreement shall have been duly performed and complied with in all
material respects and the representations and warranties of SCCB and SCCB Bank
contained in this Agreement shall be true and correct,
46
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subject to Sections 2.1 and 2.2, as of the date of this Agreement and as of the
Effective Time as though made at and as of the Effective Time (except as to any
representation or warranty which specifically relates to an earlier date). UFB
shall have received a certificate to the foregoing effect signed by the chief
executive officer and the chief financial or principal accounting officer of
SCCB;
(b) all action required to be taken by, or on the part of, SCCB and SCCB
Bank to authorize the execution, delivery and performance of this Agreement and
the consummation by SCCB and SCCB Bank of the transactions contemplated hereby
shall have been duly and validly taken by the Board of Directors and
stockholders of SCCB or SCCB Bank, as the case may be, and UFB shall have
received certified copies of the resolutions evidencing such authorization;
(c) SCCB shall have obtained the consent or approval of each person (other
than the governmental approvals or consents referred to in Section 5.1(b)) whose
consent or approval shall be required in order to permit the succession by the
surviving corporation pursuant to the Merger to any obligation, right or
interest of SCCB or its Subsidiaries under any loan or credit agreement, note,
mortgage, indenture, lease, license or other agreement or instrument to which
SCCB or its Subsidiaries is a party or is otherwise bound, except those for
which failure to obtain such consents and approvals would not, individually or
in the aggregate, have a Material Adverse Effect on UFB (after giving effect to
the consummation of the transactions contemplated hereby) or upon the
consummation of the transactions contemplated hereby;
(d) UFB shall have received certificates (such certificates to be dated as
of a day as close as practicable to the Closing Date) from appropriate
authorities as to the corporate existence and good standing of SCCB and its
Subsidiaries;
(e) UFB shall have received an opinion of Muldoon, Murphy & Faucette LLP,
counsel to UFB, dated as of the Effective Date, in form and substance customary
in transactions of the type contemplated hereby, and reasonably satisfactory to
UFB, substantially to the effect that on the basis of the facts, representations
and assumptions set forth in such opinion which are consistent with the state of
facts existing at the Effective Time, the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code and that accordingly:
(i) No gain or loss will be recognized by UFB, UFB Bank, SCCB or
SCCB Bank as a result of the Merger;
(ii) Except to the extent of any Cash Consideration, no gain or loss
will be recognized by the stockholders of SCCB who exchange their SCCB Common
Stock for UFB Common Stock pursuant to the Merger;
(iii) The tax basis of UFB Common Stock received by stockholders who
exchange their SCCB Common Stock for UFB Common Stock in the Merger will be the
same as the tax basis of SCCB Common Stock surrendered pursuant to the Merger
reduced by
47
<PAGE>
any amount allocable to a fractional share interest for which cash is received
and increased by any gain recognized on the exchange; and
(iv) The holding period of UFB Common Stock received by each
stockholder in the Merger will include the holding period of SCCB Common Stock
exchanged therefor, provided that such stockholder held such SCCB Common Stock
as a capital asset on the Effective Date.
Such opinion may be based on, in addition to the review of such matters of
fact and law as Muldoon, Murphy & Faucette LLP considers appropriate, (x)
representations made at the request of Muldoon, Murphy & Faucette LLP by UFB,
UFB Bank, SCCB, SCCB Bank, stockholders of UFB or SCCB, or any combination of
such persons and (y) certificates provided at the request of Muldoon, Murphy &
Faucette LLP by officers of UFB, UFB Bank, SCCB, SCCB Bank and other appropriate
persons.
(f) At the Effective Time, Dissenters' Shares shall not constitute more
than 10% of the outstanding shares of SCCB Common Stock.
Section 5.3. Conditions to the Obligations of SCCB and SCCB Bank. The
---------------------------------------------------
obligations of SCCB and SCCB Bank to effect the Merger, the Bank Merger and any
other transactions contemplated by this Agreement shall be further subject to
the satisfaction of the following additional conditions, any one or more of
which may be waived by SCCB:
(a) each of the obligations of UFB and UFB Bank, respectively, required to
be performed by it at or prior to the Closing pursuant to the terms of this
Agreement shall have been duly performed and complied with in all material
respects and the representations and warranties of UFB and UFB Bank contained in
this Agreement shall be true and correct, subject to Sections 2.1 and 2.2, as of
the date of this Agreement and as of the Effective Time as though made at and as
of the Effective Time (except as to any representation or warranty which
specifically relates to an earlier date). SCCB shall have received a certificate
to the foregoing effect signed by the chief executive officer and the chief
financial or principal accounting officer of UFB;
(b) all action required to be taken by, or on the part of, UFB and UFB Bank
to authorize the execution, delivery and performance of this Agreement and the
consummation by UFB and UFB Bank of the transactions contemplated hereby shall
have been duly and validly taken by the Board of Directors and stockholders of
UFB or UFB Bank, as the case may be, and SCCB shall have received certified
copies of the resolutions evidencing such authorization;
(c) UFB shall have obtained the consent or approval of each person (other
than the governmental approvals or consents referred to in Section 5.1(b)) whose
consent or approval shall be required in connection with the transactions
contemplated hereby under any loan or credit agreement, note, mortgage,
indenture, lease, license or other agreement or instrument to which UFB or its
Subsidiaries is a party or is otherwise bound, except those for which failure to
obtain such consents and approvals would not, individually or in the aggregate,
have a Material
48
<PAGE>
Adverse Effect on UFB (after giving effect to the transactions contemplated
hereby) or upon the consummation of the transactions contemplated hereby;
(d) SCCB shall have received certificates (such certificates to be dated as
of a day as close as practicable to the Closing Date) from appropriate
authorities as to the corporate existence and good standing of UFB and its
Subsidiaries;
(e) SCCB shall have received an opinion of Luse Lehman Gorman Pomerenk &
Schick, P.C., counsel to SCCB, dated as of the Effective Date, in form and
substance customary in transactions of the type contemplated hereby, and
reasonably satisfactory to SCCB, substantially to the effect that on the basis
of the facts, representations and assumptions set forth in such opinion which
are consistent with the state of facts existing at the Effective Time, the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code and that accordingly:
(i) No gain or loss will be recognized by UFB, UFB Bank, SCCB or
SCCB Bank as a result of the Merger;
(ii) Except to the extent of any Cash Consideration, no gain or loss
will be recognized by the stockholders of SCCB who exchange their SCCB Common
Stock for UFB Common Stock pursuant to the Merger;
(iii) The tax basis of UFB Common Stock received by stockholders who
exchange their SCCB Common Stock for UFB Common Stock in the Merger will be the
same as the tax basis of SCCB Common Stock surrendered pursuant to the Merger
reduced by any amount allocable to a fractional share interest for which cash is
received and increased by any gain recognized on the exchange; and
(iv) The holding period of UFB Common Stock received by each
stockholder in the Merger will include the holding period of SCCB Common Stock
exchanged therefor, provided that such stockholder held such SCCB Common Stock
as a capital asset on the Effective Date.
Such opinion may be based on, in addition to the review of such matters of
fact and law as Luse Lehman Gorman Pomerenk & Schick, P.C. considers
appropriate, (x) representations made at the request of Luse Lehman Gorman
Pomerenk & Schick, P.C. by UFB, UFB Bank, SCCB, SCCB Bank, stockholders of UFB
or SCCB, or any combination of such persons and (y) certificates provided at the
request of Luse Lehman Gorman Pomerenk & Schick, P.C. by officers of UFB, UFB
Bank, SCCB and other appropriate persons.
ARTICLE VI
Termination
-----------
Section 6.1. Termination. This Agreement may be terminated, and the Merger
-----------
abandoned, at or prior to the Effective Date, either before or after its
approval by the stockholders of SCCB:
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(a) by the mutual consent of UFB and SCCB in a written instrument, if
the Board of Directors of each so determines by vote of a majority of the
members of its entire Board;
(b) by UFB or SCCB, if its Board of Directors so determines by vote of a
majority of the members of its entire Board, in the event of the failure of the
stockholders of SCCB or UFB to approve the Agreement at its respective
Stockholder Meeting called to consider such approval;
(c) by UFB or SCCB, by written notice to the other party, if either (i) any
approval, consent or waiver of a governmental agency required to permit
consummation of the transactions contemplated hereby shall have been denied or
(ii) any governmental authority of competent jurisdiction shall have issued a
final, unappealable order enjoining or otherwise prohibiting consummation of the
transactions contemplated by this Agreement;
(d) by UFB or SCCB, if its Board of Directors so determines by vote of a
majority of the members of its entire Board, in the event that the Merger is not
consummated by March 31, 2000 ("Initial Termination Date"); unless the failure
to so consummate by such time is due to the breach of any representation,
warranty or covenant contained in this Agreement by the party seeking to
terminate; or
(e) by UFB or SCCB, if the Board of Directors of SCCB does not publicly
recommend in the Proxy Statement that SCCB's stockholders approve and adopt this
Agreement or if, after recommending in the Proxy that stockholders approve and
adopt this Agreement, the Board of Directors of UFB or SCCB shall have
withdrawn, modified or amended such recommendation in any respect materially
adverse to the other party; or
(f) by UFB or SCCB by written notice to the other party, in the event that
there has occurred since the date of this Agreement an event, condition, change
or occurrence which, individually or in the aggregate, has had or could
reasonably be expected to result in a Material Adverse Effect on SCCB or UFB, as
the case may be; provided that the party seeking termination shall have given
the other party thirty (30) calendar days' prior written notice of such
termination, and the other party shall not have remedied such event, condition,
change or occurrence by the end of such thirty-day period; or
(g) by UFB or SCCB (provided that the party seeking termination is not then
in material breach of any representation, warranty, covenant or other agreement
contained herein), in the event of (i) a failure to perform or comply by the
other party with any covenant or agreement of such other party contained in this
Agreement, which failure or non-compliance is material in the context of the
transactions contemplated by this Agreement, or (ii) subject to Sections 2.2(a)
and (b), any inaccuracies, omissions or breach in the representations,
warranties, covenants or agreements of the other party contained in this
Agreement, the circumstances as to which either individually or in the aggregate
have, or reasonably could be expected to have, a
50
<PAGE>
Material Adverse Effect on such other party; in either case which has not been
or cannot be cured within 30 calendar days after written notice thereof is given
by the party seeking to terminate to such other party.
(h) by SCCB, upon two (2) days' prior notice to UFB, if, as a result of a
tender offer by a party other than UFB or its affiliates or any written offer or
proposal with respect to a merger, share exchange, sale of a material portion of
its assets or other business combination (each, a "Business Combination
--------------------
Proposal") by a party other than UFB or its affiliates, the Board of Directors
- --------
of SCCB determines in good faith that its fiduciary obligations under applicable
law require that such Business Combination Proposal be accepted; provided,
however, that:
(i) the Board of Directors of SCCB shall have been advised in an
opinion of outside counsel that notwithstanding a binding commitment
to consummate an agreement of the nature of this Agreement entered
into in the proper exercise of its applicable fiduciary duties, and
notwithstanding all concessions that may be offered by UFB in
negotiations entered into pursuant to clause (ii) below, such
fiduciary duties would require the directors to reconsider such
commitment as a result of such tender offer or other written offer or
proposal; and
(ii) before any such termination, SCCB shall, and shall cause its
financial and legal advisors to, negotiate with UFB for three (3)
calendar days to make such adjustments in the terms and conditions of
this Agreement as would enable SCCB to proceed with the transactions
contemplated herein on such adjusted terms.
Section 6.2 Termination Fee: Expenses.
---------------------------
(a) Termination Fee. If this Agreement is terminated at such time that this
---------------
Agreement is terminable pursuant to Section 6.1(g), then the breaching party
shall promptly (but no later than five (5) business days after receipt of notice
from the non-breaching party) pay to the non-breaching party in cash an amount
equal to all documented-out-of-pocket expenses and fees incurred by the non-
breaching party (including, without limitation, fees and expenses payable to all
legal, accounting, financial, public relations and other professional advisors
arising out of, in connection with or related to the Merger or the transactions
contemplated by this Agreement) not in excess of $125,,,000; provided, however,
that, if this Agreement is terminated by a party as a result of a willful breach
by the other party, the non-breaching party may pursue any remedies available to
it at law or in equity and shall, in addition to its documented out-of-pocket
expenses and fees (which shall be paid as specified above and shall not be
limited to $125, , ,000), be entitled to recover such additional amounts as such
non-breaching party may be entitled to receive at law or in equity.
51
<PAGE>
(b) Expenses. The parties agree that the agreements contained in this
---------
Section 6.2 are an integral part of the transactions contemplated by this
Agreement and constitute liquidated damages and not a penalty. If one party
fails to promptly pay to any other party any fee due hereunder, the defaulting
party shall pay the costs and expenses (including legal fees and expenses) in
connection with any action, including the filing of any lawsuit or other legal
action, taken to collect payment, together with interest on the amount of any
unpaid fee at the publicly announced prime rate as published in the Wall Street
Journal (Eastern Edition) from the date such fee was required to be paid.
If SCCB terminates this Agreement pursuant to Section 6.1(h), SCCB shall
promptly (but no later than five (5) business days after receipt of notice from
UFB) pay UFB in cash an amount equal to $500,000.00.
ARTICLE VII
Closing, Effective Date and Effective Time
------------------------------------------
Section 7.1. Effective Date and Effective Time. The closing of the
---------------------------------
transactions contemplated hereby ("Closing") shall take place at a location
selected by UFB, on a date ("Closing Date") that is no later than five business
days following the date on which the expiration of the last applicable waiting
period in connection with notices to and approvals of governmental authorities
shall occur and all conditions to the consummation of this Agreement are
satisfied or waived, or on such other date as may be agreed to by the parties.
Prior to the Closing Date, UFB and SCCB shall execute a Certificate of Merger in
accordance with all appropriate legal requirements, which shall be filed as
required by law on the Closing Date, and the Merger provided for therein shall
become effective upon such filing or on such date as may be specified in such
Certificate of Merger. The date of such filing or such later effective date as
specified in the Certificate of Merger is herein referred to as the "Effective
Date." The "Effective Time" of the Merger shall be as set forth in the
Certificate of Merger.
Section 7.2. Deliveries at the Closing. Subject to the provisions of
-------------------------
Articles V and VI, on the Closing Date there shall be delivered to UFB and SCCB
the documents and instruments required to be delivered under Article V.
ARTICLE VIII
Certain Other Matters
---------------------
Section 8.1. Certain Definitions; Interpretation. As used in this
-----------------------------------
Agreement, the following terms shall have the meanings indicated:
52
<PAGE>
"material" means material to UFB or SCCB (as the case may be) and its
respective Subsidiaries, taken as a whole.
"person" includes an individual, corporation, limited liability company,
partnership, association, trust or unincorporated organization.
When a reference is made in this Agreement to Sections, Exhibits or
Schedules, such reference shall be to a Section of, Exhibit or Schedule to, this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for ease of reference only and shall not affect
the meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation." Any singular term in this Agreement
shall be deemed to include the plural, and any plural term the singular. Any
reference to gender in this Agreement shall be deemed to include any other
gender.
Section 8.2. Survival. Only those agreements and covenants of the
--------
parties that are by their terms applicable in whole or in part after the
Effective Time, including Sections 1.3, 4.13, 4.14 and 8.6 of this Agreement,
shall survive the Effective Time. All other representations, warranties,
agreements and covenants shall be deemed to be conditions of the Agreement and
shall not survive the Effective Time. If the Agreement shall be terminated, the
agreements of the parties in Section 8.6 shall survive such termination.
Section 8.3. Waiver; Amendment. Prior to the Effective Time, any
-----------------
provision of this Agreement may be: (i) waived in writing by the party
benefitted by the provision or (ii) amended or modified at any time (including
the structure of the transaction) by an agreement in writing between the parties
hereto except that, after the vote by the stockholders of SCCB or UFB, no
amendment or modification may be made that would reduce the Merger Consideration
or contravene any provision of the DGCL or the federal banking laws, rules and
regulations.
Section 8.4. Counterparts. This Agreement may be executed in counterparts
------------
each of which shall be deemed to constitute an original, but all of which
together shall constitute one and the same instrument.
Section 8.5. Governing Law. This Agreement shall be governed by, and
-------------
interpreted in accordance with, the laws of the State of Delaware, without
regard to conflicts of laws principles.
Section 8.6. Expenses. Each party hereto will bear all expenses incurred by
--------
it in connection with this Agreement and the transactions contemplated hereby.
Section 8.7. Notices. All notices, requests, acknowledgments and other
-------
communications hereunder to a party shall be in writing and shall be deemed to
have been duly given when delivered by hand, overnight courier or facsimile
transmission (confirmed in writing)
53
<PAGE>
to such party at its address or facsimile number set forth below or such other
address or facsimile transmission as such party may specify by notice to the
other party hereto.
If to SCCB, to:
South Carolina Community Bancshares, Inc.
110 South Congress Street
Winnsboro, South Carolina 29180
Facsimile: (803) 635-5539
Attention: Alan W. Pullen
President and Chief Executive Officer
and
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
John J. Gorman, Esq.
Alan Schick, Esq.
Facsimile: (202) 362-2902
If to UFB, to:
Union Financial Bancshares, Inc.
203 West Main Street
Union, South Carolina 29379-0866
Facsimile: (864) 429-2324
Attention: Dwight V. Neese
President and Chief Executive Officer
With copies to:
Paul M. Aguggia, Esq.
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Facsimile: (202) 966-9409
54
<PAGE>
Section 8.8. Entire Agreement; etc. This Agreement, together with the Plan
---------------------
of Bank Merger and the Disclosure Letters, represents the entire understanding
of the parties hereto with reference to the transactions contemplated hereby and
supersedes any and all other oral or written agreements heretofore made. All
terms and provisions of this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and assigns.
Except for Sections 1.3, 4.13 and 4.14, which confer rights on the parties
described therein, nothing in this Agreement is intended to confer upon any
other person any rights or remedies of any nature whatsoever under or by reason
of this Agreement.
Section 8.9. Assignment. This Agreement may not be assigned by either party
----------
hereto without the written consent of the other party.
In Witness Whereof, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the 1st day of July, 1999.
UNION FINANCIAL BANCSHARES, INC.
By: /s/ Dwight V. Neese
-------------------------------------
Dwight V. Neese
President and Chief Executive Officer
SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
By: /s/ Alan W. Pullen
-------------------------------------
Alan W. Pullen
President and Chief Executive Officer
55
<PAGE>
EXHIBIT A
FORM OF
PLAN OF BANK MERGER
This is a PLAN OF BANK MERGER, dated as of the __ day of _________, 1999
(the "Agreement"), by and between Community Federal Savings Bank ("Community
Federal"), a federally chartered savings bank and a wholly owned subsidiary of
South Carolina Community Bancshares, Inc., a Delaware corporation ("SCCB"), and
Provident Community Bank ("Provident"), a federally-chartered savings bank and a
wholly owned subsidiary of Union Financial Bancshares, Inc., a Delaware
corporation ("UFB"). The principal banking office of Community Federal is
located at 110 South Congress Street, Winnsboro, South Carolina 29180. The
principal banking office of Provident is located at 203 West Main Street, Union,
South Carolina 29379-0866.
WHEREAS, the Boards of Directors of UFB and SCCB have approved, and deem it
advisable and in the best interests of their respective stockholders to
consummate, the business combination transaction set forth in the Agreement and
Plan of Merger, dated as of ___________, 1999 (the "Merger Agreement"), by and
between SCCB and UFB, pursuant to which, among other things, SCCB will merge
with and into UFB (the "Merger"); and
WHEREAS, not less than (a) a majority of the entire Board of Directors of
Community Federal and (b) a majority of the entire Board of Directors of
Provident have approved, and deem it advisable to consummate, the merger between
Community Federal and Provident (the "Bank Merger") provided for herein, in
accordance with the regulations of the Office of Thrift Supervision ("OTS");
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Merger Agreement, and intending to be legally bound hereby, the parties
hereto agree as follows:
ARTICLE I
THE MERGER
1.1 Effective Time of the Bank Merger. Subject to the provisions of this
---------------------------------
Agreement, the Bank Merger shall become effective upon receipt of the required
approval from the OTS and consummation of the Bank Merger in accordance with the
regulations of the OTS. The term "Bank Merger Effective Time" shall mean the
date and time when the Bank Merger becomes effective.
1.2 Closing. Notwithstanding anything to the contrary contained in the
-------
Merger Agreement, the closing of the Bank Merger will take place immediately
following the Merger on
<PAGE>
the date and at the location specified in the Merger Agreement or at such other
time, date or place as may be agreed to by the parties hereto (the "Bank Merger
Closing Date").
1.3 Effects of the Merger. (a) At the Bank Merger Effective Time, (i) the
---------------------
separate existence of Community Federal shall cease and Community Federal shall
be merged with and into Provident (Provident is sometimes referred to herein as
the "Surviving Bank") and Community Federals' Charter shall be deemed canceled
as of the Bank Merger Effective Time and shall be surrendered to the OTS as soon
as practicable thereafter, (ii) the Charter of Provident as in effect
immediately prior to the Bank Merger Effective Time shall be the Charter of the
Surviving Bank until duly amended in accordance with applicable law, (iii) the
name of the Surviving Bank shall be "Provident Community Bank," (iv) the Bylaws
of Provident as in effect immediately prior to the Bank Merger Effective Time
shall be the Bylaws of the Surviving Bank and (v) the main office and other
offices of Community Federal established and authorized immediately prior to the
Bank Merger Effective Time shall become established and authorized offices of
the Surviving Bank.
(b) At and after the Bank Merger Effective Time, the Bank Merger shall have
all the effects set forth in Section 552.13(1) regulations of the OTS (12 CFR
552.13(1)).
1.4 Headquarters. The principal banking office of the Surviving Bank shall
------------
be at 203 West Main Street, Union, South Carolina 29379, and the other offices
of the Surviving Bank shall be located as listed in Appendix 1.4 hereto.
------------
1.5 Deposit Accounts. After the Bank Merger Effective Time, the Surviving
----------------
Bank will continue to issue deposit accounts on the same basis as immediately
prior to the Bank Merger Effective Time.
1.6 Directors and Officers. The names of the persons who shall constitute
----------------------
the board of directors of the Surviving Bank after the Bank Merger Effective
Time are listed on Appendix 1.6 hereto. The officers of Provident immediately
------------
prior to the Bank Merger Effective Time shall be the officers of the Surviving
Bank and, in addition, those persons listed on Appendix 1.6 hereto, each to hold
------------
office in accordance with the Charter and Bylaws of the Surviving Bank until
their respective successors are duly elected or appointed and qualified.
1.7 Liquidation Account. For purposes of granting a limited priority claim
-------------------
to the assets of the Surviving Bank in the unlikely event (and only upon such
event) of a complete liquidation of the Surviving Bank to persons who continue
to maintain savings accounts with the Surviving Bank after the Bank Merger, and
who, immediately prior to the Bank Merger had a subaccount balance (as described
in 12 C.F.R. (S) 563b.3(f)(4)) with respect to any liquidation account of
Community Federal, the Surviving Bank shall, at the time of the Bank Merger,
establish a liquidation account(s) in an amount equal to the liquidation
account(s) of Community Federal immediately prior to the Bank Merger Effective
Time, which liquidation account(s) shall participate pari passu with any other
----------
liquidation accounts of the Surviving Bank. If the balance in
A-2
<PAGE>
any savings account to which a subaccount balance relates at the close of
business on the last day of any fiscal year of the Surviving Bank after the Bank
Merger Effective Time is less than the balance in such savings account at the
Bank Merger Effective Time or at the close of business on the last day of any
other fiscal year of the Surviving Bank after the Bank Merger Effective Time,
such subaccount balance shall be reduced in an amount proportionate to the
reduction in such savings account balance. No subaccount balance shall be
increased, notwithstanding any increase in the balance of the related savings
account. If such related savings account is closed, such subaccount shall be
reduced to zero upon such closing. In the event of a complete liquidation of the
Surviving Bank, and only in such event, the amount distributable to each account
holder will be determined in accordance with the OTS rules and regulations
pertaining to conversions by savings and loan associations from mutual to stock
form of organization, on the basis of such account holder's subaccount balance
with the Surviving Bank at the time of its liquidation. No merger,
consolidation, purchase of bulk assets with assumption of savings accounts and
other liabilities, or similar transaction, whether or not the Surviving Bank is
the surviving institution, will be deemed to be a complete liquidation for this
purpose, and, in any such transaction, the liquidation account shall be assumed
by the surviving institution.
ARTICLE II
CAPITAL STOCK OF THE CONSTITUENT
BANKS AND THE SURVIVING BANK
2.1 Community Federal Capital Stock. At the Merger Effective Time, by
-------------------------------
virtue of the Merger and without any action on the part of the holder of any
shares of common stock, $1.00 par value per share, of Community Federal
("Community Federal Common Stock"), all shares of Community Federal Common Stock
shall automatically be canceled and retired and cease to exist.
2.2 Provident Common Stock. The shares of Common Stock of Provident issued
----------------------
and outstanding immediately prior to the Bank Merger Effective Time shall remain
outstanding and unchanged after the Bank Merger.
2.3 Capital Stock of Surviving Bank. The authorized capital stock of the
-------------------------------
Surviving Bank shall be _______________ shares of common stock, par value $____
per share, and ___________ shares of preferred stock, par value $_______ per
share.
ARTICLE III
Covenants
3.1 Covenants of Provident and Community Federal. During the period from
--------------------------------------------
the date of this Agreement and continuing until the Bank Merger Effective Time,
each of the
A-3
<PAGE>
parties hereto agrees to observe and perform all agreements and covenants of UFB
and SCCB in the Merger Agreement that pertain or are applicable to Community
Federal and Provident, respectively. Each of the parties hereto agrees to use
all reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, subject to and in accordance with the applicable
provisions of the Merger Agreement.
ARTICLE IV
CONDITIONS PRECEDENT
4.1 Conditions to Each Party's Obligation to Effect the Bank Merger. The
---------------------------------------------------------------
respective obligations of each party to effect the Bank Merger shall be subject
to the satisfaction prior to the Bank Merger Closing Date of the following
conditions:
(a) Consummation of The Merger. The Merger shall have been consummated in
--------------------------
accordance with the terms and conditions of the Merger Agreement.
(b) No Injunctions or Restraints; Illegality. No order, injunction or
----------------------------------------
decree issued by any court or agency of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Bank Merger shall be
in effect. No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated or enforced by any Governmental Entity which
prohibits, restricts or makes illegal the consummation of the Bank Merger.
(c) Stockholder Approvals. This Agreement and the transactions contemplated
---------------------
hereby shall have been duly approved, ratified and confirmed by the required
vote of the stockholders of each of Provident and Community Federal.
(d) Other Approvals and Notifications. All requisite regulatory approvals
---------------------------------
and clearances of the Bank Merger shall have been obtained and shall continue to
be in full force and effect, and all applicable waiting periods shall have
expired. In addition, all consents, approvals and permits of and notices to non-
governmental third parties that are necessary to consummate the Bank Merger
shall have been filed and/or obtained and shall continue to be in full force and
effect.
ARTICLE V
TERMINATION AND AMENDMENT
5.1 Termination. This Agreement shall be terminated immediately and without
-----------
any further action on the part of Community Federal or Provident upon any
termination of the Merger Agreement. This Agreement may be terminated at any
time prior to the Bank Merger
A-4
<PAGE>
Effective Time by mutual consent of Community Federal and Provident in a written
instrument, if the Board of Directors of each so determines by a vote of a
majority of the members of its entire Board.
5.2 Effect of Termination. In the event of termination of this Agreement as
---------------------
provided in Section 5.1 hereof, this Agreement shall forthwith become void and
there shall be no liability or obligation under this Agreement on the part of
Community Federal, Provident or their respective officers, directors or
affiliates, except that no party shall be relieved or released from any damages
or liabilities arising out of any willful breach of this Agreement.
5.3 Amendment. This Agreement may be amended by the parties hereto, by
---------
action taken or authorized by their respective Boards of Directors. This
Agreement may not be amended except by instrument in writing signed on behalf of
each of the parties hereto.
