As filed with the Securities and Exchange Commission on September 16, 2010
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Oconee Federal Financial Corp.
Oconee Savings and Loan Association 401(k) Profit Sharing Plan
(Exact Name of Registrant as Specified in Its Charter)
Federal | 6712 | Being applied for | ||
(State or Other Jurisdiction of Incorporation or Organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
201 East North Second Street
Seneca, South Carolina 29678
(864) 882-2765
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrants Principal Executive Offices)
Mr. T. Rhett Evatt
President and Chief Executive Officer
201 East North Second Street
Seneca, South Carolina 29678
(864) 882-2765
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
Copies to:
Kip A. Weissman, Esq. | Jonathan H. Talcott, Esq. | |
Robert B. Pomerenk, Esq. | Stephani M. Hildebrandt, Esq. | |
Luse Gorman Pomerenk & Schick, P.C. | Nelson Mullins Riley & Scarborough LLP | |
5335 Wisconsin Avenue, N.W., Suite 780 | 101 Constitution Avenue, N.W., Suite 900 | |
Washington, D.C. 20015 | Washington, D.C. 20001 | |
(202) 274-2000 | (202) 712-2800 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: x
If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨
If 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: ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
CALCULATION OF REGISTRATION FEE
Title of each class of securities to be registered |
Amount to be registered |
Proposed maximum offering price per share |
Proposed maximum aggregate offering price |
Amount of
registration fee |
||||
Common Stock, $0.01 par value per share |
1,821,600 shares | $10.00 | $ 18,216,000 (1) | $1,299 | ||||
Participation Interests |
471,974 interests | (2) | ||||||
(1) | Estimated solely for the purpose of calculating the registration fee. |
(2) | The securities of Oconee Federal Financial Corp. to be purchased by the Oconee Savings and Loan Association 401(k) Profit Sharing Plan are included in the amount shown for the common stock. Accordingly, no separate fee is required for the participation interests. In accordance with Rule 457(h) of the Securities Act of 1933, as amended, the registration fee has been calculated on the basis of the number of shares of common stock that may be purchased with the current assets of such Plan. |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
Prospectus Supplement
Interests in
OCONEE SAVINGS AND LOAN ASSOCIATION
401(k) PROFIT SHARING PLAN
Offering of Participation Interests in up to 471,974 Shares of
OCONEE FEDERAL FINANCIAL CORP.
COMMON STOCK
In connection with the reorganization of Oconee Federal Savings and Loan Association (the Association) into the mutual holding company form of organization and the related stock offering of Oconee Federal Financial Corp., Oconee Federal Financial Corp. and the Association are allowing participants in the Oconee Savings and Loan Association 401(k) Profit Sharing Plan (the Plan) to invest all or a portion of their accounts in shares of common stock of Oconee Federal Financial Corp. The Association has registered on behalf of the Plan up to 471,974 participation interests so that the trustee of the Plan could purchase up to 471,974 shares of Oconee Federal Financial Corp. common stock in the offering, at the purchase price of $10.00 per share. This prospectus supplement relates to the initial election of Plan participants to direct the trustee of the Plan to invest all or a portion of their Plan accounts in the Oconee Federal Financial Corp. Stock Fund at the time of the stock offering.
The prospectus of Oconee Federal Financial Corp., dated [ ], accompanies this prospectus supplement. It contains detailed information regarding the reorganization of the Association and the stock offering of Oconee Federal Financial Corp. common stock and the financial condition, results of operations and business of Oconee Federal Financial Corp. and the Association. This prospectus supplement provides information regarding the Plan. You should read this prospectus supplement together with the prospectus and keep both for future reference.
For a discussion of risks that you should consider, see the Risk Factors section of the prospectus.
The interests in the Plan and the offering of Oconee Federal Financial Corp. common stock have not been approved or disapproved by the Office of Thrift Supervision, the Securities and Exchange Commission or any other federal or state agency. Any representation to the contrary is a criminal offense.
The securities offered in this prospectus supplement and in the prospectus are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
This prospectus supplement may be used only in connection with offers and sales by Oconee Federal Financial Corp. of interests or shares of common stock pursuant to the Plan. No one may use this prospectus supplement to re-offer or resell interests or shares of common stock acquired through the Plan.
You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. Oconee Federal Financial Corp., the Association and the Plan have not authorized anyone to provide you with information that is different.
This prospectus supplement does not constitute an offer to sell or solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make an offer or solicitation in that jurisdiction. Neither the delivery of this prospectus supplement and the prospectus nor any sale of common stock shall under any circumstances imply that there has been no change in the affairs of Oconee Federal Financial Corp. or any of its subsidiaries or the Plan since the date of this prospectus supplement, or that the information contained in this prospectus supplement or incorporated by reference is correct as of any time after the date of this prospectus supplement.
The date of this prospectus supplement is [ ].
1 | ||
1 | ||
Election to Purchase Common Stock in the Offering: Priorities |
1 | |
3 | ||
3 | ||
4 | ||
4 | ||
5 | ||
6 | ||
6 | ||
Direction to Purchase Oconee Federal Financial Corp. Stock after the Offering |
6 | |
6 | ||
7 | ||
7 | ||
8 | ||
8 | ||
8 | ||
9 | ||
9 | ||
9 | ||
11 | ||
12 | ||
14 | ||
15 | ||
15 | ||
16 | ||
16 | ||
17 | ||
18 | ||
Securities and Exchange Commission Reporting and Short-Swing Profit Liability |
18 | |
19 | ||
19 |
1
The shares of common stock of Oconee Federal Financial Corp. are being offered at $10 per share in a subscription offering and community offering. In the offering, the shares are being offered in the following descending order of priority:
Subscription Offering:
(1) First, to depositors of the Association with aggregate account balances of at least $50 on June 30, 2009.
(2) Second, to the Associations tax-qualified plans, including the employee stock ownership plan.
(3) Third, to depositors of the Association with aggregate account balances of at least $50 on September 30, 2010.
(4) Fourth, to other depositors of the Association as of [ ] and [borrowers from the Association as of October 21, 1991 whose borrowings remain outstanding as of [ ].
If there are shares remaining after all of the orders in the subscription offering have been filled, shares may be offered in a community offering to the general public.
If you fall into subscription offering categories (1), (3), or (4) above, you have subscription rights to purchase Oconee Federal Financial Corp. common stock in the subscription offering and you may use funds in the Plan to pay for the stock. You may also be able to purchase stock in the subscription offering even though you are ineligible to purchase through subscription offering categories (1), (3), or (4) if Oconee Federal Financial Corp. determines to allow the Plan to purchase stock through subscription offering category (2), reserved for its tax-qualified employee plans. If the Plan is not included in category (2), then any order for stock placed by those ineligible to subscribe in categories (1), (3), and (4) will be considered an order placed in the community offering. Subscription offering orders, however, will have preference over orders placed in a community offering.
You may also be able to purchase Oconee Federal Financial Corp. common stock outside of the Plan. You will separately receive offering materials in the mail, including a Stock Order Form. If you wish to purchase stock outside of the Plan, you must complete and submit the Stock Order Form and payment, using the reply envelope provided. |
2
3
4
5
6
7
In connection with the reorganization of the Association into the mutual holding company form of organization and the related stock offering of Oconee Federal Financial Corp., the Association desires to permit employees who participate in the Plan to purchase common stock of Oconee Federal Financial Corp.
The Plan is a single employer tax-qualified plan with a cash or deferred compensation feature established in accordance with the requirements under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as amended (the Code).
The Association intends that the Plan, in operation, will comply with the requirements under Section 401(a) and Section 401(k) of the Code. The Association will adopt any amendments to the Plan that may be necessary to ensure the continuing qualified status of the Plan under the Code and applicable Treasury Regulations.
Employee Retirement Income Security Act of 1974 (ERISA). The Plan is an individual account plan other than a money purchase pension plan within the meaning of ERISA. As such, the Plan is subject to all of the provisions of Title I (Protection of Employee Benefit Rights) and Title II (Amendments to the Code Relating to Retirement Plans) of ERISA, except to the funding requirements contained in Part 3 of Title I of ERISA, which by their terms do not apply to an individual account plan (other than a money purchase plan). The Plan is not subject to Title IV (Plan Termination Insurance) of ERISA. The funding requirements contained in Title IV of ERISA are not applicable to participants or beneficiaries under the Plan.
Reference to Full Text of Plan. The following portions of this prospectus supplement summarize certain provisions of the Plan. They are not complete and are qualified in their entirety by the full text of the Plan. Copies of the Plan are available to all employees by filing a request with Curtis Evatt, Executive Vice President and Chief Financial Officer, Oconee Federal Savings and Loan Association; telephone number: (864) 882-2765; fax: (864) 882-2765; email: curt.evatt@oconeefederal.com. You are urged to read carefully the full text of the Plan.
All employees of the Association are eligible to participate in the Plan except for the following ineligible classes of employees: (a) employees whose employment is governed by a collective bargaining agreement, (b) non-resident aliens who do not receive earned income which constitutes income from sources within the United States, (c) any individual who becomes an employee as the result of a merger or other acquisition, (d) leased employees, and (e) employees who are employed by an affiliated employer which does not adopt this Plan. If you are an eligible employee on October 1, 2010 and you are at least 21 years of age, you will become a participant in the Plan on October 1, 2010. In all other cases, you will need to be at least age 21 and have 90 consecutive days of employment. Your entry date into the Plan will be the first day of the first, fourth, seventh or tenth month of the plan year coinciding with or next following the date you satisfy the age and service requirements.
8
Elective Deferrals. You are permitted to defer on a pre-tax basis up to 100% of your compensation, subject to certain restrictions imposed by the Code, and to have that amount contributed to the Plan on your behalf. For purposes of the Plan, compensation means the amount reported on your Form W-2. In 2010, the compensation of each participant taken into account under the Plan is limited to $245,000. (Limits established by the Internal Revenue Service are subject to increase pursuant to an annual cost-of-living adjustment, as permitted by the Code).
In connection with the stock offering, you may, as described above, direct the trustee to invest up to 100% of your Plan account in the Oconee Federal Financial Corp. Stock Fund as a one-time special election. Following the stock offering, you may elect to defer up to 100% of your elective salary deferral contributions or matching contributions into the Oconee Federal Financial Corp. Stock Fund and you may also elect to transfer into the Oconee Federal Financial Corp. Stock Fund all or a portion of your accounts invested in other funds under the Plan.
Employer Matching Contributions. The Association may, in its discretion, make matching contributions.
Profit Sharing Contributions . The Association may, in its discretion, make profit sharing contributions.
Limitations on Employee Salary Deferrals. For the Plan year beginning January 1, 2010, the amount of your before-tax contributions may not exceed $16,500 per calendar year.
Catch-up Contributions. If you have made the maximum amount of regular before-tax contributions allowed by the Plan or other legal limits and you have attained at least age 50 (or will reach age 50 prior to the end of the Plan year), you are also eligible to make an additional catch-up contribution. You may authorize your employer to withhold a specified dollar amount of your compensation for this purpose. For 2010, the maximum catch-up contribution is $5,500.
Investment of Contributions and Account Balances
All amounts credited to your accounts under the Plan are held in the Plans trust.
Prior to the effective date of the offering, you were provided the opportunity to direct the investment of your account into one of the following funds:
American Funds Euro Pacific Growth Fund (RERFX)
Vanguard 500 Index (VFINX)
9
Fidelity Contrafund (FCNTX)
Columbia Dividend Income Z (GSFTX)
Vanguard Mid-Cap Index (VIMSX)
Perkins Mid-Cap Value J (JMCVX)
T. Rowe Price Small-Cap Value (PRSVX)
Vanguard Small Cap Index (NAESX)
Vanguard GNMA (VFIIX)
Metropolitan West Total Return Bond M (MWTRX)
Vanguard Total Bond Market Index (VBMFX)
Federated Capital Preservation Fund (FCPFQ)
T. Rowe Price Capital Appreciation (PRWCX)
Vanguard Target Retirement 2005 (VTOVX)
Vanguard Target Retirement 2015 (VTXVX)
Vanguard Target Retirement 2025 (VTTVX)
Vanguard Target Retirement 2035 (VTTHX)
Vanguard Target Retirement 2045 (VTIVX)
10
The following table provides performance data with respect to the above investment funds as of June 30, 2010:
Fund Name |
YTD Returns
as of June 30, 2010 |
Average Annual Total Returns as of June 30, 2010 | |||||||||||||
1 Year | 3 Year | 5 Year | 10 Year | ||||||||||||
American Funds EuroPacific Growth Fund R5 |
-11.26 | % | 9.81 | % | -7.64 | % | 5.29 | % | 2.94 | % | |||||
Vanguard 500 Index Fund |
-6.71 | % | 14.33 | % | -9.84 | % | -0.87 | % | -1.67 | % | |||||
Fidelity Contrafund |
-4.80 | % | 16.42 | % | -5.30 | % | 3.05 | % | 2.81 | % | |||||
Columbia Dividend Income Z Fund |
-5.87 | % | 12.59 | % | -7.20 | % | 1.66 | % | 4.35 | % | |||||
Vanguard Mid Capitalization Index Fund |
-2.13 | % | 26.70 | % | -8.60 | % | 1.05 | % | 4.96 | % | |||||
Perkins Mid Cap Value T Fund |
-3.74 | % | 16.29 | % | -3.82 | % | 3.90 | % | 9.97 | % | |||||
T. Rowe Price Small Cap Value Fund |
-0.78 | % | 22.10 | % | -6.08 | % | 2.42 | % | 9.80 | % | |||||
Vanguard Small Cap Index Fund |
-1.37 | % | 25.06 | % | -7.36 | % | 1.34 | % | 3.85 | % | |||||
Vanguard GNMA Fund |
5.43 | % | 8.30 | % | 8.17 | % | 6.08 | % | 6.36 | % | |||||
Metropolitan West Total Return Bond M Fund |
7.53 | % | 19.71 | % | 9.25 | % | 7.23 | % | 7.20 | % | |||||
Vanguard Total Bond Market Index Fund |
5.33 | % | 9.28 | % | 7.54 | % | 5.48 | % | 6.20 | % | |||||
Federated Capital Preservation Fund |
1.58 | % | 3.34 | % | 3.92 | % | 4.07 | % | | ||||||
T. Rowe Price Capital Appreciation Fund |
-1.71 | % | 14.60 | % | -2.49 | % | 3.84 | % | 8.63 | % | |||||
Vanguard Target Retirement 2005 Fund |
0.55 | % | 11.83 | % | 0.62 | % | 3.25 | % | | ||||||
Vanguard Target Retirement 2015 Fund |
2.03 | % | 13.26 | % | -2.80 | % | 2.34 | % | | ||||||
Vanguard Target Retirement 2025 Fund |
-3.98 | % | 13.95 | % | -5.48 | % | 1.34 | % | | ||||||
Vanguard Target Retirement 2035 Fund |
-5.85 | % | 14.13 | % | -7.66 | % | 0.72 | % | | ||||||
Vanguard Target Retirement 2045 Fund |
-5.91 | % | 14.14 | % | -7.65 | % | 1.05 | % | |
11
Description of the Investment Funds
American Funds Euro Pacific Growth Fund (RERFX): The investment seeks to provide you with long-term growth of capital. The fund invests primarily in common stocks of issuers in Europe and the Pacific Basin that the investment adviser believes have the potential for growth. It normally invests at least 80% of net assets in securities of issuers in Europe and the Pacific Basin. The fund may invest a portion of its assets in common stocks and other securities of companies in countries with developing and/or markets and may also hold cash, money market instruments and fixed-income securities.
Vanguard 500 Index (VFINX): The investment seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks. The fund employs a passive management investment approach designed to track the performance of the Standard & Poors 500 index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. It invests all, or substantially all, of assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
Fidelity Contrafund (FCNTX): The investment seeks capital appreciation. The fund normally invests primarily in common stocks. It may invest in securities of companies whose value is not fully recognized by the public. The fund invests in both domestic and foreign issuers. It may invest in growth stocks or value stocks or both. The advisor uses fundamental analysis of each issuers financial condition and industry position and market and economic conditions to select investments.
Columbia Dividend Income Z (GSFTX): The investment seeks total return, consisting of current income and capital appreciation. The fund normally invests at least 80% of net assets in a diversified portfolio of income-producing equity securities. It may invest up to 20% of net assets in debt securities; including securities that are rated low and below investment grade or are unrated. The fund may also invest up to 20% of net assets in foreign securities.
Vanguard Mid-Cap Index (VIMSX): The investment seeks to track the performance of a benchmark index that measures the investment return of mid-capitalization stocks. The fund employs a passive management investment approach designed to track the performance of the MSCI US Mid Cap 450 index, a broadly diversified index of the stocks of medium-size U.S. companies. It attempts to replicate the target index by investing all, or substantially all, of assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
Perkins Mid-Cap Value J (JMCVX): The investment seeks capital appreciation. The fund primarily invests in the common stocks of mid-sized companies whose stock prices the portfolio managers believe to be undervalued. It normally invests at least 80% of assets in equity securities of companies whose market capitalization falls, at the time of purchase, within the 12-month average of the capitalization range of the Russell Midcap Value index. The fund may invest in foreign equity and debt securities, which may include investments in emerging markets. It can also invest assets in derivatives.
12
T. Rowe Price Small-Cap Value (PRSVX): The investment seeks long-term capital growth. The fund will invest at least 80% of assets in companies with a market capitalization that is within or below the range of companies in the Russell 2000 index. While it invests most assets in U.S. common stocks, the fund may also purchase other securities including bonds, foreign stocks, futures, and options.
Vanguard Small Cap Index (NAESX): The investment seeks to track the performance of a benchmark index that measures the investment return of small capitalization stocks. The fund employs a passive management investment approach designed to track the performance of the MSCI US Small Cap 1750 index, a broadly diversified index of the stocks of smaller U.S. companies. It attempts to replicate the target index by investing all, or substantially all, of assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
Vanguard GNMA (VFIIX): The investment seeks to provide a moderate level of current income. The fund normally invests at least 80% of assets in government National Mortgage Association certificates. It may invest the balance of assets in other U.S. government obligations, as well as in repurchase agreements secured by U.S. government securities. The funds dollar-weighted average maturity will normally fall within an intermediate-term range (3 to 10 years).
Metropolitan West Total Return Bond M (MWTRX): The investment seeks to maximize long-term total return. The fund pursues its objective by investing, under normal circumstances, at least 80% of net assets in investment grade fixed income securities or unrated securities that are determined by the Adviser to be of similar quality. Up to 20% of the funds net assets may be invested in securities rated below investment grade. Under normal conditions, the portfolio duration is two to eight years and the dollar-weighted average maturity ranges from two to fifteen years.
Vanguard Total Bond Market Index (VBMFX): The investment seeks to track the performance of a broad, market-weighted bond index. The fund employs a passive management, or indexing investment approach designed to track the performance of the Barclays Capital U.S. Aggregate Float Adjusted index. It invests by sampling the index. It invests at least 80% of assets in bonds held in the index. The fund maintains a dollar-weighted average maturity consistent with that of the index, ranging between 5 and 10 years.
Federated Capital Preservation Fund (FCPFQ): The fund seeks to offer investors stable principal and high current income. To pursue its objective, the fund invests in stable value products, including GICs (Guaranteed Investment Contract), synthetic GICs and money market instruments.
T. Rowe Price Capital Appreciation (PRWCX): The investment seeks long-term capital appreciation. The fund normally invests primarily in the common stocks of established U.S. companies believed to have above-average potential for capital growth. It invest at least 50% of assess in common stocks and the remaining assets in other securities, including convertible securities, corporate and government debt, foreign securities, futures, and options.
13
Vanguard Target Retirement 2005 (VTOVX): The investment seeks to provide growth of capital and current income. The fund primarily invests in other Vanguard mutual funds according to an asset allocation designed for investors planning to retire within a few years of 2005. It allocates approximately 62% of assets to bonds and money market instruments, and 38% to stocks.
Vanguard Target Retirement 2015 (VTXVX): The investment seeks to provide growth of capital and current income. The fund primarily invests in other Vanguard mutual funds according to an asset allocation designed for investors planning to retire within a few years of 2015. It typically allocates approximately 61% of assets to stocks, and 39% to bonds.
Vanguard Target Retirement 2025 (VTTVX): The investment seeks to provide growth of capital and current income. The fund primarily invests in other Vanguard mutual funds according to an asset allocation strategy designed for investors planning to retire within a few years of 2025. It allocates approximately 76% of assets to stocks and 24% to bonds.
Vanguard Target Retirement 2035 (VTTHX): The investment seeks to provide growth of capital and current income. The fund primarily invests in other Vanguard mutual funds according to an asset allocation strategy designed for investors planning to retire within a few years of 2035. It allocates approximately 90% of assets to stocks and 10% to bonds.
Vanguard Target Retirement 2045 (VTIVX): The investment seeks to provide growth of capital and current income. The fund primarily invests in other Vanguard mutual funds according to an asset allocation strategy designed for investors planning to retire within a few years of 2045. It allocates approximately 90% of assets to stocks and 10% to bonds.
For a discussion of material risks you should consider, see the Risk Factors section of the attached prospectus and the section of the Prospectus Supplement called Notice of Your Rights Concerning Employer Securities (see below).
Withdrawals and Distributions from the Plan
Applicable federal law requires the Plan to impose substantial restrictions on the right of a Plan participant to withdraw amounts held for his or her benefit under the Plan prior to the participants termination of employment with the Association. A substantial federal tax penalty may also be imposed on withdrawals made prior to the participants attainment of age 59 1 / 2 .
Rollover Account . You may make a withdrawal from your rollover account without any restrictions and pursuant to the procedures established in the Plan.
Distribution upon Termination of Employment . You may make withdrawals from your account at any time after you terminate employment. In the event your vested account balance as of the date of your termination is $5,000 or less, your interest in the Plan will be cashed out and payment sent to you or, at your election, rolled over to another qualified retirement plan or to an individual retirement account. If your vested interest is more than $1,000 but not more
14
than $5,000 and you fail to elect a lump sum distribution or a rollover, your vested interest will be rolled over to an individual retirement account selected by the Association. If your total vested account exceeds $5,000 and you terminate employment upon retirement on or after normal retirement age or because you suffer a disability, your vested interest will be distributed as soon as administratively feasible. If you terminate employment for reasons other than retirement or disability, your vested interest will be distributed as soon as administratively feasible after the next regularly scheduled Plan valuation date following your termination of employment. The normal form of distribution of benefits is a joint and survivor annuity. Optional forms of payments are installment payments, period payments as requested by the participant or any other form of annuity which can be purchased by an insurance company.
Disability . In the event you become disabled, your benefits will become 100% vested and immediately distributable.
Death . In the event of your death, your benefits will become 100% vested. Any death benefit payable to a non-spouse beneficiary will be distributed in a lump sum. Death benefits payable to your spouse will be distributed as monthly payments until his or her death unless, with your spouses written consent, you waive the monthly payments, in which case your spouse will receive a lump sum.
The Trustee and Custodian . The trustee of the Plan is the Association.
Plan Administrator . Pursuant to the terms of the Plan, the Plan is administered by the Plan administrator. The address of the Plan administrator is Oconee Federal Savings and Loan Association, Attention: Curtis Evatt, Executive Vice President and Chief Financial Officer, 201 North Second Street, Seneca, South Carolina 29678, telephone number: (864) 882-2765. The Plan administrator is responsible for the administration of the Plan, interpretation of the provisions of the Plan, prescribing procedures for filing applications for benefits, preparation and distribution of information explaining the Plan, maintenance of Plan records, books of account and all other data necessary for the proper administration of the Plan, preparation and filing of all returns and reports relating to the Plan which are required to be filed with the U.S. Department of Labor and the Internal Revenue Service, and for all disclosures required to be made to participants, beneficiaries and others under Sections 104 and 105 of ERISA.
Reports to Plan Participants . The Plan administrator will furnish you a statement at least quarterly showing the balance in your account as of the end of that period, the amount of contributions allocated to your account for that period, and any adjustments to your account to reflect earnings or losses (if any).
It is the intention of the Association to continue the Plan indefinitely. Nevertheless, the Association may terminate the Plan at any time. If the Plan is terminated in whole or in part, then regardless of other provisions in the Plan, you will have a fully vested interest in your
15
accounts. The Association reserves the right to make any amendment or amendments to the Plan which do not cause any part of the trust to be used for, or diverted to, any purpose other than the exclusive benefit of participants or their beneficiaries; provided, however, that the Association may make any amendment it determines necessary or desirable, with or without retroactive effect, to comply with ERISA.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another plan, or the transfer of the Plan assets to another plan, the Plan requires that you would, if either the Plan or the other plan terminates, receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit you would have been entitled to receive immediately
Federal Income Tax Consequences
The following is a brief summary of the material federal income tax aspects of the Plan. You should not rely on this summary as a complete or definitive description of the material federal income tax consequences relating to the Plan. Statutory provisions change, as do their interpretations, and their application may vary in individual circumstances. Finally, the consequences under applicable state and local income tax laws may not be the same as under the federal income tax laws. Please consult your tax advisor with respect to any distribution from the Plan and transactions involving the Plan.
As a tax-qualified retirement plan, the Code affords the Plan special tax treatment, including:
(1) the sponsoring employer is allowed an immediate tax deduction for the amount contributed to the Plan each year;
(2) participants pay no current income tax on amounts contributed by the employer on their behalf; and
(3) earnings of the Plan are tax-deferred, thereby permitting the tax-free accumulation of income and gains on investments.
The Association will administer the Plan to comply with the requirements of the Code as of the applicable effective date of any change in the law.
Lump-Sum Distribution . A distribution from the Plan to a participant or the beneficiary of a participant will qualify as a lump-sum distribution if it is made within one taxable year, on account of the participants death, disability or separation from service, or after the participant attains age 59 1 / 2 , and consists of the balance credited to participants under the Plan and all other profit sharing plans (and in some cases all other stock bonus plans), if any, maintained by the Association. The portion of any lump-sum distribution required to be included in your taxable income for federal income tax purposes consists of the entire amount of the lump-sum
16
distribution, less the amount of after-tax contributions, if any, you have made to this Plan and any other profit sharing plans maintained by the Association, which is included in the distribution.
Oconee Federal Financial Corp. Common Stock Included in Lump-Sum Distribution . If a lump-sum distribution includes Oconee Federal Financial Corp. common stock, the distribution generally will be taxed in the manner described above, except that the total taxable amount may be reduced by the amount of any net unrealized appreciation with respect to Oconee Federal Financial Corp. common stock, that is, the excess of the value of Oconee Federal Financial Corp. common stock at the time of the distribution over its cost or other basis of the securities to the trust. The tax basis of Oconee Federal Financial Corp. common stock, for purposes of computing gain or loss on its subsequent sale, equals the value of Oconee Federal Financial Corp. common stock at the time of distribution, less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of Oconee Federal Financial Corp. common stock, to the extent of the amount of net unrealized appreciation at the time of distribution, will constitute long-term capital gain, regardless of the holding period of Oconee Federal Financial Corp. common stock. Any gain on a subsequent sale or other taxable disposition of Oconee Federal Financial Corp. common stock, in excess of the amount of net unrealized appreciation at the time of distribution, will be considered long-term capital gain. The recipient of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of the distribution, to the extent allowed by regulations to be issued by the Internal Revenue Service.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or to an IRA . You may roll over virtually all distributions from the Plan to another qualified plan or to an individual retirement account (IRA) in accordance with the terms of the other plan or account.
Notice of Your Rights Concerning Employer Securities
There has been an important change in Federal law that provides specific rights concerning investments in employer securities, such as Oconee Federal Financial Corp. common stock. Because you may in the future have investments in Oconee Federal Financial Corp. Stock Fund under the Plan, you should take the time to read the following information carefully.
Your Rights Concerning Employer Securities . The Plan must allow you to elect to move any portion of your account that is invested in the Oconee Federal Financial Corp. Stock Fund from that investment into other investment alternatives under the Plan. You may contact the Plan Administrator shown above for specific information regarding this new right, including how to make this election. In deciding whether to exercise this right, you will want to give careful consideration to the information below that describes the importance of diversification. All of the investment options under the Plan are available to you if you decide to diversify out of the Oconee Federal Financial Corp. Stock Fund.
The Importance of Diversifying Your Retirement Savings . To help achieve long-term retirement security, you should give careful consideration to the benefits of a well-balanced and diversified investment portfolio. Spreading your assets among different types of investments can
17
help you achieve a favorable rate of return, while minimizing your overall risk of losing money. This is because market or other economic conditions that cause one category of assets, or one particular security, to perform very well often cause another asset category, or another particular security, to perform poorly. If you invest more than 20% of your retirement savings in any one company or industry, your savings may not be properly diversified. Although diversification is not a guarantee against loss, it is an effective strategy to help you manage investment risk.
In deciding how to invest your retirement savings, you should take into account all of your assets, including any retirement savings outside of the Plan. No single approach is right for everyone because, among other factors, individuals have different financial goals, different time horizons for meeting their goals, and different tolerance for risk. Therefore, you should carefully consider the rights described here and how these rights affect the amount of money that you invest in Oconee Federal Financial Corp. common stock through the Plan.
It is also important to periodically review your investment portfolio, your investment objectives, and the investment options under the Plan to help ensure that your retirement savings will meet your retirement goals.
Additional ERISA Considerations
As noted above, the Plan is subject to certain provisions of ERISA, including special provisions relating to control over the Plans assets by participants and beneficiaries. The Plans feature that allows you to direct the investment of your account balances is intended to satisfy the requirements of Section 404(c) of ERISA relating to control over plan assets by a participant or beneficiary. The effect of this is two-fold. First, you will not be deemed a fiduciary because of your exercise of investment discretion. Second, no person who otherwise is a fiduciary, such as the Association, the Plan Administrator, or the Plans trustee is liable under the fiduciary responsibility provision of ERISA for any loss which results from your exercise of control over the assets in your Plan account.
Because you will be entitled to invest all or a portion of your account balance in the Plan in Oconee Federal Financial Corp. common stock, the regulations under Section 404(c) of ERISA require that the Plan establish procedures that ensure the confidentiality of your decision to purchase, hold, or sell employer securities, except to the extent that disclosure of such information is necessary to comply with federal or state laws not preempted by ERISA. These regulations also require that your exercise of voting and similar rights with respect to the common stock be conducted in a way that ensures the confidentiality of your exercise of these rights.
Securities and Exchange Commission Reporting and Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934, as amended, imposes reporting and liability requirements on officers, directors, and persons beneficially owning more than 10% of public companies such as Oconee Federal Financial Corp. Section 16(a) of the Securities
18
Exchange Act of 1934 requires the filing of reports of beneficial ownership. Within 10 days of becoming an officer, director or person beneficially owning more than 10% of the shares of Oconee Federal Financial Corp., a Form 3 reporting initial beneficial ownership must be filed with the Securities and Exchange Commission. Changes in beneficial ownership, such as purchases, sales and gifts generally must be reported periodically, either on a Form 4 within two business days after the change occurs, or annually on a Form 5 within 45 days after the close of Oconee Federal Financial Corp.s fiscal year. Discretionary transactions in and beneficial ownership of the common stock through the Oconee Federal Financial Corp. Stock Fund of the Plan by officers, directors and persons beneficially owning more than 10% of the common stock of Oconee Federal Financial Corp. generally must be reported to the Securities and Exchange Commission by such individuals.
In addition to the reporting requirements described above, Section 16(b) of the Securities Exchange Act of 1934, as amended, provides for the recovery by Oconee Federal Financial Corp. of profits realized by an officer, director or any person beneficially owning more than 10% of Oconee Federal Financial Corp.s common stock resulting from non-exempt purchases and sales of Oconee Federal Financial Corp. common stock within any six-month period.
The Securities and Exchange Commission has adopted rules that provide exemptions from the profit recovery provisions of Section 16(b) for all transactions in employer securities within an employee benefit plan, provided certain requirements are met. These requirements generally involve restrictions upon the timing of elections to acquire or dispose of employer securities for the accounts of Section 16(b) persons.
Except for distributions of common stock due to death, disability, retirement, termination of employment or under a qualified domestic relations order, persons affected by Section 16(b) are required to hold shares of common stock distributed from the Plan for six months following such distribution and are prohibited from directing additional purchases within the Oconee Federal Financial Corp. Stock Fund for six months after receiving such a distribution.
Financial Information Regarding Plan Assets
Financial information representing the assets available for plan benefits at December 31, 2009, is available upon written request to the Plan Administrator at the address shown above.
The validity of the issuance of the common stock has been passed upon by Luse Gorman Pomerenk & Schick, A Professional Corporation, Washington, D.C., which firm acted as special counsel to Oconee Federal Financial Corp. in connection with Oconee Federal Financial Corp.s stock offering.
19
OCONEE FEDERAL FINANCIAL CORP.
Proposed Holding Company for Oconee Federal Savings and Loan Association
Up to 1,821,600 Shares of Common Stock
Oconee Federal Financial Corp. is offering on a best efforts basis up to 1,821,600 shares of its common stock for sale at $10.00 per share in connection with the reorganization of Oconee Federal Savings and Loan Association into the mutual holding company form of ownership. The shares being offered represent 33% of the shares of common stock of Oconee Federal Financial Corp. that will be outstanding following the offering. After the offering, 65% of our outstanding common stock will be owned by Oconee Federal, MHC, our federally chartered mutual holding company. In addition, Oconee Federal Savings and Loan Association intends to cause Oconee Federal Financial Corp. to issue, on behalf of Oconee Federal Savings and Loan Association, 2% of the shares of common stock that will be outstanding following the offering to a charitable foundation that Oconee Federal Savings and Loan Association will establish. The percentage of our outstanding shares to be owned by public stockholders, by Oconee Federal, MHC and by the charitable foundation will not be affected by the number of shares we sell in the offering. We must sell a minimum of 1,346,400 shares in order to complete the offering and we will terminate the offering if we do not sell the minimum number of shares. We may sell up to 2,094,840 shares because of regulatory considerations or changes in market or economic conditions without resoliciting subscribers.
Following the completion of the reorganization, we expect that the common stock of Oconee Federal Financial Corp. will be listed on The Nasdaq Capital Market. An active market, however, may not develop in our common stock.
Depositors who had accounts at Oconee Federal Savings and Loan Association with aggregate balances of at least $50 on June 30, 2009 will have first priority to purchase shares of common stock of Oconee Federal Financial Corp. The offering is scheduled to terminate at 4:00 p.m., Eastern Time on [Offering expiration date]. We may extend the termination date without notice to you, until [Extended offering expiration date], or such later date as the Office of Thrift Supervision may approve, which may not be beyond [extended closing date].
The minimum purchase is 25 shares of common stock. The maximum purchase that an individual may make through a single deposit account is 25,000 shares, and no person by himself, or with an associate or group of persons acting in concert may purchase more than 50,000 shares. Once submitted, orders are irrevocable unless the offering is terminated or extended beyond [Extended offering expiration date]. If the offering is extended beyond [Extended offering expiration date], subscribers will have the right to modify or rescind their purchase orders. Funds received prior to the completion of the offering will be held in a segregated account at Oconee Federal Savings and Loan Association or, at our discretion, at another federally insured depository institution. Whether the offering is completed or terminated, subscription funds will bear interest at our passbook savings rate, which is currently 0.50% per annum. If the offering is terminated, subscribers will have their funds returned promptly, with interest.
Mutual Securities, Inc. will use its best efforts to assist us in selling our common stock, but is not obligated to purchase any of the common stock that is being offered for sale. In addition, officers and directors may participate in the solicitation of offers to purchase common stock in reliance upon Rule 3a4-1 under the Securities Exchange Act of 1934, as amended. Subscribers will not pay any commissions to purchase shares of common stock in the offering.
This investment involves a degree of risk, including the possible loss of principal.
Please read the Risk Factors beginning on
OFFERING SUMMARY
Price: $10.00 per share
Minimum | Maximum | Adjusted Maximum | |||||||
Number of shares |
1,346,400 | 1,821,600 | 2,094,840 | ||||||
Gross offering proceeds |
$ | 13,464,000 | $ | 18,216,000 | $ | 20,948,400 | |||
Estimated offering expenses, excluding selling agent fees and expenses |
$ | 771,000 | $ | 771,000 | $ | 771,000 | |||
Estimated selling agent fees and expenses (1) |
$ | 233,000 | $ | 296,000 | $ | 332,000 | |||
Estimated net proceeds. |
$ | 12,460,000 | $ | 17,149,000 | $ | 19,945,000 | |||
Estimated net proceeds per share. |
$ | 9.25 | $ | 9.41 | $ | 9.47 |
(1) | See The Reorganization and the Offering Plan of Distribution and Marketing Arrangements for a discussion of Mutual Securities Inc.s compensation for this offering. The figures shown assume that all shares are sold in the subscription and the community offering. If shares are sold in the syndicated community offering or there is a re-solicitation, compensation paid to Mutual Securities, Inc. will be higher and net proceeds will be lower. |
These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 2010
MAP PAGE HERE
1 | ||
25 | ||
38 | ||
40 | ||
42 | ||
44 | ||
45 | ||
46 | ||
48 | ||
50 | ||
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT THE CHARITABLE FOUNDATION |
56 | |
57 | ||
70 | ||
71 | ||
71 | ||
97 | ||
99 | ||
111 | ||
125 | ||
148 | ||
153 | ||
DESCRIPTION OF CAPITAL STOCK OF OCONEE FEDERAL FINANCIAL CORP. |
155 | |
157 | ||
157 | ||
158 | ||
158 | ||
159 | ||
160 |
The following summary explains material information regarding the reorganization, the offering of common stock by Oconee Federal Financial Corp. and the business of Oconee Federal Savings and Loan Association. The summary may not contain all the information that is important to you. For additional information, you should read this entire prospectus carefully, including the financial statements and the notes to the financial statements of Oconee Federal Savings and Loan Association. In certain circumstances, where appropriate, the terms we, us and our refer collectively to Oconee Federal, MHC, Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association or to any of those entities, depending on the context.
The Companies
Oconee Federal, MHC
Upon completion of the reorganization and the offering, Oconee Federal, MHC will become the federally chartered mutual holding company parent of Oconee Federal Financial Corp. Oconee Federal, MHC is not currently an operating company and has not engaged in any business to date. Oconee Federal, MHC will be formed upon completion of the reorganization. As a mutual holding company, Oconee Federal, MHC will be a non-stock company that has as its members all holders of the deposit accounts at Oconee Federal Savings and Loan Association, and certain borrowers of Oconee Federal Savings and Loan Association as of October 21, 1991 for so long as such borrowings remain in existence. As a mutual holding company, Oconee Federal, MHC is required by law to own a majority of the voting stock of Oconee Federal Financial Corp. The initial directors of Oconee Federal, MHC will consist of the current directors of Oconee Federal Savings and Loan Association.
Oconee Federal Financial Corp.
Oconee Federal Financial Corp. will be the federal mid-tier stock holding company for Oconee Federal Savings and Loan Association following the reorganization and offering. This offering is made by Oconee Federal Financial Corp. Oconee Federal Financial Corp. is not currently an operating company. Oconee Federal Financial Corp. will be formed upon completion of the reorganization. Oconee Federal Financial Corp. will be chartered under federal law and will own 100% of the common stock of Oconee Federal Savings and Loan Association. Our executive office will be located at 201 E. North Second Street, Seneca, South Carolina 29678, and our telephone number will be (864) 882-2765.
Oconee Federal Savings and Loan Association
Oconee Federal Savings and Loan Association is a federally chartered savings and loan association headquartered in Seneca, South Carolina. Oconee Federal Savings and Loan Association was originally chartered by the State of South Carolina in 1924 as Seneca Building and Loan Association. In 1958, we changed our name to Oconee Savings and Loan Association and in 1991 we converted to our federal charter under the name Oconee Federal Savings and Loan Association.
1
We conduct our business from our main office, our executive office annex and three branch offices. All of our offices are located in Oconee County, South Carolina. Our primary market area consists of Oconee County and the nearby communities and townships in adjacent counties in South Carolina. The telephone number at our main office is (864) 882-2765. Our website address is www.oconeefederal.com . Information on our website should not be considered a part of this prospectus.
At June 30, 2010, we had total assets of $333.5 million, total deposits of $272.6 million and total equity of $59.7 million. We recorded net income of $2.6 million for the year ended June 30, 2010.
Our principal business activity is the origination of one- to four-family residential mortgage loans and, to a much lesser extent, non-residential mortgage loans, construction and land loans, and other loans. We offer a variety of deposit accounts, including checking, money market savings and certificates of deposit, and emphasize personal and efficient service for our customers.
Our Reorganization into a Mutual Holding Company and the Offering
We do not have stockholders in our current mutual form of ownership. Our depositors and certain borrowers as of October 21, 1991 currently have the right to vote on certain matters such as the election of directors and the proposed mutual holding company reorganization. The reorganization is a series of transactions by which we will convert our corporate structure from our current status as a mutual savings and loan association to the mutual holding company form of ownership. The reorganization will be conducted pursuant to a plan of reorganization and stock issuance plan, which we refer to as the plan of reorganization. Following the reorganization, Oconee Federal Savings and Loan Association will become a federal stock savings and loan association subsidiary of Oconee Federal Financial Corp. Oconee Federal Financial Corp. will be a majority-owned subsidiary of Oconee Federal, MHC. After the reorganization, our depositors will become members of Oconee Federal, MHC, and will continue to have the same voting rights in Oconee Federal, MHC as they have in Oconee Federal Savings and Loan Association prior to the reorganization.
We are offering between 1,346,400 and 1,821,600 shares of Oconee Federal Financial Corp. common stock based on our independent appraisal. The purchase price will be $10.00 per share. All investors will pay the same price per share in the offering. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual holding company reorganizations and offerings. We may increase the amount of stock to be sold up to 2,094,840 shares without any further notice to you. In addition, Oconee Federal Savings and Loan Association intends to (a) cause Oconee Federal Financial Corp. to issue, on behalf of Oconee Federal Savings and Loan Association, a number of shares of common stock equal to 2% of the outstanding shares, which will be up to 110,400 shares at the maximum of the offering range, to Oconee Federal Charitable Foundation, a charitable foundation that Oconee Federal Savings and Loan Association will establish in connection with the reorganization, and (b) contribute to the charitable foundation an amount of cash such that the total contribution of cash and shares of common stock will equal $2.5 million, which will be $1,396,000 at the maximum of the offering range and $1,684,000 at the minimum of the offering range.
2
The primary reasons for our decision to reorganize into a mutual holding company and conduct the offering are to establish an organizational structure that will enable us to:
|
compete more effectively in the financial services marketplace; |
|
offer our depositors, employees, management and directors an equity ownership interest in Oconee Federal Savings and Loan Association and thereby obtain an economic interest in its future success, which we expect may enhance our connection with our customers; |
|
although we currently have capital well in excess of all applicable regulatory requirements, increase our capital to support future growth and profitability; |
|
form a charitable foundation to benefit our local community and fund the foundation in part with shares of our common stock; and |
|
increase our flexibility to structure and finance expansion of our operations, including the potential acquisition of other financial institutions. |
The reorganization and the capital raised in the offering are expected to provide us with additional capital to support new loans and higher lending limits, support the growth of our banking franchise, provide an additional cushion against unforeseen risks and expand our asset base. The reorganization and offering also will allow us to establish and fund with stock and cash our charitable foundation as well as stock benefit plans for management and employees that will permit us to attract and retain qualified personnel.
Unlike a standard conversion transaction in which all of the common stock of the holding company of the converting savings and loan association is sold to the public, only a minority of the stock is sold to the public in a mutual holding company reorganization. A majority of the outstanding common stock must be held by the mutual holding company. Consequently, the shares that we are permitted to sell in the offering and issue to the charitable foundation represent a minority of our outstanding shares. As a result, a mutual holding company offering raises less than half the capital that would be raised in a standard conversion offering. Based on these restrictions and an evaluation of our capital needs, our board of directors has decided to offer 33% of our outstanding shares of common stock for sale in the offering; 65% of our shares will be retained by Oconee Federal, MHC and 2% of our shares will be issued to Oconee Federal Charitable Foundation on behalf of Oconee Federal Savings and Loan Association. Our board of directors has determined that offering 33% of our outstanding shares of common stock for sale in the offering will enable management to more effectively invest the capital raised in the offering. See Possible Conversion of Oconee Federal, MHC to Stock Form.
3
The following chart shows our corporate structure following the reorganization and offering:
Business Strategy
Our current community-oriented business strategy consists of the following:
|
continuing to focus on residential lending; |
|
maintaining a modest portfolio of non-residential mortgage loans, primarily loans to churches; |
|
managing our interest rate risk while maintaining or enhancing to the extent practicable our net interest margin; |
|
relying on our community orientation and high quality service to maintain and build a loyal local customer base, and to maintain our status as an independent community-based financial institution; and |
|
adhering to conservative underwriting guidelines to maintain strong asset quality. |
A full description of our business strategy can be found under Managements Discussion and Analysis of Financial Condition and Results of Operations of Oconee Federal Savings and Loan Association Business Strategy and a description of our products and services can be found under Business of Oconee Federal Savings and Loan Association.
Terms of the Offering
We are offering between 1,346,400 and 1,821,600 shares of common stock of Oconee Federal Financial Corp. to qualified depositors, our tax-qualified employee benefit plans and to the public to the extent shares remain available. The amount of capital we are raising in the offering is based on an appraisal of the pro forma market value of Oconee Federal Financial Corp. We may increase the maximum number of shares that we sell in the offering by up to 15%, to 2,094,840 shares, as a result of regulatory considerations, strong demand for the shares of common stock in the offering, or positive changes in financial markets in general and with
4
respect to financial institution stocks in particular. Subscription priorities have been established for the allocation of common stock to the extent the subscription offering is oversubscribed. See The Reorganization and Offering Offering of Common Stock Subscription Rights for a description of allocation procedures in the event of an oversubscription.
Unless the pro forma market value of Oconee Federal Financial Corp. decreases below $40,800,000 or increases above $63,480,000, or the offering is extended beyond [Extended offering expiration date], you will not have the opportunity to change or cancel your stock order. The offering price of the shares of common stock is $10.00 per share. All investors will pay the same $10.00 purchase price per share. Investors will not be charged a commission to purchase shares of common stock. Mutual Securities, Inc., our financial advisor in connection with the reorganization and offering, will use its best efforts to assist us in selling our shares of common stock, but Mutual Securities, Inc. is not obligated to purchase any shares in the offering.
Persons Who May Order Stock in the Offering
We are offering the shares of common stock of Oconee Federal Financial Corp. in a subscription offering in the following descending order of priority:
(1) | depositors who had accounts at Oconee Federal Savings and Loan Association with aggregate balances of at least $50 on June 30, 2009; |
(2) | the tax-qualified employee benefit plans of Oconee Federal Savings and Loan Association (including our employee stock ownership plan); |
(3) | depositors who had accounts at Oconee Federal Savings and Loan Association with aggregate balances of at least $50 on September 30, 2010; and |
(4) | other depositor members of Oconee Federal Savings and Loan Association on [Voting record date] and borrowers from Oconee Federal Savings and Loan Association as of October 21, 1991 who maintain such borrowings as of the close of business on [Voting record date]. |
Any shares of our common stock that remain unsold in the subscription offering will be offered for sale in a community offering that may commence concurrently with, during or promptly after, the subscription offering. The community offering must be completed within 45 days of the end of the subscription offering, unless extended with Office of Thrift Supervision approval. Natural persons residing in Oconee and Pickens Counties, South Carolina will have a purchase preference in any community offering. Shares also may be offered to the general public. We also may offer shares of common stock not purchased in the subscription offering or the community offering through a syndicate of brokers in what is referred to as a syndicated community offering managed by Mutual Securities, Inc. We have the right to accept or reject, in our sole discretion, any orders received in the community offering or the syndicated community offering.
To ensure proper allocation of stock, each eligible account holder must list on his or her stock order form all deposit accounts in which he or she had an ownership interest at June 30, 2009, September 30, 2010 or [Voting record date] as applicable. Failure to list an account or
5
providing incorrect information could result in the loss of all or part of a subscribers stock allocation. We will attempt to identify your ownership in all accounts but cannot guarantee we will identify all accounts in which you had an ownership interest. Our interpretations of the terms and conditions of the stock issuance plan and of the acceptability of the order forms will be final.
How We Determined the Offering Range and the $10.00 Price Per Share
Our decision to offer between 1,346,400 shares and 1,821,600 shares, which is our offering range, is based on an independent appraisal of our pro forma market value prepared by McAuliffe Financial, LLC, a firm experienced in appraisals of financial institutions. McAuliffe Financial, LLC is of the opinion that as of September 3, 2010, the estimated pro forma market value of the common stock of Oconee Federal Financial Corp. on a fully converted equivalent basis (i.e., the pro forma market value of Oconee Federal Savings and Loan Association assuming that 100% of the common stock of Oconee Federal Financial Corp. were sold in a public offering, rather than the 33% that will be sold in the offering) was between $40.8 million and $55.2 million, with a midpoint of $48.0 million.
In preparing its independent appraisal, McAuliffe Financial, LLC considered the information contained in this prospectus, including Oconee Federal Savings and Loan Associations financial statements. McAuliffe Financial, LLC also considered the following factors, among others:
|
our present and projected operating results and financial condition and the economic and demographic conditions in our existing marketing area; |
|
historical, financial and other information relating to Oconee Federal Savings and Loan Association; |
|
a comparative evaluation of the operating and financial statistics of Oconee Federal Savings and Loan Association with those of other similarly situated publicly traded mid-tier mutual holding companies; |
|
the impact of the offering on our consolidated net worth and earnings potential; and |
|
the trading market for securities of comparable institutions and general conditions in the market for such securities. |
6
Set forth below are the names and locations of the peer group companies used by McAuliffe Financial, LLC in its independent appraisal. The peer group is comprised of savings institutions that met the following criteria: (i) high capital ratios and low non-performing assets; (ii) up to $1.0 billion in assets; (iii) conducted an initial public offering of its common stock prior to June 30, 2009; (iv) had positive core earnings for the most recent four quarters; (v) trade on NASDAQ; (vi) have had no public announcement of a second-step mutual holding company conversion; and (vii) operate in rural markets.
Financial
|
Ticker | Exchange |
Primary
Market |
State |
Operating
Strategy |
Total Assets | Offices |
Fiscal
Year |
Conv.
Date |
Stock
Price |
Market
Value |
|||||||||||
($Thousands) | ($) | ($Mil) | ||||||||||||||||||||
Cheviot Financial Corp. (MHC) |
CHEV | NASDAQ | Cheviot | OH | Thrift | 351,046 | 6 | December | 01/06/04 | 8.48 | 75.14 | |||||||||||
Greene County Bancorp, Inc. (MHC) |
GCBC | NASDAQ | Catskill | NY | Thrift | 495,323 | 13 | June | 12/30/98 | 17.25 | 71.09 | |||||||||||
Kentucky First Federal Bancorp (MHC) |
KFFB | NASDAQ | Hazard | KY | Thrift | 238,355 | 4 | June | 03/03/05 | 10.00 | 78.41 | |||||||||||
Lake Shore Bancorp, Inc. (MHC) |
LSBK | NASDAQ | Dunkirk | NY | Thrift | 460,441 | 10 | December | 04/04/06 | 7.95 | 48.21 | |||||||||||
LaPorte Bancorp, Inc. (MHC) |
LPSB | NASDAQ | La Porte | IN | Thrift | 438,455 | 8 | December | 10/15/07 | 7.15 | 32.78 | |||||||||||
MSB Financial Corp. (MHC) |
MSBF | NASDAQ | Millington | NJ | Thrift | 358,743 | 5 | June | 01/05/07 | 7.94 | 41.17 | |||||||||||
Pathfinder Bancorp, Inc. (MHC) |
PBHC | NASDAQ | Oswego | NY | Thrift | 396,332 | 14 | December | 11/16/95 | 6.74 | 16.75 | |||||||||||
Prudential Bancorp, Inc. of Pennsylvania (MHC) |
PBIP | NASDAQ | Philadelphia | PA | Thrift | 538,260 | 7 | September | 03/30/05 | 7.10 | 71.22 | |||||||||||
SI Financial Group, Inc. (MHC) |
SIFI | NASDAQ | Willimantic | CT | Thrift | 889,435 | 21 | December | 10/01/04 | 6.03 | 71.02 | |||||||||||
United Community Bancorp (MHC) |
UCBA | NASDAQ | Lawrenceburg | IN | Thrift | 492,104 | 9 | June | 03/31/06 | 7.25 | 56.88 |
7
McAuliffe Financial, LLC also considered the contribution of cash and shares of common stock to Oconee Federal Charitable Foundation. The contribution of cash and shares of common stock to the charitable foundation will reduce our estimated pro forma value. See Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation.
In reviewing the appraisal prepared by McAuliffe Financial, LLC, our board of directors considered the methodologies and the appropriateness of the assumptions used by McAuliffe Financial, LLC in addition to the factors listed above, and our board of directors believes that these assumptions were reasonable.
Our board of directors determined that the common stock should be sold at $10.00 per share and that 33% of the shares of Oconee Federal Financial Corp. common stock should be offered for sale in the offering and 65% should be held by Oconee Federal, MHC (after giving effect to the issuance of shares of common stock to Oconee Federal Charitable Foundation). Our board of directors determined that offering 33% of our outstanding shares of common stock for sale in the offering allowed for an efficient use of net proceeds for Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association in the near-term. See Possible Conversion of Oconee Federal, MHC to Stock Form. Based on the estimated valuation range and the purchase price, the number of shares of Oconee Federal Financial Corp. common stock that will be outstanding upon completion of the offering will range from 4,080,000 to 5,520,000 shares (subject to adjustment to up to 6,348,000 shares), and the number of shares of Oconee Federal Financial Corp. common stock that will be sold in the offering will range from 1,346,400 shares to 1,821,600 shares (subject to adjustment to up to 2,094,840 shares). The number of shares that Oconee Federal, MHC will own after the offering will range from 2,652,000 shares to 3,588,000 shares (subject to adjustment to up to 4,126,200 shares). The number of shares of common stock that Oconee Federal Charitable Foundation will own after the reorganization will range from 81,600 at the minimum of the offering range to 110,400 at the maximum of the offering range, subject to adjustment to as much as 126,960 at the adjusted maximum of the offering range. The estimated valuation range may be amended with the approval of the Office of Thrift Supervision, if required, or if necessitated by subsequent developments in the financial condition of Oconee Federal Savings and Loan Association or market conditions generally.
The independent appraisal will be updated before we complete the reorganization and offering. If the pro forma market value of the common stock at that time is either below $40.8 million or above $55.2 million, then Oconee Federal Financial Corp., after consulting with the Office of Thrift Supervision, may terminate the plan of reorganization and return all funds promptly with interest; extend or hold a new subscription or community offering, or both; establish a new offering range and commence a resolicitation of subscribers; or take such other actions as may be permitted by the Office of Thrift Supervision. Under such circumstances, we will notify you, and you will have the opportunity to change or cancel your order.
Two measures investors use to analyze an issuers stock are the ratio of the offering price to the issuers book value and the ratio of the offering price to the issuers annual net income. McAuliffe Financial, LLC considered these ratios, among other factors, in preparing its independent appraisal. Book value is the same as total equity, and represents the difference between the issuers assets and liabilities.
8
The following table presents a summary of selected pricing ratios for the peer group companies and for us on a non-fully converted basis. These figures are from the McAuliffe Financial, LLC appraisal report.
Non-Fully Converted
Pro Forma Price to Core Earnings Multiple (1) |
Non-Fully Converted
Pro Forma Price to Book Value Ratio |
||||
Oconee Federal Financial Corp. |
|||||
Maximum |
23.26x | 75.53 | % | ||
Minimum |
16.67x | 59.17 | % | ||
Valuation of peer group companies as of September 3, 2010 |
|||||
Averages |
29.05x | 103.84 | % | ||
Medians |
19.10x | 102.73 | % |
(1) | Based on earnings for the twelve months ended June 30, 2010. |
Compared to the average pricing ratios of the peer group, our pro forma pricing ratios at the maximum of the offering range, indicated a discount of 6.95% on a price-to-core earnings basis and a discount of 19.08% on a price-to-book basis. At the minimum and maximum of the valuation range, a share of common stock is priced at 16.67 times and 23.26 times our core earnings, respectively. The peer group companies, as of September 3, 2010, traded on average at 29.05 times core earnings. The median trading price of the peer group common stock was at 19.10 times core earnings. At the minimum and maximum of the valuation range, the common stock is valued at 59.17% and 75.53%, respectively, of our pro forma book value. This represents a discount 43.02% at the minimum and 27.26% at the maximum of the valuation range to the average trading price-to-book value of peer group companies, which as of September 3, 2010 was 103.84%. As of September 3, 2010, the median trading price of peer group companies was 102.73% of the book value of these companies.
Our board of directors, in reviewing and accepting the valuation, considered the range of price-to-earnings multiples and the range of the price-to-book value ratios at the different amounts of shares to be sold in the offering. Our board of directors also considered the discount to our peer group with respect to the price-to-core earnings and price-to-book value, compared our pro forma book value and core earnings ratios to those of our peer group and noted the relative discount. In this regard, our board of directors noted the discounts applied by McAuliffe Financial, LLC with respect to our market area, the liquidity of our stock, the subscription interest in other recent mutual holding company offerings and the difficulty of marketing financial institutions stocks in todays volatile economic climate. After extensive review, our board of directors concluded that such discounts were appropriate.
The independent appraisal did not consider one valuation approach to be more important than the other. Instead, the independent appraisal concluded that these ranges represented the appropriate balance of the two approaches to valuing Oconee Federal Financial Corp. and the
9
number of shares to be sold, in comparison to the identified peer group institutions. The estimated appraised value and the resulting discounts took into consideration the potential financial impact of the reorganization and offering and the appraisers conclusions regarding Oconee Federal Financial Corp.s financial condition and operation after the offering in comparison to the peer group companies.
The following table presents a summary of selected pricing ratios for the peer group companies, with such ratios adjusted to their fully converted equivalent basis, and the resulting pricing ratios for Oconee Federal Financial Corp. on a fully converted equivalent basis. Compared to the average fully-converted pricing ratios of the peer group, Oconee Federal Financial Corp.s pro forma fully-converted pricing ratios at the maximum of the offering range indicated a discount of 8.10% on a price-to-core earnings basis and a discount of 19.24% on a price-to-book basis.
Fully Converted
Equivalent Pro Forma Price to Core Earnings Multiple |
Fully Converted
Equivalent Pro Forma Price to Book Value Ratio |
||||
Oconee Federal Financial Corp. |
|||||
Maximum |
23.81x | 52.52 | % | ||
Minimum |
16.95x | 44.03 | % | ||
Valuation of peer group companies as of September 3, 2010 |
|||||
Averages |
25.91x | 65.03 | % | ||
Medians |
20.48x | 67.09 | % |
In preparing both the fully converted pricing ratio analysis and the non-fully converted pricing ratio analysis, McAuliffe Financial, LLC assumed offering expenses equal to $856,000 plus 1.5% of the gross proceeds of the offering not related to the sale of stock to our benefit plans and our officers and directors or issued to the charitable foundation, a pre-tax reinvestment rate of 0.39% of the net proceeds of the offering, a tax rate of 38%, purchases by the employee stock ownership plan equal to 3.92% of our outstanding shares (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation) funded with a loan from Oconee Federal Financial Corp. with a 25-year term, purchases by the stock-based incentive plan equal to 1.96% of the shares issued in the offering (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation) with a five-year vesting schedule and option grants under the stock-based incentive plan equal to 4.90% of the shares issued in the offering (including shares issued to Oconee Federal, MHC and the Oconee Federal Charitable Foundation). Shares of common stock purchased by the stock-based incentive plan were assumed at $10.00 per share. The stock options were assumed to be granted with an exercise price of $10.00 per share, vesting over a five-year period and have a term of 10 years.
The pro forma fully converted calculations use the same assumptions as applied to the peer group companies, and also assume the effect of the establishment and funding of our charitable foundation. See Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation for a discussion of the impact of our charitable foundation on our appraised value.
10
The independent appraisal does not indicate market value. Do not assume or expect that Oconee Federal Financial Corp.s valuation as indicated above means that the common stock will trade at or above the $10.00 purchase price after the reorganization and offering.
After-Market Performance Information Provided by Independent Appraiser
The following table presents stock price performance information for all mutual holding company initial public offerings completed between January 2008 and September 3, 2010.
Price Performance from Initial Trading Date | |||||||||||||||||
Transaction |
Closing
Date |
One day
% |
One week
% |
One month
% |
Three
months % |
Through
September 3, 2010 % |
|||||||||||
Cullman Bancorp, Inc. |
10/09/2009 | 1.00 | 1.20 | 0.20 | 3.50 | (4.00 | ) | ||||||||||
Auburn Bancorp, Inc. |
08/18/2008 | 0.00 | (5.00 | ) | (5.00 | ) | (3.00 | ) | (33.50 | ) | |||||||
Malvern Federal Bancorp, Inc. |
05/20/2008 | 9.80 | 10.00 | 10.00 | 2.60 | (25.20 | ) | ||||||||||
William Penn Bancorp, Inc. |
04/16/2008 | 17.50 | 25.00 | 37.50 | 40.00 | 35.00 | |||||||||||
Meridian Interstate Bancorp, Inc. |
01/23/2008 | (4.00 | ) | (5.20 | ) | (4.90 | ) | (0.40 | ) | 10.00 | |||||||
Sound Financial, Inc. (MHC) |
01/09/2008 | (10.00 | ) | (10.00 | ) | (8.50 | ) | (8.40 | ) | (50.00 | ) | ||||||
Average |
2.38 | 2.67 | 4.88 | 5.72 | (11.28 | ) | |||||||||||
Median |
0.50 | (1.90 | ) | (2.35 | ) | 1.10 | (14.60 | ) |
This table is not intended to be indicative of how our stock price may perform. Furthermore, this table presents only short-term price performance with respect to companies that only recently completed their initial public offerings and may not be indicative of the longer-term stock price performance of these companies.
Stock price performance is affected by many factors, including, but not limited to: general market and economic conditions; the interest rate environment; the amount of proceeds a company raises in its offering; and numerous factors relating to the specific company, including the experience and ability of management, historical and anticipated operating results, the nature and quality of the companys assets, and the companys market area. The companies listed in the table above may not be similar to Oconee Federal Financial Corp., the pricing ratios for their stock offerings may be different from the pricing ratios for Oconee Federal Financial Corp. common stock and the market conditions in which these offerings were completed may be different from current market conditions. Any or all of these differences may cause our stock to perform differently from these other companies.
Before you make an investment decision, we urge you to carefully read this entire prospectus, including, but not limited to, the section entitled Risk Factors, beginning on page 25.
You should be aware that, in certain market conditions, stock prices of initial public offerings by thrift institutions have decreased below their initial offering prices. For example, as the above table illustrates, the stocks of 6 companies were trading at or below their initial offering price at September 3, 2010. Our stock may trade below the $10.00 purchase price and
11
our stock may not perform similarly to other recent first-step mutual holding company offerings. See Risk FactorsRisks Related to this OfferingThe Future Price of the Shares of Common Stock May Be Less Than the Purchase Price in the Offering.
Limits on the Amount of Common Stock You May Purchase
The minimum purchase is 25 shares of common stock. Generally, no individual, or individuals through a single account, may purchase more than $250,000 of common stock. If any of the following persons purchase shares of common stock, their purchases when combined with your purchases cannot exceed $500,000 of common stock:
|
your spouse, or relatives of you or your spouse living in your house; |
|
companies, trusts or other entities in which you have an interest or hold a position; or |
|
other persons who may be acting together with you (including, but not limited to, persons who file jointly a Schedule 13G or Schedule 13D Beneficial Ownership Report with the Securities and Exchange Commission). |
We may, in our sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, increase the maximum purchase limitation to 9.9% of the number of shares sold in the offering and issued to our charitable foundation, provided that the total number of shares purchased by persons, their associates and those persons with whom they are acting in concert, to the extent such purchases exceed 5% of the shares sold in the offering and issued to our charitable foundation, shall not exceed, in the aggregate, 10% of the total number of the shares sold in the offering and issued to our charitable foundation.
Subject to Office of Thrift Supervision approval, we may increase or decrease the purchase limitations in the offering at any time. A detailed discussion of the limitations on purchases of common stock by an individual and persons acting together is set forth under the caption The Reorganization and the OfferingOffering of Common StockLimitations on Purchase of Shares.
It is expected that the employee stock ownership plan will purchase 3.92% of our outstanding shares (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation). Subject to the approval of the Office of Thrift Supervision, the employee stock ownership plan may purchase some or all of these shares in the open market following the completion of the offering. Our employee stock ownership plan purchases will range from 159,936 to 216,384 shares of common stock, respectively, at the minimum and maximum of the offering range.
Our Issuance of Shares of Common Stock to the Charitable Foundation
To further our commitment to the communities we serve and may serve in the future, we intend, subject to our members approval, to establish and fund a new charitable foundation as part of the offering. We believe that the creation and funding of the charitable foundation will
12
result in a significant increase in our charitable contributions to organizations in our community. Oconee Federal Savings and Loan Association intends to (a) cause Oconee Federal Financial Corp. to issue, on behalf of Oconee Federal Savings and Loan Association, a number of shares of common stock equal to 2% of the outstanding shares to the charitable foundation, ranging from 81,600 shares at the minimum of the valuation range to 110,400 shares at the maximum of the valuation range, subject to adjustment to up to 126,960 shares at the adjusted maximum of the valuation range, and (b) contribute to the charitable foundation an amount of cash such that the total contribution of cash and shares of common stock will equal $2.5 million. The shares will have a value of $816,000 at the minimum of the valuation range and $1,104,000 at the maximum of the valuation range, subject to adjustment to up to $1,269,000 at the adjusted maximum of the valuation range. The cash contribution will be $1,684,000 at the minimum of the valuation range and $1,396,000 at the maximum of the valuation range, subject to adjustment to up to $1,231,000 at the adjusted maximum of the valuation range. As a result of the issuance of shares to the charitable foundation and the cash contribution, we expect to record an after-tax expense of approximately $1.55 million during the quarter in which the offering is completed.
Under the Internal Revenue Code, an entity is permitted to deduct up to 10% of its taxable income (income before income taxes) in any one year for charitable contributions. Any contribution in excess of the 10% limit may be deducted for federal income tax purposes over the five years following the year in which the charitable contribution was made. Accordingly, a charitable contribution by an entity to a charitable foundation could, if necessary, be deducted for federal income tax purposes over a six-year period. We could be limited if our pretax income falls below historical levels, and after-tax expense would be more in that case. While federal tax law allows the filing of consolidated income tax returns, South Carolina tax law does not. Since Oconee Federal Financial Corp. will have limited operations and limited unconsolidated income following the reorganization, we structured the contribution to the charitable foundation in an attempt to take advantage of the tax deductibility of the charitable contribution for both federal and South Carolina income tax purposes. Specifically, under the deemed purchase method of Section 1032 of the Internal Revenue Code, Oconee Federal Savings and Loan Association will cause Oconee Federal Financial Corp. to issue shares to the charitable foundation on Oconee Federal Savings and Loan Associations behalf, in satisfaction of Oconee Federal Savings and Loan Associations promised contribution to the charitable foundation. Oconee Federal Savings and Loan Association will make the cash portion of the contribution using a portion of the proceeds of the offering.
The new charitable foundation will be governed by a board of directors, initially consisting of Curtis T. Evatt, our Executive Vice President and Chief Financial Officer, Robert N. McLellan, Jr., one of our current non-employee directors and Douglas W. Brune, a civic leader with charitable experience in our community. None of these individuals will receive compensation for their service as a director of the charitable foundation. In addition, some of our employees will serve as executive officers of the charitable foundation. None of these individuals will receive compensation for their service as an executive officer of the charitable foundation.
The new charitable foundation will be dedicated to supporting charitable causes and community development activities in the communities in which we operate or may operate. In addition to traditional community contributions and community reinvestment initiatives, the charitable foundation is expected to emphasize grants or donations to support housing assistance, local education and other types of organizations or civic-minded projects.