ARTICLE VI
GENERAL PROVISIONS
6.1 Definitions. All capitalized terms which are used but not defined
-----------
herein shall have the meanings set forth in the Merger Agreement.
6.2 Nonsurvival of Agreements. None of the agreements in this Agreement or
-------------------------
in any instrument delivered pursuant to this Agreement shall survive the Bank
Merger Effective Time, except to the extent set forth herein or in the Merger
Agreement.
6.3 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to Provident or Community Federal, respectively, at the addresses for
notices to SCCB or UFB, respectively, as set forth in the Merger Agreement, with
copies to the persons referred to therein.
6.4 Counterparts. This Agreement may be adopted, certified and executed in
------------
separate counterparts, each of which shall be considered one and the same
agreement and shall become effective when all counterparts have been signed by
each of the parties and delivered to the other party, it being understood that
both parties need not sign the same counterpart.
6.5 Entire Agreement. Except as otherwise set forth in this Agreement or
----------------
the Merger Agreement (including the documents and the instruments referred to
herein or therein), this Agreement constitutes the entire agreement, and
supersedes all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof.
6.6 Governing Law. This Agreement shall be governed and construed in
-------------
accordance with the laws of the State of South Carolina except where the federal
laws of the United States shall be applicable.
A-5
<PAGE>
6.7 Assignment. Neither this Agreement nor any of the rights, interests or
----------
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
party.
IN WITNESS WHEREOF, Provident Community Bank and Community Federal Savings
Bank have caused this Plan of Bank Merger to be executed by their duly
authorized officers as of the __ day of ________________, 1999.
Provident Community Bank
By: _______________________________________________
Name:
Title:
Attest:
Name: _________________
Title: Secretary
Community Federal Savings Bank
By: _______________________________________________
Name:
Title:
Attest:
Name: _________________
Title: Secretary
A-6
<PAGE>
EXHIBIT B
[FORM OF LETTER FOR DIRECTORS AND CERTAIN OFFICERS]
__________, 1999
Union Financial Bancshares, Inc.
203 West Main Street
Union, South Carolina 29379-0866
Attention: Dwight V. Neese
Chief Executive Officer
Gentlemen:
The undersigned understands that Union Financial Bancshares, Inc. ("UFB")
is considering entering into an Agreement and Plan of Merger, to be dated as of
the date hereof (the "Merger Agreement"), with South Carolina Community
Bancshares, Inc. ("SCCB") providing for the merger of SCCB with and into UFB
(the "Merger") and that UFB has required, as a condition to entering into the
Merger Agreement, that each of the Directors and certain Officers of SCCB enter
into this Letter Agreement. In consideration of the substantial expenses and
other obligations UFB will incur in connection with the transactions
contemplated by the Merger Agreement and in order to induce UFB to execute the
Merger Agreement and to proceed to incur such expenses, the undersigned agrees
and undertakes as follows:
1. The undersigned represents and warrants that he or she is the
beneficial and record owner of ________ shares of common stock, par value $.01
per share, of SCCB (the "SCCB Common Stock") and has voting authority over
________ shares of SCCB Common Stock, and is the beneficial and record owner of
_________ shares of common stock, par value $0.01 per share, of Union Financial
Bancshares, Inc. ("UFB Common Stock") and has voting authority over ________
shares of UFB Common Stock.
2. The undersigned will be present in person or by proxy at all meetings
of stockholders of SCCB called to vote for approval of the Merger so that all
shares of SCCB Common Stock shall be counted for purposes of a quorum at each
such meeting and vote, or cause to be voted, for approval of the Merger all
shares of SCCB Common Stock that, on the record date therefor, are beneficially
owned by the undersigned or with respect to which the undersigned has the power
to vote, and vote against any other proposal of a similar nature not involving
SCCB.
3. The undersigned agrees not to, directly or indirectly, sell, transfer,
pledge, assign or otherwise dispose of, or enter into any contract, option,
commitment or other arrangement or understanding with respect to the sale,
transfer, pledge, assignment or other disposition of, or otherwise reduce my
risk in, any shares of SCCB Common Stock or UFB Common Stock now or hereafter
beneficially owned by the undersigned (including as part of a transaction
involving the sale of SCCB) until after the Record Date for the stockholder vote
on the Merger. In the case of any transfer by operation of law, this Letter
Agreement shall be binding upon and inure to the transferee. Any transfer or
other disposition in violation of the terms of this paragraph 3 shall be null
and void.
<PAGE>
4. I understand and agree that:
A. I have been advised that any issuance of UFB Common Stock to me
pursuant to the Merger will be registered with the Securities and Exchange
Commission (the "SEC"). I have also been advised, however, that, because I may
be an "affiliate" of SCCB at the time the Merger will be submitted for a vote of
the stockholders of SCCB and my disposition of such shares has not been
registered under the Securities Act of 1933, as amended (the "Act"), I must hold
such shares indefinitely unless (i) such disposition of such shares is subject
to an effective registration statement and to the availability of a prospectus
under the Act, (ii) a sale of such shares is made in conformity with the
provisions of Rule 145(d) under the Act (and I agree to provide those
representations as UFB may request in order to determine such conformity) or
(iii) in a transaction which, in the opinion of counsel, in form and substance
reasonably satisfactory to UFB, is not required to be registered under the Act.
B. Stop transfer instructions will be given to the transfer agent of
SCCB, with respect to the shares of SCCB Common Stock and with respect to the
shares of UFB Common Stock and any other shares of capital stock of SCCB and UFB
in connection with the restrictions set forth herein, and there will be placed
on the certificate representing shares of UFB Common Stock I receive pursuant to
the Merger, or any certificates delivered in substitution therefor, a legend
stating in substance:
The shares represented by this certificate were issued in a transaction to
which Rule 145 under the Act applies. The shares represented by this
certificate may only be transferred in accordance with the terms of a
letter agreement between the registered holder hereof and UFB, a copy of
which agreement is on file at the principal offices of UFB. A copy of such
agreement shall be provided to the holder hereof without charge upon
receipt by UFB of a written request.
C. Unless a transfer of my shares of UFB Common Stock is a sale made
in conformity with the provisions of Rule 145(d), or made pursuant to any
effective registration statement under the Act, UFB reserves the right to put an
appropriate legend on the certificates issued to my transferee.
D. I understand that UFB is under no obligation to register the UFB
Common Stock that I may wish to sell, transfer, or otherwise dispose of or to
take any other action necessary in order to make compliance with an exemption
from registration available.
5. It is understood and agreed that this Letter Agreement shall terminate
and be of no further force and effect if the Merger Agreement is terminated in
accordance with its terms. It is also understood and agreed that this Letter
Agreement shall terminate and be of no further force and effect and the stop
transfer instructions set forth in Paragraph 4.B. above shall be lifted
forthwith upon delivery by the undersigned to UFB of a copy of a letter from the
staff of the SEC, an opinion of counsel in form and substance reasonably
satisfactory to UFB, or other evidence reasonably satisfactory to UFB, to the
effect that a transfer of my shares of UFB Common Stock will not violate the Act
or any of the rules and regulations of the SEC thereunder. In addition, it is
understood and agreed that the legend set forth in Paragraph 4.B. above shall be
removed forthwith from the certificate or certificates representing my shares of
UFB Common Stock if I shall have delivered to UFB a copy of a letter from the
staff of the SEC, an opinion of counsel in form and substance reasonably
satisfactory to UFB, or other evidence satisfactory to UFB that a
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transfer of my shares of UFB Common Stock represented by such certificate or
certificates will be a sale made in conformity with the provisions of Rule
145(d), or made pursuant to an effective registration statement under the Act.
6. I recognize and agree that the foregoing provisions also apply to (i)
my spouse, (ii) any relative of mine or my spouse occupying my home, (iii) any
trust or estate in which I, my spouse or any such relative owns at least 10%
beneficial interest or of which any of us serves as trustee, executor or in any
similar capacity and (iv) any corporation or other organization in which I, my
spouse or any such relative owns at least 10% of any class of equity securities
or of the equity interest.
7. I further recognize that in the event I become a director or officer
of UFB upon consummation of the Merger, any purchase or sale of the capital
stock of UFB by me may be subject to liability pursuant to Section 16(b) of the
Securities Exchange Act of 1934, as amended.
8. Execution of this letter should not be construed as an admission on my
part that I am an "affiliate" of SCCB as described in the first paragraph of
this letter or as a waiver of any rights I may have to object to any claim that
I am such an affiliate on or after the date of this letter.
This Letter Agreement shall be binding on my heirs, legal
representative and successors.
This Letter Agreement may be executed in two or more counterparts, each of
which shall be deemed to constitute an original, but all of which together shall
constitute one document. This Letter Agreement constitutes the complete
understanding between the undersigned and UFB concerning the subject matter
hereof. This Letter Agreement shall be governed by, and construed in accordance
with, the laws of the State of Delaware applicable to agreements made and to be
performed entirely within such state.
Very truly yours,
Accepted:
UNION FINANCIAL BANCSHARES, INC.
By: ____________________________________
Name: Dwight V. Neese
Title: Chief Executive Officer
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EXHIBIT C
FORM OF
EMPLOYMENT AGREEMENT
FOR
ALAN W. PULLEN
THIS AGREEMENT is made effective as of ________________, 19__, by and
between PROVIDENT COMMUNITY BANK (the "Bank"), Union, South Carolina; UNION
FINANCIAL BANCSHARES, INC. (the "Company"), a Delaware corporation; and ALAN W.
PULLEN (the "Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive for
the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve as
Senior Vice President/City Executive of the Bank. During said period, Executive
also agrees to serve, if elected, as an officer of the Company or any subsidiary
or affiliate of the Company or the Bank.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of
____________ and shall continue for a period of thirty-six (36) full calendar
months thereafter. Commencing on the first anniversary date, and continuing at
each anniversary date thereafter, the Board of Directors of the Bank (the
"Board") may extend the Agreement for an additional year. Prior to the
extension of the Agreement as provided herein, the Board of Directors of the
Bank will conduct a formal performance evaluation of the Executive for purposes
of determining whether to extend the Agreement, and the results thereof shall be
included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Bank; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the Bank,
or materially affect the performance of Executive's duties pursuant to this
Agreement.
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3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The Bank
shall pay Executive as compensation a salary of $70,000.00 per year ("Base
Salary"). Such Base Salary shall be payable in accordance with the customary
payroll practices of the Bank. During the period of this Agreement, Executive's
Base Salary shall be reviewed at least annually; the first such review will be
made no later than one year from the date of this Agreement. Such review shall
be conducted by a Committee designated by the Board, and the Board may increase
Executive's Base Salary. In addition to the Base Salary provided in this
Section 3(a), the Bank shall provide Executive with all such other benefits as
are provided uniformly to permanent full-time employees of the Bank.
(b) Executive will be entitled to incentive compensation and bonuses as
provided in any plan, or pursuant to any arrangement of the Bank, in which
Executive is eligible to participate. Nothing paid to the Executive under any
such plan or arrangement will be deemed to be in lieu of other compensation to
which the Executive is entitled under this Agreement, except as provided under
Section 5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the Bank shall pay or reimburse Executive for all reasonable travel
and other obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank of Executive's full-time employment hereunder for any
reason other than a Change in Control, as defined in Section 5(a) hereof;
disability, as defined in Section 6(a) hereof; death; retirement, as defined in
Section 7 hereof; or for Cause, as defined in Section 8 hereof; (ii) Executive's
resignation from the Bank's employ, upon (A) unless consented to by the
Executive, a material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Sections 1 and 2, above, (any such material change shall be
deemed a continuing breach of this Agreement), (B) a relocation of Executive's
principal place of employment by more than 35 miles from its location at the
effective date of this Agreement, or a material reduction in the benefits and
perquisites to Executive from those being provided as of the effective date of
this Agreement, (C) the liquidation or dissolution of the Bank, or (D) any
breach of this Agreement by the Bank. Upon the occurrence of any event
described in clauses (A), (B), (C), or (D), above, Executive shall have the
right to elect to terminate his employment under this Agreement by resignation
upon not less than sixty (60) days prior written notice given within a
reasonable period of time not to exceed, except in case of a continuing breach,
four calendar months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the Bank shall pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case
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may be, as severance pay or liquidated damages, or both, a sum equal to the
payments due to the Executive for the remaining term of the Agreement, including
Base Salary, bonuses, and any other cash or deferred compensation paid or to be
paid (including the value of employer contributions that would have been made on
the Executive's behalf over the remaining term of the agreement to any tax-
qualified retirement plan sponsored by the Bank as of the Date of Termination),
to the Executive for the term of the Agreement provided, however, that if the
Bank is not in compliance with its minimum capital requirements or if such
payments would cause the Bank's capital to be reduced below its minimum capital
requirements, such payments shall be deferred until such time as the Bank is in
capital compliance. All payments made pursuant to this Section 4(b) shall be
paid in substantially equal monthly installments over the remaining term of this
Agreement following the Executive's termination; provided, however, that if the
remaining term of the Agreement is less than one (1) year (determined as of the
Executive's Date of Termination), such payments and benefits shall be paid to
the Executive in a lump sum within 30 days of the Date of Termination.
(c) Upon the occurrence of an Event of Termination, the Bank will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for Executive prior to his
termination. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall have
occurred a Change in Control of the Company or the Bank. For purposes of this
Agreement, a "Change in Control" of the Company or the Bank shall be deemed to
occur if and when (a) an offer or other than the Company purchases shares of the
common stock of the Company or the Bank pursuant to a tender or exchange offer
for such shares, (b) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934) is or becomes the beneficial
owner, directly or indirectly, of securities of the Company or the Bank
representing 25% or more of the combined voting power of the Company's then
outstanding securities, (c) the membership of the board of directors of the
Company or the Bank changes as the result of a contested election, such that
individuals who were directors at the beginning of any twenty-four month period
(whether commencing before or after the date of adoption of this Agreement) do
not constitute a majority of the Board at the end of such period, or (d)
shareholders of the Company or the Bank approve a plan merger, consolidation,
sale or disposition of all or substantially all of the Company's or the Bank's
assets, or a plan of partial or complete liquidation in which the Company or the
Bank is not the resulting entity .
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board of the Bank or the Company has
determined that a Change in Control has occurred, Executive shall be entitled to
the benefits provided in paragraphs (c), (d) and (e) of this Section 5 upon his
subsequent involuntary termination of employment at any time during the term of
this Agreement (or voluntary termination within twelve (12) months following a
Change of Control following any demotion, loss of title, office or significant
authority, reduction in his annual compensation or benefits, or relocation of
his principal place of employment by more than 35 miles from its location
immediately prior to the Change in Control), unless such termination is because
of his death, retirement as provided in Section 7, termination for Cause, or
termination for Disability.
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(c) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Bank shall pay Executive, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to 2.99
times the Executive's "base amount," within the meaning of (S)280G(b)(3) of the
Internal Revenue Code of 1986 ("Code"), as amended. Such payment shall be made
in a lump sum paid within ten (10) days of the Executive's Date of Termination.
(d) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Bank will cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Bank for Executive prior to his severance. In addition,
Executive shall be entitled to receive the value of employer contributions that
would have been made on the Executive's behalf over the remaining term of the
agreement to any tax-qualified retirement plan sponsored by the Bank as of the
Date of Termination. Such coverage and payments shall cease upon the expiration
of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, the Executive shall be
entitled to receive benefits due him under, or contributed by the Company or the
Bank on his behalf, pursuant to any retirement, incentive, profit sharing,
bonus, performance, disability or other employee benefit plan maintained by the
Bank or the Company on the Executive's behalf to the extent that such benefits
are not otherwise paid to the Executive upon a Change in Control.
(f) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to
Executive under this Section, together with any other payments or benefits
received or to be received by Executive in connection with a Change in Control,
would be deemed to include an "excess parachute payment" under (S)280G of the
Code, then, at the election of Executive, (i) such payments or benefits shall be
payable or provided to Executive over the minimum period necessary to reduce the
present value of such payments or benefits to an amount which is one dollar
($1.00) less than three (3) times Executive's "base amount" under (S)280G(b)(3)
of the Code or (ii) the payments or benefits to be provided under this Section 5
shall be reduced to the extent necessary to avoid treatment as an excess
parachute payment with the allocation of the reduction among such payments and
benefits to be determined by Executive.
6. TERMINATION FOR DISABILITY.
(a) If the Executive shall become disabled as defined in the Bank's then
current disability plan (or, if no such plan is then in effect, if the Executive
is permanently and totally disabled within the meaning of Section 22(e)(3) of
the Code as determined by a physician designated by the Board), the Bank may
terminate Executive's employment for "Disability."
(b) Upon the Executive's termination of employment for Disability, the
Bank will pay Executive, as disability pay, a bi-weekly payment equal to three-
quarters (3/4) of Executive's bi-weekly rate of Base Salary on the effective
date of such termination. These disability payments shall commence on the
effective date of Executive's termination and will end on the earlier of (i) the
date Executive returns to the full-time employment of the Bank in the same
capacity as he was employed prior to his termination for Disability and pursuant
to an employment agreement between Executive and the Bank; (ii) Executive's
full-time
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employment by another employer; (iii) Executive attaining the age of 65; or (iv)
Executive's death; or (v) the expiration of the term of this Agreement. The
disability pay shall be reduced by the amount, if any, paid to the Executive
under any plan of the Bank providing disability benefits to the Executive.
(c) The Bank will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank for Executive prior to his termination for Disability. This coverage and
payments shall cease upon the earlier of (i) the date Executive returns to the
full-time employment of the Bank, in the same capacity as he was employed prior
to his termination for Disability and pursuant to an employment agreement
between Executive and the Bank; (ii) Executive's full-time employment by another
employer; (iii) Executive's attaining the age of 65; or (iv) the Executive's
death; or (v) the expiration of the term of this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE.
Termination by the Bank of Executive based on "Retirement" shall mean
retirement at age 65 or in accordance with any retirement arrangement
established with Executive's consent with respect to him. Upon termination of
Executive upon Retirement, Executive shall be entitled to all benefits under any
retirement plan of the Bank or the Company and other plans to which Executive is
a party. Upon the death of the Executive during the term of this Agreement, the
Bank shall pay to Executive's estate the compensation due to the Executive
through the last day of the calendar month in which his death occurred.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of the Executive's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law,
rule, or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of this Agreement.
For purposes of this Section, no act, or the failure to act, on Executive's part
shall be "willful" unless done, or omitted to be done, not in good faith and
without reasonable belief that the action or omission was in the best interest
of the Bank or its affiliates. Notwithstanding the foregoing, Executive shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths of the members of the Board at a
meeting of the Board called and held for that purpose (after reasonable notice
to Executive and an opportunity for him, together with counsel, to be heard
before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying termination for Cause and specifying
the reasons thereof. The Executive shall not have the right to receive
compensation or other benefits for any period after termination for Cause. Any
stock options granted to Executive under any stock option plan or any unvested
awards granted under any other stock benefit plan of the Bank, the Company, or
any subsidiary or affiliate thereof, shall become null and void effective upon
Executive's receipt of Notice of Termination for Cause pursuant
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to Section 9 hereof, and shall not be exercisable by Executive at any time
subsequent to such Termination for Cause.
9. REQUIRED PROVISIONS.
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 8 herein.
(b) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may, in its
discretion, (i) pay Executive all or part of the compensation withheld while its
contract obligations were suspended and (ii) reinstate (in whole or in part) any
of its obligations that were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the Bank under the Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(d) If the Bank is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the Bank): (i) by the Director of the Office of Thrift
Supervision (the "Director") or his or her designee at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the FDIA or (ii) by the Director, or his or her
designee at the time the Director or such designee approves a supervisory merger
to resolve problems related to operation of the Bank or when the Bank is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by such
action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and any regulations promulgated thereunder.
10. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination
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provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of
Executive's employment under the provision so indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the notice of dispute was given, until the dispute is
finally resolved in accordance with this Agreement. Amounts paid under this
Section are in addition to all other amounts due under this Agreement and shall
not be offset against or reduce any other amounts due under this Agreement.
11. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant to
an Event of Termination as provided in Section 4 hereof, Executive agrees not to
compete with the Bank and/or the Company for a period of one (1) year following
such termination in any city, town or county in which the Bank and/or the
Company has an office or has filed an application for regulatory approval to
establish an office, determined as of the effective date of such termination.
Executive agrees that during such period and within said cities, towns and
counties, Executive shall not work for or advise, consult or otherwise serve
with, directly or indirectly, any entity whose business materially competes with
the depository, lending or other business activities of the Bank and/or the
Company. The parties hereto, recognizing that irreparable injury will result to
the Bank and/or the Company, its business and property in the event of
Executive's breach of this Subsection 11(a) agree that in the event of any such
breach by Executive, the Bank and/or the Company will be entitled, in addition
to any other remedies and damages available, to an injunction to restrain the
violation hereof by Executive, Executive's partners, agents, servants,
employers, employees and all persons acting for or with Executive. Executive
represents and admits that in the event of the termination of his employment
pursuant to Section 8 hereof, Executive's experience and capabilities are such
that Executive can obtain employment in a business engaged in other lines and/or
of a different nature than the Bank and/or the Company, and that the enforcement
of a remedy by way of
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injunction will not prevent Executive from earning a livelihood. Nothing herein
will be construed as prohibiting the Bank and/or the Company from pursuing any
other remedies available to the Bank and/or the Company for such breach or
threatened breach, including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. In the
event of a breach or threatened breach by the Executive of the provisions of
this Section, the Bank will be entitled to an injunction restraining Executive
from disclosing, in whole or in part, the knowledge of the past, present,
planned or considered business activities of the Bank or affiliates thereof, or
from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be disclosed. Nothing herein will be construed as prohibiting the Bank from
pursuing any other remedies available to the Bank for such breach or threatened
breach, including the recovery of damages from Executive.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Company, however, guarantees all
payments and the provision of all amounts and benefits due hereunder to
Executive and, if such payments are not timely aid or provided by the Bank, such
amounts and benefits shall be paid or provided by the Company.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to the Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement. This Agreement
supersedes and replaces in their entirety the Employment Agreement dated
________, 19__ by and between Executive and Community Federal Savings and Loan
Association and the Supplemental Executive Agreement by and between Executive
and Community Savings and Loan Association of Winnsboro dated _______, 19__,
therewith and Executive hereby waives any rights under such prior agreements.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge,
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pledge, or hypothecation, or to execution, attachment, levy, or similar process
or assignment by operation of law, and any attempt, voluntary or involuntary, to
affect any such action shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank, the Company and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of South
Carolina, unless otherwise specified herein; provided, however, that in the
event of a conflict between the terms of this Agreement and any applicable
federal or state law or regulation, the provisions of such law or regulation
shall prevail.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within one
hundred (100) miles from the location of the Bank, in accordance with the rules
of the American Arbitration Association then in effect. Judgment may be entered
on the arbitrator's award in any court having jurisdiction; provided, however,
that Executive shall be entitled to seek specific performance of his right to be
paid
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until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank, if successful pursuant to a legal judgment,
arbitration or settlement.
21. INDEMNIFICATION.
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under law against all expenses and liabilities reasonably incurred by
him in connection with or arising out of any action, suit or proceeding in which
he may be involved by reason of his having been a director or officer of the
Bank (whether or not he continues to be a directors or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgment, court costs and attorneys' fees and
the cost of reasonable settlements.
22. SUCCESSOR TO THE BANK OR THE COMPANY.
The Bank and the Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's or the Company's
obligations under this Agreement, in the same manner and to the same extent that
the Bank or the Company would be required to perform if no such succession or
assignment had taken place.
23. EARLY TERMINATION BY EXECUTIVE.
Notwithstanding any other provision of this Agreement to the contrary, at
any time during the thirty (30) day period beginning on the day following the
nine-month anniversary of the effective date of this Agreement, Executive may
voluntarily terminate his employment under this Agreement upon written notice to
the President of the Bank and, within ten (10) business days thereafter, receive
a lump-sum payment equal to two (2) times Executive's Base Salary in effect on
the date of termination and this Agreement shall be terminated. In the event
Executive exercises the election provided by this Section 23, the noncompetition
restrictions of Section 11 shall apply as if Executive's employment terminated
pursuant to an Event of Termination, except that the restrictions shall be
limited in geographic scope to the City of Winnsboro, South Carolina and any
location within a ten-mile radius of Winnsboro, and such restrictions shall also
be limited to a six (6) month period beginning on the effective date of
Executive's termination of employment pursuant to this Section 23.
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IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement to
be executed and their seal to be affixed hereunto by a duly authorized officer
or director, and Executive has signed this Agreement, all on the ____ day of
_____________, 19__.
ATTEST: PROVIDENT COMMUNITY BANK
__________________________ BY: _______________________________
[SEAL]
ATTEST: UNION FINANCIAL BANCSHARES, INC.
__________________________ BY: ________________________________
[SEAL]
WITNESS:
__________________________ ________________________________
Alan W. Pullen
<PAGE>
Appendix B
[WHEAT FIRST SECURITIES LETTERHEAD]
Board of Directors
Union Financial Bancshares, Inc.
203 West Main Street
Union, South Carolina 29379
Members of the Board:
Union Financial Bancshares, Inc. ("UFB"), and South Carolina Community
Bancshares, Inc. ("SCCB"), have entered into an Agreement and Plan of Merger,
dated as of June 30, 1999 (the "Agreement"), pursuant to which SCCB will combine
with UFB by means of the merger (the "Merger") of SCCB with and into UFB. Upon
consummation of the Merger, all of the issued and outstanding shares of the
$0.01 par value common stock of SCCB ("SCCB Stock") will be converted into $5.25
in cash and $12.25 of the shares of the $0.01 par value common stock of UFB
("UFB Stock"), subject to adjustment in accordance with the terms of the
Agreement (the "Merger Consideration"). The terms of the Merger are more fully
set forth in the Agreement.
Wheat First Securities ("Wheat First"), a division of First Union Capital
Markets Corp. and an affiliate of First Union Corporation, as part of its
investment banking business, is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. In the ordinary course of our business as a broker-dealer, we
may, from time to time, have a long or short position in, and buy or sell, debt
or equity securities of UFB or SCCB for our own account or for the accounts of
our customers. Wheat First will receive a fee from UFB for its services, which
include the rendering of this opinion.
You have asked us whether, in our opinion, the Merger Consideration is fair,
from a financial point of view, to the holders of UFB Stock. We understand that
the Merger is conditioned upon the occurrence of a number of contingencies as
set forth in the Agreement.
In arriving at the opinion set forth below, we have conducted discussions with
members of senior management of UFB and SCCB concerning their businesses and
prospects and have reviewed and relied upon certain publicly available business
and financial information and certain other information prepared or provided to
us in connection with the Merger, including, among other things, the following:
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(1) UFB's Annual Reports to Stockholders, Annual Reports on Form 10-K and
related financial information for the three fiscal years ended
September 30, 1998;
(2) UFB's Quarterly Reports on Form l0-Q and related financial information
for the periods ended December 31, 1998, and March 31, 1999;
(3) SCCB's Annual Reports to Stockholders, Annual Reports on Form 10-K and
related financial information for the three fiscal years ended June
30, 1998;
(4) SCCB's Quarterly Reports on Form l0-Q and related financial
information for the periods ended September 30, 1998, December 31,
1998 and March 31, 1999, and certain information made available by the
management of SCCB for the monthly periods ended March 31, 1999, April
30, 1999, and May 31, 1999;
(5) Certain publicly available information with respect to historical
market prices and trading activities for UFB Stock and SCCB Stock and
for certain publicly traded financial institutions which Wheat First
deemed relevant;
(6) Certain publicly available information with respect to similar
financial institutions and the financial terms of certain other
mergers and acquisitions which Wheat First deemed relevant;
(7) The Agreement;
(8) Certain estimates of the cost savings and revenue enhancements
projected by UFB for the combined company;
(9) Other financial information concerning the businesses and operations
of UFB and SCCB, including certain audited and unaudited financial
information and certain internal financial analyses and forecasts for
UFB and SCCB prepared by the senior managements of these companies;
and
(10) Such financial studies, analyses, inquiries and other matters as we
deemed necessary.
In preparing our opinion, as contemplated under the terms of our engagement, we
have relied on and assumed the accuracy and completeness of all information
provided to us or publicly available, including the representations and
warranties of UFB and SCCB included in the Agreement, and we have not assumed
any responsibility for the accuracy, completeness or reasonableness of, or any
obligation to verify, the same or to conduct any appraisal of assets or
liabilities. We have relied upon the management of UFB as to the reasonableness
and achievability of its financial and operational forecasts and projections,
including the estimates of cost savings and revenue enhancements expected to
result from the Merger, and the assumptions and bases therefor, provided to us,
and, with your consent, we have assumed that such forecasts and projections
reflect the best currently available
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estimates and judgments of such management, and that such forecasts and
projections will be realized in the amounts and in the time periods currently
estimated by such management. We also assumed, without independent verification,
that the aggregate allowances for loan losses and other contingencies for UFB
and SCCB are adequate to cover such losses. Wheat First did not review any
individual credit files of UFB and SCCB, nor did it make an independent
evaluation or appraisal of the assets or liabilities of UFB and SCCB. We also
assumed that, in the course of obtaining the necessary regulatory approvals for
the Merger, no conditions will be imposed that will have a material adverse
effect on the contemplated benefits of the Merger, on a pro forma basis, to UFB.
Our opinion is necessarily based upon market, economic and other conditions as
they exist and can be evaluated on the date hereof and the information made
available to us through the date hereof. Events occurring after that date could
materially affect the assumptions and conclusions contained in our opinion. We
have not undertaken to reaffirm or revise this opinion or otherwise comment on
any events occurring after the date hereof. Wheat First's opinion is directed
only to the fairness, from a financial point of view, of the Merger
Consideration to the holders of UFB Stock and does not address any other aspect
of the Merger, nor does it constitute a recommendation to any shareholder of UFB
as to how such shareholder should vote with respect to the Merger, and it is
understood that this letter is solely for the information of the Board of
Directors of UFB. Wheat First's opinion does not address the relative merits of
the Merger as compared to any alternative business strategies that might exist
for UFB, nor does it address the effect of any other business combination in
which UFB might engage.
It is understood that this opinion may be included in its entirety in the Joint
Proxy Statement/Prospectus. This opinion may not, however, be summarized,
excerpted from or otherwise publicly referred to without our prior written
consent.
On the basis of and subject to the foregoing, we are of the opinion that as of
the date hereof the Merger Consideration is fair, from a financial point of
view, to the holders of UFB Stock.
Very truly yours,
/s/ Wheat First Securities
--------------------------
WHEAT FIRST SECURITIES,
a division of First Union Capital Markets Corp.
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Appendix C
[TRIDENT SECURITIES LETTERHEAD]
Board of Directors
South Carolina Community Bancshares, Inc.
110 South Congress Street
Winnsboro, South Carolina 29180
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, of the consideration to be paid by Union Financial Bancshares, Inc.
("Union") to the holders of the issued and outstanding shares of common stock,
$0.01 par value (the "SCCB Common Stock") of South Carolina Community
Bancshares, Inc. ("SCCB") pursuant to the Agreement and Plan of Merger dated as
of July 1, 1999 (the "Agreement") by and among SCCB and Union. Unless otherwise
noted, all terms used herein will have the same meaning as defined in the
Agreement.
Under the terms of the Agreement, SCCB will merge with and into Union and
each share of SCCB Common Stock shall be converted into the right to receive one
of the following (the "Merger Consideration): (i) cash in the amount equal to
$5.25 and stock equal to 0.817 of a share of Union stock for each SCCB share, if
the Union Market Value is greater than $15.00 per share; (ii) Cash Consideration
in the amount equal to $5.25 and shares of Union stock such that based on Union
Market Value, the value of the Merger Consideration is equal to $17.50 for each
SCCB share, if the Union Market Value is greater than or equal to $12.50 per
share and less than or equal to $15.00 per share; (iii) Cash Consideration in
the amount equal to $5.25 and Stock Consideration equal to 0.980 of a share of
Union stock, if the Union Market Value is greater than or equal to $12.00 per
share and less than or equal to $12.50 per share; (iv) Stock Consideration equal
to 0.980 of a share of Union stock and additional Cash Consideration equal to
the difference between the Union Market Value of 0.980 of Union stock and
$17.00, if the Union Market Value is less than $12.00 per share.
Trident Securities ("Trident"), a division of McDonald Investments, Inc.,
as part of its investment banking business, is customarily engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
In connection with rendering our opinion, we have reviewed and analyzed,
among other
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things, the following: (i) the Agreement, including the exhibits and schedules
thereto; (ii) certain publicly available information concerning SCCB, including
the Annual Reports on Form 10-K of SCCB for each of the years in the three year
period ended June 30, 1998 and the Quarterly Report on Form l0-Q of SCCB for the
quarters ended September 30, 1998, December 31, 1998 and March 31, 1999; (iii)
certain publicly available information concerning Union, including the Annual
Reports on Form 10-K of Union for each of the years in the three year period
ended September 30, 1998 and the Quarterly Report on Form 10-Q of Union for the
quarters ended December 31, 1998 and March 31, 1999; (iv) certain other internal
information, primarily financial in nature, concerning the business and
operations of SCCB and Union furnished to us by their respective managements for
purposes of our analysis; (v) information with respect to the trading market for
SCCB Common Stock and Union Common Stock; (vi) certain publicly available
information with respect to other companies that we believe to be comparable to
SCCB and Union and the trading markets for such other companies' securities; and
(vii) certain publicly available information concerning the nature and terms of
certain other transactions that we consider relevant to our inquiry. We have
also met with certain officers and employees of SCCB and Union to discuss the
business and prospects of SCCB and Union, as well as other matters we believe
relevant to our inquiry.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us or publicly available, and we have assumed and relied
upon the representations and warranties of SCCB and Union contained in the
Agreement. We have not been engaged to, and have not independently attempted to,
verify any of such information. We have not conducted a physical inspection or
appraisal of any of the assets, properties or facilities of SCCB nor have we
been furnished with any such evaluation or appraisal. We have also assumed that
the conditions to the Merger as set forth in the Agreement would be satisfied
and that the Merger would be consummated on a timely basis in the manner
contemplated by the Agreement.
It should be noted that this opinion is based on economic and market
conditions and other circumstances existing on, and information made available
as of, the date hereof and does not address any matters subsequent to such date.
In addition, our opinion is, in any event, limited to the fairness, as of the
date hereof, from a financial point of view, of the consideration to be received
and does not address SCCB's underlying business decision to effect the Merger or
any other terms of the Merger.
We have acted as financial advisor to SCCB in connection with the Merger
and will receive from SCCB a fee for our services, a significant portion of
which is contingent upon the consummation of the Merger, as well as SCCB's
agreement to indemnify us under certain circumstances.
In the ordinary course of business, we may actively trade securities of
both SCCB and Union for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
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It is understood that this opinion was prepared solely for the confidential
use of the Board of Directors and senior management of SCCB and may not be
disclosed, summarized, excerpted from or otherwise publicly referred to without
our prior written consent. Our opinion does not constitute a recommendation to
any stockholder of SCCB as to how such stockholder should vote at the
stockholders' meeting held in connection with the Merger.
Based upon and subject to the foregoing and such other matters as we
consider relevant, it is our opinion that as of the date hereof, the Merger
Consideration is fair, from a financial point of view, to the stockholders of
SCCB.
Very truly yours,
/s/ Trident Securities
----------------------
TRIDENT SECURITIES,
a division of McDonald Investments, Inc.
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Appendix D
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect therof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
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c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph;
or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in
D-2
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writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders
on or within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such
holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such notice has
been given shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may fix, in advance,
a record date that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation
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published in the City of Wilmington, Delaware or such publication as the Court
deems advisable. The forms of the notices by mail and by publication shall be
approved by the Court, and the costs thereof shall be borne by the surviving or
resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the
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merger or consolidation); provided, however, that if no petition for an
appraisal shall be filed within the time provided in subsection (e) of this
section, or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of such stockholder's demand for an appraisal
and an acceptance of the merger or consolidation, either within 60 days after
the effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation, then
the right of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such approval may
be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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APPENDIX E
December, 1998
Dear Fellow Shareholder:
Union Financial Bancshares is a company focused on the future.
With the clarity of a single vision to be the financial services provider of
choice in the communities we serve, we are focused on building a strong
foundation to sustain and strengthen Union Financial Bancshares and Provident
Community Bank both now, and well into the new millennium. As Peter Drucker has
said, "The best way to predict the future is to create it," and we are focused
on aggressively creating Union Financial Bancshares' future.
Before going into depth about our initiatives to secure the future, I am pleased
to report on the current condition of our company and the impressive progress
made during the last year.
Net income increased from $1.444 million in fiscal 1997 to $1.550 million in
fiscal 1998, an increase of 7.34%. Earnings per share increased from $1.17 in
fiscal 1997 to $1.23 in fiscal 1998. Return on average assets for fiscal 1998
was 0.87%, down slightly from the previous year. Return on average
shareholders' equity was 10.77%, also down slightly from the previous year, but
well ahead of peers as identified by the America's Community Bankers' Policy
Development and Economic Research Department and SNL Securities, a leading trade
publication. Total assets of $189.286 million at fiscal year end were up
$18.042 million over the total assets of $171.244 million at the end of 1997, an
increase of 10.54%. The continued growth in total assets is primarily the
result of 9.42% growth in the loan portfolio.
The steady growth and increased earnings of Union Financial Bancshares are a
result of good planning and hard work. The company utilizes a five-year
Strategic Business Plan that is completely reviewed and rewritten each year
through a collaborative effort of the officers and Board of Directors. The
Board reviews the progress being made on the Strategic Business Plan on a
quarterly basis and monitors the company's progress on meeting the goals of the
Financial and Operating Plan on a monthly basis. Although the goals and
objectives of the Strategic Business Plan and Financial and Operating Plan are
long-term by design, the officers and Board of Directors are continually
monitoring the market and regulatory environment to adjust the short-term goals
and objectives when appropriate.
The primary initiative of 1998 was the re-engineering of Provident Community
Bank's retail delivery system. Although the existing branch network had served
the company and market well for many years, the time had come to rethink the
delivery of financial services and how to most effectively and efficiently serve
the Bank's clients. The redesign and rebuilding of the Bank's facilities were
wrapped around the concept of providing exceptional client service and state of
the art financial products. The Bank's two largest branches, the North Duncan
Bypass and Laurens Office, were gutted and totally rebuilt to cater to the
Bank's clients and their ever changing financial needs. Central to the new
theme was maintaining the warm atmosphere and personal attention that Provident
had built its heritage on, while providing high tech automation and alternative
methods of banking for those on the go. In addition, an innovative idea for
banking in South Carolina was introduced with the opening of Provident's new
Lending and Investment Center. This newest addition to Provident's network was
customized to become a "boutique" of retail products and services. The Lending
and Investment Center does not offer traditional teller services because it was
designed to offer a full spectrum of consumer, commercial and mortgage loans and
a complete line of alternative investment products. To make banking more
accessible to those whose schedules make it difficult to do their banking
during traditional banking hours, the Lending and
<PAGE>
Investment Center opens early each morning and stays open several evenings each
week. This new facility also has a free-standing ATM for those who need to
conduct their banking business 24 hours a day, 7 days a week.
Another innovation for 1998 was the creation of Business Resource Centers in
the remodeled North Duncan Bypass and Laurens Banking Centers. Provident
recognized the vacuum being created by the consolidation in the banking industry
and has repositioned itself to provide commercial services to existing clients
and other businesses in the communities the Bank serves. The Business Resource
Centers are equipped with computers, business software, video equipment,
numerous business publications and many other planning and analytical tools for
the business owner or manager. Provident associates have been trained to
provide assistance to those interested in utilizing the new Business Resource
Centers and many of the Bank's Lending Specialists are receiving extended
commercial loan training.
A final retail banking initiative for 1998 was the revamping and bundling of the
Bank's products and services. Traditionally, banks have provided broad menus of
products and services that have grown over time as deregulation, re-regulation,
and consolidation have occurred. Provident recognized how complicated and
disjointed banking had become for most people and decided to make it simple and
more economical, once again. Provident also recognized that most people
progress though normal life-cycles, or life-styles, and that their banking needs
were similar and changed over time. Provident responded to this need by
packaging its products and services into a progression of simple, but value-
added "product bundles." Even though individual products and services are still
available, the Bank's clients are quickly discovering the value of the new
STARTING OUT, BUILDING A FOUNDATION, SECURING THE FUTURE, and REAPING THE
BENEFITS product bundles.
Three significant corporate initiatives were consummated in fiscal 1998 to
further enhance the long-term value of the Corporation's common stock. First,
Union Financial began offering its shareholders a Dividend Reinvestment Plan, or
DRIP as it is often called, at the end of fiscal 1997. During fiscal 1998,
26,780 new shares of common stock were issued through automatic reinvestment of
dividends and the option to purchase new shares. A total of $427,000 in new
equity capital was raised through the DRIP Plan during 1998. Second, a 3-for-2
stock split was declared in January on the Corporation's outstanding shares of
common stock. And third, Union Financial Bancshares announced in July that its
common stock would be listed on the Nasdaq SmallCap Market under the symbol
UFBS. Although the global economy weakened during the last half of the fiscal
year and the stock market posted its worst quarterly returns in eight years,
each of these initiatives was targeted at making shares of Union Financial
Bancshares a more attractive investment for its' shareholders.
At the close of fiscal 1998, two new initiatives were announced that will carry
into the new year. First, it was announced that Provident Community Bank had
entered into an agreement with CCB Financial's wholly-owned subsidiary, American
Federal Bank, FSB, to purchase the deposits of American Federal's Union, South
Carolina branch. This $14.6 million acquisition, while subject to regulatory
approval, is expected to close in the first quarter of 1999. Second, it was
announced that Provident would replace its modular office in Jonesville, South
Carolina with a new facility designed to incorporate high tech automation in a
warm atmosphere of exceptional client service. Construction of the new
Jonesville Banking Center is expected to be finished in the second quarter of
1999.
These are exciting times for Union Financial Bancshares and Provident Community
Bank. We are focused on the future and have a clear vision of where we are
going and how to get there. We manage our business in a long-term context, as
an integrated whole, with the ultimate objective to enhance shareholder value.
We understand that exceptional client service is essential to enhancing
shareholder value and can only be delivered on a consistent basis by highly
motivated associates working as an integrated team. The integration of the
whole is brought full circle with our corporate philosophy of social
responsibility to the growth and well-being of the communities we serve.
Thank you for your continued interest and support.
Sincerely,
/s/ Dwight V. Neese
Dwight V. Neese
President & Chief Executive Officer
<PAGE>
TABLE OF CONTENTS
Business........................................... 3
Selected Financial and Other Data.................. 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 6
Independent Auditor's Report....................... 11
Consolidated Financial Statements.................. 12
Notes to Consolidated Financial Statements......... 17
Directors and Leadership Group..................... 35
Corporation Information............................ 36
Notice of Annual Meeting........................... 36
10-KSB Information................................. 36
Common Stock Information........................... 36
==============
BUSINESS
Union Financial Bancshares, Inc. ("Union Financial") is the savings and loan
holding company for Provident Community Bank (formerly known as Union Federal
Savings Bank), ("the Bank"). Union Financial has engaged in no significant
activity other than holding the stock of the Bank and engaging in certain
passive investment activities. Union Financial and the Bank are collectively
referred to as "the Corporation" in this annual report.
The Bank is a federally-chartered capital stock savings bank headquartered in
Union, South Carolina. The Bank, originally chartered in 1934, is a member of
the Federal Home Loan Bank System. Its deposits are insured to the maximum
limits allowable by the Federal Deposit Insurance Corporation ("FDIC") through
the Savings Association Insurance Fund ("SAIF"). In August 1987, the Bank
converted from a federal mutual savings and loan association to a federal
capital stock savings and loan association. The Bank was known as Union Federal
Savings and Loan Association until January 1992, when its shareholders approved
a change to a federally chartered savings bank. In January, 1997, the Bank
changed its name to Provident Community Bank.
The business of the Bank consists primarily of attracting deposits from the
general public and originating mortgage loans on residential properties located
in South Carolina. The Bank also makes consumer and commercial loans,
commercial real estate loans, construction loans, invests in federal government
and agency obligations and purchases fixed and variable rate mortgage
participation certificates. The principal sources of funds for the Bank's
lending activities include deposits received from the general public and
advances from the Federal Home Loan Bank. The Bank's principal expenses are
interest paid on deposit accounts and other borrowings and expenses incurred in
the operation of the Bank. The Bank's operations are conducted through its
main office and three full-service banking centers, a mortgage banking center,
and a lending and investment center, all of which are located in the upstate
area of South Carolina.
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following tables set forth selected financial data of the Corporation for
the periods indicated.
<TABLE>
<CAPTION>
OPERATIONS DATA:
- ---------------
Years Ended September 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(Dollars In Thousands - Except Share Amounts)
<S> <C> <C> <C> <C> <C>
Interest income $ 13,405 $ 11,855 $ 9,004 $ 9,265 $ 8,767
Interest expense 7,549 6,647 5,050 5,260 3,888
---------- ---------- ---------- ---------- ----------
Net interest income 5,856 5,208 3,954 4,005 4,879
Provision for loan losses -- (243) -- (105) (335)
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 5,856 4,965 3,954 3,900 4,544
Other income 1,038 953 506 381 275
Other expense (4,447) (3,616) (3,224) (2,588) (2,727)
---------- ---------- ---------- ---------- ----------
Income before income taxes and
cumulative effect of a change
in accounting principle 2,447 2,302 1,236 1,693 2,092
Income tax expense 897 858 374 639 776
---------- ---------- ---------- ---------- ----------
Income before cumulative effect
of a change in accounting 1,550 1,444 862 1,054 1,316
principle
Cumulative effect of a change in
accounting principle (2) -- -- -- -- 208
---------- ---------- ---------- ---------- ----------
Net income $ 1,550 $ 1,444 $ 862 $ 1,054 $ 1,524
---------- ---------- ---------- ---------- ----------
Income per common share: (1)
Income before cumulative effect
of a change in accounting $ 1.23 $ 1.17 $ 0.71 $ 0.89 $ 1.10
principle
Cumulative effect of a change in
accounting principle (2) -- -- -- -- 0.18
---------- ---------- ---------- ---------- ----------
Net income per common share (Basic) $ 1.23 $ 1.17 $ 0.71 $ 0.89 $ 1.28
---------- ---------- ---------- ---------- ----------
Net income per common share $ 1.15 $ 1.09 $ 0.69 $ 0.89 $ 1.28
(Diluted) ---------- ---------- ---------- ---------- ----------
Weighted average number of common
shares outstanding (Basic) 1,264,615 1,230,747 1,212,460 1,181,859 1,189,251
Weighted average number of common
shares outstanding (Diluted) 1,343,008 1,325,703 1,288,272 1,181,859 1,189,251
</TABLE>
(1) All share and per share amounts have been restated for the 2:1 stock
split occurring in July 1996 and the 3:2 stock split occurring in
February 1998.
(2) The Bank adopted Statement of Financial Standards No. 109, Accounting for
Income Taxes ("SFAS 109"), effective October 1, 1993. The cumulative
effect on prior years of adopting SFAS 109 on the Bank's financial
statements was to increase net income by $208,000 ($0.26 per share) for
the year ended September 30, 1994.
-4-
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL CONDITION:
- -------------------
September 30,
--------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $189,286 $171,244 $128,133 $120,879 $122,313
Short-term interest-bearing deposits 1,124 6,213 1,938 3,552 2,383
Investment securities 9,633 16,783 19,138 21,264 23,194
Mortgage-backed securities 19,922 6,883 14,658 18,616 19,946
Loans (net) 142,202 129,957 85,997 73,431 71,006
Deposit accounts 129,873 117,914 93,715 94,750 97,310
Shareholders' equity 15,300 13,527 12,254 11,856 10,693
Number of:
Real estate loans outstanding 1,651 1,706 1,615 1,641 1,749
Deposit accounts 17,686 16,443 13,095 13,062 12,760
Banking centers 4 4 3 3 3
<CAPTION>
OTHER SELECTED DATA:
- ----------------------
Years Ended September 30,
--------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest rate spread during the year 3.11% 3.29% 3.01% 2.96% 4.04%
Net yield on average interest-
earning assets 3.42% 3.57% 3.46% 3.27% 4.29%
Return on average assets 0.87% 0.92% 0.73% 0.83% 1.30%
Return on average shareholders' equity 10.77% 11.21% 7.01% 9.38% 14.56%
Dividend payout ratio 30.08% 30.13% 46.87% 37.40% 29.92%
Operating expense to average assets 2.52% 2.31% 2.73% 2.05% 2.33%
Ratio of average shareholders'
equity to average assets 8.12% 8.24% 10.41% 8.88% 8.94%
Cash dividends declared and paid
per share of common stock (1) $ 0.37 $ 0.35 $ 0.33 $ 0.33 $ 0.38
</TABLE>
(1) Restated to reflect 2:1 and 3:2 stock split.
-5-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ASSET AND LIABILITY MANAGEMENT
- ------------------------------
The Corporation is committed to following a program of asset and liability
management in an effort to manage the fluctuations in earnings caused by
movements in interest rates. A significant portion of the Corporation's income
results from the spread, or net interest income, between the yield realized on
its interest-earning assets and the rate of interest paid on its deposits.
Differences in the timing and volume of repricing assets versus the timing and
volume of repricing liabilities expose the Corporation to interest rate risk.
Management's policies are directed at minimizing the impact of movements in
interest rates on earnings.
The Corporation continues to work to shorten the average life of its assets and
to extend the term on its liabilities in an effort to help minimize the effects
of rising interest rates. The Corporation enjoys an increasing net interest
rate spread during periods of falling interest rates. The Corporation
experiences a shrinking net interest rate spread in a rising interest rate
environment.
The Corporation's Asset and Liability Committee makes weekly pricing and
marketing decisions on deposit and loan products in conjunction with managing
the Corporation's interest rate risk. The Asset/Liability Committee of the Board
of Directors reviews the Bank's securities portfolio, FHLB advances and other
borrowings as well as the Bank's asset and liability policies.
The Corporation has established policies and monitors results to control
interest rate sensitivity. Although the Corporation utilizes measures such as
static gap, which is simply the measurement of the difference between interest-
sensitive assets and interest-sensitive liabilities repricing for a particular
time period, just as important a process is the evaluation of how particular
assets and liabilities are impacted by changes in interest rates or selected
indices as they reprice. Asset/liability modeling techniques are utilized by
the Corporation to assess varying interest rate and balance sheet mix
assumptions.
At September 30, 1998 the Corporation's exposure to interest rate risk, as
calculated by the OTS and measured by the impact of changing interest rates on
the Market Value of Portfolio Equity ("MVPE"), was as follows:
<TABLE>
<CAPTION>
Rate Environment
----------------
Minus 200 Basis Points Flat Plus 200 Basis Points
---------------------- --------- ---------------------
(In Thousands)
<S> <C> <C> <C>
Estimated Market Value of Assets $201,680 $194,640 $186,728
Estimated Market Value of Liabilities $177,011 $174,256 $171,069
MVPE $ 24,669 $ 20,384 $ 15,659
Increase/(decrease) in MVPE $ 4,285 $ -- $ (4,725)
</TABLE>
The analysis above indicates that the Corporation would be negatively affected
by an increase in interest rates and positively affected by a decrease in
interest rates.
YIELDS EARNED AND RATES PAID
- ----------------------------
The Corporation's pretax earnings depend primarily on its net interest income,
the difference between the income it receives on its loan portfolio and other
investments and its cost of money, consisting primarily of interest paid on
savings deposits and borrowings. Net interest income is affected by the average
yield on interest-earning assets, the average rate on interest-bearing
liabilities, and the ratio of interest-earning assets to interest-bearing
liabilities.
The following table sets forth, at or for the periods and dates indicated, the
weighted average yields earned on the Corporation's interest-earning assets, the
weighted average interest rates paid on the Corporation's deposit accounts and
borrowings, the interest rate spread and net yield on interest-earning assets.
-6-
<PAGE>
<TABLE>
<CAPTION>
At September 30, Years Ended September 30,
---------------- -------------------------------
1998 1998 1997 1996
---------------- -------- -------- --------
<S> <C> <C> <C> <C>
Average yield on earnings assets:
Loans 8.01% 8.10% 8.24% 8.81%
Investments (1) 5.41% 5.89% 6.88% 6.55%
Mortgage-backed securities 7.20% 6.96% 6.76% 6.02%
Total interest-earning assets 7.69% 7.83% 7.96% 7.88%
------ -------- -------- --------
Less:
Average rate paid on deposits 4.40% 4.45% 4.36% 4.75%
Average rate paid on borrowings 5.69% 5.70% 5.62% 6.01%
Average Cost of Funds 4.70% 4.73% 4.67% 4.87%
------ -------- -------- --------
Average interest rate spread 2.99% 3.11% 3.29% 3.01%
------ -------- -------- --------
Net yield on average interest-
earning assets 3.25% 3.42% 3.57% 3.46%
------ -------- -------- --------
</TABLE>
(1) Includes investment securities, federal funds sold, interest-bearing time
deposits, overnight interest-bearing deposits and Federal Home Loan Bank
(FHLB) stock.
RATE/VOLUME ANALYSIS
- --------------------
The following table sets forth certain information regarding changes in interest
income and interest expense of the Corporation for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in volume
(changes in volume multiplied by old rate); (2) changes in rate (changes in rate
multiplied by old volume); and (3) the total. Changes in rate/volume (change in
rate multiplied by the change in volume) have been allocated to rate and volume
variances consistently on a proportionate basis.
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------- -------------
Volume Rate Total Volume Rate Total
-------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Change in interest income:
Loans $ 2,100 $ 18 $ 2,118 $ 4,186 $ (875) $ 3,311
Mortgage-backed securities 36 18 54 (575) 17 (558)
Investments (463) (159) (622) (95) 193 98
-------- ------- ------- ------- ------- -------
Total interest income 1,673 (123) 1,550 3,516 (665) 2,851
-------- ------- ------- ------- ------- -------
Change in interest expense:
Deposits 758 120 878 609 (422) 187
Borrowings and other (2) 26 24 1,546 (136) 1,410
-------- ------- ------- ------- ------- -------
Total interest expense 756 146 902 2,155 (558) 1,597
-------- ------- ------- ------- ------- -------
Change in net interest income $ 917 $ (269) $ 648 $ 1,361 $ (107) $ 1,254
-------- ------- ------- ------- ------- -------
</TABLE>
-7-
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
- -------------------------------------------------------------------
Net income increased $106,000 from $1,444,000 in fiscal 1997 to $1,550,000 in
fiscal 1998 primarily as a result of increased interest income from loans and
increased non-interest income. Earnings per share (basic) increased $0.06 to
$1.23 for the year ended September 30, 1998 from $1.17 for the same period in
1997.
Total interest income increased $1,550,000, or 13.07%, from $11,855,000 in
fiscal 1997 to $13,405,000 in fiscal 1998 due to the increase in the level of
interest-earning average assets that more than offset a slight decrease in
average yields. Average earning assets increased due primarily to higher loan
production from the Mortgage Division. The loan production was financed by
increased deposits and additional advances from the FHLB. Interest income on
loans increased $2,118,000, or 21.73%, from $9,747,000 in fiscal 1997 to
$11,865,000 in fiscal 1998. Interest income on investment and mortgage-backed
securities decreased $615,000, or 30.07%, from $2,045,000 in fiscal 1997 to
$1,430,000 in fiscal 1998. This reduction was due to a high level of security
calls that occurred during fiscal 1998 along with declining interest rates on
new securities.