13
Issuing shares of common stock to the charitable foundation will:
|
dilute the voting interests of purchasers of shares of our common stock in the offering; and |
|
result in an expense, and a reduction in our earnings during the quarter in which the contribution is made, equal to the full amount of the contribution to the charitable foundation, offset in part by a corresponding tax benefit. |
The establishment and funding of the charitable foundation has been approved by our board of directors, and must be approved by the members of Oconee Federal Savings and Loan Association at the special meeting of members. If members of Oconee Federal Savings and Loan Association do not approve the establishment and funding of the charitable foundation, we will proceed with the reorganization and offering and subscribers for common stock will not be resolicited (unless required by the Office of Thrift Supervision). Without the charitable foundation, McAuliffe Financial, LLC estimates that our pro forma valuation would be greater and, as a result, a greater number of shares or common stock would be issued in the offering. Specifically, the number of outstanding shares of common stock would increase to 1,427,600 shares from 1,346,000 at the minimum of the offering range, to 1,680,000 shares from 1,584,000 shares at the midpoint of the offering range, to 1,932,000 shares from 1,821,600 shares at the maximum of the offering range and to 2,221,800 shares from 2,094,840 shares at the adjusted maximum of the offering range. Without the charitable foundation, the percentage of the outstanding shares to be owned by public stockholders would increase to 35%. The percentage of the outstanding shares to be owned by Oconee Federal, MHC would be unchanged at 65%.
McAuliffe Financial, LLC will update its appraisal of our pro forma market value at the conclusion of the offering. The pro forma market value reflected in that updated appraisal will be based on the facts and circumstances existing at that time, including, among other things, market and economic conditions, as well as whether the charitable foundation is formed and funded with shares of our common stock.
See Risk FactorsThe Contribution of Shares to the Charitable Foundation Will Dilute Your Ownership Interests and Adversely Affect Net Income in 2011, Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation and Oconee Federal Charitable Foundation.
How You May Pay for Your Shares
In the subscription offering and the community offering you may pay for your shares only by:
|
personal check, bank check or money order payable to Oconee Federal Financial Corp. (cash and third party checks will not be accepted); or |
14
|
authorizing us to withdraw money (without any early withdrawal penalty) from your deposit account(s) maintained with Oconee Federal Savings and Loan Association, other than checking accounts or individual retirement accounts (IRAs). |
If you wish to use your Oconee Federal Savings and Loan Association individual retirement account to pay for your shares, please be aware that federal law requires that such funds first be transferred to a self-directed retirement account with a trustee other than Oconee Federal Savings and Loan Association. The transfer of such funds to a new trustee requires considerable additional time, so please contact the Stock Information Center immediately or your order may not be processed in time to purchase common stock in the offering. The Stock Information Center may be reached by calling , Monday through Friday between 9:00 a.m. and 4:00 p.m., Eastern Time. Also, please be aware that Oconee Federal Savings and Loan Association is not permitted to lend funds to anyone for the purpose of purchasing shares of common stock in the offering.
You can subscribe for shares of common stock in the offering by delivering a signed and completed original stock order form, together with full payment, before the expiration date of the subscription offering. You may submit your order form in one of three ways: by mail, using the reply envelope provided; by overnight courier to the address indicated on the order form; or by bringing your stock order form and payment to one of our offices or our stock information center. Once submitted, your order is irrevocable We are not required to accept copies or facsimiles of order forms. Funds received prior to the completion of the offering will be held in a segregated account at Oconee Federal Savings and Loan Association or, in our discretion, at another federally insured depository institution. Subscription funds will bear interest at our passbook savings rate, which is currently 0.50% per annum. If the offering is terminated, we will promptly return your subscription funds with interest.
Withdrawals from certificates of deposit at Oconee Federal Savings and Loan Association for the purpose of purchasing common stock in the offering may be made without incurring an early withdrawal penalty. All funds authorized for withdrawal from deposit accounts with Oconee Federal Savings and Loan Association must be in the deposit accounts at the time the stock order form is received. However, funds will not be withdrawn from the accounts until the offering is completed and will continue to earn interest at the applicable deposit account rate until the completion of the offering. A hold will be placed on those funds when your stock order is received, making the designated funds unavailable to you. After we receive an order, the order cannot be revoked or changed, except with our consent. In addition, we are not required to accept copies or facsimiles of order forms.
You May Not Sell or Transfer Your Subscription Rights
Office of Thrift Supervision regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to state that you are purchasing the shares of common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights. We intend to take legal action, including reporting persons to federal or state regulatory agencies, against anyone who we believe has sold or given away his or her subscription rights. We will not accept your order if
15
we have reason to believe that you have sold or transferred your subscription rights. When completing your stock order and certification form, you should not add the name(s) of persons who do not have subscription rights or who qualify in a lower subscription priority than you do. In addition, the stock order and certification form requires that you list all deposit or loan accounts, giving all names on each account and the account number at the applicable eligibility record date. Your failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation, if there is an oversubscription. Eligible depositors or borrowers who enter into agreements to allow ineligible investors to participate in the subscription offering may be violating federal and state law and may be subject to civil enforcement actions or criminal prosecution.
Deadline for Orders of Common Stock
If you wish to purchase shares of common stock, we must receive your properly completed stock order form, together with payment for the shares, no later than 4:00 p.m., Eastern Time, on [Offering expiration date] unless we extend this deadline. We may extend the [Offering expiration date] expiration date, without notice to you until [Extended offering expiration date]. If the offering is extended beyond [Extended offering expiration date], we will be required to resolicit subscriptions before proceeding with the offering. In such case, you will have the right to confirm, modify or rescind your stock order. If we do not receive a response to any resolicitation from you, your stock order will be rescinded and all funds received will be returned promptly with interest, or withdrawal authorizations will be cancelled. You may submit your stock order form by mail using the return envelope provided, by overnight courier to the indicated address on the stock order form, or by bringing your stock order form and payment to one of our offices or our stock information center. Once submitted, your stock order is irrevocable unless the offering is terminated or extended beyond [Extended offering expiration date].
Once Submitted, Your Purchase Order May Not Be Revoked Unless the Offering is Terminated or Extended Beyond [Extended offering expiration date].
Funds that you use to purchase shares of our common stock in the offering will be held in an interest bearing account until the termination or completion of the offering, including any extension of the expiration date. The Office of Thrift Supervision approved the reorganization on , 2010; however, because completion of the reorganization and offering will be subject to an update of the independent appraisal, among other factors, there may be one or more delays in the completion of the reorganization. Any orders that you submit to purchase shares of our common stock in the offering are irrevocable, and you will not have access to subscription funds unless the offering is terminated, or extended beyond [Extended offering expiration date].
Termination of the Offering
The subscription offering will terminate at 4:00 p.m., Eastern Time, on [Offering expiration date]. We expect that the community offering, if one is conducted, would terminate at the same time. We may extend this expiration date without notice to you until [Extended offering expiration date], or such later date as the Office of Thrift Supervision may approve. If the subscription offering and/or community offerings extend beyond [Extended offering
16
expiration date], we will be required to resolicit subscriptions before proceeding with the offering. In such event, all subscribers will be afforded the opportunity to increase, decrease or cancel their subscription. If you choose not to subscribe for the common stock or do not respond to the resolicitation notice, your funds will be promptly returned to you with interest. All further extensions, in the aggregate, may not last beyond [extended closing date], which is two years after the special meeting of members of Oconee Federal Savings and Loan Association to be held on to vote on the plan of reorganization.
Steps We May Take If We Do Not Receive Orders for the Minimum Number of Shares
If we do not receive orders for at least 1,346,400 shares of common stock, we may take several steps in order to sell the minimum number of shares of common stock in the offering range. Specifically, we may (a) increase the purchase limitations, (b) seek regulatory approval to extend the offering beyond the [Extended offering expiration date] expiration date, and/or (c) reduce the valuation and offering range, provided that any such extension or reduction will require us to resolicit subscriptions received in the offering and provide subscribers with the opportunity to increase, decrease or cancel their subscriptions. If a subscriber determines to cancel his or her subscription or does not respond to the resolicitation notice, his or her subscription funds will be refunded with interest.
Market for the Common Stock
We anticipate that the common stock sold in the offering will be listed and traded on The Nasdaq Capital Market. An active market may not develop in our common stock.
Cash Dividends
We currently intend to declare and pay a quarterly cash dividend on the common stock equal to $0.10 per share following our board of directors review of our financial condition and results of operations for the first full or partial quarter following the completion of the offering. This dividend represents a 4.0% annual yield assuming a share price of $10.00. The dividend rate and the continued payment of dividends will depend upon our board of directors consideration of a number of factors, including the amount of net proceeds retained by us in the offering, investment opportunities available to us, capital requirements, our financial condition and results of operations, the Office of Thrift Supervisions and Federal Reserve Boards policies regarding dividend waivers by mutual holding companies, and, to a lesser extent, statutory and regulatory limitations affecting dividends and dividend waivers by mutual holding companies, tax considerations, and general economic conditions. There can be no assurance that our quarterly cash dividend will not be reduced or eliminated in future periods. See Our Dividend Policy for more information regarding our dividend policy.
How We Intend to Use the Proceeds from the Offering
Assuming we sell 1,821,600 shares of common stock in the offering, and we have net proceeds of $17.15 million, we intend to distribute the net proceeds as follows:
|
$8.57 million (50.0% of the net proceeds) will be contributed to Oconee Federal Savings and Loan Association; |
17
|
$6.36 million (37.1% of the net proceeds) will be retained by us after we make a loan of $2.16 million to our employee stock ownership plan to fund its purchase of an amount of the common stock equal to up to 3.92% of our outstanding shares (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation); and |
|
as a part of our formation of a mutual holding company, $50,000 (0.29% of the net proceeds) will be contributed to Oconee Federal, MHC. |
We may use the net proceeds of the offering to invest in securities, to finance the possible acquisition of other financial institutions or financial service businesses, to pay dividends or for other general corporate purposes, including repurchasing shares of our common stock. Oconee Federal Savings and Loan Association intends to partially fund Oconee Federal Charitable Foundation with a cash contribution of $1,684,000, $1,540,000 or $1,396,000, respectively, at the minimum, midpoint and maximum of the offering range, and may use the proceeds it receives to make loans, to purchase securities, to expand its banking franchise internally or through acquisitions, and for general corporate purposes. See How We Intend to Use the Proceeds from the Offering. Neither Oconee Federal Savings and Loan Association nor Oconee Federal Financial Corp. has any plans or agreements for any specific acquisition transactions at this time.
Our Officers, Directors and Employees Will Receive Additional Benefits and Compensation After the Reorganization and Offering
We intend to establish an employee stock ownership plan and implement a stock-based incentive plan that will provide for grants of stock options and restricted stock.
Employee Stock Ownership Plan . The board of directors of Oconee Federal Savings and Loan Association has adopted an employee stock ownership plan, which will award shares of our common stock to eligible employees primarily based on their compensation. Our board of directors will, at the completion of the offering, ratify the loan to the employee stock ownership plan and the issuance of the common stock to the employee stock ownership plan. It is expected that our employee stock ownership plan will purchase an amount of shares equal to 3.92% of our outstanding shares (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation). In recognition of the possible expenses of the employee stock ownership plan, we adopted the Oconee Savings and Loan Association 401(k) Profit Sharing Plan, which supersedes and is expected to have a lower overall cost than the Oconee Savings and Loan Association Profit Sharing Plan would have had if it remained in force.
Stock-Based Incentive Plan . In addition to shares purchased by the employee stock ownership plan, we intend to adopt a stock-based incentive plan designed to attract and retain qualified personnel in key positions, provide directors, officers and key employees with a proprietary interest in Oconee Federal Financial Corp. as an incentive to contribute to our success and reward key employees for outstanding performance. The number of options granted and restricted shares awarded under the stock-based incentive plan may not exceed 4.90% and 1.96%, respectively, of our total outstanding shares, including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation, provided that if Oconee Federal Savings and
18
Loan Associations tangible capital at the time of adoption of the stock-based incentive plan is less than 10% of its assets then the amount of options and restricted shares may not exceed 1.47% of our outstanding shares. The number of options granted or restricted shares awarded under the stock-based incentive plan, when aggregated with any subsequently adopted stock-based benefit plans (exclusive of any shares held by any employee stock ownership plan), may not exceed 25% of the number of shares of common stock held by persons other than Oconee Federal, MHC. Under applicable regulations, the exercise price of options granted within one year of the completion of the offering must be equal to the then fair market value of the common stock on the date the options are granted.
The stock-based incentive plan will not be established sooner than six months after the offering and would require the approval of a majority of the outstanding shares of Oconee Federal Financial Corp. eligible to be cast, as well as by a majority of the votes cast by stockholders other than Oconee Federal, MHC.
Under applicable regulations, unless we obtain a waiver from the Office of Thrift Supervision (or we adopt our stock-based incentive plan more than one year following the completion of the offering) the following additional restrictions would apply to our stock-based incentive plan:
|
non-employee directors in the aggregate may not receive more than 30% of the options and restricted awards authorized under the plan; |
|
no non-employee director may receive more than 5% of the options and restricted awards authorized under the plan; |
|
no officer or employee may receive more than 25% of the options and restricted awards authorized under the plan; |
|
options and restricted awards may not vest more rapidly than 20% per year, beginning on the first anniversary of stockholder approval of the plan; and |
|
accelerated vesting is not permitted except for death, disability or upon a change in control of Oconee Federal Savings and Loan Association or Oconee Federal Financial Corp. |
These restrictions do not apply to plans adopted after one year following the completion of the offering.
We have not yet determined whether we will present the stock-based incentive plan for stockholder approval within one year following the completion of the offering or whether we will present this plan for stockholder approval more than one year after the completion of the offering. In the event the Office of Thrift Supervision changes its regulations or policies regarding stock-based incentive plans, including any regulations or policies restricting the size of awards and vesting of benefits as described above, the restrictions described above may not be applicable.
19
We may obtain the shares needed for our stock-based benefit plans by issuing additional shares of common stock from authorized but unissued shares or through stock repurchases.
Incentive Plan Expenses. The implementation of an employee stock ownership plan and a stock-based incentive plan will increase our future compensation costs, thereby reducing our earnings. For instance, we will be required to recognize an expense each year under our employee stock ownership plan equal to the fair market value of the shares committed to be released for that year to the participating employees. Similarly, if we issue restricted stock awards under a stock-based incentive plan, we would be required to recognize an expense based on the fair market value of the shares on the grant date as they vest. Finally, if we issue stock options, we would be required to recognize expense based on the estimated value of such options on the grant date, as they vest. See Risk FactorsRisks Related to this OfferingOur Stock Benefit Plans Will Increase Our Costs, Which Will Reduce Our Income and ManagementFuture Stock Benefit Plans.
Benefits to Management. The following table summarizes the stock benefits that our officers, directors and employees may receive following the reorganization and offering, at the maximum of the offering range and assuming that our employee stock ownership plan purchases 3.92% of our outstanding shares (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation) and that we implement a stock-based incentive plan granting options to purchase 4.90% of the total shares of common stock of Oconee Federal Financial Corp. issued in the offering (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation) and awarding restricted shares of common stock equal to 1.96% of the total shares of common stock of Oconee Federal Financial Corp. issued in the offering (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation).
Plan |
Individuals Eligible to Receive Awards |
% of Outstanding
Shares |
Value of Benefits
Based on Maximum of Offering Range |
||||||
Employee stock ownership plan |
All employees | 3.92 | % | $ | 2,163,840 | ||||
Stock awards |
Directors, officers and employees | 1.96 | % | 1,081,920 | |||||
Stock options |
Directors, officers and employees | 4.90 | % | 300,233 | (1) | ||||
Total |
$ | 3,545,993 | |||||||
(1) |
The fair value of stock options has been estimated at $1.11 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; dividend yield of 4.0%; expected option life of 7 years; risk free interest rate of 2.47%; and a volatility rate of 21.3% based on an index of publicly traded mutual holding company institutions. |
The value of the restricted shares of common stock issued under the stock-based incentive plan will be based on the fair market value of Oconee Federal Financial Corp.s common stock at the time those restricted shares are awarded, which, subject to stockholder approval, cannot occur until at least six months after the offering. The following table presents the total value of all restricted shares to be available for award and issuance under the stock-based incentive plan, assuming the restricted shares for the plan are purchased or issued in a range of market prices from $8.00 per share to $14.00 per share. The value of restricted shares
20
to be granted under the stock-based incentive plan ranges from $639,744 to $1,741,891, depending on the number of restricted shares awarded and the assumed market price on the date the restricted shares are granted.
Share Price |
79,968 Shares
Awarded at Minimum of Offering Range |
94,080 Shares
Awarded at Midpoint of Offering Range |
108,192 Shares
Awarded at Maximum of Offering Range |
124,421 Shares
Awarded at Adjusted Maximum of Offering Range |
|||||||||
$ | 8.00 | $ | 639,744 | $ | 752,640 | $ | 865,536 | $ | 995,366 | ||||
$ | 10.00 | $ | 799,680 | $ | 940,800 | $ | 1,081,920 | $ | 1,244,208 | ||||
$ | 12.00 | $ | 959,616 | $ | 1,128,960 | $ | 1,298,304 | $ | 1,493,050 | ||||
$ | 14.00 | $ | 1,119,552 | $ | 1,317,120 | $ | 1,514,688 | $ | 1,741,891 |
The grant-date fair value of the options granted under the stock-based incentive plan will be based in part on the price of Oconee Federal Financial Corp.s common stock at the time the options are granted, which, subject to stockholder approval, cannot occur until at least six months after the offering. The value will also depend on the various assumptions utilized in estimating the value using the Black-Scholes option pricing model. The following table presents the total estimated value of the options to be available for grant under the stock-based incentive plan, assuming the market price and exercise price for the stock options are equal and the range of market prices for the shares is $8.00 per share to $14.00 per share. The grant-date fair value of the options granted under the stock option plan ranges from $177,929 to $482,131, depending on the number of options granted and the assumed market price on the date the options are granted.
Market/Exercise
|
Grant-Date
Fair Value Per Option |
199,920
Options at Minimum of Offering Range |
235,200
Options at Midpoint of Offering Range |
270,480
Options at Maximum of Offering Range |
311,052
Options at Adjusted Maximum of Offering Range |
|||||||||||
$ | 8.00 | $ | 0.89 | $ | 177,929 | $ | 209,328 | $ | 240,727 | $ | 276,836 | |||||
$ | 10.00 | $ | 1.11 | $ | 221,911 | $ | 261,072 | $ | 300,233 | $ | 345,268 | |||||
$ | 12.00 | $ | 1.33 | $ | 265,894 | $ | 312,816 | $ | 359,738 | $ | 413,699 | |||||
$ | 14.00 | $ | 1.55 | $ | 309,876 | $ | 364,560 | $ | 419,244 | $ | 482,131 |
Restrictions on the Acquisition of Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association
Federal regulations, as well as provisions contained in the charter and bylaws of Oconee Federal Savings and Loan Association and Oconee Federal Financial Corp., restrict the ability of any person, firm or entity to acquire Oconee Federal Financial Corp., Oconee Federal Savings and Loan Association, or their respective capital stock. These restrictions include the requirement that a potential acquirer of common stock obtain the prior approval of the Office of Thrift Supervision before acquiring in excess of 10% of the voting stock of Oconee Federal Financial Corp. or Oconee Federal Savings and Loan Association, as well as a provision in Oconee Federal Financial Corp.s and Oconee Federal Savings and Loan Associations charter that provides that for a period of five years from the closing of the offering, no person, other than
21
Oconee Federal, MHC, may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of equity security of Oconee Federal Financial Corp. or Oconee Federal Savings and Loan Association held by persons other than Oconee Federal, MHC, and that any shares acquired in excess of this limit would not be entitled to be voted and would not be counted as voting stock in connection with any matters submitted to the stockholders for a vote.
Because a majority of the shares of outstanding common stock of Oconee Federal Financial Corp. must be owned by Oconee Federal, MHC, any acquisition of Oconee Federal Financial Corp. must be approved by Oconee Federal, MHC. Furthermore, Oconee Federal, MHC would not be required to pursue or approve a sale of Oconee Federal Financial Corp. even if such sale were favored by a majority of Oconee Federal Financial Corp.s public stockholders. Finally, although a mutual holding company may be acquired by a mutual institution or another mutual holding company in a remutualization transaction, current Office of Thrift Supervision policy makes such transactions unlikely because of the special regulatory scrutiny given to the structure and pricing of such transactions. Specifically, current Office of Thrift Supervision policy views remutualization transactions as raising significant issues concerning disparate treatment of minority stockholders and mutual members of the target entity, and raising issues concerning the effect on the mutual members of the acquiring entity. As a result, a remutualization transaction for Oconee Federal Financial Corp. is unlikely unless the applicant can clearly demonstrate that the Office of Thrift Supervisions concerns are not warranted in the particular case.
Proposed Stock Purchases by Management
Oconee Federal Financial Corp.s directors and executive officers and their associates are expected to purchase, for investment purposes, approximately shares of common stock in the offering, which represents %, %, % and % of the shares sold to the public and %, %, % and % of the total shares to be outstanding after the offering (including shares owned by Oconee Federal, MHC) at the minimum, midpoint, maximum and maximum, as adjusted, of the offering range, respectively. Like all of our eligible depositor and borrower purchasers, our directors and executive officers and their associates have subscription rights based on their deposits or borrowings and, in the event of an oversubscription, their orders will be subject to the allocation provisions set forth in our plan of reorganization. Oconee Federal, MHC and Oconee Federal Financial Corp.s directors and executive officers and their associates are expected to own an aggregate of , , and shares at the minimum, midpoint, maximum and maximum, as adjusted, of the offering range, respectively, or %, %, % and % of the total shares to be outstanding after the offering.
The plan of reorganization provides that the aggregate amount of shares acquired in the offering by our directors and executive officers (and their associates) may not exceed 29% of the outstanding shares held by persons other than Oconee Federal, MHC, except with the approval of the Office of Thrift Supervision. We may seek approval from the Office of Thrift Supervision to allow purchases by our directors and executive officers (and their associates) to exceed the 29% limit to the extent needed to enable us to sell the minimum number of shares of common stock in the offering range.
22
Directors and executive officers will pay the same $10.00 per share price paid by all other persons who purchase shares in the offering. These shares will be counted in determining whether the minimum of the offering range is reached.
Conditions to Completing the Reorganization and Offering
We cannot complete the reorganization and offering unless:
|
we sell at least 1,346,400 shares, the minimum of the offering range; |
|
the members of Oconee Federal Savings and Loan Association vote to approve the reorganization and offering; and |
|
we receive final approval from the Office of Thrift Supervision to complete the reorganization and offering. |
Office of Thrift Supervision approval does not constitute a recommendation or endorsement of an investment in our stock by the Office of Thrift Supervision.
Subject to member approval at the special meeting of members, we intend to establish and fund the charitable foundation in connection with the offering. However, member approval of the charitable foundation is not a condition to the completion of the reorganization and offering.
Possible Conversion of Oconee Federal, MHC to Stock Form
In the future, Oconee Federal, MHC may convert from the mutual to capital stock form, in a transaction commonly referred to as a second-step conversion. In a second-step conversion, members of Oconee Federal, MHC would have subscription rights to purchase common stock of Oconee Federal Financial Corp. or its successor, and the public stockholders of Oconee Federal Financial Corp. would be entitled to exchange their shares of common stock for an equal percentage of shares of the converted Oconee Federal, MHC. This percentage may be adjusted to reflect any assets owned by Oconee Federal, MHC.
Our board of directors has no current plans to undertake a second-step conversion transaction. Any second-step conversion transaction would require the approval of holders of a majority of the outstanding shares of Oconee Federal Financial Corp. common stock (excluding shares held by Oconee Federal, MHC) and the approval of the depositor and borrower members of Oconee Federal, MHC.
Delivery of Prospectus
To ensure that each person receives a prospectus at least 48 hours before the deadline for orders for common stock, we may not mail prospectuses any later than five days prior to such date or hand-deliver prospectuses later than two days prior to that date. Stock order forms may only be delivered if accompanied or preceded by a prospectus. We are not obligated to deliver a prospectus or order form by means other than U.S. mail.
23
We will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights. The subscription offering and all subscription rights will expire at 4:00 p.m., Eastern time, on [Offering expiration date], by Oconee Federal Savings and Loan Association and Oconee Federal Financial Corp., whether or not we have been able to locate each person entitled to subscription rights.
Delivery of Stock Certificates
Certificates representing shares of common stock issued in the offering will be mailed to purchasers at the address provided on the order form as soon as practicable following completion of the offering and receipt of all necessary regulatory approvals. It is possible that, until certificates for the common stock are delivered to purchasers, purchasers might not be able to sell the
How You May Obtain Additional Information Regarding the Reorganization and Offering
If you have any questions regarding the reorganization and offering, please call the Stock Information Center at , Monday through Friday between 9:00 a.m. and 4:00 p.m., Eastern Time.
24
You should consider carefully the following risk factors, in addition to all other information in this prospectus, in evaluating an investment in our common stock.
|
Risks Related to Our Business
The United States Economy Remains Weak and Unemployment Levels Are High. A Prolonged Economic Downturn, Especially One Affecting Our Geographic Market Area, Would Likely Materially Affect Our Business and Financial Results.
Loan portfolio quality has deteriorated at many financial institutions reflecting, in part, the weak U.S. economy and high unemployment. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. The continuing weakness in real estate markets also has resulted in reduced demand for the construction of new housing and increased delinquencies in construction, residential and commercial mortgage loans. This has had an adverse impact on real estate values in our market area and on our activities, and has contributed to an increase in our level of non-performing assets, charge-offs and allowance for loan losses during 2010. If adverse economic conditions persist or become worse, we will likely experience a material adverse impact on our asset quality and operating results. No assurance can be given that these conditions will improve or will not worsen in the near term. If these conditions do not improve or worsen, they could adversely affect our results of operations.
Future Changes in Interest Rates Could Reduce Our Profits
Our ability to make a profit largely depends on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between:
|
the interest income we earn on our interest-earning assets, such as loans and securities; and |
|
the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings. |
The rates we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. Like many savings institutions, our liabilities generally have shorter contractual maturities than our assets. This imbalance can create significant earnings volatility, because market interest rates change over time. In a period of rising interest rates, the interest income earned on our assets may not increase as rapidly as the interest paid on our liabilities. In a period of declining interest rates, the interest income earned on our assets may decrease more rapidly than the interest paid on our liabilities as borrowers prepay mortgage loans, and mortgage-backed securities and are prepaid thereby requiring us to reinvest those cash flows at lower interest rates. See Managements Discussion and Analysis of Financial Condition and Results of Operations of Oconee Federal Savings and Loan Association Management of Market Risk.
25
In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A reduction in interest rates results in increased prepayments of loans and mortgage-backed securities, as borrowers refinance their debt in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans.
We evaluate interest rate sensitivity using an Office of Thrift Supervision model that estimates the change in Oconee Federal Savings and Loan Associations net portfolio value over a range of interest rate scenarios. Net portfolio value is the discounted present value of expected cash flows provided by assets, liabilities and off-balance sheet contracts. At June 30, 2010, in the event of an immediate 200 basis point increase in interest rates, the Office of Thrift Supervision model projects that we would experience a $58.0 million, or 24%, decrease in our net portfolio value. See Managements Discussion and Analysis of Financial Condition and Results of Operations of Oconee Federal Savings and Loan AssociationManagement of Market Risk.
We Have a High Concentration of Loans Secured by Real Estate in Our Market Area
At June 30, 2010, $265.9 million, or 99.6% of our loan portfolio, consisted of loans secured by real estate, virtually all of which is located in Oconee County, South Carolina and communities and townships in adjacent counties in South Carolina. We have relatively few loans outside our market area, and as a result, we have a greater risk of loan defaults and losses in the event of a further economic downturn in our market area as adverse economic changes may have a negative effect on the ability of our borrowers to make timely repayment of their loans. As of June 30, 2010, the unemployment rate in Oconee County, South Carolina was 11.5%, compared to the unemployment rate in the State of South Carolina of 10.7% and the national rate of 9.5%. Further declines in local property values could also adversely affect the value of property used as collateral on our loans. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values to satisfy the debt, our financial condition and results of operations could be adversely affected.
If Our Allowance for Loan Losses Is Not Sufficient to Cover Actual Loan Losses, Our Earnings Could Decrease.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans (including the underlying cash flow and collateral, if any) and our loss and delinquency experience, and we evaluate economic conditions, which may be difficult to assess. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. Our allowance for loan losses was 0.33% of total loans and 22.32% of non-performing loans at June 30, 2010. Material additions to our allowance could materially decrease our net income.
26
In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our financial condition and results of operations.
Higher FDIC Insurance Premiums and Special Assessments Will Adversely Affect Our Earnings.
As part of a plan to restore the reserve ratio of the Deposit Insurance Fund, the Federal Deposit Insurance Corporation, or FDIC, imposed a special assessment equal to five basis points of assets less Tier 1 capital as of June 30, 2009, which was payable on September 30, 2009. We recorded an expense of $127,260 during the quarter ended June 30, 2009, to reflect the special assessment. The FDIC has also increased its maximum quarterly assessment rates and changed the method by which rates are calculated. Quarterly assessments paid by Oconee Federal Savings and Loan Association for the year ended June 30, 2010 equaled $329,734, compared to $166,980 for the year ended June 30, 2009. The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. Any further special assessments or increases to quarterly assessment rates will adversely affect our earnings. Moreover, under the Dodd-Frank Act, the minimum statutory reserve ratio for the FDICs Deposit Insurance Fund will increase from 1.15% to 1.35% of insurable deposits by September 30, 2020, although banks with assets under $10 billion are exempt from any FDIC assessments necessary to increase the Deposit Insurance Fund above 1.15%. There can be no assurance that the FDIC will not impose additional special assessments, or increase the deposit premiums applicable to us, in the future.
The Recently Enacted Financial Reform Legislation May Have an Adverse Effect on the Amount of Dividends We Can Pay, Which Could Adversely Affect the Value of Our Common Stock.
The value of our common stock will be significantly affected by our ability to pay dividends to our public shareholders. Our ability to pay dividends and the amount of such dividends is affected by the ability of Oconee Federal, MHC, our mutual holding company, to waive the receipt of dividends declared by Oconee Federal Financial Corp. If Oconee Federal, MHC is permitted to waive its right to receive dividends on its shares of Oconee Federal Financial Corp., then Oconee Federal Financial Corp. would have more cash available to pay dividends to our public stockholders.
The Dodd-Frank Act provides that, after the regulation of savings and loan holding companies is transferred to the Federal Reserve Board, which is expected to occur in approximately one year, a mutual holding company will be required to give the Federal Reserve Board notice before waiving the receipt of dividends, and sets forth the standards for granting a waiver, including a requirement that waived dividends be considered in determining an appropriate exchange ratio in the event of a conversion of the mutual holding company to stock form. The Federal Reserve Board historically has generally not allowed mutual holding companies to waive the receipt of dividends, and there can be no assurance that the Federal Reserve Board will permit dividend waivers by mutual holding companies such as Oconee Federal, MHC.
27
Government Responses to Economic Conditions May Adversely Affect Our Operations, Financial Condition and Earnings.
The Dodd-Frank Act, among other things, will change the bank regulatory framework, create an independent consumer protection bureau that will assume the consumer protection responsibilities of the various federal banking agencies, and establish more stringent capital standards for banks and bank holding companies. The legislation will also result in new regulations affecting the lending, funding, trading and investment activities of banks and bank holding companies. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and the domestic and international credit markets, and the effect of new legislation and regulatory actions in response to these conditions, may adversely affect our operations by restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These measures are likely to increase our costs of doing business and may have a significant adverse effect on our lending activities, financial performance and operating flexibility. In addition, these risks could affect the performance and value of our loan and investment securities portfolios, which also would negatively affect our financial performance.
Furthermore, the Federal Reserve Board, in an attempt to help the overall economy, has, among other things, kept interest rates low through its targeted federal funds rate and the purchase of mortgage-backed securities. If the Federal Reserve Board increases the federal funds rate, overall interest rates will likely rise, which may negatively affect the housing markets and the U.S. economic recovery. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.
Financial Reform Legislation Recently Enacted by Congress Will, Among Other Things, Eliminate the Office of Thrift Supervision, Tighten Capital Standards, Create a New Consumer Financial Protection Bureau and Result in New Laws and Regulations That Are Expected to Increase Our Costs of Operations.
The Dodd-Frank Act will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act will eliminate our current primary federal regulator, the Office of Thrift Supervision, and require Oconee Federal Savings and Loan Association to be regulated by the Office of the Comptroller of the Currency (the primary federal regulator for national banks). The Dodd-Frank Act also authorizes the Federal Reserve Board to supervise and regulate all savings and loan holding companies, including mutual holding companies, like Oconee Federal Financial Corp. and Oconee Federal, MHC, in addition to bank holding companies that it currently regulates. As a result, the Federal Reserve Boards current regulations applicable to bank holding companies, including holding company capital requirements, will apply to savings and loan holding companies like Oconee Federal Financial Corp. and Oconee Federal, MHC. These capital requirements are substantially similar to the capital requirements currently applicable to Oconee Federal Savings and Loan Association, as described in Supervision and RegulationFederal Banking RegulationCapital
28
Requirements. The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. Bank holding companies with assets of less than $500 million are exempt from these capital requirements. The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.
The Dodd-Frank Act also creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Oconee Federal Savings and Loan Association, including the authority to prohibit unfair, deceptive or abusive acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.
Lastly, the Dodd-Frank Act will increase stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called golden parachute payments, and by authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a companys proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. It is difficult to predict at this time what impact the new legislation and implementing regulations will have on community banks, including the lending and credit practices of such banks. Moreover, many of the provisions of the Dodd-Frank Act will not take effect for at least a year, and the legislation requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years. Although the substance and scope of these regulations cannot be determined at this time, it is expected that the legislation and implementing regulations, particularly those provisions relating to the new Consumer Financial Protection Bureau and mutual holding company dividend waivers, will increase our operating and compliance costs and restrict our ability to pay dividends.
Strong Competition Within Our Market Area May Limit Our Growth and Profitability.
Competition in the banking and financial services industry, and more specifically in the Seneca area, is intense. In our market area and the Seneca area generally, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources
29
and lending limits than we have and offer certain services that we do not or cannot provide. Our profitability depends upon our continued ability to successfully compete in our market area. The greater resources and broader range of deposit and loan products offered by our competition may limit our ability to increase our interest-earning assets and profitability. We expect competition to remain intense in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Competition for deposits and the origination of loans could limit our ability to successfully implement our business plan, and could adversely affect our results of operations in the future. For additional information see Business of Oconee Federal Savings and Loan AssociationCompetition.
Future Changes in the Level of Support that the Government Provides Housing Finance Could Adversely Impact Our Financial Condition and Operating Results.
On August 17, 2010, the Department of the Treasury, Department of Housing and Urban Development and the White House opened the Conference on the Future of Housing Finance, or the Conference, with the stated purpose of determining what role the government should play in the housing market. The Conference acknowledged that the governments involvement in the housing market needs to be reduced from its current position, where the Federal Housing Administration and the government sponsored enterprises collectively guarantee over 90% of all residential mortgages.
Because we focus on residential mortgage lending, we may be adversely affected by any changes that arise, either directly or indirectly, from changes in the governments role in the housing finance system. Such changes include a decreased governmental role in housing finance that might result in reduced demand for housing, which could lower home values in our market area; changes in tax policy, which might make home ownership less attractive as an investment; and changes to the structure of the housing finance system, which might give a competitive advantage to other types of financial institutions.
While it is impossible to predict changes to the housing finance system at this time, and how any such changes might impact us, any change that adversely affects the competitive position of the operations of a traditional thrift will likely also have a material adverse impact on our financial condition and operating results. Any such change may also reduce the value of your shares of common stock.
We Will Need to Implement Additional Finance and Accounting Systems, Procedures and Controls in Order to Satisfy Our New Public Company Reporting Requirements. This Will Increase Our Operating Expenses.
In connection with the offering, we are becoming a public company. The federal securities laws and regulations of the Securities and Exchange Commission require that we file annual, quarterly and current reports and that we maintain effective disclosure controls and procedures and internal control over financial reporting. We expect that the obligations of being a public company, including substantial public reporting obligations, will require significant
30
expenditures and place additional demands on our management team. These obligations will increase our operating expenses and could divert our managements attention from our operations. Compliance with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the Securities and Exchange Commission will require us to certify the adequacy of our internal controls and procedures, which will require us to upgrade our accounting systems, which will increase our operating costs. In addition, such requirements may cause us to hire additional accounting, internal audit and/or compliance personnel.
Our Business Is Continually Subject to Technological Change, and We May Have Fewer Resources Than Our Competitors to Continue to Invest in Technological Improvements.
The banking and financial services industry continually undergoes technological changes, with frequent introductions of new technology-driven products and services. In addition to enhancing customer service, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that provide customer convenience, as well as create additional efficiencies in our operations. Many of our competitors have greater resources to invest in technological improvements than we do. We may not effectively implement new technology-driven products and services or do so as quickly, which could reduce our ability to effectively compete, and could adversely affect earnings.
We Operate in a Highly Regulated Environment and May Be Adversely Affected by Changes in Laws and Regulations.
We are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision, our chartering authority, and by the FDIC, as insurer of deposits. Such regulation and supervision govern the activities in which a financial institution and its holding company may engage and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institutions allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, may have a material impact on our operations. See The Recently Enacted Financial Reform Legislation May Have an Adverse Effect On the Amount of Dividends We Can Pay, which Could Adversely Affect the Value of our Common Stock and Financial Reform Legislation Recently Enacted by Congress Will, Among Other Things, Eliminate the Office of Thrift Supervision, Tighten Capital Standards, Create a New Consumer Financial Protection Bureau and Result in New Laws and Regulations That Are Expected to Increase our Costs of Operations.
We Rely on Our Management Team for the Successful Implementation of Our Business Strategy.
The future success of Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association will be largely due to the efforts of our senior management team consisting of T. Rhett Evatt, President and Chief Executive Officer, and Curtis T. Evatt, Executive Vice
31
President and Chief Financial Officer. Because we are a relatively small community savings and loan association, our senior management team has more responsibility than would be typical at a larger institution with more employees, and we have fewer management-level personnel who are in a position to assume the responsibilities of our senior management team. Accordingly, the loss of services of either of these individuals may have a material adverse effect on our ability to implement our business plan.
Risks Related to this Offering
The Future Price of the Shares of Common Stock May Be Less Than the Purchase Price in the Offering.
If you purchase shares of common stock in the offering, you may not be able to sell them at or above the purchase price in the offering. The purchase price in the offering is determined by an independent, third-party appraisal, pursuant to federal banking regulations and subject to review and approval by the Office of Thrift Supervision. The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. Our aggregate pro forma market value as reflected in the final, approved independent appraisal may exceed the market price of our shares of common stock after the completion of the offering, which may result in our stock trading below the initial offering price of $10.00 per share.
Publicly traded stocks, including stocks of financial institutions, have recently experienced substantial market price volatility. In recent transactions, shares of common stock issued by newly converted savings institutions or mutual holding companies have traded below the price at which the shares were sold in the offerings conducted by those companies. After our shares begin trading, the trading price of our common stock will be determined by the marketplace, and may be influenced by many factors that are not directly related to our operating performance or asset quality, including prevailing interest rates, the overall performance of the economy, investor perceptions of Oconee Federal Financial Corp., the current market conditions for financial institutions generally, investor perception of the health of the financial industry and investor assessment of credit quality conditions, including default and foreclosure rates, and general industry, geopolitical and economic conditions.
There Will be a Limited Trading Market in Our Common Stock, Which Will Hinder Your Ability to Sell Our Common Stock and May Lower the Market Price of the Stock.
Oconee Federal Financial Corp. has never issued stock and, therefore, there is no current trading market for the shares of common stock. Moreover, our public float, which is the total number of our outstanding shares less the shares held by Oconee Federal, MHC, our employee stock ownership plan and our directors and senior officers and is used as a measurement of shares available for trading, will likely be quite limited. We estimate that our public float, as so defined, will range from 1,068,064 shares at the minimum of the offering range to 1,515,616 shares at the maximum of the offering range. The limited public float will likely result in the spread between the bid and ask prices for the stock being significantly wider than that of many other public companies. This wide spread could make it more difficult to sell a large number of shares at one time and could mean a sale of a large number of shares at one time could depress the market price.
32
Although we expect that our common stock will trade on The Nasdaq Capital Market, an active and liquid trading market in shares of our common stock may not develop. Persons purchasing shares may not be able to sell their shares when they desire if a liquid trading market does not develop or sell them at a price equal to or above the initial purchase price of $10.00 per share even if a liquid trading market develops. This limited trading market for our common stock may reduce the market value of the common stock and make it difficult to buy or sell our shares on short notice. For additional information see Market for the Common Stock.
The Capital We Raise in the Offering Will Reduce Our Return on Equity, Which Could Negatively Affect the Trading Price of Our Common Stock.
Net income divided by average equity, known as return on equity, is a ratio many investors use to compare the performance of a financial institution to its peers. For the year ended June 30, 2010, our return on average equity was 4.40%. Following the offering, we expect our consolidated equity to increase from $59.7 million to between $68.9 million at the minimum of the offering range and $75.4 million at the adjusted maximum of the offering range. Based upon our earnings for the year ended June 30, 2010, and these pro forma equity levels, our pro forma return on equity would be 3.53% and 3.12% at the minimum and adjusted maximum of the offering range, respectively. We expect our return on equity to remain lower until we are able to leverage the additional capital we receive from the offering. Although we will be able to increase net interest income using proceeds of the offering, our return on equity will be reduced by the capital raised in the offering, higher expenses from the costs of being a public company, and added expenses associated with our employee stock ownership plan and the stock-based benefit plan we intend to adopt. Until we can increase our net interest income and non-interest income, we expect our return on equity to remain lower, which may reduce the value of your shares of common stock.
The Contribution of Shares to the Charitable Foundation Will Dilute Your Ownership Interests and Adversely Affect Net Income.
Subject to member approval at the special meeting of members, Oconee Federal Savings and Loan Association intends to establish a charitable foundation in connection with the offering. Oconee Federal Savings and Loan Association will make a contribution to the charitable foundation in the form of 2% of the outstanding shares of Oconee Federal Financial Corp. common stock and an amount of cash such that the total contribution of cash and shares of common stock will equal $2.5 million. The aggregate contribution will have an adverse effect on our net income for the quarter and year in which we make the contribution to the charitable foundation. The after-tax expense of the contribution will reduce net income in fiscal year 2011 by approximately $1.55 million. We had net income of $2.6 million for the year ended June 30, 2010. Because Oconee Federal, MHC will hold 65% of our outstanding shares, persons purchasing shares in the offering will have their ownership and voting interests in Oconee Federal Financial Corp. diluted by 5.7% due to the issuance of shares of common stock to the charitable foundation.
33
The Contribution to the Charitable Foundation May Not Be Tax Deductible, Which Could Reduce Our Profits.
We believe that the contribution to Oconee Federal Charitable Foundation will be deductible for federal and state income tax purposes. However, we cannot assure you that the Internal Revenue Service will grant tax-exempt status to the charitable foundation. If the contribution is not deductible, we would not receive any tax benefit from the contribution. The value of the contribution would be $2.5 million in cash and shares of common stock, which would result in after-tax expense of approximately $1.55 million during the year ending June 30, 2011. In the event that the Internal Revenue Service does not grant tax-exempt status to the charitable foundation or the contribution to the charitable foundation is otherwise not tax deductible, we would recognize after-tax expense up to the value of the entire contribution, or $2.5 million.
In addition, even if the contribution is tax deductible, we may not have sufficient profits to be able to use the deduction fully. Under the Internal Revenue Code and South Carolina income tax laws, an entity is permitted to deduct up to 10% of its taxable income (income before income taxes) in any one year for charitable contributions. Any contribution in excess of the 10% limit may be deducted for federal and South Carolina income tax purposes over the five years following the year in which the charitable contribution was made. Accordingly, a charitable contribution by an entity to a charitable foundation could, if necessary, be deducted for federal and South Carolina income tax purposes over a six-year period. Our pre-tax income over this period may not be sufficient to fully use this deduction. While federal tax law allows the filing of consolidated income tax returns, South Carolina tax law does not. Since Oconee Federal Financial Corp. will have limited operations and limited unconsolidated income following the reorganization, we structured the contribution to the charitable foundation in an attempt to take advantage of the tax deductibility of the charitable contribution for both federal and South Carolina income tax purposes. Specifically, under the deemed purchase method of Section 1032 of the Internal Revenue Code, Oconee Federal Savings and Loan Association will cause Oconee Federal Financial Corp. to issue shares to the charitable foundation on Oconee Federal Savings and Loan Associations behalf, in satisfaction of Oconee Federal Savings and Loan Associations promised contribution to the charitable foundation. Oconee Federal Savings and Loan Association will make the cash portion of the contribution to the charitable foundation using a portion of the proceeds of the offering.
Our Stock Benefit Plans Will Increase Our Costs, Which Will Reduce Our Income.
We anticipate that our employee stock ownership plan will purchase an amount of shares of our common stock equal to up to 3.92% of our outstanding shares (including the shares held by Oconee Federal, MHC and Oconee Federal Charitable Foundation) in the offering, provided that, with approval of the OTS, our employee stock ownership plan may purchase some or all of such shares in the open market following the completion of the offering. The cost of acquiring the shares of common stock for the employee stock ownership plan will be between $1.60 million at the minimum of the offering range and $2.49 million at the adjusted maximum of the offering range. We will record annual employee stock ownership plan expenses in an amount equal to the fair value of shares of common stock committed to be released to employees. If shares of common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.
34
We also intend to adopt a stock-based incentive plan after the offering under which plan participants would be awarded restricted shares of our common stock (at no cost to them) and/or options to purchase shares of our common stock. Under Office of Thrift Supervision regulations, we are authorized to grant awards of stock or options under one or more stock-based incentive plans in an amount up to 25% of the number of shares of common stock held by persons other than Oconee Federal, MHC. The number of shares of common stock or options granted under any initial stock-based incentive plan may not exceed 1.96% and 4.90%, respectively, of our total outstanding shares, including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation.
The shares of restricted common stock granted under the stock-based incentive plan will be expensed by us over their vesting period based on the fair market value of the shares on the date they are awarded. If the shares of restricted common stock to be granted under the stock-based incentive plan are repurchased in the open market (rather than issued directly from authorized but unissued shares by Oconee Federal Financial Corp.) and cost the same as the purchase price in the offering, the reduction to stockholders equity due to the plan would be between $800,000 at the minimum of the offering range and $1,244,000 at the adjusted maximum of the offering range. To the extent we repurchase shares of common stock in the open market to fund the grants of restricted shares under the plan, and the price of such shares exceeds the offering price of $10.00 per share, the reduction to stockholders equity would exceed the range described above. Conversely, to the extent the price of such shares is below the offering price of $10.00 per share, the reduction to stockholders equity would be less than the range described above.
We will recognize as an expense in our income statement the grant-date fair value of stock options as such options vest. When we record an expense related to the grant of options using the fair value method, we will incur significant compensation and benefits expense. As discussed in the Managements Discussion and Analysis section of this prospectus, and based on certain assumptions discussed there, we estimate this annual expense would be approximately $62,000 on an after-tax basis, assuming the adjusted maximum number of shares is sold in the offering.
The Implementation of a Stock-Based Incentive Plan May Dilute Your Ownership Interest.
We intend to adopt a stock-based incentive plan following the reorganization and offering. This stock-based incentive plan will be funded through either open market purchases, if permitted, or from the issuance of authorized but unissued shares. Stockholders would experience a reduction in ownership interest totaling 1.8% in the event newly issued shares are used to fund stock options and stock awards in an amount equal to 4.90% and 1.96%, respectively, of the total shares issued in the reorganization and offering (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation).
35
We Have Broad Discretion in Allocating the Proceeds of the Offering, and Our Failure to Effectively Utilize Such Proceeds Could Reduce Our Profits.
Oconee Federal Financial Corp. may retain up to 50% of the net proceeds from the offering and contribute the remainder of the net proceeds of the offering to Oconee Federal Savings and Loan Association. Oconee Federal Financial Corp. will use a portion of the net proceeds to fund the employee stock ownership plan and may use the remaining net proceeds to pay dividends to stockholders, repurchase shares of common stock, purchase investment securities or acquire other financial services companies, although we do not have any specific plans or commitments to do so as of this date. Oconee Federal Savings and Loan Association may use the proceeds it receives to fund new loans, establish or acquire new branches, purchase investment securities, or for general corporate purposes. We have not, however, allocated specific amounts of proceeds for any of these purposes and we will have significant flexibility in determining the amount of net proceeds we apply to different uses and the timing of such applications. Our failure to utilize these funds effectively could reduce our profitability.
Persons Who Purchase Stock in the Offering Will Own a Minority of Oconee Federal Financial Corp.s Common Stock and Will Not Be Able to Exercise Voting Control Over Most Matters Put to a Vote of Stockholders.
Public stockholders will own a minority of the outstanding shares of Oconee Federal Financial Corp.s common stock. As a result, stockholders other than Oconee Federal, MHC will not be able to exercise voting control over most matters put to a vote of stockholders. Oconee Federal, MHC, will own a majority of Oconee Federal Financial Corp.s common stock after the offering and, through its board of directors, will be able to exercise voting control over most matters put to a vote of stockholders. The same directors and officers who manage Oconee Federal Savings and Loan Association will also manage Oconee Federal Financial Corp. and Oconee Federal, MHC. No assurances can be given that our board of directors, officers or Oconee Federal, MHC will not take action that the public stockholders believe to be contrary to their interests. The only matters as to which stockholders other than Oconee Federal, MHC will be able to exercise voting control currently include any proposal to implement a stock-based incentive plan within one year of the offering or a second-step conversion. In addition, Oconee Federal, MHC may exercise its voting control to prevent a sale or merger transaction in which stockholders could receive a premium for their shares.
Our Stock Value May be Negatively Affected by Our Mutual Holding Company Structure and Federal Regulations Restricting Takeovers.
The Mutual Holding Company Structure May Impede Takeovers. Oconee Federal, MHC, as the majority stockholder of Oconee Federal Financial Corp., will be able to control the outcome of virtually all matters presented to stockholders for their approval, including a proposal to acquire Oconee Federal Financial Corp. Accordingly, Oconee Federal, MHC may prevent the sale of control or merger of Oconee Federal Financial Corp. or its subsidiaries even if such a transaction were favored by a majority of the public stockholders of Oconee Federal Financial Corp. The board of directors of Oconee Federal Savings and Loan Association has decided to form a mutual holding company rather than undertake a standard conversion to stock form in part because the mutual holding company structure will allow our board of directors to control
36
the future of Oconee Federal Financial Corp and its subsidiaries. Additionally, while current Office of Thrift Supervision regulations permit a mutual holding company to be acquired by a mutual institution in a remutualization transaction, the Office of Thrift Supervision has issued a policy statement indicating that it views remutualization transactions as raising significant issues concerning disparate treatment of minority stockholders and mutual members of the target entity and raising issues concerning the effect on the mutual members of the acquiring entity. Under certain circumstances, the Office of Thrift Supervision intends to give these issues special scrutiny and reject applications providing for the remutualization of a mutual holding company unless the applicant can clearly demonstrate that the Office of Thrift Supervisions concerns are not warranted in the particular case.
Federal Regulations Restricting Takeovers. For three years following the offering, Office of Thrift Supervision regulations prohibit any person from acquiring or offering to acquire more than 10% of our common stock without the prior written approval of the Office of Thrift Supervision. Moreover, current Office of Thrift Supervision policy prohibits the acquisition of a mutual holding company subsidiary by any person or entity other than a mutual holding company or a mutual institution, and restricts the terms of permissible acquisitions. See Restrictions on the Acquisition of Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association on page 153 for a discussion of applicable Office of Thrift Supervision Regulations regarding acquisitions.
The Corporate Governance Provisions in Our Charter and Bylaws May Prevent or Impede the Holders of a Minority of Our Common Stock from Obtaining Representation on Our Board of Directors and May Also Prevent or Impede a Change in Control.
Provisions in our charter and bylaws may prevent or impede holders of a minority of our common stock from obtaining representation on our board of directors. For example, our board of directors will be divided into three classes with staggered three-year terms. A classified board makes it more difficult for stockholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur. Second, our charter provides that there will not be cumulative voting by stockholders for the election of our directors, which means that Oconee Federal, MHC, as the holder of a majority of the shares eligible to be voted at a meeting of stockholders, may elect all of our directors to be elected at that meeting. Third, our bylaws contain procedures and timetables for a stockholder wanting to make a nomination for the election of directors or a proposal for new business at a meeting of stockholders, the effect of which may be to give our management time to solicit its own proxies in an attempt to defeat any dissident slate of nominations if management thinks it is in the best interests of stockholders generally. Also, we have the ability to issue preferred stock with voting rights to third parties who may be friendly to our board of directors.
In addition, a section in Oconee Federal Financial Corp.s and Oconee Federal Savings and Loan Associations charter provides that for a period of five years from the closing of the offering, no person, other than Oconee Federal, MHC, and, with respect to Oconee Federal Savings and Loan Association, other than Oconee Federal, MHC and Oconee Federal Financial Corp., may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of equity security of Oconee Federal Financial Corp. or Oconee Federal Savings and Loan Association held by persons other than Oconee Federal, MHC, and, with
37
respect to Oconee Federal Savings and Loan Association, other than Oconee Federal Financial Corp., and that any shares acquired in excess of this limit would not be entitled to be voted and would not be counted as voting stock in connection with any matters submitted to the stockholders for a vote.
Our Management Team Has No Experience Managing a Public Company, and Regulatory Compliance May Divert Its Attention from the Day-to-Day Management of Our Business.
Our management team has no experience managing a publicly-traded company or complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition into a public company, which will be subject to significant regulatory oversight and reporting obligations under federal securities laws. In particular, these new obligations will require substantial attention from our management and may divert their attention away from the day-to-day management of our business, which could materially and adversely impact our business operations.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:
|
statements of our goals, intentions and expectations; |
|
statements regarding our business plans and prospects and growth and operating strategies; |
|
statements regarding the asset quality of our loan and investment portfolios; and |
|
estimates of our risks and future costs and benefits. |
These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:
|
our ability to manage our operations under the current adverse economic conditions nationally and in our market area; |
|
adverse changes in the financial industry, securities, credit and national and local real estate markets (including real estate values); |
|
changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments and inflation; |
|
further declines in the yield on our assets resulting from the current low market interest rate environment; |
38
|
risks related to high concentration of loans secured by real estate located in our market area; |
|
significant increases in our loan losses; |
|
potential increases in deposit and premium assessments; |
|
our ability to pay dividends and Oconee Federal, MHCs ability to waive dividends; |
|
legislative or regulatory changes, including increased compliance costs resulting from the recently enacted financial reform legislation, that adversely affect our business and earnings; |
|
changes in the level of government support of housing finance; |
|
significantly increased competition with either depository and nondepository financial institutions; |
|
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the authoritative accounting and auditing bodies; |
|
risks and costs related to becoming a publicly traded company; and |
|
changes in our organization, compensation and benefit plans. |
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. We discuss these and other uncertainties in Risk Factors beginning on page 25.
39
SELECTED FINANCIAL AND OTHER DATA
The summary information presented below at each date or for each of the periods presented is derived in part from the financial statements of Oconee Federal Savings and Loan Association. The financial condition data at June 30, 2010 and 2009, and the operating data for the years ended June 30, 2010 and 2009 were derived from the audited financial statements of Oconee Federal Savings and Loan Association included herein. The information at June 30, 2008, 2007 and 2006 and for the years ended June 30, 2008, 2007 and 2006 was derived in part from audited financial statements that are not included in this prospectus. The following information is only a summary, and should be read in conjunction with our financial statements and notes beginning on page F-1 of this prospectus.
At or For the Year Ended June 30, | ||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||
(In thousands) | ||||||||||||||||
Financial Condition Data: |
||||||||||||||||
Total assets |
$ | 333,546 | $ | 311,584 | $ | 309,504 | $ | 296,872 | $ | 300,109 | ||||||
Investment securities |
12,150 | 8,964 | 22,269 | 36,103 | 56,071 | |||||||||||
Cash and cash equivalents |
49,792 | 50,709 | 38,970 | 19,674 | 6,802 | |||||||||||
Loans receivable, net |
264,328 | 245,969 | 242,203 | 234,855 | 230,941 | |||||||||||
Deposits |
272,606 | 252,750 | 251,776 | 237,091 | 234,700 | |||||||||||
Other borrowings |
| | | | 8,000 | |||||||||||
Total equity (1) |
59,661 | 57,068 | 55,530 | 56,273 | 54,319 | |||||||||||
Operating Data: |
||||||||||||||||
Interest and dividend income |
$ | 15,084 | $ | 15,473 | $ | 15,846 | $ | 15,523 | $ | 14,966 | ||||||
Interest expense |
5,980 | 7,605 | 9,609 | 9,091 | 6,971 | |||||||||||
Net interest income |
9,104 | 7,868 | 6,237 | 6,432 | 7,995 | |||||||||||
Provision for loan losses |
758 | (27 | ) | 100 | 7 | 62 | ||||||||||
Non-interest income |
237 | 90 | 148 | 161 | 330 | |||||||||||
Non-interest expense |
4,583 | 4,240 | 4,021 | 3,890 | 3,829 | |||||||||||
Income before income taxes |
4,000 | 3,745 | 2,264 | 2,696 | 4,434 | |||||||||||
Income taxes |
1,407 | 1,429 | 770 | 928 | 1,561 | |||||||||||
Net income |
$ | 2,593 | $ | 2,316 | $ | 1,494 | $ | 1,768 | $ | 2,873 | ||||||
(1) | Total equity consists of retained earnings and accumulated other comprehensive income for the Associations investment in FHLMC Common Stock, which is classified as available for sale. Accumulated other comprehensive income at June 30, 2007 of $3.0 million had declined to zero at June 30, 2009 and 2010 due to declines in the fair value of these securities. |
40
At or For the Year Ended June 30, | |||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||
Performance Ratios: |
|||||||||||||||
Return on average assets |
0.80 | % | 0.76 | % | 0.50 | % | 0.59 | % | 0.94 | % | |||||
Return on average equity |
4.43 | 4.13 | 2.67 | 3.18 | 5.34 | ||||||||||
Interest rate spread (1) |
2.53 | 2.13 | 1.43 | 1.61 | 2.26 | ||||||||||
Net interest margin (2) |
2.91 | 2.65 | 2.15 | 2.25 | 2.71 | ||||||||||
Noninterest expense to average assets (annualized) |
1.42 | 1.38 | 1.34 | 1.31 | 1.26 | ||||||||||
Efficiency ratio (3) |
48.98 | 53.08 | 62.97 | 59.00 | 46.00 | ||||||||||
Average interest-earning assets to average interest-bearing liabilities |
1.20 | 1.21 | 1.22 | 1.20 | 1.19 | ||||||||||
End of year equity to average assets |
18.45 | 18.64 | 18.49 | 18.90 | 17.81 | ||||||||||
Average equity to average assets |
18.11 | 18.32 | 18.65 | 18.68 | 17.63 | ||||||||||
Capital Ratios: |
|||||||||||||||
Total capital to risk weighted assets |
38.20 | % | 39.20 | % | 39.20 | % | 40.40 | % | 40.60 | % | |||||
Tier I capital to risk weighted assets |
37.64 | 39.02 | 38.90 | 40.20 | 40.40 | ||||||||||
Tier I capital to average assets |
17.86 | 18.32 | 17.80 | 18.20 | 17.40 | ||||||||||
Asset Quality Ratios: |
|||||||||||||||
Allowance for loan losses as a percent of total loans |
0.33 | % | 0.10 | % | 0.13 | % | 0.12 | % | 0.12 | % | |||||
Allowance for loan losses as a percent of nonperformingloans |
22.32 | 13.24 | 25.49 | 43.16 | 40.06 | ||||||||||
Allowance for loan losses as a percentage of nonperforming assets |
18.78 | 12.59 | 24.38 | 43.16 | 40.06 | ||||||||||
Net charge-offs (recoveries) to average outstanding loans during the period |
0.05 | 0.02 | 0.02 | 0.00 | 0.02 | ||||||||||
Non-performing loans as a percent of total loans |
1.49 | 0.79 | 0.52 | 0.28 | 0.30 | ||||||||||
Non-performing assets as a percent of total assets |
1.42 | 0.66 | 0.43 | 0.22 | 0.23 | ||||||||||
Non-performing assets as a percent of loans and real estate owned |
1.77 | 0.83 | 0.55 | 0.28 | 0.30 | ||||||||||
Number of full service branch offices |
4 | 4 | 4 | 4 | 4 |
(1) | Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities. |
(2) | Represents net interest income as a percent of average interest-earning assets. |
(3) | Represents noninterest expense divided by the sum of net interest income and noninterest income, excluding securities impairments and gains or losses on the sale of securities. |
41
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
Although we will not be able to determine the amount of actual net proceeds we will receive from the sale of shares of common stock until the offering is completed, we anticipate that the net proceeds will be between $12.46 million and $17.15 million, or $19.85 million if the offering is increased by 15%, assuming in each case all shares are sold in the subscription offering.
Oconee Federal Financial Corp. intends to distribute the net proceeds from the offering as follows:
1,346,400 Shares at
Minimum of Offering Range |
1,584,000 Shares at
Midpoint of Offering Range |
1,821,600 Shares at
Maximum of Offering Range |
2,094,840 Shares at
Adjusted Maximum of Offering Range |
|||||||||||||||||||||||||
Amount |
Percent
of Net Proceeds |
Amount |
Percent
of Net Proceeds |
Amount |
Percent
of Net Proceeds |
Amount |
Percent
of Net Proceeds |
|||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Offering proceeds |
$ | 13,464 | 100.00 | % (1) | $ | 15,840 | 100.00 | % (1) | $ | 18,216 | 100.00 | % (1) | $ | 20,948 | 100.00 | % (1) | ||||||||||||
Less: offering expenses |
(1,004 | ) | (7.46 | ) (1) | (1,035 | ) | (6.53 | ) (1) | (1,067 | ) | (5.86 | ) (1) | (1,103 | ) | (5.27 | ) (1) | ||||||||||||
Net offering proceeds |
12,460 | 92.54 | % (1) | 14,805 | 93.47 | % (1) | 17,149 | 94.14 | % (1) | 19,846 | 94.73 | % (1) | ||||||||||||||||
Less: |
||||||||||||||||||||||||||||
Amount contributed to Oconee Federal, MHC |
(50 | ) | (0.40 | ) | (50 | ) | (0.34 | ) | (50 | ) | (0.29 | ) | (50 | ) | (0.25 | ) | ||||||||||||
Proceeds contributed to Oconee Federal Savings and Loan Association |
(6,230 | ) | (50.00 | ) | (7,402 | ) | (50.00 | ) | (8,574 | ) | (50.00 | ) | (9,923 | ) | (50.00 | ) | ||||||||||||
Proceeds used for loan to employee stock ownership plan |
(1,599 | ) | (12.83 | ) (2) | (1,882 | ) | (12.71 | ) (2) | (2,164 | ) | (12.62 | ) (2) | (2,488 | ) | (12.54 | ) (2) | ||||||||||||
Proceeds retained by Oconee Federal Financial Corp. |
$ | 4,581 | 36.77 | % | $ | 5,471 | 36.95 | % | $ | 6,361 | 37.09 | % | $ | 7,385 | 37.21 | % | ||||||||||||
(1) | Percent of gross proceeds. |
(2) | The employee stock ownership plan will purchase 3.92% of our outstanding shares (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation). Therefore, the amount of the proceeds used for the loan to the employee stock ownership plan are expected to be $1,599,360, $1,881,600, $2,163,840 and $2,488,416, respectively, at the minimum, midpoint, maximum and adjusted maximum of the offering range. The loan will be repaid principally through Oconee Federal Savings and Loan Associations contribution to the employee stock ownership plan and dividends payable on common stock held by the employee stock ownership plan over the anticipated 25-year term of the loan. The interest rate for the employee stock ownership plan loan is expected to be an adjustable rate equal to the prime rate, as published in The Wall Street Journal , on the closing date of the offering. Thereafter the interest rate will adjust annually and will be the prime rate on the first business day of the calendar year, retroactive to January 1 of such year. |
The net proceeds may vary because total expenses relating to the reorganization and offering may be more or less than our estimates. For example, our expenses would increase if a community or syndicated community offering were used to sell shares of common stock not purchased in the subscription offering. Payments for shares made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of Oconee Federal Savings and Loan Associations deposits. Oconee Federal Savings and Loan Association will receive at least 50% of the net proceeds of the offering.
42
We are undertaking the reorganization and offering at this time in order to increase the capital of Oconee Federal Savings and Loan Association and to establish an organizational structure that will enable us to:
|
compete more effectively in the financial services marketplace; |
|
offer our depositors, employees, management and directors an equity ownership interest in Oconee Federal Savings and Loan Association and thereby obtain an economic interest in its future success, which we expect may enhance our connection with our customers; |
|
although we currently have capital well in excess of all applicable regulatory requirements, increase our capital to support future growth and profitability; |
|
form a charitable foundation to benefit our local community and fund the charitable foundation in part with shares of our common stock; and |
|
increase our flexibility to structure and finance expansion of our operations, including the potential acquisition of other financial institutions. |
For further information, see Managements Discussion and Analysis of Financial Condition and Results of Operations of Oconee Federal Savings and Loan AssociationBusiness Strategy. As a part of our formation of a mutual holding company, $50,000 will be contributed to Oconee Federal, MHC. The offering proceeds will increase our lending capacity by providing us with additional capital to support new loans and higher lending limits, support the growth of our banking franchise, provide an additional cushion against unforeseen risks, expand our asset base, and give us greater flexibility to diversify operations and expand the products and services we offer to our customers. The reorganization and offering also will allow us to establish and fund with stock and cash our charitable foundation as well as stock benefit plans for management and employees that will permit us to attract and retain qualified personnel. We expect that the offering proceeds will be sufficient to sustain our proposed activities for the foreseeable future.
Oconee Federal Financial Corp. may use the proceeds it retains from the offering:
|
to invest in securities; |
|
to make a loan to the employee stock ownership plan; |
|
to allow us to pay cash dividends and repurchase shares of our common stock; |
|
to finance acquisitions of financial institutions, branch offices or other financial services businesses, or to expand through de novo branching, although no specific transactions are being considered at this time and no expansion outside Oconee County is being considered at this time; and |
|
for general corporate purposes. |
43
Under current Office of Thrift Supervision regulations, we may not repurchase shares of our common stock during the first year following the reorganization and offering, except to fund stock-based benefit plans or when extraordinary circumstances exist and with prior regulatory approval. The loan that will be used to fund the purchases by the employee stock ownership plan will accrue interest.
Oconee Federal Savings and Loan Association may use the proceeds it receives from the offering:
|
to increase our lending capacity by providing us with additional capital to support new loans and higher lending limits; |
|
to fund new loans in accordance with our current lending guidelines; |
|
to support new products and services; |
|
to increase our capacity to invest in securities, including mortgage-backed securities; |
|
to expand our retail banking franchise, by establishing or acquiring new branches or by acquiring other financial institutions, although no such transactions are being considered at this time; and |
|
for general corporate purposes. |
Oconee Federal Savings and Loan Association also intends to contribute $1.68 million, $1.54 million or $1.40 million of the proceeds that it receives at the minimum, midpoint and maximum of the offering range, respectively, to Oconee Federal Charitable Foundation. The use of the proceeds may change based on changes in interest rates, equity markets, laws and regulations affecting the financial services industry, our relative position in the financial services industry, the attractiveness of potential acquisitions to expand our operations, and overall market conditions.
OUR POLICY REGARDING DIVIDENDS
We currently intend to declare and pay a quarterly cash dividend on the common stock equal to $0.10 per share following our board of directors review of our financial condition and results of operations for the first full or partial quarter following the completion of the offering. This dividend represents a 4% annual yield assuming a share price of $10.00. The dividend rate and the continued payment of dividends will depend upon our board of directors consideration of a number of factors, including the amount of net proceeds retained by us in the offering, investment opportunities available to us, capital requirements, our financial condition and results of operations, the Office of Thrift Supervisions and Federal Reserve Boards policies regarding dividend waivers by mutual holding companies like Oconee Federal, MHC, and, to a lesser extent, statutory and regulatory limitations, tax considerations and general economic conditions. There can be no assurance that our quarterly cash dividend will not be reduced or eliminated in future periods.
44
Under the rules of the Office of Thrift Supervision, Oconee Federal Savings and Loan Association is not permitted to make a capital distribution if, after making such distribution, it would be undercapitalized. For information concerning additional federal laws and regulations regarding the ability of Oconee Federal Savings and Loan Association to make capital distributions, including the payment of dividends to Oconee Federal Financial Corp., see Federal, State and Local TaxationFederal Taxation and Supervision and RegulationFederal Banking Regulation.
Unlike Oconee Federal Savings and Loan Association, Oconee Federal Financial Corp. is not restricted by Office of Thrift Supervision regulations on the payment of dividends to its shareholders, although the source of dividends will depend on the net proceeds retained by us and earnings thereon, and dividends from Oconee Federal Savings and Loan Association.
When Oconee Federal Financial Corp. pays dividends on its common stock to public shareholders, it will also be required to pay dividends to Oconee Federal, MHC, unless Oconee Federal, MHC elects to, and is permitted to, waive the receipt of dividends. In recent years, the Office of Thrift Supervision has generally approved requests from mutual holding companies to waive the receipt of dividends. However, the Dodd-Frank Act transfers the authority to review and approve mutual holding company dividend waivers to the Federal Reserve Board and sets forth standards for Federal Reserve Board approval (including a requirement that waived dividends will be taken into account in determining an appropriate exchange ratio in a conversion of a mutual holding company to stock form). The Federal Reserve Board historically has generally not allowed mutual holding companies to waive the receipt of dividends, and there can be no assurance that the Federal Reserve Board will approve dividend waiver requests by mutual holding companies such as Oconee Federal, MHC. See The Recently Enacted Financial Reform Legislation May Have An Adverse Effect on Our Ability to Pay Dividends which Would Adversely Affect the Value of Our Common Stock, in the Risk Factors section of this prospectus.
Additionally, we have committed to the Office of Thrift Supervision that, during the three-year period following the completion of the reorganization and offering, we will not take any action to declare an extraordinary dividend to our stockholders that would be treated by such stockholders as a tax-free return of capital for federal income tax purposes, without prior approval of the Office of Thrift Supervision.
Oconee Federal Financial Corp. is a newly formed company and has never issued capital stock, and there is no established market for the common stock. Oconee Federal Savings and Loan Association, as a mutual institution, has never issued capital stock. Oconee Federal Financial Corp. anticipates that its common stock will be listed and traded on The Nasdaq Capital Market.
The development and maintenance of an active trading market depends on us obtaining market makers for our stock and on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. An active and liquid
45
trading market for the common stock may not develop due to the relatively small size of the offering and small number of stockholders expected following the reorganization and offering. Under such circumstances, you could have difficulty selling your shares of common stock on short notice and, therefore, you should not view the shares of common stock as a short-term investment. In addition, our public float, which is the total number of our outstanding shares less the shares held by Oconee Federal, MHC, our employee stock ownership plan and our directors and executive officers, is likely to be limited. Furthermore, we cannot assure you that, if you purchase shares of common stock, you will be able to sell them at or above $10.00 per share. Purchasers of common stock in this offering should have long-term investment intent and should recognize that there will be a limited trading market in the common stock. This may make it difficult to sell the common stock after the offering and may have an adverse impact on the price at which the common stock can be sold.
At June 30, 2010, Oconee Federal Savings and Loan Association exceeded all or its regulatory capital requirements. The following table sets forth our compliance, as of June 30, 2010, with the regulatory capital standards, on a historical and pro forma basis assuming that:
|
the indicated number of shares of common stock were sold as of such date at $10.00 per share; |
|
Oconee Federal Savings and Loan Association received 50% of the net proceeds of the offering and contributed $1.68 million, $1.54 million, $1.40 million and $1.23 million at the minimum, midpoint, maximum and adjusted maximum, respectively, of the offering range to Oconee Federal Charitable Foundation; |
|
an employee stock ownership plan and stock-based incentive plan are implemented on the basis set forth as described in this Prospectus with the related expense amounts reflected in regulatory capital; |
|
a charitable contribution is made by Oconee Federal Savings and Loan Association and Oconee Federal Savings and Loan Association receives all of the tax benefits associated with the contribution; and |
|
the remaining net proceeds are retained by Oconee Federal Financial Corp. |
Based on the above, proceeds received by Oconee Federal Savings and Loan Association have been assumed to equal $4.55 million, $5.86 million, $7.18 million and $8.69 million at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. For a discussion of the applicable capital requirements, see Supervision and RegulationFederal Banking RegulationCapital Requirements.
46
Pro Forma at June 30, 2010, Based Upon the Sale of | ||||||||||||||||||||||||||||||||||
Historical at
June 30, 2010 |
1,346,400 Shares
at Minimum of Offering Range |
1,584,000 Shares
at Midpoint of Offering Range |
1,821,600 Shares
at Maximum of Offering Range |
2,094,840 Shares
at Adjusted Maximum of Offering Range (1) |
||||||||||||||||||||||||||||||
Amount |
Percent
of Assets (2) |
Amount |
Percent
of Assets (2) |
Amount |
Percent
of Assets (2) |
Amount |
Percent
of Assets (2) |
Amount |
Percent
of Assets (2) |
|||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||
GAAP capital (3) |
$ | 59,661 | 17.86 | % | $ | 62,708 | 18.60 | % | $ | 63,601 | 18.82 | % | $ | 64,494 | 19.03 | % | $ | 65,521 | 19.27 | % | ||||||||||||||
Tangible capital: |
||||||||||||||||||||||||||||||||||
Tangible capital |
$ | 59,661 | 17.86 | % | $ | 62,708 | 18.60 | % | $ | 63,601 | 18.82 | % | $ | 64,494 | 19.03 | % | $ | 65,521 | 19.27 | % | ||||||||||||||
Requirement |
5,011 | 1.50 | % | 5,057 | 1.50 | % | 5,070 | 1.50 | % | 5,083 | 1.50 | % | 5,099 | 1.50 | % | |||||||||||||||||||
Excess |
$ | 54,650 | 16.36 | % | $ | 57,651 | 17.10 | % | $ | 58,531 | 17.32 | % | $ | 59,410 | 17.53 | % | $ | 60,422 | 17.77 | % | ||||||||||||||
Core capital: |
||||||||||||||||||||||||||||||||||
Core capital (4) |
$ | 59,661 | 17.86 | % | $ | 62,708 | 18.60 | % | $ | 63,601 | 18.82 | % | $ | 64,494 | 19.06 | % | $ | 65,521 | 19.27 | % | ||||||||||||||
Requirement (5) |
10,022 | 3.00 | % | 10,113 | 3.00 | % | 10,140 | 3.00 | % | 10,167 | 3.00 | % | 10,198 | 3.00 | % | |||||||||||||||||||
Excess |
$ | 49,639 | 14.86 | % | $ | 52,595 | 15.60 | % | $ | 53,461 | 15.82 | % | $ | 54,327 | 16.06 | % | $ | 55,323 | 16.27 | % | ||||||||||||||
Risk-based capital: |
||||||||||||||||||||||||||||||||||
Tier 1 risk-based |
$ | 59,661 | 37.64 | % | $ | 62,708 | 39.56 | % | $ | 63,601 | 40.12 | % | $ | 64,494 | 40.69 | % | $ | 65,521 | 41.33 | % | ||||||||||||||
Requirement |
6,340 | 4.00 | % | 6,465 | 4.00 | % | 6,489 | 4.00 | % | 6,512 | 4.00 | % | 6,539 | 4.00 | % | |||||||||||||||||||
Excess |
$ | 53,322 | 33.64 | % | $ | 56,243 | 35.56 | % | $ | 57,112 | 36.12 | % | $ | 57,982 | 36.69 | % | $ | 59,982 | 37.33 | % | ||||||||||||||
Total risk-based capital: |
||||||||||||||||||||||||||||||||||
Total risk-based capital (4)(6) |
$ | 60,549 | 38.20 | % | $ | 63,596 | 39.35 | % | $ | 64,489 | 39.76 | % | $ | 65,382 | 40.16 | % | $ | 66,409 | 40.62 | % | ||||||||||||||
Requirement |
12,681 | 8.00 | % | 12,930 | 8.00 | % | 12,977 | 8.00 | % | 13,024 | 8.00 | % | 13,078 | 8.00 | % | |||||||||||||||||||
Excess |
$ | 47,868 | 30.20 | % | $ | 50,666 | 31.35 | % | $ | 51,512 | 31.76 | % | $ | 52,358 | 32.16 | % | $ | 53,331 | 32.62 | % | ||||||||||||||
Reconciliation of capital infused into Oconee Federal Savings and Loan Association: |
||||||||||||||||||||||||||||||||||
Net proceeds of offering |
$ | 12,460 | $ | 14,805 | $ | 17,149 | $ | 19,846 | ||||||||||||||||||||||||||
Less proceeds to Oconee Federal Savings and Loan Association |
(6,230 | ) | (7,402 | ) | (8,575 | ) | (9,923 | ) | ||||||||||||||||||||||||||
Less capitalization of Oconee Federal, MHC |
(50 | ) | (50 | ) | (50 | ) | (50 | ) | ||||||||||||||||||||||||||
Less stock acquired by employee stock ownership plan |
(1,599 | ) | (1,882 | ) | (2,164 | ) | (2,488 | ) | ||||||||||||||||||||||||||
Less stock acquired by stock based incentive plan |
(800 | ) | (941 | ) | (1,082 | ) | (1,244 | ) | ||||||||||||||||||||||||||
Less after-tax impact of charitable donation |
(734 | ) | (590 | ) | (446 | ) | (280 | ) | ||||||||||||||||||||||||||
Pro forma increase in GAAP and regulatory capital |
$ | 3,047 | $ | 3,940 | $ | 4,833 | $ | 5,860 |
(1) | As adjusted to give effect to a 15% increase in the number of shares of common stock outstanding after the offering, which could occur due to an increase in the maximum of the independent valuation as a result of regulatory considerations, demand for the shares of common stock, or changes in market conditions or general financial and economic conditions following the commencement of the offering. |
(2) | Tangible capital levels are shown as a percentage of tangible assets. Core capital levels are shown as a percentage of total adjusted assets. Risk-based capital levels are shown as a percentage of risk-weighted assets. |
(3) | Derived from Oconee Federal Savings and Loan Associations audited June 30, 2010 financial statements. |
(4) | Pro forma capital levels assume that Oconee Federal Financial Corp. funds restricted stock awards under the stock-based incentive plan with purchases in the open market of 1.96% of the shares of common stock issued (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation) at a price equal to the price for which the shares of common stock are sold in the offering, and that the employee stock ownership plan purchases 3.92% of our outstanding shares (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation) with funds borrowed from Oconee Federal Financial Corp. Oconee Federal Savings and Loan Associations pro forma GAAP and regulatory capital has been reduced by the amount required to fund both of these plans. See Management for a discussion of the stock-based incentive plan and employee stock ownership plan. |
(5) | The current core capital requirement for savings associations that receive the highest supervisory rating for safety and soundness is 3% of total adjusted assets and 4% to 5% of total adjusted assets for all other savings associations. See Supervision and RegulationFederal Banking RegulationCapital Requirements. |
(6) | Assumes net proceeds are invested in assets that carry a 50% risk-weighting. |
47
The following table presents the historical capitalization of Oconee Federal Savings and Loan Association at June 30, 2010, and the pro forma consolidated capitalization of Oconee Federal Financial Corp. after giving effect to the offering, based upon the sale of the number of shares of common stock indicated in the table and the other assumptions set forth under Pro Forma Data.
Pro Forma Consolidated Capitalization
of
Oconee Federal Financial Corp. Based Upon the Sale for $10.00 Per Share of |
|||||||||||||||||||
Oconee Federal
Savings and Loan Association Historical Capitalization (1) |
1,346,400
Shares at Minimum of Offering Range |
1,584,000
Shares at Midpoint of Offering Range |
1,821,600
Shares at Maximum of Offering Range |
2,094,840
Shares at Adjusted Maximum of Offering Range (2) |
|||||||||||||||
(Dollars in thousands) | |||||||||||||||||||
Deposits (3) |
$ | 272,606 | $ | 272,606 | $ | 272,606 | $ | 272,606 | $ | 272,606 | |||||||||
Borrowings |
| | | | | ||||||||||||||
Total interest-bearing liabilities |
$ | 272,606 | $ | 272,606 | $ | 272,606 | $ | 272,606 | $ | 272,606 | |||||||||
Stockholders equity: |
|||||||||||||||||||
Preferred Stock, $0.01 par value per share, 100,000,000 shares authorized (post offering); none to be issued |
$ | | $ | | $ | | $ | | $ | | |||||||||
Common Stock, $0.01 par value per share: |
|||||||||||||||||||
1,000,000 shares authorized (post offering); shares to be issued as reflected |
| 41 | 48 | 55 | 63 | ||||||||||||||
Additional paid-in capital (4) |
| 13,235 | 15,717 | 18,198 | 21,052 | ||||||||||||||
Retained earnings |
59,661 | 59,661 | 59,661 | 59,661 | 59,661 | ||||||||||||||
Accumulated other comprehensive loss |
| | | | | ||||||||||||||
Less: |
|||||||||||||||||||
After-tax expense of contribution to charitable foundation (5) |
| 1,550 | 1,550 | 1,550 | 1,550 | ||||||||||||||
Assets retained by Oconee Federal, MHC (6) |
| 50 | 50 | 50 | 50 | ||||||||||||||
Common Stock acquired by employee stock ownership plan (7) |
| 1,599 | 1,882 | 2,164 | 2,488 | ||||||||||||||
Common Stock acquired by the stock-based incentive plan (8) |
| 800 | 941 | 1,082 | 1,244 | ||||||||||||||
Total stockholders equity |
$ | 59,661 | $ | 68,938 | $ | 71,003 | $ | 73,068 | $ | 75,443 | |||||||||
Pro forma shares outstanding: |
|||||||||||||||||||
Total shares outstanding |
4,080,000 | 4,800,000 | 5,520,000 | 6,348,000 | |||||||||||||||
Shares issued to Oconee Federal, MHC |
2,652,000 | 3,120,000 | 3,588,000 | 4,126,200 | |||||||||||||||
Shares offered for sale |
1,346,400 | 1,584,000 | 1,821,600 | 2,094,840 | |||||||||||||||
Shares issued to charitable foundation |
81,600 | 96,000 | 110,400 | 126,960 | |||||||||||||||
Total stockholders equity as a percentage of pro forma total assets |
20.11 | % | 20.59 | % | 21.06 | % | 21.60 | % |
(1) | Derived from Oconee Federal Savings and Loan Associations audited June 30, 2010 financial statements. |
(2) | As adjusted to give effect to a 15% increase in the number of shares of common stock outstanding after the offering, which could occur due to an increase in the maximum of the independent valuation as a result of regulatory considerations, demand for the shares of common stock, or changes in market conditions or general financial and economic conditions following the commencement of the offering. |
(3) | Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the offering. Such withdrawals would reduce pro forma deposits by the amount of such withdrawals. |
(4) | The sum of the par value and additional paid-in capital equals the net conversion proceeds plus the market value of the shares issued to the charitable foundation. No effect has been given to the issuance of additional shares of common stock pursuant to stock options under the stock-based incentive plan that Oconee Federal Financial Corp. expects to adopt. The plan of reorganization permits Oconee Federal Financial Corp. to adopt one or more stock benefit plans, subject to stockholder approval, in an amount up to 25% of the number of shares of common stock held by persons other than Oconee Federal, MHC. |
(footnotes continue on following page)
48
(5) | Represents the expense of the contribution to the charitable foundation based on a 38.0% tax rate. The realization of the deferred tax benefit is limited annually to a maximum deduction for charitable foundations equal to 10% of our annual taxable income, subject to our ability to carry forward any unused portion of the deduction for five years following the year in which the contribution is made. |
(6) | Pro forma stockholders equity reflects a $50,000 initial capitalization of Oconee Federal, MHC. |
(7) | Assumes that 3.92% of the shares of common stock outstanding following the reorganization and offering (including shares issued to Oconee Federal Charitable Foundation) will be purchased by the employee stock ownership plan at a price of $10.00 per share and that the funds used to acquire the employee stock ownership plan shares will be borrowed from Oconee Federal Financial Corp. The common stock acquired by the employee stock ownership plan is reflected as a reduction of stockholders equity. Oconee Federal Savings and Loan Association will provide the funds to repay the employee stock ownership plan loan. See ManagementBenefit Plans. |
(8) | Assumes that subsequent to the offering, 1.96% of the shares of common stock issued in the reorganization and offering (including shares of common stock issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation) are purchased by Oconee Federal Financial Corp. for stock awards under the stock-based incentive plan in the open market. The shares of common stock to be purchased by the stock-based incentive plan are reflected as a reduction of stockholders equity. See Pro Forma Data and Management. The plan of reorganization permits Oconee Federal Financial Corp. to adopt one or more stock benefit plans that award stock or stock options, in an aggregate amount up to 25% of the number of shares of common stock held by persons other than Oconee Federal, MHC. The stock-based incentive plan will not be implemented for at least six months after the reorganization and offering and, if required under applicable regulations, until it has been approved by stockholders. |
49
We cannot determine the actual net proceeds from the sale of the common stock until the offering is completed. However, we estimate that net proceeds will be between $12.46 million and $17.15 million, or $19.85 million if the offering range is increased by 15%, based upon the following assumptions:
|
we will sell all shares of common stock in the subscription and community offerings; |
|
expenses of the offering, other than fees to be paid to Mutual Securities, Inc., are estimated to be $856,000; and |
|
Mutual Securities, Inc. will receive a fee equal to 1.5% of the dollar amount of the shares of common stock sold in the subscription and community offerings, excluding shares sold to our directors, officers and employees and their immediate families members living in the same household. |
We calculated the pro forma consolidated net income and stockholders equity of Oconee Federal Financial Corp. for the year ended June 30, 2010 as if the shares of common stock had been sold at the beginning of that period and the net proceeds had been invested at 0.39% for the year ended June 30, 2010, which rates are equal to the one year United States Treasury yield for that period. We believe these rates more accurately reflect a pro forma reinvestment rate than the arithmetic average method, which assumes reinvestment of the net proceeds at a rate equal to the average of the yield on interest-earning assets and the cost of deposits for those periods. We assumed a tax rate of 38% for those periods. This resulted in an annualized after-tax yield of 0.24% for the year ended June 30, 2010.
We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of net income and stockholders equity by the indicated number of shares of common stock. We adjusted these figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts for each period as if the common stock was outstanding at the beginning of the periods, but we did not adjust per share historical or pro forma stockholders equity to reflect the earnings on the estimated net proceeds.
The pro forma data gives effect to the implementation of an employee stock ownership plan that will purchase an amount of shares, at a price of $10.00 per share, equal to 3.92% of our outstanding shares, including shares held by Oconee Federal, MHC and Oconee Federal Charitable Foundation, with a loan from Oconee Federal Financial Corp. The loan will be repaid in substantially equal principal payments over a period of 25 years.
The pro forma tables give effect to the implementation of a stock-based incentive plan. We have assumed that the stock-based incentive plan will acquire an amount of common stock equal to 1.96% of our outstanding shares of common stock, including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation, at the same price for which they were sold in the offering. We assume that shares of common stock are granted under the plan in
50
awards that vest over a five-year period. The plan of reorganization provides that we may grant awards of restricted stock under one or more stock benefit plans in an aggregate amount up to 25% of the number of shares of common stock held by persons other than Oconee Federal, MHC. However, any awards of restricted stock in excess of 1.96% of the outstanding shares, including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation, currently would require prior approval of the Office of Thrift Supervision.
We have assumed that the stock-based incentive plan will grant options to acquire common stock equal to 4.90% of our outstanding shares of common stock (including shares of common stock issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation). In preparing the following tables, we also assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $1.11 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model incorporated an estimated volatility rate of 21.3% for the common stock based on an index of publicly traded mutual holding companies, a dividend yield of 4.0%, an expected option life of 7 years and a risk free interest rate of 2.47%. The plan of reorganization provides that we may grant awards of stock options under one or more stock benefit plans in an amount up to 25% of the number of shares of common stock held by persons other than Oconee Federal, MHC. However, any awards of options in excess of 4.90% of our outstanding shares, including shares issued to Oconee Federal, MHC, would require prior approval of the Office of Thrift Supervision.
As discussed under How We Intend to Use the Proceeds from the Offering, Oconee Federal Financial Corp. intends to retain not more than $7.39 million of the net proceeds of the offering (after funding the loan to our employee stock ownership plan) and to contribute the remaining net proceeds from the offering to Oconee Federal Savings and Loan Association. Oconee Federal Financial Corp. will use a portion of the proceeds it retains for the purpose of making a loan to the employee stock ownership plan and retain the rest of the proceeds for future use. The pro forma tables do not give effect to:
|
withdrawals from deposit accounts for the purpose of purchasing shares of common stock in the offering; |
|
Oconee Federal Financial Corp.s results of operations after the offering; or |
|
changes in the market price of the common stock after the offering. |
51
The following pro forma information may not represent the financial effects of the offering at the date on which the offering actually occurs and you should not use the tables to indicate future results of operations. Pro forma stockholders equity represents the difference between the stated amount of assets and liabilities of Oconee Federal Financial Corp., computed in accordance with U.S. generally accepted accounting principles. We did not increase or decrease stockholders equity to reflect the difference between the carrying value of loans and other assets and their market value. Pro forma stockholders equity is not intended to represent the fair market value of the common stock, and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Pro forma stockholders equity does not give effect to the impact of intangibles and tax bad debt reserves in the event we are liquidated.
52
At or For the Year Ended June 30,
2010
Based Upon the Sale at $10.00 Per Share of |
||||||||||||||||
1,346,400
Shares at Minimum of Offering Range |
1,584,000
Shares at Midpoint of Offering Range |
1,821,600
Shares at Maximum of Offering Range |
2,094,840
Shares at Adjusted Maximum of Offering Range (1) |
|||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||
Gross proceeds |
$ | 13,464 | $ | 15,840 | $ | 18,216 | $ | 20,948 | ||||||||
Market value of shares issued to charitable foundation |
816 | 960 | 1,104 | 1,270 | ||||||||||||
Market value of shares issued to Oconee Federal, MHC |
26,520 | 31,200 | 35,880 | 41,262 | ||||||||||||
Market value of Oconee Federal Financial Corp. (fully converted) |
$ | 40,800 | $ | 48,000 | $ | 55,200 | $ | 63,480 | ||||||||
Gross proceeds |
$ | 13,464 | $ | 15,840 | $ | 18,216 | $ | 20,948 | ||||||||
Expenses |
(1,004 | ) | (1,035 | ) | (1,067 | ) | (1,103 | ) | ||||||||
Estimated net proceeds |
12,460 | 14,805 | 17,149 | 19,846 | ||||||||||||
Oconee Federal, MHC capitalization |
(50 | ) | (50 | ) | (50 | ) | (50 | ) | ||||||||
Cash contribution to charitable foundation |
(1,684 | ) | (1,540 | ) | (1,396 | ) | (1,230 | ) | ||||||||
Common stock acquired by employee stock ownership plan (2) |
(1,599 | ) | (1,882 | ) | (2,164 | ) | (2,488 | ) | ||||||||
Common stock acquired by stock-based incentive plan (3) |
(800 | ) | (941 | ) | (1,082 | ) | (1,244 | ) | ||||||||
Estimated net proceeds after adjustment for charitable foundation, stock benefit plans and capitalization to Oconee Federal, MHC |
$ | 8,327 | $ | 10,392 | $ | 12,457 | $ | 14,832 | ||||||||
For the year ended June 30, 2010 |
||||||||||||||||
Net income: |
||||||||||||||||
Historical (4) |
$ | 2,593 | $ | 2,593 | $ | 2,593 | $ | 2,593 | ||||||||
Pro forma adjustments: |
||||||||||||||||
Income on adjusted net proceeds |
20 | 25 | 30 | 36 | ||||||||||||
Employee stock ownership plan (2) |
(40 | ) | (47 | ) | (54 | ) | (62 | ) | ||||||||
Shares granted under stock-based incentive plan (3) |
(99 | ) | (117 | ) | (134 | ) | (154 | ) | ||||||||
Options granted under stock-based incentive plan (5) |
(40 | ) | (47 | ) | (54 | ) | (62 | ) | ||||||||
Pro forma net income (7) |
$ | 2,434 | $ | 2,407 | $ | 2,381 | $ | 2,350 | ||||||||
Net income per share: |
||||||||||||||||
Historical |
$ | 0.66 | $ | 0.56 | $ | 0.49 | $ | 0.42 | ||||||||
Pro forma adjustments: |
||||||||||||||||
Income on net proceeds |
0.01 | 0.01 | 0.01 | 0.01 | ||||||||||||
Employee stock ownership plan (2) |
(0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||||
Shares granted under stock-based incentive plan (3) |
(0.03 | ) | (0.03 | ) | (0.03 | ) | (0.03 | ) | ||||||||
Options granted under stock-based incentive plan (5) |
(0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||||
Pro forma net income per share (2)(3)(5)(7) |
$ | 0.62 | $ | 0.52 | $ | 0.45 | $ | 0.38 | ||||||||
Offering price to pro forma net income per share |
16.13x | 19.23x | 22.22x | 26.32x | ||||||||||||
Shares considered outstanding in calculating pro forma net income per share |
3,926,461 | 4,619,366 | 5,312,271 | 6,109,112 |
53
At June 30, 2010 |
||||||||||||||||
Stockholders equity: |
||||||||||||||||
Historical (4) |
$ | 59,661 | $ | 59,661 | $ | 59,661 | $ | 59,661 | ||||||||
Estimated net proceeds |
12,460 | 14,805 | 17,149 | 19,8496 | ||||||||||||
Stock contribution to charitable foundation |
816 | 960 | 1,104 | 1,270 | ||||||||||||
Less: Capitalization of Oconee Federal, MHC |
(50 | ) | (50 | ) | (50 | ) | (50 | ) | ||||||||
After-tax effect of contribution to charitable foundation |
(1,550 | ) | (1,550 | ) | (1,550 | ) | (1,550 | ) | ||||||||
Common stock acquired by employee stock ownership plan (2) |
(1,599 | ) | (1,882 | ) | (2,164 | ) | (2,488 | ) | ||||||||
Common stock acquired by stock-based incentive plan (3) |
(800 | ) | (941 | ) | (1,082 | ) | (1,244 | ) | ||||||||
Pro forma stockholders equity (6) |
$ | 68,938 | $ | 71,003 | $ | 73,068 | $ | 75,443 | ||||||||
Stockholders equity per share: |
||||||||||||||||
Historical |
$ | 14.62 | $ | 12.43 | $ | 10.81 | $ | 9.40 | ||||||||
Estimated net proceeds |
3.05 | 3.08 | 3.11 | 3.13 | ||||||||||||
Stock contribution to charitable foundation |
0.20 | 0.20 | 0.20 | 0.20 | ||||||||||||
Less: Capitalization of Oconee Federal, MHC |
(0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||||
After-tax effect of contribution to charitable foundation |
(0.38 | ) | (0.32 | ) | (0.28 | ) | (0.24 | ) | ||||||||
Common stock acquired by employee stock ownership plan (2) |
(0.39 | ) | (0.39 | ) | (0.39 | ) | (0.39 | ) | ||||||||
Common stock acquired by stock-based incentive plan (3) |
(0.20 | ) | (0.20 | ) | (0.20 | ) | (0.20 | ) | ||||||||
Pro forma stockholders equity per share (3)(6) |
$ | 16.90 | $ | 14.79 | $ | 13.24 | $ | 11.88 | ||||||||
Offering price as percentage of pro forma stockholders equity per share |
59.17 | % | 67.61 | % | 75.53 | % | 84.18 | % | ||||||||
Shares considered outstanding in calculating offering price as a percentage of pro forma stockholders equity per share |
4,080,000 | 4,800,000 | 5,520,000 | 6,348,000 | ||||||||||||
Charitable foundation ownership |
2.00 | % | 2.00 | % | 2.00 | % | 2.00 | % | ||||||||
Mutual holding company ownership |
65.00 | % | 65.00 | % | 65.00 | % | 65.00 | % | ||||||||
Public ownership |
33.00 | % | 33.00 | % | 33.00 | % | 33.00 | % |
(1) | As adjusted to give effect to a 15% increase in the number of shares outstanding after the offering which could occur due to an increase in the maximum of the independent valuation as a result of regulatory considerations, demand for the shares, or changes in market conditions or general financial and economic conditions following the commencement of the offering. |
(2) | It is assumed that 3.92% of the shares outstanding following the offering will be purchased by the employee stock ownership plan at a price of $10.00 per share. For purposes of this table, the funds used to acquire such shares are assumed to have been borrowed by the employee stock ownership plan from Oconee Federal Financial Corp. The amount to be borrowed is reflected as a reduction of stockholders equity. Oconee Federal Savings and Loan Association intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the principal and interest requirement of the debt. Oconee Federal Savings and Loan Associations total annual payment of the employee stock ownership plan debt is based upon 25 equal annual installments of principal and interest. The pro forma net earnings information makes the following assumptions: (i) Oconee Federal Savings and Loan Associations contribution to the employee stock ownership plan is equivalent to the debt service requirement for the period presented and was made at the end of the period; (ii) the employee stock ownership plan acquires 159,936, 188,160, 216,384 and 248,841 shares, respectively, at the minimum, midpoint, maximum and adjusted maximum of the offering range; (iii) 6,397, 7,526, 8,655 and 9,954 shares, respectively, at the minimum, midpoint, maximum and adjusted maximum of the offering range, (based on a twenty-five year loan term) were committed to be released during the year ended June 30, 2010, at an average fair value equal to the price for which the shares are sold in the offering in accordance with Statement of Position 93-6; and (iv) only the employee stock ownership plan shares committed to be released were considered outstanding for purposes of the net earnings per share calculations. Employee stock ownership plan participants who elect to receive their benefit distributions in the form of our common stock may require us to purchase the common stock distributed at fair value if, under the Internal Revenue Code, the stock does not meet the standard of being readily tradable on an established securities market. Currently, we are unable to determine whether this standard will be met. If this contingent repurchase obligation does apply, it will reduce stockholders equity by an amount that represents the market value of all common stock held by the employee stock ownership plan and allocated to participants, without regard to whether it is likely that the shares would be distributed or that the recipients of the shares would be likely to exercise their right to require us to purchase the shares. |
(footnotes continue on following page)
54
(3) | Gives effect to the stock-based incentive plan expected to be adopted following the offering. We have assumed that this plan acquires a number of shares of common stock equal to 1.96% of the shares issued in the reorganization and offering (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation) either through open market purchases or from authorized but unissued shares of common stock or treasury stock of Oconee Federal Financial Corp., if any. Funds used by the stock-based incentive plan to purchase the shares will be contributed to the plan by Oconee Federal Financial Corp. In calculating the pro forma effect of the stock-based incentive plan, it is assumed that the shares were acquired by the plan in open market purchases at the beginning of the period presented for a purchase price equal to the price for which the shares are sold in the offering, and that 20% of the amount contributed was an amortized expense (based upon a five-year vesting period) during the year ended June 30, 2010. The actual purchase price of the shares granted under the stock-based incentive plan may not be equal to the subscription price of $10.00 per share. If shares are acquired from the issuance of authorized but unissued shares of common stock of Oconee Federal Financial Corp., there would be a dilutive effect of up to 1.92% on the ownership interest of persons who purchase common stock in the offering. The above table shows pro forma net income per share and pro forma stockholders equity per share, assuming all the shares to fund the stock-based incentive plan are obtained from authorized but unissued shares. |
(4) | Derived from Oconee Federal Savings and Loan Associations audited June 30, 2010 financial statements included elsewhere in this prospectus. |
(5) | Gives effect to the stock-based incentive plan expected to be adopted following the offering. We have assumed that options will be granted to acquire common stock equal to 4.90% of the shares of common stock issued in the reorganization and offering (including shares of common stock issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation). In calculating the pro forma effect of the stock-based incentive plan, it is assumed that the exercise price of the stock options and the trading price of the stock at the date of grant were $10.00 per share, the estimated grant-date fair value pursuant to the application of the Black-Scholes option pricing model was $1.11 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options, and that 25% of the amortization expense (the assumed portion relating to options granted to directors) resulted in a tax benefit using an assumed tax rate of 38.0%. Under the above assumptions, the adoption of the stock-based incentive plan will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. The actual exercise price of the stock options may not be equal to the $10.00 price per share. If a portion of the shares issued to satisfy the exercise of options under the stock-based incentive plan are obtained from the issuance of authorized but unissued shares, our net income per share and stockholders equity per share will decrease. This will also have a dilutive effect of up to 4.67% on the ownership interest of persons who purchase common stock in the offering. |
(6) | The retained earnings of Oconee Federal Savings and Loan Association will continue to be substantially restricted after the offering. See Supervision and RegulationFederal Banking Regulation. |
(7) | Does not give effect to the non-recurring expense that will be recognized during 2011 as a result of the contribution to the charitable foundation. The following table shows the estimated after-tax expense associated with the contribution to the charitable foundation, as well as pro forma net income and pro forma net income per share assuming the contribution to the charitable foundation had been expensed during the year ended June 30, 2010. |
For the Year Ended June 30, 2010 |
1,346,400
Shares at Minimum of Offering Range |
1,584,000
Shares at Midpoint of Offering Range |
1,821,600
Shares at Maximum of Offering Range |
2,094,840
Shares at Adjusted Maximum of Offering Range |
||||||||
(In thousands, except per share amounts) | ||||||||||||
After-tax expense of contribution to charitable foundation |
$ | 1,550 | $ | 1,550 | $ | 1,550 | $ | 1,550 | ||||
Pro forma net income, adjusted for foundation contribution |
813 | 786 | 760 | 729 | ||||||||
Pro forma net income per share |
$ | 0.21 | $ | 0.17 | $ | 0.14 | $ | 0.12 |
The pro forma data assume that we will realize 100.0% of the income tax benefit as a result of the contribution to the charitable foundation based on a 38.0% tax rate. The realization of the tax benefit is limited annually to 10.0% of our annual taxable income. However, for federal and state tax purposes, we can carry forward any unused portion of the deduction for five years following the year in which the contribution is made.
55
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT THE CHARITABLE FOUNDATION
As reflected in the table below, if the charitable foundation is not established and funded as part of the offering, McAuliffe Financial, LLC estimates that our pro forma valuation would be greater and, as a result, a greater number of shares of common stock would be issued in the offering. At the minimum, midpoint, maximum and adjusted maximum of the valuation range, our pro forma valuation is $40.8 million, $48.0 million, $55.2 million and $63.5 million with the charitable foundation, as compared to $41.7 million, $49.0 million, $56.4 million and $64.8 million, respectively, without the charitable foundation. There is no assurance that in the event the charitable foundation were not formed, the appraisal prepared at that time would conclude that our pro forma market value would be the same as that estimated in the table below. Any appraisal prepared at that time would be based on the facts and circumstances existing at that time, including, among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios and financial data and ratios at and for the year ended June 30, 2010 at the minimum, midpoint, maximum and adjusted maximum of the offering range, assuming the offering was completed at the beginning of the period, with and without the charitable foundation.
Minimum of Offering
Range |
Midpoint of Offering
Range |
Maximum of Offering
Range |
Adjusted Maximum of
Offering Range |
|||||||||||||||||||||||||||||
With
Foundation |
Without
Foundation |
With
Foundation |
Without
Foundation |
With
Foundation |
Without
Foundation |
With
Foundation |
Without
Foundation |
|||||||||||||||||||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||
Estimated offering amount |
$ | 13,464 | $ | 13,745 | $ | 15,840 | $ | 16,170 | $ | 18,216 | $ | 18,596 | $ | 20,948 | $ | 21,385 | ||||||||||||||||
Estimated full value |
40,800 | 41,650 | 48,000 | 49,000 | 55,200 | 56,350 | 63,480 | 64,803 | ||||||||||||||||||||||||
Total assets |
341,873 | 343,784 | 343,938 | 345,745 | 346,003 | 347,706 | 348,378 | 349,962 | ||||||||||||||||||||||||
Total liabilities |
273,885 | 273,885 | 273,885 | 273,885 | 273,885 | 273,885 | 273,885 | 273,885 | ||||||||||||||||||||||||
Pro forma stockholders equity |
68,938 | 69,899 | 71,003 | 71,860 | 73,068 | 73,821 | 75,443 | 76,077 | ||||||||||||||||||||||||
Pro forma net income |
2,434 | 2,435 | 2,407 | 2,407 | 2,381 | 2,380 | 2,350 | 2,348 | ||||||||||||||||||||||||
Pro forma stockholders equity per share |
16.90 | 16.78 | 14.79 | 14.67 | 13.24 | 13.10 | 11.88 | 11.74 | ||||||||||||||||||||||||
Pro forma net income per share |
0.62 | 0.61 | 0.52 | 0.51 | 0.45 | 0.44 | 0.38 | 0.38 | ||||||||||||||||||||||||
Pro forma pricing ratios: |
||||||||||||||||||||||||||||||||
Offering price as a percentage of pro forma stockholders equity per share |
59.17 | % | 59.59 | % | 67.61 | % | 68.17 | % | 75.53 | % | 76.34 | % | 84.18 | % | 85.18 | % | ||||||||||||||||
Offering price to pro forma net income per share |
16.13x | 16.39x | 19.23x | 19.61x | 22.22x | 22.73x | 26.32x | 26.32x | ||||||||||||||||||||||||
Offering price to assets |
11.93 | % | 12.12 | % | 13.96 | % | 14.17 | % | 15.95 | % | 16.21 | % | 18.22 | % | 18.52 | % | ||||||||||||||||
Pro forma financial ratios: |
||||||||||||||||||||||||||||||||
Return on assets (annualized) |
0.71 | % | 0.71 | % | 0.70 | % | 0.70 | % | 0.69 | % | 0.68 | % | 0.67 | % | 0.67 | % | ||||||||||||||||
Return on equity (annualized) |
3.53 | 3.48 | 3.39 | 3.35 | 3.25 | 3.22 | 3.11 | 3.09 | ||||||||||||||||||||||||
Equity to assets |
20.16 | 20.33 | 20.64 | 20.78 | 21.12 | 21.23 | 21.66 | 21.74 |
56
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF OCONEE FEDERAL SAVINGS AND LOAN
ASSOCIATION
This section is intended to help potential investors understand the financial performance of Oconee Federal Savings and Loan Association through a discussion of the factors affecting our financial condition at June 30, 2010 and June 30, 2009 and our results of operations for the years ended June 30, 2010 and 2009. This section should be read in conjunction with the financial statements and notes to the financial statements that appear elsewhere in this prospectus.
Overview
We have historically operated as a traditional thrift institution headquartered in Seneca, South Carolina. Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations, in one- to-four family residential mortgage loans and, to a much lesser extent, non-residential mortgage, construction and land and other loans. We also invest in U.S. Government and federal agency securities and mortgage-backed securities. Our revenues are derived principally from the interest on loans and securities and loan fees and service charges. Our primary sources of funds are deposits and principal and interest payments on loans and securities. At June 30, 2010, we had total assets of $333.5 million, total deposits of $272.6 million and total equity of $59.7 million.
A significant majority of our assets consist of long-term, fixed-rate residential mortgage loans, and, to a much lesser extent, investment-quality securities, which we have funded primarily with deposit accounts and the repayment of existing loans. We generally do not rely on outside borrowings. Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities (including U.S. Government and federal agency securities and mortgage-backed securities) and other interest-earning assets, primarily interest-earning deposits at other financial institutions, and the interest paid on our interest-bearing liabilities, consisting primarily of savings and transaction accounts and certificates of deposit. Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of service charges on deposit accounts and miscellaneous other income. Non-interest expense currently consists primarily of compensation and employee benefits, occupancy and equipment expenses, data processing, professional and supervisory fees, office expense and other operating expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Other than our loans for the construction of one- to four-family residential mortgage loans, we do not offer interest only mortgage loans on one- to four-family residential properties (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as Option ARM loans, where the borrower can pay less than the interest owed
57
on his or her loan, resulting in an increased principal balance during the life of the loan. We do not offer subprime loans (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (generally defined as loans having less than full documentation).
Our securities are typically high-quality securities issued or guaranteed by the U.S. government or by Freddie Mac, Fannie Mae or Ginnie Mae, all of which are U.S. government-sponsored enterprises.
Anticipated Increase in Non-Interest Expense Due to Stock Benefit Plans
Following the completion of the reorganization and offering, we anticipate that our non-interest expense will increase as a result of increased compensation expenses associated with the implementation of our employee stock ownership plan and the implementation of a stock-based incentive plan, if that incentive plan is approved by our stockholders. In recognition of the possible expenses of the employee stock ownership plan, we adopted the Oconee Savings and Loan Association 401(k) Profit Sharing Plan, which supersedes and is expected to have a lower overall cost than the Oconee Savings and Loan Association Profit Sharing Plan would have had if it remained in force.
Assuming that the adjusted maximum number of shares is sold in the offering:
|
the employee stock ownership plan will acquire 248,841 shares of common stock with a $2.49 million loan that is expected to be repaid over 25 years, resulting in an annual expense (after-tax) of approximately $62,000 (assuming that the common stock maintains a value of $10.00 per share; the actual expense would be higher if the stock price is higher); |
|
the stock-based incentive plan would grant options to purchase shares equal to 4.90% of the total outstanding shares (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation), or 311,052 shares to eligible participants, which would result in compensation expense over the vesting period of the options. The estimated grant-date fair value of the options utilizing the Black-Scholes option pricing model is $1.11 per option granted, based on the assumptions set forth under Pro Forma Data. Assuming this value is amortized over a five-year vesting period, the corresponding annual expense (after-tax) associated with the stock options would be approximately $62,000; and |
|
the stock-based incentive plan would award a number of restricted shares of common stock equal to 1.96% of the outstanding shares (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation), or 124,421 shares, to eligible participants, which would be expensed as the awards vest. Assuming that all shares awarded under the stock-based incentive plan have a value of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual expense (after-tax) associated with restricted shares awarded under the stock-based incentive plan would be approximately $154,000. |
58
These estimates are subject to change. The actual expense that will be recorded for the employee stock ownership plan will be determined by the fair market value of the shares of common stock as they are released to employees over the term of the loan, and whether the loan is repaid faster than its contractual term. Accordingly, increases in the stock price above $10.00 per share will increase the total employee stock ownership plan expense, and any accelerated repayment of the loan will increase the annual employee stock ownership plan expense. Further, the actual expense of the stock awards issued under the stock-based incentive plan will be determined by the fair market value of the stock on the grant date, which might be greater than $10.00 per share. The actual expense of the stock options issued under the stock-based incentive plan will be determined by the grant-date fair value of the options which will depend on a number of factors, including the valuation assumptions used in the Black-Scholes option pricing model.
Critical Accounting Policies
We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies:
Allowance for Loan Losses. Our allowance for loan losses is the estimated amount considered necessary to reflect probable incurred credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of the most critical for us. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.
Management performs a quarterly evaluation of the allowance for loan losses. The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment loss is measured by determining the present value of expected future cash flows or, for collateral-dependent
59
loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating classified loans from the remaining loans, and then categorizing each group by type of loan. Loans within each type exhibit common characteristics including terms, collateral type, and other risk characteristics. In determining the amount of the allowance for loan losses, we apply loss factors to each category of loan. We estimate our loss factors taking into consideration both quantitative and qualitative aspects that would affect our estimation of probable incurred losses. These aspects include, but are not limited to historical charge-offs; loan delinquencies and foreclosure trends; current economic trends and demographic data within Oconee County and the other surrounding areas, such as unemployment rates and population trends; current trends in real estate values within the Oconee County market area; charge-off trends of other comparable institutions; the results of any internal loan reviews; loan to value ratios; our historically conservative credit risk policy; the strength of our underwriting and ongoing credit monitoring function; and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results.
Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.
Real Estate Owned Valuation. Real estate acquired through loan foreclosure is recorded at the lower of carrying amount or fair value less estimated costs to sell. Any initial losses at the time of foreclosure are charged against the allowance for loan losses. Valuation of these assets are periodically reviewed by management with the carrying value of such assets adjusted through non-interest expense to the then estimated fair value net of estimated selling costs, if lower, until disposition. Fair values of real estate owned are generally based on third party appraisals or other valuations of the property.
Business Strategy
We have focused primarily on improving the execution of our community oriented retail banking strategy. Highlights of our current business strategy include the following:
|
Continue to Focus on Residential Lending . We have been and will continue to be primarily a one- to four-family residential mortgage lender for borrowers in our market area. As of June 30, 2010, $250.4 million, or 93.8%, of our total loan portfolio consisted of one- to four-family residential mortgage loans (including home equity loans). We also may gradually increase our residential construction and home equity loan portfolios. |
60
|
Maintain a Modest Portfolio of Non-residential Mortgage Loans . We have historically maintained a small portfolio of non-residential mortgage loans, primarily loans to churches located in our market area. As of June 30, 2010, $14.6 million, or 5.5% of our loan portfolio were non-residential mortgages or non-residential construction and land loans, of which $9.2 million were loans to churches. We believe that loans to churches help expand our financial services business as congregation members become familiar with us and enhance our presence in the community. |
|
Manage Interest Rate Risk While Maintaining or Enhancing, to the Extent Practicable, our Net Interest Margin . Subject to market conditions, we have sought to enhance net interest income by emphasizing controls on the cost of funds, particularly on the deposit products that we offer, rather than attempting to maximize asset yields, as loans with high yields often involve greater credit risk or may be repaid during periods of decreasing market interest rates. In addition, in view of our strong capital position, from time to time we place more emphasis on enhancing our net interest income than on limiting our interest rate risk. |
|
Rely on Community Orientation and High Quality Service to Maintain and Build a Loyal Local Customer Base and Maintain our Status as an Independent Community-Based Institution . We were established in 1924 and have been operating continuously in Oconee County since that time. By using our recognized brand name and the goodwill developed over years of providing timely, efficient banking services, we have been able to attract a solid base of local retail customers on which to continue to build our banking business. We have historically focused on promoting relationships within our community rather than specific banking products, and we expect to continue to build our customer base by relying on customer referrals and referrals from local builders and realtors. |
|
Adhere to Conservative Underwriting Guidelines to Maintain Strong Asset Quality . We have emphasized maintaining strong asset quality by following conservative underwriting guidelines, sound loan administration, and focusing on loans secured by real estate located within our market area only. Our non-performing assets and troubled debt restructurings totaled $4.7 million or 1.4% of total assets at June 30, 2010. Our total nonperforming loans to total loans ratio was 1.5% at June 30, 2010. Total loan delinquencies, 30 days or more past due, as of June 30, 2010, were $8.7 million, or 3.3% of total loans. |
Comparison of Financial Condition at June 30, 2010 and June 30, 2009
Our total assets increased to $333.5 million at June 30, 2010 from $311.6 million at June 30, 2009. The increase was due to an increase in net loans of $18.4 million, or 7.5%, to $264.3 million at June 30, 2010 from $245.9 million at June 30, 2009, as well as an increase in securities held to maturity of $3.2 million, or 35.9%, to $12.1 million at June 30, 2010 from $8.9 million at June 30, 2009. The increase in net loans reflected steady demand for real estate loans in our market area in the current low market interest rate environment. The largest growth in our loan
61
portfolio during the year ended June 30, 2010 was in one- to four-family residential mortgage loans, which increased to $250.4 million at June 30, 2010 from $232.1 million at June 30, 2009, reflecting our emphasis on the origination of this type of loan product. The increase in investment securities reflected the deployment of excess liquidity, as deposits increased to $272.6 million at June 30, 2010 from $252.8 million at June 30, 2009. Real estate owned increased to $751,000 at June 30, 2010 from $100,000 at June 30, 2009, reflecting an increase in foreclosures of real estate collateralizing one- to four-family residential mortgage loans. Prepaid FDIC insurance premiums increased to $734,000 at June 30, 2010 from $58,000 at June 30, 2009. Increases in prepaid FDIC premiums were partially offset by a decrease in cash and cash equivalents to $49.8 million at June 30, 2010 from $50.7 million at June 30, 2009, reflecting normal year-end cash management.
Deposits increased $19.9 million, or 7.9%, to $272.6 million at June 30, 2010 from $252.8 million at June 30, 2009. The increase in deposits reflected increases in certificates of deposit of $15.9 million, or 8.0%, and money market deposits of $2.6 million, or 39.6%, as depositors sought out lower-risk, FDIC-insured investments at a well-capitalized institution. The increase in total deposits also reflected an increase in regular savings and other deposits to $32.2 million at June 30, 2010 from $29.7 million at June 30, 2009. We generally do not accept brokered deposits and no brokered deposits were accepted during the 12 months ended June 30, 2010.
We had no advances from the Federal Home Loan Bank of Atlanta as of June 30, 2010 or June 30, 2009. We have credit available under a loan agreement with the Federal Home Loan Bank of Atlanta in the amount of 11% of total assets (as defined), or approximately $36.1 million at June 30, 2010.
Total equity equaled $59.7 million at June 30, 2010, compared to $57.1 million at June 30, 2009. The increase resulted from net income of $2.6 million for the year ended June 30, 2010.
Comparison of Operating Results for the Years Ended June 30, 2010 and June 30, 2009
General. Net income increased to $2.6 million for the year ended June 30, 2010 from $2.3 million for the year ended June 30, 2009. The increase reflected an increase in net interest income of $1.2 million to $9.1 million for the year ended June 30, 2010 from $7.9 million for the year ended June 30, 2009, and an increase in noninterest income to $237,000 for the year ended June 30, 2010 from $90,000 for the year ended June 30, 2009.
Interest Income. Interest income decreased $389,000, or 2.5% to $15.1 million for the year ended June 30, 2010 from $15.5 million for the year ended June 30, 2009. The decrease was due to a decline in the average yield on interest-earning assets to 4.8% for the year ended June 30, 2010, compared to 5.2% for the year ended June 30, 2009 in the lower market interest rate environment, and a decline in the average balance of investment securities to $9.8 million for the period ended June 30, 2010 from $17.6 million for the period ended June 30, 2009.
62
Interest income on loans increased $98,000 or 0.7%, to $14.6 million for the year ended June 30, 2010 from $14.5 million for the year ended June 30, 2009, reflecting growth in our loan portfolio, the average balance of which increased to $261.9 million from $242.3 million. The growth in our loan portfolio more than offset the decrease in average yields to 5.58% in 2010 from 5.99% in 2009. The lower yields reflected a declining market interest rate environment during 2010 from 2009 and its impact on our portfolio, which is largely composed of one- to four-family residential mortgage loans. Interest income on investment securities decreased to $432,000 for the year ended June 30, 2010 from $666,000 for the year ended June 30, 2009, reflecting a decrease in the average balance of such securities to $9.8 million in 2010 from $17.6 million in 2009, which more than offset the increase in the average yield on such securities to 4.42% from 3.78%.
Interest Expense. Interest expense decreased $1.6 million, or 21.4%, to $5.9 million for the year ended June 30, 2010 from $7.6 million for the year ended June 30, 2009. The decrease reflected a decrease in the average rate paid on deposits in 2010 to 2.29% from 3.09% in 2009, which more than offset increases in the average balance of such deposits.
Interest expense on certificates of deposit decreased to $5.5 million for the year ended June 30, 2010 from $7.1 million for the year ended June 30, 2009. An increase in the average balance of such certificates to $208.4 million from $195.9 million was more than offset by a decrease in the average cost of such certificates to 2.63% from 3.62%. The increase in average balance of our certificates of deposit resulted primarily from our customers seeking lower-risk investments in lieu of higher volatility equity investments during 2010. Interest expense on money market deposits and NOW and demand deposits decreased slightly to $508,000 for the year ended June 30, 2010 from $522,000 for the year ended June 30, 2009. The decrease was due to the lower average cost on the NOW and demand deposits as well as savings and money market accounts to 0.97% from 1.04%, which more than offset the increased average balances of such deposits to $52.3 million from $50.0 million.
Net Interest Income. Net interest income increased to $9.1 million for the year ended June 30, 2010 from $7.9 million for the year ended June 30, 2009. The increase resulted from an increase in our interest rate spread to 2.53% from 2.13%, which more than offset a slight decrease in the ratio of our average interest earning assets to average interest bearing liabilities to 1.20x from 1.21x. Our net interest margin increased to 2.91% from 2.65%. The increases in our interest rate spread and net interest margin were largely due to our declining cost of funds, which reflected the continuing decline in the United States Treasury yield curve.
Provision for Loan Losses. We recorded a provision for loan losses of $758,000 for the year ended June 30, 2010, and recorded no provision for the year ended June 30, 2009. The provision for loan losses in 2010 reflected net charge offs of $128,000 for the year ended June 30, 2010, compared with $40,000 for the year ended June 30, 2009. The allowance for loan losses was $888,000, or 0.33% of total loans at June 30, 2010, compared with $258,000, or 0.10% of total loans at June 30, 2009. Total nonperforming loans were $3.9 million at June 30, 2010, compared with $1.9 million at June 30, 2009. Although we used the same methodology in assessing the allowances for both periods, the increase in the provision and resulting allowance is reflective of increases in our general valuation allowance and our specific allowance for impaired loans. Increases in our general valuation allowance is reflective of increases in our nonperforming loans, net charge offs, and consideration of current economic factors. Total
63
impaired loans increased to $4.7 million at June 30, 2010 from $4.1 million at June 30, 2009, and the impaired loans with an allocated allowance increased to $2.6 million at June 30, 2010 from $1.4 million at June 30, 2009. These increases resulted in an increase in the allowance for impaired loans to $188,000 at June 30, 2010 from $53,000 at June 30, 2009. Improvements in credit quality of the loan portfolio and the lower levels of net charge offs and nonperforming assets compared to the overall loan portfolio were the primary reason for no provision for loan losses in 2009. To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the years ended June 30, 2010 and 2009.
Noninterest Income. Noninterest income increased to $237,000 for the year ended June 30, 2010 from $90,000 for the year ended June 30, 2009. The increase in noninterest income was primarily attributable to $128,000 of gains on sale of real estate owned during 2010 and increased service charges on deposit accounts to $89,000 from $77,000, reflecting higher balances of deposits during 2010. These increases were partially offset by an other-than-temporary impairment charge of $17,000 on our investment in FHLMC common stock, which reflected the length of time this investment had been impaired and the unpredictability for recovery to cost.
Noninterest Expense. Noninterest expense increased $343,000, or 8.1%, to $4.6 million for the year ended June 30, 2010 from $4.2 million for the year ended June 30, 2009. The increase was due to increased salaries and employee benefits expense to $2.6 million for the year ended June 30, 2010 from $2.5 million for the year ended June 30, 2009, reflecting normal annual salary increases and profit sharing plan contributions. The number of full time equivalent employees increased to 45 in the 2010 period from 44 in the 2009 period. Additionally, FDIC insurance premiums increased $163,000, or 97.6%, to $330,000 for the year ended June 30, 2010 from $167,000 for the year ended June 30, 2009 primarily as a result of us being required to expense a disproportionate amount of the pre-payment of our 2010 2013 FDIC deposit insurance premiums that was due on December 30, 2009 during the year ended June 30, 2010 and an increase in assessment rates.
Income Tax Expense. The provision for income taxes was $1.4 million for each of the years ended June 30, 2010 and June 30, 2009. Our effective tax rates for the years ended June 30, 2010 and 2009 were 35.2% and 38.2%, respectively. The decrease in effective tax rates resulted from lower book tax expense resulting from changes in our deferred tax assets and liabilities, primarily an increase in deferred tax assets arising from the book-tax differences related to the allowance for loan losses.
Analysis of Net Interest Income
Net interest income represents the difference between the income we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.
64
The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.
For the Years Ended June 30, | |||||||||||||||||||||||||||
2010 | 2009 | 2008 | |||||||||||||||||||||||||
Average
Balance |
Interest and
Dividends |
Yield/Cost |
Average
Balance |
Interest and
Dividends |
Yield/Cost |
Average
Balance |
Interest and
Dividends |
Yield/Cost | |||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||
Assets: |
|||||||||||||||||||||||||||
Interest-earning assets: |
|||||||||||||||||||||||||||
Loans |
$ | 261,915 | $ | 14,604 | 5.58 | % | $ | 242,326 | $ | 14,506 | 5.99 | % | $ | 237,509 | $ | 13,975 | 5.88 | % | |||||||||
Investment securities |
9,789 | 432 | 4.42 | 17,627 | 666 | 3.78 | 28,254 | 805 | 2.85 | ||||||||||||||||||
Other interest-earning assets |
41,217 | 48 | 0.12 | 36,448 | 301 | 0.83 | 24,005 | 1,066 | 4.44 | ||||||||||||||||||
Total interest-earning assets |
312,921 | 15,084 | 4.82 | 296,402 | 15,473 | 5.22 | 289,768 | 15,846 | 5.47 | ||||||||||||||||||
Noninterest-earning assets |
10,434 | 9,787 | 10,562 | ||||||||||||||||||||||||
Total assets |
$ | 323,355 | $ | 306,189 | $ | 300,330 | |||||||||||||||||||||
Liabilities and equity: |
|||||||||||||||||||||||||||
Interest-bearing liabilities: |
|||||||||||||||||||||||||||
NOW and demand deposits |
$ | 13,461 | $ | 69 | 0.51 | $ | 14,503 | $ | 72 | 0.50 | $ | 13,929 | $ | 73 | 0.53 | ||||||||||||
Money market deposits |
7,755 | 105 | 1.35 | 6,083 | 91 | 1.50 | 4,881 | 73 | 1.50 | ||||||||||||||||||
Regular savings and other deposits |
31,126 | 334 | 1.07 | 29,425 | 359 | 1.22 | 29,516 | 360 | 1.22 | ||||||||||||||||||
Certificates of deposit |
208,383 | 5,472 | 2.63 | 195,906 | 7,083 | 3.62 | 190,144 | 9,103 | 4.79 | ||||||||||||||||||
Total interest-bearing deposits |
260,725 | 5,980 | 2.29 | 245,917 | 7,605 | 3.09 | 238,469 | 9,609 | 4.03 | ||||||||||||||||||
Total interest-bearing liabilities |
260,725 | 5,980 | 2.29 | 245,917 | 7,605 | 3.09 | 238,469 | 9,609 | 4.03 | ||||||||||||||||||
Noninterest-bearing demand deposits |
1,869 | 1,797 | 2,266 | ||||||||||||||||||||||||
Other noninterest-bearing liabilities |
2,201 | 2,387 | 3,580 | ||||||||||||||||||||||||
Total liabilities |
264,795 | 250,101 | 244,315 | ||||||||||||||||||||||||
Accumulated other comprehensive income (loss) |
12 | 139 | 2,025 | ||||||||||||||||||||||||
Retained earnings |
58,548 | 55,949 | 53,990 | ||||||||||||||||||||||||
Total equity |
58,560 | 56,088 | 56,015 | ||||||||||||||||||||||||
Total liabilities and equity |
$ | 323,355 | $ | 306,189 | $ | 300,330 | |||||||||||||||||||||
Net interest income |
$ | 9,104 | $ | 7,868 | $ | 6,237 | |||||||||||||||||||||
Interest rate spread |
2.53 | % | 2.13 | % | 1.43 | % | |||||||||||||||||||||
Net interest margin |
2.91 | % | 2.65 | % | 2.15 | % | |||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities |
1.20x | 1.21x | 1.22x |
65
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
2010 Compared to 2009 |
Volume | Rate | Net | |||||||||
(In thousands) | ||||||||||||
Interest income: |
||||||||||||
Loans receivable |
$ | 641 | $ | (544 | ) | $ | 97 | |||||
Investment securities |
(377 | ) | 144 | (233 | ) | |||||||
Other interest-earning assets |
45 | (299 | ) | (254 | ) | |||||||
Total |
309 | (699 | ) | (390 | ) | |||||||
Interest expense: |
||||||||||||
Deposits |
494 | (2,120 | ) | (1,626 | ) | |||||||
Total |
494 | (2,120 | ) | (1,626 | ) | |||||||
Increase (decrease) in net interest income |
$ | (185 | ) | $ | 1,421 | $ | 1,236 | |||||
2009 Compared to 2008 |
Volume | Rate | Net | |||||||||
(In thousands) | ||||||||||||
Interest income: |
||||||||||||
Loans receivable |
$ | 286 | $ | 245 | $ | 531 | ||||||
Investment securities |
(1,040 | ) | 901 | (139 | ) | |||||||
Other interest-earning assets |
1,341 | (2,106 | ) | (765 | ) | |||||||
Total |
587 | (960 | ) | (373 | ) | |||||||
Interest expense: |
||||||||||||
Deposits |
311 | (2,315 | ) | (2,004 | ) | |||||||
Total |
311 | (2,315 | ) | (2,004 | ) | |||||||
Increase (decrease) in net interest income |
$ | 276 | $ | 1,356 | $ | 1,631 | ||||||
66
Management of Market Risk
Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Our board of directors is responsible for the review and oversight of our asset/liability strategies. The Asset/Liability Committee of our board of directors meets monthly and is charged with developing an asset/liability management plan. Our board of directors has established an Asset/Liability Management Committee, consisting of senior management. Senior management meets daily to review pricing and liquidity needs and to assess our interest rate risk. This committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by our board of directors.
The techniques we are currently using to manage interest rate risk include:
|
using a pricing strategy in an effort to balance the proportions of 30-year and 15-year fixed rate loans in our portfolio; |
|
maintaining a modest portfolio of adjustable-rate one- to four-family residential loans; |
|
funding a portion of our operations with deposits with terms greater than one year; |
|
focusing our business operations on local retail customers who value our community orientation and personal service and who may be somewhat less sensitive to interest rate changes than wholesale deposit customers; and |
|
maintaining a strong capital position, which provides for a favorable level of interest-earning assets relative to interest-bearing liabilities. |
Depending on market conditions, from time to time we place more emphasis on enhancing net interest margin rather than matching the interest rate sensitivity of our assets and liabilities. In particular, we believe that the increased net interest income resulting from a mismatch in the maturity of our asset and liabilities portfolios can, during periods of stable or declining interest rates, provide high enough returns to justify increased exposure to sudden and unexpected increases in interest rates. As a result of this philosophy, our results of operations and the economic value of our equity will remain vulnerable to increases in interest rates and to declines due to the difference between long- and short-term interest rates.
An important measure of interest rate risk is the amount by which the net present value of an institutions cash flow from assets, liabilities and off balance sheet items changes in the event of a range of assumed changes in market interest rates. We have utilized the Office of Thrift Supervision net portfolio value model (NPV) to provide an analysis of estimated changes in
67
our NPV under the assumed instantaneous changes in the United States treasury yield curve. The financial model uses a discounted cash flow analysis and an option-based pricing approach to measuring the interest rate sensitivity of the NPV. Set forth below is an analysis of the changes to the economic value of our equity as of June 30, 2010 in the event of designated changes in the United States treasury yield curve. At June 30, 2010, our NPV exposure related to these hypothetical changes in market interest rates was within the current guidelines we have established.
Net Portfolio
Value per Model |
Dollar Change
from Base |
Percentage
Change from Base |
Percentage of
Total Assets |
||||||||||
(Dollars in Thousands) | |||||||||||||
Up 300 basis points |
$ | 46,597 | $ | (29,738 | ) | (39 | )% | 14.5 | % | ||||
Up 200 basis points |
57,973 | (18,362 | ) | (24 | ) | 17.4 | |||||||
Up 100 basis points |
68,533 | (7,802 | ) | (10 | ) | 19.9 | |||||||
Base |
76,335 | | | 21.6 | |||||||||
Down 100 basis points |
80,068 | 3,733 | 5 | 22.4 |
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. In addition, this the net portfolio value table does not reflect the impact of a change in interest rates on the credit quality of our assets. Accordingly, although the net portfolio value table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
Our policies generally do not permit us to engage in derivative transactions, such as futures, options, caps, floors or swap transactions; however, such transactions may be entered into with the prior approval of the Asset/Liability Management Committee or the board of directors for hedging purposes only.
Liquidity and Capital Resources
Our primary sources of funds are deposits and the proceeds from principal and interest payments on loans and investment securities. While maturities and scheduled amortization of loans and securities are predicable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally manage the pricing of our deposits to be competitive within our market and to increase core deposit relationships.
68
Our cash flows are derived from operating activities, investing activities and financing activities. Net cash flows provided by operating activities were $2.3 million for the year ended June 30, 2010 and $4.0 million for the year ended June 30, 2009. Net cash flows provided by investing activities consisted primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, and proceeds from maturation and sales of securities. Net cash flows used in investing activities were $23.1 million for the year ended June 30, 2010 and net cash flows provided by investing activities for the year ended June 30, 2009 were $6.8 million. Net cash flows provided by financing activities consisted entirely of activity in deposits. Net cash flows provided by financing activities were $19.9 million and $975,000 for the years ended June 30, 2010 and 2009, respectively.
Our most liquid assets are cash and short-term investments. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. At June 30, 2010 and 2009, cash and short-term investments totaled $49.8 million and $50.7 million, respectively. We may also utilize as sources of funds the sale of securities available-for-sale, federal funds purchased, Federal Home Loan Bank of Atlanta advances and other borrowings.
At June 30, 2010 and 2009, we had outstanding commitments to originate loans of $2.0 million and $10.5 million, respectively. We had no unfunded commitments under lines of credit or standby letters of credit at June 30, 2010 and 2009. We anticipate that we will have sufficient funds available to meet our current loan commitments. In recent periods, loan commitments have been funded through liquidity and normal deposit flows. Certificates of deposit scheduled to mature in one year or less from June 30, 2010 totaled $182.8 million. Management believes, based on past experience, that a significant portion of such deposits will remain with us. Based on the foregoing, in addition to our level of core deposits and capital, we consider our liquidity and capital resources sufficient to meet our outstanding short-term and long-term needs. Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon managements assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and investment securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits and federal funds sold. If we require funds beyond our ability to generate them internally, we have additional borrowing capacity with the Federal Home Loan Bank of Atlanta. At June 30, 2010, we had an available borrowing limit of $36.0 million in advances from the Federal Home Loan Bank of Atlanta. It is anticipated that immediately upon completion of the reorganization and offering, Oconee Federal Financial Corp. and Oconee Federal Savings and Loans liquid assets will be increased. See How We Intend to Use the Proceeds from the Offering.
We are subject to various regulatory capital requirements. At June 30, 2010, we were in compliance with all applicable capital requirements. See Supervision and RegulationFederal Banking RegulationCapital Requirements and Pro Forma Data and Note 10 of the Notes to our Financial Statements.
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying
69
degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers requests for funding and take the form of loan commitments and lines of credit. For information about our loan commitments and unused lines of credit, see Note 9 of the Notes to our Financial Statements.
For the fiscal year ended June 30, 2010, we did not engage in any off-balance-sheet transactions other than loan origination commitments in the normal course of our lending activities.
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 1 of the notes to our financial statements beginning on page F-1 of this prospectus.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America 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. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institutions performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
BUSINESS OF OCONEE FEDERAL FINANCIAL CORP.
We have not engaged in any business to date. Upon completion of the reorganization and offering, we will own all of the issued and outstanding common stock of Oconee Federal Savings and Loan Association. We may retain up to 50% of the net proceeds from the offering. A portion of the net proceeds we retain will be used to make a loan to fund the purchase of our shares of common stock by the Oconee Federal Savings and Loan Association employee stock ownership plan. We will contribute the remaining net proceeds to Oconee Federal Savings and Loan Association as additional capital. We intend to invest our capital as discussed in How We Intend to Use the Proceeds from the Offering.
In the future, Oconee Federal Financial Corp., as the holding company of Oconee Federal Savings and Loan Association, will be authorized to pursue other business activities permitted by applicable laws and regulations for savings and loan holding companies, which may include the acquisition of banking and financial services companies. We have no plans for any mergers or acquisitions, or other diversification of the activities of Oconee Federal Financial Corp. at the present time.
Our cash flow will depend on earnings from the investment of the net proceeds we retain, and any dividends received from Oconee Federal Savings and Loan Association. Initially, Oconee Federal Financial Corp. will neither own nor lease any property, but will instead use the
70
premises, equipment and furniture of Oconee Federal Savings and Loan Association. At the present time, we intend to employ only persons who are officers of Oconee Federal Savings and Loan Association to serve as officers of Oconee Federal Financial Corp. We will also use the support staff of Oconee Federal Savings and Loan Association from time to time. These persons will not be separately compensated by Oconee Federal Financial Corp. Oconee Federal Financial Corp. may hire additional employees, as appropriate, to the extent it expands its business in the future.
BUSINESS OF OCONEE FEDERAL, MHC
Oconee Federal, MHC will be formed as a federal mutual holding company and will at all times own a majority of the outstanding shares of Oconee Federal Financial Corp.s common stock. Persons who had membership rights in Oconee Federal Savings and Loan Association as of the date of the reorganization will continue to have membership rights, however, these membership rights will be in Oconee Federal, MHC.