Interest expense increased 13.57% to $7,549,000 for fiscal 1998 from $6,647,000
for fiscal 1997. Interest expense increased $878,000 for deposits and $24,000
for other borrowings, respectively. Interest expense for deposits increased due
to higher volumes (10.14% increase from fiscal 1997) along with a slight
increase in the costs of deposits. Interest expense on other borrowings
increased due to higher volumes and rates on FHLB advances throughout fiscal
1998 as compared to fiscal 1997.
Provisions for loan losses are charges to earnings to bring the total allowance
for loan losses to a level considered by management as adequate to provide for
estimated loan losses based on management's evaluation of the collectibility of
the loan portfolio. Provisions for loan losses decreased from $243,000 in fiscal
1997 to $0 in fiscal 1998. The decrease in the provision was due to the
reduction in the Bank loan portfolio that is held for investment, along with
the reduction in losses experienced in consumer loans. The Corporation
experienced bad debt charge-offs, net of recoveries, of approximately $101,000
in fiscal 1998 compared to $114,000 for fiscal 1997. The loan reserves to total
loans ratio excluding loans held for sale for fiscal 1998 was .79% compared to
.80% for fiscal 1997.
Non-interest income increased 8.92% to $1,038,000 for the year ended September
30, 1998 from $953,000 for the year ended September 30, 1997. Service charges
and fees increased $81,000 to $791,000 primarily as a result of increased
deposit account fees. Loan servicing fees (net) decreased $199,000 to $(111,000)
for the year ended September 30, 1998 from $88,000 for the year ended September
30, 1997 primarily as a result of the establishment of a $108,000 loss provision
for the Bank's loan servicing portfolio. Gain on sale of loans increased to
$358,000 during the year ended September 30, 1998 from $96,000 for the year
ended September 30, 1997 due to increased conventional mortgage loan sales.
Non-interest expense increased 22.98% to $4,447,000 in fiscal 1998 from
$3,616,000 in fiscal 1997. The increase in non-interest expense is the result
of additional expenses absorbed with the purchase of the Laurens, S. C. branch
along with the startup of the Mortgage Division. Both operations were
established during the third quarter of fiscal 1997.
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
- -------------------------------------------------------------------
Net income increased $582,000 from $862,000 in fiscal 1996 to $1,444,000 in
fiscal 1997. Earnings per share increased $0.46 (basic) to $1.17 for the year
ended September 30, 1997 from $.71 for the same period in 1996. Fiscal 1996 net
income included a one-time FDIC assessment of $606,000 ($395,000 after taxes).
On September 30, 1996 President Clinton signed the Omnibus Appropriations Bill
which called for all financial institutions to share in recapitalizing the FDIC
fund that insures deposits. Earnings before income taxes, gains and losses on
the sale of loans and the effect of the FDIC special assessment were
approximately $1,837,000 for fiscal 1996 and approximately $2,206,000 for fiscal
1997 or an increase of $369,000 or 20.09%.
Total interest income increased $2,851,000, or 31.66%, from $9,004,000 in fiscal
1996 to $11,855,000 in fiscal 1997 due to the increased level of interest-
earning assets more than offsetting a slight decrease in average yields.
Average interest-earning assets increased due primarily to the purchase of
adjustable rate loans during the year along with higher loan production as a
result of the startup of a Mortgage Division within the Bank. The loan
production was financed by advances from the FHLB. Interest income on loans
increased $3,311,000, or 51.44%, from $6,436,000 in fiscal 1996 to $9,747,000 in
fiscal 1997. Interest income on investment securities increased $136,000, or
9.97%, from $1,363,000 in fiscal 1996 to $1,499,000 in fiscal 1997. The
increases in interest income on loans and investment securities were offset by
decreases of $559,000 and $37,000 in interest income on mortgage-backed
securities and on deposits and federal funds sold, respectively.
Interest expense increased 31.62% to $6,647,000 for fiscal 1997 from $5,050,000
for fiscal 1996. Interest expense increased $187,000 and $1,410,000 for
deposits and for other borrowings, respectively. Interest expense for deposits
increased due to
-8-
<PAGE>
increasing volumes as a result of the acquisition of a banking center location
in Laurens, SC with acquired deposits of $20,144,000. Interest expense on other
borrowings increased due to higher volumes required by the Mortgage Division and
rates on FHLB advances throughout fiscal 1997.
Provisions for loan losses increased $243,000 from $0 in fiscal 1996 to $243,000
in fiscal 1997. The provision was larger in fiscal 1997 due to the increased
size of the loan portfolio. In fiscal 1997, the Corporation experienced bad debt
charge-offs, net of recoveries, of approximately $114,000. The Corporation
experienced bad debt charge-offs, net of recoveries, of approximately $79,000 in
fiscal 1996. While future losses in the loan portfolio are probable, management
feels that provisions for loan losses are adequate.
Non-interest income increased 88.34% to $953,000 for the year ended September
30, 1997 from $506,000 for the year ended September 30, 1996. This increase was
due primarily to increased fees from financial services from $411,000 in fiscal
1996 to $710,000 in fiscal 1997. In addition, gains recognized on the sale of
loans and investments in the current year were $155,000 compared to $25,000
recognized in fiscal 1996.The servicing of loans purchased during the year was
outsourced and therefore resulted in net servicing fee expense of $24,000 in
fiscal 1997 compared to net servicing fee income in fiscal 1996 of $70,000.
Non-interest expense increased 12.15% to $3,616,000 in fiscal 1997 from
$3,224,000 in fiscal 1996. The increase in non-interest expense is a result of
additional expenses absorbed with the purchase of the Laurens, S.C. banking
center along with the startup of the Mortgage Division.
YEAR 2000
- ---------
The approach of the year 2000 ("Year 2000") presents significant issues for many
financial, information, and operational systems. Many systems in use today may
not be able to interpret dates after December 31, 1999, appropriately, because
such systems allow only two digits to indicate the year in a date. The
Year 2000 problems may occur in computer programs, computer hardware, or
electronic devices that utilize computer chips to process any information that
contains dates. Therefore, the issue is not limited to dates in computer
programs but is a complex combination of problems that may exist in computer
programs, data files, computer hardware, and other devices essential to the
operation of the business. Further, companies must consider the potential impact
that Year 2000 may have on services provided by third parties.
Substantially all of the Year 2000 risk is related to the Bank's activities.
The Bank has a formal Year 2000 Plan which includes a Year 2000 Task Force. The
Plan has been reviewed by the senior management and the Board of Directors.
Included in the Plan is a listing of all systems (whether in-house or
provided/supported by third parties) which may be impacted by Year 2000 and a
categorization of the systems by their potential impact on Bank operations. The
Task Force has received Year 2000 plans from third parties identified during the
assessment phase of the Year 2000 Plan. For systems that have been classified
as critical to the operations of the Bank, contingency plans have been
developed. Contingency plans may include utilization of alternate third party
vendors, alternate processing methods and software, or manual processing. The
plans have various activation dates (e.g., the date on which a third party
processor fails to meet its Year 2000 compliance deadline). In addition to
addressing its own Year 2000 issues, the Bank is in the process of assessing the
impact of the Year 2000 on significant commercial borrowers. The Bank's
Year 2000 readiness is reviewed and monitored by the Office of Thrift
Supervision ("OTS").
The Bank's core processing systems are outsourced through a contract with The
BISYS Group, Inc. ("BISYS"). BISYS has developed a Year 2000 Plan and provides
the Bank with periodic updates. BISYS also has held Year 2000 workshops, whose
objectives have been to assist the Bank in the development of its Year 2000
Plan, to provide updates on the BISYS Year 2000 plan, and training on the use of
the BISYS Year 2000 test facility, whose function is to allow BISYS clients to
test their systems' compatibility with the BISYS system. BISYS completed all
program maintenance associated with Year 2000 prior to October 31, 1998, and
expects a full year of testing prior to January 1, 2000. Like the Bank, BISYS
Year 2000 activities are subject to OTS oversight.
The incremental cost associated with the Bank's compliance is expected to be
less than $50,000. The majority of all hardware upgrades began in 1995 as a
result of the Bank's plan to increase efficiencies and eliminate obsolescence of
some system components. Should the Bank or any of its third party service
providers fail to complete Year 2000 measures in a timely manner, it would
likely have a material adverse effect, whose amount cannot be reasonably
estimated at this time.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
At September 30, 1998, the Corporation's assets totaled $189,286,000, an
increase of $18,042,000, or 10.54%, as compared to $171,244,000 at September 30,
1997. Investment and mortgage-backed securities increased $5,889,000 to
$29,555,000 from $23,666,000 at September 30, 1997. Loans held for sale, net,
increased $22,540,000 to $37,584,000 from $15,044,000 at September 30, 1997.
The increase in loans held for sale, net, was partially funded by advances from
the Federal Home Loan Bank and other borrowings which increased $3,462,000 from
September 30, 1997 to the same period in 1998. The majority of the
-9-
<PAGE>
increase in loans held for sale, net, represents fixed rate product purchased
from other organizations through the Bank's Mortgage Division that will be sold
into loan commitments. Loans held for investment, net, decreased $10,295,000 to
$104,618,000 from $114,913,000 at September 30, 1997. The decrease was due to
the high volume of refinancing activity in fixed rate product during fiscal
1998. Total deposits increased $11,959,000 from $117,944,000 at September 30,
1997 to $129,873,000 on September 30, 1998. The Bank experienced the significant
deposit growth as a result of ongoing marketing promotions throughout fiscal
1998. There was also a 13.11% growth in shareholders' equity from September 30,
1997 to September 30, 1998. During fiscal 1998 the Corporation implemented a
dividend reinvestment program that allows existing shareholders to reinvest
dividends and make additional cash contributions to purchase stock.
The Bank's liquidity, as measured by the ratio of cash, cash equivalents (not
committed, pledged or required to liquidate specific liabilities) and investment
securities to total deposits was approximately 14.66% at September 30, 1998.
Assets that qualify as eligible liquidity are defined by applicable federal
regulation and include cash and cash equivalents and certain types of United
States Treasury and agency obligations, and other similar investments. The
required ratio of such liquid investments is currently 4% of certain of the
Bank's liabilities as defined by the OTS. The liquidity requirement is changed
periodically by the OTS to reflect economic conditions. The Bank has relied
upon deposit growth and loan repayments as its principal sources of liquidity.
If deposit growth and loan repayments do not generate sufficient liquid funds in
the future, the Bank may borrow additional funds from the FHLB or liquidate
short-term investments. These sources of funds are intended to provide a
secondary source of relatively liquid funds upon which the Bank may rely, if
necessary. Commitments to fund loans in the ordinary course of business at
September 30, 1998 were approximately $2,736,000. See Note 10 to the financial
statements for further information about commitments and contingencies.
As of September 30, 1998, the Bank exceeded the OTS's capital requirements. See
Note 13 to the financial statements for further discussion of these capital
requirements.
IMPACT OF INFLATION AND CHANGING PRICES
- ---------------------------------------
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. However, non-interest expenses
do reflect general levels of inflation.
SUBSEQUENT EVENT
- ----------------
On October 5, 1998, the Corporation, through its subsidiary, Provident Community
Bank, entered into a definitive agreement with CCB Financial's wholly-owned
subsidiary, American Federal Bank, FSB to purchase the deposits of American
Federal's Union, South Carolina branch. The purchase is subject to regulatory
approval and is anticipated to close by February, 1999. The acquisition will be
accounted for as a purchase.
-10-
<PAGE>
[LETTERHEAD OF ELLIOTT, DAVIS & COMPANY, L.L.P.]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Union Financial Bancshares, Inc. and Subsidiary
Union, South Carolina
We have audited the accompanying consolidated balance sheets of UNION
FINANCIAL BANCSHARES, INC. AND SUBSIDIARY as of September 30, 1998 and 1997, and
the related consolidated statements of income, shareholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY as of September 30, 1998 and
1997 and the consolidated results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ Elliott, Davis & Company, LLP
Elliott, Davis & Company, LLP
Greenville, South Carolina
November 6, 1998
-11-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
September 30,
--------------------------
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
Assets
- ------
Cash $ 2,469 $ 1,608
Short term interest-bearing deposits 1,124 6,213
-------- --------
Total cash and cash equivalents 3,593 7,821
-------- --------
Investment and mortgage-backed securities:
Held to maturity, at amortized cost (fair value 1998 - $2,744, 1997 - $7,927) 2,699 7,811
Available for sale, at fair value (amortized cost 1998 - $26,516, 1997 - $15,945) 26,856 15,855
-------- --------
Total investment and mortgage-backed securities 29,555 23,666
-------- --------
Loans, net
Held for sale 37,584 15,044
Held for investment 104,618 114,913
-------- --------
Total loans, net 142,202 129,957
Office properties and equipment, net 4,020 3,009
Federal Home Loan Bank Stock, at cost 2,023 2,105
Accrued interest receivable 1,197 1,317
Mortgage servicing rights 3,270 805
Other assets 3,426 2,564
-------- --------
Total assets $189,286 $171,244
======== ========
Liabilities
- -----------
Deposit accounts $129,873 $117,914
Securities sold under repurchase agreements 895 504
Advances from the Federal Home Loan Bank and other borrowings 41,441 37,979
Accrued interest payable 336 314
Advances from borrowers for taxes and insurance 496 389
Other liabilities 945 617
-------- --------
Total liabilities 173,986 157,717
-------- --------
Commitments and contingencies - note 12
Shareholders' equity
- --------------------
Serial preferred stock, no par value,
authorized - 500,000 shares, issued
and outstanding - None
Common stock - $0.01 par value,
authorized - 2,500,000 shares,
issued and outstanding - 1,278,250 shares in 1998 and 827,700 shares in 1997 13 8
Additional paid-in capital 4,471 3,993
Accumulated other comprehensive income 148 (63)
Retained earnings, substantially restricted 10,668 9,589
-------- --------
Total shareholders' equity 15,300 13,527
-------- --------
Total liabilities and shareholders' equity $189,286 $171,244
======== ========
</TABLE>
See notes to consolidated financial statements.
-12-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
For the Years Ended September 30,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(In Thousands, Except Share Data)
<S> <C> <C> <C>
Interest Income:
Loans $ 11,865 $ 9,747 $ 6,436
Deposits and federal funds sold 110 63 100
Securities available for sale:
State and municipal 17 37 122
Other investments 980 1,128 1,832
Securities held to maturity:
Other investments 433 880 514
---------- ---------- ----------
Total interest income 13,405 11,855 9,004
---------- ---------- ----------
Interest Expense:
Deposit accounts 5,544 4,666 4,479
Advances from the FHLB and other 2,005 1,981 571
---------- ---------- ----------
Total interest expense 7,549 6,647 5,050
---------- ---------- ----------
Net Interest Income 5,856 5,208 3,954
Provision for loan losses -- (243) --
---------- ---------- ----------
Net interest income after provision for loan losses 5,856 4,965 3,954
---------- ---------- ----------
Non Interest Income:
Fees for financial services 791 710 411
Loan servicing fees (111) 88 70
Net gains on sale of investments -- 59 20
Gains on sale of loans 358 96 5
---------- ---------- ----------
Total non interest income 1,038 953 506
---------- ---------- ----------
Non Interest Expense:
Compensation and employee benefits 2,301 1,768 1,265
Occupancy and equipment 972 702 557
Deposit insurance premiums 54 93 821
Professional services 275 332 173
Real estate operations 10 (3) (2)
Other 835 724 410
---------- ---------- ----------
Total non interest expense 4,447 3,616 3,224
---------- ---------- ----------
Income before income taxes 2,447 2,302 1,236
Provision for income taxes 897 858 374
---------- ---------- ----------
Net Income $ 1,550 $ 1,444 $ 862
========== ========== ==========
Net Income per common share (Basic) $1.23 $1.17 $0.71
========== ========== ==========
Net Income per common share (Diluted) $1.15 $1.09 $0.69
========== ========== ==========
Dividends per common share $0.37 $0.35 $0.33
========== ========== ==========
Weighted average number of common shares outstanding 1,264,615 1,230,747 1,212,460
(Basic) ========== ========== ==========
Weighted average number of common shares outstanding 1,343,008 1,325,703 1,288,272
(Diluted) ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
-13-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Retained Accumulated
Common Stock Additional Earnings Other Total
--------------------- Paid-In Substantially Comprehensive Shareholders'
Shares Amount Capital Restricted Income Equity
------- ------ --------- ------------ -------- --------
(In Thousands, Except Share Data)
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 $ 403,322 $ 4 $ 3,860 $ 8,120 $ (128) $ 11,856
Net income -- -- -- 862 -- 862
Other comprehensive income
Unrealized losses on securities:
Unrealized holding losses arising
during period -- -- -- -- (101) --
-----
Other comprehensive income -- -- -- -- (101) (101)
----- ------
Comprehensive income 761
-----
Options exercised 2,321 -- 41 -- -- 41
Two-for-one stock split 405,643 4 (4) - - --
Cash dividend ($.33 per share) -- -- -- (404) -- (404)
------- ------ ------ ------- ------ -------
Balance at September 30, 1996 811,286 8 3,897 8,578 (229) 12,254
Net income -- -- -- 1,444 -- 1,444
Other comprehensive income
Unrealized losses on securities:
Unrealized holding gains arising
during period -- -- -- -- 166 --
-----
Other comprehensive income -- -- -- -- 166 166
----- ------
Comprehensive income 1,610
-----
Options exercised 16,414 -- 96 -- -- 96
Cash dividend ($.35 per share) -- -- -- (433) -- (433)
------- ------ ------ ------- ------ -------
Balance at September 30, 1997 827,700 8 3,993 9,589 (63) 13,527
Net income -- -- -- 1,550 -- 1,550
Other comprehensive income
Unrealized losses on securities:
Unrealized holding losses arising
during period -- -- -- -- (211) --
-----
Other comprehensive income -- -- -- -- (211) (211)
----- ------
Comprehensive income 1,761
-----
Options exercised 9,920 -- 51 -- -- 51
Three-for-two stock split 413,850 4 -- (4) -- --
Dividend reinvestment plan contributions 26,780 1 427 -- -- 428
Cash dividend ($.37 per share) -- -- -- (467) -- (467)
--------- ------ ------ ------- ------ -------
Balance at September 30, 1998 1,278,250 13 4,471 10,668 148 15,300
========= ====== ====== ======= ====== =======
</TABLE>
See notes to consolidated financial statements.
-14-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For the Years Ended September 30,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Operating activities:
Net income $ 1,550 $ 1,444 $ 862
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Provision for loan losses -- 243 --
Amortization expense 561 106 --
Depreciation expense 221 188 165
Recognition of deferred income, net of costs (140) (7) (111)
Deferral of fee income, net of costs 77 29 244
Gain on investment transactions -- (59) (20)
Loans originated for sale (141,436) (61,806) (805)
Proceeds from sale of loans 123,677 46,762 810
Gain on sale of loans held for sale (358) (96) (5)
(Increase) decrease in accrued interest receivable 120 (196) (241)
(Increase) decrease in other assets (862) 598 (614)
(Increase) decrease in accrued interest payable (22) 235 49
Increase (decrease) in other liabilities 434 (830) 426
----------- ----------- -----------
Net cash (used in) provided by operating activities (16,178) (13,389) 760
----------- ----------- -----------
</TABLE>
-15-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended September 30,
----------------------------------------
1998 1997 1996
------------ ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Investing activities:
Maturities of time deposits $ -- $ -- $ 99
Purchase of investment and mortgage-backed securities:
Held to maturity -- (2,000) (11,617)
Available for sale (20,368) (2,950) (10,228)
Proceeds from maturity of investment and mortgage- backed securities:
Held to maturity 4,497 500 500
Available for sale 7,978 4,450 4,568
Proceeds from sale of investment and mortgage-backed securities,
Available for sale -- 8,281 16,563
Principal repayments on mortgage-backed securities:
Held to maturity 616 137 242
Available for sale 1,388 1,712 6,387
Loan originations (43,568) (53,449) (37,078)
Principal repayments of loans 49,520 24,588 23,951
Proceeds from sale of real estate acquire in settlement of loans 27 7 36
Purchase of mortgage servicing rights (2,814) -- --
Purchase of FHLB stock -- (1,380) (197)
Redemption of FHLB stock 82 225 --
Purchase of office properties and equipment (1,231) (1,534) (116)
------------ ---------- ----------
Net cash used in investing activities (3,873) (21,413) (6,890)
------------ ---------- ----------
Financing activities:
Proceeds from the exercise of stock options 51 96 41
Proceeds from dividend reinvestment plan 427 -- --
Dividends paid in cash (467) (433) (404)
Proceeds from FHLB advances and other borrowings 117,891 99,440 43,763
Repayment of FHLB advances and other borrowings (114,038) (81,443) (36,355)
Acquired deposits from purchased branch -- 17,223 --
Increase (decrease) in deposit accounts 11,959 4,055 (1,035)
------------ ---------- ----------
Net cash provided by financing activities 15,823 38,938 6,010
------------ ---------- ----------
Net (decrease) increase in cash and cash equivalents (4,228) 4,136 (120)
Cash and cash equivalents at beginning of year 7,821 3,685 3,805
------------ ---------- ----------
Cash and cash equivalents at end of year $ 3,593 $ 7,821 $ 3,685
============ ========== ==========
</TABLE>
See notes to consolidated financial statements.
-16-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Union Financial Bancshares, Inc. ("Union Financial") was
- ------------
incorporated in the State of Delaware in April 1994, for the purpose of becoming
a thrift holding company for Provident Community Bank (formerly known as Union
Federal Savings Bank), a federally chartered savings bank ("the Bank").
Provident Community Bank, founded in 1934, offers a complete array of financial
services throughout four full service banking centers in two counties in South
Carolina. The Bank offers a full range of financial services including
checking, savings, time deposits, individual retirement accounts (IRAs),
investment services, and secured and unsecured consumer loans. The Bank
originates and services home loans and provides financing for small businesses
and affordable housing.
Accounting Principles - The accounting and reporting policies of the Corporation
- ---------------------
conform to generally accepted accounting principles and to general practice
within the banking industry. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses and
disclosure of commitments and contingencies. Actual results could differ from
those estimates. The following summarizes the more significant policies.
Basis of Consolidation - The accompanying consolidated financial statements
- ----------------------
include the accounts of Union Financial Bancshares, Inc. (the "Corporation") and
its wholly owned subsidiary, Provident Community Bank (the "Bank") and its
wholly owned subsidiary, Provident Financial Services, Inc. ("PFS"). PFS
consists primarily of investment brokerage services. All inter corporation
amounts and balances have been eliminated in consolidation.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and
- -------------------------
amounts due from depository institutions, federal funds sold and short term,
interest-bearing deposits. From time to time, the Corporation's cash deposits
with other financial institutions may exceed the FDIC insurance limits.
Investments - The Bank accounts for investment securities in accordance with
- -----------
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
--------------
Certain Investments in Debt and Equity Securities ("SFAS 115"). In accordance
- -------------------------------------------------
with the Statement, debt securities that the Bank has the positive intent and
ability to hold to maturity are classified as "held to maturity" securities and
reported at amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling in the near term are classified as
"trading" securities and reported at fair value, with unrealized gains and
losses included in earnings. Debt and equity securities not classified as
either held to maturity or trading securities are classified as "available for
sale" securities and reported at fair value with unrealized gains and losses
excluded from earnings and reported as a separate component of shareholders'
equity. Transfers of securities between classifications will be accounted for
at fair value. No securities have been classified as trading securities.
Premiums and discounts on debt securities are amortized or accreted as
adjustments to income over the estimated life of the security using a method
approximating the level yield method. Gains or losses on the sale of securities
are based on the specific identification method. The fair value of securities
is based on quoted market prices or dealer quotes. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
securities.
Loans - Loans held for investment are recorded at cost. Mortgage loans consist
- -----
principally of conventional one-to-four family residential loans and interim and
permanent financing of non-residential loans that are secured by real estate.
Commercial loans are made primarily on the strength of the borrower's general
credit standing, the ability to generate repayment from income sources and the
collateral securing such loans. Consumer loans generally consist of home equity
loans, automobile and other personal loans.
In many lending transactions, collateral is taken to provide an additional
measure of security. Generally, the cash flow or earning power of the borrower
represents the primary source of repayment, and collateral liquidation serves as
a secondary source of repayment. The Corporation determines the need for
collateral on a case-by-case or product-by-product basis. Factors considered
include the current and prospective credit worthiness of the customer, terms of
the instrument and economic conditions.
Mortgage loans held for sale are valued at the aggregate lower of cost or market
as determined by outstanding commitments from investors or current investor
yield requirements calculated on the aggregate loan basis.
-17-
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowances for Estimated Losses - The Corporation maintains allowances for
- -------------------------------
estimated loan losses, uncollected accrued interest receivable and losses on
real estate acquired in settlement of loans. Loss provisions are charged to
income when, in the opinion of management, such losses for which no provision
has been made are probable.
The allowance for loan losses is based upon an evaluation of the loan portfolio.
The evaluation considers such factors as the delinquency status of loans,
current economic conditions, the net realizable value of the underlying
collateral and prior loan loss experience.
The Corporation provides an allowance for uncollectible interest on accrued
interest which is primarily related to loans more than ninety days delinquent
and other loans determined by management to be uncollectible. This allowance is
deducted from accrued interest for financial statement purposes.
Recovery of the carrying value of loans is dependent to some extent on the
future economic environment and operating and other conditions that may be
beyond the Corporation's control. Unanticipated future adverse changes in such
conditions could result in material adjustments to allowances (and future
results of operation).
Accounting for Impaired Loans - Impaired loans are accounted for in accordance
- -----------------------------
with SFAS No. 114, Accounting by Creditors for Impairment of a Loan
------------------------------------------------
("SFAS 114"), which was amended by SFAS No. 118. SFAS 114 requires that impaired
loans be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical matter, at
the loan's observable market value or fair value of the collateral if the loan
is collateral dependent. The Corporation maintains an allowance for impaired
loans based on a combination of evaluation of impairment of smaller balance,
homogeneous loans (primarily consumer loans and 1-4 family real estate
mortgages) and specific identification of impaired loans based on delinquency
status and other factors related to the borrower's ability to repay the loan.
The risk characteristics used to aggregate loans are collateral type, borrower's
financial condition and geographic location.
The Corporation generally determines a loan to be impaired at the time
management believes that it is probable that the principal and interest may be
uncollectible. Management has determined that, generally, a failure to make a
payment within a 90-day period constitutes a minimum delay or shortfall and does
not generally constitute an impaired loan. However, management reviews each
past due loan on a loan-by-loan basis and may determine a loan to be impaired
prior to the loan becoming over 90 days past due, depending upon the
circumstances of that particular loan. A loan is classified as a nonaccrual
loan at the time management believes that the collection of interest is
improbable, generally when a loan becomes 90 days past due. The Corporation's
policy for charge-off of impaired loans is on a loan-by-loan basis. At the time
management believes the collection of interest and principal is remote, the loan
is charged off. The Corporation's policy is to evaluate impaired loans based on
the fair value of the collateral. Interest income from impaired loans is
recorded using the cash method.
As of and for the years ended September 30, 1998 and 1997, there were no
impaired loans and the Corporation had recognized no interest income from
impaired loans.
Office Properties and Equipment - Office properties and equipment are presented
- -------------------------------
at cost less accumulated depreciation. Depreciation is provided on the straight-
line basis over the estimated useful lives of the assets. Estimated useful
lives are 20-50 years for buildings and improvements and generally five to ten
years for furniture, fixtures and equipment.
The cost of maintenance and repairs is charged to expense as incurred, and
improvements and other expenditures, which materially increase property lives,
are capitalized. The costs and accumulated depreciation applicable to office
properties and equipment retired or otherwise disposed of are eliminated from
the related accounts, and any resulting gains or losses are credited or charged
to income.
Mortgage Servicing Rights - Effective October 1, 1996, the Corporation adopted
- -------------------------
SFAS No. 122, Accounting for Mortgage Servicing Rights. The statement
----------------------------------------
eliminates the distinction between originated and purchased mortgage servicing
rights. Since the adoption of SFAS 122, the Corporation capitalizes the
allocated cost of originated mortgage servicing rights and records a
corresponding increase in mortgage banking income.