Oconee Federal, MHCs principal assets will be the common stock of Oconee Federal Financial Corp. it receives in the reorganization and offering and $50,000 cash in initial capitalization, which will be contributed to Oconee Federal, MHC by Oconee Federal Savings and Loan Association. Presently, it is expected that the only business activity of Oconee Federal, MHC will be to own a majority of Oconee Federal Financial Corp.s common stock. Oconee Federal, MHC will be authorized, however, to engage in any other business activities that are permissible for mutual holding companies under federal law, including investing in loans and securities.
Oconee Federal, MHC will neither own nor lease any property, but will instead use the premises, equipment and furniture of Oconee Federal Savings and Loan Association. It is anticipated that Oconee Federal, MHC will employ only persons who are officers of Oconee Federal Savings and Loan Association to serve as officers of Oconee Federal, MHC. Those persons will not be separately compensated by Oconee Federal, MHC. The initial directors of Oconee Federal, MHC will consist of the current directors of Oconee Federal Savings and Loan Association.
BUSINESS OF OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
General
Oconee Federal Savings and Loan Association is a federally chartered savings and loan association headquartered in Seneca, South Carolina. We were originally charted by the State of South Carolina in 1924 as Seneca Building and Loan Association. In 1958, we changed our name to Oconee Savings and Loan Association and in 1991 we converted to our federal charter under the name Oconee Federal Savings and Loan Association. Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations, in one- to four-family residential mortgage loans and, to a much lesser extent, non-residential mortgage, construction and land and other loans. We also invest in U.S. Government and federal agency securities and mortgage-backed securities and short-term deposits.
71
Reflecting our focus on our community, in connection with the offering, we intend to form a charitable foundation called Oconee Federal Charitable Foundation and fund it with an aggregate of $2.5 million in cash and shares of Oconee Federal Financial Corp. common stock. The corporate purpose of this new foundation will be to make contributions to various charitable organizations operating in our community.
Our website address is www.oconeefederal.com . Information on our website should not be considered a part of this prospectus.
Market Area
We conduct business through our main office, our executive office annex and one branch office located in Seneca, South Carolina and one additional branch office located in each of Walhalla, South Carolina and Westminster, South Carolina. All five of our offices are located in Oconee County, which is located on the I-85 corridor between the Charlotte and Atlanta metropolitan areas, approximately 120 miles south of Charlotte and approximately 120 miles north of Atlanta. Our offices are also located approximately 40 miles south of Greenville, South Carolina, and 10 miles from Clemson, South Carolina.
Our primary market area, which consists of Oconee County and the nearby communities and townships in adjacent counties in South Carolina, is mostly rural and suburban in nature. The Oconee County economy has historically been concentrated in manufacturing. Plant closings and layoffs in this sector in recent years have contributed to high unemployment in Oconee County. The regional economy is fairly diversified, with services, wholesale/retail trade, manufacturing and government providing the primary support. In addition, Oconee County and nearby counties are experiencing an increase in retiree populations.
The largest employers in Oconee County are education and health services providers, public utilities and light manufacturing companies, including the Oconee County and Seneca City School Systems, Oconee Memorial Hospital, Duke Energy, an electric utility and provider of nuclear and hydroelectric energy, Schneider Electric-Square D, a manufacturer of electronic components, Itron, a manufacturer of electronic measuring devices and Covidien, a manufacturer of healthcare products. Other employers include the local government, retail trade and the leisure/hospitality industry. Many residents of Oconee County are employed in nearby Greenville, South Carolina, which has major employers such as BMW Motors, Inc., and Greenville Memorial Hospital, and in Pickens County, which has major employers such as Clemson University and the Pickens County school system. In addition, although we only accept deposits from existing customers and residents of Oconee County, we extend credit to residents of adjacent counties in order to take advantage of the additional lending market located in these areas.
The local economy has been adversely affected by the recent recession. In particular, light manufacturing industries have experienced plant closings and layoffs. Oconee Countys and South Carolinas respective June 2010 unemployment rates of 11.5% and 10.7% were above
72
the comparable United States unemployment rate of 9.5%. In 2008, per capita income for Oconee County was $32,456 and the median household income was $42,668, compared to per capita income of $32,495 and $40,166, respectively, and median household income of $44,695 and $52,029, respectively, for the State of South Carolina and the United States.
Competition
Competition for making loans and attracting deposits in our primary market area is significant, particularly in light of the relatively modest population base of Oconee County and the relatively large number of institutions that maintain a presence in the county. Financial institution competitors in our primary market area include other locally based commercial banks, thrifts and credit unions, as well as regional and super regional banks. We also compete with depository and lending institutions not physically located in our primary market area but capable of doing business remotely, mortgage loan originators and mortgage brokers and other companies in the financial services industry, such as investment firms, mutual funds and insurance companies. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. To meet our competition, we seek to emphasize our community orientation, local and timely decision making and superior customer service. As of June 30, 2009 our market share of deposits represented 22.14% of FDIC-insured deposits in Oconee County.
Lending Activities
The principal lending activity of Oconee Federal Savings and Loan Association is originating one- to four-family residential mortgage loans and, to a much lesser extent, home equity loans, non-residential mortgage loans, construction and land loans, and other loans. In recent years we have modestly expanded our non-residential mortgage loans in an effort to diversify our overall loan portfolio, increase the yield of our loans and shorten asset duration. In addition, we may modestly increase our home equity loan portfolio.
73
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
At June 30, | |||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Real estate loans: |
|||||||||||||||||||||||||||||||||||
One- to four-family (1) |
$ | 250,390 | 93.81 | % | $ | 232,106 | 93.66 | % | $ | 230,260 | 94.37 | % | $ | 225,424 | 95.29 | % | $ | 222,163 | 95.49 | % | |||||||||||||||
Multi-family |
380 | 0.14 | 395 | 0.16 | 480 | 0.20 | 234 | 0.10 | 284 | 0.12 | |||||||||||||||||||||||||
Home equity |
510 | 0.19 | 892 | 0.36 | 1,239 | 0.51 | 458 | 0.19 | 138 | 0.06 | |||||||||||||||||||||||||
Non-residential |
9,456 | 3.55 | 8,353 | 3.38 | 5,751 | 2.35 | 3,045 | 1.29 | 2,992 | 1.29 | |||||||||||||||||||||||||
Construction and land |
5,158 | 1.93 | 4,867 | 1.96 | 5,116 | 2.10 | 6,304 | 2.67 | 5,914 | 2.54 | |||||||||||||||||||||||||
Total real estate loans |
265,894 | 99.62 | 246,613 | 99.52 | 242,846 | 99.53 | 235,465 | 99.53 | 231,491 | 99.50 | |||||||||||||||||||||||||
Consumer and other loans |
1,012 | 0.38 | 1,194 | 0.48 | 1,141 | 0.47 | 1,102 | 0.47 | 1,158 | 0.50 | |||||||||||||||||||||||||
Total loans |
$ | 266,906 | 100.00 | % | $ | 247,807 | 100.00 | % | $ | 243,987 | 100.00 | % | $ | 236,567 | 100.00 | % | $ | 232,649 | 100.00 | % | |||||||||||||||
Net deferred loan fees |
(1,690 | ) | (1,580 | ) | (1,459 | ) | (1,428 | ) | (1,426 | ) | |||||||||||||||||||||||||
Allowance for losses |
(888 | ) | (258 | ) | (325 | ) | (284 | ) | (282 | ) | |||||||||||||||||||||||||
Loans, net |
$ | 264,328 | $ | 245,969 | $ | 242,203 | $ | 234,855 | $ | 230,941 | |||||||||||||||||||||||||
(1) | Includes $3.09 million of loans secured by modular and manufactured homes as of June 30, 2010. |
74
Contractual Maturities and Interest Rate Sensitivity. The following table summarizes the scheduled repayments of our loan portfolio at June 30, 2010. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Loans are presented net of loans in process.
One-
to
Four- Family Residential |
Multi-
Family |
Home
equity |
Non-
residential |
Construction
and Land |
Consumer
and Other |
Total | |||||||||||||||
(In thousands) | |||||||||||||||||||||
Amounts due in: |
|||||||||||||||||||||
One year or less |
$ | 125 | $ | | $ | | $ | | $ | | $ | 815 | $ | 940 | |||||||
More than one to two years |
135 | | 3 | 9 | 17 | 50 | 214 | ||||||||||||||
More than two to three years |
405 | | | 22 | | 62 | 489 | ||||||||||||||
More than three to five years |
2,157 | | | 159 | 12 | 85 | 2,413 | ||||||||||||||
More than five to ten years |
29,410 | | 507 | 604 | 1,388 | | 31,909 | ||||||||||||||
More than ten to fifteen years |
32,476 | 106 | | 266 | | | 32,848 | ||||||||||||||
More than fifteen years |
185,682 | 274 | | 8,396 | 3,741 | | 198,093 | ||||||||||||||
Total |
$ | 250,390 | $ | 380 | $ | 510 | $ | 9,456 | $ | 5,158 | $ | 1,012 | $ | 266,906 | |||||||
Age of Real Estate Loan Portfolio. The following table summaries the age of the real estate loans in our portfolio, based on the date of origination of the loans, at June 30, 2010.
One-
to
Four- Family Residential |
Multi-
Family |
Home
equity |
Non-
residential |
Construction
and Land (1) |
Total | |||||||||||||
(In thousands) | ||||||||||||||||||
Origination date: |
||||||||||||||||||
July 1, 2009 to June 30, 2010 |
$ | 45,585 | $ | | $ | 87 | $ | 724 | $ | 4,594 | $ | 50,990 | ||||||
July 1, 2008 to June 30, 2009 |
47,719 | | 22 | 484 | 340 | 48,565 | ||||||||||||
July 1, 2007 to June 30, 2008 |
17,070 | 273 | 312 | 2,230 | 147 | 20,032 | ||||||||||||
July 1, 2006 to June 30, 2007 |
16,308 | | 84 | 3,949 | 22 | 20,363 | ||||||||||||
July 1, 2005 to June 30, 2006 |
27,278 | | | 1,286 | 26 | 28,590 | ||||||||||||
July 1, 2000 to June 30, 2005 |
76,619 | | 5 | 351 | 29 | 77,004 | ||||||||||||
Prior to June 30, 2000 |
19,811 | 107 | | 432 | | 20,350 | ||||||||||||
Total |
$ | 250,390 | $ | 380 | $ | 510 | $ | 9,456 | $ | 5,158 | $ | 265,894 | ||||||
(1) | Our construction loans generally have a term of 8 months, after which they convert into residential, multi-family or non-residential mortgage loans. Accordingly, the majority of our construction loans were originated recently. |
75
The following table sets forth our fixed and adjustable-rate loans at June 30, 2010 that are contractually due after June 30, 2011. Loans are presented net of loans in process.
Due After June 30, 2011 | |||||||||
Fixed | Adjustable | Total | |||||||
(In thousands) | |||||||||
Real Estate: |
|||||||||
One- to four-family |
$ | 228,799 | $ | 21,466 | $ | 250,265 | |||
Multi-family |
| 380 | 380 | ||||||
Home equity |
510 | | 510 | ||||||
Non-residential |
9,456 | | 9,456 | ||||||
Construction and land |
4,960 | 198 | 5,158 | ||||||
Total real estate loans |
243,725 | 22,044 | 265,769 | ||||||
Consumer and other loans |
197 | | 197 | ||||||
Total |
$ | 243,922 | $ | 22,044 | $ | 265,966 | |||
Loan Approval Procedures and Authority . Pursuant to federal law, the aggregate amount of loans that Oconee Federal Savings and Loan Association is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Oconee Federal Savings and Loan Associations unimpaired capital and surplus (25% if the amount in excess of 15% is secured by readily marketable collateral or 30% for certain residential development loans). At June 30, 2010, based on the 15% limitation, Oconee Federal Savings and Loan Associations loans-to-one-borrower limit was approximately $8.1 million. On the same date, Oconee Federal Savings and Loan Association had no borrowers with outstanding balances in excess of this amount. At June 30, 2010, our largest loan was for approximately $3.6 million secured by a church building located in Seneca, South Carolina, and was performing in accordance with its terms on that date.
Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrowers ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, financial statements and tax returns.
Under our loan policy, the loan officer processing an application is responsible for ensuring proposals and approval of any extensions of credit are in compliance with internal policies and procedures and applicable laws and regulations, and for establishing and maintaining credit files and documentation sufficient to support the loan and to perfect any collateral position. The Loan Committee of the board of directors reviews all loan applications, and may override the risk analysis of loan officers.
76
Our lending officers do not have individual lending authority. The Loan Committee has approval authority for loans up to $250,000. Real estate loans over $250,000 must be approved by the Loan Committee and ratified by the board of directors. Our board of directors must approve all loans in excess of $500,000. To ensure adequate liquidity, under our loan policy, aggregate loans outstanding should not exceed our total deposits and advances from the Federal Home Loan Bank of Atlanta.
Generally, we require title insurance or abstracts on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan.
One- to Four-Family Residential Real Estate Lending . The cornerstone of our lending program has long been the origination of long-term loans secured by mortgages on owner-occupied one- to four-family residences. At June 30, 2010, $250.4 million, or 93.8% of our total loan portfolio consisted of one- to four-family residential mortgage loans. At that date, our average outstanding one- to four-family residential mortgage loan balance was $117,198 and our largest outstanding residential loan had a principal balance of $1.2 million. At June 30, 2010, of our ten largest loans, eight loans totaling $9.1 million were residential mortgages. Virtually all of the residential mortgage loans we originate are secured by properties located in our market area. See Originations, Sales and Purchases of Loans.
The terms of our mortgage loans are generally up to 30 years for traditional homes and up to 15 years for manufactured or modular homes. The terms of non-owner-occupied homes are generally up to 15 years for fixed-rate loans and up to 30 years for adjustable-rate loans. Due to consumer demand in the current low market interest rate environment, many of our recent originations are 15- to 30-year fixed-rate loans secured by one- to four-family residential real estate. Although we typically retain in our portfolio the loans we originate, we generally originate our fixed-rate one- to four-family residential loans in accordance with secondary market standards. At June 30, 2010, we had $32.7 million of residential mortgage loans with original contractual maturities of 10 years or less, $32.6 million of residential mortgage loans with original contractual maturities between 10 and 15 years and $185.7 million of residential mortgage loans with original contractual maturities in excess of 15 years in our portfolio.
In order to reduce the term to repricing of our loan portfolio, we also originate one-year adjustable-rate one- to four-family residential mortgage loans. Our current adjustable-rate mortgage loans have fixed rates for the first 12 months, and then carry interest rates that adjust annually at a rate based on the change, between closing of the loan and the adjustment date, of the Federal Home Loan Bank Boards published contract interest rate, which represents the national average rate for purchases of previously occupied homes. Such loans carry terms to maturity of up to 30 years. The adjustable-rate mortgage loans currently offered by us generally provide for a 100 basis point annual interest rate change cap, a lifetime cap of 500 basis points over the initial rate and a lifetime floor of 200 basis points under the initial rate.
Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically reprice, as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments
77
permitted by our loan documents. At June 30, 2010, $21.5 million, or 8.6% of our one- to four-family residential loans, had adjustable rates of interest. During the year ended June 30, 2010, we originated 13 one-to-four family residential loans totaling $2.2 million with adjustable rates of interest.
We evaluate both the borrowers ability to make principal, interest and escrow payments and the value of the property that will secure the loan. Our one- to four-family residential mortgage loans do not currently include prepayment penalties, are non-assumable and do not produce negative amortization. Our one- to four-family residential mortgage loans customarily include due-on-sale clauses giving us the right to declare the loan immediately due and payable in the event that, among other things, the borrower sells the property subject to the mortgage.
We currently originate residential mortgage loans for our portfolio with loan-to-value ratios of up to 80% for traditional owner-occupied homes. For traditional homes, we may originate loans with loan-to-value ratios in excess of 80% if the borrower obtains mortgage insurance or provides readily marketable collateral. We may make exceptions for special loan programs that we offer. For example, we currently offer mortgages of up to $95,000 with loan-to-value ratios of up to 95% to low- to moderate-income borrowers solely for the purchase of their primary residence. We also originate residential mortgage loans for non-owner-occupied homes with loan-to-value ratios of up to 80%.
We also originate residential mortgage loans with loan-to-value ratios of up to 75% for manufactured or modular homes. We require lower loan-to-value ratios for manufactured and modular homes because such homes tend to depreciate over time. Manufactured or modular homes must be permanently affixed to a lot to make them more difficult to move without our permission. Such homes must be de-titled by the State of South Carolina so that they are taxed as residential homes rather than vehicles. We also obtain a mortgage on the real estate to which such homes are affixed. At June 30, 2010, the balance of loans secured by manufactured or modular homes was $3.09 million, representing 1.23% of our one- to four-family residential loans and 1.16% of our total loans.
At June 30, 2010, we had $5.1 million of one- to four-family residential mortgage loans that were 60 days or more delinquent.
Non-Residential Real Estate Lending . Our non-residential real estate loans are secured primarily by churches and, to a much lesser extent, office buildings, and retail and mixed-use properties located in our primary market area. We believe that focusing on loans to churches enables us to maintain our status as a community-oriented institution, and build our customer base as congregation members become familiar with us. At June 30, 2010, we had $9.5 million in non-residential real estate loans, representing 3.6% of our total loan portfolio.
The non-residential real estate loans that we originate generally have maximum terms of 5 years with amortization periods of 30 years. For loans secured by church property, our loans generally have maximum terms of 20 years with amortization periods of up to 20 years. The maximum loan-to-value ratio of our non-residential real estate loans is generally 75%. At June 30, 2010, our average outstanding non-residential mortgage loan balance was $315,193, and our largest non-residential real estate loan totaled $3.8 million. This loan is secured by a mortgage on a church building in Seneca, South Carolina, and, at June 30, 2010, this loan was performing in accordance with its terms. At June 30, 2010, of our ten largest loans, two loans totaling $5.2 million were non-residential real estate loans.
78
Set forth below is information regarding our non-residential real estate loans at June 30, 2010.
Type of Loan |
Number of Loans | Balance | |||
(Dollars in thousands) | |||||
Church |
22 | $ | 9,159 | ||
Other Non-Residential |
8 | 297 | |||
Total |
30 | $ | 9,456 | ||
We consider a number of factors in originating non-residential real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, cash flows, the applicable business plan, the financial resources of the borrower, the borrowers experience in owning or managing similar property and the borrowers payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). For church loans, we also consider the length of time the church has been in existence, the size and financial strength of the denomination with which it is affiliated, attendance figures and growth projections and current and pro forma operating budgets. All non-residential real estate loans are appraised by outside independent appraisers approved by our board of directors. Personal guarantees may be obtained from the principals of non-residential real estate borrowers and, in the case of church loans, guarantees from the applicable denomination may be obtained.
Loans secured by non-residential real estate generally are larger than one- to four-family residential loans and involve greater credit risk. Non-residential real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general, including the current adverse conditions. In addition, because a churchs financial stability often depends on donations from congregation members, some of whom may not reside in our market area, rather than income from business operations, repayment may be affected by economic conditions that affect individuals located both in our market area and in other market areas with which we are not as familiar. In addition, due to the unique nature of church buildings and properties, the real estate securing church loans may be less marketable than other non-residential real estate. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate. At June 30, 2010, all of our non-residential real estate loans were performing in accordance with their terms.
Construction Lending . We make construction loans to individuals for the construction of their primary residences. These loans generally have maximum terms of eight months, and upon completion of construction convert to conventional amortizing mortgage loans. These
79
construction loans have rates and terms comparable to one- to four-family residential mortgage loans that we originate. During the construction phase, the borrower generally pays interest only. The maximum loan-to-value ratio of our owner-occupied construction loans is 80%. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans.
We also make interim construction loans for non-residential properties. In addition, we occasionally make loans for the construction of homes on speculation, but we generally permit a borrower to have only one such loan at a time. These loans generally have a maximum term of eight months, and upon completion of construction convert to conventional amortizing non-residential real estate loans. These construction loans have rates and terms comparable to permanent loans secured by property of the type being constructed that we originate. The maximum loan-to-value ratio of these construction loans is 80%.
Finally, we make loans secured by land to complement our construction and non-residential lending activities. These loans have terms of up to 10 years, and maximum loan-to-value ratios of 90% for improved lots and 65% for unimproved land.
Number of
Loans |
Loans in
Process |
Net Principal
Balance |
Non-
Performing |
||||||||
(Dollars in thousands) | |||||||||||
One- to four-family construction |
31 | $ | 7,565 | $ | 3,139 | $ | | ||||
Non-residential construction |
1 | 228 | 602 | | |||||||
Residential land |
18 | | 1,417 | | |||||||
Total construction and land loans |
50 | $ | 7,793 | $ | 5,158 | $ | | ||||
At June 30, 2010, our largest outstanding residential construction loan was for $1.1 million, of which $400,000 was outstanding. This loan was performing according to its terms at June 30, 2010. At June 30, 2010, all of our construction loans were performing in accordance with their terms.
The application process for a construction loan includes a submission to Oconee Federal Savings and Loan Association of accurate plans, specifications and costs of the project to be constructed or developed, a copy of the deed or plat survey of the real estate involved in the loan and an appraisal of the proposed collateral for the loan. Our construction loan agreements generally provide that loan proceeds are disbursed in increments as construction progresses. Outside independent licensed or certified appraisers inspect the progress of the construction of the dwelling before disbursements are made.
To the extent our construction loans are not made to owner-occupants of single-family homes, they are more vulnerable to changes in economic conditions and the concentration of credit with a limited number of borrowers. Further, the nature of these loans is such that they are more difficult to evaluate and monitor. Our risk of loss on a construction or land loan is dependent largely upon the accuracy of the initial estimate of the propertys value upon completion of the project and the estimated cost (including interest) of the project. If the estimate of value proves to be inaccurate, we may be confronted, at or prior to the maturity of the
80
loan, with a project with a value which is insufficient to assure full repayment and/or the possibility of having to make substantial investments to complete and sell the project. Because defaults in repayment may not occur during the construction period, it may be difficult to identify problem loans at an early stage.
Home Equity Lending. We originate fixed-rate home equity loans secured by a lien on the borrowers primary residence, but only where we hold the first mortgage on the property. Our home equity loans are limited to an 80% loan-to-value ratio (including all prior liens), and have terms of up to 10 years with 10-year amortization periods. We use the same underwriting standards for home equity loans as we use for one- to four-family residential mortgage loans. Although we do not currently offer home equity lines of credit, we may offer lines of credit in the future. We expect that any lines of credit that we issue will be originated and underwritten using the same standards that we use for home equity loans and residential mortgage loans. At June 30, 2010, we had $510,000 or 0.2% of our total loans in home equity loans.
Consumer Lending . We offer installment loans for various consumer purposes, including the purchase of automobiles, boats, appliances, and recreational vehicles and for other legitimate personal purposes. The maximum terms of consumer loans is 18 months for unsecured loans, 12 months for loans secured by marketable securities and 18-60 months for loans secured by an vehicle depending on the age of the vehicle.
To date, our consumer lending apart from home equity loans has been quite limited. We generally only extend consumer loans to existing customers or their immediate family members, and these loans generally have relatively low limits. At June 30, 2010, we had $1.0 million of consumer loans outstanding, representing 0.4% of our total loan portfolio. Of these loans, $956,000 were secured by deposits at Oconee Federal Savings and Loan Association.
Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrowers continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At June 30, 2010, all of our consumer loans were performing in accordance with their terms.
Originations, Purchases and Sales of Loans
Lending activities are conducted solely by our salaried personnel operating at our main and branch office locations. All loans originated by us are underwritten pursuant to our policies and procedures. We originate both fixed-rate and adjustable-rate loans. Our ability to originate fixed or adjustable-rate loans is dependent upon relative customer demand for such loans, which is affected by current and expected future levels of market interest rates. We originate real estate and other loans through our salaried loan officers, marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders and attorneys.
We currently do not purchase whole loans or interests in loans from third parties or sell any of the loans that we originate into the secondary market. However, we may in the future elect to do so, depending on market conditions, in order to supplement our loan production or diversify our risk.
81
The following table shows our loan origination and principal repayment activity for loans originated for our portfolio during the periods indicated. Loans are presented net of loans in process.
Years Ended June 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Total loans at beginning of period |
$ | 247,807 | $ | 243,987 | ||||
Loans originated: |
||||||||
Real estate loans: |
||||||||
One- to four-family |
38,823 | 41,086 | ||||||
Multi-family |
| | ||||||
Home equity |
90 | 55 | ||||||
Non-residential |
744 | 511 | ||||||
Construction and land |
21,251 | 12,593 | ||||||
Total real estate loans |
60,908 | 54,245 | ||||||
Consumer and other loans |
652 | 708 | ||||||
Total loans originated |
61,560 | 54,953 | ||||||
Deduct: |
||||||||
Principal repayments |
(41,140 | ) | (50,858 | ) | ||||
Net other |
(1,321 | ) | (275 | ) | ||||
Net loan activity |
19,099 | 3,820 | ||||||
Total loans at end of period |
$ | 266,906 | $ | 247,807 | ||||
Delinquencies and Non-Performing Assets
Delinquency Procedures . When a loan payment becomes 20 days past due, we contact the customer by mailing a late notice. If a loan payment becomes 30 days past due, we mail a right to cure letter to the borrower and any co-makers and endorsers. If a loan payment becomes 90 days past due (or a borrower misses three consecutive payments, whichever occurs first), we send a demand letter and generally cease accruing interest. It is our policy to institute legal procedures for collection or foreclosure when a loan becomes 90 days past due, unless management determines that it is in the best interest of Oconee Federal Savings and Loan Association to work further with the borrower to arrange a workout plan. It is our policy to not accept deeds in lieu of foreclosure.
When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair value, less estimated costs to sell Soon after acquisition, we order a new appraisal to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for loan losses, or, if the existing reserve is inadequate, charged to expense of the current period. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.
82
Delinquent Loans . The following table sets forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.
At June 30, | ||||||||||||||||||
2010 | 2009 | |||||||||||||||||
30-59
Days Past Due |
60-89
Days Past Due |
90
Days
or More Past Due |
30-59
Days Past Due |
60-89
Days Past Due |
90
Days
or More Past Due |
|||||||||||||
(In thousands) | ||||||||||||||||||
Real estate loans: |
||||||||||||||||||
One- to four-family |
$ | 3,559 | $ | 1,150 | $ | 3,978 | $ | 3,118 | $ | 413 | $ | 1,738 | ||||||
Multi-family |
| | | | | | ||||||||||||
Home equity |
| | | | | | ||||||||||||
Non-residential |
| | | | | 211 | ||||||||||||
Construction and land |
| | | | | | ||||||||||||
Total real estate loans |
3,559 | 1,150 | 3,978 | 3,118 | 413 | 1,949 | ||||||||||||
Consumer and other loans |
5 | | | | | | ||||||||||||
Total |
$ | 3,564 | $ | 1,150 | $ | 3,978 | $ | 3,118 | $ | 413 | $ | 1,949 | ||||||
Classified Assets . Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of Thrift Supervision to be of lesser quality, as substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as special mention by our management.
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as loss, it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institutions determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.
83
In connection with the filing of our periodic reports with the Office of Thrift Supervision and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.
On the basis of this review of our assets, our classified or special mention assets (presented gross of reserves) at the dates indicated were as follows:
At June 30, | ||||||
2010 | 2009 | |||||
(In thousands) | ||||||
Special mention assets |
$ | 1,414 | $ | 541 | ||
Substandard assets |
3,298 | 3,568 | ||||
Doubtful assets (1) |
771 | 121 | ||||
Loss assets |
| | ||||
Total classified assets |
$ | 5,483 | $ | 4,230 | ||
(1) | Consists solely of real estate owned. |
The increase in classified loans between June 30, 2010 and 2009 was due to an increase in real estate owned from loan foreclosures and a $603,000 increase in special mention and substandard assets arising from credit deterioration of certain one- to four-family mortgage loans that management determined were impaired.
Non-Performing Assets. We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days delinquent unless the loan is well-secured and in the process of collection. Loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until the loans qualifies for return to accrual. Generally, loans are restored to accrual status when all the principal and interest amounts contractually due are brought current, and future payments are reasonably assured. Loans are moved to non-accrual status in accordance with our policy, which is typically after 90 days of non-payment.
84
The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.
At June 30, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Non-accrual loans: |
||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||
One- to four-family |
$ | 3,214 | $ | 1,286 | $ | 1,037 | $ | 528 | $ | 410 | ||||||||||
Multi-family |
| | | | | |||||||||||||||
Home equity |
| | | | | |||||||||||||||
Non-residential |
| 211 | | | | |||||||||||||||
Construction and land |
| | | | | |||||||||||||||
Total real estate loans |
3,214 | 1,497 | 1,037 | 528 | 410 | |||||||||||||||
Consumer and other loans |
| | | | | |||||||||||||||
Total nonaccrual loans |
$ | 3,214 | $ | 1,497 | $ | 1,037 | $ | 528 | $ | 410 | ||||||||||
Accruing loans past due 90 days or more: |
||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||
One- to four-family |
$ | 764 | $ | 452 | $ | 238 | $ | 123 | $ | 294 | ||||||||||
Multi-family |
| | | | | |||||||||||||||
Home equity |
| | | | | |||||||||||||||
Non-residential |
| | | 7 | | |||||||||||||||
Construction and land |
| | | | | |||||||||||||||
Total real estate loans |
764 | 452 | 238 | 130 | 294 | |||||||||||||||
Consumer and other loans: |
||||||||||||||||||||
Total accruing loans past due 90 days or more |
764 | 452 | 238 | 130 | 294 | |||||||||||||||
Total of nonaccrual and 90 days or more past due loans |
$ | 3,978 | $ | 1,949 | $ | 1,275 | $ | 658 | $ | 704 | ||||||||||
Real estate owned: |
||||||||||||||||||||
One- to four-family |
$ | 751 | $ | 100 | $ | 58 | $ | | $ | | ||||||||||
Multi-family |
| | | | | |||||||||||||||
Home equity |
| | | | | |||||||||||||||
Non-residential |
| | | | | |||||||||||||||
Other |
| | | | | |||||||||||||||
Other nonperforming assets |
| | | | | |||||||||||||||
Total nonperforming assets |
$ | 4,729 | $ | 2,049 | $ | 1,333 | $ | 658 | $ | 704 | ||||||||||
Troubled debt restructurings |
| | | | | |||||||||||||||
Troubled debt restructurings and total nonperforming assets |
$ | 4,729 | $ | 2,049 | $ | 1,333 | $ | 658 | $ | 704 | ||||||||||
Total nonperforming loans to total loans |
1.49 | % | 0.79 | % | 0.52 | % | 0.28 | % | 0.30 | % | ||||||||||
Total nonperforming assets to total assets |
1.42 | % | 0.66 | % | 0.43 | % | 0.22 | % | 0.23 | % | ||||||||||
Total nonperforming assets to loans and real estate owned |
1.77 | % | 0.83 | % | 0.55 | % | 0.28 | % | 0.30 | % |
At June 30, 2010, special mention, substandard and loss loans totaled $4.7 million. All nonperforming loans in the table above were classified as substandard. There were no other loans that are not already disclosed where there is information about possible credit problems of borrowers that caused us serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.
85
For the years ended June 30, 2010 and June 30, 2009, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $112,204 and $49,569, respectively.
Allowance for Loan Losses
Analysis and Determination of the Allowance for Loan Losses . Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (a) specific allowances for identified problem loans; and (b) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
Specific Allowances for Identified Problem Loans . We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Factors in identifying a specific problem loan include:
|
the strength of the customers personal or business cash flows; |
|
the availability of other sources of repayment; |
|
the amount due or past due; |
|
the type and value of collateral; |
|
the strength of our collateral position; |
|
the estimated cost to sell the collateral; and |
|
the borrowers effort to cure the delinquency. |
In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.
General Valuation Allowance on Certain Identified Problem Loans . Although our policy allows for a general valuation allowance on certain smaller balance, homogenous pools of loans classified as substandard, we have historically evaluated every nonperforming loan, regardless of size, for impairment in establishing a specific allowance.
86
General Valuation Allowance on the Remainder of the Loan Portfolio . We establish a general allowance for loans that are not otherwise specifically identified as impaired to recognize the probable incurred losses within our portfolio, but which, unlike specific allowances, has not been allocated to particular problem loans. In estimating this portion of the allowance, we apply loss factors to each category of loan. We estimate our loss factors taking into consideration both quantitative and qualitative aspects that would affect our estimation of probable incurred losses. These aspects include, but are not limited to historical charge-offs; loan delinquencies and foreclosure trends; current economic trends and demographic data within Oconee County and the other surrounding areas, such as unemployment rates and population trends; current trends in real estate values within the Oconee County market area; charge-off trends of other comparable institutions; the results of any internal loan reviews; loan to value ratios; our historically conservative credit risk policy; the strength of our underwriting and ongoing credit monitoring function; and other relevant factors.
We evaluate our loss factors quarterly to ensure their relevance in the current real estate and economic environment, and we review the allowance for loan losses (as a percentage of total loans) maintained by the us relative to other thrift institutions within our peer group, taking into consideration the other institutions delinquency trends, charge-offs, nonperforming loans, and portfolio composition as a basis for validation for the adequacy of our overall allowance for loan loss.
87
In addition, as an integral part of their examination process, the Office of Thrift Supervision will periodically review our allowance for loan losses. Such agency may require that we recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
Allowance for Loan Losses . The following table sets forth activity in our allowance for loan losses for the periods indicated.
Year Ended June 30, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Allowance at beginning of period |
$ | 258 | $ | 325 | $ | 284 | $ | 282 | $ | 254 | ||||||||||
Provision for loan losses |
758 | (27 | ) | 100 | 7 | 62 | ||||||||||||||
Charge offs: |
||||||||||||||||||||
Real estate loans |
||||||||||||||||||||
One- to four-family |
$ | (128 | ) | $ | (36 | ) | $ | (59 | ) | $ | (6 | ) | $ | (39 | ) | |||||
Multi-family |
| | | | | |||||||||||||||
Home equity |
| | | | | |||||||||||||||
Non-residential |
| | | | | |||||||||||||||
Construction and land |
| | | | | |||||||||||||||
Consumer and other loans |
| (4 | ) | | (2 | ) | | |||||||||||||
Total charge-offs |
$ | (128 | ) | $ | (40 | ) | $ | (59 | ) | $ | (8 | ) | $ | (39 | ) | |||||
Recoveries: |
||||||||||||||||||||
Real estate loans |
||||||||||||||||||||
One- to four-family |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Multi-family |
| | | | | |||||||||||||||
Home equity |
| | | | | |||||||||||||||
Non-residential |
| | | | | |||||||||||||||
Construction and land |
| | | | | |||||||||||||||
Consumer and other loans |
| | | 3 | 5 | |||||||||||||||
Total recoveries |
| | | 3 | 5 | |||||||||||||||
Net (charge-offs) recoveries |
$ | (128 | ) | $ | (40 | ) | $ | (59 | ) | $ | (5 | ) | $ | (34 | ) | |||||
Allowance at end of period |
$ | 888 | $ | 258 | $ | 325 | $ | 284 | $ | 282 | ||||||||||
Allowance to nonperforming loans |
22.32 | % | 13.24 | % | 25.49 | % | 43.16 | % | 40.06 | % | ||||||||||
Allowance to total loans outstanding at the end of the period |
0.33 | 0.10 | 0.13 | 0.12 | 0.12 | |||||||||||||||
Net charge-offs (recoveries) to average loans outstanding during the period |
0.05 | 0.02 | 0.02 | 0.00 | 0.02 |
88
Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category (including loans held for sale), and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
At June 30, | |||||||||||||||||||||||||||
2010 | 2009 | 2008 | |||||||||||||||||||||||||
Amount |
% of
Allowance to Total Allowance |
% of
Loans in Category to Total Loans |
Amount |
% of
Allowance to Total Allowance |
% of
Loans in Category to Total Loans |
Amount |
% of
Allowance to Total Allowance |
% of
Loans in Category to Total Loans |
|||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||
Real estate loans: |
|||||||||||||||||||||||||||
One- to four-family |
$ | 785 | 88.40 | % | 93.81 | % | $ | 215 | 83.33 | % | 93.66 | % | $ | 277 | 85.23 | % | 94.37 | % | |||||||||
Multi-family |
6 | 0.68 | 0.14 | 3 | 1.16 | 0.16 | 4 | 1.23 | 0.20 | ||||||||||||||||||
Home equity |
1 | 0.11 | 0.19 | | | 0.36 | | | 0.51 | ||||||||||||||||||
Non-residential |
57 | 6.42 | 3.55 | 28 | 10.85 | 3.38 | 31 | 9.54 | 2.35 | ||||||||||||||||||
Construction and land |
35 | 3.94 | 1.93 | 7 | 2.72 | 1.96 | 8 | 2.46 | 2.10 | ||||||||||||||||||
Total real estate loans |
884 | 99.55 | 99.62 | 253 | 98.06 | 99.52 | 320 | 98.46 | 99.53 | ||||||||||||||||||
Consumer and other loans |
4 | 0.45 | 0.38 | 5 | 1.94 | 0.48 | 5 | 1.54 | 0.47 | ||||||||||||||||||
Unallocated |
| | | | | | | | | ||||||||||||||||||
Total allowance for loan losses |
$ | 888 | 100.00 | % | 100.00 | % | $ | 258 | 100.00 | % | 100.00 | % | $ | 325 | 100.00 | % | 100.00 | % | |||||||||
89
At June 30, 2010, our allowance for loan losses represented 0.33% of total loans and 22.32% of nonperforming loans. The allowance for loan losses increased to $888,000 at June 30, 2010 from $258,000 at June 30, 2009, due to a provision for loan losses of $758,000 for the year ended June 30, 2010, partially offset by net charge offs of $128,000 for the year ended June 30, 2010.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, regulators, in reviewing our loan portfolio, may request us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate and increases may be necessary should the quality of any loan deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Investment Activities
General . The goals of our investment policy are to provide and maintain liquidity to meet deposit withdrawal and loan funding needs, to help manage our interest rate risk, and to generate a return on idle funds within the context of our interest rate and credit risk objectives.
Our board of directors approved and adopted our investment policy. The investment policy is reviewed annually by our board of directors and any changes to the policy are subject to the approval of our board of directors. Authority to make investments under the approved investment policy guidelines is delegated to our Investment Committee. All investment transactions are reviewed at regularly scheduled monthly meetings of our board of directors.
Our current investment policy permits investments in securities issued by the United States Government and its agencies or government sponsored enterprises. We also may invest in mortgage-backed securities and mutual funds that invest in mortgage-backed securities. Our investment policy also permits, with certain limitations, investments in bank-owned life insurance, collateralized mortgage obligations, asset-backed securities, real estate mortgage investment conduits, South Carolina revenue bonds and municipal securities. While equity investments are generally not authorized by our investment policy, such investments are permitted on a case-by-case basis provided such investments are pre-authorized by action of our board of directors.
At June 30, 2010, we did not have an investment in the securities of any single non-government issuer that exceeded 10% of equity at that date.
Our current investment policy does not permit investment in stripped mortgage-backed securities, complex securities and derivatives as defined in federal banking regulations and other high-risk securities. As of June 30, 2010, we held no asset-backed securities other than mortgage-backed securities. Our current policies do not permit hedging activities, such as
90
engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities. At June 30, 2010, none of the collateral underlying our securities portfolio was considered subprime or Alt-A.
Current accounting principles require that, at the time of purchase, we designate a security as either held to maturity, available-for-sale, or trading, based upon our ability and intent. Securities available-for-sale and trading securities are reported at market value and securities held to maturity are reported at amortized cost. A periodic review and evaluation of our available-for-sale and held-to-maturity securities portfolios is conducted to determine if the fair value of any security has declined below its carrying value and whether such decline is other-than-temporary. If such decline is deemed to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged against earnings. The fair values of our securities are based on published or securities dealers market values. At June 30, 2010, $33,000 of our securities were classified as available for sale and $12.1 million of our securities were classified as held to maturity. The fair value of the securities classified as available for sale was $33,000, and the fair value of the securities classified as held to maturity was $12.6 million.
U.S. Government and Federal Agency Obligations. We may invest in U.S. Government and federal agency securities. While these securities generally provide lower yields than other investments in our securities investment portfolio, we maintain these investments, to the extent appropriate, for liquidity purposes, as collateral for borrowings and for prepayment protection.
Mortgage-Backed Securities . At June 30, 2010, our mortgage-backed securities portfolio totaled $12.1 million, all of which was classified as held to maturity. The fair value of these securities was $12.6 million. Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as pass-through certificates because the principal and interest of the underlying loans is passed through to investors, net of certain costs, including servicing and guarantee fees. Mortgage-backed securities typically are collateralized by pools of one- to four-family or multifamily mortgages, although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Oconee Federal Savings and Loan Association. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. Ginnie Mae, a United States Government agency, and government sponsored enterprises, such as Fannie Mae and Freddie Mac, either guarantee the payments or guarantee the timely payment of principal and interest to investors. Mortgage-backed securities are more liquid than individual mortgage loans since there is an active trading market for such securities. In addition, mortgage-backed securities may be used to collateralize our borrowings.
Investments in mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion
91
adjustments. Also, in September 2008, the Federal Housing Finance Agency placed Freddie Mac and Fannie Mae into conservatorship. The U.S. Treasury Department has established financing agreements to ensure that Freddie Mac and Fannie Mae meet their obligations to holders of mortgage-backed securities that they have issued or guaranteed. These actions have not affected the markets for mortgage-backed securities issued by Freddie Mac or Fannie Mae.
All of our mortgage-backed securities are issued by government agencies or government-sponsored entities.
Restricted Equity Securities . We invest in the common stock of the Federal Home Loan Bank of Atlanta. The common stock is carried at cost and classified as restricted equity securities. We periodically evaluate these shares of common stock for impairment based on ultimate recovery of par value.
Bank-Owned Life Insurance . We invest in bank-owned life insurance to provide us with a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides us non-interest income that is non-taxable. Federal regulations generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses. At June 30, 2010, we had invested $350,000 in bank-owned life insurance.
Securities Portfolio Composition . The following table sets forth the composition of our securities portfolio at the dates indicated.
At June 30, | ||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
|||||||||||||
(In thousands) | ||||||||||||||||||
Securities available for sale: |
||||||||||||||||||
FHLMC Common Stock |
$ | 33 | $ | 33 | $ | 50 | $ | 50 | $ | 80 | $ | 1,335 | ||||||
Total available for sale |
33 | 33 | 50 | 50 | 80 | 1,335 | ||||||||||||
Securities held to maturity: |
||||||||||||||||||
FHLMC mortgage-backed securities |
$ | 545 | $ | 587 | $ | 744 | $ | 781 | $ | 951 | $ | 973 | ||||||
GNMA mortgage-backed securities |
11,572 | 12,015 | 8,170 | 8,242 | | | ||||||||||||
U.S. treasury notes |
| | | | 19,983 | 20,108 | ||||||||||||
Total available for sale |
12,117 | 12,602 | 8,914 | 9,023 | 20,934 | 21,081 | ||||||||||||
Restricted equity securities |
540 | 540 | 540 | 540 | 537 | 537 | ||||||||||||
Total |
$ | 12,690 | $ | 13,175 | $ | 9,504 | $ | 9,613 | $ | 21,551 | $ | 22,953 | ||||||
92
Securities Portfolio Maturities and Yields . The following table sets forth the contractual maturities and weighted average yields of our securities portfolio at June 30, 2010. Mortgage-backed securities are anticipated to be repaid in advance of their contractual maturities as a result of projected mortgage loan prepayments. The weighted average life of the mortgage-backed securities in our portfolio at June 30, 2010 was 22.8 years.
One Year or Less |
More than One Year
to Five Years |
More than Five Years
to Ten Years |
More than Ten Years | Total | ||||||||||||||||||||||||||
June 30, 2010 |
Amortized
Cost |
Weighted
Average Yield |
Amortized
Cost |
Weighted
Average Yield |
Amortized
Cost |
Weighted
Average Yield |
Amortized
Cost |
Weighted
Average Yield |
Amortized
Cost |
Weighted
Average Yield |
||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||
Securities available-for-sale: |
||||||||||||||||||||||||||||||
FHLMC Common Stock |
| | % | | | % | | | % | 33 | 0.48 | % | 33 | 0.48 | % | |||||||||||||||
Total available for sale |
| | | | | | 33 | 0.48 | 33 | 0.48 | ||||||||||||||||||||
Securities held to maturity: |
||||||||||||||||||||||||||||||
FHLMC mortgage-backed securities |
| | | | 545 | 5.65 | | | 545 | 5.65 | ||||||||||||||||||||
GNMA mortgage-backed securities |
| | | | | | 11,572 | 3.85 | 11,572 | 3.85 | ||||||||||||||||||||
U.S. treasury notes |
| | | | | | | | | | ||||||||||||||||||||
Restricted equity securities |
| | | | | | 540 | 0.44 | 540 | 0.44 | ||||||||||||||||||||
Total held to maturity |
| | | | 545 | 5.65 | 12,112 | 3.70 | 12,657 | 3.78 | ||||||||||||||||||||
Total |
$ | | | % | $ | | | % | $ | 545 | 5.65 | % | $ | 12,145 | 3.70 | % | $ | 12,690 | 3.77 | % | ||||||||||
93
Sources of Funds
General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also may use borrowings, primarily Federal Home Loan Bank of Atlanta advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.
Deposits. Our deposits are solely from residents of Oconee County, South Carolina and from persons outside Oconee County with whom we have an existing banking relationship. We offer a selection of deposit accounts, including demand accounts, NOW accounts, money market accounts, savings accounts, certificates of deposit and individual retirement accounts (IRAs). Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We do not accept brokered deposits, although we have the authority to do so. We very rarely accept certificates of deposit in excess of $250,000 or other deposits in excess of applicable FDIC insurance coverage, which is currently $250,000 per depositor.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. Personalized customer service, long-standing relationships with customers, and the favorable image of Oconee Federal Savings and Loan Association in the community are relied upon to attract and retain deposits. We recently implemented a fully functional electronic banking platform, including on-line bill pay, as a service to our deposit customers.
The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. Our ability to gather deposits is affected by the competitive market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products.
The following table sets forth the distribution of total deposits by account type, at the dates indicated.
At June 30, | ||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||
(Dollars in thousands) | ||||||||||||||||||
NOW and demand deposits |
$ | 15,399 | 5.65 | % | $ | 16,661 | 6.59 | % | $ | 17,154 | 6.81 | % | ||||||
Money market deposits |
9,338 | 3.43 | 6,689 | 2.65 | 5,447 | 2.16 | ||||||||||||
Regular savings and other deposits |
32,194 | 11.81 | 29,679 | 11.74 | 29,755 | 11.82 | ||||||||||||
Certificates of deposit IRA |
59,388 | 21.78 | 54,984 | 21.75 | 51,042 | 20.28 | ||||||||||||
Certificates of deposit other |
156,287 | 57.33 | 144,738 | 57.27 | 148,378 | 58.93 | ||||||||||||
Total |
$ | 272,606 | 100.00 | % | $ | 252,750 | 100.00 | % | $ | 251,776 | 100.00 | % | ||||||
94
As of June 30, 2010, the aggregate amount of our outstanding certificate of deposit in amounts greater than or equal to $100,000 was approximately $61.9 million. The following table sets forth the maturity of these certificates as of June 30, 2010.
Certificates
of Deposit |
|||
(In thousands) | |||
Maturity Period: |
|||
Three months or less |
$ | 14,636 | |
Over three through six months |
14,767 | ||
Over six through twelve months |
21,881 | ||
Over twelve months |
10,618 | ||
Total |
$ | 61,902 | |
The following table sets forth our time deposits classified by interest rate as of the dates indicated.
At June 30, | |||||||||
2010 | 2008 | 2007 | |||||||
(In thousands) | |||||||||
Interest Rate: |
|||||||||
Less than 2% |
$ | 14,591 | $ | 2,952 | $ | | |||
2.00% - 2.99% |
179,827 | 80,445 | 2,116 | ||||||
3.00% - 3.99% |
19,611 | 98,579 | 66,342 | ||||||
4.00% - 4.99% |
1,646 | 17,726 | 43,661 | ||||||
5.00% - 5.99% |
| 20 | 87,301 | ||||||
Total |
$ | 215,675 | $ | 199,722 | $ | 199,420 | |||
The following table sets forth the amount and maturities of our time deposits at June 30, 2010.
At June 30, 2010 | ||||||||||||||||||
Period to Maturity | ||||||||||||||||||
Less Than
One Year |
Over One
Year to Two Years |
Over Two
Years to Three Years |
Over Three
Years |
Total |
Percentage
of Total Certificate Accounts |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||||
Interest Rate: |
||||||||||||||||||
Less than 2% |
$ | 14,591 | $ | | $ | | $ | | $ | 14,591 | 6.77 | % | ||||||
2.00% - 2.99% |
147,958 | 29,301 | 2,478 | 90 | 178,827 | 83.38 | ||||||||||||
3.00% - 3.99% |
18,738 | 802 | 71 | | 19,611 | 9.09 | ||||||||||||
4.00% - 4.99% |
1,552 | 94 | | | 1,646 | 0.76 | ||||||||||||
5.00% - 5.99% |
| | | | | | ||||||||||||
Total |
$ | 182,839 | $ | 30,197 | $ | 2,549 | $ | 90 | $ | 215,675 | 100.00 | % | ||||||
Borrowings . We may obtain advances from the Federal Home Loan Bank of Atlanta upon the security of our capital stock in the Federal Home Loan Bank of Atlanta and certain of our mortgage loans and mortgage-backed securities. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. To the extent such borrowings have different terms to repricing than our deposits, they can change our interest rate risk profile.
95
We had no borrowings from the Federal Home Loan Bank of Atlanta at June 30, 2010 or June 30, 2009. At June 30, 2010, we had access to Federal Home Loan Bank of Atlanta advances of up to $36.1 million. It is possible that we may use Federal Home Loan Bank of Atlanta advances or other short-term borrowings to fund loan
Properties
As of June 30, 2010, the net book value of our properties was $3.3 million. The following is a list of our offices:
Location |
Leased or
Owned |
Year Acquired
or Leased |
Square Footage |
Net Book Value
of Real Property |
|||||
(In thousands) | |||||||||
Main Office: |
|||||||||
115 E. North 2 nd St. Seneca, South Carolina |
Owned | 1966 | 7,000 | $ | 1,186 | ||||
Main Office Annex: |
|||||||||
201 E. North 2 nd St. Seneca, South Carolina |
Owned | 1996 | 7,500 | 738 | |||||
Branch Offices: |
|||||||||
813 123 By-Pass Seneca, South Carolina |
Owned | 1985 | 5,250 | 535 | |||||
204 W. North Broad St. Walhalla, South Carolina |
Owned | 1973 | 3,100 | 478 | |||||
111 W. Windsor St. Westminster, South Carolina |
Owned | 1972 | 3,200 | 340 | |||||
$ | 3,277 | ||||||||
We believe that current facilities are adequate to meet our present and foreseeable needs, subject to possible future expansion.
Subsidiary and Other Activities
Oconee Federal Savings and Loan Association has no subsidiaries.
Legal Proceedings
We are not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business. At June 30, 2010, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.
96
Expense and Tax Allocation
Oconee Federal Savings and Loan Association will enter into an agreement with Oconee Federal Financial Corp. and Oconee Federal, MHC to provide them with certain administrative support services for compensation not less than the fair market value of the services provided. In addition, Oconee Federal Savings and Loan Association and Oconee Federal Financial Corp. will enter into an agreement to establish a method for allocating and for reimbursing the payment of their consolidated tax liability.
Personnel
As of June 30, 2010, we had 45 full-time employees and no part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good relations with our employees.
FEDERAL, STATE AND LOCAL TAXATION
Federal Taxation
General . Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association will be subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. Oconee Federal Savings and Loan Associations tax returns have not been audited during the past five years. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Oconee Federal Financial Corp. or Oconee Federal Savings and Loan Association.
Method of Accounting . For federal income tax purposes, Oconee Federal Savings and Loan Association currently reports its income and expenses on the accrual method of accounting and uses a tax year ending June 30 for filing its federal income tax returns.
Bad Debt Reserves . Prior to the Small Business Protection Act of 1996 (the 1996 Act), Oconee Federal Savings and Loan Association and similar savings institutions were permitted to establish reserves for bad debts and to make annual additions to the reserve using several methods. For taxable years beginning after 1995, savings institutions are permitted to compute their bad debt deductions only to the same extent that banks are permitted. Accordingly, small savings institutions with less than $500 million in assets may maintain a reserve using the experience method, and large savings institutions with more than $500 million in assets are required to use the specific charge-off method. Oconee Federal Savings and Loan Association currently has less than $500 million in assets and uses the experience method to determine its annual additions to its tax bad debt reserves. Under the experience method, a savings institution is allowed a deduction for amounts that it adds to its bad debt reserve in accordance with Internal Revenue Code Section 585. Instead of taking a direct deduction when a debt becomes worthless, the savings institution charges off the debt against its reserve. The determination of whether and when a debt becomes worthless is made in the same manner as under the specific charge-off method. The savings institution calculates its addition to its bad debt reserve at the end of each year.
97
These additions are, within specified formula limits, deducted in arriving at taxable income. Pursuant to the 1996 Act, Oconee Federal Savings and Loan Association was required to recapture into taxable income a portion of its bad debt reserve. Savings institutions were required to recapture any reserves in excess of the amounts allowed except for reserves established after the end of the base year. For Oconee Federal Savings and Loan Association, the reserve balance as of June 30, 1987 is preserved and is referred to as the base year reserve. The experience method authorizes a savings institution to add to its reserve at least the amount required to maintain the reserve balance as it existed at the end of its base year, even if this addition causes the reserve to exceed the permissible level computed using the experience method alone.
Taxable Distributions and Recapture . Prior to the 1996 Act, federal tax bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if the thrift institution failed to meet certain thrift asset and definitional tests. Federal legislation has eliminated these thrift-related recapture rules.
At June 30, 2010, our total federal and South Carolina pre-1988 base year tax bad debt reserve was approximately $5.28 million. Under current law, pre-1988 federal base year reserves remain subject to recapture if a thrift institution makes certain non-dividend distributions, certain repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a thrift or bank charter.
Alternative Minimum Tax . The Internal Revenue Code of 1986, as amended imposes an alternative minimum tax (AMT) at a rate of 20% on a base of regular taxable income plus certain tax preferences (alternative minimum taxable income or AMTI). The AMT is payable to the extent such AMTI is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of AMTI. Certain payments of AMT may be used as credits against regular tax liabilities in future years. Oconee Federal Savings and Loan Association has not been subject to the AMT and has no such amounts available as credits for carryover.
Net Operating Loss Carryovers . A financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At June 30, 2010, Oconee Federal Savings and Loan Association had no net operating loss carryforwards for federal and state income tax purposes.
Corporate Dividends-Received Deduction . Oconee Federal Financial Corp. may exclude from its income 100% of dividends received from Oconee Federal Savings and Loan Association as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 80% in the case of dividends received from 20%-or-more-owned domestic corporations and 70% in the case of dividends received from less-than-20%-owned domestic corporations.
98
State and Local Taxation
South Carolina State Taxation . Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association will be required to file South Carolina income tax returns and pay tax at a stated tax rate of 5% and 6%, respectively, of South Carolina taxable income. For these purposes, South Carolina taxable income generally means federal taxable income subject to certain modifications, primarily the exclusion of interest income on United States obligations, state income tax deductions, and adjustments for bonus depreciation deductions.
General
As savings and loan holding companies, Oconee Federal, MHC and Oconee Federal Financial Corp. are required by federal law to report to, and otherwise comply with the rules and regulations of, the Office of Thrift Supervision. As a result of the Dodd-Frank Act, the powers and duties of the Office of Thrift Supervision with respect to savings and loan and mutual holding companies will be transferred to the Federal Reserve Board within one year of the date of the legislation, unless extended by up to six months. At that time, we will be subject to the rules and regulations, as well as supervision, of the Federal Reserve Board. In addition, after the offering is completed, Oconee Federal Financial Corp. will be subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
Oconee Federal Savings and Loan Association is examined, regulated and supervised by the Office of Thrift Supervision and is subject to examination by the FDIC. As a result of the Dodd-Frank Act, the powers and duties of the Office of Thrift Supervision with respect to savings associations such as Oconee Federal Savings and Loan Association, will be transferred to the Office of the Comptroller of the Currency. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDICs deposit insurance fund, the banking system and depositors. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Following completion of its examination, the federal agency critiques the institutions operations and assigns its rating (known as an institutions CAMELS rating). Under federal law, an institution may not disclose its CAMELS rating to the public. Oconee Federal Savings and Loan Association also is a member of and owns stock in the Federal Home Loan Bank of Atlanta, which is one of the twelve regional banks in the Federal Home Loan Bank System. Oconee Federal Savings and Loan Association also is currently regulated to a lesser extent by the Federal Reserve Board governing reserves to be maintained against deposits and other matters. The Office of Thrift Supervision examines Oconee Federal Savings and Loan Association and prepares reports for the consideration of its board of directors on any operating deficiencies. Oconee Federal Savings and Loan Associations relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of Oconee Federal Savings and Loan Associations mortgage documents.
99
The Dodd-Frank Act and the extensive new regulations implementing the Act, will significantly affect our business and operating results, and any future laws or regulations, whether enacted by Congress or implemented by the FDIC, the Comptroller of the Currency or the Federal Reserve Board, could have a material adverse impact on Oconee Federal, MHC, Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association.
Set forth below is a brief description of certain regulatory requirements applicable to Oconee Federal, MHC, Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association. The description below is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association.
New Federal Legislation
The recently enacted Dodd-Frank Act will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act will eliminate our current primary federal regulator, the Office of Thrift Supervision, and require Oconee Federal Savings and Loan Association to be regulated by the Office of the Comptroller of the Currency (the primary federal regulator for national banks). The Dodd-Frank Act also authorizes the Federal Reserve Board to supervise and regulate all savings and loan holding companies, including mutual holding companies, like Oconee Federal Financial Corp. and Oconee Federal, MHC, in addition to bank holding companies that it currently regulates. As a result, the Federal Reserve Boards current regulations applicable to bank holding companies, including holding company capital requirements, will apply to savings and loan holding companies like Oconee Federal Financial Corp. and Oconee Federal, MHC. These capital requirements are substantially similar to the capital requirements currently applicable to Oconee Federal Savings and Loan Association, as described in Supervision and RegulationFederal Banking RegulationCapital Requirements. Moreover, Oconee Federal, MHC will require the approval of the Federal Reserve Board before it may waive the receipt of any dividends from Oconee Federal Financial Corp., and there is no assurance that the Federal Reserve Board will approve future dividend waivers or what conditions it may impose on such waivers. See The recently enacted financial reform legislation may have an adverse effect on our ability to pay dividends, which would adversely affect the value of our common stock, in the Risk Factors section of this prospectus. The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. Bank holding companies with assets of less than $500 million are exempt from these capital requirements. Under the Dodd-Frank Act, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.
100
The Dodd-Frank Act also creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Oconee Federal Savings and Loan Association, including the authority to prohibit unfair, deceptive or abusive acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.
The legislation also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013. Lastly, the Dodd-Frank Act will increase stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called golden parachute payments, and by authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a companys proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded.
It is difficult to predict at this time what impact the new legislation and implementing regulations will have on community banks like Oconee Federal Savings and Loan Association, including the lending and credit practices of such banks. Moreover, many of the provisions of the Dodd-Frank Act will not take effect for at least a year, and the legislation requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years. Although the substance and scope of these regulations cannot be determined at this time, it is expected that the legislation and implementing regulations, particularly those provisions relating to the new Consumer Financial Protection Bureau and mutual holding company dividend waivers, will increase our operating and compliance costs and restrict our ability to pay dividends.
Federal Banking Regulation
Business Activities. A federal savings and loan association derives its lending and investment powers from the Home Owners Loan Act, as amended, and the regulations of the Office of Thrift Supervision. Under these laws and regulations, Oconee Federal Savings and Loan Association may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. Oconee Federal Savings and Loan Association also may establish subsidiaries that may engage in activities not otherwise permissible for Oconee Federal Savings and Loan Association, including real estate investment and securities and insurance brokerage.
101
Capital Requirements. Office of Thrift Supervision regulations require savings and loan associations to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio. The prompt corrective action standards discussed below, in effect, establish a minimum 2% tangible capital standard.
The risk-based capital standard for savings and loan associations requires the maintenance of Tier 1 (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 Office of Thrift Supervision, based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings and loan association that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings and loan association.
At June 30, 2010, Oconee Federal Savings and Loan Associations capital exceeded all applicable requirements. See Regulatory Capital Compliance.
Loans-to-One Borrower. Generally, a federal savings and loan association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of June 30, 2010, Oconee Federal Savings and Loan Associations largest lending relationship with a single or related group of borrowers totaled $3.6 million, which represented 6.0% of unimpaired capital and surplus; therefore, Oconee Federal Savings and Loan Association was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test. As a federal savings and loan association, Oconee Federal Savings and Loan Association is subject to a qualified thrift lender, or QTL, test. Under the QTL test, Oconee Federal Savings and Loan Association must maintain at least 65% of its portfolio assets in qualified thrift investments in at least nine months of the most recent 12-month period. Portfolio assets generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings and loan associations business.
Qualified thrift investments includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of portfolio assets. Qualified thrift investments also include 100% of an
102
institutions credit card loans, education loans and small business loans. Oconee Federal Savings and Loan Association also may satisfy the QTL test by qualifying as a domestic building and loan association as defined in the Internal Revenue Code.
A savings and loan association that fails the qualified thrift lender test must either convert to a commercial bank charter or operate under specified restrictions set forth in the Home Owners Loan Act. At June 30, 2010, Oconee Federal Savings and Loan Association maintained approximately 95.06% of its portfolio assets in qualified thrift investments and, therefore, satisfied the QTL test.
Capital Distributions. Office of Thrift Supervision regulations govern capital distributions by a federal savings and loan association, which include cash dividends, stock repurchases and other transactions charged to the savings and loan associations capital account. A savings and loan association must file an application for approval of a capital distribution if:
|
the total capital distributions for the applicable calendar year exceed the sum of the associations net income for that year to date plus the associations retained net income for the preceding two years; |
|
the association would not be at least adequately capitalized following the distribution; |
|
the distribution would violate any applicable statute, regulation, agreement or Office of Thrift Supervision-imposed condition; or |
|
the association is not eligible for expedited treatment of its application or notice filings. |
Even if an application is not otherwise required, every savings and loan association that is a subsidiary of a holding company must still file a notice with the Office of Thrift Supervision at least 30 days before our board of directors declares a dividend or approves a capital distribution.
The Office of Thrift Supervision may disapprove a notice or application if:
|
the association would be undercapitalized following the distribution; |
|
the proposed capital distribution raises safety and soundness concerns; or |
|
the capital distribution would violate a prohibition contained in any statute, regulation or agreement. |
In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution, if after making such distribution the institution would be undercapitalized.
Liquidity. A federal savings and loan association is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. We seek to maintain a ratio of liquid assets not subject to pledge as a percentage of deposits and borrowings of 4.0% or greater. At June 30, 2010, this ratio was 18.29%. We anticipate that we will maintain higher liquidity levels following the completion of the offering.
103
Community Reinvestment Act and Fair Lending Laws. All federal savings and loan associations have a responsibility under the Community Reinvestment Act and related regulations of the Office of Thrift Supervision to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings and loan association, the Office of Thrift Supervision is required to assess the associations record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An associations failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications, such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of Thrift Supervision, as well as other federal regulatory agencies and the Department of Justice. Oconee Federal Savings and Loan Association received a satisfactory Community Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties. A federal savings and loan associations authority to engage in transactions with its affiliates is limited by Office of Thrift Supervision regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W. The term affiliate for these purposes generally means any company that controls, is controlled by, or is under common control with an insured depository institution such as Oconee Federal Savings and Loan Association. Oconee Federal Financial Corp. is an affiliate of Oconee Federal Savings and Loan Association. In general, transactions with affiliates must be on terms that are as favorable to the savings and loan association as comparable transactions with non-affiliates. In this regard, transaction between an insured depository institution and its affiliate are limited to 10% of the institutions unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the savings and loan association. In addition, Office of Thrift Supervision regulations prohibit a savings and loan association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. The Office of Thrift Supervision requires savings and loan associations to maintain detailed records of all transactions with affiliates.
Oconee Federal Savings and Loan Associations authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders:
|
be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and |
104
|
not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Oconee Federal Savings and Loan Associations capital. |
In addition, Oconee Federal Savings and Loan Associations board of directors must approve extensions of credit in excess of certain limits.
Enforcement. The Office of Thrift Supervision has primary enforcement responsibility over federal savings and loan associations and has the authority to bring enforcement action against all institution-affiliated parties, including stockholders, and 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 by the Office of Thrift Supervision may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day. The FDIC also has the authority to terminate deposit insurance or to recommend to the Director of the Office of Thrift Supervision that enforcement action be taken with respect to a particular savings institution. If the Director does not take action, the FDIC has authority to take action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. 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. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan.
Prompt Corrective Action Regulations . Under the prompt corrective action regulations, the Office of Thrift Supervision is authorized and, under certain circumstances, required to take supervisory actions against undercapitalized savings and loan associations. For this purpose, a savings and loan association is placed in one of the following five categories based on the associations capital:
|
well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital); |
105
|
adequately capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital); |
|
undercapitalized (less than 8% total risk-based capital, 4% Tier 1 risk-based capital or 3% leverage capital); |
|
significantly undercapitalized (less than 6% total risk-based capital, 3% Tier 1 risk-based capital or 3% leverage capital); and |
|
critically undercapitalized (less than 2% tangible capital). |
Generally, the Office of Thrift Supervision is required to appoint a receiver or conservator for a savings and loan association that is critically undercapitalized within specific time frames. The regulations also provide that a capital restoration plan must be filed with the Office of Thrift Supervision within 45 days of the date a savings and loan association receives notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. Any holding company for the savings and loan association required to submit a capital restoration plan must guarantee the lesser of (i) an amount equal to 5% of the associations assets at the time it was notified or deemed to be undercapitalized by the Office of Thrift Supervision, or (ii) the amount necessary to restore the savings and loan association to adequately capitalized status. This guarantee remains in place until the Office of Thrift Supervision notifies the association that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the Office of Thrift Supervision has the authority to require payment and collect payment under the guarantee. Failure by a holding company to provide the required guarantee will result in certain operating restrictions on the savings and loan association, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The Office of Thrift Supervision may also take any one of a number of discretionary supervisory actions against undercapitalized associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.
At June 30, 2010, Oconee Federal Savings and Loan Association met the criteria for being considered well-capitalized.
Insurance of Deposit Accounts. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institution and credit unions to $250,000 per depositor. Non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013. Under the FDICs risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. An institution is assigned an assessment rate from 7 to 77.5 basis points based upon the risk category to which it is assigned.
The FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits. The Dodd-Frank Act mandates that the statutory minimum reserve ratio of the Deposit Insurance Fund increase from 1.15% to 1.35% of insured deposits by September 30, 2020. Banks with assets of less than $10 billion are exempt
106
from any additional assessments necessary to increase the reserve fund above 1.15%. As part of a plan to restore the reserve ratio to 1.15%, in 2009 the FDIC imposed a special assessment on all insured institutions equal to five basis points of assets less Tier 1 capital as of June 30, 2009, payable on September 30, 2009, in order to cover losses to the Deposit Insurance Fund resulting from bank failures. Oconee Federal Savings and Loan Association recorded an expense of $127,260 during the quarter ended June 30, 2009, to reflect the special assessment. In addition, the FDIC increased its quarterly deposit insurance assessment rates and amended the method by which rates are calculated.
In addition, in lieu of further special assessments, the FDIC required all insured depository institutions to prepay on December 30, 2009 their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. Estimated assessments for the fourth quarter of 2009 and for all of 2010 were based upon the assessment rate in effect on September 30, 2009, with 3 basis points added for the 2011 and 2012 assessment rates. In addition, a 5% annual growth in the assessment base was assumed. Prepaid assessments are to be applied against the actual quarterly assessments until exhausted, and may not be applied to any special assessments that may occur in the future. Any unused prepayments will be returned to the institution on June 30, 2013. On December 30, 2009, Oconee Federal Savings and Loan Association prepaid approximately $880,000 in estimated assessment fees. Because the prepaid assessments represent the prepayment of future expense, they do not affect Oconee Federal Savings and Loan Associations capital (the prepaid asset will have a risk-weighting of 0%) or tax obligations.
Insurance of deposits may be terminated by the FDIC upon a finding that an 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. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
In addition to the FDIC assessments, the Financing Corporation (FICO) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. For the quarter ended June 30, 2010, the annualized FICO assessment rate equaled 0.20 basis points for each $100 in domestic deposits maintained at an institution. The bonds issued by the FICO are due to mature in 2017 through 2019.
U.S. Treasurys Troubled Asset Relief Program Capital Purchase Program. The Emergency Economic Stabilization Act of 2008 provided the Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. financial markets. One of the programs established under the legislation is the Troubled Asset Relief ProgramCapital Purchase Program (CPP), which provided for direct equity investment by the U.S. Treasury Department in perpetual preferred stock or similar securities of qualified financial institutions. CPP participants must comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. We opted not to participate in the CPP.
107
Prohibitions Against Tying Arrangements . Federal savings and loan associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Federal Home Loan Bank System. Oconee Federal Savings and Loan Association is a member of the Federal Home Loan Bank System, which consists of twelve regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Atlanta, Oconee Federal Savings and Loan Association is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of June 30, 2010, Oconee Federal Savings and Loan Association was in compliance with this requirement.
Federal Reserve System
Federal Reserve Board regulations require savings and loan associations to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. At June 30, 2010, Oconee Federal Savings and Loan Association was in compliance with these reserve requirements.
Other Regulations
Interest and other charges collected or contracted for by Oconee Federal Savings and Loan Association are subject to state usury laws and federal laws concerning interest rates. Oconee Federal Savings and Loan Associations operations are also subject to federal laws applicable to credit transactions, such as the:
|
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; |
|
Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; |
|
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; |
|
Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; |
|
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; |
|
Truth in Savings Act; and |
|
rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. |
108
The operations of Oconee Federal Savings and Loan Association also are subject to the:
|
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; |
|
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers rights and liabilities arising from the use of automated teller machines and other electronic banking services; |
|
Check Clearing for the 21 st Century Act (also known as Check 21), which gives substitute checks, such as digital check images and copies made from that image, the same legal standing as the original paper check; |
|
The USA PATRIOT Act, which requires savings and loan associations to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and |
|
The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institutions privacy policy and provide such customers the opportunity to opt out of the sharing of certain personal financial information with unaffiliated third parties. |
Holding Company Regulation
General . Upon completion of the reorganization, Oconee Federal, MHC and Oconee Federal Financial Corp. will be non-diversified savings and loan holding companies within the meaning of the Home Owners Loan Act. As such, Oconee Federal, MHC and Oconee Federal Financial Corp. will be registered with the Office of Thrift Supervision and will be subject to Office of Thrift Supervision regulations, examinations, supervision and reporting requirements. In addition, the Office of Thrift Supervision will have enforcement authority over Oconee Federal Financial Corp. and Oconee Federal, MHC, and their non-savings institution subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to Oconee Federal Savings and Loan Association. Under the Dodd-Frank Act, the powers and duties of the Office of Thrift Supervision relating to savings and loan holding companies and their subsidiaries, including rulemaking and supervision authority, will be transferred to the Federal Reserve Board no later than one year from the July 21, 2010 effective date of the legislation, subject to extension of up to six months if requested by the Secretary of the Treasury.
109
Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring control of another savings institution or holding company thereof, without prior written approval of the Office of Thrift Supervision. It also prohibits the acquisition or retention of, with specified exceptions, more than 5% of the equity securities of a company engaged in activities that are not closely related to banking or financial in nature or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision must consider the financial and managerial resources and future prospects of the savings institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.
Federal Securities Laws
Oconee Federal Financial Corp. has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 for the registration of the shares of common stock to be issued pursuant to the offering. Upon completion of the offering, Oconee Federal Financial Corp. common stock will be registered with the Securities and Exchange Commission. Oconee Federal Financial Corp. will be subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of shares of common stock to be issued in the offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not affiliates of Oconee Federal Financial Corp. may be resold without registration. Shares purchased by an affiliate of Oconee Federal Financial Corp. will be subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If Oconee Federal Financial Corp. meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of Oconee Federal Financial Corp. that complies with the other conditions of Rule 144, including those that require the affiliates sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of Oconee Federal Financial Corp. or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, Oconee Federal Financial Corp. may permit affiliates to have their shares registered for sale under the Securities Act of 1933.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer will be required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the board of directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control
110
over financial reporting or in other factors that could materially affect internal control over financial reporting. We will be subject to further reporting and audit requirements beginning with the year ending June 30, 2011 under the requirements of the Sarbanes-Oxley Act. Specifically, our management will be required to design and implement disclosure controls and procedures and internal controls over financial reporting, evaluate the effectiveness of these controls on a quarterly basis, and certify as to the effectiveness. We will prepare policies, procedures and systems designed to ensure compliance with these regulations.
Shared Management Structure
The directors of Oconee Federal Financial Corp. will be those same persons who are the directors of Oconee Federal Savings and Loan Association. In addition, each executive officer of Oconee Federal Financial Corp. will also be an executive officer of Oconee Federal Savings and Loan Association. Although there are no present plans to do so, both Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association may choose to appoint additional or different persons as directors and executive officers in the future. We expect that Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association will continue to have common executive officers until there is a business reason to establish separate management structures. To date, directors and executive officers have been compensated for their services to Oconee Federal Savings and Loan Association. These individuals may receive additional compensation, such as director fees, for their services to Oconee Federal Financial Corp.
Directors of Oconee Federal Financial Corp.
The board of directors of Oconee Federal Financial Corp. will initially consist of six members. Directors will serve three-year staggered terms so that approximately one-third of the directors will be elected at each annual meeting of stockholders. The class of directors whose term of office expires at the first annual meeting of stockholders following completion of the reorganization and offering will consist of Directors T. Rhett Evatt and Curtis T. Evatt. The class of directors whose term expires at the second annual meeting of stockholders following completion of the reorganization and offering will consist of Directors McLellan and Poore. The class of directors whose term of office expires at the third annual meeting of stockholders following the completion of the reorganization and offering will consist of Directors Mays and Sandifer. Because Oconee Federal, MHC will own a majority of our outstanding common stock, we will be a controlled corporation within the meaning of the NASDAQ corporate governance guidelines. As a controlled corporation, we will be exempt from certain requirements, including that a majority of our board of directors be independent under those standards, and that executive compensation and director nominations be overseen by independent directors. We intend that at least three of our directors will be independent and, under the NASDAQ corporate governance listing standards, Directors Mays, McLellan and Sandifer would be considered independent. In determining the independence of Director McLellan, the board of directors considered the fact that Oconee Federal Savings and Loan Association purchased certain of its insurance policies through the Byrd-McLellan Agency, which received commissions of approximately $8,100 in each of the past three years. The policies were negotiated on an arms length basis and the commissions were not in excess of the commissions that the Byrd-McLellan
111
Agency would have received with respect to insurance policies sold to other clients. The board of directors determined that the payment of the commissions does not interfere with
Executive Officers of Oconee Federal Financial Corp.
The following individuals will be the executive officers of Oconee Federal Financial Corp. and will hold the offices set forth below opposite their names.
Name |
Age (1) |
Position |
||
T. Rhett Evatt |
83 | President and Chief Executive Officer | ||
Curtis T. Evatt |
38 | Executive Vice President and Chief Financial Officer | ||
Nancy M. Carter |
58 | Senior Vice President and Assistant Treasurer |
(1) | As of June 30, 2010. |
The executive officers of Oconee Federal Financial Corp. will be elected annually and will hold office until their respective successors have been elected or until death, resignation, retirement or removal by our board of directors.
Directors of Oconee Federal Savings and Loan Association
Composition of our Board . We have six directors. Our directors serve three-year staggered terms so that approximately one-third of the directors are elected each year. After the completion of the offering, one class of directors of Oconee Federal Savings and Loan Association will be elected annually by Oconee Federal Financial Corp. as its sole stockholder.
The following table states our directors names, their ages as of June 30, 2010, and the calendar years when they began serving as directors:
Directors |
Age |
Position |
Director Since |
Current Term
to Expire (1) |
||||
T. Rhett Evatt |
83 |
President, Chief Executive Officer and Chairman of the Board |
1970 | 2011 | ||||
Curtis T. Evatt |
38 |
Executive Vice President, Chief Financial Officer and Director |
2010 | 2011 | ||||
Harry B. Mays, Jr. |
63 | Director | 2009 | 2010 | ||||
Robert N. McLellan, Jr. |
54 | Director | 2005 | 2010 | ||||
Cecil T. Sandifer, Jr. |
62 | Director | 1985 | 2012 | ||||
W. Maurice Poore |
66 | Director | 1995 | 2012 |
(1) | Our directors terms expire at our annual meeting of members, which is typically held in October of each year. If Messrs. Mays and McLellan are re-elected at the 2010 annual meeting of members, their terms will next expire at our 2013 annual meeting of stockholders. |
The Business Background of Our Directors and Executive Officers . The business experience for the past five years of each of our directors and executive officers is set forth below. Unless otherwise indicated, directors and executive officers have held their positions for the past five years.
112
Directors
T. Rhett Evatt currently serves as President, Chief Executive Officer and Chairman of the board of directors of Oconee Federal Savings and Loan Association and was appointed to that position in 1983. He has been employed by Oconee Federal Savings and Loan Association since 1960, and has held several positions prior to being named President and Chief Executive Officer, including President and Treasurer, a position he held from 1974 until his appointment as President and Chief Executive Officer. He currently serves as the Chairman of the Board of Directors of Oconee Federal Savings and Loan Association. Mr. Evatt was selected to serve as a director and as Chairman of the Board of Directors of Oconee Federal Financial Corp. because his extensive experience in a variety of roles at Oconee Federal Savings and Loan Association provides a broad and unique perspective on the challenges facing our organization and our business strategies and operations.
Curtis T. Evatt currently serves as Executive Vice President and Chief Financial Officer of Oconee Federal Savings and Loan Association, and was appointed to that position in 2010. He has been employed by Oconee Federal Savings and Loan Association since 1988, and has held several positions prior to being named Executive Vice President and Chief Financial Officer, including Senior Vice President and Assistant Secretary, a position he held from 2007 until his most recent appointment, and Treasurer. He was also elected to the board of directors of Oconee Federal Savings and Loan Association effective January 1, 2010. Mr. Evatt was selected to serve as a director of Oconee Federal Financial Corp. because his experience in a variety of roles at Oconee Federal Savings and Loan Association, particularly in finance and accounting, provides perspective on the challenges facing our organization and our business strategies and operations.
Harry B. Mays, Jr. is the owner of, and serves as pharmacist at, Mays Clinic Pharmacy, a position he has held since 1973. Mr. Mays was selected to serve as a director of Oconee Federal Financial Corp. because his experience managing his own business provides insight and perspective with respect to general business operations, as well as experience reviewing financial statements.
Robert N. McLellan, Jr. is the President and majority owner of Byrd-McLellan Agency, Inc., an insurance agency in Seneca, South Carolina. He has been employed at Byrd-McLellan agency since 1975, and became majority (51%) owner in 1986. Mr. McLellan was selected to serve as a director of Oconee Federal Financial Corp. because his experience managing his own business provides insight and perspective with respect to general business operations, as well as experience reviewing financial statements.
Cecil T. Sandifer, Jr. is President and Chief Executive Officer of Sandifer Funeral Home in Westminster, South Carolina and the President of Heritage Memorial Garden, Inc., a cemetery services company in Westminster, South Carolina. Mr. Sandifer has been employed by Sandifer Funeral Home since 1964, and is the 49% owner. He has been employed by Heritage Memorial Garden, Inc. since its formation in 1998, and is the 75% owner. Mr. Sandifer was selected to serve as a director of Oconee Federal Financial Corp. because his experience managing his own business provides insight and perspective with respect to general business operations, as well as experience reviewing financial statements.
113
W. Maurice Poore is currently retired. Prior to his retirement in 2009, he served as the Executive Vice President and Treasurer of Oconee Federal Savings and Loan Company, a position he held since 1998. He was employed by Oconee Federal Savings and Loan Association from 1970 until his retirement, and held several positions prior to being named Executive Vice President and Treasurer, including Vice President and Assistant Treasurer. Mr. Poore was selected to serve as a director of Oconee Federal Financial Corp. because his experience in a variety of roles at Oconee Federal Savings and Loan Association provides a broad and unique perspective on the challenges facing our organization and our business strategies and operations, and because his service as Treasurer provides unique insight into our financial accounting a practices and procedures, financial reporting and our relationship with our auditors.
Executive Officers Who Are Not Directors
Nancy M. Carter is the Senior Vice President and Assistant Treasurer of Oconee Federal Savings and Loan Association and was appointed to that position on January 1, 2010. She has previously served in a variety of positions with Oconee Federal Savings and Loan Association since 1970, including Assistant Treasurer and Bookkeeper, Assistant Vice President and Assistant Treasurer, and Vice President and Assistant Treasurer.
Meetings of the Board of Directors and Committees
Our board of directors meets on a monthly basis and may hold additional special meetings. During the year ended June 30, 2010, the board of directors of Oconee Federal Savings and Loan Association held twelve regular meetings and two special meetings.
Committees of Oconee Federal Financial Corp.
Oconee Federal Financial Corp. will have standing Audit, Nominating and Compensation Committees.
The Audit Committee will be responsible for supervising Oconee Federal Financial Corp.s accounting, financial reporting and financial control processes. Generally, the Audit Committee will oversee managements efforts with respect to the quality and integrity of our financial information and reporting functions and the adequacy and effectiveness of our system of internal accounting and financial controls. The Audit Committee will also review the independent audit process and the qualifications of the independent registered public accounting firm.
The Audit Committee will be comprised of Directors McLellan, Sandifer and Poore. We intend that each member of the Audit Committee will be deemed independent as defined in the Nasdaq corporate governance listing standards, except for Mr. Poore. Mr. Poore will serve on the Audit Committee pursuant to an exemption that permits one director who is not independent under the Nasdaq listing standards to serve on the audit committee for a period of up to two years, so long as that director does not receive any advisory, consulting or other compensatory fee, and is not currently an officer, employee or affiliate of Oconee Federal Financial Corp. or any subsidiary. The board of directors has determined that Mr. Poores past service as an officer of Oconee Federal Savings and Loan Association will not affect the ability of the Audit Committee to act independently of management and to satisfy applicable SEC requirements for audit committees of publicly held companies. Under the Nasdaq listing standards, Mr. Poore will be deemed independent as of January 1, 2012 for purposes of ongoing service on the Audit Committee.
114
Beginning in 2011, the Audit Committee will have sole responsibility for engaging our registered public accounting firm. Based on its review of the criteria of an audit committee financial expert under the rules adopted by the Securities and Exchange Commission, our board of directors believes that Mr. Poore qualifies as an audit committee financial expert under applicable SEC rules as a result of his extensive experience serving in a variety of positions with Oconee Federal Savings and Loan Association since 1970. Specifically, while serving as Executive Vice President and Treasurer, he performed the functions typically performed by a chief financial officer. Each of Directors McLellan and Sandifer has an understanding of, and the ability to analyze and evaluate, Oconee Federal Savings and Loan Associations financial statements, and has overseen and assessed the finances of their personal businesses. In addition, having served on the audit committee of Oconee Federal Savings and Loan Association for a number of years, each has an understanding of an audit committees functions.
The Nominating Committee will meet annually in order to nominate candidates for membership on our board of directors. The Nominating Committee will be comprised of Directors Mays, McLellan and Sandifer.
The Compensation Committee will establish Oconee Federal Financial Corp.s compensation policies and will review compensation matters. The Compensation Committee will be comprised of Directors Mays, McLellan and Sandifer.
Board Structure and Risk Oversight
Our board of directors is chaired by T. Rhett Evatt, who is also our president and chief executive officer. We do not have a lead independent director. We believe our structure is appropriate given the relatively small size and relatively non-complex operating philosophy of our organization. In addition, we have never engaged in a transaction with an affiliate of our Chairman. As chief executive officer of our organization, and having been employed by Oconee Federal Savings and Loan Association in various roles for 40 years, Mr. Evatt is well-positioned to understand the challenges faced by our organization. As a result, he can recommend solutions and prioritize the agenda for action by the board of directors. We understand the risk that an inside Chairman of the Board could theoretically manage the board of directors agenda to limit the consideration of important issues relating to management. To minimize the risk involved with having a joint chairman and chief executive officer, the independent directors will meet in executive sessions periodically to discuss certain matters such as the chief executive officers performance and his annual compensation as well as our independent audit and internal controls.
The board of directors will be actively involved in oversight of risks that could affect Oconee Federal Financial Corp. This oversight will be conducted in part through committees of the board of directors, but the full board of directors has retained responsibility for general oversight of risks. The board of directors intends to satisfy this responsibility through full reports by each committee chair regarding the committees considerations and actions, through regular reports directly from officers responsible for oversight of particular risks, and through internal and external audits. Risks relating to the direct operations of Oconee Federal Savings and Loan Association are and will continue to be further overseen by the board of directors of Oconee
115
Federal Savings and Loan Association, who are the same individuals who serve on the board of directors of Oconee Federal Financial Corp. The board of directors of Oconee Federal Savings and Loan Association also has additional committees that conduct risk oversight separate from Oconee Federal Financial Corp. Further, the board of directors oversees risks through the establishment of policies and procedures that are designed to guide daily operations in a manner consistent with applicable laws, regulations and risks acceptable to the organization.
Corporate Governance Policies and Procedures
In addition to establishing committees of our board of directors, Oconee Federal Financial Corp. will adopt several policies to govern the activities of both Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association, including corporate governance policies and a code of business conduct and ethics. The corporate governance policies are expected to involve such matters as the following:
|
the composition, responsibilities and operation of our board of directors; |
|
the establishment and operation of board committees, including audit, nominating and compensation committees; |
|
convening executive sessions of independent directors; and |
|
our board of directors interaction with management and third parties. |
The code of business conduct and ethics, which is expected to apply to all employees and directors, will address conflicts of interest, the treatment of confidential information, general employee conduct and compliance with applicable laws, rules and regulations. In addition, the code of business conduct and ethics will be designed to deter wrongdoing and to promote honest and ethical conduct, the avoidance of conflicts of interest, full and accurate disclosure and compliance with all applicable laws, rules and regulations.
116
Executive Officer Compensation
Summary Compensation Table. The table below summarizes for the year ended June 30, 2010 the total compensation paid to or earned by our President and Chief Executive Officer T. Rhett Evatt, and our two other most highly compensated executive officers. Each individual listed in the table below is referred to as a named executive officer.
Summary Compensation Table
Name and principal position |
Year |
Salary
($) |
Bonus
($) |
All
other
compensation ($)(1) |
Total
($) |
|||||
T. Rhett Evatt President and Chief Executive Officer |
2010 | 178,516 | 9,424 | 70,502 | 258,442 | |||||
Curtis T. Evatt Executive Vice President and Chief Financial Officer (2) |
2010 | 82,128 | 3,372 | 21,143 | 106,643 | |||||
W. Maurice Poore Executive Vice President and Treasurer (3) |
2010 | 108,242 | 7,394 | 45,630 | 161,266 |
(1) | The amounts in this column reflect what Oconee Federal Savings and Loan Association paid for, or reimbursed, the applicable named executive officer for the various benefits and perquisites received. A break-down of the various elements of compensation in this column is set forth in the table provided below. |
(2) | Mr. Curtis T. Evatt became Executive Vice President and Chief Financial Officer of Oconee Federal Savings and Loan Association on January 1, 2010. Mr. Evatt previously served as Senior Vice President and Assistant Secretary of Oconee Federal Savings and Loan Association. |
(3) | Mr. Poore retired as Executive Vice President and Treasurer of Oconee Federal Savings and Loan Association on December 31, 2009. |
All Other Compensation
Name |
Auto
Expenses ($) |
Country
Club Dues ($) |
Board
Fees ($) |
Employer
Contributions to Profit Sharing Plan ($) |
Life
Insurance
Premiums Paid ($) |
Total
All
Other Compensation ($) |
||||||
T. Rhett Evatt |
7,309 | 1,650 | 23,775 | 26,025 | 11,743 | 70,502 | ||||||
Curtis T. Evatt |
1,828 | 1,650 | 7,737 | 9,928 | | 21,143 | ||||||
W. Maurice Poore |
1,828 | | 20,001 | 23,801 | | 45,630 |
Benefit Plans and Agreements
Employment Agreements. In connection with the reorganization, Oconee Federal Savings and Loan Association anticipates entering into employment agreements with each of Mr. T. Rhett Evatt and Mr. Curtis T. Evatt, which will be effective as of the date of the reorganization. Each agreement has substantially similar terms and has an initial term of three years. Commencing on the first anniversary of the agreements and on each subsequent anniversary thereafter, the agreements will be renewed for an additional year so that the remaining term will be three years, unless a notice is provided to the executive that the agreement will not renew. The current base salaries for Mr. T. Rhett Evatt and Mr. Curtis T. Evatt are $174,720 and $97,356 respectively. In addition to the base salary, each agreement provides for, among other things, participation in bonus programs and other fringe benefit plans applicable to executive employees, including automobile and club membership benefits. The executives employment may be terminated for cause at any time, in which event the executive would have no right to receive compensation or other benefits for any period after termination.
117
Certain events resulting in the executives termination or resignation entitle the executive to payments of severance benefits following termination of employment. In the event the executives involuntary termination for reasons other than for cause, disability or retirement, or in the event the executive resigns during the term of the agreement following (a) failure to appoint the executive to the executive position set forth in the agreement, (b) a material change in the executives function, duties or responsibilities resulting in a reduction of the responsibility, scope, or importance of executives position, (c) relocation of the executives office by more than 20 miles, (d) a material reduction in the benefits or perquisites paid to the executive unless such reduction is part of a reduction that is generally applicable to officers or employees of Oconee Federal Savings and Loan Association, or (e) a material breach of the employment agreement by Oconee Federal Savings and Loan Association, then the executive would be entitled to a severance payment in the form of a cash lump sum equal to the base salary and bonus the executive would be entitled to receive for the remaining unexpired term of the employment agreement. For this purpose, the bonuses payable will be deemed to be equal to the highest bonus paid at any time during the prior three years. In addition, the executive would be entitled to receive a lump sum payment equal to the present value of the contributions that would reasonably have been expected to be made on executives behalf under Oconee Federal Savings and Loan Associations defined contribution plans (e.g., 401(k) Plan, Employee Stock Ownership Plan) if the executive had continued working for the remaining unexpired term of the employment agreement earning the salary that would have been achieved during such period. Internal Revenue Code Section 409A may require that a portion of the above payments cannot be made until six months after termination of employment, if the executive is a key employee under IRS rules. In addition, the executive would be entitled, at no expense to the executive, to the continuation of life insurance and non-taxable medical and dental coverage for the remaining unexpired term of the employment agreement.
In the event of a change in control of Oconee Federal Savings and Loan Association or Oconee Federal Financial Corp., followed by executives involuntary termination other than for cause, disability or retirement, or resignation for one of the reasons set forth above within 18 months thereafter, the executive would be entitled to a severance payment in the form of a cash lump sum equal to (a) three (3) times the sum of (i) the highest rate of base salary paid to the executive at any time, and (ii) the highest bonus paid to the executive with respect to the three (3) completed fiscal years prior to the change of control, plus (b) a lump sum equal to the present value of the contributions that would reasonably have been expected to be made on the executives behalf under Oconee Federal Savings and Loan Associations defined contribution plans (e.g., 401(k) Plan, Employee Stock Ownership Plan) if the executive had continued working for an additional thirty-six (36) months after termination of employment, earning the salary that would have been achieved during such period. In addition, the executive would be entitled, at no expense to the executive, to the continuation of life insurance and non-taxable medical and dental coverage for thirty-six (36) months following the termination of employment. In the event payments made to the executive include an excess parachute payment as defined in Section 280G of the Internal Revenue Code, such payments will be cutback by the minimum dollar amount necessary to avoid this result.
118
Under each employment agreement, if an executive becomes disabled within the meaning of such term under Section 409A of the Internal Revenue Code, the executive shall receive benefits under any short-term or long-term disability plans maintained by Oconee Federal Savings and Loan Association, plus, if amount paid under such disability programs are less than the executives base salary, Oconee Federal Savings and Loan Association shall pay the executive an additional amount equal to the difference between such disability plan benefits and the amount of the executives full base salary for the longer of one year or the remaining term of the employment agreement following the termination of employment due to disability. Oconee Federal Savings and Loan Association will also provide the executive with continued life insurance and non-taxable medical and dental coverage until the earlier of (i) the date the executive returns to full-time employment with Oconee Federal Savings and Loan Association, (ii) the executives full-time employment with another employer, (iii) the expiration of the remaining term of the employment agreement, or (iv) death.
In the event of executives death, his estate or beneficiaries will be paid the executives base salary for one year from executives death, and the executives family will be entitled to continued non-taxable medical, dental and other insurance for twelve months following the executives death.
Upon termination of the executives employment, the executive shall be subject to certain restrictions on their ability to compete, or to solicit business or employees of Oconee Federal Savings and Loan Association and Oconee Federal Financial Corp. for a period of one year following termination of employment.
Non-Qualified Salary Continuation Agreement . Oconee Federal Savings and Loan Association entered into a non-qualified salary continuation agreement with T. Rhett Evatt in 1997. The agreement provides that Mr. Evatt is entitled to receive a supplemental retirement benefit of $10,000 a year payable over 15 years following his death, total and permanent disability, or retirement (with the benefit paid in monthly installments).
Deferred Compensation Agreement . Oconee Federal Savings and Loan Association entered into a deferred compensation agreement with Mr. W. Maurice Poore on February 1, 1996. Under the agreement, Mr. Poore elected to defer receipt of his director fees in the amount of $740 per month, and such deferrals ceased in August 2009. On the first day of the month following Mr. Poores attainment of age 65 1 / 2 , which was September 1, 2009, he began to receive payments in the amount of $36,000 a year payable over 15 years (with the benefit paid in monthly installments).
401(k) Plan . In connection with the reorganization, Oconee Federal Savings and Loan Association adopted the Oconee Savings and Loan Association 401(k) Profit Sharing Plan (401(k) Plan), effective October 1, 2010. The 401(k) Plan amends and supersedes the Oconee Savings and Loan Association Profit Sharing Plan. Employees who have attained age 21 and completed 90 consecutive days of employment are eligible to participate in the 401(k) Plan. Under the 401(k) Plan a participant may elect to defer, on a pre-tax basis, up to 100% of his or her salary in any plan year, subject to limits imposed by the Internal Revenue Code. For 2010, the salary deferral contribution limit is $16,500, provided, however, that a participant over age 50 may contribute an additional $5,500, for a total contribution of $22,000. In addition to salary deferral contributions, Oconee Federal Savings and Loan Association may make matching
119
contributions and profit sharing contributions. Generally, unless the participant elects otherwise, the participants account balance will be distributed as a result of his or her termination of employment with Oconee Federal Savings and Loan Association.
Each participant has an individual account under the 401(k) Plan and may direct the investment of his or her account among a variety of investment options. In connection with the reorganization, each participant will be allowed to invest his or her account balance in the common stock of Oconee Federal Financial Corp. through the Oconee Federal Financial Corp. Stock Fund.
Employee Stock Ownership Plan. In connection with the reorganization, Oconee Federal Savings and Loan Association adopted an employee stock ownership plan for eligible employees. Eligible employees will begin participation in the employee stock ownership plan on the later of the effective date of the reorganization or upon the first entry date commencing on or after the eligible employees completion of 1,000 hours of service during a continuous 12-month period.
The employee stock ownership plan trustee is expected to purchase, on behalf of the employee stock ownership plan, 3.92% of our outstanding shares (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation). We expect that this purchase will be made in the offering, but the purchase may be made, in whole or in part, with the approval of the Office of Thrift Supervision, in the open market following the completion of the offering. We anticipate that the employee stock ownership plan will fund its stock purchase with a loan from Oconee Federal Financial Corp. equal to the aggregate purchase price of the common stock. The loan will be repaid principally through Oconee Federal Savings and Loan Associations contribution to the employee stock ownership plan and dividends payable on common stock held by the employee stock ownership plan over the anticipated 25-year term of the loan. The interest rate for the employee stock ownership plan loan is expected to be an adjustable rate equal to the prime rate, as published in The Wall Street Journal , on the closing date of the offering. Thereafter the interest rate will adjust annually and will be the prime rate on the first business day of the calendar year, retroactive to January 1 of such year. See Pro Forma Data.
The trustee will hold the shares purchased by the employee stock ownership plan in an unallocated suspense account, and shares will be released from the suspense account on a pro-rata basis as we repay the loan. The trustee will allocate the shares released among participants on the basis of each participants proportional share of compensation relative to all participants. Each participant will vest in his or her benefit at a rate of 20% per year, beginning after the participants completion of his or her second year of service, such that the participant will be fully vested upon completion of six years of credited service. However, each participant who was employed by Oconee Federal Savings and Loan Association prior to the offering will receive credit for vesting purposes for years of service prior to the adoption of the employee stock ownership plan. A participant also will become fully vested automatically in his or her benefit upon normal retirement, death or disability, a change in control, or termination of the employee stock ownership plan. Generally, a participant will receive a distribution from the employee stock ownership plan upon separation from service.
120
The employee stock ownership plan permits a participant to direct the trustee as to how to vote the shares of common stock allocated to his or her account. The trustee votes unallocated shares and allocated shares for which participants do not provide instructions on any matter in the same ratio as those shares for which participants provide instructions, subject to fulfillment of the trustees fiduciary responsibilities.
Under applicable accounting requirements, Oconee Federal Savings and Loan Association will record a compensation expense for the employee stock ownership plan at the fair market value of the shares as they are committed to be released from the unallocated suspense account to each participants account. The compensation expense resulting from the release of the common stock from the suspense account and allocation to plan participants will result in a corresponding reduction in Oconee Federal Financial Corps
Director Compensation
The following table sets forth for the fiscal year ended June 30, 2010 certain information as to the total remuneration we paid to
our directors other than to our named executive officers. Information with respect to director compensation paid to directors who are also named executive officers is included above in Executive Officer CompensationSummary Compensation
Directors Compensation Table
Name |
Fees earned
or paid in cash ($) |
All Other
Compensation ($) |
Total
($) |
|||
Harry B. Mays, Jr. |
12,025 | | 12,025 | |||
Robert N. McLellan, Jr. |
18,967 | | 18,967 | |||
Cecil T. Sandifer, Jr. |
15,682 | | 15,682 |
For the fiscal year ended June 30, 2010, each director of Oconee Federal Savings and Loan Association was paid a monthly retainer of $1,165. T. Rhett Evatt, as chairman of the board, received an additional monthly retainer of $692 per month. Each director was paid a fee of $81 for each special meeting attended during the fiscal year.
Additionally, each director was a paid a fee for his services on the Loan Committee, Personnel Committee, and the Audit & Compensation Committee in the amount of $448, $83, and $86, respectively, for each committee meeting attended.
Director Plans
Deferred Compensation Agreement . Oconee Federal Savings and Loan Association entered into a deferred compensation agreement with Mr. Sandifer on December 10, 1990, which was amended on December 10, 1994. Under the agreement, Mr. Sandifer elected to defer receipt of his director fees in the amount of $575 per month. If Mr. Sandifer continues to serve as a Director to age 65, he will be entitled to a deferred compensation benefit of $50,000 a year payable over 15 years (with the benefit paid in monthly installments). In the event of
121
Mr. Sandifers termination from our board of directors for any reason, other than death or disability, prior to attaining age 65, the amount of his benefit will be reduced. The reduced annual benefit will be determined by multiplying the annual benefit by the percentage of the 22-year year term beginning in 1991 that is actually completed by Mr. Sandifer prior to his termination. In the event of Mr. Sandifers disability or death prior to attaining age 65, he or his beneficiary will be entitled to a deferred compensation benefit of $40,000 a year payable over 15 years (with the benefit paid in monthly installments).
Future Stock Benefit Plans
Stock-Based Incentive Plan . Following the offering, we intend to adopt a stock-based incentive plan that will be designed to attract and retain qualified personnel in key positions, provide directors, officers and key employees with a proprietary interest in Oconee Federal Financial Corp. as an incentive to contribute to our success and reward key employees for outstanding performance. The stock-based incentive plan will provide for grants of stock options and restricted common stock awards for up to 4.90% and 1.96%, respectively, of our outstanding shares (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation). Without prior Office of Thrift Supervision approval, the number of options granted and shares awarded under the plan, when aggregated with any subsequently adopted stock-based benefit plans (exclusive of any shares held by any employee stock ownership plan), may not exceed 25% of the number of shares of common stock held by persons other than Oconee Federal, MHC.
The stock-based incentive plan will not be established sooner than six months after the offering and would require the approval of a majority of the outstanding shares of Oconee Federal Financial Corp. eligible to be cast, as well as by a majority of the votes cast by stockholders other than Oconee Federal, MHC.
Under applicable regulations, unless we obtain a waiver from the Office of Thrift Supervision (or we adopt our stock-based incentive plan more than one year following the completion of the offering) the following additional restrictions would apply to our stock-based incentive plan if it were implemented within one year after the offering:
|
non-employee directors in the aggregate may not receive more than 30% of the options and restricted awards authorized under the plan; |
|
no non-employee director may receive more than 5% of the options and restricted awards authorized under the plan; |
|
no officer or employee may receive more than 25% of the options and restricted awards authorized under the plan; |
|
options and restricted awards may not vest more rapidly than 20% per year, beginning on the first anniversary of stockholder approval of the plan; and |
|
accelerated vesting is not permitted except for death, disability or upon a change in control of Oconee Federal Savings and Loan Association or Oconee Federal Financial Corp. |
122
These restrictions do not apply to plans adopted after one year following the completion of the offering.
We have not yet determined whether we will present the stock-based incentive plan for stockholder approval within one year following the completion of the reorganization or whether we will present this plan for stockholder approval more than one year after the completion of the reorganization. In the event the Office of Thrift Supervision changes its regulations or policies regarding stock-based incentive plans, including any regulations or policies restricting the size of awards and vesting of benefits as described above, the restrictions described above may not be applicable.
We may obtain the shares needed for our stock-based benefit plans by issuing additional shares of common stock from
Transactions with Certain Related Persons
Federal regulations require that all loans or extensions of credit to executive officers and directors of insured institutions must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and must not involve more than the normal risk or repayment or present other unfavorable features. Oconee Federal Savings and Loan Association is therefore prohibited from making any loans or extensions of credit to executive officers and directors at different rates or terms than those offered to the general public, except for loans made under a program generally available to all other employees and that does not give preference to any executive officer or director over any other employee.
Extensions of credit to any executive officer or his or her interests must not exceed the lesser of (A) $100,000 or (B) the greater of $25,000 or 2.5% of Oconee Federal Savings and Loan Associations unimpaired capital and surplus, except for: first mortgages on a residence; loans to finance the education of children; re-financings to the extent of the borrowing used to repay the original extension of credit (together with closing costs and any additional amounts used to improve the residence); loans secured by a perfected security interest in obligations of or guaranteed by the United States; loans secured by unconditional take-out commitments of guarantees of any department or agency of the United States; or loans secured by a perfected security interest in a segregated deposit account at Oconee Federal Savings and Loan Association.
Any extension of credit to an executive officer or director that exceeds the greater of $25,000 or 5% of Oconee Federal Savings and Loan Associations unimpaired capital and surplus, or that, when aggregated with all other outstanding loans to such executive officer or director and his or her related interests, would exceed $500,000, must be approved by the majority of our board of directors.
Additionally, all future material affiliated transactions and loans, and any forgiveness of loans, must be approved by a majority of our independent directors who do not have an interest in the transactions and who had access, at our expense, to legal counsel.
123
All loans the principal balances of which exceeded $120,000 at any time during the period beginning January 1, 2009, made by Oconee Federal Savings and Loan Association to executive officers, directors, immediate family members of executive officers and directors, or organizations with which executive officers and directors are affiliated, were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to Oconee Federal Savings and Loan Association.
The aggregate amount of our loans to our executive officers and directors and their related entities was $851,000 at June 30, 2010. These loans were performing according to their original terms at June 30, 2010.
Participation by Management in the Offering
The following table sets forth information regarding intended common stock purchases by each of the directors of Oconee Federal Savings and Loan Association and their associates, and by all directors and executive officers as a group. In the event the individual maximum purchase limitation is increased, persons subscribing for the maximum amount may increase their purchase order. Directors and executive officers will purchase shares of common stock at the same $10.00 purchase price per share and on the same terms as other purchasers in the offering. This table excludes shares of common stock to be purchased by the employee stock ownership plan, as well as any restricted stock awards or stock option grants which, in any case, may be made no earlier than six months after the completion of the reorganization and offering. The directors and executive officers have indicated their intention to purchase in the offering an aggregate of $ million of common stock, equal to %, %, % and % of the number of shares of common stock to be sold in the offering, at the minimum, midpoint, maximum and adjusted maximum of the estimated valuation range, respectively.
Name |
Aggregate
Purchase Price(1) |
Number of
Shares(1) |
Percent at
Midpoint |
|||||
T. Rhett Evatt |
$ | % | ||||||
Curtis T. Evatt |
||||||||
Harry B. Mays, Jr. |
||||||||
Robert N. McLellan, Jr. |
||||||||
Cecil T. Sandifer, Jr. |
||||||||
W. Maurice Poore |
||||||||
Nancy M. Carter |
||||||||
All directors and executive officers as a group |
$ | % | ||||||
(1) | Includes purchases by the individuals spouse and other relatives of the named individual living in the same household. The above named individuals are not aware of any other purchases by a person who or entity which would be considered an associate of the named individuals under the plan of reorganization. |
124
THE REORGANIZATION AND OFFERING
The board of directors of Oconee Federal Savings and Loan Association and the Office of Thrift Supervision have approved the plan of reorganization subject to the plans approval by members at a Special Meeting of Members, and subject to the satisfaction of certain other conditions imposed by the Office of Thrift Supervision in its approval. Office of Thrift Supervision approval does not constitute a recommendation or endorsement of the plan by the Office of Thrift Supervision.
General
On August 19, 2010, our board of directors unanimously adopted the plan pursuant to which we will reorganize from a federally chartered mutual savings and loan association into a two-tier federal mutual holding company structure. This structure is called a two-tier structure because it will have two levels of holding companies. After the reorganization, Oconee Federal Financial Corp. will be the mid-tier stock holding company and Oconee Federal, MHC will be the top-tier mutual holding company. After the offering, subscribers in the offering will own 33% and Oconee Federal, MHC will own 65% of the outstanding shares of common stock of Oconee Federal Financial Corp. In addition, Oconee Federal Savings and Loan Association intends to (a) cause Oconee Federal Financial Corp. to issue, on Oconee Federal Savings and Loan Associations behalf, a number of shares of common stock equal to 2% of the outstanding shares (96,000 shares at the midpoint of the offering range) to a charitable foundation that Oconee Federal Savings and Loan Association will establish in connection with the reorganization and the offering, and (b) contribute to the charitable foundation an amount of cash ($1.54 million at the midpoint of the offering range) such that the aggregate contribution of cash and shares of common stock will equal $2.5 million.
The plan of reorganization has been conditionally approved by the Office of Thrift Supervision subject to, among other things, approval of the plan by the members of Oconee Federal Savings and Loan Association as of the voting record date. A special meeting of members has been called for this purpose, to be held on , 2010. The reorganization will be completed as follows, or in any manner approved by the Office of Thrift Supervision that is consistent with the purposes of the plan of reorganization and applicable laws and regulations:
(i) | Oconee Federal Savings and Loan Association will organize an interim stock savings and loan association as a wholly owned subsidiary (Interim One); |
(ii) | Interim One will organize an interim stock savings and loan association as a wholly owned subsidiary (Interim Two); |
(iii) | Interim One will organize Oconee Federal Financial Corp. as a wholly owned subsidiary; |
(iv) | Oconee Federal Savings and Loan Association will exchange its charter for a federal stock savings and loan association charter, at which time it will become a stock savings and loan association (the Stock Bank), and Interim One will exchange its charter for a federal mutual holding company charter to become Oconee Federal, MHC; |
125
(v) | simultaneously with step (iv), Interim Two will merge with and into the Stock Bank, and the Stock Bank will be the surviving institution; |
(vi) | all of the stock constructively issued by the Stock Bank will be transferred to Oconee Federal, MHC in exchange for membership interests in Oconee Federal, MHC; and |
(vii) | Oconee Federal, MHC will contribute the Stock Banks stock to Oconee Federal Financial Corp., and the Stock Bank will become a wholly owned subsidiary of Oconee Federal Financial Corp. |
Concurrently with the reorganization, Oconee Federal Financial Corp. will offer for sale up to 33% of its common stock representing up to 33% of the pro forma market value of Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association.
We have mailed to each person eligible to vote at the special meeting a proxy statement containing information concerning the business purposes of the reorganization and the effects of the reorganization on voting rights, liquidation rights, existing savings accounts, deposit insurance, loans and Oconee Federal Savings and Loan Associations business. The proxy statement also describes the manner in which the plan may be amended or terminated. Included with the proxy statement is a proxy card that can be used to vote on the plan.
The following is a summary of the material aspects of the plan of reorganization, the subscription offering, and the community offering. The plan should be consulted for a more detailed description of its terms.
Reasons for the Reorganization
The primary purpose of the reorganization is to establish a holding company and to convert Oconee Federal Savings and Loan Association to the stock form of ownership in order to compete and expand more effectively in the financial services marketplace. The stock form of ownership is the corporate form used by commercial banks, most major businesses and a large number of savings institutions. The reorganization also will enable customers, employees, management and directors to have an equity ownership interest in our company. Management believes that this will enhance the long-term growth and performance of Oconee Federal Savings and Loan Association and Oconee Federal Financial Corp. by enabling us to attract and retain qualified employees who have a direct interest in our financial success and that customer ownership may enhance our connection with our customers. The reorganization will permit us to issue and sell capital stock, which is a source of capital not available to mutual savings institutions. The reorganization also will give us greater flexibility to structure and finance the expansion of our operations and increase our capital to support future growth and profitability, including the potential acquisition of other financial institutions, and to diversify into other financial services, to the extent permissible by applicable law and regulation. Although there are no current arrangements, understandings or agreements regarding any such opportunities, we will be in a position after the reorganization, subject to regulatory limitations and our financial condition, to take advantage of any such opportunities that may arise, and to compete more
126
effectively in the financial services marketplace. The reorganization and the capital raised in the offering are expected to increase our lending capacity by providing us with additional capital to support new loans and higher lending limits, support the growth of our banking franchise, provide an additional cushion against unforeseen risk and expand our asset base. Lastly, the reorganization will enable us to better manage our capital by providing broader investment opportunities through the holding company structure and by enabling us to repurchase our common stock as market conditions permit. Although the reorganization and offering will create a stock savings and loan association and stock holding company, only a minority of the common stock will be offered for sale in the offering. As a result, our mutual form of ownership and its ability to provide community-oriented financial services will be preserved through the mutual holding company structure. The offering also will permit us to support our local community through the establishment and funding of the charitable foundation.
Our board of directors believes that these advantages outweigh the potential disadvantages of the mutual holding company structure to minority stockholders, including the inability of stockholders other than Oconee Federal, MHC to own a majority of the common stock of Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association. A majority of our voting stock will be owned by Oconee Federal, MHC, which will be controlled by its board of directors. While this structure will permit management to focus on our long-term business strategy for growth and capital redeployment without undue pressure from stockholders, it will also serve to perpetuate our existing management and directors. Oconee Federal, MHC will be able to elect all the members of Oconee Federal Financial Corp.s board of directors, and will be able to control the outcome of all matters presented to our stockholders for resolution by vote. No assurance can be given that Oconee Federal, MHC will not take action adverse to the interests of stockholders other than Oconee Federal, MHC. For example, Oconee Federal, MHC could prevent the sale of control of Oconee Federal Financial Corp., or defeat a candidate for the board of directors of Oconee Federal Financial Corp. or other proposals put forth by stockholders.
Since we will not be offering all of our common stock for sale in the offering, the reorganization will result in less capital raised in comparison to a standard mutual-to-stock conversion. We are not undertaking a standard mutual-to-stock conversion at this time since we do not believe we could effectively deploy that amount of additional capital on a short-term or near-term basis. The reorganization, however, will allow us to raise additional capital in the future because a majority of our common stock will be available for sale in the event of a conversion of Oconee Federal, MHC to stock form.
The reorganization does not preclude the conversion of Oconee Federal, MHC from the mutual to stock form of organization in the future. No assurance can be given when, if ever, Oconee Federal, MHC will convert to stock form or what conditions the Office of Thrift Supervision or other regulatory agencies may impose on such a transaction. See SummaryPossible Conversion of Oconee Federal, MHC to Stock Form.
Effects of the Reorganization and Offering on Depositors and Borrowers of Oconee Federal Savings and Loan Association
Continuity. While the reorganization is being accomplished, and after its completion, our routine business of accepting deposits and making loans will continue without interruption. We will continue to be subject to regulation by the Office of Thrift Supervision and the FDIC. After the reorganization, we will continue to provide services for depositors and borrowers under current policies by our management and staff.
127
Liquidation Rights . Following the completion of the reorganization, all depositors and borrowers who had liquidation rights with respect to Oconee Federal Savings and Loan Association as of the effective date of the reorganization will continue to have such rights solely with respect to Oconee Federal, MHC so long as they continue to hold deposit accounts with Oconee Federal Savings and Loan Association. In addition, all persons who become depositors of Oconee Federal Savings and Loan Association subsequent to the reorganization will have such liquidation rights with respect to Oconee Federal, MHC.
Deposit Accounts and Loans . Under the plan of reorganization, each depositor of Oconee Federal Savings and Loan Association at the time of the reorganization will automatically continue as a depositor after the reorganization, and each such deposit account will remain the same with respect to deposit balance, interest rate and other terms, except to the extent such deposit is reduced by withdrawals to purchase common stock in the offering. All insured deposit accounts of Oconee Federal Savings and Loan Association will continue to be federally insured by the FDIC up to the legal maximum limit in the same manner as deposit accounts existing in Oconee Federal Savings and Loan Association immediately prior to the reorganization. Furthermore, no loan outstanding will be affected by the reorganization, and the amounts, interest rates, maturity and security for each loan will remain the same as they were prior to the reorganization.
Voting Rights . Following the completion of the reorganization and offering, members of Oconee Federal Savings and Loan Association will no longer have voting rights in Oconee Federal Savings and Loan Association, but will have voting rights in Oconee Federal, MHC. Following the completion of the reorganization and offering, voting rights in Oconee Federal Financial Corp. will be held exclusively by its stockholders. Each share of outstanding common stock held by a stockholder will entitle the stockholder to one vote on matters considered by Oconee Federal Financial Corp. stockholders. Although Oconee Federal Financial Corp. will have the power to issue shares of capital stock to persons other than Oconee Federal, MHC, as long as Oconee Federal, MHC is in existence, Oconee Federal, MHC will be required to own a majority of the voting stock of Oconee Federal Financial Corp., and consequently will be able to control the outcome of matters put to a vote of stockholders. Oconee Federal Financial Corp. may issue any amount of non-voting stock to persons other than Oconee Federal, MHC, and Oconee Federal Financial Corp. must own 100% of the voting stock of Oconee Federal Savings and Loan Association.
Tax Effects of the Reorganization
We intend to proceed with the reorganization on the basis of an opinion from our special counsel, Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., as to tax matters that are material to the reorganization. The opinion is based, among other things, on factual representations made by us, including the representation that the exercise price of the subscription rights to purchase the common stock will be approximately equal to the fair market value of the stock at the time of the completion of the reorganization. Luse Gorman Pomerenk & Schick, P.C.s opinion provides as follows:
1. | The conversion of Oconee Federal Savings and Loan Associations charter from a mutual savings and loan association charter to a stock savings and loan association charter will qualify as a tax-free reorganization under Section 368(a)(1)(F) of the Internal Revenue Code of 1986 (the Code), and no gain or loss will be recognized by Oconee Federal Savings and Loan Association in either its mutual form (the Mutual Bank) or stock form (the Stock Bank) as a result. |
128
2. | The Stock Banks holding period in the assets received from the Mutual Bank will include the period during which such assets were held by the Mutual Bank. |
3. | The Stock Banks basis in the assets of Oconee Federal Savings and Loan Association will be the same as the basis of such assets in the hands of the Mutual Bank immediately prior to the reorganization. |
4. | The Mutual Bank members will recognize no gain or loss upon the constructive receipt of solely Stock Bank common stock in exchange for their membership interests in the Mutual Bank. |
5. | The Stock Bank will succeed to and take into account the Mutual Banks earnings and profits or deficit in earnings and profits, as of the date of the reorganization. |
6. | For purposes of Section 381, the Stock Bank will be treated the same as the Mutual Bank and, therefore, the Mutual Banks tax year will not end merely as a result of the conversion of the Mutual Bank to stock form and the Stock Bank will not be required to obtain a new employer identification number. |
7. | No gain or loss will be recognized by eligible account holders, supplemental eligible account holders or other members of the Mutual Bank on the issuance to them of withdrawable deposit accounts in the Stock Bank plus liquidation rights with respect to Oconee Federal, MHC, in exchange for their deposit accounts in the Mutual Bank or to the other depositors on the issuance to them of withdrawable deposit accounts. |
8. | It is more likely than not that the fair market value of the subscription rights to purchase common stock is zero. Accordingly, no gain or loss will be recognized by eligible account holders, supplemental eligible account holders or other members of the Mutual Bank upon the distribution to them of the nontransferable subscription rights to purchase shares of stock in Oconee Federal Financial Corp. Gain realized, if any, by the eligible account holders, supplemental eligible account holders and other members of the Mutual Bank on the distribution to them of the nontransferable subscription rights to purchase shares of common stock will be recognized but only in an amount not in excess of the fair market value of such subscription rights. Eligible account holders and supplemental eligible account holders will not realize any taxable income as a result of the exercise by them of the nontransferable subscription rights. |
9. |
The basis of the deposit accounts in the Stock Bank to be received by the eligible account holders, supplemental eligible account holders and other members of the Mutual Bank will be the same as the basis of their deposit accounts in the Mutual |
129
Bank surrendered in exchange therefor. The basis of the interests in the liquidation rights in Oconee Federal, MHC to be received by the eligible account holders and supplemental eligible account holders and other members of the Mutual Bank will be zero. |
10. | The exchange of Stock Bank common stock constructively received by eligible account holders, supplemental eligible account holders and other members in exchange for membership interests in Oconee Federal, MHC will constitute a tax-free exchange of property solely for stock pursuant to Section 351 of the Code. |
11. | Eligible account holders, supplemental eligible account holders and other members will recognize no gain or loss upon the transfer of Stock Bank common stock (which they constructively received in the conversion of the Mutual Bank to stock form) to Oconee Federal, MHC solely in exchange for membership interests in Oconee Federal, MHC. |
12. | Eligible account holders, supplemental eligible account holders and other members basis in the Oconee Federal, MHC membership interests received in the transaction (which basis is zero) will be the same as the basis of the property transferred in exchange for such interests. |
13. | Oconee Federal, MHC will recognize no gain or loss upon receipt of property from eligible account holders, supplemental eligible account holders and other members in exchange for membership interests in Oconee Federal, MHC. |
14. | Oconee Federal, MHCs basis in the property received from eligible account holders, supplemental eligible account holders and other members (which basis is zero) will be the same as the basis of such property in the hands of eligible account holders, supplemental eligible account holders and other members immediately prior to the transaction. |
15. | Oconee Federal, MHCs holding period for the property received from eligible account holders, supplemental account holders and other members will include the period during which such property was held by such persons. |
16. | Oconee Federal, MHC and the persons who purchased common stock of Oconee Federal Financial Corp. in the subscription and community offering (minority stockholders) will recognize no gain or loss upon the transfer of Stock Bank stock and cash, respectively, to Oconee Federal Financial Corp. in exchange for stock in Oconee Federal Financial Corp. |
17. | Oconee Federal Financial Corp. will recognize no gain or loss on its receipt of Stock Bank stock and cash in exchange for Oconee Federal Financial Corp. common stock. |
18. | Oconee Federal, MHCs basis in the Oconee Federal Financial Corp. common stock received in the Secondary 351 Transaction will be the same as its basis in the Stock Bank stock exchanged for such stock. |
130
19. | Oconee Federal, MHCs holding period in the Oconee Federal Financial Corp. common stock received will include the period during which it held the Stock Bank common stock, provided that such property was a capital asset on the date of the exchange. |
20. | Oconee Federal Financial Corp.s basis in the Stock Bank stock received from Oconee Federal, MHC will be the same as the basis of such property in the hands of Oconee Federal, MHC. |
21. | Oconee Federal Financial Corp.s holding period for the Stock Bank stock received from Oconee Federal, MHC will include the period during which such property was held by Oconee Federal, MHC. |
22. | It is more likely than not that the basis of the Oconee Federal Financial Corp. common stock to its stockholders will be the purchase price thereof. The holding period of the common stock purchased pursuant to the exercise of subscription rights shall commence on the date on which the right to acquire such stock was exercised. |
The opinion addresses all material federal income tax consequences of the reorganization. With respect to items 8 and 22 above, Luse Gorman Pomerenk & Schick, P.C. noted that the subscription rights will be granted at no cost to the recipients, are legally non-transferable and of short duration, and will provide the recipient with the right only to purchase shares of common stock at the same price to be paid by members of the general public in any community offering. The firm also noted that McAuliffe Financial, LLC has issued an opinion dated September 3, 2010 that the subscription rights have no ascertainable fair market value. Finally, Luse Gorman Pomerenk & Schick, P.C. noted that the Internal Revenue Service has not in the past concluded that subscription rights have value. Based on the foregoing, Luse Gorman Pomerenk & Schick, P.C. believes that it is more likely than not that the nontransferable subscription rights to purchase shares of common stock have no value. However, the issue of whether or not the nontransferable subscription rights have value is based on all the facts and circumstances. If the nontransferable subscription rights granted to eligible subscribers are subsequently found to have an ascertainable value greater than zero, income may be recognized by various recipients of the nontransferable subscription rights (in certain cases, whether or not the rights are exercised) and we could recognize gain on the distribution of the nontransferable subscription rights. The federal and state tax opinions, respectively, referred to in this prospectus are filed as exhibits to the registration statement. See Where You Can Find More Information.
The opinion of Luse Gorman Pomerenk & Schick, P.C., unlike a letter ruling issued by the Internal Revenue Service, is not binding on the Internal Revenue Service and the conclusions expressed therein may be challenged at a future date. The Internal Revenue Service has issued favorable rulings for transactions substantially similar to the proposed reorganization, but any such ruling may not be cited as precedent by any taxpayer other than the taxpayer to whom the ruling is addressed. We do not plan to apply for a letter ruling concerning the transactions described in this prospectus.
We also have received an opinion from Cherry, Bekaert & Holland, L.L.P. that the South Carolina State income tax consequences of the proposed transaction are consistent with the federal income tax consequences.
131
Offering of Common Stock
Under the plan of reorganization, up to 1,821,600 shares (subject to increase to 2,094,840 shares) of Oconee Federal Financial Corp. common stock will be offered for sale, subject to certain restrictions described below, through a subscription and community offering.
Subscription Offering . The subscription offering will expire at 4:00 p.m., Eastern Time, on [Offering expiration date], unless otherwise extended by Oconee Federal Savings and Loan Association and Oconee Federal Financial Corp. Regulations of the Office of Thrift Supervision require that all shares to be offered in the offering be sold within a period ending not more than 90 days after Office of Thrift Supervision approval of the use of the prospectus or a longer period as may be approved by the Office of Thrift Supervision or, despite approval of the plan of reorganization by our members, the reorganization and offering will not be effected. This period expires on [Extended offering expiration date], unless extended with the approval of the Office of Thrift Supervision. If the offering is not completed by [Extended offering expiration date], all subscribers will have the right to modify or rescind their subscriptions and to have their subscription funds returned promptly with interest. In the event of an extension of this type, all subscribers will be notified in writing of the time period within which subscribers must notify Oconee Federal Savings and Loan Association of their intention to maintain, modify or rescind their subscriptions. If the subscriber rescinds or does not respond in any manner to Oconee Federal Savings and Loan Associations notice, the funds submitted will be refunded to the subscriber with interest at Oconee Federal Savings and Loan Associations current passbook savings rate, and/or the subscribers withdrawal authorizations will be terminated. In the event that the offering is not consummated, all funds submitted and not previously refunded pursuant to the subscription and community offering will be promptly refunded to subscribers with interest at Oconee Federal Savings and Loan Associations current passbook savings rate, and all withdrawal authorizations will be terminated.
Subscription Rights . Under the plan of reorganization, nontransferable subscription rights to purchase the shares of common stock have been issued to persons and entities entitled to purchase the shares of common stock in the subscription offering. The amount of shares of common stock that these parties may purchase will depend on the availability of the common stock for purchase under the categories described in the plan of reorganization. Subscription priorities have been established for the allocation of common stock to the extent that the common stock is available. These priorities are as follows:
Category 1: Eligible Account Holders. Subject to the maximum purchase limitations, each depositor with $50.00 or more on deposit at Oconee Federal Savings and Loan Association, as of the close of business on June 30, 2009 will receive nontransferable subscription rights to subscribe for up to the greater of the following:
|
$250,000 of common stock; |
|
one-tenth of one percent of the total offering of common stock; or |
|
15 times the product, rounded down to the nearest whole number, obtained by multiplying the total number of shares of common stock to be sold by a fraction, the numerator of which is the amount of the qualifying deposit of the eligible account holder and the denominator is the total amount of qualifying deposits of all eligible account holders. |
132
If the exercise of subscription rights in this category results in an oversubscription, shares of common stock will be allocated among subscribing eligible account holders so as to permit each one, to the extent possible, to purchase a number of shares sufficient to make the persons total allocation equal 100 shares or the number of shares for which the person has actually subscribed, whichever is less. Thereafter, unallocated shares will be allocated among the remaining subscribing eligible account holders whose subscriptions remain unfilled in the proportion that the amounts of their respective qualifying deposits bear to the total amount of qualifying deposits of all remaining eligible account holders whose subscriptions remain unfilled; however, no fractional shares shall be issued. If the amount so allocated exceeds the amount subscribed for by any one or more eligible account holders, the excess shall be reallocated, one or more times as necessary, among those eligible account holders whose subscriptions are still not fully satisfied on the same principle until all available shares have been allocated or all subscriptions satisfied. Subscription rights received by officers and directors in this category based on their increased deposits in Oconee Federal Savings and Loan Association in the one-year period preceding June 30, 2009 are subordinated to the subscription rights of other eligible account holders.
Category 2: Tax-Qualified Employee Plans. The plan of reorganization provides that tax-qualified employee plans of Oconee Federal Savings and Loan Association, such as the employee stock ownership plan, will receive nontransferable subscription rights to purchase up to 10% of the shares of common stock issued in the offering (including shares contributed to Oconee Federal Charitable Foundation). The employee stock ownership plan intends to purchase 3.92% of our outstanding shares (including shares issued to Oconee Federal, MHC and Oconee Federal Charitable Foundation). In the event the number of shares offered in the offering is increased above the maximum of the valuation range, tax-qualified employee plans will have a priority right to purchase any shares exceeding that amount up to 10% of the common stock issued in the offering. The employee stock ownership plan may, with Office of Thrift Supervision approval, purchase some or all of the shares of common stock in the open market or may purchase shares of common stock directly from Oconee Federal Financial Corp.
Category 3: Supplemental Eligible Account Holders. To the extent that there are sufficient shares of common stock remaining after satisfaction of subscriptions by eligible account holders and the tax-qualified employee plans, and subject to the maximum purchase limitations, each depositor with $50.00 or more on deposit, as of the close of business on September 30, 2010, will receive nontransferable subscription rights to subscribe for up to the greater of:
|
$250,000 of common stock; |
|
one-tenth of one percent of the total offering of common stock; or |
|
15 times the product, rounded down to the nearest whole number, obtained by multiplying the total number of shares of common stock to be issued by a fraction, the numerator of which is the amount of qualifying deposits of the supplemental eligible account holder and the denominator is the total amount of qualifying deposits of all supplemental eligible account holders. |
133
If the exercise of subscription rights in this category results in an oversubscription, shares of common stock will be allocated among subscribing supplemental eligible account holders so as to permit each supplemental eligible account holder, to the extent possible, to purchase a number of shares sufficient to make his or her total allocation equal 100 shares or the number of shares for which the person has actually subscribed, whichever is less. Thereafter, unallocated shares will be allocated among subscribing supplemental eligible account holders whose subscriptions remain unfilled in the proportion that the amounts of their respective qualifying deposits bear to total qualifying deposits of all subscribing supplemental eligible account holders.
Category 4: Other Members. To the extent that there are sufficient shares of common stock remaining after satisfaction of subscriptions by eligible account holders, the tax-qualified employee plans and supplemental eligible account holders, and subject to the maximum purchase limitations, each member of Oconee Federal Savings and Loan Association who is not an eligible account holder, supplemental eligible account holder or tax-qualified employee plan, as of the close of business on [Voting record date], including borrowers from Oconee Federal Savings and Loan Association as of October 21, 1991 who maintain such borrowings as of the close of business on [Voting record date], will receive nontransferable subscription rights to purchase up to $250,000 of common stock.
If there is an oversubscription in this category, the available shares of common stock will be allocated proportionately based on the size of such other members orders.
Oconee Federal Savings and Loan Association and Oconee Federal Financial Corp. will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for shares of common stock pursuant to the plan of reorganization reside. However, no shares of common stock will be offered or sold under the plan of reorganization to any person who resides in a foreign country or resides in a state of the United States in which a small number of persons otherwise eligible to subscribe for shares under the plan of reorganization reside or as to which Oconee Federal Savings and Loan Association and Oconee Federal Financial Corp. determine that compliance with the securities laws of the state would be impracticable for reasons of cost or otherwise, including, but not limited to, a requirement that Oconee Federal Savings and Loan Association or Oconee Federal Financial Corp. or any of their officers, directors or employees register, under the securities laws of the state, as a broker, dealer, salesman or agent. No payments will be made in lieu of the granting of subscription rights to any person.
Community Offering . Any shares of common stock which have not been purchased in the subscription offering may be offered by Oconee Federal Financial Corp. in a community offering to members of the general public to whom Oconee Federal Financial Corp. delivers a copy of this prospectus and a stock order form, with preference given to natural persons residing in Oconee and Pickens Counties, South Carolina. Subject to the maximum purchase limitations, these persons may purchase up to $250,000 of common stock. The community offering, if any, may be undertaken concurrently with, during, or promptly after the subscription offering, and may terminate at any time without notice. Subject to any required regulatory approvals, Oconee
134
Federal Financial Corp. will determine in its sole discretion the advisability of a community offering, the commencement and termination dates of any community offering, and the methods of finding potential purchasers in such offering. The opportunity to subscribe for shares of common stock in the community offering category is subject to the right of Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association, in their sole discretion, to accept or reject these orders in whole or in part either at the time of receipt of an order or as soon as practicable thereafter.
If there are not sufficient shares of common stock available to fill orders in the community offering, the shares of common stock will be allocated first to each natural person residing in Oconee and Pickens Counties, South Carolina whose order is accepted by Oconee Federal Savings and Loan Association and, thereafter, to the extent any shares remain available, to cover orders of other members of the general public. In the event orders for common stock in each of these categories exceed the number of shares available for sale within such category, orders shall first be filled so that each person may receive 1,000 shares (if sufficient shares are available), and thereafter remaining shares will be allocated on an equal number of shares basis per order.
Syndicated Community Offering . The plan of reorganization provides that, if necessary, all shares of common stock not purchased in the subscription offering and community offering may be offered for sale to the general public in a syndicated community offering to be managed by Mutual Securities, Inc., acting as our agent. In such capacity, Mutual Securities, Inc. may form a syndicate of other brokers-dealers who are member firms of the Financial Industry Regulatory Authority, Inc. (FINRA). Alternatively, we may sell any remaining shares in an underwritten public offering. Neither Mutual Securities, Inc. nor any registered broker-dealer will have any obligation to take or purchase any shares of the common stock in the syndicated community offering; however, Mutual Securities, Inc. has agreed to use its best efforts in the sale of shares in any syndicated community offering. We have not selected any particular broker-dealers to participate in a syndicated community offering and will not do so until prior to the commencement of the syndicated community offering. The syndicated community offering would terminate no later than 45 days after the expiration of the subscription offering, unless extended by us, with approval of the Office of Thrift Supervision. See Community Offering above for a discussion of rights of subscribers in the event an extension is granted.
The opportunity to subscribe for shares of common stock in the syndicated community offering is subject to our right to reject orders, in whole or part, either at the time of receipt of an order or as soon as practicable following the expiration date of the offering. If your order is rejected in part, you will not have the right to cancel the remainder of your order.
The price at which shares of common stock are sold in the syndicated community offering will be the same price as in the subscription and community offerings. Subject to the overall purchase limitations, no person by himself or herself may subscribe for or purchase more than $250,000 of common stock.