Purchased mortgage servicing rights are recorded at the lower of cost or market.
Originated mortgage servicing rights are capitalized based on the allocated cost
which is determined when the underlying loans are sold or securitized. MSRs
are amortized in proportion to and over the period of estimated net servicing
income using a method that is designed to approximated a level-yield method,
taking into consideration the estimated prepayment of the underlying loans. For
purposes of measuring impairment, MSRs are periodically reviewed for impairment
based upon quarterly valuations. Such valuations are based on projections using
a discounted cash flow method that includes assumptions regarding prepayments,
servicing costs and other factors. Impairment is measured on a disaggregated
basis for each pool of rights.
-18-
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Real Estate Acquired Through Foreclosure - Real estate acquired through
- ----------------------------------------
foreclosure is stated at the lower of cost or estimated fair value less
estimated costs to sell. Any accrued interest on the related loan at the date
of acquisition is charged to operations. Costs relating to the development and
improvement of property are capitalized to the extent that such costs do not
exceed the estimated fair value less selling costs of the property, whereas
those relating to holding the property are charged to expense.
Deferred Loan Origination Fees - Nonrefundable loan fees and certain direct loan
- ------------------------------
origination costs are deferred and recognized over the lives of the loans using
the level yield method. Amortization of these deferrals is recognized as
interest income.
Sale of Loans - The Corporation frequently sells and retains servicing rights on
- -------------
certain mortgage loans. Gains or losses on the sale of such loans are
recognized when substantially all risks and rewards of ownership are
transferred. If loan servicing is retained, the value of future servicing
rights are considered in the determination of the amount of gain or loss.
Income Taxes - The Bank accounts for income taxes in accordance with SFAS
- ------------
No. 109, Accounting for Income Taxes. Under SFAS 109, deferred income taxes
---------------------------
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. A valuation allowance is established for
deferred tax assets that may not be realized. Also, SFAS 109 eliminates, on a
prospective basis, the exception from the requirement to record deferred taxes
on tax basis bad debt reserves in excess of the base year amounts. The tax basis
bad debt reserve that arose prior to the fiscal year 1988 (the base year amount)
is frozen, and the book reserves at that date and all subsequent changes in book
and tax basis reserves are included in the determination of deferred taxes.
Fair Values of Financial Instruments - The following methods and assumptions
- ------------------------------------
were used by the Corporation in estimating fair values of financial instruments
as disclosed herein:
Cash and short-term instruments - The carrying amounts of cash and short-term
instruments approximate their fair value.
Available for sale and held to maturity securities - Fair values for
securities are based on quoted market prices. The carrying values of
restricted equity securities approximate fair values.
Loans - For variable rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values.
Fair values for certain mortgage loans (for example, one-to-four-family
residential), credit-card loans, and other consumer loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. Fair values
for commercial real estate and commercial loans are estimated using
discounted cash flow analysis, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality. Fair
values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values, where applicable.
Deposit liabilities - The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-
term money-market accounts and certificates of deposit (CD's) approximate
their fair values at the reporting date. Fair values for fixed-rate CD's are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
Short-term borrowings - The carrying amounts of other short-term borrowings
maturing within 90 days approximate their fair values. Fair values of other
short-term borrowings are estimated using discounted cash flow analysis based
on the Corporation's current incremental borrowing rates for similar types of
borrowing arrangements.
Long-term debt - The fair values of the Corporation's long-term debt are
estimated using discounted cash flow analysis based on the Corporation's
current incremental borrowing rates for similar types of borrowing
arrangements.
Accrued interest - The carrying amounts of accrued interest approximate their
fair values.
Off-balance-sheet instruments - Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counter parties' credit standings.
Per-Share Data - SFAS 128, Earnings Per Share, issued in February 1997,
- -------------- ------------------
simplifies the standard for computing earnings per share and makes them
comparable to international earnings per share standards. It also requires the
dual presentation of basic and diluted earnings per share on the face of the
income statement.
-19-
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basic earnings per share is computed by dividing net income by the weighted-
average number of shares outstanding for the period. Diluted earnings per share
is similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common share that
would have been outstanding if the dilutive potential common shares had been
issued. The dilutive effect of options outstanding under the Corporation's stock
option plan is reflected in diluted earnings per share by the application of
the treasury stock method.
SFAS128 became effective for the Corporation as of September 30, 1998. As
required by SFAS 128, all prior period earnings per share data presented has
been restated to conform with the provisions of the statement.
Share and per-share data have been restated to reflect stock splits issued in
July 1996 and February 1998.
Intangible Assets - Intangible assets, included in other assets, consist of core
- -----------------
deposit premiums resulting from the Corporation's branch acquisition.
During 1998, $212,000 of intangible expense was charged to operations. Core
deposit intangibles are being amortized over 10 years using the straight-line
method.
Interest Income - Interest on loans is accrued and credited to income monthly
- ---------------
based on the principal balance outstanding and the contractual rate on the loan.
The Corporation places loans on non-accrual status when they become greater than
ninety days delinquent or when in the opinion of management, full collection of
principal or interest is unlikely. The Corporation provides an allowance for
uncollectible accrued interest on loans which are ninety days delinquent for all
interest accrued prior to the loan being placed on non-accrual status. The
loans are returned to an accrual status when full collection of principal and
interest appears likely.
Comprehensive Income - In June, 1997, the FASB issued SFAS No. 130, Reporting
- -------------------- ---------
Comprehensive Income, which establishes standards for reporting and display of
- --------------------
comprehensive income and its components in a full set of general purposes
financial statements. Under this statement, enterprises are required to
classify items of "other comprehensive income" by their nature in the financial
statement and display the balance of other comprehensive income separately in
the equity section of a statement of financial position. Statement 130 is
effective for both interim and annual periods beginning after December 15, 1997.
Comparative financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of the statement. The adoption of this
standard did not have a material effect on the Corporation.
Reclassifications - Certain amounts in prior years' financial statements have
- -----------------
been reclassified to conform with current year classifications.
-20-
<PAGE>
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
Held to Maturity - Securities classified as held to maturity consisted of the
- ----------------
following (in thousands):
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------
Gross Unrealized
Amortized ------------------ Fair
Cost Gains Losses Value
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Agency Obligations $ 1,500 $24 -- $1,524
Mortgage-backed Securities:
GNMA 1,199 21 -- 1,220
---------- -------- -------- --------
Total held to maturity $ 2,699 $45 -- $2,744
========== ======== ======== ========
<CAPTION>
September 30, 1997
-----------------------------------------
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Agency Obligations $5,995 $ 51 ($29) $6,017
---------- -------- -------- --------
Mortgage-backed Securities:
GNMA 1,816 94 -- 1,910
Total held to maturity $7,811 $145 ($29) $7,927
========== ======== ======== ========
</TABLE>
Available for Sale - Securities classified as available for sale consisted of
- ------------------
the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------------------
Gross Unrealized
Amortized ------------------ Fair
Cost Gains Losses Value
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Agency Obligations $ 7,668 $ 45 ($31) $ 7,682
Municipal Securities 449 2 -- 451
---- -- --- ----
Total Investment Securities 8,117 47 (31) 8,133
---------- -------- -------- --------
Mortgage-backed Securities:
FHLMC 9,713 158 -- 9,871
FNMA 880 16 (2) 894
CMOs 7,806 157 (5) 7,958
----- --- --- -----
Total Mortgage-backed Securities 18,399 331 (7) 18,723
---------- -------- -------- --------
Total available for sale $26,516 $378 ($38) $26,856
========== ======== ======== ========
<CAPTION>
September 30, 1997
-------------------------------------------
Gross Unrealized
Amortized ------------------ Fair
Cost Gains Losses Value
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Agency Obligations $10,429 $21 ($109) $10,341
Municipal Securities 449 -- (2) 447
---- --- --- ----
Total Investment Securities 10,878 21 (111) 10,788
---------- -------- -------- --------
Mortgage-backed Securities
FHLMC 2,783 11 (8) 2,786
FNMA 1,388 11 (3) 1,396
CMOs 896 5 (16) 885
---- --- ---- ----
Total Mortgage-backed Securities 5,067 27 (27) 5,067
Total available for sale $15,945 $48 ($138) $15,855
========== ======== ======== ========
</TABLE>
-21-
<PAGE>
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES (CONTINUED)
Proceeds, gross gains and gross losses realized from the sales, calls and
prepayments of available for sale securities were as follows for the years ended
(in thousands):
<TABLE>
<CAPTION>
September 30,
-------------------------------
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Proceeds $7,978 $8,281 $21,131
------ ------ -------
Gross gains -- 76 168
Gross losses -- 17 148
------ ------ -------
Net gain on investment transactions $ 0 $ 59 $ 20
====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
The maturities of securities at September 30, 1998 are as follows (in thousands):
Held to Maturity Available for Sale
----------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------ ------ ------- -------
<S> <C> <C> <C> <C>
Due in one year or less $ 0 $ 0 $ 863 $ 861
Due after one year through five years 0 0 2,402 2,405
Due after five years through ten years 1,500 1,524 474 482
Due after ten years 1,199 1,220 22,777 23,108
------ ------ ------- -------
Total investment and mortgage-backed
securities $2,699 $2,744 $26,516 $26,856
====== ====== ======= =======
</TABLE>
The mortgage-backed securities held at September 30, 1998 mature between one and
thirty years. The actual lives of those securities may be significantly shorter
as a result of principal payments and prepayments.
At September 30, 1998 and 1997, $10,383,000 and $9,013,000, respectively, of
securities were pledged as collateral for certain deposits.
At September 30, 1998, approximately $1,395,000 of the debt securities and
$751,000 of mortgage-backed securities were adjustable rate securities. The
adjustment periods range from monthly to annually and rates are adjusted based
on the movement of a variety of indices.
Investments in collateralized mortgage obligations ("CMOs") represent securities
issued by agencies of the federal government.
-22-
<PAGE>
3. LOANS, NET
Loans receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Conventional real estate loans:
Fixed rate residential
Held for sale $ 37,584 $ 8,044
Held for investment 24,075 30,036
Fixed rate commercial 4,053 3,629
Adjustable rate residential
Held for sale -- 7,000
Held for investment 48,531 57,365
Adjustable rate commercial 140 170
Construction loans 12,838 13 ,508
-------- --------
Total real estate loans 127,221 119,752
-------- --------
Other loans:
Consumer and installment loans 9,797 9,957
Commercial loans 3,539 2,550
Consumer lines of credit 7,404 4,961
Loans secured by deposit accounts 1,551 183
-------- --------
Total other loans 22,291 17,651
-------- --------
Total loans 149,512 137,403
-------- --------
Less:
Undisbursed portion of interim
construction loans (6,625) (6,598)
Allowance for loan losses (827) (928)
Net deferred loan origination costs 142 80
-------- --------
Total, net $142,202 $129,957
======== ========
Weighted-average interest rate of loans 8.01% 8.05%
</TABLE>
Participations sold and serviced by the Corporation at September 30, 1998 and
1997 were approximately $164,396,000 and $64,730,000, respectively. The
Corporation sells loans in the secondary market without recourse and retains
servicing rights. Servicing loans for others consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors and
foreclosure processing. Loan servicing income is recorded on the accrual basis
and includes servicing fees received from the investors as well as certain
charges collected from the borrowers, such as late payment fees. In connection
with these loans serviced for others, the Corporation held borrowers' escrow
balances of $496,000 at September 30, 1998 and $389,000 at September 30, 1997.
Adjustable rate real estate loans (approximately $48,671,000 and $64,535,000 at
September 30, 1998 and 1997, respectively) are subject to rate adjustments
annually and generally are adjusted based on movement of the Federal Home Loan
Bank National Monthly Median Cost of Funds rate or the Constant Maturity
Treasury index. The maximum loan rates can be adjusted is 200 basis points in
any one year with a lifetime cap of 600 basis points.
The Corporation made commercial real estate loans which totaled approximately
$4,193,000 and $3,799,000 at September 30, 1998 and 1997, respectively. These
loans are considered by management to contain a somewhat greater risk of
uncollectibility due to the dependency on income production or future
development and sale of the real estate. These commercial real estate loans are
collateralized by housing for the aged, churches, motels, apartments and other
improved real estate.
Mortgage loans held for sale are stated at the lower of aggregate cost or
market, net of discounts and deferred loan fees and are included in net loans in
the consolidated balance sheets. Nonrefundable deferred origination fees and
cost and discount points collected at loan closing, net of commitment fees paid,
are deferred and recognized at the time of sale of the mortgage loans. Gain or
loss on sales of mortgage loans is recognized based upon the difference between
the selling price and the
-23-
<PAGE>
3. LOANS NET (CONTINUED)
carrying amount of the mortgage loans sold. Other fees earned during the loan
origination process are also included in net gain or loss on sales of mortgage
loans.
Mortgage servicing rights are accounted for in accordance with SFAS No. 122,
Accounting for Mortgage Servicing Rights. SFAS No. 122 requires that an entity
- ----------------------------------------
recognize, as separate assets, rights to service mortgage loans for others,
whether purchased or originated, by allocating the total cost of loans between
the loan and the mortgage servicing rights ("MSR") based on their relative fair
values.
Capitalized MSRs are amortized based on a method which approximates the
proportion of current net servicing revenues to the total estimated net
servicing revenues expected to be recognized over the average estimated
remaining lives of the underlying loans. Capitalized MSRs are assessed for
impairment based on their fair values.
The Bank paid $2,687,000 for mortgage servicing rights for approximately
$141,436,000 of loans in 1998. The amortization of servicing rights and excess
servicing rights included in loan servicing fees amounted to $348,764, $19,171,
and $0 in 1998, 1997, and 1996 respectively.
The fair value of mortgage servicing rights at September 30, 1998 is
approximately $3,270,000.
Under OTS regulations, the Bank may not make loans to one borrower in excess of
15% of unimpaired capital. This limitation does not apply to loans made before
August 9, 1989. At September 30, 1998, the Bank had loans outstanding to one
borrower ranging up to $1,485,000 and was in compliance with this regulation.
Also under current regulations, the Bank's aggregate commercial real estate
loans may not exceed 400% of its capital as determined under regulatory
requirements. These limitations are not expected to have a material impact on
the Bank's ongoing operations.
At September 30, 1998 and 1997, loans which are accounted for on a non-accrual
basis or contractually past due ninety days or more totaled approximately
$696,000 and $778,000, respectively. The amount the Corporation will ultimately
realize from these loans could differ materially from their carrying value
because of future developments affecting the underlying collateral or the
borrower's ability to repay the loans. During the years ended September 30,
1998, 1997, and 1996, the Corporation recognized no interest income on loans
past due 90 days or more, whereas, under the original terms of these loans, the
Corporation would have recognized additional interest income of approximately
$20,000, $36,000, and $34,000, respectively.
The changes in the allowance for loan losses consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Balance at beginning of year $ 928 $ 799 $878
Provision for loan losses -- 243 --
(Charge-offs) recoveries, net (101) (114) (79)
----- ----- -----
Balance at end of year $ 827 $ 928 $799
===== ===== =====
</TABLE>
Directors and officers of the Corporation are customers of the Corporation in
the ordinary course of business. Loans of directors and officers have terms
consistent with those offered to other customers. Loans to officers and
directors of the Corporation are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1998 1997
------- ------
<S> <C> <C>
Balance at beginning of year $ 1,014 $ 712
Loans originated during the year 1,908 685
Loan repayments during the year (1,003) (383)
------- ------
Balance at end of year $ 1,919 $1,014
======= ======
</TABLE>
-24-
<PAGE>
4. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
--------------------------
1998 1997
------- -------
<S> <C> <C>
Land $ 660 $ 422
Building and improvements 2,859 2,096
Office furniture, fixtures and equipment 2,151 1,922
------- -------
Total 5,670 4,440
Less accumulated depreciation (1,650) (1,431)
------- -------
Office properties and equipment - net $ 4,020 $ 3,009
======= =======
</TABLE>
5. DEPOSIT ACCOUNTS
Deposit accounts at September 30, were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------------- --------------------------------
Rate Balance % Rate Balance %
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Account Type
- ------------
NOW accounts:
Commercial noninterest-bearing 0.00% $ 7,119 5.48% 0.00% $ 6,502 5.52%
Noncommercial 1.33% 10,925 8.41% 1.33% 9,982 8.47%
Money market checking accounts 3.40% 6,832 5.26% 3.89% 6,913 5.86%
Regular savings 1.97% 11,849 9.13% 2.43% 11,652 9.88%
------- ------ -------- ------
Total demand and savings deposits 1.60% 36,725 28.28% 1.95% 35,049 29.73%
------- ------ -------- ------
Savings certificates:
Up to 3.00% 29 0.02% 22 0.02%
3.01 %- 4.00% 55 0.04% -- 0.00%
4.01 %- 5.00% 19,393 14.93% -- 0.00%
5.01 %- 6.00% 68,969 53.11% 77,401 65.64%
6.01 %- 7.00% 4,702 3.62% 5,342 4.61%
-------- ------ -------- ------
Total savings certificates 5.51% $ 93,148 71.72% 5.39% 82,765 70.27%
-------- ------ -------- ------
Total deposit accounts 4.40% $129,873 100.00% 4.39% $117,914 100.00%
====== ======== ====== ====== ======== ======
</TABLE>
As of September 30, 1998 and 1997, total deposit accounts include approximately
$1,432,000 and $1,528,000, respectively, of deposits from the Corporation's
officers, shareholders, employees or parties related to them.
At September 30, 1998 and 1997, deposit accounts with balances of $100,000 and
over totaled approximately $18,829,000 and $13,238,000, respectively.
Savings certificates by maturity were as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------------
1998 1997
------- -------
<S> <C> <C>
Maturity Date
- -------------
Within 1 year $74,647 $60,910
After 1 but within 2 years 11,408 14,178
After 2 but within 3 years 2,038 4,017
Thereafter 5,055 3,660
------- -------
Total certificate accounts $93,148 $82,765
======= =======
</TABLE>
-25-
<PAGE>
5. DEPOSITS ACCOUNTS (CONTINUED)
Interest expense on deposits consisted of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Account Type
- ------------
NOW accounts and money market deposit accounts $ 410 $ 353 $ 264
Passbook and statement savings accounts 253 275 302
Certificate accounts 4,912 4,062 3,926
Early withdrawal penalties (31) (24) (13)
------ ------ ------
Total $5,544 $4,666 $4,479
====== ====== ======
</TABLE>
6. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements at September 30, 1998 and 1997,
amounted to $895,000 and $504,000, respectively. U.S. government securities
with a book value of $1,000,000 ($1,001,000 market value) at September 30, 1998,
are used as collateral for the agreements.
The Corporation enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed coupon reverse repurchase agreements are
treated as financings. The obligations to repurchase securities sold are
reflected as a liability and securities underlying the agreements continue to be
reflected as assets in the Consolidated Balance Sheets.
7. ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
At September 30, 1998 and 1997, the Bank had $41,441,000 and $37,979,000,
respectively, of advances outstanding from the Federal Home Loan Bank and
treasury, tax and loan deposits. The maturity of the advances from the Federal
Home Loan Bank and treasury, tax and loan deposits is as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Contractual Maturity:
Within one year - fixed rate $19,441 $15,979
Within one year - adjustable rate 16,000 0
After one but within two years - fixed rate 1,000 5,000
After one but within two years - adjustable rate 5,000 17,000
------- -------
Total Advances $41,441 $37,979
======= =======
Weighted average rate 5.69% 6.00%
</TABLE>
The Bank pledges as collateral to the advances their Federal Home Loan Bank
Stock, and has entered into a blanket collateral agreement with the Federal Home
Loan Bank whereby the Bank maintains, free of other encumbrances, qualifying
mortgages (as defined) with unpaid principal balances equal to, when discounted
at 75% of the unpaid principal balances, 100% of total advances. The amount of
qualifying mortgages was $117,840,000 and $106,880,000, respectively, at
September 30, 1998 and 1997.
-26-
<PAGE>
8. INCOME TAXES
Income tax expense is summarized as follows (in thousands):
<TABLE>
<CAPTION>
For the Years Ended September 30,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current $1,094 $ 755 $ 540
Deferred 197 103 (166)
------ ----- -----
Total income taxes $ 897 $ 858 $ 374
====== ===== =====
</TABLE>
The provision for income taxes differed from amounts computed by applying the
statutory federal rate of 34% to income before income taxes as follows (in
thousands):
<TABLE>
<CAPTION>
For the Years Ended September 30,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax at federal income tax rate $832 $783 $420
Increase (decrease) resulting from:
State income taxes, net of federal benefit 96 91 57
Interest on municipal bonds (6) (10) (37)
Other, net (25) (6) (66)
---- ---- ----
Total $897 $858 $374
==== ==== ====
</TABLE>
The tax effects of significant items comprising the Corporation's deferred taxes
as of September 30, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ -- $ 32
Book reserves in excess of tax basis bad debt reserves 331 177
Mark to market adjustment on securities 136 --
Book reserves in excess of tax basis mortgage servicing rights reserves 67 --
Total deferred tax asset 534 209
---- -----
Deferred tax liabilities:
Difference between book and tax property basis 210 157
Difference between book and tax Federal Home Loan Bank stock basis 100 100
Deferred loan fees 57 -
Mark to market adjustment on securities -- 17
Tax bad debt reserve in excess of base year reserve - 94
Other 3 --
---- -----
Total deferred tax liability 370 368
---- -----
Net deferred tax asset (liability) $164 ($159)
==== =====
</TABLE>
Net deferred tax assets of $164,000 at September 30, 1998, are included in other
assets in the balance sheet. Net deferred tax liabilities of $159,000 at
September 30, 1997, are included in other liabilities in the balance sheet.
Legislation has been passed which repeals the "reserve" method of accounting for
thrift bad debt reserves for the first tax year beginning after December 31,
1995 (the fiscal year ending September 30, 1999 for the Corporation which
qualifies for deferral of the recapture under the "residential loan
requirement"). This legislation requires all thrifts (including the
Corporation) to account for bad debts using either the specific charge-off
method (available to all thrifts) or the experience method (available only to
thrifts that qualify as "small banks," i.e. under $500 million in assets). The
Corporation currently uses the experience method of accounting for its tax bad
debt reserves. The legislation also suspends recapture of bad debt reserves
taken through 1987 (i.e., the base year reserve), but requires thrifts to
recapture or repay bad debt deductions taken after 1987 over six years.
-27-
<PAGE>
8. INCOME TAXES (CONTINUED)
As of September 30, 1998, the bad debt reserve subject to recapture, for which
deferred taxes have previously been provided, totaled approximately $275,000.
As permitted under SFAS 109, no deferred tax liability is provided for
approximately $1,636,000 ($621,000 approximate tax effect) of such tax bad debt
reserves that arose prior to October 1, 1988.
9. EMPLOYEE BENEFITS
The Corporation has a contributory profit-sharing plan which is available to all
eligible employees. Annual employer contributions to the plan consist of an
amount which matches participant contributions up to a maximum of 5% of a
participant's compensation and a discretionary amount determined annually by the
Corporation's Board of Directors. In addition, the corporation implemented a
money purchase pension plan, effective October 1, 1996, in which all eligible
employees participate. The annual contributions to the pension plan will be 5%
of a participant's compensation. Employer expensed contributions to the plans
were $182,000, $91,000, and $38,000 for the years ended September 30, 1998, 1997
and 1996, respectively.
10. FINANCIAL INSTRUMENTS
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments are 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. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by the Corporation upon extension of credit, is based on management's
credit evaluation of the counter-party. Collateral held varies but may include
accounts receivable, inventory, property, plant, and equipment and income-
producing commercial properties.
Those instruments involve, to varying degrees, elements of credit and interest-
rate-risk in excess of the amount recognized in the Consolidated Balance Sheets.
The contract amounts of those instruments reflect the extent of the
Corporation's involvement in particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Corporation
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
The Corporation had loan commitments as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Fixed interest rate commitments to extend credit $ 2,736 $ 1,290
Undisbursed portion of interim construction loans 6,393 6,598
Unused portion of credit lines (principally variable-rate
consumer lines secured by real estate) 5,767 4,463
------- -------
Total $14,896 $12,351
======= =======
</TABLE>
The Corporation has no additional financial instruments with off-balance sheet
risk.
The Corporation has not been required to perform on any financial guarantees
during the past two years. The Corporation has not incurred any losses on its
commitments in 1998, 1997 or 1996.
-28-
<PAGE>
10. FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Corporation's financial instruments were as
follows at September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------------
Carrying Amount Fair Value
--------------- ----------
<S> <C> <C>
Financial assets
- ----------------
Cash and cash equivalents $ 3,593 $ 3,593
Securities available for sale 26,856 26,856
Securities held to maturity 2,699 2,744
FHLB Stock 2,023 2,023
Loans 142,202 144,634
Accrued interest receivable 1,197 1,197
Financial liabilities
- ---------------------
Deposits $129,873 $128,850
Advances from FHLB and other borrowings 41,441 41,547
Securities sold under repurchase agreements 895 895
Off-balance-sheet asset (liabilities)
- -------------------------------------
Commitments to extend credit $ 14,896 $ 14,896
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
-------------------------------------
Carrying Amount Fair Value
--------------- ----------
<S> <C> <C>
Financial assets
- ----------------
Cash and cash equivalents $ 7,821 $ 7,821
Securities available for sale 15,855 15,855
Securities held to maturity 7,811 7,927
FHLB Stock 2,105 2,105
Loans 129,957 131,887
Accrued interest receivable 1,317 1,317
Financial liabilities
- ---------------------
Deposits 117,914 115,332
Advances from FHLB and other borrowings 37,979 38,457
Securities sold under repurchase agreements 504 504
Off-balance-sheet asset (liabilities)
Commitments to extend credit $ 12,351 $ 12,351
</TABLE>
11. SUPPLEMENTAL CASH FLOW DISCLOSURES
<TABLE>
<CAPTION>
For the Years Ended September 30,
----------------------------------
1998 1997 1996
--------- -------- ----------
<S> <C> <C> <C>
Cash paid for:
Income taxes, net of refund $ 792 $ 873 $1,139
Interest 7,213 6,333 5,001
Non-cash transactions:
Loans foreclosed -- -- 17
Unrealized gain (loss) on securities available for sale $ 340 $ 166 ($353)
</TABLE>
-29-
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
Concentrations of Credit Risk - The Corporation's business activity is
- -----------------------------
principally with customers located in South Carolina. Except for residential
loans in the Corporation's market area, the Corporation has no other significant
concentrations of credit risk.
Litigation - The Corporation is involved in legal actions in the normal course
- ----------
of business. In the opinion of management, based on the advice of its general
counsel, the resolution of these matters will not have a material adverse impact
on future results of operations or the financial position of the Corporation.
Potential Impact of Changes in Interest Rates - The Corporation's profitability
- ---------------------------------------------
depends to a large extent on its net interest income, which is the difference
between interest income from loans and investments and interest expense on
deposits and borrowings. Like most financial institutions, the Corporation's
interest income and interest expense are significantly affected by changes in
market interest rates and other economic factors beyond its control. The
Corporation's interest-earning assets consist primarily of long-term, fixed rate
mortgage loans and investments which adjust more slowly to changes in interest
rates than its interest-bearing liabilities which are primarily term deposits
and advances. Accordingly, the Corporation's earnings would be adversely
affected during periods of rising interest rates.
13. STOCK OPTION AND OWNERSHIP PLANS
The Corporation has a stock option incentive compensation plan through which the
Board of Directors may grant stock options to officers and employees to purchase
common stock of the Corporation at prices not less than 100 percent of the fair
market value on the date of grant. The outstanding options expire ten years
from the date of grant. The Corporation applies Accounting Principles Board
(APB) Opinion 25 and related Interpretations in accounting for the plan.