135
Limitations on Purchase of Shares . The plan provides for certain limitations on the purchase of shares of common stock in the offering. These limitations are as follows:
A. | The aggregate amount of outstanding common stock of Oconee Federal Financial Corp. owned or controlled by persons other than Oconee Federal, MHC at the close of the reorganization and offering shall be less than 50% of Oconee Federal Financial Corp.s total outstanding common stock. |
B. | The maximum purchase of common stock in the subscription offering by a person or group of persons through a single deposit account is $250,000. No person by himself, or with an associate or group of persons acting in concert, may purchase more than $500,000 of the common stock offered in the offering, except that: (i) Oconee Federal Financial Corp. may, in its sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, increase such maximum purchase limitation to 9.9% of the number of shares sold in the offering and issued to our charitable foundation, provided that the total number of shares purchased by persons, their associates and those persons with which they are acting in concert, to the extent such purchases exceed 5% of the shares sold in the offering and issued to our charitable foundation, shall not exceed, in the aggregate, 10% (or such higher percentage as may be determined by our board of directors with the approval of the Office of Thrift Supervision) of the total number of the shares sold in the offering and issued to our charitable foundation; (ii) the tax-qualified employee plans may purchase up to 10% of the shares offered in the offering; and (iii) for purposes of this paragraph B shares to be held by any tax-qualified employee plan and attributable to a person shall not be aggregated with other shares purchased directly by or otherwise attributable to such person. |
C. | The aggregate amount of common stock acquired in the offering, plus all prior stock offerings by Oconee Federal Financial Corp., by any non-tax-qualified employee plan or any management person (as defined in the plan) and his or her associates, exclusive of any shares of common stock acquired by such plan or management person and his or her associates in the secondary market, shall not exceed 4.9% of the outstanding shares of common stock of Oconee Federal Financial Corp., at the conclusion of the offering. In calculating the number of shares held by any management person and his or her associates under this paragraph, shares held by any tax-qualified employee plan or non-tax-qualified employee plan of Oconee Federal Financial Corp., or Oconee Federal Savings and Loan Association that are attributable to such person shall not be counted. |
D. | The aggregate amount of common stock acquired in the offering, plus all prior stock issuances by Oconee Federal Financial Corp., by any one or more tax-qualified employee plans, or any management person and his or her associates, exclusive of any shares of common stock acquired by such plan or management person and his or her associates in the secondary market, shall not exceed 4.9% of the stockholders equity of Oconee Federal Financial Corp., at the conclusion of the offering. In calculating the number of shares held by any management person and his or her associates under this paragraph, shares held by any tax-qualified employee plan or non-tax-qualified employee plan of Oconee Federal Financial Corp., or Oconee Federal Savings and Loan Association that are attributable to such person shall not be counted. |
136
E. | The aggregate amount of common stock acquired in the offering, plus all prior stock issuances by Oconee Federal Financial Corp., by any one or more tax-qualified employee plans, exclusive of any shares of common stock acquired by such plans in the secondary market, shall not exceed 4.9% of the outstanding shares of common stock of Oconee Federal Financial Corp. at the conclusion of the offering. |
F. | The aggregate amount of common stock acquired in the offering, plus all prior stock issuances by Oconee Federal Financial Corp., by any one or more tax-qualified employee plans, exclusive of any shares of common stock acquired by such plans in the secondary market, shall not exceed 4.9% of the stockholders equity of Oconee Federal Financial Corp. at the conclusion of the offering. |
G. | The aggregate amount of common stock acquired in the offering, plus all prior stock issuances by Oconee Federal Financial Corp., by all stock benefit plans of Oconee Federal Financial Corp., or Oconee Federal Savings and Loan Association, other than employee stock ownership plans, shall not exceed 25% of the outstanding common stock of Oconee Federal Financial Corp. held by persons other than Oconee Federal, MHC. |
H. | The aggregate amount of common stock acquired in the offering, plus all prior stock issuances by Oconee Federal Financial Corp., by all non-tax-qualified employee plans or management persons and their associates, exclusive of any common stock acquired by such plans or management persons and their associates in the secondary market, shall not exceed 29% (or such higher percentage as may be set by our board of directors with the approval of the Office of Thrift Supervision) of the outstanding shares of common stock held by persons other than Oconee Federal, MHC at the conclusion of the offering. In calculating the number of shares held by management persons and their associates under this paragraph or paragraph I. below, shares held by any tax-qualified employee plan or non-tax-qualified employee plan that are attributable to such persons shall not be counted. |
I. | The aggregate amount of common stock acquired in the offering, plus all prior stock issuances by Oconee Federal Financial Corp., by all non-tax-qualified employee plans or management persons and their associates, exclusive of any common stock acquired by such plans or management persons and their associates in the secondary market, shall not exceed 29% of the stockholders equity of Oconee Federal Financial Corp. held by persons other than Oconee Federal, MHC at the conclusion of the offering. |
J. | Notwithstanding any other provision of the plan of reorganization, no person shall be entitled to purchase any common stock to the extent such purchase would be illegal under any federal law or state law or regulation or would violate regulations or policies of FINRA. Oconee Federal Financial Corp., and/or its agents may ask for an acceptable legal opinion from any purchaser as to the legality of such purchase and may refuse to honor any purchase order if such opinion is not timely furnished. |
137
K. | The board of directors of Oconee Federal Financial Corp., has the right in its sole discretion to reject any order submitted by a person whose representations our board of directors believes to be false or who it otherwise believes, either alone or acting in concert with others, is violating, circumventing, or intends to violate, evade or circumvent the terms and conditions of the plan. |
L. | A minimum of 25 shares of common stock must be purchased by each person purchasing shares in the offering to the extent those shares are available; provided, however, that in the event the minimum number of shares of common stock purchased times the price per share exceeds $500, then such minimum purchase requirement shall be reduced to such number of shares which when multiplied by the price per share shall not exceed $500, as determined by our board of directors. |
For purposes of the plan of reorganization, the members of our board of directors are not deemed to be acting in concert solely by reason of their board membership. The term associate is used above to indicate any of the following relationships with a person:
|
any corporation or organization, other than Oconee Federal, MHC, Oconee Federal Financial Corp. or Oconee Federal Savings and Loan Association or a majority-owned subsidiary of Oconee Federal Financial Corp. or Oconee Federal Savings and Loan Association, of which a person is a senior officer or partner, or beneficially owns, directly or indirectly, 10% or more of any class of equity securities of the corporation or organization; |
|
any trust or other estate if the person has a substantial beneficial interest in the trust or estate or is a trustee or fiduciary of the estate. For purposes of Office of Thrift Supervision Regulations Sections 563b.370, 563b.380, 563b.385, 563b.390 and 563b.505, a person who has a substantial beneficial interest in a tax-qualified or non-tax-qualified employee plan, or who is a trustee or fiduciary of the plan is not an associate of the plan. For purposes of Section 563b.370 of the Office of Thrift Supervision Regulations, a tax-qualified employee plan is not an associate of a person; |
|
any person who is related by blood or marriage to such person and (i) who lives in the same house as the person; or (ii) who is a director or senior officer of Oconee Federal, MHC, Oconee Federal Financial Corp. or Oconee Federal Savings and Loan Association or a subsidiary thereof. |
As used above, the term acting in concert means:
|
knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or |
|
a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. A person or company that acts in concert with another person or company (other party) shall |
138
also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that any tax-qualified employee plan will not be deemed to be acting in concert with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether stock held by the trustee and stock held by the plan will be aggregated. |
Persons or companies who file jointly a Schedule 13D or Schedule 13G with any regulatory agency will be deemed to be acting in concert.
The boards of directors of Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association may, in their sole discretion, and without notice or solicitation of other prospective purchasers, increase the maximum purchase limitation to 9.9% of the number of shares sold in the offering and issued to the charitable foundation provided that the total number of shares purchased by persons, their associates and those persons with which they are acting in concert, to the extent such purchases exceed 5% of the shares sold in the offering and issued to the charitable foundation, shall not exceed, in the aggregate, 10% (or such higher percentage as may be determined by our board of directors with the approval of the Office of Thrift Supervision) of the total number of shares sold in the offering and issued to the charitable foundation. Requests to purchase shares of Oconee Federal Financial Corp. common stock under this provision will be allocated by the boards of directors of Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association in accordance with the priority rights and allocation procedures set forth above. Depending upon market and financial conditions, and subject to certain regulatory limitations, the boards of directors of Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association, with the approval of the Office of Thrift Supervision and without further approval of the members, may increase or decrease any of the above purchase limitations at any time. To the extent that shares are available, each subscriber must subscribe for a minimum of 25 shares. In computing the number of shares of common stock to be allocated, all numbers will be rounded down to the next whole number.
Shares of common stock purchased in the offering will be freely transferable except for shares of common stock purchased by executive officers and directors of Oconee Federal Savings and Loan Association or Oconee Federal Financial Corp. and except as described below. In addition, under FINRA guidelines, members of the FINRA and their associates are subject to certain reporting requirements upon purchase of these securities.
Restrictions on Transferability of Subscription Rights
Subscription rights are nontransferable. Oconee Federal Savings and Loan Association may reasonably investigate to determine compliance with this restriction. Persons selling or otherwise transferring their rights to subscribe for shares of common stock in the subscription offering or subscribing for shares of common stock on behalf of another person may forfeit those rights and may face possible further sanctions and penalties imposed by the Office of Thrift Supervision or another agency of the United States Government. Oconee Federal Savings and Loan Association and Oconee Federal Financial Corp. will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve the transfer of these rights. Each person exercising subscription rights will be required to certify that he or she is purchasing shares solely for his or her own account and that he or she has no agreement or understanding
139
with any other person for the sale or transfer of the shares of common stock. In addition, joint stock registration will be allowed only if the qualifying account is so registered. Once tendered, subscription orders cannot be revoked without the consent of Oconee Federal Savings and Loan Association and Oconee Federal Financial Corp.
Prospectus Delivery and Procedure for Purchasing Common Stock
To ensure that each purchaser receives a prospectus at least 48 hours prior to the end of the offering, in accordance with Rule 15c2-8 under the Securities Exchange Act of 1934, as amended (the Exchange Act) no prospectus will be mailed later than five days or hand delivered any later than two days prior to the end of the offering. Execution of the order form will confirm receipt or delivery of a prospectus in accordance with Rule 15c2-8. Order forms will be distributed only with a prospectus. Neither we nor Mutual Securities, Inc. is obligated to deliver a prospectus and an order form by any means other than the United States Postal Service.
To ensure that eligible account holders, supplemental eligible account holders, and other members are properly identified as to their stock purchase priorities, such parties must list all deposit accounts on the order form giving all names on each deposit account and the account numbers at the applicable eligibility date.
Full payment by check, money order, bank draft or withdrawal authorization (payment by wire transfer will not be accepted) must accompany an original order form. We are not obligated to accept an order submitted on photocopied or telecopied order forms. Orders cannot and will not be accepted without the execution of the certification appearing on the order form.
If the employee stock ownership plan purchases shares of common stock in the offering, it will not be required to pay for such shares until consummation of the offering, provided that there is a loan commitment to lend to the employee stock ownership plan the amount of funds necessary to purchase the number of shares ordered.
Plan of Distribution and Marketing Arrangements
Offering materials for the offering initially have been distributed to certain persons by mail, with additional copies made available through our Stock Information Center and Mutual Securities, Inc. All prospective purchasers must send payment directly to Oconee Federal Savings and Loan Association, where such funds will be held in a segregated savings account at Oconee Federal Savings and Loan Association or, at our discretion, another federally insured depository institution, and not released until the offering is completed or terminated. Checks must be made payable to Oconee Federal Savings and Loan Association.
To assist in the marketing of the common stock, we have retained Mutual Securities, Inc., which is a broker-dealer registered with the FINRA. Mutual Securities, Inc. will assist us in the offering as follows: (i) in training and educating our employees regarding the mechanics of the offering; (ii) in conducting informational meetings for employees, customers and the general public; (iii) in coordinating the selling efforts in our local communities; and (iv) in soliciting orders for shares of common stock in the subscription and community offering. For these services, Mutual Securities, Inc. will receive a non-refundable management fee of $40,000 and a success fee equal to 1.5% of the dollar amount of the shares of common stock sold in the
140
subscription and community offerings, excluding shares sold to our directors, officers and employees and their immediate family members living in the same household, and excluding shares sold to Oconee Federal Charitable Foundation. The success fee will be reduced by the management fee. In addition, if there is a re-solicitation of subscribers, Mutual Securities, Inc. shall receive a re-solicitation fee of $30,000. If there is a syndicated offering, Mutual Securities, Inc. will receive a fee in an amount competitive with gross underwriting discounts charged at such time for underwritings of comparable amounts of common stock sold at a comparable price per share in a similar market environment. However, the total fees payable to Mutual Securities, Inc. and other FINRA member firms in the syndicated offering are not anticipated to exceed 6.5% of the aggregate dollar amount of the common stock sold in the syndicated community offering.
We also will reimburse Mutual Securities, Inc. for its reasonable expenses associated with its marketing effort and for fees and expenses of its counsel. Such fees and expenses are not expected to exceed $85,000. We will indemnify Mutual Securities, Inc. against liabilities and expenses (including legal fees) incurred in connection with certain claims or litigation arising out of or based upon untrue statements or omissions contained in the offering material for the common stock, including liabilities under the Securities Act of 1933.
Mutual Securities, Inc. has not prepared any report or opinion constituting a recommendation or advice to us or to persons who subscribe for stock, nor has it prepared an opinion as to the fairness to us of the purchase price or the terms of the stock to be sold. Mutual Securities, Inc. expresses no opinion as to the prices at which common stock to be issued may trade.
Our directors and executive officers may participate in the solicitation of offers to purchase shares of common stock. Other trained employees may participate in the offering in ministerial capacities, providing clerical work in effecting a sales transaction or answering questions of a ministerial nature. Other questions of prospective purchasers will be directed to executive officers or registered representatives. We will rely on Rule 3a4-1 of the Exchange Act, so as to permit officers, directors, and employees to participate in the sale of shares of common stock. No officer, director or employee will be compensated for his participation by the payment of commissions or other remuneration based either directly or indirectly on the transactions in the common stock. Mutual Securities, Inc. will solicit orders and conduct sales of the common stock of Oconee Federal Financial Corp. in states in which our directors and executive officers are not permitted to offer and sell our common stock.
Records Management
We have also engaged Capital Resources Group, Inc. to act as our records agent in connection with the offering. For these services, Capital Resources Group, Inc. will receive a fee of $40,000 plus reimbursement of expenses not to exceed $10,000. In its role as records agent, Capital Resources Group, Inc. will assist us in the offering as follows:
|
development of a master file and consolidation of accounts; |
|
generation of address lists for proxy and offering mailings; and |
141
|
provide software for the operation of the Stock Information Center. |
How We Determined Stock Pricing and the Number of Shares to be Issued
The plan of reorganization and federal regulations require that the aggregate purchase price of the common stock sold in the offering be based on the appraised pro forma market value of the common stock, as determined on the basis of an independent valuation. We retained McAuliffe Financial, LLC to make the independent valuation. McAuliffe Financial, LLC will receive a fee of $40,000, and we will reimburse McAuliffe Financial, LLC for expenses not to exceed $5,000 without our prior written approval. We have agreed to indemnify McAuliffe Financial, LLC and its employees and affiliates against certain losses (including any losses in connection with claims under the federal securities laws) arising out of its services as appraiser, except where McAuliffe Financial, LLCs liability results from its negligence or bad faith.
The independent valuation was prepared by McAuliffe Financial, LLC in reliance upon the information contained in the prospectus, including the financial statements. McAuliffe Financial, LLC also considered the following factors, among others:
|
the present and projected operating results and financial condition of Oconee Federal Savings and Loan Association and the economic and demographic conditions in our existing market area; |
|
historical, financial and other information relating to Oconee Federal Savings and Loan Association; |
|
a comparative evaluation of the operating and financial statistics of Oconee Federal Savings and Loan Association with those of other publicly traded subsidiaries of holding companies; |
|
the aggregate size of the offering; |
|
the impact of the reorganization and offering on our stockholders equity and earnings potential; |
|
the proposed dividend policy of Oconee Federal Financial Corp.; |
|
the trading market for securities of comparable institutions and general conditions in the market for such securities; and |
|
the issuance of shares and contribution of cash to the charitable foundation. |
On the basis of the foregoing, McAuliffe Financial, LLC advised us that as of September 3, 2010, the estimated pro forma market value of the common stock on a fully converted basis ranged from a minimum of $40.8 million to a maximum of $55.2 million, with a midpoint of $48.0 million (the estimated valuation range). Our board of directors determined to offer the shares of common stock in the offering at the purchase price of $10.00 per share and that 33% of
142
the shares issued should be held by purchasers in the offering and 65% should be held by Oconee Federal, MHC after giving effect to the issuance of shares of common stock to Oconee Federal Charitable Foundation. Based on the estimated valuation range and the purchase price of $10.00 per share, the number of shares of common stock that Oconee Federal Financial Corp. will issue will range from 4,080,000 to 5,520,000 shares, with a midpoint of 4,800,000 shares, and the number of shares sold in the offering will range from 1,346,400 shares to 1,821,600 shares, with a midpoint of 1,584,000 shares.
Our board of directors reviewed the independent valuation and, in particular, considered (i) our financial condition and results of operations for the two years ended June 30, 2010, (ii) financial comparisons to other financial institutions, and (iii) stock market conditions generally and, in particular, for financial institutions, all of which are set forth in the independent valuation. Our board of directors also reviewed the methodology and the assumptions used by McAuliffe Financial, LLC in preparing the independent valuation. The estimated valuation range may be amended with the approval of the Office of Thrift Supervision, if necessitated by subsequent developments in our financial condition or market conditions generally.
Following commencement of the subscription offering, the maximum of the estimated valuation range may be increased by up to 15%, to up to $63.48 million and the maximum number of shares that will be outstanding immediately following the offering may be increased up to 15% to up to 6,348,000 shares. Under such circumstances the number of shares sold in the offering will be increased to up to 2,094,840 shares and the number of shares held by Oconee Federal, MHC will be increased to up to 4,126,200 shares. The increase in the valuation range may occur to reflect changes in market and financial conditions, demand for the shares, or regulatory considerations, without the resolicitation of subscribers. The minimum of the estimated valuation range and the minimum of the offering range may not be decreased without a resolicitation of subscribers. The purchase price of $10.00 per share will remain fixed. See Offering of Common StockLimitations On Purchase of Shares as to the method of distribution and allocation of additional shares of common stock that may be issued in the event of an increase in the offering range to fill unfilled orders in the subscription and community offerings.
The independent valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. McAuliffe Financial, LLC did not independently verify the financial statements and other information provided by Oconee Federal Savings and Loan Association, nor did McAuliffe Financial, LLC value independently the assets or liabilities of Oconee Federal Savings and Loan Association. The independent valuation considers Oconee Federal Savings and Loan Association as a going concern and should not be considered as an indication of its liquidation value. Moreover, because the valuation is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons purchasing shares in the offering will thereafter be able to sell such shares at prices at or above the purchase price.
The independent valuation will be updated at the time of the completion of the offering. If the update to the independent valuation at the conclusion of the offering results in an increase in the pro forma market value of the common stock to more than $63.48 million or a decrease in
143
the pro forma market value to less than $40.80 million, then Oconee Federal Financial Corp., after consulting with the Office of Thrift Supervision, may terminate the plan of reorganization and return all funds promptly, with interest on payments made by check, certified or tellers check, bank draft or money order; extend or hold a new subscription offering, community offering, or both; establish a new offering range and commence a resolicitation of subscribers; or take such other actions as may be permitted by the Office of Thrift Supervision in order to complete the reorganization and offering. In the event that a resolicitation is commenced, unless an affirmative response is received within a reasonable period of time, all funds will be promptly returned to investors as described above. A resolicitation, if any, following the conclusion of the subscription and community offerings would not exceed 45 days unless further extended by the Office of Thrift Supervision for periods of up to 90 days not to extend beyond 24 months following the special meeting of members, or [extended closing date].
An increase in the independent valuation and the number of shares to be issued in the offering would decrease both a subscribers ownership interest and Oconee Federal Financial Corp.s pro forma earnings and stockholders equity on a per share basis while increasing pro forma earnings and stockholders equity on an aggregate basis. A decrease in the independent valuation and the number of shares of common stock to be issued in the offering would increase both a subscribers ownership interest and Oconee Federal Financial Corp.s pro forma earnings and stockholders equity on a per share basis while decreasing pro forma net income and stockholders equity on an aggregate basis. For a presentation of the effects of such changes, see Pro Forma Data.
Copies of the appraisal report of McAuliffe Financial, LLC and the detailed memorandum of the appraiser setting forth the method and assumptions for such appraisal are available for inspection at the main office of Oconee Federal Savings and Loan Association and the other locations specified under Where You Can Find More Information.
No sale of shares of common stock may occur unless, prior to such sale, McAuliffe Financial, LLC confirms to Oconee Federal Savings and Loan Association and the Office of Thrift Supervision that, to the best of its knowledge, nothing of a material nature has occurred that, taking into account all relevant factors, would cause McAuliffe Financial, LLC to conclude that the independent valuation is incompatible with its estimate of the pro forma market value of the common stock of Oconee Federal Financial Corp. at the conclusion of the offering. Any change that would result in an aggregate purchase price that is below the minimum or above the maximum of the estimated valuation range would be subject to Office of Thrift Supervisions approval. If such confirmation is not received, we may extend the offering; reopen the offering or commence a new offering; establish a new estimated valuation range and commence a resolicitation of all purchasers with the approval of the Office of Thrift Supervision; or take such other actions as permitted by the Office of Thrift Supervision in order to complete the offering.
Procedure for Purchasing Shares
Prospectus Delivery. To ensure that each purchaser receives a prospectus at least 48 hours before the expiration date, prospectuses may not be mailed any later than five days prior to such date or be hand delivered any later than two days prior to such date. Order forms may only be distributed with a prospectus.
144
Expiration Date. The offering will terminate at 4:00 p.m., Eastern Time on [Offering expiration date] unless extended by us for up to 45 days following the expiration of the offering, which is [Extended offering expiration date], or, if approved by the Office of Thrift Supervision, for an additional period after [Extended offering expiration date] (as so extended, the expiration date). We are not required to give purchasers notice of any extension unless the expiration date is later than [Extended offering expiration date], in which event purchasers will be given the right to increase, decrease, confirm, or rescind their orders.
Use of Order Forms. In order to purchase shares of common stock, each purchaser must complete an order form except for certain persons purchasing in the syndicated community offering as more fully described below. Any person receiving an order form who desires to purchase shares of common stock may do so by delivering to a full service office of Oconee Federal Savings and Loan Association, a properly executed and completed order form, together with full payment for the shares of common stock purchased. The order form must be received by Oconee Federal Savings and Loan Association prior to 4:00 p.m., Eastern Time on [Offering expiration date]. Each person ordering shares of common stock is required to represent that they are purchasing such shares for his or her own account. Our interpretation of the terms and conditions of the plan of reorganization and stock issuance plan and of the acceptability of the order forms will be final. We are not required to accept copies of order forms.
Payment for Shares . Payment for all shares will be required to accompany a completed order form for the purchase to be valid. Payment for shares may be made by (a) check or money order or (b) authorization of withdrawal from a deposit account maintained with Oconee Federal Savings and Loan Association. Third party checks will not be accepted as payment for a subscribers order. Appropriate means by which such withdrawals may be authorized are provided in the order forms.
Once such a withdrawal amount has been authorized, a hold will be placed on such funds, making them unavailable to the depositor until the offering has been completed or terminated. In the case of payments authorized to be made through withdrawal from deposit accounts, all funds authorized for withdrawal will continue to earn interest at the contract rate until the offering is completed or terminated.
Interest penalties for early withdrawal applicable to certificate of deposit accounts at Oconee Federal Savings and Loan Association will not apply to withdrawals authorized for the purchase of shares of common stock. However, if a withdrawal results in a certificate of deposit account with a balance less than the applicable minimum balance requirement, the certificate of deposit shall be canceled at the time of withdrawal without penalty, and the remaining balance will earn interest at our passbook rate subsequent to the withdrawal.
Funds received prior to the completion of the offering will be held in a segregated account at Oconee Federal Savings and Loan Association or, in our discretion, at another federally insured depository institution. Subscription funds will bear interest at our passbook savings rate, which is currently 0.50% per annum. Subscribers checks will be transmitted to the segregated account referred to above by no later than noon of the next business day where they will be invested in investments that are permissible under SEC Rule 15c2-4. If the offering is terminated, subscription funds will be returned promptly, with interest. Such interest will be paid by check, on all funds held, including funds accepted as payment for shares of common stock, promptly following completion or termination of the offering.
145
The employee stock ownership plan will not be required to pay for the shares of common stock it intends to purchase in the offering until consummation of the offering.
We may, in our sole discretion, permit institutional investors to submit irrevocable orders together with the legally binding commitment for payment and to thereafter pay for such shares of common stock for which they subscribe in the community or syndicated community offering at any time prior to the 48 hours before completion of the offering. This payment may be made by wire transfer.
Owners of self-directed IRAs may use the assets of such IRAs to purchase shares of common stock in the offering, provided that the IRA accounts are not maintained at Oconee Federal Savings and Loan Association. Persons with IRAs maintained with us must have their accounts transferred to a self-directed IRA account with an unaffiliated trustee in order to purchase shares of common stock in the offering. In addition, the provisions of ERISA and IRS regulations require that executive officers, trustees, and 10% stockholders who use self-directed IRA funds and/or Keogh plan accounts to purchase shares of common stock in the offering, make such purchase for the exclusive benefit of the IRA and/or Keogh plan participant. Assistance on how to transfer IRAs maintained at Oconee Federal Savings and Loan Association can be obtained from the Stock Information Center. Depositors interested in using funds in an IRA maintained at Oconee Federal Savings and Loan Association should contact the Stock Information Center as soon as possible.
Once submitted, an order cannot be modified or revoked unless the offering is terminated or extended beyond [Extended offering expiration date].
Delivery of Stock Certificates. Certificates representing shares of common stock issued in the offering will be mailed to the persons entitled thereto at the registration address noted on the order form, as soon as practicable following consummation of the offering. Any certificates returned as undeliverable will be held by us until claimed by persons legally entitled thereto or otherwise disposed of in accordance with applicable law. Until certificates for the shares of common stock are available and delivered to purchasers, purchasers may not be able to sell the shares of common stock that they ordered.
Restrictions on Purchase or Transfer of Stock by Directors and Officers
All shares of the common stock purchased by our directors and officers in the offering will be subject to the restriction that such shares may not be sold or otherwise disposed of for value for a period of one year following the date of purchase, except for any disposition of such shares (a) following the death of the original purchaser or (b) by reason of an exchange of securities in connection with a merger or acquisition approved by the applicable regulatory authorities. Sales of shares of the common stock by Oconee Federal Financial Corp.s directors and officers will also be subject to certain insider trading and other transfer restrictions under the federal securities laws. See Supervision and RegulationFederal Securities Laws.
146
Purchases of outstanding shares of common stock of Oconee Federal Financial Corp. by directors, executive officers, or any person who was an executive officer or director of Oconee Federal Savings and Loan Association after adoption of the plan of reorganization, and their associates during the three-year period following the reorganization and offering may be made only through a broker or dealer registered with the Securities and Exchange Commission, except with the prior written approval of the Office of Thrift Supervision. This restriction does not apply, however, to negotiated transactions involving more than 1% of Oconee Federal Financial Corp.s outstanding common stock or to the purchase of shares of common stock under the stock option plan.
Oconee Federal Financial Corp. has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933, as amended, for the registration of the shares of common stock to be issued in the offering. The registration under the Securities Act of shares of the common stock to be issued in the offering does not cover the resale of the shares of common stock. Shares of common stock purchased by persons who are not affiliates of Oconee Federal Financial Corp. may be resold without registration. Shares purchased by an affiliate of Oconee Federal Financial Corp. will have resale restrictions under Rule 144 of the Securities Act of 1933. If Oconee Federal Financial Corp. meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of Oconee Federal Financial Corp. who complies with the other conditions of Rule 144, including those that require the affiliates sale to be aggregated with those of certain other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of Oconee Federal Financial Corp. common stock or the average weekly volume of trading in the shares of common stock during the preceding four calendar weeks. Provision may be made in the future by Oconee Federal Financial Corp. to permit affiliates to have their shares of common stock registered for sale under the Securities Act of 1933 under certain circumstances.
Under guidelines of the FINRA, members of the FINRA and their associates face certain reporting requirements upon purchase of the securities.
Interpretation, Amendment and Termination
All interpretations of the plan of reorganization by our board of directors will be final, subject to the authority of the Office of Thrift Supervision. The plan of reorganization provides that, if deemed necessary or desirable by the board of directors of Oconee Federal Savings and Loan Association, the plan of reorganization may be substantially amended by a majority vote of the board of directors of Oconee Federal Savings and Loan Association as a result of comments from regulatory authorities or otherwise, at any time prior to submission of proxy materials to Oconee Federal Savings and Loan Associations members. Amendment of the plan of reorganization thereafter requires a majority vote of the board of directors of Oconee Federal Savings and Loan Association, with the concurrence of the Office of Thrift Supervision. The plan of reorganization may be terminated by a majority vote of the board of directors of Oconee Federal Savings and Loan Association at any time prior to the earlier of approval of the plan of reorganization by the Office of Thrift Supervision and the date of the special meeting of members, and may be terminated at any time thereafter with the concurrence of the Office of Thrift Supervision. Completion of the reorganization requires the approval of the plan of
147
reorganization by the affirmative vote of not less than a majority of the total number of votes of members eligible to be cast at the Special Meeting of Members. The plan of reorganization shall be terminated if the reorganization and offering are not completed within 24 months from the date on which the members of Oconee Federal Savings and Loan Association approve the plan of reorganization and may not be extended by Oconee Federal Savings and Loan Association or the Office of Thrift Supervision.
Stock Information Center
If you have any questions regarding the offering or the reorganization, please call the Stock Information Center at ( ) - from 9:00 a.m. to 4:00 p.m., Eastern Time, Monday through Friday.
OCONEE FEDERAL CHARITABLE FOUNDATION
General
In furtherance of our commitment to our local community, our plan of reorganization provides that we will establish a new charitable foundation, Oconee Federal Charitable Foundation, as a non-stock, nonprofit Delaware corporation in connection with the offering. The new charitable foundation will be funded with cash and shares of our common stock, as further described below. We believe that the creation and funding of the charitable foundation will result in a significant increase in our charitable contributions to organizations in our community.
By further enhancing our visibility and reputation in our local community, we believe that the new charitable foundation will enhance the long-term value of Oconee Federal Savings and Loan Associations community banking franchise. The offering presents us with a unique opportunity to provide a substantial and continuing benefit to our community through Oconee Federal Charitable Foundation.
Purpose of the Charitable Foundation
In connection with the closing of the offering, Oconee Federal Savings and Loan Association intends to (a) cause Oconee Federal Financial Corp. to issue, on Oconee Federal Savings and Loan Associations behalf, a number of shares of common stock equal to 2.0% of the outstanding shares (including shares issued to Oconee Federal, MHC) to Oconee Federal Charitable Foundation, and (b) contribute to Oconee Federal Charitable Foundation an amount of cash such that the total contribution of cash and shares of common stock will equal $2.5 million. The purpose of the charitable foundation is to provide financial support to charitable organizations in the communities in which we operate and to enable our communities to share in our long-term growth. Oconee Federal Charitable Foundation will be dedicated completely to community activities and the promotion of charitable causes, and may be able to support such activities in ways that are not presently available to us. Oconee Federal Charitable Foundation will also support our ongoing obligations to the community under the Community Reinvestment Act. Oconee Federal Savings and Loan Association received a satisfactory rating in its most recent Community Reinvestment Act examination by the Office of Thrift Supervision.
148
Funding Oconee Federal Charitable Foundation with shares of our common stock is also intended to allow our communities to share in our potential growth and success after the offering is completed because Oconee Federal Charitable Foundation will benefit directly from any increases in the value of our shares of common stock. In addition, Oconee Federal Charitable Foundation will maintain close ties with Oconee Federal Savings and Loan Association, thereby forming a partnership within the communities in which Oconee Federal Savings and Loan Association operates.
Structure of the Charitable Foundation
Oconee Federal Charitable Foundation will be incorporated under Delaware law as a non-stock, nonprofit corporation. The certificate of incorporation of Oconee Federal Charitable Foundation will provide that the corporation is organized exclusively for charitable purposes as set forth in Section 501(c)(3) of the Internal Revenue Code. Oconee Federal Charitable Foundations certificate of incorporation will further provide that no part of the net earnings of the charitable foundation will inure to the benefit of, or be distributable to, its members, directors or officers or to private individuals.
The charitable foundation will be governed by a board of directors, initially consisting of our Executive Vice President and Chief Financial Officer, one of our current non-employee directors and one individual who is not affiliated with us. Office of Thrift Supervision regulations require that we select one person to serve on the initial board of directors who is not one of our officers or directors and who has experience with local charitable organizations and grant making, and we have selected Douglas W. Brune as a director to satisfy these requirements. While there are no plans to change the size of the initial board of directors during the year following the completion of the offering, following the first anniversary of the offering, the charitable foundation may alter the size and composition of its board of directors. For five years after the offering, one seat on the charitable foundations board of directors will be reserved for a person from our local community who has experience with local community charitable organizations and grant making and who is not one of our officers, directors or employees, and at least one seat on the charitable foundations board of directors will be reserved for one of Oconee Federal Savings and Loan Associations directors. Except as described below in Regulatory Requirements Imposed on the Charitable Foundation, on an annual basis, the directors of the charitable foundation elect members of the board to serve for one-year terms.
The business experience of our current directors is described in Management. Douglas W. Brune is the co-owner of Bruski, LLC, an apartment and self-storage warehouse rental company, and the President of Brune Enterprises, a property management company, where he has been employed for 14 years. Both of Mr. Brunes businesses are located in Oconee County, and he lives in Seneca, South Carolina. Mr. Brune has been involved with numerous local civic and charitable organizations, including serving as a staff member of Palmetto Boys State since 1996, serving as a member of the Board of Directors of Friends of Boys State since 2009, and serving as a member and Past President of the Seneca Sertoma Club. He has received the Sertoman of the Year Award and the Club Achievement Award from the Seneca Sertoma Club. He is also actively involved in charitable activities conducted by Saint Mark United Methodist Church in Seneca, South Carolina.
149
The board of directors of Oconee Federal Charitable Foundation will be responsible for establishing its grant and donation policies, consistent with the purposes for which it was established. As directors of a nonprofit corporation, directors of Oconee Federal Charitable Foundation will at all times be bound by their fiduciary duty to advance the charitable foundations charitable goals, to protect its assets and to act in a manner consistent with the charitable purposes for which the charitable foundation is established. The directors of Oconee Federal Charitable Foundation also will be responsible for directing the activities of the charitable foundation, including the management and voting of the shares of our common stock held by the charitable foundation. However, as required by Office of Thrift Supervision regulations, all shares of our common stock held by Oconee Federal Charitable Foundation must be voted in the same ratio as all other shares of our common stock on all proposals considered by our stockholders.
Oconee Federal Charitable Foundations initial place of business will be located at our administrative offices. The board of directors of Oconee Federal Charitable Foundation will appoint such officers and employees as may be necessary to manage its operations. To the extent applicable, we will comply with the affiliates restrictions set forth in Sections 23A and 23B of the Federal Reserve Act and the Office of Thrift Supervision regulations governing transactions between Oconee Federal Savings and Loan Association and the charitable foundation.
Oconee Federal Charitable Foundation will receive working capital from the initial cash contribution of $1.54 million (at the midpoint of the offering range) and:
(1) | any dividends that may be paid on our shares of common stock in the future; |
(2) | within the limits of applicable federal and state laws, loans collateralized by the shares of common stock; or |
(3) | the proceeds of the sale of any of the shares of common stock in the open market from time to time. |
As a private foundation under Section 501(c)(3) of the Internal Revenue Code, Oconee Federal Charitable Foundation generally will be required to distribute annually in grants or donations a minimum of 5% of the average fair market value of its net investment assets.
Tax Considerations
We believe that an organization created for the above purposes should qualify as a Section 501(c)(3) exempt organization under the Internal Revenue Code and should be classified as a private foundation. Oconee Federal Charitable Foundation will submit a timely request to the Internal Revenue Service to be recognized as a tax-exempt organization. As long as Oconee Federal Charitable Foundation files its application for tax-exempt status within 27 months after the last day of the month in which it was incorporated, and provided the Internal Revenue Service approves the application, its effective date as a Section 501(c)(3) organization will be the date of its incorporation. We have not received a tax opinion as to whether Oconee Federal Charitable Foundations tax exempt status will be affected by the regulatory requirement that all shares of our common stock held by Oconee Federal Charitable Foundation must be voted in the same ratio as all other outstanding shares of our common stock on all proposals considered by our stockholders.
150
Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association are authorized by federal law to make charitable contributions. We believe that the offering presents a unique opportunity to establish and fund a charitable foundation given the substantial amount of additional capital being raised. In making such a determination, we considered the dilutive impact to our stockholders of the contribution of shares of common stock to Oconee Federal Charitable Foundation. We believe that the contribution to Oconee Federal Charitable Foundation of an amount of common stock and cash that does not exceed the 10% annual limitation on charitable deductions described below is justified given Oconee Federal Savings and Loan Associations capital position and its earnings, the substantial additional capital being raised in the offering and the potential benefits of Oconee Federal Charitable Foundation to our community. See Capitalization, Regulatory Capital Compliance, and Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation.
We believe that our contribution of shares of our common stock to Oconee Federal Charitable Foundation should not constitute an act of self-dealing and that we should be entitled to a federal and state tax deduction in the amount of the fair market value of the stock at the time of the contribution. We are permitted to deduct for charitable purposes only an amount equal to 10% of our annual taxable income in any one year. We are permitted under the Internal Revenue Code and South Carolina tax law to carry the excess contribution over the five-year period following the contribution to Oconee Federal Charitable Foundation. We believe that substantially all of the contribution should be deductible for federal and state tax purposes over the six-year period (i.e., the year in which the contribution is made and the succeeding five-year period). However, we do not have any assurance that the Internal Revenue Service will grant tax-exempt status to the charitable foundation. In such event, our contribution to Oconee Federal Charitable Foundation would be expensed without a tax benefit, resulting in a reduction in earnings in the year in which the Internal Revenue Service makes such a determination. Furthermore, even if the contribution is deductible, we may not have sufficient earnings to be able to use the deduction in full. Any such decision to continue to make additional contributions to Oconee Federal Charitable Foundation in the future would be based on an assessment of, among other factors, our financial condition at that time, the interests of our stockholders and depositors, and the financial condition and operations of the charitable foundation.
While federal tax law allows the filing of consolidated income tax returns, South Carolina tax law does not. Since Oconee Federal Financial Corp. will have limited operations and limited unconsolidated income following the reorganization, we structured the contribution to the charitable foundation in an attempt to take advantage of the tax deductibility of the charitable contribution for both federal and South Carolina income tax purposes. Specifically, under the deemed purchase method of Section 1032 of the Internal Revenue Code, Oconee Federal Savings and Loan Association will cause Oconee Federal Financial Corp. to issue shares to the charitable foundation on Oconee Federal Savings and Loan Associations behalf, in satisfaction of Oconee Federal Savings and Loan Associations promised contribution to the charitable foundation. Oconee Federal Savings and Loan Association will contribute the cash portion of the charitable foundation funding using a portion of the proceeds of the offering. We believe that all of the contribution will be deductible for federal and state income tax purposes. As a
151
private foundation, earnings and gains of the charitable foundation, if any, from the sale of common stock or other assets are exempt from federal and state income taxation. However, investment income, such as interest, dividends and capital gains, is generally taxed at a rate of 2%. Oconee Federal Charitable Foundation will be required to file an annual return with the Internal Revenue Service within four and one-half months after the close of its fiscal year. Oconee Federal Charitable Foundation will be required to make its annual return available for public inspection. The annual return for a private foundation includes, among other things, an itemized list of all grants made or approved, showing the amount of each grant, the recipient, any relationship between a grant recipient and the charitable foundations managers and a concise statement of the purpose of each grant.
Regulatory Requirements Imposed on the Charitable Foundation
Office of Thrift Supervision regulations require that, before our board of directors adopted the plan of stock issuance, the board of directors had to identify its members that will serve on the charitable foundations board, and these directors could not participate in our boards discussions concerning contributions to the charitable foundation, and could not vote on the matter. Our board of directors complied with this regulation in adopting the plan of stock issuance.
Office of Thrift Supervision regulations provide that the Office of Thrift Supervision will generally not object if a well-capitalized savings and loan association contributes to a charitable foundation an aggregate amount of 8% or less of the shares issued in or proceeds from an offering. Oconee Federal Savings and Loan Association qualifies as a well-capitalized savings and loan association for purposes of this limitation, and the contribution to the charitable foundation will not exceed this limitation.
Office of Thrift Supervision regulations impose the following additional requirements on the establishment of the charitable foundation:
|
the Office of Thrift Supervision may examine the charitable foundation at the charitable foundations expense; |
|
the charitable foundation must comply with all supervisory directives imposed by the Office of Thrift Supervision; |
|
the charitable foundation must provide annually to the Office of Thrift Supervision a copy of the annual report that the charitable foundation submits to the Internal Revenue Service; |
|
the charitable foundation must operate according to written policies adopted by its board of directors, including a conflict of interest policy; |
|
the charitable foundation may not engage in self-dealing and must comply with all laws necessary to maintain its tax-exempt status under the Internal Revenue Code; and |
152
|
the charitable foundation must vote its shares of our common stock in the same ratio as all of the other shares voted on each proposal considered by our stockholders. |
Within six months of completing the offering, Oconee Federal Charitable Foundation must submit to the Office of Thrift Supervision a three-year operating plan, and must provide the Office of Thrift Supervision with a copy of the charitable foundations certificate of incorporation, bylaws, gift instrument, conflicts of interest policy and a federal and state tax opinion addressing deductibility of the contribution.
RESTRICTIONS ON THE ACQUISITION OF OCONEE FEDERAL FINANCIAL
CORP. AND OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
The principal federal regulatory restrictions which affect the ability of any person, firm or entity to acquire Oconee Federal Financial Corp., Oconee Federal Savings and Loan Association or their respective capital stock are described below. Also discussed are certain provisions in Oconee Federal Financial Corp.s charter and bylaws that may be deemed to affect the ability of a person, firm or entity to acquire Oconee Federal Financial Corp.
Federal Law
The Change in Bank Control Act provides that no person, acting directly or indirectly or through or in concert with one or more other persons, may acquire control of a savings institution unless the Office of Thrift Supervision has been given 60 days prior written notice. The Home Owners Loan Act provides that no company may acquire control of a savings institution without the prior approval of the Office of Thrift Supervision. Any company that acquires such control becomes a savings and loan holding company subject to registration, examination and regulation by the Office of Thrift Supervision. Pursuant to federal regulations, a person is deemed conclusively to have acquired control of a savings institution by, among other things, acquiring more than 25% of any class of voting stock of the institution or controlling the election of a majority of the directors of an institution. Moreover, a person is presumed to have acquired control, subject to rebuttal, by acquiring more than 10% of any class of voting stock, or of more than 25% of any class of stock of a savings institution, where certain enumerated control factors are also present in the acquisition.
The Office of Thrift Supervision may prohibit an acquisition of control if:
|
it would result in a monopoly or substantially lessen competition; |
|
the financial condition of the acquiring person might jeopardize the financial stability of the institution; or |
|
the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or of the public to permit the acquisition of control by such person. |
153
These restrictions do not apply to the acquisition of a savings institutions capital stock by one or more tax-qualified employee stock benefit plans, provided that the plans do not have beneficial ownership of more than 25% of any class of equity security of the savings institution.
For a period of three years following completion of the offering, Office of Thrift Supervision regulations generally prohibit any person from acquiring or making an offer to acquire beneficial ownership of more than 10% of the stock of Oconee Federal Financial Corp. or Oconee Federal Savings and Loan Association without Office of Thrift Supervisions prior approval.
Charter and Bylaws of Oconee Federal Financial Corp.
The following discussion is a summary of provisions of the charter and bylaws of Oconee Federal Financial Corp. that relate to corporate governance. The description is necessarily general and qualified by reference to the charter and bylaws.
Classified Board of Directors . The board of directors of Oconee Federal Financial Corp. is required by the charter and bylaws to be divided into three staggered classes that are as equal in size as is possible. Each year one class will be elected by stockholders of Oconee Federal Financial Corp. for a three year term. A classified board promotes continuity and stability of management of Oconee Federal Financial Corp., but makes it more difficult for stockholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur.
Authorized but Unissued Shares of Capital Stock . Following the offering, Oconee Federal Financial Corp. will have authorized but unissued shares of preferred stock and common stock. See Description of Capital Stock of Oconee Federal Financial Corp. Although these shares could be used by the board of directors of Oconee Federal Financial Corp. to make it more difficult or to discourage an attempt to obtain control of Oconee Federal Financial Corp. through a merger, tender offer, proxy contest or otherwise, it is unlikely that we would use or need to use shares for these purposes since Oconee Federal, MHC will own a majority of the common stock for so long as we remain in the mutual holding company structure.
How Shares are Voted . Oconee Federal Financial Corp.s charter provides that there will not be cumulative voting by stockholders for the election of Oconee Federal Financial Corp.s directors. No cumulative voting rights means that Oconee Federal, MHC, as the holder of a majority of the shares eligible to be voted at a meeting of stockholders, may elect all directors of Oconee Federal Financial Corp. to be elected at that meeting. This could prevent minority stockholder representation on Oconee Federal Financial Corp.s board of directors.
Restrictions on Acquisitions of Shares . A section in Oconee Federal Financial Corp.s and Oconee Federal Savings and Loan Associations charter provides that for a period of five years from the closing of the offering, no person, other than Oconee Federal, MHC, and, with respect to Oconee Federal Savings and Loan Association, other than Oconee Federal, MHC and Oconee Federal Financial Corp., may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of equity security of Oconee Federal Financial Corp. or Oconee Federal Savings and Loan Association held by persons other than
154
Oconee Federal, MHC, and, with respect to Oconee Federal Savings and Loan Association, other than Oconee Federal Financial Corp., and that any shares acquired in excess of this limit would not be entitled to be voted and would not be counted as voting stock in connection with any matters submitted to the stockholders for a vote.
Procedures for Stockholder Nominations . Oconee Federal Financial Corp.s bylaws provide that any stockholder wanting to make a nomination for the election of directors or a proposal for new business at a meeting of stockholders must send written notice to the Secretary of Oconee Federal Financial Corp. at least five days before the date of the annual meeting. Management believes that it is in the best interests of Oconee Federal Financial Corp. and its stockholders to provide enough time for management to disclose to stockholders information about a dissident slate of nominations for directors. This advance notice requirement may also give management time to solicit its own proxies in an attempt to defeat any dissident slate of nominations if management thinks it is in the best interest of stockholders generally. Similarly, adequate advance notice of stockholder proposals will give management time to study such proposals and to determine whether to recommend to the stockholders that such proposals be adopted.
Benefit Plans
In addition to the provisions of Oconee Federal Financial Corp.s charter and bylaws described above, benefit plans of Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association that may authorize the issuance of equity to its board of directors, officers and employees adopted in connection with the offering contain provisions which also may discourage hostile takeover attempts which the board of directors of Oconee Federal Savings and Loan Association might conclude are not in the best interests of Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association or Oconee Federal Financial Corp.s stockholders.
DESCRIPTION OF CAPITAL STOCK OF OCONEE FEDERAL FINANCIAL CORP.
General
Oconee Federal Financial Corp. is authorized to issue 100,000,000 shares of common stock having a par value of $0.01 per share and 1,000,000 shares of serial preferred stock. Each share of Oconee Federal Financial Corp.s common stock will have the same relative rights as, and will be identical in all respects with, each other share of common stock. Upon payment of the purchase price for the common stock in accordance with the plan or reorganization and stock issuance plan, all of the stock will be duly authorized, fully paid and nonassessable. Presented below is a description of the features of Oconee Federal Financial Corp.s capital stock that are deemed material to an investment decision with respect to the offering. The common stock of Oconee Federal Financial Corp. will represent nonwithdrawable capital, will not be an account of an insurable type, and will not be insured by the FDIC.
Oconee Federal Financial Corp. currently expects that it will have a maximum of up to 5,520,000 shares of common stock outstanding after the offering, of which up to 2,754,480 shares will be held by persons other than Oconee Federal, MHC (including 110,400 shares issued
155
to Oconee Federal Charitable Foundation). Our board of directors can, without stockholder approval, issue additional shares of common stock, although Oconee Federal, MHC, so long as it is in existence, must own a majority of Oconee Federal Financial Corp.s outstanding shares of common stock. Oconee Federal Financial Corp.s issuance of additional shares of common stock 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. Oconee Federal Financial Corp. has no present plans to issue additional shares of common stock other than pursuant to the stock benefit plans previously discussed.
Common Stock
Distributions . Oconee Federal Financial Corp. can pay dividends if, as and when declared by its board of directors, subject to compliance with limitations which are imposed by law. The holders of common stock of Oconee Federal Financial Corp. will be entitled to receive and share equally in such dividends as may be declared by the board of directors of Oconee Federal Financial Corp. out of funds legally available therefor. Dividends from Oconee Federal Financial Corp. will depend, in large part, upon receipt of dividends from Oconee Federal Savings and Loan Association, because Oconee Federal Financial Corp. initially will have no source of income other than dividends from Oconee Federal Savings and Loan Association, earnings from the investment of proceeds from the sale of shares of common stock, and interest payments with respect to Oconee Federal Financial Corp.s loan to the employee stock ownership plan. A regulation of the Office of Thrift Supervision imposes limitations on capital distributions by savings institutions. Our ability to pay dividends and the amount of such dividends is also affected by the ability of Oconee Federal, MHC, our mutual holding company, to waive the receipt of dividends declared by Oconee Federal Financial Corp. Office of Thrift Supervision regulations allow federally chartered mutual holding companies to waive dividends. However, the recently enacted Dodd-Frank Act provides that the Federal Reserve Board will become the new regulator of Oconee Federal Financial Corp. and Oconee Federal, MHC, and that a mutual holding company will be required to give the Federal Reserve Board notice before waiving the receipt of dividends. The Federal Reserve Board historically has generally not allowed mutual holding companies to waive the receipt of dividends, and there can be no assurance as to the conditions, if any, the Federal Reserve Board will place on future dividend waiver requests by mutual holding companies such as Oconee Federal, MHC. See Supervision and RegulationFederal Banking RegulationCapital Distributions.
Pursuant to our charter, Oconee Federal Financial Corp. is authorized to issue preferred stock. If Oconee Federal Financial Corp. issues preferred stock, the holders thereof may have a priority over the holders of the common stock with respect to dividends.
Voting Rights . Upon the effective date of the offering, the holders of common stock of Oconee Federal Financial Corp. will possess exclusive voting rights in Oconee Federal Financial Corp. Each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. If Oconee Federal Financial Corp. issues preferred stock, holders of the preferred stock may also possess voting rights.
156
Liquidation . In the event of any liquidation, dissolution or winding up of Oconee Federal Savings and Loan Association, Oconee Federal Financial Corp., as holder of Oconee Federal Savings and Loan Associations capital stock, would be entitled to receive, after payment or provision for payment of all debts and liabilities of Oconee Federal Savings and Loan Association, including all deposit accounts and accrued interest thereon, all assets of Oconee Federal Savings and Loan Association available for distribution. In the event of liquidation, dissolution or winding up of Oconee Federal Financial Corp., 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 Oconee Federal Financial Corp. available for distribution. If preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution.
Rights to Buy Additional Shares . Holders of the common stock of Oconee Federal Financial Corp. will not be entitled to preemptive rights with respect to any shares which may be issued. Preemptive rights are the priority right to buy additional shares if Oconee Federal Financial Corp. issues more shares in the future. The common stock is not subject to redemption.
Provisions in Oconee Federal Financial Corp.s Charter that Could Restrict the Acquisition of Oconee Federal Financial Corp. Certain provisions in the charter of Oconee Federal Financial Corp. will serve to restrict the ability of a person, firm, or entity from acquiring Oconee Federal Financial Corp., Oconee Federal Savings and Loan Association or their respective capital stock. See Restrictions on Acquisition of Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association Charter and Bylaws of Oconee Federal Financial Corp. Restriction on Acquisition of Shares on page 154.
Preferred Stock
None of the shares of Oconee Federal Financial Corp.s authorized preferred stock will be issued in the offering. Such stock may be issued with such preferences and designations as our board of directors may from time to time determine. Our board of directors can, without stockholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights which could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control. The issuance of preferred stock must be approved by a majority of our independent directors who do not have an interest in the transaction and who have access, at our expense, to legal counsel. Oconee Federal Financial Corp. has no present plans to issue preferred stock.
Registrar and Transfer Company, Cranford, New Jersey, will act as the transfer agent and registrar for the common stock.
The legality of the common stock and the federal income tax consequences of the reorganization and offering and the contribution to the charitable foundation have been passed upon for Oconee Federal Savings and Loan Association and Oconee Federal Financial Corp. by the firm of Luse Gorman Pomerenk & Schick, P.C., Washington, D.C. The South Carolina state income tax consequences of the reorganization and offering have been passed upon for Oconee Federal Savings and Loan Association and Oconee Federal Financial Corp. by Cherry, Bekaert
157
& Holland, L.L.P. Luse Gorman Pomerenk & Schick, P.C. and Cherry, Bekaert & Holland, L.L.P. have consented to the references in this prospectus to their opinions. Certain legal matters regarding the reorganization and offering will be passed upon for Mutual Securities, Inc. by Nelson Mullins Riley & Scarborough LLP.
The financial statements of Oconee Federal Savings and Loan Association as of and for the years ended June 30, 2010 and 2009, have been included herein and in the registration statement in reliance upon the report of Cherry, Bekaert & Holland, L.L.P., an independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
McAuliffe Financial, LLC has consented to the publication in this prospectus of the summary of its report to Oconee Federal Savings and Loan Association and Oconee Federal Financial Corp. setting forth its opinion as to the estimated pro forma market value of the common stock upon the completion of the reorganization and offering and its valuation with respect to subscription rights.
WHERE YOU CAN FIND MORE INFORMATION
Oconee Federal Financial Corp. has filed a registration statement with the Securities and Exchange Commission under the Securities Act of 1933, with respect to the common stock offered hereby. As permitted by the rules and regulations of the Securities and Exchange Commission, this prospectus does not contain all the information set forth in the registration statement. This information, including the appraisal report of McAuliffe Financial, LLC and the detailed memorandum setting forth the methods and assumptions for the appraisal, can be examined without charge at the Public Reference Room of the Securities and Exchange Commission located at 100 F Street, N.E., Washington, D.C. 20549 on official business days during the hours of 10:00 a.m. to 3:00 p.m., and copies of the material can be obtained from the Securities and Exchange Commission at prescribed rates. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The registration statement also is available through the Securities and Exchange Commissions world wide web site on the internet at http://www.sec.gov. The statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions thereof and are not necessarily complete but do contain all material information regarding the documents; each statement is qualified by reference to the contract or document.
Oconee Federal Savings and Loan Association has filed a Combined Application MHC-1/MHC-2 with the Office of Thrift Supervision with respect to the reorganization and offering. Pursuant to the rules and regulations of the Office of Thrift Supervision, this prospectus omits certain information contained in that Application. The Application may be examined at the principal offices of the Office of Thrift Supervision, 1700 G Street, N.W., Washington, D.C. 20552 and at the Southeast Regional Office of the Office of Thrift Supervision located at 1475 Peachtree Street, N.E., Atlanta, Georgia 30309.
158
A copy of the charter and bylaws of Oconee Federal Financial Corp. is available without charge from Oconee Federal Savings and Loan Association.
In connection with the offering, Oconee Federal Financial Corp. will register the common stock with the Securities and Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934. Upon this registration, Oconee Federal Financial Corp. and the holders of its shares of common stock will become subject to the proxy solicitation rules, reporting requirements and restrictions on stock purchases and sales by directors, officers and greater than 10% stockholders, the annual and periodic reporting and certain other requirements of the Securities Exchange Act of 1934. Under the plan of reorganization, Oconee Federal Financial Corp. has undertaken that it will not terminate this registration for a period of at least three years following the reorganization.
159
***
Separate financial statements for Oconee Federal Financial Corp. have not been included in this prospectus because Oconee Federal Financial Corp. has not engaged in any significant activities, has no significant assets, and has no contingent liabilities, revenue or expenses.
All financial statement schedules have been omitted as the required information either is not applicable or is included in the financial statements or related notes.
Pursuant to Securities and Exchange Commission regulations, Oconee Federal Financial Corp. is a smaller reporting company as it will have a public float of less than $75 million.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Oconee Federal Savings and Loan Association
Seneca, South Carolina
We have audited the accompanying balance sheets of Oconee Federal Savings and Loan Association as of June 30, 2010 and 2009, and the related statements of income, changes in equity and cash flows for each of the years then ended. These financial statements are the responsibility of the Associations management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Association is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Associations internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Oconee Federal Savings and Loan Association as of June 30, 2010 and 2009, and the results of its operations and its cash flows for each of the years then ended in conformity with U.S. generally accepted accounting principles.
Greenville, South Carolina
September 8, 2010
F-2
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
BALANCE SHEETS
June 30, 2010 and 2009
(All amounts in thousands)
2010 | 2009 | |||||
ASSETS |
||||||
Cash and cash equivalents |
$ | 3,704 | $ | 6,091 | ||
Federal funds sold and overnight interest bearing deposits |
46,088 | 44,618 | ||||
Total cash and cash equivalents |
49,792 | 50,709 | ||||
Securities held to maturity (estimated fair value: 2010$12,602 and 2009$9,023) |
12,117 | 8,914 | ||||
Securities available for sale |
33 | 50 | ||||
Loans, net of allowance for loan losses of $888 and $258 |
264,328 | 245,969 | ||||
Premises and equipment, net |
3,521 | 3,717 | ||||
Real estate owned |
751 | 100 | ||||
Accrued interest receivable |
||||||
Loans |
965 | 908 | ||||
Investments |
68 | 58 | ||||
Restricted equity securities |
540 | 540 | ||||
Bank owned life insurance |
350 | 330 | ||||
Prepaid FDIC insurance premiums |
734 | 58 | ||||
Other assets |
347 | 231 | ||||
Total assets |
$ | 333,546 | $ | 311,584 | ||
LIABILITIES AND EQUITY |
||||||
Deposits |
||||||
Non-interest bearing |
$ | 2,017 | $ | 1,589 | ||
Interest bearing |
270,589 | 251,161 | ||||
Total deposits |
272,606 | 252,750 | ||||
Accrued interest payable and other liabilities |
1,279 | 1,766 | ||||
Total liabilities |
273,885 | 254,516 | ||||
Commitments and contingencies (Note 9) |
||||||
EQUITY |
||||||
Retained earnings, substantially restricted |
59,661 | 57,068 | ||||
Accumulated other comprehensive income |
| | ||||
Total equity |
59,661 | 57,068 | ||||
Total liabilities and equity |
$ | 333,546 | $ | 311,584 | ||
See accompanying notes to financial statements.
F-3
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF INCOME
Years Ended June 30, 2010 and 2009
(All amounts in thousands)
2010 | 2009 | ||||||
Interest and dividend income: |
|||||||
Loans, including fees |
$ | 14,604 | $ | 14,506 | |||
Securities, taxable |
432 | 666 | |||||
Federal funds sold and other |
48 | 301 | |||||
Total interest income |
15,084 | 15,473 | |||||
Interest expense: |
|||||||
Deposits |
5,980 | 7,605 | |||||
Total interest expense |
5,980 | 7,605 | |||||
Net interest income |
9,104 | 7,868 | |||||
Provision for loan losses |
758 | (27 | ) | ||||
Net interest income after provision for loan losses |
8,346 | 7,895 | |||||
Noninterest income: |
|||||||
Service charges on deposit accounts |
89 | 77 | |||||
Income on bank owned life insurance |
23 | 27 | |||||
Other |
125 | (14 | ) | ||||
Total noninterest income |
237 | 90 | |||||
Noninterest expense: |
|||||||
Salaries and employee benefits |
2,643 | 2,508 | |||||
Occupancy and equipment |
688 | 649 | |||||
Data processing |
284 | 306 | |||||
Professional and supervisory fees |
143 | 137 | |||||
Office expense |
77 | 77 | |||||
Advertising |
51 | 42 | |||||
FDIC deposit insurance |
330 | 167 | |||||
Charitable contributions |
25 | 40 | |||||
Other |
342 | 314 | |||||
Total noninterest expense |
4,583 | 4,240 | |||||
Income before income taxes |
4,000 | 3,745 | |||||
Income tax expense |
1,407 | 1,429 | |||||
Net income |
$ | 2,593 | $ | 2,316 | |||
See accompanying notes to financial statements.
F-4
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CHANGES IN EQUITY
Years Ended June 30, 2010 and 2009
(All amounts in thousands)
Retained
Earnings |
Accumulated
Other Comprehensive Income |
Total | |||||||||
Balance at July 1, 2008 |
$ | 54,752 | $ | 778 | $ | 55,530 | |||||
Comprehensive income: |
|||||||||||
Net income |
2,316 | 2,316 | |||||||||
Unrealized holding gains net of tax, $476 |
| (778 | ) | (778 | ) | ||||||
Total comprehensive income |
1,538 | ||||||||||
Balance at June 30, 2009 |
$ | 57,068 | $ | | $ | 57,068 | |||||
Comprehensive income: |
|||||||||||
Net income |
2,593 | | 2,593 | ||||||||
Unrealized holding gains net of tax |
| ||||||||||
Total comprehensive income |
2,593 | ||||||||||
Balance at June 30, 2010 |
$ | 59,661 | $ | | $ | 59,661 | |||||
See accompanying notes to financial statements.
F-5
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS OF CASH FLOWS
Years Ended June 30, 2010 and 2009
(All amounts in thousands)
2010 | 2009 | |||||||
Cash Flows From Operating Activities |
||||||||
Net income |
$ | 2,593 | $ | 2,316 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
758 | (27 | ) | |||||
Provision for real estate owned |
41 | 73 | ||||||
Depreciation and amortization, net |
287 | 1,435 | ||||||
Deferred loan fees, net of accretion |
108 | 122 | ||||||
Deferred income tax benefit |
(318 | ) | (12 | ) | ||||
Gain on sale of real estate owned |
(128 | ) | | |||||
Loss from other-than-temporary impairment |
17 | 30 | ||||||
Income on bank owned life insurance |
(20 | ) | (27 | ) | ||||
Net change in operating assets and liabilities |
||||||||
Accrued interest receivable |
(67 | ) | 109 | |||||
Accrued interest payable |
(47 | ) | (119 | ) | ||||
Other |
(897 | ) | 79 | |||||
Net cash provided by operating activities |
2,327 | 3,979 | ||||||
Cash Flows From Investing Activities |
||||||||
Purchases of premises and equipment |
(89 | ) | (120 | ) | ||||
Purchases of securities held-to-maturity |
(5,158 | ) | (9,007 | ) | ||||
Proceeds from maturities, paydowns and calls of securities held-to-maturity |
1,952 | 19,890 | ||||||
(Purchases) redemptions of restricted equity securities |
| (3 | ) | |||||
Proceeds from sale of real estate owned |
614 | 99 | ||||||
Loan originations and repayments, net |
(20,419 | ) | (4,074 | ) | ||||
Net cash provided by (used in) investing activities |
(23,100 | ) | 6,785 | |||||
Cash Flows from Financing Activities |
||||||||
Net change in deposits |
19,856 | 975 | ||||||
Net cash provided by financing activities |
19,856 | 975 | ||||||
Change in cash and cash equivalents |
(917 | ) | 11,739 | |||||
Cash and cash equivalents, beginning of year |
50,709 | 38,970 | ||||||
Cash and cash equivalents, end of period |
$ | 49,792 | $ | 50,709 | ||||
Cash paid during the period for: |
||||||||
Interest paid |
$ | 6,027 | $ | 7,723 | ||||
Income taxes paid |
$ | 1,787 | $ | 1,404 | ||||
Supplemental noncash disclosures: |
||||||||
Transfers from loans to foreclosed assets |
$ | 1,321 | $ | 275 |
See accompanying notes to financial statements.
F-6
NOTES TO FINANCIAL STATEMENTS
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations : Oconee Federal Savings and Loan Association (the Association) is a federally chartered mutual savings and loan association engaged in the business of accepting savings and demand deposits and providing mortgage, consumer and commercial loans to its members and others. Primarily, the Associations business is limited to the Oconee County area of northwestern South Carolina. The following is a description of the more significant accounting policies, which the Association follows in preparing and presenting its financial statements.
Basis of accounting : The accounting and reporting policies of the Association conform to accounting principles generally accepted in the United States of America and to general practices within the savings and loan industry.
Use of estimates : To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, carrying value of deferred tax assets and fair value of financial instruments are particularly subject to change.
Cash flows : Cash and cash equivalents include cash on hand, federal funds sold, overnight interest-bearing deposits and amounts due from other depository institutions.
Restrictions on Cash : Cash on hand or on deposit with the Federal Reserve Bank is required to meet regulatory reserve and clearing requirements. These balances do not earn interest.
Interest-Bearing Deposits in Other Financial Institutions : Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.
Securities : Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Equity securities with readily determinable fair values are classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
Loans : Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Management defers any material loan fees net of certain direct costs and amortizes these deferred fees or costs into interest income using the level yield method without anticipating prepayments.
Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to non-accrual status in accordance with the Associations policy, typically after 90 days of non-payment.
F-7
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS(Continued)
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses : The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in managements judgment, should be charged-off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.
In accordance with accounting guidance for impaired loans, loans are considered impaired when full payment under the loan terms is not expected. Any nonresidential or residential non-owner occupied loans that meet certain size requirements and performance characteristics are individually evaluated for impairment. In addition, all nonperforming and any associated loans of the same borrower and loans approved for foreclosure are individually evaluated for impairment regardless of size. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loans existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loans effective rate at inception.
Concentration of Credit Risk and Other : The Associations business activity is principally with customers located in South Carolina. The Association requires its customers to provide collateral, generally in the form of title to real estate, for substantially all loans. Certain consumer loans are made to customers without requiring collateral. Except for loans in the Associations market area, the Association has no other significant concentrations of credit risk.
The Association maintains its cash and cash equivalents on deposit with various financial institutions. In October and November 2008, the Federal Deposit Insurance Corporation (FDIC) temporarily increased coverage to $250 for substantially all depository accounts and temporarily provides unlimited coverage for certain qualifying and participating non-interest bearing transaction accounts. The increased coverage is scheduled to expire on December 31, 2013, at which time it is anticipated amounts insured by the FDIC will return to $100. Periodically, the Association may maintain balances in excess of these insured limits, and management believes the risk of loss is not significant.
Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method and charged to operations over the estimated useful lives of the assets which range from 3 to 40 years. Maintenance and repairs are charged to operations in the year incurred. Gains and losses on dispositions are included in current year operations.
The Association reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. If the sum of the expected cash flows is less than the stated amount of the asset, an impairment loss is recognized.
Real Estate Owned : Real estate acquired through loan foreclosure is recorded at the lower of carrying amount or fair value less estimated costs to sell. Any initial losses at the time of foreclosure are charged against the allowance for loan losses with any subsequent losses or write-downs included in the statements of income as a component of other expenses.
Fair values are based primarily on independent appraisals of market value. Recovery of estimated fair value is dependent to a great extent on economic, operating, and other conditions that may be beyond the Associations control. Accordingly, these estimates are particularly susceptible to changes that could result in material adjustments in the near term.
Restricted Equity Securities : The Association is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
F-8
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS(Continued)
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income taxes: The provision for income taxes is based on amounts reported in the statements of income (after exclusion of non-taxable income such as interest on state and municipal securities) and include changes in deferred taxes. Deferred taxes are computed using the asset and liability approach. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
The Association adopted guidance issued by the FASB with respect to accounting for uncertainty in income taxes, as of January 1, 2008. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The adoption had no affect on the Associations financial statements.
The Association recognizes interest and/or penalties related to income tax matters in income tax expense.
Comprehensive Income : Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as a separate component of equity.
Advertising costs: The Association expensed as incurred $51 and $42 of advertising costs during the years ended June 30, 2010 and 2009, respectively.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information. Changes in market conditions could significantly affect the estimates. For financial instruments where there is little or no relevant market information due to limited or no market activity, the Association estimates the fair value of these instruments through the use of a discounted present value of estimated cash flows technique, which includes the Associations own assumptions as to the amounts and timing of cash flows, adjusted for risk factors related to nonperformance and liquidity. The Associations assumptions are based on an exit price strategy and take into consideration the assumptions that a willing market participant would use about nonperformance and liquidity risk.
Retirement Plans : Profit sharing plan expense is the amount the Associations contribution to participants of the plan. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.
Bank Owned Life Insurance: The Association has purchased life insurance policies on certain directors. Accounting guidance requires bank owned life insurance to be recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Reclassifications : Some items in the prior year financial statements were reclassified to conform to the current presentation.
New Accounting Standards: In September 2006, the FASB issued guidance that defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance also establishes a fair value
F-9
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS(Continued)
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The guidance was effective for fiscal years beginning after November 15, 2007.
In February 2008, the FASB issued guidance that delayed the effective date of this fair value guidance for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The effects of this guidance were not significant to the financial statements.
In June 2009, the FASB replaced The Hierarchy of Generally Accepted Accounting Principles , with the FASB Accounting Standards Codification TM (The Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification was effective for financial statements issued for periods ending after September 15, 2009.
In January 2010, the FASB issued ASU an update to previously issued accounting standards for fair value measurements and disclosures to clarify existing disclosures, require new disclosures, and this update includes conforming amendments to guidance on employers disclosures about postretirement benefit plan assets. This update is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this guidance is not expected to have a significant impact on the Associations financial statements.
In July 2010, FASB issued an update to previously issued accounting standards with regard to disclosures about the credit quality of financing receivables and the allowance for credit losses. This update is intended to provide additional information to assist financial statement users in assessing an entitys credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in this update encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. The Association is currently evaluating the impact the adoption of this guidance will have on the Associations financial position or results of operations.
F-10
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS(Continued)
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 2 SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Debt, mortgage-backed and equity securities have been classified in the balance sheets according to managements intent. Investment securities at June 30, 2010 and 2009 are summarized as follows:
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
|||||||||
2010 |
||||||||||||
Held-to-maturity: |
||||||||||||
FHLMC mortgage-backed securities |
$ | 545 | $ | 42 | $ | | $ | 587 | ||||
GNMA mortgage-backed securities |
11,572 | 443 | | 12,015 | ||||||||
Total held-to-maturity |
$ | 12,117 | $ | 485 | $ | | $ | 12,602 | ||||
Available-for-saleFHLMC common stock |
$ | 33 | $ | | $ | | $ | 33 | ||||
2009 |
||||||||||||
Held-to-maturity: |
||||||||||||
FHLMC mortgage-backed securities |
$ | 744 | $ | 37 | $ | | $ | 781 | ||||
GNMA mortgage-backed securities |
8,170 | 72 | | 8,242 | ||||||||
Total held-to-maturity |
$ | 8,914 | $ | 109 | $ | | $ | 9,023 | ||||
Available-for-saleFHLMC common stock |
$ | 50 | $ | | $ | | $ | 50 | ||||
Management evaluates securities for other-than-temporary impairment at least on an quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Association to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
At June 30, 2010 and 2009, the fair market value of the held-to-maturity investment securities was greater than their respective amortized costs; therefore, no other-than-temporary impairment concerns related to these securities were present at June 30, 2010. Based on managements evaluation of the length of time the FHLMC common stock had been impaired and the prospects for recoverability, management determined the stock to be other-than-temporarily impaired during 2009 and recorded a before tax impairment charge to income of $30. Additional declines in value during 2010 were also charged as other-than-temporary impairment losses. The total impairment charge recognized in income for the year ended June 30, 2010 was $17.