Accordingly, no compensation cost has been charged to operations. Had
compensation cost for the plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the accounting method
available under SFAS No. 123, Accounting for Stock-Based Compensation, the
---------------------------------------
Corporations's net income and net income per common share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (in thousands)
As reported $1,550 $1,444 $ 862
Pro forma 1,532 1,443 859
Basic net income per common share
As reported 1.23 1.17 .071
Pro forma 1.21 1.17 .071
Diluted net income per common share
As reported $ 1.15 $ 1.09 $0.69
Pro forma 1.14 1.09 0.69
</TABLE>
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield 2% 2% 2%
Expected volatility 17% 17% 10%
Risk-free interest rate 6% 6% 5%
Expected lives 10 years 10 years 10 years
</TABLE>
A summary of the status of the plan as of September 30, 1998 and 1997, and
changes during the years ending on those dates is presented below (all shares
have been adjusted for the 2 for 1 stock split in July 1996 and 3:2 stock split
in February 1998):
<TABLE>
<CAPTION>
Shares Average Option Price Expiration
Grant Date Granted Per Share Date
- ---------- -------------------- ---------------- ---------------
<S> <C> <C> <C>
October, 1995 128,500 6.08 October, 2005
January, 1996 2,100 6.08 January, 2006
April, 1996 6,000 7.00 April, 2006
March, 1997 6,150 10.50 March, 2007
May, 1998 40,000 16.63 May, 2008
-------
Total Shares Granted 182,750
</TABLE>
- 30 -
<PAGE>
13. STOCK OPTION AND OWNERSHIP PLANS (CONTINUED)
As of September 30, 1998, the number of shares exercisable were 79,557.
Options were exercised as follows:
<TABLE>
<CAPTION>
Average Exercise
For the Years Ended September 30, Shares Exercised Price Per Share
- ---------------------------------- ---------------- ---------------
<S> <C> <C>
1998 9,920 $5.09
1997 24,621 $3.94
1996 6,963 $5.93
</TABLE>
No stock options have been forfeited during the years ended September 30, 1998,
1997, and 1996. At September 30, 1998, 8,900 shares were available for grant.
The Plan also provides for stock appreciation rights ("SARs"). To date, no SARs
have been granted. Employees participate in stock ownership through the profit
sharing plan (see Note 9).
During the fiscal year 1998, the Corporation implemented a dividend reinvestment
plan that allows existing shareholders to reinvest their dividends for the
purchase of additional Union Financial Bancshares stock. In addition, the plan
can accept cash contributions up to a maximum of $50,000 annually for the
purchase of Union Financial Bancshares stock. The plan currently offers a
5% discount on all purchases and does not charge purchase fees.
14. SHAREHOLDERS' EQUITY, DIVIDEND RESTRICTIONS AND REGULATORY MATTERS
On August 7, 1987, the Bank completed its conversion from a federally chartered
mutual association to a federally chartered stock association. A special
liquidation account was established by the Bank for the preconversion retained
earnings of approximately $3,718,000. The liquidation account will be
maintained for the benefit of depositors who held a savings or demand account as
of the March 31, 1986 eligibility or the June 30, 1987 supplemental eligibility
record dates who continue to maintain their deposits at the Bank after the
conversion. In the event of a future liquidation (and only in such an event),
each eligible and supplemental eligible account holder who continues to maintain
his or her savings account will be entitled to receive a distribution from the
liquidation account. The total amount of the liquidation account will be
decreased in an amount proportionately corresponding to decreases in the savings
account balances of eligible and supplemental eligible account holders on each
subsequent annual determination date. Except for payment of dividends by the
Bank to Union Financial and repurchase of the Bank's stock, the existence of the
liquidation account will not restrict the use or application of such net worth.
The Bank is prohibited from declaring cash dividends on its common stock or
repurchasing its common stock if the effect thereof would cause its net worth to
be reduced below either the amount required for the liquidation account or the
minimum regulatory capital requirement. In addition, the Bank is also
prohibited from declaring cash dividends and repurchasing its own stock without
prior regulatory approval in any amount in a calendar year in excess of 100% of
its current year's net income to the date of any such dividend or repurchase,
plus 50% of the excess of its capital at the beginning of the year over its
regulatory capital requirement.
Under present regulations of the Office of Thrift Supervision ("OTS"), the Bank
must have core capital (leverage requirement) equal to 4.0% of assets, of which
1.5% must be tangible capital, excluding goodwill. The Bank must also maintain
risk-based regulatory capital as a percent of risk weighted assets at least
equal to 8.0%. In measuring compliance with capital standards, certain
adjustments must be made to capital and total assets.
- 31 -
<PAGE>
14. SHAREHOLDERS' EQUITY, DIVIDEND RESTRICTIONS AND REGULATORY MATTERS
(CONTINUED)
At September 30, 1998 and 1997, the Bank had the following actual and required
capital amounts and ratios (in thousands):
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
---------- ---------- ----------
<S> <C> <C> <C>
Actual Capital $14,945 $14,945 $14,945
Unrealized gains on available for sale securities (148) (148) (148)
Goodwill and other intangible assets (1,873 (1,873) (1,873)
Allowances for loan and lease losses (1) -- -- 994
--- --- ---
Total Adjusted capital 12,924 12,924 13,918
Minimum Capital Requirement 2,824 7,530 8,454
------- ------- -------
Regulatory Capital Excess $10,100 $ 5,394 $ 5,464
------- ------- -------
Regulatory Capital Ratio 6.86% 6.86% 13.17%
<CAPTION>
September 30, 1997
--------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
---------- ---------- ----------
<S> <C> <C> <C>
Actual Capital $13,088 $13,088 $13,088
Unrealized losses on available for sale securities 63 63 63
Goodwill and other intangible assets (2,009) (2,009) (2,009)
General allowance for loan losses (1) -- -- 928
--- --- ---
Total Adjusted capital 11,142 11,142 12,070
Minimum Capital Requirement 2,556 5,111 7,310
------- ------- -------
Regulatory Capital Excess $ 8,586 $ 6,031 $ 4,760
------- ------- -------
Regulatory Capital Ratio 6.54% 6.54% 13.21%
</TABLE>
(1) Limited to 1.25% of risk-weighted assets
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and discretionary actions by regulators that, if
undertaken, could have a material adverse effect on the corporation. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classifications are also subject to qualitative judgements by the regulators
about components, risk weightings and other factors. As of the most recent
regulatory examination, the Bank was in compliance with the regulatory capital
requirements. There are no conditions or events that management believes have
changed the Bank's compliance with the guidelines since that examination.
15. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued four new accounting
standards that will affect accounting, reporting, and disclosure of financial
information by the Bank. Adoption of these standards is not expected to have a
material impact on financial condition or results of operations. The following
is a summary of the standards and their required implementation dates:
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
------------------------------------------------------
Information -- This statement establishes standards for the way public
- -----------
enterprises are to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. Statement 131 is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated unless it is
impractical to do so.
-32-
<PAGE>
15. RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
SFAS No. 132, Employers' Disclosures about Pensions and other Post-Retirement
---------------------------------------------------------------
Benefits- This statement deals principally with employers' disclosures about
- --------
defined benefit plans and other post-retirement benefit plans. This statement is
effective for the Bank for the fiscal year beginning October 1, 1998.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities-This
------------------------------------------------------------
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative. The statement is
effective for the Bank for the fiscal year beginning October 1, 1999 and may
not be applied retroactively.
SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the
------------------------------------------------------------
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise-
- -------------------------------------------------------------------------------
This statement is effective for the first quarter beginning after December 15,
1998. This statement conforms the subsequent accounting for securities retained
after the securitization of mortgage loans by a mortgage banking enterprise with
the subsequent accounting for securities retained after the securitization of
other types of assets by a non mortgage banking enterprise. The adoption of this
standard is not expected to have a material effect on the Bank's financial
statements.
16. UNION FINANCIAL BANCSHARES, INC. FINANCIAL INFORMATION
(PARENT CORPORATION ONLY)
Condensed financial information for Union Financial is presented as follows (in
thousands):
<TABLE>
<CAPTION>
Condensed Balance Sheets September 30,
- ------------------------ ------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 35 $ 400
Investment in subsidiary 14,922 13,086
Other 28 42
------- -------
Total Assets $15,300 $13,528
======= =======
Liabilities and Shareholders' Equity:
Liabilities $ -- $ --
Shareholders' Equity 15,300 13,528
------- -------
Total Liabilities and Shareholders' Equity $15,300 $13,528
======= =======
<CAPTION>
Condensed Statements of Income For Years Ended September 30,
- ------------------------------------------------ ----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Equity in undistributed earnings of subsidiary $ 1,610 $ 1,477 $ 893
Other expense, net (60) (33) (31)
------- ------- -------
Net income $ 1,550 $ 1,444 $ 862
======= ======= =======
</TABLE>
-33-
<PAGE>
16. UNION FINANCIAL BANCSHARES, INC. FINANCIAL INFORMATION
(PARENT CORPORATION ONLY) (CONTINUED)
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows For Years Ended September 30,
- ---------------------------------- ----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Operating Activities:
Net income $ 1,550 $ 1,444 $ 862
Adjustments to reconcile net income to
net cash used by operating activities:
Equity in undistributed earnings of subsidiary (1,610) (1,477) (893)
Decrease in other assets (1) (1) 14 18
------- ------- -------
Net cash used by operating activities (61) (19) (13)
------- ------- -------
Financing Activities:
Dividends received from subsidiary -- 500 500
Dividend reinvestment plan contributions 427 -- --
Dividends paid (467) (433) (404)
Proceeds from the exercise of stock options 51 96 41
------- ------- -------
Net cash provided by financing activities 11 163 137
------- ------- -------
Net increase (decrease) in cash and cash equivalents (50) 144 124
Cash and cash equivalents at beginning of year 400 256 132
------- ------- -------
Cash and cash equivalents at end of year $ 350 $ 400 $ 256
======= ======= =======
</TABLE>
-34-
<PAGE>
BOARD OF DIRECTORS
UNION FINANCIAL BANCSHARES AND SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C>
MASON G. ALEXANDER CARL L. MASON
Director, Mid-South Management Company CHAIRMAN
Retired
JAMES W. EDWARDS
Dean of Academics, USC-Union DWIGHT V. NEESE
President and Chief Executive Officer
WILLIAM M. GRAHAM Provident Community Bank
Owner, Graham's Flowers
DAVID G. RUSSELL
LOUIS M. JORDAN Self-employed accountant
President, Jordan's Ace Hardware, Inc.
<CAPTION>
LEADERSHIP GROUP
PROVIDENT COMMUNITY BANK
<S> <C>
BENJAMIN D. AIKEN DAVID L. GARRETT
Assistant Vice President Vice President
Internal Audit & Compliance Manager Mortgage Loan Acquisitions Manager
CAROLYN H. BELUE ROBERT J. GREGORY, JR.
Assistant Vice President Assistant Vice President
Operational & Systems Administration Manager Mortgage Lending Specialist
GERALD L. BOLIN GEORGE E. HALL, JR.
Vice President Vice President
Chief Operating Officer Retail Banking Manager
CLEMMIE W. BOYD SUZANNE M. LOWERY
Assistant Vice President Assistant Vice President
Jonesville Banking Center Manager Wholesale Lending Processing Manager
HOLLY COFFER DWIGHT V. NEESE
Assistant Vice President President
Financial Accounting Manager Chief Executive Officer
GREGORY S. DUNCAN MICHAEL H. VANDERFORD
Vice President Vice President
Credit Administration Manager Mortgage Lending Manager
RICHARD H. FLAKE WANDA J. WELLS
Executive Vice President Vice President & Corporate Secretary
Chief Financial Officer Human Resource Manager
EMMA S. GARNER GERALD B. WYATT
Assistant Vice President Vice President
Collections Officer Consumer Lending Manager
</TABLE>
-35-
<PAGE>
CORPORATE INFORMATION
COMMON STOCK INFORMATION
- ------------------------
Union Financial Bancshares, Inc.'s (UFBS) common stock is quoted on the Nasdaq
SmallCap market.. As of September 30, 1998, the bid and ask prices for Union
Financial Bancshares, Inc. was $13.50 and $15.00, respectively. Quotations are
obtained form the National Daily Quotation Service. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down, or commissions and may
not necessarily reflect actual transactions.
As of September 30, 1998, there were 523 shareholders of record and
1,278,250 shares of common stock issued and outstanding. This does not reflect
the number of persons or entities who held their stock in nominee or "street"
names.
DIVIDEND INFORMATION
- --------------------
During the year ended September 30, 1998, the Corporation declared and paid a
cash dividend of $.37 per share. See Note 13 to the financial statements for
information regarding certain limitations imposed on the Bank's ability to pay
cash dividends to the holding company
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
- ---------------------------------------------
The Corporation has a dividend reinvestment program that allow shareholders to
purchase additional shares with corporate dividends and additional cash
purchases. Details of the program are outlined in the dividend reinvestment
prospectus. To receive more information, please contact Shareholder Services at
the corporate address.
10-KSB INFORMATION
------------------
A copy of the Form 10-KSB filed with the Securities and Exchange Commission,
will be furnished to shareholders upon written request to the Corporate
Secretary, Union Financial Bancshares, Inc., 203 West Main Street, Union, South
Carolina 29379.
ANNUAL MEETING OF SHAREHOLDERS
------------------------------
The Annual Meeting of Shareholders will convene at the Community Room of the
University of South Carolina, Union Campus, Academy and North Mountain Street,
Union, South Carolina on January 20, 1999 at 2:00 p.m..
ADDITIONAL INFORMATION
----------------------
If you are receiving duplicate mailing of shareholder reports due to multiple
accounts, we can consolidate the mailings without affecting your account
registration. To do this, or for additional information, contact our
Shareholder Relations Officer, at the Corporate address shown below.
CORPORATE OFFICES
- -----------------
203 West Main Street
Union, South Carolina 29379
(888) 427-9002
TRANSFER AGENT
- --------------
Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(800) 456-0596
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- ----------------------------------------
Elliott, Davis & Company, LLP
870 South Pleasantburg Drive
Greenville, SC 29607-6286
(864) 242-3370
SPECIAL COUNSEL
- ---------------
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
(202) 362-0840
GENERAL COUNSEL
- ---------------
Whitney, White and Diamaduros
203 West South Street
Union, South Carolina 29379
(864) 427-5661
STOCK INFORMATION
- -----------------
Interstate/Johnson Lane
Interstate Tower
P. O. Box 1012
Charlotte, NC 28201-10123
(800) 929-1003
Trident Securities, Inc.
4601 Six Forks Road
Raleigh, NC 27609
(800) 222-2618
Wheat First Union
P. O. Box 10586
Greenville, SC 29603
(800) 695-5104
SHAREHOLDER SERVICES OFFICER
- ----------------------------
Wanda J. Wells
Union Financial Bancshares, Inc.
203 West Main Street
Union, SC 29379
(864) 429-1861
- 36 -
<PAGE> 1
Appendix F
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- ---- OF 1934 For the quarterly period ended June 30, 1999
-------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ----------------
COMMISSION FILE NUMBER 1-5735
UNION FINANCIAL BANCSHARES, INC.
--------------------------------
Delaware 57-1001177
- --------------------------------------------------------------------------------
(Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
203 West Main Street, Union, South Carolina 29379
- ------------------------------------------- --------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (864)429-1864
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: The Corporation had issued and
outstanding 1,352,992 shares, $0.01 par value, common stock as of June 30, 1999.
<PAGE> 2
UNION FINANCIAL BANCSHARES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 1999
and September 30, 1998 3
Consolidated Statements of Income for the three and nine months
ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the nine
months ended June 30, 1999 and 1998 5
Consolidated Statements of Shareholders' Equity for the
nine months ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
PART II. OTHER INFORMATION 14-15
-----------------
Signatures 16
<PAGE> 3
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 (UNAUDITED) AND SEPTEMBER 30, 1998
JUNE 30, SEPTEMBER 30,
ASSETS 1999 1998
-------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash $ 2,154 $ 2,469
Short term interest-bearing deposits 2,534 1,124
-------------------- --------------------
Total cash and cash equivalents 4,688 3,593
-------------------- --------------------
Investment and mortgage-backed securities:
Held to maturity 799 2,699
Available for sale 38,927 26,856
-------------------- --------------------
Total investment and mortgage-backed securities 39,726 29,555
Loans, net
Held for sale 3,361 37,584
Held for investment 139,686 104,618
-------------------- --------------------
Total loans receivable, net 143,047 142,202
Office properties and equipment, net 4,352 4,020
Federal Home Loan Bank Stock, at cost 2,029 2,023
Accrued interest receivable 1,618 1,197
Mortgage servicing rights 3,657 3,270
Other assets 5,245 3,426
-------------------- --------------------
TOTAL ASSETS $ 204,362 $ 189,286
==================== ====================
LIABILITIES
Deposit accounts $ 144,582 $ 129,873
Securities sold under repurchase agreements 845 895
Advances from the Federal Home Loan Bank and other borrowings 42,825 41,441
Accrued interest on deposits 245 336
Advances from borrowers for taxes and insurance 346 496
Other liabilities 589 945
-------------------- --------------------
TOTAL LIABILITIES 189,432 173,986
-------------------- --------------------
SHAREHOLDERS' EQUITY
Serial preferred stock, no par value,
authorized - 500,000 shares, issued
and outstanding - None 0 0
Common stock - $0.01 par value,
authorized - 2,500,000 shares,
issued and outstanding - 1,352,992 shares at 6/30/99 and 1,278,250 at 9/30/98 13 13
Additional paid-in capital 4,541 4,471
Accumulated other comprehensive income (1,207) 148
Retained earnings, substantially restricted 11,583 10,668
-------------------- --------------------
TOTAL SHAREHOLDERS' EQUITY 14,930 15,300
-------------------- --------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 204,362 $ 189,286
==================== ====================
See notes to consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 1998 (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
---------------- ---------------- ----------------- -----------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income:
Loans $ 2,742 $ 3,023 $ 8,311 $ 8,823
Deposits and federal funds sold 17 28 67 88
Mortgage-backed securities 385 130 1,132 385
Interest and dividends on
investment securities 279 205 713 640
---------------- ---------------- ----------------- -----------------
TOTAL INTEREST INCOME 3,423 3,386 10,223 9,936
---------------- ---------------- ----------------- -----------------
INTEREST EXPENSE:
Deposit accounts 1,419 1,429 4,288 4,085
Advances from the FHLB and other borrowings 409 478 1,376 1,485
---------------- ---------------- ----------------- -----------------
TOTAL INTEREST EXPENSE 1,828 1,907 5,664 5,570
---------------- ---------------- ----------------- -----------------
NET INTEREST INCOME 1,595 1,479 4,559 4,366
Provision for loan losses 25 44 70 108
---------------- ---------------- ----------------- -----------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,570 1,435 4,489 4,258
---------------- ---------------- ----------------- -----------------
NON INTEREST INCOME:
Fees for financial services 287 182 635 558
Loan servicing fees (costs) (60) 10 (135) 3
Net gains on sale of loans 119 139 493 313
Net gains on sale of investments 0 0 7 0
---------------- ---------------- ----------------- -----------------
TOTAL NON INTEREST INCOME 346 331 1,000 874
---------------- ---------------- ----------------- -----------------
NON INTEREST EXPENSE:
Compensation and employee benefits 592 606 1,774 1,724
Occupancy and equipment 292 248 828 707
Deposit insurance premiums 17 13 59 45
Professional services 68 51 206 205
Real estate operations 1 2 3 7
Other 253 206 715 606
---------------- ---------------- ----------------- -----------------
TOTAL NON INTEREST EXPENSE 1,223 1,126 3,585 3,294
---------------- ---------------- ----------------- -----------------
INCOME BEFORE INCOME TAXES 693 640 1,904 1,838
Income tax expense 251 234 689 675
---------------- ---------------- ----------------- -----------------
NET INCOME $ 442 $ 406 $ 1,215 $ 1,163
================ ================ ================= =================
BASIC NET INCOME PER COMMON SHARE $ 0.33 $ 0.32 0.92 $ 0.92
================ ================ ================= =================
DILUTED NET INCOME PER COMMON SHARE $ 0.31 $ 0.30 0.86 $ 0.86
================ ================ ================= =================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
BASIC 1,351,762 1,273,301 1,319,069 1,260,309
DILUTED 1,442,277 1,363,816 1,407,385 1,350,640
See notes to consolidated financial statements.
</TABLE>
<PAGE> 5
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30, 1999 (unaudited) and 1998 (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30, June 30,
1999 1998
------------ --------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $1,215 $1,163
Adjustments to reconcile net income to
net cash provided by (used by) operating activities:
Provision for loan losses 70 108
Amortization of intangibles 195 159
Depreciation expense 249 172
Recognition of deferred income, net of costs (81) (90)
Deferral of fee income, net of costs 231 56
Loans originated for sale (90,166) (96,995)
Sale of loans 90,166 96,995
Gain on sale of loans 493 313
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest receivable (421) 253
Increase in other assets (2,014) (1,742)
Decrease in other liabilities (506) (30)
Increase (decrease) in accrued interest payable (91) 1
---------------- ----------------
Net cash provided by (used by) operating activities (660) 363
---------------- ----------------
INVESTING ACTIVITIES:
Purchase of investment and mortgage-backed securities:
Available for sale (21,539) (5,657)
Proceeds from sale of investment and mortgage-
backed securities 2,090 0
Proceeds from maturity of investment and mortgage- backed securities:
Available for sale 4,657 9,478
Principal repayments on mortgage-backed securities:
Held to maturity 165 70
Available for sale 4,456 1,501
Loan originations (42,754) (54,989)
Principal repayments of loans 39,837 36,000
Proceeds from sale of real estate acquired in settlement of loans 4 22
Purchase of mortgage servicing rights (387) (1,335)
Purchase of FHLB stock (6) 0
Redemption of FHLB stock 0 255
Purchase of office properties and equipment (581) (527)
---------------- ----------------
Net cash used by investing activities ($14,058) ($15,182)
---------------- ----------------
FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 2 51
Proceeds from the dividend reinvestment plan 68 306
Dividends paid in cash ($0.28 per share - 1999
and $0.27 per share - 1998) (300) (290)
Proceeds from FHLB advances and other borrowings 18,256 59,100
Repayment of FHLB advances and other borrowings (16,872) (60,611)
Increase (Decrease) in securities sold under repurchase agreements (50) 59
Acquired deposits from purchased branch 12,622 0
Increase (Decrease) in deposit accounts 2,087 12,083
---------------- ----------------
Net cash provided by financing activities 15,813 10,698
---------------- ----------------
NET DECREASE \ INCREASE IN CASH
AND CASH EQUIVALENTS 1,095 (4,121)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 3,593 7,821
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $4,688 $3,700
================ ================
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes $953 $642
Interest 5,755 5,568
Non-cash transactions:
Loans foreclosed $220 0
See notes to consolidated financial statements.
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
Retained Accumulated
Additional Earnings Other Total
Common Stock Paid-in Substantially Comprehensive Shareholders'
Shares Amount Capital Restricted Income Equity
------ ------ ------- ---------- ------ ------
(In Thousands, Except Share Data)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1997 1,241,550 $12 $3,989 $9,589 ($63) $13,527
Net income 1,163 1,163
Other comprehensive income
Unrealized gains on securities:
Unrealized holding gains arising during
period (9)
---
Other comprehensive income (9) (9)
---
Comprehensive income 1,154
Options exercised 11,565 51 51
Dividend reinvestment plan contributions 22,349 306 306
Cash dividend ($.27 per share) (291) (291)
---------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 1,275,464 12 4,346 10,461 (72) 14,747
===========================================================================
BALANCE AT SEPTEMBER 30, 1998 1,278,250 13 4,471 10,668 148 15,300
Net income 1,215 1,215
Other comprehensive income
Unrealized losses on securities:
Unrealized holding losses arising during
period (1,355)
-------
Other comprehensive income (1,355) (1,355)
-------
Comprehensive income (140)
Options exercised 2,000 2 2
Dividend reinvestment plan contributions 8,652 68 68
Five percent stock dividend 64,090
Cash dividend ($.28 per share) (300) (300)
---------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 1,352,992 $13 $4,541 $11,583 ($1,207) $14,930
===========================================================================
</TABLE>
6
<PAGE> 7
UNION FINANCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Presentation of Consolidated Financial Statements
-------------------------------------------------
The accompanying unaudited consolidated financial statements of Union
Financial Bancshares, Inc. (the "Corporation") were prepared in accordance
with instructions for Form 10-QSB and, therefore, do not include all
disclosures necessary for a complete presentation of consolidated
financial condition, results of operations, and cash flows in conformity
with generally accepted accounting principles. However, all adjustments
which are, in the opinion of management, necessary for the fair
presentation of the interim consolidated financial statements have been
included. All such adjustments are of a normal and recurring nature. The
consolidated financial statements include the Corporation's wholly owned
subsidiary, Provident Community Bank (the "Bank"). The results of
operations for the nine months ended June 30, 1999, are not necessarily
indicative of the results which may be expected for the entire fiscal
year. The consolidated balance sheet as of September 30, 1998, has been
derived from the Company's audited financial statements presented in the
annual report to shareholders. Certain amounts in the prior year's
financiastatements have been reclassified to conform with current year
classifications.
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
----------------------------------------------------------
Information- This statement establishes standards for the way public
-----------
enterprises are to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued
to shareholders. Statement 131 is effective for financial statements for
periods beginning after December 15, 1997. In the initial year of
application, interim disclosures will not be needed. The Corporation will
adopt this standard in its September 30, 1999, financial statements.
SFAS No. 132, Employers' Disclosures about Pensions and other
--------------------------------------------------------
Post-Retirement Benefits- This statement deals principally with employers'
------------------------
disclosures about defined benefit plans and other post-retirement benefit
plans. This statement is effective for the Corporation for the fiscal year
beginning October 1, 1998. The adoption of SFAS 132 will not have an
impact on the financial statements of the Corporation due to the
disclosure requirements only.
SFAS No. 133, Accounting for Derivative Instruments and Hedging
--------------------------------------------------------
Activities-This statement establishes accounting and reporting standards
----------
for derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use
of the derivative. The statement is effective for the Corporation for the
fiscal year beginning October 1, 1999, and may not be applied
retroactively.
7
<PAGE> 8
SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the
------------------------------------------------------------
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
--------------------------------------------------------------------------
Enterprise - This statement is effective for the first quarter beginning
----------
after December 15, 1998. This statement conforms the subsequent accounting
for securities retained after the securitization of mortgage loans by a
mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a non
mortgage banking enterprise. The adoption of this standard is not expected
to have a material effect on the Corporation's financial statements.
2. Income Per Share
----------------
Effective January 29, 1998, the Corporation declared a three-for-two stock
split in the form of a 50% stock dividend of the Corporation's common
stock. The weighted average number of shares and all other share data have
been restated for all periods presented to reflect this stock split.
Effective January 31, 1999, the Corporation declared a stock dividend of
5% per share on common stock. The weighted average number of shares and
all other share data have been restated for all periods presented to
reflect this dividend.
Income per share amounts for the three and nine months ended June 30, 1999
and 1998, were computed based on the weighted average number of common
shares outstanding adjusted for the dilutive effect of outstanding common
stock options during the periods.
3. Assets Pledged
--------------
Approximately $11,880,000 and $10,383,000 of debt securities at June 30,
1999 and September 30, 1998, respectively, were pledged by the Bank as
collateral to secure deposits of the State of South Carolina, Laurens
County and certain other liabilities. The Bank pledges as collateral for
Federal Home Loan Bank advances the Bank's Federal Home Loan Bank stock
and has entered into a blanket collateral agreement with the Federal Home
Loan Bank whereby the Bank maintains, free of other encumbrances,
qualifying mortgages (as defined) with unpaid principal balances equal to,
when discounted at 75% of the unpaid principal balances, 100% of total
advances.
4. Contingencies and Loan Commitments
----------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These instruments expose the Bank to credit risk in excess of
the amount recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
is represented by the contractual
8
<PAGE> 9
amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-
sheet instruments. Total credit exposure at June 30, 1999 related to these
items is summarized below:
<TABLE>
<CAPTION>
Loan Commitments: Contract Amount
---------------- ---------------
<S> <C>
Approved loan commitments $ 812,000
Unadvanced portions of loans 7,230,000
------------
Total loan commitments $ 8,042,000
------------
</TABLE>
Loan 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. Loan commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The Bank evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained upon extension of credit is based on management's
credit evaluation of the counter party. Collateral held is primarily
residential property. Interest rates on loan commitments are a combination
of fixed and variable.