F-11
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS(Continued)
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 2 SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY (Continued)
The amortized cost and fair value of held-to-maturity debt securities at June 30, 2010 and 2009, by contractual maturity, are summarized as follows:
2010 | 2009 | |||||||||||
Amortized
Cost |
Estimated
Fair Value |
Amortized
Cost |
Estimated
Fair Value |
|||||||||
Due from one to five years |
$ | | $ | | $ | | $ | | ||||
Due from five to ten years |
545 | 587 | 744 | 781 | ||||||||
Due after ten years |
11,572 | 12,015 | 8,170 | 8,242 | ||||||||
Total |
$ | 12,117 | $ | 12,602 | $ | 8,914 | $ | 9,023 | ||||
There were no sales of available-for-sale securities during each of the years ended June 30, 2010 and 2009. Maturities of held-to-maturity securities did not result in realized gains or losses during each of the years ended June 30, 2010 and 2009.
Restricted equity securities consist of Federal Home Loan Bank of Atlanta (FHLB) stock in the amount of $540 and $540 as of June 30,
NOTE 3 LOANS
Loans at June 30, 2010 and 2009 are as follows:
2010 | 2009 | |||||||
Real estate loans: |
||||||||
One- to four-family |
$ | 250,390 | $ | 232,106 | ||||
Multi-family |
380 | 395 | ||||||
Home equity |
510 | 892 | ||||||
Nonresidential |
9,456 | 8,353 | ||||||
Construction and land |
5,158 | 4,868 | ||||||
Total real estate loans |
265,894 | 246,614 | ||||||
Consumer and other loans |
1,012 | 1,194 | ||||||
Total loans |
266,906 | 247,808 | ||||||
Net deferred loan fees |
(1,690 | ) | (1,581 | ) | ||||
Allowance for loan losses |
(888 | ) | (258 | ) | ||||
Loans, net |
$ | 264,328 | $ | 245,969 | ||||
The table below lists our adjustable rate and fixed rate loans at June 30, 2010 and 2009:
2010 | 2009 | |||||
Adjustable rate |
$ | 22,129 | $ | 22,691 | ||
Fixed rate |
244,777 | 225,117 | ||||
Total |
$ | 266,906 | $ | 247,808 | ||
F-12
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS(Continued)
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 3 LOANS (Continued)
Adjustable rate mortgage loans generally are subject to rate adjustment annually and principally are based on the Federal Home Loan Bank Boards published contract interest rate, which represents the national average rate for purchases of previously occupied homes. The maximum that rates can be adjusted in any one year is generally one percentage point. Rate adjustments over the life of the loan are limited generally to a maximum of five percentage points upward and two percentage points downward from the original lending rate.
Activity in the allowance for loan losses for the years ended June 30, 2010 and 2009 were as follows:
2010 | 2009 | |||||||
Beginning balance |
$ | 258 | $ | 325 | ||||
Provision for loan losses |
758 | (27 | ) | |||||
Loans charged off |
(128 | ) | (40 | ) | ||||
Recoveries |
| | ||||||
Ending balance |
$ | 888 | $ | 258 | ||||
Individually impaired loans at June 30, 2010 and 2009 were as follows:
2010 | 2009 | |||||
Year-end loans with no allocated allowance for loan losses |
$ | 2,086 | $ | 2,655 | ||
Year-end loans with allocated allowance for loan losses |
2,626 | 1,454 | ||||
Total |
$ | 4,712 | $ | 4,109 | ||
Amount of allowance for loan losses allocated |
$ | 188 | $ | 53 | ||
Average of individually impaired loans during the year |
$ | 4,411 | $ | 3,599 |
Interest income on impaired loans recognized using the cash method of accounting was not significant during fiscal years 2010 or 2009.
Non-performing loans at June 30, 2010 and 2009 were as follows:
2010 | 2009 | |||||
Loan past due 90 days and still on accrual |
$ | 764 | $ | 452 | ||
Non-accrual loans |
3,214 | 1,497 | ||||
Total non-performing loans |
3,978 | 1,949 | ||||
Troubled debt restructurings |
| | ||||
Total non-performing loans and troubled debt restructurings |
$ | 3,978 | $ | 1,949 | ||
Non-performing loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
F-13
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS(Continued)
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 3 LOANS (Continued)
Loans to principal officers, directors, and their affiliates during the years ending December 31, 2010 and 2009 were as follows:
2010 | 2009 | |||||||
Beginning balance |
$ | 870 | $ | 829 | ||||
New loans |
| 449 | ||||||
Repayments |
(19 | ) | (408 | ) | ||||
Ending balance |
$ | 851 | $ | 870 | ||||
Directors and officers of the Association are customers of the institution in the ordinary course of business. Loans of directors and executive officers have terms consistent with those offered to other customers. In the opinion of management, these loans do not involve more than normal risk of collectability nor do they present other unfavorable features.
NOTE 4 PREMISES AND EQUIPMENT
Premises and equipment at June 30, 2010 and 2009 were as follows:
2010 | 2009 | |||||||
Land |
$ | 783 | $ | 783 | ||||
Buildings and improvements |
4,481 | 4,467 | ||||||
Furniture, fixtures and equipment |
1,272 | 1,297 | ||||||
6,536 | 6,547 | |||||||
Less: Accumulated depreciation |
(3,015 | ) | (2,830 | ) | ||||
$ | 3,521 | $ | 3,717 | |||||
Depreciation expense was $285 and $298 at June 30, 2010 and 2009, respectively.
F-14
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS(Continued)
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 5 DEPOSITS
At June 30, 2010 and 2009 deposit accounts with balances over $100 totaled approximately $70,472 and $59,002, respectively. Scheduled maturities of time deposits at June 30, 2010 for the next five years were as follows:
2010 | |||
2011 |
$ | 182,840 | |
2012 |
30,197 | ||
2013 |
2,549 | ||
2014 |
89 | ||
$ | 215,675 | ||
There are no time deposits scheduled to mature after 2014. The Association does not take brokered time deposits.
Directors and executive officers were customers of and had transactions with the Association in the ordinary course of business. Included in such transactions are deposit accounts, all of which were made under normal terms. The aggregate amount of these deposit accounts was $2,836 and $2,592 at June 30, 2010 and 2009, respectively.
NOTE 6 BORROWING ARRANGEMENTS WITH THE FEDERAL HOME LOAN BANK
The Association has credit available under a loan agreement with the FHLB in the amount of 11% of total assets (as defined), approximately $36,060 of availability at June 30, 2010. As a member of the FHLB, the Association is required to own capital stock in the FHLB and is authorized to apply for advances from the FHLB. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range in maturities. Borrowings under the FHLB would mostly be secured by single family first mortgage loans. The Association had no advances from the FHLB as of June 30, 2010 and 2009 and recognized no interest expense for the respective years ended.
F-15
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS(Continued)
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 7 INCOME TAXES
Income tax expense for the years ended June 30, 2010 and 2009 was as follows:
2010 | 2009 | |||||||
Current federal expense |
$ | 1,450 | $ | 1,214 | ||||
Current state expense |
275 | 227 | ||||||
Deferred federal expense |
(285 | ) | (10 | ) | ||||
Deferred state expense |
(33 | ) | (2 | ) | ||||
Total |
$ | 1,407 | $ | 1,429 | ||||
Temporary differences between tax and financial reporting that result in net deferred tax assets (liabilities) are as follows at June 30, 2010 and 2009:
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Deferred compensation |
$ | 270 | $ | 266 | ||||
Allowance for loan losses |
316 | 77 | ||||||
Total deferred tax assets |
586 | 343 | ||||||
Deferred tax liabilities: |
||||||||
FHLB stock dividends |
(86 | ) | (86 | ) | ||||
Deferred loan fees, net |
(299 | ) | (265 | ) | ||||
Basis difference in premises and equipment |
(84 | ) | (114 | ) | ||||
Other |
(170 | ) | (249 | ) | ||||
Total deferred tax liabilities |
(639 | ) | (714 | ) | ||||
Net deferred tax liability |
$ | (53 | ) | $ | (371 | ) | ||
Retained earnings as of June 30, 2010 and 2009 includes approximately $5,285 representing reserve method bad debt reserves originating prior to December 31, 1987 for which no deferred income taxes are required to be provided. These reserves may be included in taxable income if the Association pays dividends in excess of its accumulated earnings and profits (as defined by the Internal Revenue Code) or in the event of a distribution in partial or complete liquidation of the Association.
A reconciliation of the amount computed by applying the federal statutory rate (34%) to pretax income with income tax expense (benefit) for the years ended June 30, 2010 and 2009 is as follows:
2010 | 2009 | |||||||||||||
Amount | % | Amount | % | |||||||||||
Tax at statutory federal income tax rate |
$ | 1,360 | 34.0 | % | $ | 1,274 | 34.0 | % | ||||||
Increase (decrease) resulting from: |
||||||||||||||
State income tax expense |
158 | 3.9 | % | 126 | 3.4 | % | ||||||||
Life insurance benefits |
(8 | ) | (0.2 | )% | (9 | ) | (0.2 | )% | ||||||
Othernet |
(103 | ) | (2.6 | )% | 38 | 0.9 | % | |||||||
Total |
$ | 1,407 | 35.2 | % | $ | 1,429 | 38.1 | % | ||||||
F-16
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS(Continued)
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 7 INCOME TAXES (Continued)
The Association does not have any uncertain tax positions and does not have any interest and penalties recorded in the statement of operations for the years ended June 30, 2010 and 2009. The Association is subject to U.S. federal income tax as well as income tax of the state of South Carolina. The Association is no longer subject to examination by taxing authorities for years before 2006.
NOTE 8 EMPLOYEE BENEFIT PLANS
The Association has deferred compensation agreements with certain of its directors whereby director fees are withheld to fund insurance contracts from which the funds will ultimately be disbursed. These agreements require the Association to make payments to such directors beginning at the age set forth in the agreement or upon death of the director if prior to the minimum age requirement. The directors vest ratably over periods established in the agreements. Interest on the liabilities is charged to earnings based on imputed interest rates established at the beginning of each agreement, which range from 6.69% to 8.87% at both June 30, 2010 and 2009, respectively. The total expense incurred under these plans for the years ended June 30, 2010 and 2009 was $75 and $75, respectively. The recorded liability for these agreements was $831 and $812 at June 30, 2010 and 2009, respectively, and is included in other accrued liabilities in the balance sheet.
To provide funds for the payments under these deferred compensation agreements, the Association has purchased insurance policies on the lives of the directors covered by these plans.
The Association has the option of making an annual contribution to a profit-sharing plan for all full-time employees over the age of 21 having completed one year of service. The Association has exercised this option in 2010 and 2009, and as such, total expense under the profit sharing plan for each of the years ended June 30, 2010 and 2009 was $225 and $200, respectively.
NOTE 9 COMMITMENTS
Loan commitments and related activities: Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amount of financial instruments with off-balance-sheet risk at June 30, 2010 and 2009 was as follows:
2010 | 2009 | |||||||||||
Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | |||||||||
Commitments to make loans |
$ | 2,043 | $ | | $ | 10,549 | $ | |
Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments are for the purpose of financing the purchase, the refinance, or the construction of residential real estate. These commitments have interest rates ranging from 4.38% to 7.50% and maturities ranging from 15 to 30 years.
Financial instruments with off-balance-sheet risk: The Association has no additional financial instruments with off-balance-sheet risk.
F-17
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS(Continued)
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 9 COMMITMENTS (Continued)
Leases and service agreements: The Association leases office equipment under varying lease terms which are noncancelable. Rent expense was approximately $53 and $58 for the years ended June 30, 2010 and 2009, respectively. Future minimum lease commitments under the non-cancelable operating leases are as follows:
Operating
Lease |
|||
Year |
|||
2011 |
$ | 51 | |
2012 |
7 | ||
2013 |
| ||
2014 |
| ||
2015 and thereafter |
| ||
Total |
$ | 58 | |
The Association operates under a 7-year service agreement with a third party, which expires on January 31, 2016. The third party provides electronic transaction services related to the deposit and loan cycles for the Association. Transaction processing service expense related to this agreement for the years ended June 30, 2010 and 2009 was $261 and $240, respectively, and is included in data processing expenses on the income statement.
NOTE 10 REGULATORY CAPITAL REQUIREMENTS
The Association is subject to various regulatory capital requirements administered by the federal financial institution regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Associations financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital guidelines that involve quantitative measures of the Associations assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.
The Associations capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios. Under regulations of the Office of Thrift Supervision (OTS), the Association must have: (i) core capital equal to 4.0% of adjusted total assets, (ii) tangible capital equal to 1.5% of adjusted total assets, and (iii) total capital equal to 8.0% of risk-weighted assets. In measuring compliance with all three capital standards, institutions must deduct from their capital (with several exceptions primarily for mortgage banking subsidiaries and insured depository institution subsidiaries) their investments in, and advances to, subsidiaries engaged (as principal) in activities not permissible for national banks and certain other adjustments. Management believes, as of June 30, 2010, that the Association meets all capital adequacy requirements to which it is subject.
F-18
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS(Continued)
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 10 REGULATORY CAPITAL REQUIREMENTS (Continued)
The following is a reconciliation of the Associations equity reported in the financial statements under accounting principles generally accepted in the United States of America to OTS regulatory capital requirements:
Tangible
Capital |
Core
Capital |
Risk-Based
Capital |
|||||||
As of June 30, 2010 |
|||||||||
Total equity as reported in the financial statements |
$ | 59,661 | $ | 59,661 | $ | 59,661 | |||
General allowance for loan losses |
| | 888 | ||||||
Unrealized gain on available-for-sale securitiesnet of deferred taxes |
| | | ||||||
Regulatory capital |
$ | 59,661 | $ | 59,661 | $ | 60,549 | |||
As of June 30, 2009 |
|||||||||
Total equity as reported in the financial statements |
$ | 57,068 | $ | 57,068 | $ | 57,068 | |||
General allowance for loan losses |
| | 258 | ||||||
Unrealized gain on available-for-sale securitiesnet of deferred taxes |
| | | ||||||
Regulatory capital |
$ | 57,068 | $ | 57,068 | $ | 57,326 | |||
F-19
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS(Continued)
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 10 REGULATORY CAPITAL REQUIREMENTS (Continued)
As of June 30, 2010, the most recent respective notifications from the OTS categorized the Association as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the most recent notification that management believes have changed the Associations category. To be categorized as well-capitalized, the Association must maintain minimum ratios of total capital to risk-weighted assets, core capital to risk-weighted assets, and core capital to adjusted total assets.
The Associations actual and minimum capital requirements to be well-capitalized under prompt corrective action provisions are as follows:
Actual |
For Capital
Adequacy Purposes |
To Be Well Capitalized
Under Prompt Corrective Action Provisions |
||||||||||||||||
2010 |
Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
Total Capital to risk weighted assets |
$ | 60,549 | 38.20 | % | $ | 12,681 | 8.00 | % | $ | 15,851 | 10.00 | % | ||||||
Tier 1 (Core) Capital to risk weighted assets |
59,661 | 37.64 | % | 6,340 | 4.00 | % | 9,511 | 6.00 | % | |||||||||
Tier 1 (Core) Capital to tangible assets |
59,661 | 17.86 | % | 10,022 | 3.00 | % | 16,703 | 5.00 | % | |||||||||
Tangible Capital to tangible assets |
59,661 | 17.86 | % | 5,011 | 1.50 | % | N/A | N/A | ||||||||||
Actual |
For Capital
Adequacy Purposes |
To Be Well Capitalized
Under Prompt Corrective Action Provisions |
||||||||||||||||
2009 |
Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
Total Capital to risk weighted assets |
$ | 57,326 | 39.20 | % | $ | 11,699 | 8.00 | % | $ | 14,624 | 10.00 | % | ||||||
Tier 1 (Core) Capital to risk weighted assets |
57,068 | 39.02 | % | 5,850 | 4.00 | % | 8,774 | 6.00 | % | |||||||||
Tier 1 (Core) Capital to tangible assets |
57,068 | 18.32 | % | 9,346 | 3.00 | % | 15,577 | 5.00 | % | |||||||||
Tangible Capital to tangible assets |
57,068 | 18.32 | % | 4,673 | 1.50 | % | N/A | N/A |
NOTE 11 FAIR VALUE MEASUREMENTS
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entitys own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities relationship to other benchmark quoted securities (Level 2 inputs).
F-20
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS(Continued)
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 11 FAIR VALUE MEASUREMENTS (Continued)
The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
Nonrecurring adjustments to certain commercial and residential real estate properties classified as real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Assets and liabilities measured at fair value on a recurring basis at June 30, 2010 and 2009 are
Fair Value Measurements
Using Significant Other Observable Inputs
(Level 1)
2010 | 2009 | |||||
Financial assets: |
||||||
Available-for-saleFHLMC common stock |
$ | 33 | $ | 50 | ||
Total investment securities available for sale |
$ | 33 | $ | 50 | ||
Assets and liabilities measured at fair value on a non-recurring basis
Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)
2010 | 2009 | |||||
Assets: |
||||||
Impaired loans, with specific allocations |
$ | 2,438 | $ | 1,401 | ||
Real estate owned |
751 | 100 |
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $2,626 and $1,454, with a valuation allowance of $188 and $53, resulting in an addition in the provision for loan losses of $135 and $19 for the years ended June 30, 2010 and 2009, respectively.
Real estate owned, which is measured at the lower of carrying or fair value less costs to sell, had a net had a carrying amount of $751, which is made up of the outstanding balance of $771, net of a valuation allowance of $20 at June 30, 2010, resulting in a write-down of $42 for the year ending June 30, 2010.
F-21
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
NOTES TO FINANCIAL STATEMENTS(Continued)
As of and for the Years Ended
June 30, 2010 and 2009
(All amounts in thousands)
NOTE 11 FAIR VALUE MEASUREMENTS (Continued)
The carrying amounts and estimated fair values of the Associations on-balance sheet financial instruments at June 30, 2010 and 2009 are summarized below:
2010 | 2009 | |||||||||||
Carrying
Amount |
Fair
Value |
Carrying
Amount |
Fair
Value |
|||||||||
Financial assets |
||||||||||||
Securities available for sale |
$ | 33 | $ | 33 | $ | 50 | $ | 50 | ||||
Securities held to maturity |
12,117 | 12,602 | 8,914 | 9,023 | ||||||||
Loans, net |
264,328 | 280,228 | 245,969 | 251,818 | ||||||||
Restricted equity securities |
540 | N/A | 540 | N/A | ||||||||
Financial liabilities |
||||||||||||
Deposits |
272,606 | 275,504 | 252,750 | 256,001 |
The methods and assumptions, not previously presented, used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. The methods for determining the fair values for securities were described previously. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk (including consideration of widening credit spreads). Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of restricted equity securities due to restrictions placed on transferability. The fair value of off-balance sheet items is not consider material (or is based on the current fees or cost that would be charged to enter into or terminate such arrangements).
NOTE 12 SUBSEQUENT EVENT MUTUAL HOLDING COMPANY REORGANIZATION AND OFFERING
On August 19, 2010, the board of directors unanimously adopted a Plan of Reorganization From a Mutual Savings Bank to a Mutual Holding Company and Stock Issuance Plan (the Plan) pursuant to which the Association will reorganize from a federally chartered mutual savings bank into a two-tier federal mutual holding company structure. As part of the Plan, the Association will establish a federally chartered mutual holding company known as Oconee Federal MHC (the Mutual Holding Company) and a capital stock holding company known Oconee Federal Financial Corp. (the Company). The Association will become a federally chartered capital stock savings bank, wholly owned by the Company.
As part of the reorganization, the Company will offer for sale shares of its common stock in a subscription offering initially to eligible depositors, the Associations tax-qualified employee benefit plans, and certain other depositors and borrowers of the Association. Any shares of common stock not sold in the subscription offering will be offered to certain members of the general public in a community offering. In addition, the Association intends to contribute cash and shares of common stock of the Company to a charitable foundation that the Association is establishing in connection with the reorganization.
F-22
You should rely only on the information contained in this document or that to which we have referred you. We have not authorized anyone to provide you with information that is different. This document does not constitute an offer to sell, or the solicitation of an offer to buy, any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation would be unlawful. The affairs of Oconee Federal Savings and Loan Association or Oconee Federal Financial Corp. may change after the date of this prospectus. Delivery of this document and the sales of shares made hereunder does not mean otherwise.
Oconee Federal Financial Corp.
Proposed Holding Company for Oconee Federal Savings and Loan Association
1,821,600 Shares of Common Stock
(Subject to Increase to up to 2,094,840 Shares)
PROSPECTUS
.
, 2010
Until the later of , 2010 or 90 days after the commencement of the offering, all dealers effecting transactions in these securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. | Other Expenses of Issuance and Distribution |
Amount(1) | |||||
* |
Registrants Legal Fees and Expenses | $ | 300,000 | ||
* |
Registrants Accounting Fees and Expenses | 80,000 | |||
* |
Conversion Agent and Data Processing Fees | 40,000 | |||
* |
Marketing Agent Fees (1) | 247,000 | |||
* |
Marketing Agent Expenses (Including Legal Fees and Expenses) | 85,000 | |||
* |
Appraisal Fees and Expenses | 45,000 | |||
* |
Printing, Postage, Mailing and EDGAR Fees | 125,000 | |||
* |
Filing Fees (OTS, Nasdaq, FINRA and SEC) | 68,000 | |||
* |
Business Plan Fees and Expenses | 50,000 | |||
* |
Reorganization and Offering Consulting Fees | 20,000 | |||
* |
Accounting Consulting Fees and Expenses | 13,000 | |||
* |
Other | 30,000 | |||
* |
Total | $ | 1,103,000 | ||
* | Estimated |
(1) | Oconee Federal Financial Corp. has retained Mutual Securities, Inc. to assist in the sale of common stock on a best efforts basis in the offerings. Fees are estimated at the adjusted maximum of the offering range. |
Item 14. | Indemnification of Directors and Officers |
Provisions in the Registrants bylaws provide for indemnification of the Registrants directors and officers up to the fullest extent authorized by applicable law and regulations of the Office of Thrift Supervision (OTS). Section 545.121 of the OTS regulations are described below.
Generally, federal regulations require indemnity coverage for federal savings associations for any person against whom any action is brought or threatened because that person is or was a director or officer of the savings association, for:
(i) | Any amount for which that person becomes liable under a judgment in such action; and |
(ii) | Reasonable costs and expenses, including reasonable attorneys fees, actually paid or incurred by that person in defending or settling such action, or in enforcing his or her rights under this section if he or she attains a favorable judgment in such enforcement action, |
provided that indemnification shall be made to such person only if:
(i) | Final judgment on the merits is in his or her favor; or |
(ii) | In case of: |
a. | Settlement, |
b. | Final judgment against him or her, or |
c. | Final judgment in his or her favor, other than on the merits, |
if a majority of the disinterested directors of the savings association determine that he or she was acting in good faith within the scope of his or her employment or authority as he
II-1
or she could reasonably have perceived it under the circumstances and for a purpose he or she could reasonably have believed under the circumstances was in the best interests of the savings association or its members. However, no indemnification shall be made unless the association gives the Office at least 60 days notice of its intention to make such indemnification. Such notice shall state the facts on which the action arose, the terms of any settlement, and any disposition of the action by a court. Such notice, a copy thereof, and a certified copy of the resolution containing the required determination by the board of directors shall be sent to the Regional Director, who shall promptly acknowledge receipt thereof. The notice period shall run from the date of such receipt. No such indemnification shall be made if the OTS advises the association in writing, within such notice period, of its objection thereto. |
As used in the above paragraph:
(i) | Action means any judicial or administrative proceeding, or threatened proceeding, whether civil, criminal, or otherwise, including any appeal or other proceeding for review; |
(ii) | Court includes, without limitation, any court to which or in which any appeal or any proceeding for review is brought; |
(iii) | Final Judgment means a judgment, decree, or order which is not appealable or as to which the period for appeal has expired with no appeal taken; |
(iv) | Settlement includes the entry of a judgment by consent or confession or a plea of guilty or of nolo contendere . |
Item 15. | Recent Sales of Unregistered Securities |
Not Applicable.
Item 16. | Exhibits and Financial Statement Schedules: |
The exhibits and financial statement schedules filed as part of this registration statement are as follows:
(a) | List of Exhibits |
1.1 | Engagement Letter between Oconee Federal Savings and Loan Association and Mutual Securities, Inc. | |
1.2 | Form of Agency Agreement among Oconee Federal Financial Corp., Oconee Federal, MHC, Oconee Federal Savings and Loan Association and Mutual Securities, Inc.* | |
2 | Plan of Reorganization from a Mutual Savings and Loan Association to a Mutual Holding Company and Stock Issuance Plan | |
3.1 | Charter of Oconee Federal Financial Corp. | |
3.2 | Bylaws of Oconee Federal Financial Corp. | |
4 | Form of Common Stock Certificate of Oconee Federal Financial Corp. | |
5 | Opinion of Luse Gorman Pomerenk & Schick regarding legality of securities being registered | |
8 | Form of Federal Tax Opinion of Luse Gorman Pomerenk & Schick | |
10.1 | Form of Employee Stock Ownership Plan | |
10.2 | Non-Qualified Salary Continuation Agreement by and between Oconee Federal Savings and Loan Association and T. Rhett Evatt | |
10.3 | Deferred Compensation Agreement by and between Oconee Federal Savings and Loan Association and W. Maurice Poore | |
10.4 | Deferred Compensation Agreement by and between Oconee Federal Savings and Loan Association and Cecil T. Sandifer, Jr. |
II-2
10.5 | Form of Employment Agreement by and between Oconee Federal Savings and Loan Association and T. Rhett Evatt | |
10.6 | Form of Employment Agreement by and between Oconee Federal Savings and Loan Association and Curtis T. Evatt | |
21 | Subsidiaries of Registrant | |
23.1 | Consent of Luse Gorman Pomerenk & Schick (contained in opinions included herein as Exhibits 5 and 8) | |
23.2 | Consent of Cherry, Bekaert & Holland, L.L.P. | |
23.3 | Consent of McAuliffe Financial, LLC | |
24 | Power of Attorney (set forth on signature page) | |
99.1 | Appraisal Agreement between Oconee Federal Savings and Loan Association and McAuliffe Financial, LLC | |
99.2 | Business Plan and Data Processing Agreement between Oconee Federal Savings and Loan Association and Capital Resources Group, Inc. | |
99.3 | Appraisal Report of McAuliffe Financial, LLC** | |
99.4 | Letter of McAuliffe Financial, LLC with respect to Subscription Rights | |
99.5 | Marketing Materials* | |
99.6 | Order and Acknowledgment Form* |
* | To be filed supplementally or by amendment. |
** | Supporting financial schedules filed pursuant to Rule 202 of Regulation S-T. |
(b) | Financial Statement Schedules |
No financial statement schedules are filed because the required information is not applicable or is included in the consolidated financial statements or related notes.
Item 17. | Undertakings |
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sales are being made, a post-effective amendment to this registration statement:
(i) | To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; |
(ii) | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the 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; |
(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 that time shall be deemed to be the initial bona fide offering thereof.
II-3
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(5) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus 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.
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§230.424 of this chapter); |
(ii) | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; |
(iii) | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and |
(iv) | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Seneca, State of South Carolina on September 15, 2010.
OCONEE FEDERAL FINANCIAL CORP. | ||
By: |
/ S / T. R HETT E VATT |
|
T. Rhett Evatt | ||
President and Chief Executive Officer | ||
(Duly Authorized Representative) |
POWER OF ATTORNEY
We, the undersigned directors and officers of Oconee Federal Financial Corp. (the Company) hereby severally constitute and appoint T. Rhett Evatt as our true and lawful attorney and agent, to do any and all things in our names in the capacities indicated below which said T. Rhett Evatt may deem necessary or advisable to enable the Company to comply with the Securities Act of 1933, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the registration statement on Form S-1 relating to the offering of the Companys common stock, including specifically, but not limited to, power and authority to sign for us in our names in the capacities indicated below the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby approve, ratify and confirm all that said T. Rhett Evatt shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signatures |
Title |
Date |
||
/ S / T. R HETT E VATT |
President and Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) |
September 15, 2010 | ||
T. Rhett Evatt | ||||
/ S / C URTIS T. E VATT |
Executive Vice President, Chief Financial Officer and Director (Principal Financial and Accounting Officer) |
September 15, 2010 | ||
Curtis T. Evatt | ||||
/ S / H ARRY B. M AYS , J R . |
Director | September 15, 2010 | ||
Harry B. Mays, Jr. | ||||
/ S / R OBERT N. M C L ELLAN , J R . |
Director | September 15, 2010 | ||
Robert N. McLellan, Jr. | ||||
/ S / C ECIL T. S ANDIFER , J R . |
Director | September 15, 2010 | ||
Cecil T. Sandifer, Jr. | ||||
/ S / W. M AURICE P OORE |
Director | September 15, 2010 | ||
W. Maurice Poore |
As filed with the Securities and Exchange Commission on September 16, 2010
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO THE
REGISTRATION STATEMENT
ON
FORM S-1
Oconee Federal Financial Corp. and
Oconee Savings and Loan Association 401(k) Profit Sharing Plan
Seneca, South Carolina
EXHIBIT INDEX
1.1 | Engagement Letter between Oconee Federal Savings and Loan Association and Mutual Securities, Inc. | |
1.2 | Form of Agency Agreement between Oconee Federal Financial Corp., Oconee Federal, MHC, Oconee Federal Savings and Loan Association and Mutual Securities, Inc.* | |
2 | Plan of Reorganization from a Mutual Savings and Loan Association to a Mutual Holding Company and Stock Issuance Plan | |
3.1 | Charter of Oconee Federal Financial Corp. | |
3.2 | Bylaws of Oconee Federal Financial Corp. | |
4 | Form of Common Stock Certificate of Oconee Federal Financial Corp. | |
5 | Opinion of Luse Gorman Pomerenk & Schick regarding legality of securities being registered | |
8 | Form of Federal Tax Opinion of Luse Gorman Pomerenk & Schick | |
10.1 | Form of Employee Stock Ownership Plan | |
10.2 | Non-Qualified Salary Continuation Agreement by and between Oconee Federal Savings and Loan Association and T. Rhett Evatt | |
10.3 | Deferred Compensation Agreement by and between Oconee Federal Savings and Loan Association and W. Maurice Poore | |
10.4 | Deferred Compensation Agreement by and between Oconee Federal Savings and Loan Association and Cecil T. Sandifer, Jr. | |
10.5 | Form of Employment Agreement by and between Oconee Federal Savings and Loan Association and T. Rhett Evatt | |
10.6 | Form of Employment Agreement by and between Oconee Federal Savings and Loan Association and Curtis T. Evatt | |
21 | Subsidiaries of Registrant | |
23.1 | Consent of Luse Gorman Pomerenk & Schick (contained in opinions included herein as Exhibits 5 and 8) | |
23.2 | Consent of Cherry, Bekaert & Holland, L.L.P. | |
23.3 | Consent of McAuliffe Financial, LLC | |
24 | Power of Attorney (set forth on signature page) | |
99.1 | Appraisal Agreement between Oconee Federal Savings and Loan Association and McAuliffe Financial, LLC | |
99.2 | Business Plan Agreement between Oconee Federal Savings and Loan Association and Capital Resources Group, Inc. | |
99.3 | Appraisal Report of McAuliffe Financial, LLC** | |
99.4 | Letter of McAuliffe Financial, LLC with respect to Subscription Rights | |
99.5 | Marketing Materials* | |
99.6 | Order and Acknowledgment Form* |
* | To be filed supplementally or by amendment. |
** | Supporting financial schedules filed pursuant to Rule 202 of Regulation S-T. |
Exhibit 1.1
June 3, 2010
CONFIDENTIAL
Mr. T. Rhett Evatt
President and Chief Executive Officer
Oconee Federal Savings and Loan
115 E. North 2nd Street
P.O. Box 1039,
Seneca, SC 29679-1039
Dear Mr. Evatt:
Mutual Securities, Inc. (Mutual Securities) is pleased to submit this letter setting forth the terms and conditions of the proposed engagement to act as exclusive marketing agent for Oconee Federal Savings and Loan Association (Oconee Federal or the Bank), Oconee Federal Savings and Loan MHC (the MHC) and the to-be-formed Mid-Tier Holding Company (the Holding Company) in connection with the proposed reorganization of Oconee Federal (the Reorganization) and offer and sale of certain shares of the common stock of the Holding Company (the Offering). The Bank, MHC and Holding Company are collectively referred to herein as the Company and their respective Board of Directors are collectively referred to herein as the Board.
BACKGROUND ON MUTUAL SECURITIES
Founded in 1982, Mutual Securities, Inc. is a member of the Financial Industry Regulatory Authority (FINRA) and the Security Investor Protection Corporation (SIPC) and is registered and licensed to conduct securities business in all 50 states and the District of Columbia. Our representatives are licensed securities personnel who have extensive experience in conducting local sales efforts for thrift offerings. Our hands-on philosophy and direct sales involvement provides an experience for your customers that is representative of a Main Street approach versus Wall Street. We combine the critical and necessary operational and records management support within our package of marketing services to help ensure a smooth, professionally conducted, successful Reorganization and Offering.
As you are aware, there are substantial benefits to be derived from a successful local offering of your stock. Such an offering not only results in stable, loyal stockholders, but also provides a rare opportunity to capture many ancillary benefits to Oconee Federal, such as the opportunity for enhancing local identity and increasing local exposure.
P.O. Box 2864, Camarillo, CA 93011-2864
(805) 764-6740 FAX: (805) 987-4300
Mutual Securities, Inc.
Mr. T. Rhett Evatt
June 3, 2010
Page 2
The reorganization and offering process involves an enormous amount of attention to detail and requires extensive knowledge and expertise in OTS regulations and Securities and Exchange Commission (SEC) marketing restrictions. Our experience in managing thrift offerings will help alleviate the burden on management and minimize disruption to normal banking business while ensuring each detail is attended to in a timely and accurate manner.
PROPOSED SERVICES
Mutual Securities proposes to act as financial and operations advisor to the Company with respect to the Reorganization and the Offering and as placement agent and marketing representative on behalf of the Company with respect to the Offering. We combine three critical roles of the reorganization and offering process:
I. Sales and Marketing Assistance
II. Comprehensive Staff Training
III. Stock Information Center Management
Each area is discussed in the following sections.
I. | SALES AND MARKETING ASSISTANCE |
Mutual Securities proposes to represent the Company as placement agent in the sale of the common stock in your Subscription Offering, your Direct Community Offering and, if necessary on a best efforts basis your Syndicated Community Offering. Our marketing assistance program is designed to inform and educate your customers of the investment opportunity and the Offering. Our main objective is to target sales to your customers and the community. Our representatives have had much success in selling entire issues exclusively to Bank customers during the Subscription Offering period. In the event shares remain available after completion of the Subscription Offering, we will market the remaining shares to achieve a wide distribution to friendly shareholders in the Direct Community Offering and, if necessary, a Syndicated Community Offering.
Our specific responsibilities as such will be as follows:
|
Assign a licensed professional from our staff to work at the Companys offices as sales representative on behalf of the Company. Our representative will be responsible for all customer contact and inquiries regarding the Offering. |
|
Work with your special counsel regarding the prospectus and the language in it from a marketing perspective. |
Mutual Securities, Inc.
Mr. T. Rhett Evatt
June 3, 2010
Page 3
|
Design and prepare for the Company a marketing campaign, including appropriate marketing literature and media advertisements. |
|
Conduct a series of community meetings, as appropriate, to provide information on the Offering. We will provide all materials and scripts for these meetings and participate in the presentations. These meetings serve as a customer relations tool as well as a means to enhance exposure of the Company and set the stage for continued favorable stockholder relations after completion of the Offering. |
|
Disseminate and discuss the Reorganization and Offering with the Companys market makers and research analysts. |
|
If shares remain unsubscribed after the Subscription and Direct Community Offerings, we will assemble a syndicate of brokerage firms approved by the Company to distribute any remaining shares through a best efforts underwriting (the Syndicated Offering). We will meet with syndicate members to educate them on the particulars of thrift stocks, discuss the salient terms of the Companys offering, create after-market interest and stimulate community interest in the Companys stock |
II. | COMPREHENSIVE STAFF TRAINING |
Mutual Securities will conduct comprehensive training sessions before the commencement of the subscription offering. Our training sessions are designed to ensure that directors, management and staff are knowledgeable of the offering process, aware of their roles and capable of dealing with inquiries. Each session is tailored to the audience involved and each covers a different level of detail and area of the Reorganization and Offering, as follows:
Top Management Meeting: A structured discussion pertaining to organization, role assignments, facilities, marketing, accounting, reporting and timetables.
Board Meeting: A presentation regarding the reorganization process and directors roles and responsibilities, with emphasis on insider behavior and the specific need for directors personal involvement.
Staff Training Meeting: A comprehensive training session with the entire staff to discuss the nature of the Reorganization and Offering, roles and responsibilities, and the opportunity to elaborate community involvement. A slide presentation and handouts are used.
Stock Information Center Training: We will train and supervise persons responsible for assisting us in the Stock Information Center with clerical tasks (see section III below). Computer training, account balancing procedures and stock order recordkeeping are covered.
Mutual Securities, Inc.
Mr. T. Rhett Evatt
June 3, 2010
Page 4
In addition to our personalized training meetings, Mutual Securities documents the many details and functions of the Reorganization and Offering process in easy-to-read study manuals. Our reorganization study manuals are intended to be used in conjunction with our personnel training sessions and as a reference tool during the Offering. The manuals provide instruction, sample forms and general information vital to a smooth reorganization.
III. | STOCK INFORMATION CENTER MANAGEMENT |
A stock offering requires accurate and timely recordkeeping and reporting. Furthermore, customer inquiries must be handled professionally and accurately. The Stock Information Center centralizes operations relating to the Offering and solicitation of proxies. Mutual Securities will establish the Stock Information Center, preferably on-site at the Companys offices, from which we will supervise all activities relating to the Offering. Our professionals will be on-site throughout the Offering and for the critical period immediately thereafter to handle customer inquiries and special situations as they arise. In addition, we will require at least one of the Companys employees (or temporary personnel) to assist us in the Stock Information Center with clerical tasks. We will train and supervise the clerical assistants.
Proxy Solicitation: We will solicit proxies of members of Oconee Federal to ensure the vote requirement for approval of the Plan of Reorganization is met. We will need your staff to assist us in this process. Other duties will include:
|
Tabulate all validly executed proxies. |
|
Furnish daily reports to management. |
|
Provide financial printer with processed data output for second mailing of proxies (i.e., ProxyGrams) to un-voted target members, if necessary. |
|
Provide proxy vote final list showing all members entitled to vote, if they voted, how they voted and the number of votes voted. |
|
Provide an inspector of elections to attend the special meeting of members, if requested, and if the election is not contested. |
Stock Sales Activities . Mutual Securities will provide the Company with all stock marketing and management services for the Offering to include the following:
|
Sort and track prospects |
|
Coordinate and record community meetings and attendance, if necessary |
|
Design and implement procedures for stock orders by IRA and Keogh accounts |
Mutual Securities, Inc.
Mr. T. Rhett Evatt
June 3, 2010
Page 5
|
Tabulate stock orders |
|
Create and maintain a file for all subscribers |
|
Mail Stock-Grams and other literature as applicable |
|
Respond to mail and telephone inquiries |
|
Send order confirmations to subscribers |
|
Balance daily totals |
|
Generate daily management reports |
|
Generate reports for use in reconciling shares purchased to cash received and holds placed on deposit accounts. |
|
Manage the pro-ration process of shares ordered by subscribers in the event of oversubscription |
|
Issue a final report and confirm the final shares sold |
|
Provide to transfer agent processed data for the issuance of stock certificates |
|
Calculate and generate refund/interest checks |
|
Prepare 1099s for interest paid at year end. |
Closing Assistance: The end of the Offering is a critical time that requires coordination of many events. Mutual Securities will be on-site to coordinate tasks such as mailing interest checks, preparing 1099 forms, sending welcome letters to shareholders, account balancing, final stock share tabulation and preparing stockholder records for the transfer agent, and to answer post-offering questions from subscribers.
In performing the various Stock Information Center tasks outlined above, Mutual Securities will utilize its proprietary program, the Back Office Stock System (BOSS). BOSS is menu-driven, user-friendly software which will help ensure efficient, accurate recordkeeping and timely reporting during the Conversion. To use BOSS, we would require networked computers to be provided by the Company for Stock Information Center use during the reorganization.
Mutual Securities, Inc.
Mr. T. Rhett Evatt
June 3, 2010
Page 6
PROPOSED FEE STRUCTURE
For our services as described herein, it is agreed that our compensation structure will be as follows:
a) | A Marketing Fee of one percent and one half (1.5%) of the total dollar amount of stock sold in the Subscription and Direct Community Offerings, excluding purchases by directors, officers, employees, and their immediate family members in the same household, employee stock ownership plans and the foundation. |
b) | If any shares of the Companys stock remain after the Subscription and Direct Community Offerings, Mutual Securities will, at the request of the Company, seek to form a syndicate of registered broker-dealers to assist in the sale of all remaining stock. Mutual Securities will be paid a fee not to exceed six and one-half percent (6.5%) of the total dollar amount of stock sold in the Syndicated Community Offering. From this fee, which will be paid to us at closing, Mutual Securities will pass onto selected broker-dealers who assist in the Syndicated Community Offering an amount competitive with then current gross underwriting discounts for similar syndicated offerings, which normally range from four to five percent. The decision to utilize the selected broker-dealers will be made by Mutual Securities upon consultation with the Company. |
c) | In recognition of the long lead times involved in the offering process, the Company agrees to pay a fee of $40,000 as follows: $20,000 upon execution of this proposal and the commencement of our engagement; and, $20,000 upon filing of the Plan of Reorganization. Such fees shall be deemed to be earned for services performed when paid to Mutual Securities. These payments will be applied towards the Marketing Fee due Mutual Securities upon closing of the Offering. |
d) | If, as a result of a resolicitation of subscribers is undertaken by the Company, Mutual Securities is required to provide significant additional services, the additional fee due Mutual Securities will not exceed $30,000. |
e) | In addition to any fees that may be payable to Mutual Securities hereunder, the Company agrees to reimburse us, upon request from time to time, for reasonable out-of-pocket expenses and fees incurred by us on behalf of the Reorganization and Offering regardless of whether the Reorganization and Offering is consummated. Such expenses shall include, but are not limited to, travel, lodging, meals, legal, communications and postage/shipping and are not expected to exceed $85,000 in the aggregate. We will provide you with a detailed accounting of all reimbursable expenses. |
ADDITIONAL PROVISIONS
Furthermore, it is understood that:
|
Prior to the commencement of the Offering, the Company and Mutual Securities will enter into a formal Agency Agreement that provides for mutual indemnities and warranties as to certain liabilities, including liabilities under the Securities Act of 1933. The Company also |
Mutual Securities, Inc.
Mr. T. Rhett Evatt
June 3, 2010
Page 7
agrees to defend, indemnify and hold harmless Mutual Securities and its officers, directors, employees and agents against all claims, losses, actions, judgments, damages and expenses, including but not limited to reasonable attorney fees, arising solely out of the engagement described herein, except that such indemnification shall not apply to Mutual Securities own bad faith, willful misconduct or gross negligence. |
|
The Company will pay all other expenses of the Reorganization and Offering, including but not limited to attorneys fees, FINRA, SEC and OTS filing fees, all fees and expenses relating to blue sky research and filings, state licensing and securities registration fees, all fees relating to auditing and accounting, appraisal, business plan, and data processing, all printing and advertising fees and all costs associated with retaining temporary staffing, if any, in connection with the Offering. |
|
Our role as your FINRA agent is subject to our normal underwriting criteria and examination of relevant books and records. |
|
Mutual Securities will conduct an examination of the relevant documents and records of the Company, as appropriate. The Company agrees to make all documents and records deemed appropriate or necessary by Mutual Securities available upon request. Mutual Securities agrees to treat all material non-public information as confidential. The Company acknowledges that Mutual Securities will rely upon the accuracy and completeness of all information received from the Company, Oconee Federal, its officers, directors, employees, agents and representatives, accountants, and counsel, including this letter to serve as the Companys financial advisor, placement agent and marketing representative. |
|
Our obligations stated herein will be subject to there being no material changes, in the opinion of our firm, in the Companys condition or in market conditions so as to significantly delay the Offering or to render the Offering inadvisable. |
|
Our marketing obligations pursuant to this agreement will terminate upon the completion or termination of the initial Offering, but in no event later than 12 months from the date of this letter. All fees or expenses due to Mutual Securities but unpaid will be payable to Mutual Securities at that time. In the event the Offering is extended beyond this term, the Company and Mutual Securities may mutually agree to renew this engagement under mutually acceptable terms. |
|
This letter agreement shall inure to the benefit of the parties hereto and their respective successors and to the parties indemnified pursuant to the terms and conditions of the Agency Agreement and their successors, and the obligations and liabilities assumed hereunder by the parties hereto shall be binding upon their respective successors; provided, however, that this letter agreement shall not be assignable by Mutual Securities. |
Mutual Securities, Inc.
Mr. T. Rhett Evatt
June 3, 2010
Page 8
|
This letter agreement reflects Mutual Securities present intention of proceeding to work with the Company on its proposed Reorganization and Offering. It does not create a binding obligation on the part of the Company or Mutual Securities except as to the agreement to maintain the confidentiality of non-public information, the payment of certain fees and the assumption of expenses, all of which shall constitute the binding obligations of the parties hereto and which shall survive the termination of this letter agreement or the completion of the services furnished hereunder and shall remain operative and in full force and effect. You further acknowledge that any report or analysis rendered by Mutual Securities pursuant to this engagement is rendered for use solely by the Company and its agents in connection with the Reorganization. Accordingly, you agree that you will not provide any such information to any other person without our prior written consent. |
* * *
To engage our services, please sign two copies of this letter in the space provided below and return one of the signed copies to me with the initial retainer. We look forward to working with you and the others at Oconee Federal on this project.
Sincerely, |
MUTUAL SECURITIES, INC. |
Mitchell C. Voss |
President |
Agreed To and Accepted By: |
Oconee Federal Savings and Loan Association |
/s/ Mr. T. Rhett Evatt |
Date: 6/11/10 | |||
Mr. T. Rhett Evatt | ||||
President and Chief Executive Officer |
Exhibit 2
OCONEE FEDERAL
SAVINGS AND LOAN ASSOCIATION
PLAN OF REORGANIZATION
FROM A MUTUAL SAVINGS
AND LOAN ASSOCIATION
TO A MUTUAL HOLDING COMPANY
AND STOCK ISSUANCE PLAN
TABLE OF CONTENTS
Exhibits
Exhibit A | Charter and Bylaws of the Bank | |
Exhibit B | Charter and Bylaws of the Holding Company | |
Exhibit C | Charter and Bylaws of the MHC |
1. | Introduction |
This Plan of Reorganization from a Mutual Savings Association to a Mutual Holding Company and Stock Issuance Plan, dated as of August 19, 2010 (the Plan) provides for the reorganization of Oconee Federal Savings and Loan Association (the Bank) from a federally-chartered mutual savings and loan association into the mutual holding company structure (the Reorganization) under the laws of the United States of America and the regulations of the Office of Thrift Supervision (OTS). The mutual holding company (the MHC) will be a mutually-owned federal corporation, and all of the current ownership and voting rights of the Members of the Bank will be transferred to the MHC. As part of the Reorganization and the Plan, the Bank will convert to a federal stock savings and loan association (the Stock Bank), and a stock holding company (the Holding Company) will be established as a federal corporation and a majority-owned subsidiary of the MHC at all times so long as the MHC remains in existence. Concurrently with the Reorganization, the Holding Company intends to offer for sale up to 49.9% of its Common Stock in the Stock Offering. The Common Stock will be offered on a priority basis to depositors and the Tax-Qualified Employee Plans of the Bank, with any remaining shares offered to the public in a Community Offering or a Syndicated Community Offering, or a combination thereof. The Reorganization, Stock Offering and Issuance of Common Stock shall be conducted in accordance with 12 C.F.R. Parts 563g and 575, to the extent applicable, Form OC of the Regulations.
The primary purpose of the Reorganization is to establish a holding company and to convert the Bank to the stock form of ownership, which will enable the Bank to compete and expand more effectively in the financial services marketplace. The Reorganization will permit the Holding Company to issue Capital Stock, which is a source of capital not available to mutual savings associations. Since the Holding Company will not offer all of its Common Stock for sale to depositors and the public in the Stock Offering, the Reorganization will result in less capital raised in comparison to a standard mutual-to-stock conversion. The Reorganization, however, will also permit the Bank to raise additional capital since a majority of the Holding Companys common stock will be available for sale in the future. It will also provide the Bank with greater flexibility to structure and finance the expansion of its operations, including the potential acquisition of other financial institutions. Lastly, the Reorganization will enable the Bank to better manage its capital by (i) providing broader acquisition and investment opportunities through the holding company structure, (ii) enabling the Bank to distribute capital to stockholders of the Holding Company in the form of dividends, and (iii) enabling the Holding Company to repurchase its common stock as market conditions warrant. Although the Reorganization and Stock Offering will create a stock savings and loan association and stock holding company, only a minority of the Common Stock will be offered for sale in the Stock Offering. As a result, the Banks mutual form of ownership and its ability to remain an independent community savings and loan association will be preserved through the mutual holding company structure. The Reorganization is subject to the approval of the OTS, and must be approved by the affirmative vote of a majority of the total votes eligible to be cast by Members.
In the event the Board of Directors of the Bank determines not to establish the Holding Company as part of the Reorganization, then all references in this Plan to the issuance of Common Stock by the Holding Company, including all references to Employee Plans of the
Holding Company, shall mean the issuance of common stock by the Bank and Employee Plans of the Bank. If no Holding Company is established as part of the Reorganization, the Board of Directors may elect to establish the Holding Company subsequent to the completion of the Reorganization and Stock Offering.
As part of the Stock Offering and consistent with the Banks ongoing commitment to remain an independent community-oriented savings and loan association, the Bank may establish a charitable foundation or trust. The charitable foundation would complement the Banks existing community reinvestment and charitable activities in a manner that will allow the community to share in the growth and success of the Bank. Accordingly, concurrently with the completion of the Stock Offering, the Stock Holding Company may contribute to a new charitable foundation shares of Common Stock and/or cash, provided the total contribution of Common Stock and/or cash to the charitable foundation does not exceed 8% of the gross proceeds of the Stock Offering, and provided that the number of shares of Common Stock to be held by the charitable foundation following such contribution shall be less than 2% of the total number of shares of Common Stock to be outstanding.
2. | Definitions |
As used in this Plan, the terms set forth below have the following meanings:
Acting in Concert: The term Acting in Concert means (i) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or (ii) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. A Person or company which acts in concert with another Person or company (other party) shall also be deemed to be acting in concert with any Person or company who is also acting in concert with that other party, except that any Tax-Qualified Employee Plan will not be deemed to be acting in concert with its trustee or a Person who serves in a similar capacity solely for the purpose of determining whether stock held by the trustee and stock held by the plan will be aggregated.
Actual Purchase Price: The price per share, determined as provided in this Plan, at which the Common Stock will be sold in the Stock Offering.
Affiliate: Any Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with another Person.
Associate: The term Associate, when used to indicate a relationship with any Person, means: (i) any corporation or organization (other than the Bank, the Holding Company, the MHC or a majority-owned subsidiary of any thereof) of which such Person is a senior officer or partner, or beneficially owns, directly or indirectly, 10% or more of any class of equity securities of the corporation or organization; (ii) any trust or other estate, if the Person has a substantial beneficial interest in the trust or estate or is a trustee or fiduciary of the trust or estate. For purposes of §§563b.370, 563b.380, 563b.385, 563b.390, 563b.395 and 563b.505 of the Regulations, a Person who has a substantial beneficial interest in a Tax-Qualified or Non-Tax Qualified Employee Plan, or who is a trustee or a fiduciary of the plan, is not an Associate of the
2
plan. For purposes of §563b.370 of the Regulations, a Tax-Qualified Employee Plan is not an Associate of a Person; (iii) any Person who is related by blood or marriage to such Person and (a) who lives in the same house as the Person; or (b) who is a director or senior officer of the Bank, the Holding Company, the MHC or a subsidiary thereof.
Bank: Oconee Federal Savings and Loan Association in its pre-Reorganization mutual form or post-Reorganization stock form, as indicated by the context.
Capital Stock: Any and all authorized stock of the Bank or the Holding Company.
Common Stock: Common stock issuable by the Holding Company in connection with the Reorganization, including securities convertible into Common Stock, pursuant to its stock charter.
Community: Oconee and Pickens Counties, South Carolina.
Community Offering: The offering to certain members of the general public of any unsubscribed shares in the Subscription Offering. The Community Offering may include a Syndicated Community Offering or public offering.
Control: (including the terms controlling, controlled by and under common control with) means the direct or indirect power to direct or exercise a controlling influence over the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise as described in Part 574 of the Regulations.
Deposit Account(s): Any withdrawable account as defined in Section 561.42 of the Regulations, and shall include all demand deposit accounts as defined in Section 561.16 of the Regulations and certificates of deposit.
Effective Date: The date upon which all necessary approvals have been obtained to complete the Reorganization, and the Reorganization and Stock Offering have been completed.
Eligible Account Holder: Any person holding a Qualifying Deposit on the Eligibility Record Date for purposes of determining subscription rights.
Eligibility Record Date: June 30, 2009, the date for determining who qualifies as an Eligible Account Holder of the Bank.
Employee Plans: The Tax-Qualified and Non-Tax Qualified Employee Plans of the Bank and/or the Company.
ESOP: The Banks employee stock ownership plan.
Estimated Valuation Range: The range of the estimated pro forma market value of the total number of shares of Common Stock to be issued by the Holding Company to the MHC and to Minority Stockholders, as determined by the Independent Appraiser prior to the Subscription Offering and as it may be amended from time to time thereafter.
3
Exchange Act: The Securities Exchange Act of 1934, as amended.
FDIC: The Federal Deposit Insurance Corporation.
Foundation: Any new and/or existing charitable foundation intended to qualify as an exempt organization under Section 501(c)(3) of the Internal Revenue Code that will receive Common Stock and/or cash in connection with the Stock Offering.
HOLA: The Home Owners Loan Act, as amended.
Holding Company: The federal corporation created in the Reorganization. The Holding Company will be majority-owned by the MHC and will own 100% of the common stock of the Bank.
Holding Company Application: The Holding Company Application on Form H(e)-1 or H(e)-1s to be submitted by the Bank to the OTS to have the Holding Company acquire the common stock of the Bank.
Independent Appraiser: The appraiser retained by the Bank to prepare an appraisal of the pro forma market value of the Bank and the Holding Company.
Management Person: Any Officer or director of the Bank or any Affiliate of the Bank, and any person acting in concert with any such Officer or director.
Market Maker: A dealer ( i.e ., any person who engages directly or indirectly as agent, broker, or principal in the business of offering, buying, selling or otherwise dealing or trading in securities issued by another person) who, with respect to a particular security, (1) regularly publishes bona fide competitive bid and offer quotations on request, and (2) is ready, willing and able to effect transactions in reasonable quantities at the dealers quoted prices with other brokers or dealers.
Member: Any person or entity who qualifies as a member of the Bank pursuant to its charter and bylaws.
MHC: The mutual holding company created in the Reorganization.
Minority Ownership Interest: The shares of the Holding Companys Common Stock owned by persons other than the MHC, expressed as a percentage of the total shares of Holding Company Common Stock outstanding.
Minority Stock Offering: One or more offerings of less than 50% in the aggregate of the outstanding Common Stock of the Holding Company to persons other than the MHC.
Minority Stockholder: Any owner of the Holding Companys Common Stock, other than the MHC.
Non-Voting Stock: Any Capital Stock other than Voting Stock.
4
Notice: The Notice of Mutual Holding Company Reorganization to be submitted by the Bank to the OTS to notify the OTS of the Reorganization and the Stock Offering.
Offering Range: The aggregate purchase price of the Common Stock to be sold in the Stock Offering based on the Independent Valuation expressed as a range, which may vary within 15% above or 15% below the midpoint of such range, with a possible adjustment by up to 15% above the maximum of such range. The Offering Range will be based on the Estimated Valuation Range, but will represent a Minority Ownership Interest equal to up to 49.9% of the Common Stock.
Officer: An executive officer of the Holding Company or the Bank, including the Chief Executive Officer, President, Senior Vice Presidents in charge of principal business functions, Secretary, Treasurer and any other person performing similar functions.
Order Form: Any form (together with any attached cover letter and/or certifications or acknowledgements), sent by the Bank to any Person containing among other things a description of the alternatives available to such Person under the Plan and by which any such Person may make elections regarding purchases of Common Stock in the Subscription and Community Offerings.
Other Member: Any person who is a Member of the Bank at the close of business on the Voting Record Date who is not an Eligible Account Holder or Supplemental Eligible Account Holder, or Tax-Qualified Employee Plan.
OTS: The Office of Thrift Supervision, and any successor thereto.
Person: An individual, corporation, partnership, association, joint-stock company, limited liability company, trust, unincorporated organization, or a government or political subdivision of a government.
Plan: This Plan of Reorganization from a Mutual Savings Association to a Mutual Holding Company and Stock Issuance Plan.
Qualifying Deposit: The aggregate balance of each Deposit Account of an Eligible Account Holder as of the close of business on the Eligibility Record Date or of a Supplemental Eligible Account Holder as of the close of business on the Supplemental Eligibility Record Date, as the case may be, provided such aggregate balance is not less than $50.
Regulations: The rules and regulations of the OTS, including the OTS rules and regulations regarding mutual holding companies.
Reorganization: The reorganization of the Bank into the mutual holding company structure including the organization of the MHC, the Holding Company and the Bank in stock form pursuant to this Plan.
Resident: The terms resident, residence, reside, resided or residing as used herein with respect to any person shall mean any person who occupied a dwelling within the Banks Community, has an intent to remain with the Community for a period of time, and
5
manifests the genuineness of that intent by establishing an ongoing physical presence within the Community together with an indication that such presence within the Community is something other than merely transitory in nature. To the extent the Person is a corporation or other business entity, the principal place of business or headquarters shall be in the Community. To the extent a person is a personal benefit plan, the circumstances of the beneficiary shall apply with respect to this definition. In the case of all other benefit plans, the circumstances of the trustee shall be examined for purposes of this definition. The Bank may utilize deposit or loan records or such other evidence provided to it to make a determination as to whether a person is a resident. In all cases, however, such a determination shall be in the sole discretion of the Bank.
SEC: The Securities and Exchange Commission.
Special Meeting: The Special Meeting of Members called for the purpose of voting on the Plan.
Stock Bank: The federally chartered stock savings and loan association resulting from the conversion of the Bank to stock form pursuant to this Plan.
Stock Offering: The offering of Common Stock of the Holding Company to persons other than the MHC, in a Subscription Offering and, to the extent shares remain available, in a Community Offering.
Subscription Offering: The offering of Common Stock of the Holding Company for subscription and purchase pursuant to Section 11 of this Plan.
Subsidiary: A company that is controlled by another company, either directly or indirectly through one or more subsidiaries.
Supplemental Eligible Account Holder: Any Person holding a Qualifying Deposit on the Supplemental Eligibility Record Date, who is not an Eligible Account Holder, a Tax-Qualified Employee Plan or an Officer or director of the Bank.
Supplemental Eligibility Record Date: The last day of the calendar quarter preceding approval of the Plan by the OTS.
Syndicated Community Offering: The offering of Common Stock following or contemporaneously with the Community Offering through a syndicate of broker-dealers.
Tax-Qualified Employee Plan: Any defined benefit plan or defined contribution plan (including any employee stock ownership plan, stock bonus plan, profit-sharing plan, or other plan) of the Bank, the Holding Company, the MHC or any of their affiliates, which, with its related trusts, meets the requirements to be qualified under Section 401 of the Internal Revenue Code. The term Non-Tax-Qualified Employee Plan means any stock benefit plan which is not so qualified under Section 401 of the Internal Revenue Code.
Voting Member: Any Person who at the close of business on the Voting Record Date is entitled to vote as a Member of the Bank pursuant to its charter and bylaws.
6
Voting Record Date: The date established by the Bank for determining which Members are entitled to vote on the Plan.
Voting Stock:
(1) | Voting Stock means common stock or preferred stock, or similar interests if the shares by statute, charter or in any manner, entitle the holder: |
(i) | To vote for or to select directors of the Bank or the Holding Company; and |
(ii) | To vote on or to direct the conduct of the operations or other significant policies of the Bank or the Holding Company. |
(2) | Notwithstanding anything in paragraph (1) above, preferred stock is not Voting Stock if: |
(i) | Voting rights associated with the preferred stock are limited solely to the type customarily provided by statute with regard to matters that would significantly and adversely affect the rights or preferences of the preferred stock, such as the issuance of additional amounts or classes of senior securities, the modification of the terms of the preferred stock, the dissolution of the Bank, or the payment of dividends by the Bank when preferred dividends are in arrears; |
(ii) | The preferred stock represents an essentially passive investment or financing device and does not otherwise provide the holder with control over the issuer; and |
(iii) | The preferred stock does not at the time entitle the holder, by statute, charter, or otherwise, to select or to vote for the selection of directors of the Bank or the Holding Company. |
(3) | Notwithstanding anything in paragraphs (1) and (2) above, Voting Stock shall be deemed to include preferred stock and other securities that, upon transfer or otherwise, are convertible into Voting Stock or exercisable to acquire Voting Stock where the holder of the stock, convertible security or right to acquire Voting Stock has the preponderant economic risk in the underlying Voting Stock. Securities immediately convertible into Voting Stock at the option of the holder without payment of additional consideration shall be deemed to constitute the Voting Stock into which they are convertible; other convertible securities and rights to acquire Voting Stock shall not be deemed to vest the holder with the preponderant economic risk in the underlying Voting Stock if the holder has paid less than 50% of the consideration required to directly acquire the Voting Stock and has no other economic interest in the underlying Voting Stock. |
7
3. | The Reorganization |
A. | Organization of the Holding Companies and the Bank |
As part of the Reorganization, the Bank will convert to a federal stock charter and become the Stock Bank, and the Holding Company and the MHC will be established as federal corporations. The Reorganization will be effected as follows, or in any manner approved by the OTS that is consistent with the purposes of this Plan and applicable laws and regulations: (i) the Bank will organize an interim stock savings and loan association as a wholly-owned subsidiary (Interim One); (ii) Interim One will also organize an interim stock savings and loan association as a wholly-owned subsidiary (Interim Two); (iii) Interim One will organize the Holding Company as a wholly-owned subsidiary; (iv) the Bank will exchange its charter for a federal stock savings and loan association charter to become the Stock Bank and Interim One will exchange its charter for a federal mutual holding company charter to become the MHC; (v) simultaneously with step (iv), Interim Two will merge with and into the Stock Bank with the Stock Bank as the resulting institution; (vi) all of the initially issued stock of the Stock Bank will be transferred to the MHC in exchange for membership interests in the MHC; and (vii) the MHC will contribute the capital stock of the Stock Bank to the Holding Company, and the Stock Bank will become a wholly-owned subsidiary of the Holding Company.
Contemporaneously with the Reorganization, the Holding Company will offer for sale in the Stock Offering shares of Common Stock representing the pro forma market value of the Holding Company and the Bank. Upon consummation of the Reorganization, the legal existence of the Bank will not terminate, but the Stock Bank will be a continuation of the Bank, and all property of the Bank, including its right, title, and interest in and to all of its property and assets of every conceivable value or benefit then existing or pertaining to the Bank, or which would inure to the Bank will by operation of law and without the necessity of any conveyance or transfer and without any further act or deed, vest in the Stock Bank. The Stock Bank will have, hold, and enjoy the same in its right and fully and to the same extent as the same was possessed, held, and enjoyed by the Bank. The Stock Bank will continue to have, succeed to, and be responsible for all the assets, rights, liabilities and obligations of the Bank and will maintain its headquarters and operations at the Banks present locations.
Upon consummation of the Reorganization, substantially all of the assets and liabilities (including the savings accounts, demand accounts, tax and loan accounts, United States Treasury General Accounts, or United States Treasury Time Deposit Open Accounts, as defined in the Regulations) of the Bank shall become the assets and liabilities of the Stock Bank, which will thereupon become an operating savings and loan association subsidiary of the Holding Company and of the MHC. The Bank will apply to the OTS to have the Holding Company receive or retain (as the case may be) up to 50% of the net proceeds of the Stock Offering, or such other amount as may be determined by the Board of Directors. The Stock Bank may distribute additional capital to the Holding Company following the Reorganization, subject to the OTS regulations governing capital distributions.
8
B. | Effect on Deposit Accounts and Borrowings |
Each deposit account in the Bank on the Effective Date will remain a deposit account in the Stock Bank in the same amount and upon the same terms and conditions, and will continue to be federally insured up to the legal maximum by the FDIC in the same manner as the deposit account existed in the Bank immediately prior to the Reorganization. Upon consummation of the Reorganization, all loans and other borrowings from the Bank shall retain the same status with the Stock Bank after the Reorganization as they had with the Bank immediately prior to the Reorganization.
C. | The Bank |
Upon completion of the Reorganization the Stock Bank will be authorized to exercise any and all powers, rights and privileges of, and will be subject to all limitations applicable to, capital stock savings and loan associations under federal law. A copy of the proposed charter and bylaws of the Stock Bank is attached hereto as Exhibit A and made a part of this Plan. The Reorganization will not result in any reduction of the amount of retained earnings (other than the assets of the Bank retained by or distributed to the Holding Company or the MHC), undivided profits, and general loss reserves that the Bank had prior to the Reorganization. Such retained earnings and general loss reserves will be accounted for by the MHC, the Holding Company and the Stock Bank on a consolidated basis in accordance with generally accepted accounting principles.
The initial members of the Board of Directors of the Stock Bank will be the members of the existing Board of Directors of the Bank. The Stock Bank will be wholly-owned by the Holding Company. The Holding Company will be wholly-owned by its stockholders who will consist of the MHC and the persons who purchase Common Stock in the Stock Offering and any subsequent Minority Stock Offering. Upon the Effective Date of the Reorganization, the voting and membership rights of Members will be transferred to the MHC, subject to the conditions specified below.
D. | The Holding Company |
The Holding Company will be authorized to exercise any and all powers, rights and privileges, and will be subject to all limitations applicable to savings and loan holding companies and mutual holding companies under federal law and regulations. The initial members of the Board of Directors of the Holding Company will be the existing Board of Directors of the Bank. Thereafter, the voting stockholders of the Holding Company will elect approximately one-third of the Holding Companys directors annually. A copy of the proposed charter and bylaws of the Holding Company is attached as Exhibit B and made part of this Plan.
The Holding Company will have the power to issue shares of Capital Stock to persons other than the MHC. However, so long as the MHC is in existence, the MHC will be required to own at least a majority of the Voting Stock of the Holding Company. The Holding Company may issue any amount of Non-Voting Stock to persons other than the MHC. The Holding Company will be authorized to undertake one or more Minority Stock Offerings of less than 50% in the aggregate of the total outstanding Common Stock of the Holding Company, and the Holding Company intends to offer for sale up to 49.9% of its Common Stock in the Stock Offering.
9
E. | The Mutual Holding Company |
As a mutual corporation, the MHC will have no stockholders. The members of the MHC will have exclusive voting authority as to all matters requiring a vote of members under the charter of the MHC. Persons who have membership rights with respect to the Bank under its existing charter immediately prior to the Reorganization shall continue to have such rights solely with respect to the MHC after the Reorganization so long as such persons remain depositors of the Bank after the Reorganization. In addition, all persons who become depositors of the Stock Bank following the Reorganization will have membership rights with respect to the MHC. The rights and powers of the MHC will be defined by the MHCs charter and bylaws (a copy of which is attached to this Plan as Exhibit C and made a part hereof) and by the statutory and regulatory provisions applicable to savings and loan holding companies and mutual holding companies. In particular, the MHC will be subject to the limitations and restrictions imposed on savings and loan holding companies by Section 10(o)(5) of the HOLA.
The initial members of the Board of Directors of the MHC will be the existing Board of Directors of the Bank. Thereafter, approximately one-third of the directors of the MHC will be elected annually by the members of the MHC who will consist of the former Members of the Bank and all persons who become depositors of the Bank after the Reorganization.