Commitments outstanding at June 30, 1999 consist of fixed and adjustable
rate loans of approximately $8,042,000 at rates ranging from 7% to 9%.
Commitments to originate loans generally expire within 30 to 60 days.
Commitments to fund credit lines (principally variable rate, consumer
lines secured by real estate and overdraft protection) totaled
approximately $17,516,000 at June 30, 1999. Of these lines, the
outstanding loan balances totaled approximately $10,286,000. The Bank also
has commitments to fund warehouse lines of credit for various mortgage
banking companies totaling $750,000, which had an outstanding balance at
June 30, 1999 of approximately $167,000. At June 30, 1999, the Bank had
loan commitments to sell $13,000,000 in fixed rate residential loans which
had not been closed to Freddie Mac for the months of July-September,
1999.
On February 8, 1999, the Corporation, through its subsidiary, Provident
Community Bank, assumed certain liabilities of the CCB/American Federal
Union, South Carolina banking center. Provident Community Bank acquired
$12,622,000 in deposit liabilities in the transaction. The total premium
paid for the acquisition was approximately $1,073,000. The premium paid
will be amortized using straight-line amortization over a period of ten
years.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
-------------------
At June 30, 1999, total assets of the Corporation increased $15,076,000 or
7.96% to $204,362,000 from $189,286,000 at September 30, 1998. Investments
and mortgage-backed securities increased approximately $10,171,000 or
34.41% during the nine months ended June 31, 1999. Available funds were
invested in mortgage backed securities as a result in a slow down in loan
growth. Deposits increased $14,709,000 or 11.33% to $144,582,000 for the
nine months ended June 30, 1999. Approximately $12,622,000 or 85.8% of the
deposit increase was a result of the CCB/American Federal branch purchase
that was consummated on February 8, 1999. The remaining growth was a
result of various deposit promotion programs with continued emphasis on
core deposits. At June 30, 1999, mortgage servicing rights increased
$387,000 or 11.83% to $3,657,000 from $3,270,000 at September 30, 1998. In
conjunction with this increase, loans serviced for others increased from
$164,396,000 at September 30, 1998 to $247,324,000 at June 30, 1999.
Liquidity
---------
Liquidity is the ability to meet demand for loan disbursements, deposit
withdrawals, repayment of debt, payment of interest on deposits and other
operating expenses. The primary sources of liquidity are savings deposits,
loan repayments, borrowings and interest payments.
The OTS imposes a minimum level of liquidity on the Bank which is
currently 4% of withdrawable deposits plus short-term borrowings. The
liquidity level of the Bank as measured for regulatory purposes was 18.55%
as of June 30, 1999. As in the past, management expects that the Bank can
meet its obligations to fund outstanding mortgage loan commitments, which
were approximately $812,000, as described in Note 4 to the Consolidated
Financial Statements, and other loan commitments as of June 30, 1999,
while maintaining liquidity in excess of regulatory requirements.
Capital Resources
-----------------
The capital requirement of the Bank consists of three components: (1)
tangible capital, (2) core capital and (3) risk based capital. Tangible
capital must equal or exceed 1.5% of adjusted total assets. Core capital
must be a minimum of 4% of adjusted total assets and risk based capital
must be a minimum of 8% of risk weighted assets.
As of June 30, 1999, the Bank's capital position, as calculated under
regulatory guidelines, exceeds these minimum requirements as follows
(dollars in thousands):
10
<PAGE> 11
<TABLE>
<CAPTION>
REQUIREMENT ACTUAL EXCESS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tangible capital $3,073 $13,288 $10,215
Tangible capital to adjusted total assets 1.50% 6.55% 5.05%
Core capital $8,114 $13,28 $5,174
Core capital to adjusted total assets 4.00% 6.5% 2.55%
Risk based capital $9,054 $14,118 $5,064
Risk based capital to risk weighted assets 8.00% 12.47% 4.47%
</TABLE>
The reported capital requirements are based on information reported in the
OTS June 30, 1999 quarterly thrift financial report.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998
----------------------------------------------------------------------
General
-------
Net income increased $52,000 or 4.47% to $1,215,000 for the nine months
ended June 30, 1999 as compared to the same period in 1998. Non interest
income increased $126,000 or 14.42% and net interest income after
provision for loan losses increased $231,000 or 5.43%.
Interest Income
---------------
Interest income increased $287,000 or 2.89% for the nine months ended June
30,1999 as compared to the same period in 1998. Interest income on loans
decreased 5.80% or $512,000 to $8,311,000 for the nine months ended June
30, 1999 from $8,823,000 for the nine months ended June 30, 1998. Interest
income on overnight deposits and federal funds sold had a net decrease of
$21,000 for the nine months ended June 30, 1999 as compared to the same
period in the prior year due primarily to lower rates. Interest and
dividends on investment and mortgage-backed securities increased $820,000
or 80% for the nine months ended June 30, 1999 to $1,845,000 from
$1,025,000 during the same period in 1998. The increase was due primarily
to an increase in the level of purchases in investment and mortgage-backed
securities made during the first three quarters of the fiscal year. This
increase in purchases was a direct result of lower loan volumes and higher
loan prepayments made during this period.
Interest Expense
----------------
The Corporation experienced an overall increase of $94,000 or 1.69% in
interest expense for the nine months ended June 30, 1999 as compared to
the nine months ended June 30, 1998, due primarily to the growth in the
deposit base. Interest expense on deposit accounts increased $203,000 or
4.97% to $4,288,000 for the nine months ended June 30, 1999 from
$4,085,000 during the same period in 1998. Interest expense on borrowings
decreased $109,000 or 7.34% for the nine months ended June 30, 1999, as
compared to the nine months
11
<PAGE> 12
ended June 30, 1998. The decrease was due to lower volumes in FHLB
advances during the period.
Provision for Loan Loss
-----------------------
During the nine months ended June 30, 1999, provisions for loan losses
were $70,000 as compared to $108,000 for the same period in the previous
year. The decrease in loan loss provisions are due to the low volume of
loan charge offs along with low level of delinquent loans to total loans.
Management believes the Bank's loan loss allowances are adequate to absorb
estimated future loan losses. The Bank's loan loss allowances at June 30,
1999 were approximately .60% of the Bank's outstanding loan portfolio, net
of loans held for sale compared to .79% for the same period in the
previous year.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated (dollars in thousands):
JUNE 30, 1999 SEPTEMBER 30, 1998
------------- ------------------
Non-accruing loans which are
contractually past due 90 days
or more:
Real Estate:
Residential $ 71 $ 581
Commercial -- --
Construction -- --
Non-mortgage 48 115
---- -----
Total $ 119 $ 696
===== =====
Percentage of loans receivable, net 0.08 0.49%
===== =====
Allowance for loan losses $830 $827
==== ====
Real estate acquired through
foreclosure and repossessed
assets, net of allowances $274 $ 10
==== ====
Non Interest Income and Expense
-------------------------------
Total non interest income increased $126,000 or 14.42% to $1,000,000 for
the nine months ended June 30, 1999 from $874,000 for the same period in
the previous year. The increase in non-interest income from the previous
year was due to increased gain on sale of loans through the mortgage
division of the bank. Gains on sale of loans was $493,000 for the nine
12
<PAGE> 13
months ended June 30, 1999 as compared to a gain on sale of loans of
$313,000 for the nine months ended June 30, 1998. The increased gain on
sale of loans was partially offset by negative loan service fee income of
($135,000) for the nine months ended June 30, 1999 compared to service fee
income of $3,000 for the nine months ended June 30, 1998. The increase in
the negative income is due to higher premium amortization expense as a
result of higher loan prepayments.
For the nine months ended June 30, 1999, total non interest expense
increased $291,000 or 8.83% to $3,585,000 from $3,294,000 for the same
period in 1998. Compensation and employee benefits increased $50,000 or
2.90% to $1,774,000 for the nine months period ended June 30, 1999 from
$1,724,000 for the same period in 1998. Occupancy and equipment expense
increased $121,000 or 17.11% to $828,000 for the nine months ended June
30, 1999 from $707,000 for the same period in 1998. Professional services
expenses increased $1,000 or .49% to $206,000 for the nine month period
ended June 30, 1999 from $205,000 for the same period in 1998. The
increase in compensation and employee benefits was due primarily to cost
of living increases. The increase in occupancy and equipment expenses was
due to higher data processing costs along with higher depreciation
expense. Deposit insurance premiums for the nine months ended June 30,
1999 increased $14,000 to $59,000 from $45,000 for the same period in 1998
due to an increase in the deposit base. Other operating expense for the
nine months ended June 30, 1999 increased $109,000 to $715,000 from
$606,000 for the same period in 1998. The increase in other operating
expenses was due to continued expansion in the mortgage division of the
bank along with increased deposit premium amortization expense as a result
of the current year branch acquisition.
Recent Developments
-------------------
On July 1, 1999, the Corporation entered into an agreement to acquire
South Carolina Community Bancshares, Inc., holding company for Community
Federal Savings Bank, a $45 million savings bank headquartered in
Winnsboro, South Carolina. The merger entails an exchange of $12.25 in
Union common stock and $5.25 in cash, subject to adjustment under certain
circumstances, for each South Carolina Community share. The merger is
subject to the approval of both companies' shareholders and applicable
regulatory authorities.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
The Corporation is involved in various claims and legal
actions arising in the normal course of business. Management
believes that these proceedings will not result in a material
loss to the Corporation.
ITEM 2. Changes in Securities
---------------------
Not applicable.
ITEM 3. Defaults upon Senior Securities
-------------------------------
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
ITEM 5. Other Information
-----------------
YEAR 2000
- ---------
The approach of the year 2000 ("Year 2000") presents significant issues for many
financial, information, and operational systems. Many systems in use today may
not be able to interpret dates after December 31, 1999, appropriately, because
such systems allow only two digits to indicate the year in a date. The Year 2000
problems may occur in computer programs, computer hardware, or electronic
devices that utilize computer chips to process any information that contains
dates. Therefore, the issue is not limited to dates in computer programs but is
a complex combination of problems that may exist in computer programs, data
files, computer hardware, and other devices essential to the operation of the
business. Further, companies must consider the potential impact that Year 2000
may have on services provided by third parties.
Substantially all of the Year 2000 risk is related to the Bank's activities. The
Bank has a formal Year 2000 Plan which includes a Year 2000 Task Force. The Plan
has been reviewed by the senior management and the Board of Directors. Included
in the Plan is a listing of all systems (whether in-house or provided/supported
by third parties) which may be impacted by Year 2000 and a categorization of the
systems by their potential impact on Bank operations. The Task Force has
received Year 2000 plans from third parties identified during the assessment
phase of the Year 2000 Plan. For systems that have been classified as critical
to the operations of the Bank, contingency plans have been developed.
Contingency plans may include utilization of alternate third party vendors,
alternate processing methods and software, or manual processing. To date,
14
<PAGE> 15
no critical problems are anticipated. The plans have various activation dates
(e.g., the date on which a third party processor fails to meet its Year 2000
compliance deadline). In addition to addressing its own Year 2000 issues, the
Bank is in the process of assessing the impact of the Year 2000 on significant
commercial borrowers. The Bank will continue discussing the Year 2000 compliance
activities with commercial borrowers and will not lend to borrowers who have not
addressed Year 2000 procedures. The Bank's Year 2000 readiness is reviewed and
monitored by the Office of Thrift Supervision ("OTS").
The Bank's core processing systems are outsourced through a contract with The
BISYS Group, Inc. ("BISYS"). BISYS has developed a Year 2000 Plan and provides
the Bank with periodic updates. BISYS also has held Year 2000 workshops, whose
objectives have been to assist the Bank in the development of its Year 2000
Plan, to provide updates on the BISYS Year 2000 plan, and training on the use of
the BISYS Year 2000 test facility, whose function is to allow BISYS clients to
test their systems' compatibility with the BISYS system. BISYS completed all
program maintenance associated with Year 2000 prior to October 31, 1998. The
Bank completed its initial testing phase of the BISYS system for Year 2000
compliance. During the testing phase, no significant problems were found. The
Bank will continue testing the BISYS system during their next testing phase to
ensure overall compliance for Year 2000. Like the Bank, BISYS Year 2000
activities are subject to OTS oversight.
The incremental cost associated with the Bank's compliance is expected to be
less than $50,000. The majority of all hardware upgrades began in 1995 as a
result of the Bank's plan to increase efficiencies and eliminate obsolescence of
some system components. Should the Bank or any of its third party service
providers fail to complete Year 2000 measures in a timely manner, it would
likely have a material adverse effect, whose amount cannot be reasonably
estimated at this time.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
--------
27 Financial Data Schedule
15
<PAGE> 16
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION FINANCIAL BANCSHARES, INC.
--------------------------------
(REGISTRANT)
Date: 8/4/99 By: /s/ Dwight V. Neese, CEO
-------- --------------------------------------
Dwight V. Neese, CEO
Date: 8/4/99 By: /s/ Richard H. Flake, CFO
-------- --------------------------------------
Richard H. Flake, CFO
16
<PAGE>
APPENDIX G
South Carolina Community
Annual Report on Form 10-KSB
for the Year Ended June 30, 1999
[to be filed as part of a pre-effective
amendment when available]
<PAGE>
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law ("DGCL"), inter
alia, empowers a Delaware corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with such action, suit or proceeding if the person acted in good
faith and in a manner the person reasonably believed to be in or not opposed to
the best interest of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe the person's conduct was
unlawful. Similar indemnity is authorized for such person against expenses
(including attorneys' fees) actually and reasonably incurred in connection with
the defense or settlement of any such threatened, pending or completed action or
suit if such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and provided
further that (unless a court of competent jurisdiction otherwise provides) such
person shall not have been adjudged liable to the corporation. Any such
indemnification may be made only as adjudged liable to the corporation. Any such
indemnification may be made only as authorized in each specific case upon a
determination by the shareholders or disinterested directors or by independent
legal counsel in a written opinion that indemnification is proper because the
indemnitee has met the applicable standard of conduct.
Any such indemnification and advancement of expenses provided under
Section 145 shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of such person's
heirs, executors and administrators.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him, and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
In addition, pursuant to the Merger Agreement, the Registrant has
agreed that, for a period of six years following the effective time of the
Merger, the Registrant will indemnify and hold harmless each present and former
director and officer of South Carolina Community Bancshares, Inc. or its direct
or indirect subsidiaries, and each officer or employee of South Carolina
Community Bancshares, Inc. or its direct or indirect subsidiaries who is serving
or has served as a director or trustee of another entity expressly at South
Carolina Community Bancshares, Inc.'s request or direction, with respect to
matters existing or occurring at or prior to the effective time of the Merger,
whether asserted or claimed prior to, at or after the effective time. The
Registrant has also agreed in the Merger Agreement to maintain, for a period of
three years following the effective time of the Merger, the directors' and
officers' liability insurance coverage maintained by South Carolina Community
Bancshares, Inc. (or substantially equivalent coverage under substitute
policies) with respect to any claims arising out of any actions or omissions
occurring at or prior to the effective time of the Merger.
II-1
<PAGE>
In accordance with the DGCL (being Chapter 1 of Title 8 of the
Delaware Code), Articles 17 and 18 of the Registrant's Certificate of
Incorporation provide as follows:
Article XVII. Indemnification
------------- ---------------
Article XVII of the Union Financial Certificate of Incorporation
indemnifies any person who is or was a director, officer, or employee of Union
Financial and any person who served at Union Financial's request as a director,
officer, employee, agent, partner or trustee of another corporation,
partnership, joint venture, trust or other enterprise.
In the case of a threatened, pending or completed action or suit by or
in the right of Union Financial against such a person (a derivative suit), Union
Financial shall indemnify him for expenses (including attorneys' fees but
excluding amounts paid in settlement) actually or reasonably incurred by him in
connection with the defense or settlement, providing he is successful on the
merits or otherwise; or if he acted in good faith in the transaction which is
the subject of the suit or action and in a manner he reasonably believed to be
in the best interest of Union Financial. This includes, but is not limited to,
the taking of any and all actions in connection with Union Financial's response
to any tender offer or any offer or proposal of another party to engage in a
business combination not approved by the board of directors. However, he shall
not be indemnified in respect of any claim, issue or matter as to which he has
been adjudged liable to Union Financial unless (and only to the extent that) the
court in which the suit was brought shall determine, upon application, that
despite the adjudication but in view of all the circumstances, he is fairly and
reasonably entitled to indemnity for such expenses as the court shall deem
proper.
In the case of a threatened, pending or completed suit, action or
proceeding (whether civil, criminal, administrative or investigative), other
than a suit by or in the right of Union Financial (a nonderivative suit),
against an indemnified person by reason of his holding a position with Union
Financial, he shall be indemnified only if he is successful on the merits or
otherwise; or if he acted in good faith in the transaction which is the subject
of the nonderivative suit and in a manner he reasonably believed to be in, or
not opposed to, the best interests of Union Financial, including, but not
limited to, the taking of any and all actions in connection with Union
Financial's response to any tender offer or any offer or proposal of another
party to engage in a business combination not approved by the board of
directors, and, with respect to any criminal action or proceeding, he had no
reasonable cause to believe his conduct was unlawful. The termination of a
nonderivative suit by judgment, order, settlement, conviction, or upon a plea of
nolo contendre or its equivalent shall not, in itself, create a presumption that
- --------------
the person failed to satisfy the foregoing standard.
A determination that the indemnified party has met the standards
required for indemnification in derivative and nonderivative suits may be made
by a court, or except in relation to the standard for a finding of good faith
action in a shareholder derivative suit, by (1) the board of directors by a
majority vote of a quorum consisting of Union Financial directors not parties to
the legal proceeding; or (2) independent legal counsel (appointed by a majority
of the disinterested directors of Union Financial, whether or not a quorum) in a
written opinion; or (3) the stockholders of Union Financial.
Anyone making a determination as to whether a party has met the
standards required for indemnification may determine that a person has met the
standard as to some matters but not as to others, and may reasonably prorate
amounts to be indemnified.
II-2
<PAGE>
Union Financial may pay in advance any expenses (including attorneys'
fees) which may become subject to indemnification if (1) the board of directors
authorizes the specific payment and (2) the person receiving the payment
undertakes in writing to repay the same if it is ultimately determined that he
is not entitled to indemnification.
The indemnification and advance of expenses provided for in the
preceding paragraphs is not exclusive of any other rights to which a person may
be entitled by law or otherwise.
The indemnification provided by Article XVII of the Union Financial
Certificate of Incorporation shall be deemed to be a contract between Union
Financial and the persons entitled to indemnification thereunder, and any repeal
or modification shall not affect any rights or obligations then existing and the
indemnification and advance payment provided for above shall continue as to a
person who has ceased to hold a position with Union Financial, and shall inure
to his heirs, executors and administrators.
Union Financial may purchase and maintain insurance on behalf of any
person who holds or who has held any position subject to indemnification,
against any liability incurred by him in any such position, or arising out of
his status as such, whether or not Union Financial would have the power to
indemnify him against liability under the preceding paragraphs.
If Article XVII or any portion of it shall be invalidated on any
ground, then Union Financial shall nevertheless indemnify each director,
officer, employee and agent of Union Financial as to costs, charges, and
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement with respect to any action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, including a shareholder derivative
suit, to the full extent permitted by any remaining applicable portion of
Article XVII and to the full extent permitted by applicable law.
Article XVIII. Elimination of Directors' Liability
- ----------------------------------------------------
A director of Union Financial shall not be personally liable to Union
Financial or its stockholders for monetary damages for breach of fiduciary duty
as a director, except: (1) for any breach of the director's duty of loyalty to
Union Financial or its stockholders; (2) for acts or omissions not made in good
faith or which involve intentional misconduct or a knowing violation of law; (3)
under Section 174 of the General Corporation Law of the State of Delaware; or
(4) for any transaction from which a director derived an improper personal
benefit. If the General Corporation Law of the State of Delaware is amended to
further eliminate or limit the personal liability of directors, then the
liability of a director of Union Financial shall be eliminated or limited to the
fullest extent permitted by the General Corporation Law of the State of
Delaware, as amended.
Item 21. Exhibits and Financial Statement, Schedules.
(a) Exhibits.
2.1 Agreement and Plan of Merger, dated as of July 1, 1999, by and
between Union Financial Bancshares, Inc. and South Carolina
Community Bancshares is included as Appendix A to the Joint Proxy
Statement/Prospectus which is part of this Registration
Statement.
3.1 Certificate of Incorporation of the Registrant, as amended,
previously filed and incorporated by reference to the Union
Financial Bancshares, Inc. Registration
II-3
<PAGE>
Statement on Form S-4 (File No. 33-80808) filed with the SEC on
June 29, 1994.
3.2 Bylaws of the Registrant, previously filed and incorporated by
reference to the Union Financial Bancshares, Inc. Registration
Statement on Form S-4 (File No. 33-80808) filed with the SEC on
June 29, 1994.
4.1 Union Financial Bancshares, Inc. Specimen Stock Certificate,
previously filed and incorporated by reference to the Union
Financial Bancshares, Inc. Registration Statement on Form S-4
(File No. 33-80808) filed with the SEC on June 29, 1994.
5.1 Opinion of Muldoon, Murphy & Faucette LLP is filed herewith.
8.1 Opinion of Muldoon, Murphy & Faucette LLP regarding tax matters
is filed herewith.
8.2 Opinion of Luse Lehman Gorman Pomerenk & Schick regarding tax
matters is filed herewith.
10.1 Form of Employment Agreement between Provident Community Bank,
Union Financial Bancshares, Inc., and Allan W. Pullen, previously
filed and incorporated by reference to the Union Financial
Bancshares, Inc. Form 8-K filed with the SEC on July 9, 1999.
11.1 Statement regarding computation of per share earnings, previously
filed and incorporated by reference to the Union Financial
Bancshares, Inc. Form 10-QSB for the quarter ended June 30, 1999
and filed with the SEC on August 13, 1999.
13.1 Annual and quarterly reports to stockholders, included as
Appendix G and Appendix F, respectively, to the Joint Proxy
Statement/Prospectus which is part of this Registration
Statement.
21.1 Subsidiaries of the Registrant, previously filed and incorporated
by reference to the Union Financial Bancshares, Inc. Form 10-KSB
for the year ended September 30, 1998 and filed with the SEC on
December 29, 1998.
23.1 Consent of Muldoon, Murphy & Faucette LLP (included in Exhibit
5.1 hereto).
23.2 Consent of Muldoon, Murphy & Faucette LLP (included in Exhibit
8.1 hereto).
23.3 Consent of Elliott, Davis & Company LLP.
23.4 Consent of Crisp Hughes Evans LLP.
23.5 Consent of Wheat First Securities.
II-4
<PAGE>
23.6 Consent of Trident Securities.
23.7 Consent of Luse Lehman Gorman Pomerenk & Schick (included in
Exhibit 8.2 hereto).
24.1 Power of Attorney (located on the signature page).
27.1 Financial Data Schedule, previously filed and incorporated by
reference to the Union Financial Bancshares, Inc. Form 10-QSB
for the quarter ended June 30, 1999 and filed with the SEC on
August 13, 1999.
99.1 Opinion of Trident Securities is included as Appendix C to the
Joint Proxy Statement/Prospectus which is part of this
Registration Statement.
99.2 Opinion of Wheat First Securities, included as Appendix B to the
Joint Proxy Statement/Prospectus which is part of this
Registration Statement.
99.3 Consent of person to be named as Director of Union Financial
Bancshares, Inc.
99.4 Union Financial Bancshares, Inc. Proxy Card.
99.5 South Carolina Community Bancshares, Inc. Proxy Card.
(b) Financial Statement Schedules.
None.
(c) Item 4(b) Information.
None.
Item 22. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this registration
statement (or the most recent post-effective amendment
hereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in this registration statement. Notwithstanding
the foregoing, any increase or decrease in the volume
or securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the
II-5
<PAGE>
low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no
more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the Registration Statement or any
material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such
securities at the time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange
Act of 1934) that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) To deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual
report to security holders that is incorporated by reference in the
prospectus and furnished pursuant to and meeting the requirements of
Rule 14a-3 or Rule 14c-3 of the Securities Exchange Act of 1934;
and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to
deliver, or cause to be delivered to each person to whom the
prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus and to
provide such interim financial information.
(d)(1) That prior to any public reoffering of the securities registered
hereunder by the use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the
applicable form.
II-6
<PAGE>
(d)(2) That every prospectus (i) that is filed pursuant to paragraph (d)(1)
immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will
be filed as part of an amendment to the registration statement and
will not be used until such amendment is effective, and that, for
purposes or 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 the securities offered therein,
and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the
Securities Act 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
Securities Act of 1933 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 a 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 Securities Act of 1933 and
will be governed by the final adjudication of such issue.
(f) The registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11 or 13 of this form, within one
business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement
through the date of responding to the request.
(g) The registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the
subject of and included in the Registration Statement when it became
effective.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Union, State of South
Carolina, on September 1, 1999.
UNION FINANCIAL BANCSHARES, INC.
By: /s/ Dwight V. Neese
-------------------------------------
Dwight V. Neese
President and Chief Executive Officer
On September 1, 1999, we, the undersigned officers and directors of Union
Financial Bancshares, Inc., hereby, severally and individually, constitute and
appoint Dwight V. Neese and Richard H. Flake, the true and lawful attorneys-in-
fact and agents (with full power of substitution in each case) of each of us to
execute, in the name, place and stead of each of us (individually and in any
capacity stated below), any and all amendments to this Registration Statement
and all instruments necessary or advisable in connection therewith, and to file
the same with the SEC, said attorney-in-fact and agent to have power to act and
to have full power and authority to do and perform, in the name and on behalf of
each of the undersigned, every act whatsoever necessary or advisable to be done
in the premises as fully and to all intents and purposes as any of the
undersigned might or could do in person and we hereby ratify and confirm our
signatures as they may be signed by said attorneys-in-fact and agents to any and
all such amendments and instruments.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Dwight V. Neese President, Chief Executive Officer, September 1, 1999
- ----------------------
Dwight V. Neese and Director
(Principal Executive Officer)
/s/ Richard H. Flake Senior Vice President and September 1, 1999
- ----------------------
Richard H. Flake Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Carl L. Mason Chairman of the Board September 1, 1999
- ----------------------
Carl L. Mason
/s/ Mason G. Alexander Director September 1, 1999
- ----------------------
Mason G. Alexander
/s/ James W. Edwards Director September 1, 1999
- ----------------------
James W. Edwards
/s/ William M. Graham Director September 1, 1999
- ----------------------
William M. Graham
/s/ Louis M. Jordan Director September 1, 1999
- ----------------------
Louis M. Jordan
/s/ David G. Russell Director September 1, 1999
- ----------------------
David G. Russell
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing Page Location
- ----------- ----------- ---------------- -------------
<S> <C> <C> <C>
2.1 Agreement and Plan of Included with the Joint Appendix A
Merger Dated July 1, Proxy Statement/
1999 Prospectus which is
part of this Registration
Statement.
3.1 Certificate of Incorporated by
Incorporation of the Reference.
Registrant
3.2 Bylaws of the Incorporated by
Registrant Reference.
4.1 Union Financial Incorporated by
Bancshares, Inc. Reference.
Specimen Stock
Certificate
5.1 Opinion of Muldoon, Filed herewith.
Murphy & Faucette
LLP
8.1 Opinion of Muldoon, Filed herewith.
Murphy & Faucette
LLP as to Tax Matters
8.2 Opinion of Luse Filed herewith.
Lehman Gorman
Pomerenk & Schick, P.C.
10.1 Form of Employment Incorporated by
Agreement between Reference.
Provident Community
Bank, Union Financial
Bancshares, Inc. and
Allan W. Pullen
11.1 Statement regarding Incorporated by
computation of per Reference.
share earnings
13.1 Annual and quarterly Included with the Joint Appendix E
reports to stockholders Proxy Statement/ and
Prospectus which is Appendix F
part of this Registration
Statement.
21.1 Subsidiaries of the Incorporated by
Registrant Reference.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
23.1 Consent of Muldoon, Included in Exhibit 5.1
& Murphy Faucette LLP hereto.
23.2 Consent of Muldoon, Included in Exhibit 8.1
Murphy & Faucette hereto.
LLP
23.3 Consent of Elliott, Filed herewith.
Davis & Company,
LLP
23.4 Consent of Crisp Filed herewith.
Hughes Evans LLP
23.5 Consent of Wheat First Filed herewith.
Securities
23.6 Consent of Trident Filed herewith.
Securities
23.7 Consent of Luse Included in Exhibit 8.2
Lehman Gorman hereto.
Pomerenk & Schick
24.1 Power of Attorney Located on the
signature page.
27.1 Financial Data Incorporated by
Schedule Reference.
99.1 Opinion of Trident Included with the Joint Appendix C
Securities Proxy Statement/
Prospectus.
99.2 Opinion of Wheat First Included with the Joint Appendix B
Securities Proxy Statement/
Prospectus.
99.3 Consent of persons to Filed herewith.
be named as Director
of Union Financial
Bancshares, Inc.
99.4 Union Financial Filed herewith.
Bancshares, Inc. Proxy
Card
99.5 South Carolina Filed herewith.
Community
Bancshares, Inc. Proxy
Card
</TABLE>
<PAGE>
EXHIBIT 5.1
FORM OF LEGAL OPINION
, 1999
- ----------
Union Financial Bancshares, Inc.
203 West Main Street
Union, South Carolina 29379-0866
Re: Union Financial Bancshares, Inc.
Registration Statement on Form S-4
----------------------------------
Ladies and Gentlemen:
We have acted as special counsel for Union Financial Bancshares, Inc., a
Delaware corporation ("UFB"), and, at the request of UFB, have examined the
registration statement on Form S-4 (the "Registration Statement") to be filed
on ___________, 1999, by UFB with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and the
regulations promulgated thereunder. All capitalized terms not otherwise defined
herein have the meanings given them in the Registration Statement.
The Registration Statement relates to, among other things, the registration
under the Act of _____________ shares, subject to adjustment, of common stock,
$.01 par value per share, of UFB (the "UFB Common Stock "), into which certain
shares of common stock, $____ par value per share of South Carolina Community
Bancshares, Inc., a Delaware corporation ("SCCB"), will be converted pursuant to
an Agreement and Plan of Merger dated as of July 1, 1999 (the "Merger
Agreement") by and between SCCB and UFB and certain related instruments and
agreements described in the Registration Statement that were executed, or are to
be executed, in connection with the Merger Agreement (the "Related
Instruments").
In our examinations, we have assumed, without investigation, the
genuineness of all signatures, the authenticity of all documents and instruments
submitted to us as originals, the conformity to the originals of all documents
and instruments submitted to us as certified or conformed copies and the
authenticity of the originals of such copies, the correctness of all
certificates, and the accuracy and completeness of all records, documents,
instruments and materials made available to us by UFB and SCCB.
<PAGE>
Union Financial Bancshares, Inc.
, 1999
- ----------
Page 2
Our opinion is limited to the matters set forth herein and we express no
opinion other than as expressly set forth herein. In rendering the opinion set
forth below, we do not express any opinion concerning law other than the federal
law of the United States and the corporate law of the State of Delaware. Our
opinion is expressed as of the date hereof and is based on laws currently in
effect. Accordingly, the conclusions set forth in this opinion are subject to
change in the event that any laws should change or be enacted in the future. We
are under no obligation to update this opinion or to otherwise communicate with
you in the event of any such change.
Based upon and subject to the foregoing, it is our opinion that, upon
effectiveness of the Registration Statement and approval of the issuance of the
Merger Shares by SCCB shareholders and UFB shareholders, the UFB Common Stock,
when issued in accordance with the terms of the Merger Agreement upon
consummation of the merger contemplated therein, will be validly issued, fully
paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our Firm under the caption "Legal
Matters" in the Joint Proxy Statement/Prospectus forming a part of the
Registration Statement. In giving such consent we do not hereby admit that we
are experts or otherwise within the category of persons whose consent is
required under Section 7 of the Act or the rules or regulations of the
Securities and Exchange Commission thereunder.
Sincerely,
MULDOON, MURPHY & FAUCETTE LLP
<PAGE>
FORM OF FEDERAL TAX OPINION EXHIBIT 8.1
, 1999
--------------
Board of Directors
Union Financial Bancshares, Inc.
203 West Main Street
Union, South Carolina 29379-0866
Board of Directors
South Carolina Community Bancshares, Inc.
110 South Congress Street
Winnsboro, South Carolina 29180
Gentlemen:
We have acted as counsel to Union Financial Bancshares, Inc., a Delaware
corporation and a unitary savings and loan holding company ("UFB"), in
connection with the proposed merger (the "Merger") of South Carolina Community
Bancshares, Inc., a Delaware corporation and a unitary savings and loan holding
company ("SCCB"), into UFB. The Merger will be effected pursuant to an
Agreement and Plan of Merger dated July 1, 1999, by and between UFB and SCCB.
Capitalized terms used herein without definition have the respective meaning
assigned to such terms in the Merger Agreement.
In our capacity as counsel to UFB, our opinion has been requested with
respect to certain of the federal income tax consequences of the Merger. In
rendering this opinion, we have examined (i) the Merger Agreement, (ii) the
Registration Statement on Form S-4 (the "Registration Statement") and the
Prospectus/Proxy Statement included therein that was filed with the U.S.
Securities and Exchange Commission, (iii) the Officer's Certificate of UFB and
the Officer's Certificate of SCCB (collectively the "Officer's Certificates"),
and (iv) such other documents, instruments and information as we have deemed
appropriate ((i-iv) collectively constituting the "Documents").
In rendering this opinion, we have assumed, without independent
verification:
(a) the genuineness of all signatures,
<PAGE>
Boards of Directors
Union Financial Bancshares, Inc.
South Carolina Community Bancshares, Inc.
, 1999
- ---------
Page 2
(b) the authenticity of any Document submitted to us as an original,
(c) the conformity to the original of all documents submitted to us as
certified, photostatic or conformed copies, and the authenticity of
the originals of all such Documents,
(d) each natural person executing any such instrument, document, or
agreement is legally competent to do so,
(e) the accuracy of the facts set forth in the Registration Statement and
the representations contained in the Merger Agreement and the
Officer's Certificates,
(f) that the Merger will be effective under applicable state law, and,
(g) that the Merger will be consummated in the manner described in the
Merger Agreement and Registration Statement.
In rendering our opinions set forth below, we have referred solely to the
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing, proposed and temporary regulations promulgated thereunder,
current administrative rulings, procedures and published positions of the
Internal Revenue Service (the "IRS"), all of which are subject to change, either
prospectively or retroactively, at any time. No assurance can be provided as to
the effect of any such change upon our conclusions reached herein. We assume no
obligation to supplement this opinion if any applicable laws change after the
date hereof or if we become aware of any facts that might change the opinions
herein after the date hereof.
On the basis of an subject to the foregoing, we are of the opinion that:
1. The Merger will be considered a merger of SCCB into UFB. Accordingly, the
Merger qualifies as a reorganization within the meaning of Section
368(a)(1)(A) of the Code. SCCB and UFB will each be a party to a
reorganization within the meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized by SCCB or UFB as a result of the
Merger.
3. A SCCB shareholder who receives cash and UFB common stock in exchange for
his SCCB common stock will recognize gain (but not loss) equal to the
lesser of (x) the amount by
<PAGE>
Boards of Directors
Union Financial Bancshares, Inc.
South Carolina Community Bancshares, Inc.
, 1999
- ---------
Page 3
which the sum of the fair market value of the UFB common stock and cash
received in the Merger exceeds his adjusted tax basis in the SCCB common
stock exchanged therefor, or (y) the cash received in the Merger. Except
for the cash received in lieu of fractional shares, such gain may be
treated, in whole or in part, as dividend income pursuant to Section 356 of
the Code.
4. The aggregate federal income tax basis of the shares of UFB common stock
received in exchange for SCCB common stock in the Merger will be the same
as the aggregate basis of the SCCB common stock exchanged therefor,
increased by any gain and dividend income recognized in the transaction and
decreased by any cash received.
5. A SCCB shareholder's holding period for the UFB common stock received in
exchange for SCCB common stock in the Merger will include the period that
such SCCB common stock was held by such shareholder, provided such SCCB
common stock was a capital asset of such shareholder.
6. The receipt of cash in lieu of any fractional share of UFB common stock by
a SCCB shareholder will be treated as if the fractional share was
distributed as part of the exchange and then was redeemed by UFB.
No opinion is expressed as to any transaction other than the Merger as
described in the Merger Agreement or to any transaction whatsoever, including
the Merger, if all the transactions described in the Merger Agreement are not
consummated in accordance with the terms of such Agreement and without waiver or
breach of any material provision thereof, or if all of the representations,
warranties, statements and assumptions upon which we relied are not true and
accurate at all relevant times. In the event any one of the statements,
representations, warranties or assumptions upon which we have relied to issue
this opinion is incorrect, our opinion might be adversely affected and may not
be relied upon.
The conclusions, predictions, statements and analysis presented herein and
the Prospectus/Proxy Statement are not binding upon the IRS, and this opinion
should not be construed as a guarantee that the IRS might not differ with the
conclusions, predictions, statements and analysis presented herein and in the
Registration Statement, or raise other questions or issues upon audit, or that
such action taken by the IRS will not be judicially sustained.
<PAGE>
Boards of Directors
Union Financial Bancshares, Inc.
South Carolina Community Bancshares, Inc.
, 1999
- -----------
Page 4
This opinion is being furnished in connection with the Merger and may not
be used or relied upon for any other purpose and may not be circulated, quoted
or otherwise referred to for any other purpose without our express written
consent.
The shareholders of SCCB should consult with a qualified tax advisor with
respect to any reporting requirements which may be applicable or with respect to
any tax considerations other than those expressly mentioned herein.
Very truly yours,
MULDOON, MURPHY & FAUCETTE LLP
<PAGE>
EXHIBIT 8.2
FORM OF
FEDERAL TAX OPINION
Board of Directors
South Carolina Community Bankshares, Inc.
110 South Congress Street
Winnsboro, South Carolina 29180
Re: Federal Tax Consequences of the Merger of South Carolina Community
Bankshares, Inc. into Union Financial Bancshares, Inc.
Gentlemen:
You have requested an opinion on the federal income tax consequences of the
proposed mergers of South Carolina Community Bankshares, Inc. ("SCCB") into
Union Financial Bancshares, Inc. (UFB") and Community Federal Savings Bank
("SCCB Bank") into Provident Community Bank ("UFB Bank") pursuant to an
Agreement and Plan of Merger (the "Plan of Merger").
Reference is made to the information set forth under the heading "The
Merger" contained in the Joint Proxy Statement/Prospectus which is included in
the Registration Statement on Form S-4 (the "Registration Statement"), filed by
UFB with the Securities and Exchange Commission (the "SEC"), in connection with
the acquisition of SCCB by UFB pursuant to the Plan of Merger. Subject to the
facts, representations, assumptions and other conditions described or referenced
therein, and the additional representations made by you which are set forth
below, upon all of which we have relied, we provide the tax opinions set forth
herein, limited in the manner discussed below under "Limitations of Opinion."
You have provided the following representations concerning this
transaction:
(a) The Merger of SCCB into UFB will satisfy the statutory requirements of
the state law of Delaware. Furthermore, the Merger will comply with the
regulations and any other legal requirements imposed by Delaware.
<PAGE>
Board of Directors
, 1999
- --------
Page 2
(b) As of the Effective Date of the Merger, the former shareholders of SCCB
will have a continuing interest through stock ownership in UFB, equal in
value to at least 50 percent of the value of all of the formerly
outstanding stock of SCCB as of the same date.
(c) To the best of the knowledge of the management of SCCB, there is no
plan or intention by the shareholders of SCCB who own 5 percent or more of
SCCB Common Stock, and there is no plan or intention on the part of the
remaining shareholders of SCCB to sell, exchange or otherwise dispose of a
number of shares of the UFB Common Stock received in the Merger that would
reduce the SCCB shareholder's ownership of UFB Common Stock to a number of
shares having a value, as of the Effective Date, of less than 50 percent of
the value of all of the formerly outstanding stock of SCCB as of the same
date. For purposes of this representation, shares of SCCB Common Stock
exchanged for cash or other property, surrendered by dissenters, or
exchanged for cash in lieu of fractional shares of UFB Common Stock will be
treated as outstanding SCCB Common Stock held by SCCB shareholders and
otherwise sold, redeemed, or disposed of prior or subsequent to the Merger
will be considered in making this representation.
(d) The fair market value of the UFB Common Stock and other consideration
received by SCCB shareholders will be approximately equal to the fair
market value of the SCCB Common Stock surrendered in the exchange.
(e) To the best of the knowledge of the management of SCCB, UFB has no plan
or intention to reacquire any of its Common Stock issued in the
transaction.
(f) To the best of the knowledge of the management of SCCB, UFB has no plan
or intention to sell or otherwise dispose of any of the assets of SCCB
acquired in the Plan of Merger, except for dispositions made in the
ordinary course of business or transfers of assets to a corporation
controlled by SCCB.
(g) The liabilities of SCCB to be assumed by UFB and the liabilities to
which the transferred assets of SCCB are subject were incurred in the
ordinary course of business and are associated with the assets of SCCB.
(h) Following the Merger, UFB and its subsidiaries will continue to the
historic business of SCCB or use a significant portion of the historic
business assets of SCCB in a business.
(i) SCCB and UFB will pay their respective expenses, if any, incurred in
connection with the Merger (except as otherwise provided in the Plan of
Merger).
<PAGE>
Board of Directors
, 1999
- --------
Page 3
(j) There is no intercorporate indebtedness existing between SCCB and UFB
that was issued, acquired, of will be settled at a discount.
(k) No two parties to the transaction have more than 25% of the value of
their assets invested in stock and securities of any one issuer and not
more than 50% of the value of their assets invested stock or securities of
five or fewer issuers.
(l) SCCB is not insolvent and is not under the jurisdiction of a bankruptcy
or similar court, a receivership, foreclosure, or similar proceeding on a
Federal or State court.
(m) The fair market value of the assets of SCCB transferred to UFB will
equal or exceed the sum of the liabilities assumed by UFB plus the amount
of liabilities, if any, to which the transferred assets are subject.
(n) The total adjusted basis of the assets of SCCB transferred to UFB will
equal or exceed the sum of the liabilities, if any, to which the
transferred assets are subject.
(o) No shares of Common Stock of UFB were issued to or purchased by SCCB
shareholders or employees at a discount or as compensation for services
rendered or to be rendered.
LIMITATIONS OF OPINION
Our opinions expressed herein are based solely upon current provisions of
the Internal Revenue Code of 1986, as amended (the "Code") including applicable
regulations thereunder and current judicial and administrative authority. Any
future amendments to the Code or applicable regulations, or new judicial
decisions or administrative interpretations, any of which could be retroactive
in effect, could cause us to modify our opinion. No opinion is expressed herein
with regard to the federal or state tax consequences of the Merger under any
Section of the Code (or under state of local tax law) except if and to the
extent specifically addressed.
OPINION
Based solely upon the foregoing representations and information and
assuming the transaction occurs in accordance with the Plan of Merger (and
taking into consideration the limitations at the end of the opinion), it is our
opinion that:
(i) No gain or loss will be recognized by UFB, UFB Bank, SCCB or SCCB Bank
as a result of the Merger;
<PAGE>
Board of Directors
, 1999
- --------
Page 4
(ii) Except to the extent of any cash received in exchange for SCCB Common
Stock, no gain or loss will be recognized by the stockholders of SCCB
who exchange their SCCB Common Stock for UFB Common Stock pursuant to
the Merger;
(iii) The tax basis of UFB Common Stock received by stockholders who
exchange their SCCB Common Stock for UFB Common Stock in the Merger
will be the same as the tax basis of SCCB Common Stock surrendered
pursuant to the Merger reduced by any amount allocable to a fractional
share interest for which cash is received and increased by any gain
recognized on the exchange; and
(iv) The holding period of UFB Common Stock received by each stockholder in
the Merger will include the holding period of SCCB Common Stock
exchanged therefor, provided that such stockholder held such SCCB
Common Stock as a capital asset on the Effective Date.
***
Since this letter is rendered in advance of the closing of this
transaction, we have assumed that the transaction will be consummated in
accordance with the Plan of Merger as well as all the information and
representations referred to herein. Any change in the transaction could cause
us to modify our opinion. We hereby consent to the filing with the SEC of this
opinion as an exhibit to the Registration Statement and to the reference to our
firm under the heading "Tax Considerations for South Carolina Community
Shareholders" contained therein. In giving such consent, we do not thereby
admit we are in the category of persons whose consent is required under Section
7 of the Securities Act of 1933, as amended.
Sincerely,
_________________________________________
Luse Lehman Gorman Pomerenk & Schick, P.C.
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Union Financial Bancshares, Inc.
Union, South Carolina
We consent to the use in this Registration Statement of Union Financial
Bancshares, Inc. on Form S-4 of our report dated November 6, 1998 relating to
the consolidated financial statements of Union Financial Bancshares, Inc. and
Subsidiary as of September 30, 1998 and 1997 and for each of the three years in
the period ended September 30, 1998, appearing in the Prospectus, which is part
of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Elliott, Davis & Company, LLP
------------------------------------------------
Elliott, Davis & Company, LLP
Greenville, South Carolina
September 1, 1999
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
Board of Directors and Stockholders
South Carolina Community Bancshares, Inc.
Winnsboro, South Carolina
We consent to the use in this Registration Statement of Union Financial
Bancshares, Inc. on Form S-4 of our report dated July 23, 1999 relating to the
consolidated balance sheets of South Carolina Community Bancshares, Inc. and
Subsidiary as of June 30, 1998 and 1999 and the related consolidated statements
of income, stockholders' equity and cash flows for the years then ended,
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Experts" in such
Registration Statement.
/s/ Crisp Hughes Evans LLP
-----------------------------------------------
Crisp Hughes Evans LLP
Asheville, North Carolina
September 1, 1999
<PAGE>
EXHIBIT 23.5
CONSENT OF FINANCIAL ADVISOR
We hereby consent to the use in this Registration Statement on Form S-4 of the
form of our letter to be issued to the Board of Directors of Union Financial
Bancshares, Inc., included as Appendix B to the Joint Proxy Statement/Prospectus
that is a part of this Registration Statement, and to the references to such
letter and to our firm in such Joint Proxy Statement/Prospectus. In giving such
consent we do not thereby admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933 or the
rules and regulations of the Securities and Exchange Commission thereunder.
/s/ WHEAT FIRST SECURITIES
-----------------------------------------------
WHEAT FIRST SECURITIES
A Division of First Union Capital Markets Corp.
Richmond, Virginia
September 1, 1999
<PAGE>
EXHIBIT 23.6
Consent of Trident Securities, a Division of McDonald Investments Inc.
----------------------------------------------------------------------
Trident Securities hereby consents to the inclusion of its fairness opinion
addressed to the Board of Directors of South Carolina Community Bancshares, Inc.
as an annex to the Registration Statement on Form S-4 of Union Financial
Bancshares, Inc. and a description of the opinion letter and references to our
firm contained in or made a part of the Registration Statement. In giving such
consent Trident Securities does not hereby admit to being included within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended or the rules and regulations of the Securities and
Exchange Commission thereunder.
/s/ Trident Securities
----------------------------------------
Trident Securities,
A Division of McDonald Investments, Inc.
Raleigh, North Carolina
September 1, 1999
<PAGE>
EXHIBIT 99.3
CONSENT
-------
In accordance with Item 401 of Regulation S-K, I do hereby consent to being
named in the Registration Statement to be filed with the Securities and Exchange
Commission by Union Financial Bancshares, Inc. as a person who is to become a
director of Union Financial Bancshares, Inc., and the disclosure of that fact in
the Registration Statement.
By: /s/ Philip C. Wilkins
--------------------------------------
Philip C. Wilkins
Dated this 25th day of
August, 1999
<PAGE>
CONSENT
-------
In accordance with Item 401 of Regulation S-K, I do hereby consent to being
named in the Registration Statement to be filed with the Securities and Exchange
Commission by Union Financial Bancshares, Inc. as a person who is to become a
director of Union Financial Bancshares, Inc., and the disclosure of that fact in
the Registration Statement.
By: /s/ John S. McMeekin
-----------------------------------------
John S. McMeekin
Dated this 25th day of
August, 1999
<PAGE>
CONSENT
-------
In accordance with Item 401 of Regulation S-K, I do hereby consent to being
named in the Registration Statement to be filed with the Securities and Exchange
Commission by Union Financial Bancshares, Inc. as a person who is to become a
director of Union Financial Bancshares, Inc., and the disclosure of that fact in
the Registration Statement.
By: /s/ Quay McMaster
--------------------------------------
Quay McMaster
Dated this 25th day of
August, 1999
<PAGE>
REVOCABLE PROXY EXHIBIT 99.4
UNION FINANCIAL BANCSHARES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF UNION FINANCIAL BANCSHARES, INC.
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON _______________, 1999.
The undersigned stockholder of Union Financial Bancshares, Inc. (the
"Company") hereby appoints _________________, ____________________ and
_________________ as proxies, each of them with full power of substitution, to
attend and act as proxy for the undersigned and to cast all votes which the
undersigned stockholder is entitled to cast at the special meeting of
stockholders of the Company to be held at _____ p.m., local time on
____________, 1999, at __________________ ____________, and any and all
adjournments and postponements thereof (the "Special Meeting"), with all powers
which the undersigned would possess if personally present (i) as designated
below with respect to the matters set forth below and described in the
accompanying Proxy Statement and (ii) in their discretion with respect to any
other business that may properly come before the Special Meeting. The
undersigned stockholder hereby revokes any proxy or proxies heretofore given.
This proxy will be voted in the manner directed by the undersigned
stockholder. If no direction is made, this proxy will be voted (1) "FOR"
approval and adoption of the Merger Agreement (as defined herein) and (2) in
the discretion of the proxies as to all other matters that may properly come
before the Special Meeting.
(continued--to be signed and dated on reverse side)
<PAGE>
The Board of Directors recommends a vote "FOR" approval and adoption of the
Merger Agreement.
1. Approval and adoption of the Agreement and Plan of Merger, dated as of
July 1, 1999, by and between South Carolina Community Bancshares, Inc.
and the Company pursuant to which South Carolina Community Bancshares,
Inc. will merge into the Company. Each share of common stock of South
Carolina Community Bancshares, Inc., par value at $0.01 per share, will
be converted into the right to receive cash and stock, subject to
adjustment, all on and subject to the terms and conditions contained
therein. The amount of cash and stock referred to as the merger
consideration will depend on the average market price of Union Financial
stock over a certain period of time prior to the merger's closing date.
In all circumstances, the cash portion of the merger consideration must
----
be at least $5.25. The stock portion of the merger consideration must be
-----
at least 0.817 shares, and can be no more than 0.980 shares, of Union
Financial stock. If Union Financial's average market price per share
during this period is between $12.50 and $15.00, the total merger
consideration will be $17.50 per share of the Company. If Union
Financial's average market price per share is more than $15.00, the
total merger consideration will be at least $17.51 per share of the
Company. If the average market price per share is between $12.00 and
$12.49, the total merger consideration will be between $17.01 and $17.49
per share of the Company. If the average market price per share is less
than $12.00, the total merger consideration will be $17.00 per share of
the Company.
FOR AGAINST ABSTAIN
|_| |_| |_|
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Special Meeting or any
adjournment or postponement thereof. As of the date of the Special
Meeting, management of the Company is not aware of any such other
business.
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Stockholders and the Proxy Statement, dated ___________, 1999, for
the Special Meeting.
Dated: ____________________________________
Signature: ________________________________
Signature: ________________________________
Title: ____________________________________
(Please date and sign here exactly as name appears
at left. When signing as attorney, administrator,
trustee or guardian, give full title as such; and
when stock has been issued in the name of two or
more persons, all should sign.)
PLEASE ACT PROMPTLY.
SIGN, DATE AND MAIL YOUR PROXY CARD TODAY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
IF YOU RECEIVE MORE THAN ONE PROXY CARD, PLEASE DATE,
SIGN AND RETURN ALL CARDS IN THE ACCOMPANYING ENVELOPE.
2
<PAGE>
REVOCABLE PROXY EXHIBIT 99.5
SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF SOUTH CAROLINA COMMUNITY BANCSHARES, INC.
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON _______________, 1999.
The undersigned stockholder of South Carolina Community Bancshares, Inc.
(the "Company") hereby appoints _________________, ____________________ and
_________________ as proxies, each of them with full power of substitution, to
attend and act as proxy for the undersigned and to cast all votes which the
undersigned stockholder is entitled to cast at the special meeting of
stockholders of the Company to be held at _____ p.m., local time on
____________, 1999, at _________________ _____________, and any and all
adjournments and postponements thereof (the "Special Meeting"), with all powers
which the undersigned would possess if personally present (i) as designated
below with respect to the matters set forth below and described in the
accompanying Proxy Statement and (ii) in their discretion with respect to any
other business that may properly come before the Special Meeting. The
undersigned stockholder hereby revokes any proxy or proxies heretofore given.
This proxy will be voted in the manner directed by the undersigned
stockholder. If no direction is made, this proxy will be voted (1) "FOR"
approval and adoption of the Merger Agreement (as defined herein) and (2) in
the discretion of the proxies as to all other matters that may properly come
before the Special Meeting.
This proxy card will also be used to provide voting instructions to the
trustee for any shares of common stock of the Company allocated to participants
under the Community Federal Savings Bank Employee Stock Ownership Plan.
(continued--to be signed and dated on reverse side)
<PAGE>
The Board of Directors recommends a vote "FOR" approval and adoption of the
Merger Agreement.
1. Approval and adoption of the Agreement and Plan of Merger, dated as of
July 1, 1999, by and between Union Financial Bancshares, Inc. and the
Company pursuant to which the Company will merge Union Financial
Bancshares, Inc. Each share of common stock of the Company, par value at
$0.01 per share, will be converted into the right to receive cash and
stock, subject to adjustment, all on and subject to the terms and
conditions contained therein. The amount of cash and stock referred to
as the merger consideration will depend on the average market price of
Union Financial stock over a certain period of time prior to the
merger's closing date. In all circumstances, the cash portion of the
----
merger consideration must be at least $5.25. The stock portion of the
-----
merger consideration must be at least 0.817 shares, and can be no more
than 0.980 shares, of Union Financial stock. If Union Financial's
average market price per share during this period is between $12.50 and
$15.00, the total merger consideration will be $17.50 per share of the
Company. If Union Financial's average market price per share is more
than $15.00, the total merger consideration will be at least $17.51 per
share of the Company. If the average market price per share is between
$12.00 and $12.49, the total merger consideration will be between $17.01
and $17.49 per share of the Company. If the average market price per
share is less than $12.00, the total merger consideration will be $17.00
per share of the Company.
FOR AGAINST ABSTAIN
|_| |_| |_|
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Special Meeting or any
adjournment or postponement thereof. As of the date of the Special
Meeting, management of the Company is not aware of any such other
business.
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Stockholders and the Proxy Statement, dated ___________, 1999, for
the Special Meeting.
Dated: ____________________________________
Signature: ________________________________
Signature: ________________________________
Title: ____________________________________
(Please date and sign here exactly as name appears
at left. When signing as attorney, administrator,
trustee or guardian, give full title as such; and
when stock has been issued in the name of two or
more persons, all should sign.)
PLEASE ACT PROMPTLY.
SIGN, DATE AND MAIL YOUR PROXY CARD TODAY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
IF YOU RECEIVE MORE THAN ONE PROXY CARD, PLEASE DATE,
SIGN AND RETURN ALL CARDS IN THE ACCOMPANYING ENVELOPE.
2