4. | Conditions to Implementation of the Reorganization |
Consummation of the Reorganization is expressly conditioned upon the following:
A. | Approval of the Plan by a majority of the Board of Directors of the Bank. |
B. | The filing of a Reorganization Notice, including the Plan, with the OTS and either: |
(i) | The OTS has given written notice of its intent not to disapprove the Reorganization; or |
(ii) | Sixty days have passed since the OTS received the Reorganization Notice and deemed it complete under § 516.210 or § 516.220 of the OTS regulations, and the OTS has not given written notice that the Reorganization is disapproved or extended for an additional 30 days the period during which disapproval may be issued. |
C. | The filing of a holding company application with and approval by the OTS pursuant to the HOLA for the Holding Company and MHC to become mutual savings and loan holding companies by owning or acquiring up to 100% of the common stock of the Stock Bank and the Holding Company, respectively, to be issued in connection with the Reorganization. |
10
D. | Submission of the Plan to the Members for approval pursuant to a Proxy Statement and form of proxy cleared in advance by the OTS, and such Plan is approved by a majority of the total votes of the Voting Members eligible to be cast at a meeting held at the call of the directors in accordance with the procedures prescribed by the Banks charter and bylaws. |
E. | All necessary approvals have been obtained from the OTS in connection with the adoption of the charter and bylaws of the MHC, the Holding Company and the Stock Bank, the conversion of the Bank to a stock charter, and any transfer of assets and liabilities of the Bank to the Stock Bank pursuant to the Plan; and all conditions specified or otherwise imposed by the OTS in connection with the issuance of a notice of intent not to disapprove the Notice have been satisfied. |
5. | Special Meeting of Members |
Subsequent to the approval of the Plan by the OTS, the Special Meeting shall be scheduled in accordance with the Banks Bylaws. Promptly after receipt of approval and at least 20 days but not more than 45 days prior to the Special Meeting, the Bank shall distribute proxy solicitation materials to all Voting Members. The proxy solicitation materials shall include a proxy statement and other documents authorized for use by the regulatory authorities. A copy of the Plan will be made available to Voting Members upon request. Pursuant to the Regulations, an affirmative vote of not less than a majority of the total outstanding votes of the Voting Members is required for approval of the Plan. Voting may be in person or by proxy. The OTS shall be notified promptly of the actions of the Voting Members.
6. | Rights of Members of the MHC |
Following the Reorganization, all persons who had membership rights with respect to the Bank as of the date of the Reorganization will continue to have such rights solely with respect to the MHC as long as they remain depositors with the Bank. All existing proxies granted by members of the Bank to the Board of Directors of the Bank shall automatically become proxies granted to the Board of Directors of the MHC. In addition, all persons who become depositors of the Stock Bank subsequent to the Reorganization also will have membership rights with respect to the MHC. In each case, no person who ceases to be the holder of a deposit account with the Stock Bank after the Reorganization shall have any membership or other rights with respect to the MHC. Borrowers of the Stock Bank who were borrower members of the Bank at the time of Reorganization will have the same membership rights in the MHC as they had in the Bank immediately prior to the Reorganization for so long their pre-Reorganization borrowings remain outstanding. Borrowers will not receive membership rights in connection with any new borrowings made after the Reorganization.
7. | Conversion of MHC to Stock Form |
Following the completion of the Reorganization, the MHC may elect to convert to stock form in accordance with applicable law (a Conversion Transaction). There can be no assurance when, if ever, a Conversion Transaction will occur.
11
In a Conversion Transaction, the MHC would merge with and into the Stock Bank or the Holding Company, with the Stock Bank or the Holding Company as the resulting entity, and the depositors of the Stock Bank would receive the right to subscribe for shares of common stock of the Holding Company or its successor, which shares would represent the ownership interest of the MHC in the Holding Company and the Stock Bank. The additional shares of Common stock of the Holding Company issued in the Conversion Transaction would be sold at their aggregate pro forma market value as determined by an Independent Appraisal.
Any Conversion Transaction shall be fair and equitable to Minority Stockholders. In any Conversion Transaction, Minority Stockholders, if any, will be entitled without additional consideration to maintain the same percentage ownership interest in the Holding Company after the Conversion Transaction as their percentage ownership interest in the Holding Company immediately prior to the Conversion Transaction ( i.e., the Minority Ownership Interest). The Minority Ownership Interest of Minority Stockholders shall not be reduced in a Conversion Transaction as a result of any waiver of dividends by the MHC.
At the sole discretion of the Board of Directors of the MHC and the Holding Company, a Conversion Transaction may be effected in any other manner necessary to qualify the Conversion Transaction as a tax-free reorganization under applicable federal and state tax laws, provided such Conversion Transaction does not diminish the rights and ownership interest of Minority Stockholders. If a Conversion Transaction does not occur, the MHC will always own a majority of the Voting Stock of the Holding Company. Management of the Bank has no current intention to conduct a Conversion Transaction.
A Conversion Transaction would require the approval of the OTS and would be presented to a vote of the members of the MHC. Federal regulatory policy requires that in any Conversion Transaction the members of the MHC will be accorded the same stock purchase priorities as if the MHC were a mutual savings and loan association converting to stock form.
8. | Timing of the Reorganization and Sale of Capital Stock |
The Bank intends to consummate the Reorganization as soon as feasible following the receipt of all approvals referred to in Section 4 of the Plan. Subject to the approval of the OTS, the Holding Company intends to commence the Stock Offering concurrently with the proxy solicitation of Members. The Holding Company may close the Stock Offering before the Special Meeting, provided that the offer and sale of the Common Stock shall be conditioned upon approval of the Plan by the Members at the Special Meeting. Subject to OTS approval, the Banks proxy solicitation materials may permit certain Members to return to the Bank by a reasonable date certain a postage paid card or other written communication requesting receipt of the prospectus if the prospectus is not mailed concurrently with the proxy solicitation materials. The Stock Offering shall be conducted in compliance with 12 C.F.R. part 563g, the securities offering regulations of the SEC and to the extent applicable Form OC promulgated under the Regulations.
12
9. | Number of Shares to be Offered |
The total number of shares (or range thereof) of Common Stock to be issued and offered for sale pursuant to the Plan shall be determined initially by the Board of Directors of the Bank and the Holding Company in conjunction with the determination of the Independent Appraiser. The number of shares to be offered may be adjusted prior to completion of the Stock Offering. The total number of shares of Common Stock that may be issued to persons other than the MHC at the close of the Stock Offering must be less than 50% of the issued and outstanding shares of Common Stock of the Holding Company.
10. | Independent Valuation and Purchase Price of Shares |
All shares of Common Stock sold in the Stock Offering shall be sold at a uniform price per share. The purchase price and number of shares to be outstanding shall be determined by the Board of Directors of the Holding Company on the basis of the estimated pro forma market value of the Holding Company and the Bank. The aggregate purchase price for the Common Stock will not be inconsistent with such market value of the Holding Company and the Bank. The pro forma market value of the Holding Company and the Bank will be determined for such purposes by the Independent Appraiser.
Prior to the commencement of the Stock Offering, an Estimated Valuation Range will be established, which range may vary within 15% above to 15% below the midpoint of such range, and up to 15% greater than the maximum of such range, as determined by the Board of Directors at the time of the Stock Offering and consistent with OTS regulations. The Holding Company intends to issue up to 49.9% of its Common Stock in the Stock Offering. The number of shares of Common Stock to be issued and the ownership interest of the MHC may be increased or decreased by the Holding Company, taking into consideration any change in the independent valuation and other factors, at the discretion of the Board of Directors of the Bank and the Holding Company.
Based upon the independent valuation as updated prior to the commencement of the Stock Offering, the Board of Directors may establish the minimum and maximum percentage of shares of Common Stock that will be offered for sale in the Stock Offering, or it may fix the percentage of shares that will be offered for sale in the Stock Offering. In the event the percentage of the shares offered for sale in the Minority Stock Offering is not fixed in the Stock Offering, the Minority Ownership Interest resulting from the Stock Offering will be determined as follows: (a) the product of (x) the total number of shares of Common Stock sold by the Holding Company and (y) the purchase price per share, divided by (b) the aggregate pro forma market value of the Bank and the Holding Company upon the closing of the Stock Offering and sale of all the Common Stock.
Notwithstanding the foregoing, no sale of Common Stock may be consummated unless, prior to such consummation, the Independent Appraiser confirms to the Holding Company, the Bank and to the OTS that, to the best knowledge of the Independent Appraiser, nothing of a material nature has occurred which, taking into account all relevant factors, would cause the Independent Appraiser to conclude that the aggregate value of the Common Stock sold in the Stock Offering at the Actual Purchase Price is incompatible with its estimate of the aggregate
13
consolidated pro forma market value of the Holding Company and the Bank. If such confirmation is not received, the Holding Company may cancel the Stock Offering, extend the Stock Offering and establish a new price range and/or estimated price range, extend, reopen or hold a new Stock Offering or take such other action as the OTS may permit.
The estimated market value of the Holding Company and the Bank shall be determined for such purpose by an Independent Appraiser on the basis of such appropriate factors as are not inconsistent with OTS regulations. The Common Stock to be issued in the Stock Offering shall be fully paid and nonassessable.
If there is a Community Offering or Syndicated Community Offering of shares of Common Stock not subscribed for in the Subscription Offering, the price per share at which the Common Stock is sold in such Community Offering or Syndicated Community Offering shall be the Actual Purchase Price which will be equal to the purchase price per share at which the Common Stock is sold to persons in the Subscription Offering. Shares sold in the Community Offering or Syndicated Community Offering will be subject to the same limitations as shares sold in the Subscription Offering.
11. | Method of Offering Shares and Rights to Purchase Stock |
In descending order of priority, the opportunity to purchase Common Stock shall be given in the Subscription Offering to: (1) Eligible Account Holders; (2) Tax-Qualified Employee Plans; (3) Supplemental Eligible Account Holders; and (4) Other Members, pursuant to priorities established by the Board of Directors. Any shares of Common Stock that are not subscribed for in the Subscription Offering may at the discretion of the Bank and the Holding Company be offered for sale in a Community Offering or a Syndicated Community Offering. The minimum purchase by any Person shall be 25 shares. The Holding Company shall determine in its sole discretion whether each prospective purchaser is a resident, associate, or acting in concert as defined in the Plan, and shall interpret all other provisions of the Plan in its sole discretion. All such determinations are in the sole discretion of the Holding Company, and may be based on whatever evidence the Holding Company chooses to use in making any such determination.
In addition to the priorities set forth below, the Board of Directors may establish other priorities for the purchase of Common Stock, subject to the approval of the OTS. The priorities for the purchase of shares in the Stock Offering are as follows:
A. | Subscription Offering |
Priority 1: Eligible Account Holders. Each Eligible Account Holder shall receive non-transferable subscription rights to subscribe for shares of Common Stock offered in the Stock Offering in an amount equal to the greater of $250,000, one-tenth of one percent (0.1%) of the total shares offered in the Stock Offering, or 15 times the product (rounded down to the nearest whole number) obtained by multiplying the total number of shares of Common Stock to be issued in the Stock Offering by a fraction, of which the numerator is the Qualifying Deposit of the Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Eligible Account Holders, in each case on the Eligibility Record Date and subject to the
14
provisions of Section 12; provided that the Holding Company may, in its sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, increase such maximum purchase limitation to 5% of the maximum number of shares offered in the Stock Offering or decrease such maximum purchase limitation to 0.1% of the maximum number of shares offered in the Stock Offering, subject to the overall purchase limitations set forth in Section 12. If there are insufficient shares available to satisfy all subscriptions of Eligible Account Holders, shares will be allocated to Eligible Account Holders so as to permit each such subscribing Eligible Account Holder to purchase a number of shares sufficient to make his total allocation equal to the lesser of 100 shares or the number of shares subscribed for. Thereafter, unallocated shares will be allocated pro rata to remaining subscribing Eligible Account Holders whose subscriptions remain unfilled in the same proportion that each such subscribers Qualifying Deposit bears to the total amount of Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unfilled. To ensure proper allocation of stock, each Eligible Account Holder must list on his subscription order form all accounts in which he had an ownership interest as of the Eligibility Record Date. Officers, directors, and their Associates may be Eligible Account Holders. However, if an officer, director, or his or her Associate receives subscription rights based on increased deposits in the year before the Eligibility Record Date, subscription rights based upon these deposits are subordinate to the subscription rights of other Eligible Account Holders.
Priority 2: Tax-Qualified Employee Plans. The Tax-Qualified Employee Plans shall be given the opportunity to purchase in the aggregate up to 4.9% of the shares issued and outstanding following the completion of the Stock Offering. In the event of an oversubscription in the Stock Offering, subscriptions for shares by the Tax-Qualified Employee Plans may be satisfied, in whole or in part, out of authorized but unissued shares of the Holding Company subject to the maximum purchase limitations applicable to such plans as set forth herein, or may be satisfied, in whole or in part, through open market purchases by the Tax-Qualified Employee Plans subsequent to the closing of the Stock Offering. If the final valuation exceeds the maximum of the Offering Range, up to 4.9% of the Common Stock issued and outstanding following the completion of the Stock Offering may be sold to the Tax-Qualified Employee Plans notwithstanding any oversubscription by Eligible Account Holders.
Priority 3: Supplemental Eligible Account Holders. To the extent there are sufficient shares remaining after satisfaction of subscriptions by Eligible Account Holders, and the Tax-Qualified Employee Plans, each Supplemental Eligible Account Holder shall receive non-transferable subscription rights to subscribe for shares of Common Stock offered in the Stock Offering in an amount equal to the greater of $250,000, one-tenth of one percent (0.1%) of the total shares offered in the Stock Offering, or 15 times the product (rounded down to the nearest whole number) obtained by multiplying the total number of shares of Common Stock to be issued in the Stock Offering by a fraction, of which the numerator is the Qualifying Deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Supplemental Eligible Account Holders, in each case on the Supplemental Eligibility Record Date and subject to the provisions of Section 12; provided that the Bank may, in its sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, increase such maximum purchase limitation to 5% of the maximum number of shares offered in the Stock Offering or decrease such maximum purchase limitation to 0.1% of the maximum number of shares offered in the Stock Offering, subject to the overall
15
purchase limitations set forth in Section 12. In the event Supplemental Eligible Account Holders subscribe for a number of shares which, when added to the shares subscribed for by Eligible Account Holders and the Tax-Qualified Employee Plans, is in excess of the total shares offered in the Stock Offering, the subscriptions of Supplemental Eligible Account Holders will be allocated among subscribing Supplemental Eligible Account Holders so as to permit each subscribing Supplemental Eligible Account Holder to purchase a number of shares sufficient to make his total allocation equal to the lesser of 100 shares or the number of shares subscribed for. Thereafter, unallocated shares will be allocated to each subscribing Supplemental Eligible Account Holder whose subscription remains unfilled in the same proportion that such subscribers Qualifying Deposits on the Supplemental Eligibility Record Date bear to the total amount of Qualifying Deposits of all subscribing Supplemental Eligible Account Holders whose subscriptions remain unfilled.
Priority 4: Other Members. To the extent that there are sufficient shares remaining after satisfaction of subscriptions by Eligible Account Holders, the Tax-Qualified Employee Plans and Supplemental Eligible Account Holders, each Other Member shall have the opportunity to purchase up to $250,000, provided that the Bank may, in its sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, increase such maximum purchase limitation to 5% of the maximum number of shares offered in the Stock Offering, or decrease such maximum purchase limitation to 0.1% of the maximum number of shares offered in the Stock Offering, subject to the overall purchase limitations set forth in Section 12. In the event Other Members subscribe for a number of shares which, when added to the shares subscribed for by the Eligible Account Holders, Tax-Qualified Employee Plans and Supplemental Eligible Account Holders, is in excess of the total number of shares offered in the Stock Offering, the subscriptions of such Other Members will be allocated among subscribing Other Members on a pro rata basis based on the size of such Other Members orders.
B. | Community Offering |
Any shares of Common Stock not subscribed for in the Subscription Offering may be offered for sale in a Community Offering. This will involve an offering of all unsubscribed shares directly to the general public with a preference to those natural persons residing in the Community. The Community Offering, if any, shall be for a period of not more than 45 days unless extended by the Holding Company and the Bank, and shall commence concurrently with, during or promptly after the Subscription Offering. The Holding Company and the Bank may use one or more investment banking firms on a best efforts basis to sell the unsubscribed shares in the Subscription and Community Offering. The Holding Company and the Bank may pay a commission or other fee to such investment banking firm(s) as to the shares sold by such firm(s) in the Subscription and Community Offering and may also reimburse such firm(s) for expenses incurred in connection with the sale. No Person may purchase more than $250,000of Common Stock in the Community Offering, subject to the overall purchase limitations set forth in Section 12. In the event orders for Common Stock in the Community Offering exceed the number of shares available for sale, shares will be allocated (to the extent shares remain available) first to cover orders of natural persons residing in the Community, and, thereafter, to the extent any shares remain available, to cover orders of other members of the general public on a basis that will promote a widespread distribution of stock. In the event orders for Common Stock in each of these categories exceed the number of shares available for sale within such category, orders shall first be filled so that each Person may receive 1,000 shares, and thereafter remaining shares will be allocated on an equal number of shares basis per order.
16
The Bank and the Holding Company, in their sole discretion, may reject subscriptions, in whole or in part, received from any Person under this Section 11.B.
C. | Syndicated Community Offering |
Any shares of Common Stock not sold in the Subscription Offering or in the Community Offering, if any, may be offered for sale to the general public by a selling group of broker-dealers in a Syndicated Community Offering, subject to terms, conditions and procedures, including the timing of the offering, as may be determined by the Bank and the Holding Company subject to the rights of the Holding Company to accept or reject in whole or in part all orders in the Syndicated Community Offering. It is expected that the Syndicated Community Offering would commence as soon as practicable after termination of the Subscription Offering and the Community Offering, if any. The Syndicated Community Offering shall be completed within 45 days after the termination of the Subscription Offering, unless such period is extended as provided herein. No Person, Associate of such Person, or group of Persons acting in concert, may purchase more than $250,000 of Common Stock in the Syndicated Community Offering, subject to the overall purchase limitations set forth in Section 12.
If for any reason a Syndicated Community Offering of unsubscribed shares of Common Stock cannot be effected and any shares remain unsold after the Subscription Offering and the Community Offering, if any, the Boards of Directors of the Holding Company and the Bank will seek to make other arrangements (including an underwritten public offering) for the sale of the remaining shares. Such other arrangements will be subject to the approval of the OTS and to compliance with applicable securities laws.
12. | Additional Limitations on Purchases of Common Stock |
Purchases of Common Stock in the Stock Offering will be subject to the following purchase limitations:
A. | The aggregate amount of outstanding Common Stock of the Holding Company owned or controlled by persons other than MHC at the close of the Stock Offering shall be less than 50% of the Holding Companys total outstanding Common Stock. |
B. |
The maximum purchase of Common Stock in the Subscription Offering by a Person or group of Persons through a single Deposit Account is $250,000. No Person by himself, with an Associate or group of Persons acting in concert, may purchase more than $500,000 of the Common Stock offered in the Stock Offering except that: (i) the Holding Company may, in its sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, increase such maximum purchase limitation to 9.9% of the number of shares sold in the Stock Offering and issued to the Foundation provided that the total number of shares purchased by Persons, their Associates and those Persons with which they are acting in concert, to the extent such purchases exceed 5% of the shares |
17
sold in the Stock Offering and issued to the Foundation, shall not exceed, in the aggregate, 10% (or such higher percentage as may be determined by the Board of Directors with the approval of the OTS) of the total number of the shares sold in the Offering and issued to the Foundation; (ii) the Tax-Qualified Employee Plans may purchase up to 10% of the shares offered in the Stock Offering; and (iii) for purposes of this subsection 12.B shares to be held by any Tax-Qualified Employee Plan and attributable to a person shall not be aggregated with other shares purchased directly by or otherwise attributable to such person. |
C. | The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by any Non-Tax-Qualified Employee Plan or any Management Person and his or her Associates, exclusive of any shares of Common Stock acquired by such plan or Management Person and his or her Associates in the secondary market, shall not exceed 4.9% of the outstanding shares of Common Stock of the Holding Company at the conclusion of the Stock Offering. In calculating the number of shares held by any Management Person and his or her Associates under this paragraph, shares held by any Tax-Qualified Employee Plan or Non-Tax-Qualified Employee Plan of the Holding Company or the Bank that are attributable to such Person shall not be counted. |
D. | The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by any Non-Tax-Qualified Employee Plan or any Management Person and his or her Associates, exclusive of any Common Stock acquired by such plan or Management Person and his or her Associates in the secondary market, shall not exceed 4.9% of the stockholders equity of the Holding Company at the conclusion of the Stock Offering. In calculating the number of shares held by any Management Person and his or her Associates under this paragraph, shares held by any Tax-Qualified Employee Plan or Non-Tax-Qualified Employee Plan of the Holding Company or the Bank that are attributable to such Person shall not be counted. |
E. | The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by any one or more Tax-Qualified Employee Plans, exclusive of any shares of Common Stock acquired by such plans in the secondary market, shall not exceed 4.9% of the outstanding shares of Common Stock of the Holding Company at the conclusion of the Stock Offering. |
F. | The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by any one or more Tax-Qualified Employee Plans, exclusive of any shares of Common Stock acquired by such plans in the secondary market, shall not exceed 4.9% of the stockholders equity of the Holding Company at the conclusion of the Stock Offering |
G. | The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by all stock benefit plans of the Holding Company or the Bank, other than employee stock ownership plans, shall not exceed 25% of the outstanding common stock of the Holding Company held by persons other than the MHC. |
18
H. | The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by all Non-Tax-Qualified Employee Plans or Management Persons and their Associates, exclusive of any Common Stock acquired by such plans or Management Persons and their Associates in the secondary market, shall not exceed 29% (or such higher percentage as may be set by the Board of Directors with the approval of the OTS) of the outstanding shares of Common Stock held by persons other than the MHC at the conclusion of the Stock Offering. In calculating the number of shares held by Management Persons and their Associates under this paragraph or paragraph I. below, shares held by any Tax-Qualified Employee Plan or Non-Tax-Qualified Employee Plan that are attributable to such persons shall not be counted. |
I. | The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by all Non-Tax-Qualified Employee Plans or Management Persons and their Associates, exclusive of any Common Stock acquired by such plans or Management Persons and their Associates in the secondary market, shall not exceed 29% of the stockholders equity of the Holding Company held by persons other than the MHC at the conclusion of the Stock Offering. |
J. | Notwithstanding any other provision of this Plan, no person shall be entitled to purchase any Common Stock to the extent such purchase would be illegal under any federal law or state law or regulation or would violate regulations or policies of the National Association of Securities Dealers, Inc., particularly those regarding free riding and withholding. The Holding Company and/or its agents may ask for an acceptable legal opinion from any purchaser as to the legality of such purchase and may refuse to honor any purchase order if such opinion is not timely furnished. |
K. | The Board of Directors of the Holding Company has the right in its sole discretion to reject any order submitted by a person whose representations the Board of Directors believes to be false or who it otherwise believes, either alone or acting in concert with others, is violating, circumventing, or intends to violate, evade or circumvent the terms and conditions of this Plan. |
L. | A minimum of 25 shares of Common Stock must be purchased by each Person purchasing shares in the Stock Offering to the extent those shares are available; provided, however, that in the event the minimum number of shares of Common Stock purchased times the price per share exceeds $500, then such minimum purchase requirement shall be reduced to such number of shares which when multiplied by the price per share shall not exceed $500, as determined by the Board. |
19
Subscription rights afforded under this Plan and by OTS regulations are non-transferable. No person may transfer, offer to transfer, or enter into any agreement or understanding to transfer, the legal or beneficial ownership of any subscription rights under this Plan. No person may transfer, offer to transfer or enter into an agreement or understanding to transfer legal or beneficial ownership of any shares of Common Stock except pursuant to this Plan.
EACH PERSON PURCHASING COMMON STOCK IN THE STOCK OFFERING WILL BE DEEMED TO CONFIRM THAT SUCH PURCHASE DOES NOT CONFLICT WITH THE PURCHASE LIMITATIONS IN THIS PLAN. ALL QUESTIONS CONCERNING WHETHER ANY PERSONS ARE ASSOCIATES OR A GROUP ACTING IN CONCERT OR WHETHER ANY PURCHASE CONFLICTS WITH THE PURCHASE LIMITATIONS IN THIS PLAN OR OTHERWISE VIOLATES ANY PROVISION OF THIS PLAN SHALL BE DETERMINED BY THE BANK IN ITS SOLE DISCRETION. SUCH DETERMINATION SHALL BE CONCLUSIVE, FINAL AND BINDING ON ALL PERSONS, AND THE BANK MAY TAKE ANY REMEDIAL ACTION INCLUDING, WITHOUT LIMITATION, REJECTING THE PURCHASE OR REFERRING THE MATTER TO THE OTS FOR ACTION, AS THE BANK MAY IN ITS SOLE DISCRETION DEEM APPROPRIATE.
13. | Payment for Stock |
All payments for Common Stock subscribed for or ordered in the Stock Offering must be delivered in full to the Bank, together with a properly completed and executed order form, or purchase order in the case of the Syndicated Community Offering, on or prior to the expiration date specified on the order form or purchase order, as the case may be, unless such date is extended by the Bank; provided, that if the Employee Plans subscribe for shares of Common Stock during the Subscription Offering, such plans may pay for such shares at the Actual Purchase Price upon consummation of the Stock Offering. The Holding Company or the Bank may make scheduled discretionary contributions to the ESOP provided such contributions from the Bank, if any, do not cause the Bank to fail to meet its regulatory capital requirement.
Payment for Common Stock shall be made either by check or money order, or if a purchaser has a Deposit Account in the Bank, such purchaser may pay for the shares subscribed for by authorizing the Bank to make a withdrawal from the purchasers Deposit Account at the Bank in an amount equal to the purchase price of such shares. Such authorized withdrawal, whether from a savings passbook or certificate account, shall be without penalty as to premature withdrawal. If the authorized withdrawal is from a certificate account, and the remaining balance does not meet the applicable minimum balance requirements, the certificate shall be canceled at the time of withdrawal, without penalty, and the remaining balance will earn interest at the Banks passbook rate. Funds for which a withdrawal is authorized will remain in the purchasers Deposit Account but may not be used by the purchaser until the Common Stock has been sold or the 45-day period (or such longer period as may be approved by the OTS) following the Stock Offering has expired, whichever occurs first. Thereafter, the withdrawal will be given effect only to the extent necessary to satisfy the subscription (to the extent it can be filled) at the Actual Purchase Price per share. Interest will continue to be earned on any amounts authorized for withdrawal until such withdrawal is given effect.
20
Subscription funds received prior to the completion of the offering will be held in a segregated deposit account at the Bank or, in the Banks discretion, at another federally insured depository institution. Interest on subscription funds made by check or money order will be paid by the Bank at a rate no less than the Banks passbook rate. Such interest will be paid from the date payment is received by the Bank until consummation or termination of the Stock Offering. If for any reason the Stock Offering is not consummated, all payments made by subscribers in the Stock Offering will be refunded to them with interest. In case of amounts authorized for withdrawal from Deposit Accounts, refunds will be made by canceling the authorization for withdrawal.
14. | Manner of Exercising Subscription Rights Through Order Forms |
As soon as practicable after the prospectus prepared by the Holding Company and the Bank has been declared effective by the OTS and the SEC, copies of the prospectus and order forms will be distributed to all Eligible Account Holders, Supplemental Eligible Account Holders and the Tax-Qualified Employee Plans at their last known addresses appearing on the records of the Bank for the purpose of subscribing for shares of Common Stock in the Subscription Offering and will be made available to those persons that purchase Common Stock in the Community Offering.
Each order form will be preceded or accompanied by the prospectus describing the Holding Company, the Bank, the Common Stock and the Subscription and Community Offerings. Each order form will contain, among other things, the following:
A. | A specified date by which all order forms must be received by the Bank, which date shall be not less than 20, nor more than 45 days, following the date on which the order forms are mailed by the Bank, and which date will constitute the termination of the Subscription Offering; |
B. | The purchase price per share for shares of Common Stock to be sold in the Subscription and Community Offerings; |
C. | A description of the minimum and maximum number of shares of Common Stock that may be subscribed for pursuant to the exercise of Subscription Rights or otherwise purchased in the Community Offering; |
D. | Instructions as to how the recipient of the order form must indicate thereon the number of shares of Common Stock for which such Person elects to subscribe and the available alternative methods of payment therefor; |
E. | An acknowledgment that the recipient of the order form has received a final copy of the prospectus prior to execution of the order form; |
F. |
A statement indicating the consequences of failing to properly complete and return the order form, including a statement to the effect that all subscription rights are nontransferable, will be void at the end of the Subscription Offering, and can only be exercised by delivering to the Bank within the subscription period such properly completed and executed order form, together with a check or |
21
money order in the full amount of the purchase price as specified in the order form for the shares of Common Stock for which the recipient elects to subscribe in the Subscription Offering (or by authorizing on the order form that the Bank withdraw said amount from the subscribers Deposit Account at the Bank); and |
G. | A statement to the effect that the executed order form, once received by the Bank, may not be modified or amended by the subscriber without the consent of the Bank. |
Notwithstanding the above, the Bank and the Holding Company reserve the right in their sole discretion to accept or reject orders received on photocopied or facsimilied order forms.
15. | Undelivered, Defective or Late Order Form; Insufficient Payment |
In the event order forms (a) are not delivered and are returned to the Bank by the United States Postal Service or the Bank is unable to locate the addressee, (b) are not received back by the Bank or are received by the Bank after the expiration date specified thereon, (c) are defectively filled out or executed, (d) are not accompanied by the full required payment for the shares of Common Stock subscribed for (including cases in which Deposit Accounts from which withdrawals are authorized are insufficient to cover the amount of the required payment), or (e) are not mailed pursuant to a no mail order placed in effect by the account holder, the subscription rights of the Person to whom such rights have been granted will lapse as though such Person failed to return the completed order form within the time period specified thereon; provided, that the Bank may, but will not be required to, waive any immaterial irregularity on any order form or require the submission of corrected order forms or the remittance of full payment for subscribed shares by such date as the Bank may specify. The interpretation by the Bank of terms and conditions of this Plan and of the order forms will be final, subject to the authority of the OTS.
16. | Completion of the Stock Offering |
The Stock Offering will be terminated if not completed within 90 days from the date on which the prospectus is declared effective by the OTS unless an extension is approved by the OTS.
17. | Establishment and Funding of Charitable Foundation |
As part of the Stock Offering, the Stock Holding Company and the Bank may establish a Foundation which will qualify as an exempt organization under Section 501(c)(3) of the Internal Revenue Code and contribute to the Foundation (i) shares of Common Stock that shall represent less than 2% of the number of shares of Common Stock to be outstanding following the Stock Offering, and/or (ii) cash, provided that the total contribution to the Foundation does not exceed 8% of the gross proceeds from the sale of Common Stock in the Stock Offering. Contributions to the Foundation in connection with the Stock Offering are intended to complement the Banks existing community reinvestment activities and to permit the communities in which the Bank operates to share in financial success of the Bank as a locally headquartered, community-oriented savings and loan association.
22
The Foundation will be dedicated to the promotion of charitable purposes within the communities in which the Bank operates, including, but not limited to, grants or donations to support housing assistance, scholarships, local education, not-for-profit medical facilities, not-for-profit community groups and other types of organizations or civic minded projects. The Foundation will distribute annually total grants to assist charitable organizations or to fund projects within its local community of not less than 5% of the average fair value of Foundation assets each year. In order to serve the purposes for which it was formed and maintain its 501(c)(3) qualification, the Foundation may sell, on an annual basis, a limited portion of the Common Stock contributed to it. For at least five years after the organization of the Foundation, except for temporary periods resulting from death, resignation, removal or disqualification, at least (i) one director shall be an independent director who is unaffiliated with the Bank or the Holding Company, who is from the Banks local community and who has experience with local community charitable organizations and grant making, and (ii) at least one director shall be a person who is also a member of the board of directors of the Bank.
The board of directors of the Foundation will be responsible for establishing the policies of the Foundation with respect to grants or donations, consistent with the stated purposes of the Foundation. The Foundation will comply with applicable federal banking laws and regulations.
18. | Market for Common Stock |
The Holding Company shall use its best efforts to:
(i) | encourage and assist a market maker to establish and maintain a market for that class of stock; and |
(ii) | list that class of stock on a national or regional securities exchange, or on the Nasdaq quotation system. |
19. | Stock Purchases by Management Persons After the Stock Offering |
For a period of three years after the Stock Offering, no Management Person or his or her Associates may purchase, without the prior written approval of the OTS, any Common Stock of the Holding Company, except from a broker-dealer registered with the SEC, except that the foregoing shall not apply to:
A. | Negotiated transactions involving more than 1% of the outstanding stock in the class of stock; or |
B. | Purchases of stock made by and held by any Tax-Qualified or Non-Tax Qualified Employee Plan even if such stock is attributable to Management Persons or their Associates. |
20. | Resales of Stock by Directors and Officers |
Common Stock purchased by Management Persons and their Associates in the Stock Offering may not be resold for a period of at least one year following the date of purchase, except in the case of death of a Management Person or an Associate.
23
21. | Stock Certificates |
Each stock certificate shall bear a legend giving appropriate notice of the restrictions set forth in Section 20 above. Appropriate instructions shall be issued to the Holding Companys transfer agent with respect to applicable restrictions on transfers of such stock. Any shares of stock issued as a stock dividend, stock split or otherwise with respect to such restricted stock, shall be subject to the same restrictions as apply to the restricted stock.
22. | Restriction on Financing Stock Purchases |
The Holding Company and the Bank will not loan funds to any Person to purchase Common Stock in the Stock Offering, and will not knowingly offer or sell any of the Common Stock to any Person whose purchase would be financed by funds loaned to the Person by the Holding Company, the Bank or any Affiliate.
23. | Stock Benefit Plans |
The Board of Directors of the Bank and/or the Holding Company intend to adopt one or more stock benefit plans for employees, officers and directors, including an ESOP, stock award plans and stock option plans, which will be authorized to purchase Common Stock and grant options for Common Stock. However, only the Tax-Qualified Employee Plans will be permitted to purchase Common Stock in the Stock Offering, subject to the purchase priorities set forth in this Plan. The Board of Directors of the Bank intends to establish the ESOP and authorize the ESOP and any other Tax-Qualified Employee Plans to purchase in the aggregate up to 10% of the shares issued in the Stock Offering. The Bank or the Holding Company may make scheduled discretionary contributions to one or more Tax-Qualified Employee Plans to purchase Common Stock issued in the Stock Offering, or to purchase issued and outstanding shares of Common Stock in the open market or from authorized but unissued shares of Common Stock or treasury shares from the Holding Company subsequent to the completion of the Stock Offering; provided such contributions do not cause the Bank to fail to meet any of its regulatory capital requirements. In addition to shares purchased by one or more Tax-Qualified Employee Plans in this Stock Offering, any subsequent stock offering, and/or from authorized but unissued shares or treasury shares of the Holding Company, this Plan specifically authorizes the Holding Company to grant awards under one or more stock benefit plans, including stock recognition and award plans and stock option plans, in an amount up to 25% of the number of shares of Common Stock held by persons other than the MHC.
24. | Post-Reorganization Filing and Market Making |
It is likely that there will be a limited market for the Common Stock sold in the Stock Offering, and purchasers must be prepared to hold the Common Stock for an indefinite period of time. If the Holding Company has more than 35 stockholders of any class of stock, the Holding Company shall register its Common Stock with the SEC pursuant to the Exchange Act, and shall undertake not to deregister such Common Stock for a period of three years thereafter.
24
25. | Payment of Dividends and Repurchase of Stock |
The Holding Company may not declare or pay a cash dividend on its Common Stock if the effect thereof would cause the regulatory capital of the Bank to be reduced below the amount required under § 567.2 of the Regulations. Otherwise, the Holding Company may declare dividends or make other capital distributions in accordance with §563b.520 of the Regulations. Following completion of the Stock Offering, the Holding Company may repurchase its Common Stock consistent with § 563b.510 and § 563b.515 of the Regulations relating to stock repurchases, as long as such repurchases do not cause the regulatory capital of the Bank to be reduced below the amount required under § 563b.550. of the Regulations. The MHC may from time to time purchase Common Stock of the Holding Company. Subject to any notice or approval requirements of the OTS under the Regulations, the MHC may waive its right to receive dividends declared by the Holding Company.
26. | Reorganization and Stock Offering Expenses |
The Regulations require that the expenses of any Stock Offering must be reasonable. The Bank will use its best efforts to assure that the expenses incurred by the Bank and the Holding Company in effecting the Reorganization and the Stock Offering will be reasonable.
27. | Employment and Other Severance Agreements |
Following or contemporaneously with the Reorganization, the Bank and/or the Holding Company may enter into employment and/or severance arrangements with one or more executive officers of the Bank and/or the Holding Company. It is anticipated that any employment contracts entered into by the Bank and/or the Holding Company will be for terms not exceeding three years and that such contracts will provide for annual renewals of the term of the contracts, subject to approval by the Board of Directors. The Bank and/or the Holding Company also may enter into severance arrangements with one or more executive officers which provide for the payment of severance compensation in the event of a change in control of the Bank and/or the Holding Company. The terms of such employment and severance arrangements have not been determined as of this time, but will be described in any prospectus circulated in connection with the Stock Offering and will be subject to and comply with all regulations of the OTS.
28. | Residents of Foreign Countries and Certain States |
The Holding Company will make reasonable efforts to comply with the securities laws of all States in the United States in which Persons entitled to subscribe for shares of Common Stock pursuant to this Plan reside. However, no such Person will be issued subscription rights or be permitted to purchase shares of Common Stock in the Subscription Offering if such Person resides in a foreign country or resides in a state of the United States with respect to which any of the following apply: (A) a small number of Persons otherwise eligible to subscribe for shares under this Plan reside in such state; (B) the issuance of subscription rights or the offer or sale of shares of Common Stock to such Persons would require the Holding Company, under the securities laws of such state, to register as a broker, dealer, salesman or agent or to register or otherwise qualify its securities for sale in such state; or (C) such registration or qualification would be impracticable for reasons of cost or otherwise.
25
29. | Interpretation |
All interpretations of this Plan and application of its provisions to particular circumstances by a majority of the Board of Directors of the Bank shall be final, subject to the authority of the OTS.
30. | Amendment or Termination of the Plan |
If necessary or desirable, the terms of the Plan may be substantially amended by a majority vote of the Banks Board of Directors, as a result of comments from regulatory authorities or otherwise, at any time prior to the solicitation of proxies and submission of the Plan and proxy materials to a vote of the Members. At any time after the solicitation of proxies and submission of the Plan and proxy materials to a vote of the Members, the terms of the Plan that relate to the Reorganization may be amended by a majority vote of the Board of Directors only with the concurrence of the OTS. Terms of the Plan relating to the Stock Offering including, without limitation, Sections 8 through 21, may be amended by a majority vote of the Banks Board of Directors as a result of comments from regulatory authorities or otherwise at any time prior to the approval of the Plan by the OTS and at any time thereafter with the concurrence of the OTS. The Plan may be terminated by a majority vote of the Board of Directors at any time prior to the earlier of approval of the Plan by the OTS and the date of the Special Meeting, and may be terminated by a majority vote of the Board of Directors at any time thereafter with the concurrence of the OTS. In its discretion, the Board of Directors may modify or terminate the Plan upon the order of the regulatory authorities without a resolicitation of proxies or another meeting of the Members; however, any material amendment of the terms of the Plan that relate to the Reorganization which occur after the Special Meeting shall require a resolicitation of Members. Failure of the Members to approve the Plan will result in the termination of the Plan.
The Plan shall be terminated if the Reorganization is not completed within 24 months from the date upon which the Members of the Bank approve the Plan, and may not be extended by the Bank or the OTS.
26
Exhibit 3.1
OCONEE FEDERAL FINANCIAL CORP.
STOCK HOLDING COMPANY CHARTER
Section 1. Corporate Title . The full corporate title of the mutual holding company subsidiary holding company is Oconee Federal Financial Corp. (the Company).
Section 2. Domicile . The domicile of the Company shall be located in the City of Seneca in the State of South Carolina.
Section 3. Duration . The duration of the Company is perpetual.
Section 4. Purpose and Powers . The purpose of the Company is to pursue any or all of the lawful objectives of a federal mutual savings and loan holding company chartered under Section 10(o) of the Home Owners Loan Act, 12 U.S.C. 1467a(o), and to exercise all of the express, implied, and incidental powers conferred thereby and by all acts amendatory thereof and supplemental thereto, subject to the Constitution and laws of the United States as they are now in effect, or as they may hereafter be amended, and subject to all lawful and applicable rules, regulations, and orders of the Office of Thrift Supervision (the Office).
Section 5. Capital Stock . The total number of shares of all classes of the capital stock that the Company has authority to issue is 101,000,000 of which 100,000,000 shares shall be common stock, par value $0.01 per share, and of which 1,000,000 shares shall be serial preferred stock. The shares may be issued from time to time as authorized by the board of directors without the approval of its shareholders, except as otherwise provided in this Section 5 or to the extent that such approval is required by governing law, rule, or regulation. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the par or stated value. Neither promissory notes nor future services shall constitute payment or part payment for the issuance of shares of the Company. The consideration for the shares shall be cash, tangible or intangible property (to the extent direct investment in such property would be permitted to the Company), labor, or services actually performed for the Company, or any combination of the foregoing. In the absence of actual fraud in the transaction, the value of such property, labor, or services, as determined by the board of directors of the Company, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, that part of the retained earnings of the Company that is transferred to common stock or paid in capital accounts upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance.
Except for shares issued in the initial organization of the Company, no shares of capital stock (including shares issuable upon conversion, exchange, or exercise of other securities) shall be issued, directly or indirectly, to officers, directors, or controlling persons (except for shares issued to the parent mutual holding company) of the Company other than as part of a general public offering or as qualifying shares to a director, unless their issuance or the plan under which they would be issued has been approved by a majority of the total votes eligible to be cast at a legal meeting.
Nothing contained in this Section 5 (or in any supplementary sections hereto) shall entitle the holders of any class or series of capital stock to vote as a separate class or series or to more than one vote per share, and there shall be no cumulation of votes for the election of directors; provided , that this restriction on voting separately by class or series shall not apply:
(i) | To any provision which would authorize the holders of preferred stock, voting as a class or series, to elect some members of the board of directors, less than a majority thereof, in the event of default in the payment of dividends on any class or series of preferred stock; |
(ii) | To any provision which would require the holders of preferred stock, voting as a class or series, to approve the merger or consolidation of the Company with another corporation or the sale, lease, or conveyance (other than by mortgage or pledge) of properties or business in exchange for securities of a corporation other than the Company if the preferred stock is exchanged for securities of such other corporation; provided, that no provision may require such approval for transactions undertaken with the assistance or pursuant to the direction of the Office or the Federal Deposit Insurance Corporation; |
(iii) | To any amendment which would adversely change the specific terms of any class or series of capital stock as set forth in this Section 5 (or in any supplementary sections hereto), including any amendment which would create or enlarge any class or series ranking prior thereto in rights and preferences. An amendment which increases the number of authorized shares of any class or series of capital stock, or substitutes the surviving Company in a merger or consolidation for the Company, shall not be considered to be such an adverse change. |
A description of the different classes and series of the Companys capital stock and a statement of the designations, and the relative rights, preferences and limitations of the shares of each class of and series of capital stock are as follows:
A. Common Stock. Except as provided in this Section 5 (or in any supplementary sections thereto) the holders of common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by such holder.
Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to payment of dividends, the full amount of dividends and of sinking fund, retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends out of any assets legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the Company, the holders of the common stock (and the holders of any class or series of stock entitled to participate with the common stock in the distribution of assets) shall be entitled to receive, in cash or in kind, the assets of the Company available for distribution remaining after: (i) payment or provision for payment of the Companys debts and liabilities; (ii) distributions or provision for distributions in settlement of its liquidation account; and (iii) distributions or provisions for distributions to holders of any class or series of stock having preference over the common stock in the liquidation, dissolution, or winding up of the Company. Each share of common stock shall have the same relative rights as and be identical in all respects with all the other shares of common stock.
B. Preferred Stock. The Company may provide in supplementary sections to its charter for one or more classes of preferred stock, which shall be separately identified. The shares of any class may be divided into and issued in series, with each series separately designated so as to distinguish the shares thereof from the shares of all other series and classes. The terms of each series shall be set forth in a supplementary section to the charter. All shares of the same class shall be identical, except as to the following relative rights and preferences, as to which there may be variations between different series:
(a) | The distinctive serial designation and the number of shares constituting such series; |
2
(b) | The dividend rate or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date(s), the payment date(s) for dividends, and the participating or other special rights, if any, with respect to dividends; |
(c) | The voting powers, full or limited, if any, of shares of such series; |
(d) | Whether the shares of such series shall be redeemable and, if so, the price(s) at which, and the terms and conditions on which, such shares may be redeemed; |
(e) | The amount(s) payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution, or winding up of the Company; |
(f) | Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price(s) at which such shares may be redeemed or purchased through the application of such fund; |
(g) | Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes of stock of the Company and, if so, the conversion price(s) or the rate(s) of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; |
(h) | The price or other consideration for which the shares of such series shall be issued; and |
(i) | Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock. |
Each share of each series of serial preferred stock shall have the same relative rights as and be identical in all respects with all the other shares of the same series.
The board of directors shall have authority to divide, by the adoption of supplementary charter sections, any authorized class of preferred stock into series and, within the limitations set forth in this section and the remainder of this charter, fix and determine the relative rights and preferences of the shares of any series so established.
Prior to the issuance of any preferred shares of a series established by a supplementary charter section adopted by the board of directors, the Company shall file with the Secretary to the Office a dated copy of that supplementary section of this charter establishing and designating the series and fixing and determining the relative rights and preferences thereof.
Section 6. Beneficial Ownership Limitation . No person other than Oconee Federal, MHC may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10 percent of the outstanding stock of any class of voting stock of the Company held by persons other than Oconee Federal, MHC. This limitation expires on , 2016 and does not apply to a transaction in which an underwriter purchases stock in connection with a public offering, or the purchase of stock by an employee stock ownership plan or other tax-qualified employee stock benefit plan that is exempt from the approval requirements under § 574.3(c)(1)(vii) of the Offices regulations.
3
In the event a person acquires stock in violation of this Section 6, all stock beneficially owned by such person in excess of 10 percent of the stock held by stockholders other than Oconee Federal, MHC shall be considered excess shares and shall not be counted as stock entitled to vote and shall not be voted by any person or counted as voting stock in connection with any matters submitted to the stockholders for a vote.
Section 7. Preemptive Rights. Holders of the capital stock of the Company shall not be entitled to preemptive rights with respect to any shares of the Company which may be issued.
Section 8. Directors. The Company shall be under the direction of a board of directors. The authorized number of directors, as stated in the Companys bylaws, shall not be fewer than five or more than fifteen except when a greater or lesser number is approved by the Director of the Office, or his or her delegate.
Section 9. Amendment of Charter. Except as provided in Section 5, no amendment, addition, alteration, change or repeal of this charter shall be made, unless such is proposed by the board of directors of the Company, approved by the shareholders by a majority of the votes eligible to be cast at a legal meeting, unless a higher vote is otherwise required, and approved or preapproved by the Office.
4
OCONEE FEDERAL FINANCIAL CORP. | ||
ATTEST: |
|
|
Robert N. McLellan, Jr. Corporate Secretary |
||
BY: |
|
|
T. Rhett Evatt | ||
President and Chief Executive Officer | ||
OFFICE OF THRIFT SUPERVISION | ||
ATTEST: |
|
|
Secretary of Office of Thrift Supervision | ||
BY: |
|
|
Director of Office of Thrift Supervision | ||
Effective Date: |
|
5
Exhibit 3.2
OCONEE FEDERAL FINANCIAL CORP.
BYLAWS
ARTICLE I Home Office
The home office of Oconee Federal Financial Corp. (the Company) shall be at 201 E. North Second Street in the City of Seneca, in the County of Oconee, in the State of South Carolina.
ARTICLE II Shareholders
Section 1. Place of Meetings. All annual and special meetings of shareholders shall be held at the home office of the Company or at such other convenient place as the board of directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the Company for the election of directors and for the transaction of any other business of the Company shall be held annually within 150 days after the end of the Companys fiscal year, on the third Thursday of October of each calendar year, if not a legal holiday, and if a legal holiday, then on the next day following which is not a legal holiday, or at such other date within such 150-day period as the board of directors may determine.
Section 3. Special Meetings. Special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by the regulations of the Office of Thrift Supervision (the Office), may be called at any time by the chairman of the board, the president, or a majority of the board of directors, and shall be called by the chairman of the board, the president, or the secretary upon the written request of the holders of not less than one-tenth of all of the outstanding capital stock of the Company entitled to vote at the meeting. Such written request shall state the purpose or purposes of the meeting and shall be delivered to the home office of the Company addressed to the chairman of the board, the president, or the secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be conducted in accordance with written procedures established by the Board of Directors. The board of directors shall designate, when present, either the chairman of the board or president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day, and hour of the meeting and the purpose(s) for which the meeting is called shall be delivered not fewer than 20 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, the president, or the secretary, or the directors calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the shareholder at the address as it appears on the stock transfer books or records of the Company as of the record date prescribed in Section 6 of this Article II with postage prepaid. When any shareholders meeting, either annual or special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than 30 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken.
Section 6. Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 60 days and, in case of a meeting of
shareholders, not fewer than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the Company shall make a complete list of the shareholders of record entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address and the number of shares held by each. This list of shareholders shall be kept on file at the home office of the Company and shall be subject to inspection by any shareholder of record or the shareholders agent at any time during usual business hours for a period of 20 days prior to such meeting. Such list also shall be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder of record or the shareholders agent during the entire time of the meeting. The original stock transfer book shall constitute prima facie evidence of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders.
In lieu of making the shareholder list available for inspection by shareholders as provided in the preceding paragraph, the board of directors may elect to follow the procedures prescribed in § 552.6(d) of the Offices regulations as now or hereafter in effect.
Section 8. Quorum. A majority of the outstanding shares of the Company entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If a quorum is present at a meeting of shareholders and the withdrawal of shareholders results in the presence of less than a quorum, the shareholders present may continue to transact business until adjournment. If a quorum is present the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number of shareholders voting together or voting by classes is required by law or the charter. Directors, however, are elected by a plurality of the votes cast at an election of directors.
Section 9. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his or her duly authorized attorney in fact. Proxies may be given telephonically or electronically as long as the holder uses a procedure for verifying the identity of the shareholder. Proxies solicited on behalf of the management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid more than eleven months from the date of its execution except for a proxy coupled with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When ownership stands in the name of two or more persons, in the absence of written directions to the Company to the contrary, at any meeting of the shareholders of the Company any one or more of such shareholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such stock and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree.
2
Section 11. Voting of Shares of Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent, or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian, or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name. Shares held in trust in an IRA or Keogh Account, however, may be voted by the Company if no other instructions are received. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer into his or her name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Company nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Company, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. Stockholders may not cumulate their votes for election of directors.
Section 13. Inspectors of Election. In advance of any meeting of shareholders, the board of directors may appoint any persons other than nominees for office as inspectors of election to act at such meeting or any adjournment. The number of inspectors shall be either one or three. Any such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board or the president may, or on the request of not fewer than 10 percent of the votes represented at the meeting shall, make such appointment at the meeting. If appointed at the meeting, the majority of the votes present shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting or at the meeting by the chairman of the board or the president.
Unless otherwise prescribed by regulations of the Office, the duties of such inspectors shall include: determining the number of shares and the voting power of each share, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the rights to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders.
Section 14. Nominating Committee. The board of directors shall appoint a nominating committee for selecting the nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least twenty (20) days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Company. No nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders are made in writing and delivered to the secretary of the Company at least five (5) days prior to the date of the annual
3
meeting. Such shareholders notice shall set forth: (A) as to each person whom the shareholder proposes to nominate for election or reelection as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, and (iii) such persons written consent to serve as a director, if elected; and (B) as to the shareholder giving the notice (i) the name and address of such shareholder and (ii) the class and number of shares of the Company that are owned of record by such shareholder. At the request of the board of directors, any person nominated by the board of directors for election as a director shall furnish to the secretary that information required to be set forth in a shareholders notice of nomination which pertains to the nominee together with the required written consents. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Company. Ballots bearing the names of all persons nominated by the nominating committee and by shareholders shall be provided for use at the annual meeting. However, if the nominating committee shall fail or refuse to act at least twenty (20) days prior to the annual meeting, nominations for directors may be made at the annual meeting by any shareholder entitled to vote and shall be voted upon.
Section 15. New Business. Any new business to be taken up at the annual meeting shall be stated in writing and filed with the secretary of the Company at least five (5) days prior to the date of the annual meeting, and all business so stated, proposed, and filed shall be considered at the annual meeting; but no other proposal shall be acted upon at the annual meeting. Any shareholder may make any other proposal at the annual meeting and the same may be discussed and considered, but unless stated in writing and filed with the secretary at least five (5) days before the meeting, such proposal shall be laid over for act i on at an adjourned, special or annual meeting of the shareholders taking place thirty (30) days or more thereafter. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors, and committees; but in connection with such reports, no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. A shareholders notice to the secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (A) a brief description of the proposal desired to be brought before the annual meeting, (B) the business, as well as the name and address of such shareholder and the class and number of shares of the Company that are owned of record by such shareholder.
ARTICLE III Board of Directors
Section 1. General Powers. The business and affairs of the Company shall be under the direction of its board of directors. The board of directors shall annually elect a chairman of the board and a president from among its members and shall designate, when present, either the chairman of the board or the president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of six (6) members and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the board of directors shall be held without notice other than this bylaw following the annual meeting of shareholders. The board of directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution. Directors may participate in a meeting by means of a conference telephone or similar communications device through which all persons participating can hear each other at the same time. Participation by such means shall constitute presence in person for all purposes.
4
Section 4. Qualification. Each director shall at all times be the beneficial owner of not less than 100 shares of capital stock of the Company unless the company is a wholly owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president, or one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place, within the Companys normal lending territory, as the place for holding any special meeting of the board of directors called by such persons.
Members of the board of directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person for all purposes.
Section 6. Notice. Written notice of any special meeting shall be given to each director at least 24 hours prior thereto when delivered personally or by telegram or at least five days prior thereto when delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage prepaid if sent by mail, when delivered to the telegraph company if sent by telegram or when the Company receives notice of delivery if electronically transmitted. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice or waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors; but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 6 of this Article III.
Section 8. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by regulation of the Office or by these bylaws.
Section 9. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors.
Section 10. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the Company addressed to the chairman of the board or the president. Unless otherwise specified, such resignation shall take effect upon receipt by the chairman of the board or the president. More than three consecutive absences from regular meetings of the board of directors, unless excused by resolution of the board of directors, shall automatically constitute a resignation, effective when such resignation is accepted by the board of directors.
Section 11. Vacancies. Any vacancy occurring on the board of directors may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected to serve until the next election of directors by the shareholders. Any directorship to be filled by reason of an increase in the number of directors may be filled by election by the board of directors for a term of office continuing only until the next election of directors by the shareholders.
5
Section 12. Compensation. Directors, as such, may receive a stated salary for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for attendance at committee meetings as the board of directors may determine.
Section 13. Presumption of Assent. A director of the Company who is present at a meeting of the board of directors at which action on any Company matter is taken shall be presumed to have assented to the action taken unless his or her dissent or abstention shall be entered in the minutes of the meeting or unless he or she shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Company within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action.
Section 14. Removal of Directors. At a meeting of shareholders called expressly for that purpose, any director may be removed only for cause by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of the charter or supplemental sections thereto, the provisions of this section shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole.
For purposes of this section, removal for cause includes, as defined in 12 C.F.R. Section 563.39, or any successor regulation enacted by the Office, personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, [or a] willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order.
Section 15. Integrity of Directors. A person is not qualified to serve as director if he or she: (1) is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year, or (2) is a person against who a banking agency has, within the past ten years, issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal, or (3) has been found either by a regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency.
Section 16. Emeritus Directors. Emeritus directors may be appointed and their compensation for services (in an amount not to exceed those fees paid to voting directors) determined by resolution of the board of directors of the Company. Only former directors of the Company or Oconee Federal Savings and Loan Association (including former directors of other savings and loan associations or savings banks that have been merged with, or otherwise acquired by the Company) shall be eligible to serve as emeritus directors. Emeritus directors shall be available for consultation with and advice to the management of the Company. Emeritus directors may attend meetings of the board of directors, but shall have no vote on any matter acted upon by such board.
6
Section 17. Age Limitation. No person ninety (90) years of age or older shall be eligible for election, reelection, appointment, or reappointment to the board of directors of the Company. No director shall serve as such beyond the annual meeting of the Company immediately following the director becoming ninety (90) years of age. This age limitation does not apply to an advisory or emeritus director
ARTICLE IV Executive And Other Committees
Section 1. Appointment. The board of directors, by resolution adopted by a majority of the full board, may designate the chief executive officer and two or more of the other directors to constitute an executive committee. The designation of any committee pursuant to this Article IV and the delegation of authority shall not operate to relieve the board of directors, or any director, of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of directors is not in session, shall have and may exercise all of the authority of the board of directors except to the extent, if any, that such authority shall be limited by the resolution appointing the executive committee; and except also that the executive committee shall not have the authority of the board of directors with reference to: the declaration of dividends; the amendment of the charter or bylaws of the Company or recommending to the shareholders a plan of merger, consolidation, or conversion; the sale, lease, or other disposition of all or substantially all of the property and assets of the Company otherwise than in the usual and regular course of its business; a voluntary dissolution of the Company; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this Article IV, each member of the executive committee shall hold office until the next regular annual meeting of the board of directors following his or her designation and until a successor is designated as a member of the executive committee.
Section 4. Meetings. Regular meetings of the executive committee may be held without notice at such times and places as the executive comm i ttee may fix from time to time by resolution. Special meetings of the executive committee may be called by any member thereof upon not less than one days notice stating the place, date, and hour of the meeting, which notice may be written or oral. Any member of the executive committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the executive committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted to be taken by the executive committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the full board of
7
directors. Any member of the executive committee may resign from the executive committee at any time by giving written notice to the president or secretary of the Company. Unless otherwise specified, such resignation shall take effect upon its receipt; the acceptance of such resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding officer from its members and may fix its own rules of procedure which shall not be inconsistent with these bylaws. It shall keep regular minutes of its proceedings and report the same to the board of directors for its information at the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by resolution establish an audit, loan, or other committee composed of directors as it may determine to be necessary or appropriate for the conduct of the business of the Company and may prescribe the duties, constitution, and procedures thereof.
ARTICLE V Officers
Section 1. Positions. The officers of the Company shall be a president, one or more vice presidents, a secretary, and a treasurer or comptroller, each of whom shall be elected by the board of directors. The board of directors also may designate the chairman of the board as an officer. The offices of the secretary and treasurer or comptroller may be held by the same person and a vice president also may be either the secretary or the treasurer or comptroller. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors also may elect or authorize the appointment of such other officers as the business of the Company may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices.
Section 2. Election and Term of Office. The officers of the Company shall be elected annually at the first meeting of the board of directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officers death, resignation, or removal in the manner hereinafter provided. Election or appointment of an officer, employee, or agent shall not of itself create contractual rights. The board of directors may authorize the Company to enter into an employment contract with any officer in accordance with regulations of the Office; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V.
Section 3. Removal. Any officer may be removed by the board of directors whenever in its judgment the best interests of the Company will be served thereby, but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise may be filled by the board of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors.
Section 6. Age Limitation. No person eighty-five (85) years of age or older shall be eligible for election, reelection, appointment, or reappointment as an officer the Bank. No director shall serve as such beyond the annual meeting of the Bank immediately following the director becoming eighty-five (85)
8
years of age. However, an officer shall, at the option of the board of directors, retire at age sixty-five (65) if the officer has served in an executive or high policy-making position for at least two (2) years immediately prior to retirement and is immediately entitled to nonforfeitable annual retirement benefits of at least twenty percent (20%).
ARTICLE VI Contracts, Loans, Checks, and Deposits
Section 1. Contracts. To the extent permitted by regulations of the Office, and except as otherwise prescribed by these bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee or agent of the Company to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Company. Such authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the Company and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances.
Section 3. Checks, Drafts, etc. All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Company shall be signed by one or more officers, employees, or agents of the Company in such manner as shall from time to time be determined by the board of directors.
Section 4. Deposits. All funds of the Company not otherwise employed shall be deposited from time to time to the credit of the Company in any duly authorized depositories as the board of directors may select.
ARTICLE VII Certificates for Shares and Their Transfer
Section 1. Certificates for Shares. Certificates representing shares of capital stock of the Company shall be in such form as shall be determined by the board of directors and approved by the Office. Such certificates shall be signed by the chief executive officer or by any other officer of the Company authorized by the board of directors, attested by the secretary or an assistant secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar other than the Company itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Company. All certificates surrendered to the Company for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares has been surrendered and cancelled, except that in the case of a lost or destroyed certificate, a new certificate may be issued upon such terms and indemnity to the Company as the board of directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of the Company shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his or her legal representative, who shall furnish proper evidence of such authority, or by his or her attorney authorized by a duly executed power of attorney and filed with the Company. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Company shall be deemed by the Company to be the owner for all purposes.
9
ARTICLE VIII Fiscal Year
The fiscal year of the Company shall end on the last day of December of each year. The appointment of accountants shall be subject to annual ratification by the shareholders.
ARTICLE IX Dividends
Subject only to the terms of the Companys charter and the regulations and orders of the Office, the board of directors may, from time to time, declare, and the Company may pay, dividends on its outstanding shares of capital stock.
ARTICLE X Corporate Seal
The board of directors shall provide a Company seal which shall be two concentric circles between which shall be the name of the Company. The year of incorporation or an emblem may appear in the center.
ARTICLE XI Amendments
These bylaws may be amended in a manner consistent with regulations of the Office and shall be effective after: (i) approval of the amendment by a majority vote of the authorized board of directors, or by a majority vote of the votes cast by the shareholders of the Company at any legal meeting; and (ii) receipt of any applicable regulatory approval. When the Company fails to meet its quorum requirements, solely due to vacancies on the board, then the affirmative vote of a majority of the sitting board will be required to amend the bylaws.
ARTICLE XII Indemnification
The Company shall indemnify its personnel, including directors, officers and employees, to the fullest extent authorized by applicable law and OTS regulations, as the same exists or may hereafter be amended.
ARTICLE XIII Reliance upon Books, Reports and Records
Each director, each member of any committee designated by the board of directors, and each officer of the Company shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Company and upon such information, opinions, reports or statements presented to the Company by any of its officers or employees, or committees of the board of directors so designated, or by any other person as to matters which such director or committee member reasonably believes are within such other persons professional or expert competence and who has been selected with reasonable care by or on behalf of the Company.
10
Exhibit 4
CHARTERED UNDER THE LAWS OF THE UNITED STATES OF AMERICA
No. |
O CONEE F EDERAL F INANCIAL C ORP . | Shares |
Seneca, South Carolina | ||||
CUSIP: | ||||
FULLY PAID AND NON-ASSESSABLE | ||||
PAR VALUE $0.01 PER SHARE | ||||
THE SHARES REPRESENTED BY THIS | ||||
CERTIFICATE ARE SUBJECT TO | ||||
RESTRICTIONS, SEE REVERSE SIDE |
THIS CERTIFIES that | is the owner of |
SHARES OF COMMON STOCK OF
O CONEE F EDERAL F INANCIAL C ORP .
a federally chartered subsidiary holding company
The shares evidenced by this certificate are transferable only on the books of Oconee Federal Financial Corp. by the holder hereof, in person or by attorney, upon surrender of this certificate properly endorsed.
The interest in Oconee Federal Financial Corp. evidenced by this certificate may not be retired or withdrawn except as provided in the Rules and Regulations promulgated by the Office of Thrift Supervision and the charter and bylaws of Oconee Federal Financial Corp. The common stock evidenced hereby is not an account of an insurable type and is not insured by the Federal Deposit Insurance Corporation or any other Federal or state governmental agency .
This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar.
IN WITNESS WHEREOF, Oconee Federal Financial Corp. has caused this certificate to be executed by the facsimile signatures of its duly authorized officers and has caused its seal to be hereunto affixed.
By |
|
[SEAL] | By |
|
||||
ROBERT N. MCLELLAN, JR. | T. RHETT EVATT | |||||||
CORPORATE SECRETARY | PRESIDENT AND CHIEF EXECUTIVE OFFICER |
The Board of Directors of Oconee Federal Financial Corp. (the Company) is authorized by resolution or resolutions, from time to time adopted, to provide for the issuance of more than one class of stock, including preferred stock in series, and to fix and state the voting powers, designations, preferences, limitations and restrictions thereof. The Company will furnish to any stockholder upon request and without charge a full description of each class of stock and any series thereof.
The shares evidenced by this certificate are subject to a limitation contained in the Charter to the effect that in no event shall any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the outstanding shares of common stock (the Limit) be entitled or permitted to any vote in respect of shares held in excess of the Limit.
The shares represented by this Certificate may not be cumulatively voted on any matter.
The following abbreviations when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations.
TEN COM | - | as tenants in common | UNIF GIFT MIN ACT | Custodian | ||||||||
(Cust) | (Minor) | |||||||||||
TEN ENT | - | as tenants by the entireties | ||||||||||
Under Uniform Gifts to Minors Act | ||||||||||||
JT TEN | - | as joint tenants with right of survivorship and not as tenants in common | ||||||||||
(State) |
Additional abbreviations may also be used though not in the above list
For value received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER | ||
(please print or typewrite name and address including postal zip code of assignee) | ||
Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said shares on the books of the within named corporation with full power of substitution in the premises. |
Dated |
|
|||||
In the presence of | Signature: | |||||
|
|
NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME OF THE STOCKHOLDER(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
Exhibit 5
LUSE GORMAN POMERENK & SCHICK
A Professional Corporation
Attorneys at Law
5335 WISCONSIN AVENUE, N.W., SUITE 780
Washington, D.C. 20015
TELEPHONE (202) 274-2000
Facsimile (202) 362-2902
www.luselaw.com
writers direct dial number | writers e-mail | |
(202) 274-2000 |
September 15, 2010
The Board of Directors
Oconee Federal Financial Corp.
201 East North Second Street
Seneca, South Carolina 29678
Re: | Oconee Federal Financial Corp. |
Common Stock Par Value $0.01 Per Share
Ladies and Gentlemen:
You have requested the opinion of this firm as to certain matters in connection with the offer and sale (the Offering) of Oconee Federal Financial Corp. (the Company) Common Stock, par value $0.01 per share (Common Stock). We have reviewed the Companys Charter, Registration Statement on Form S-1, as amended (the Form S-1), as well as applicable statutes and regulations governing the Company and the offer and sale of the Common Stock.
We are of the opinion that upon the declaration of effectiveness of the Form S-1, the Common Stock, when sold pursuant to the Companys prospectus and the Oconee Federal Savings and Loan Association Plan of Reorganization from a Mutual Savings Bank to a Mutual Holding Company and Stock Issuance Plan, will be legally issued, fully paid and non-assessable.
This Opinion has been prepared in connection with the Form S-1. We hereby consent to our firm being referenced under the caption Legal and Tax Matters, and for inclusion as an exhibit to the Registration Statement on Form S-1.
Very truly yours, |
/s/ Luse Gorman Pomerenk & Schick, P.C. |
LUSE GORMAN POMERENK & SCHICK |
A PROFESSIONAL CORPORATION |
Exhibit 8
[FORM OF]
(202) 274-2000
, 20__
Boards of Directors
Oconee Federal Savings and Loan Association
Oconee Federal Financial Corp.
Oconee Federal, MHC
201 N. Second St.
Seneca, South Carolina 29678
Re: | Federal Tax Consequences of Mutual Holding Company Formation and Stock Issuance |
Gentlemen:
We have been requested as special counsel to Oconee Federal Savings and Loan Association, a federally chartered mutual savings association (the Mutual Association, Association, or Stock Association, as the context requires), Oconee Federal, MHC, a to-be-formed federally chartered mutual holding company (Mutual Holding Company) and Oconee Federal Financial Corp., a to-be-formed federally chartered subsidiary holding company with the power to issue stock (Stock Holding Company), to express our opinion concerning material federal income tax consequences relating to the reorganization of the Association from a mutual savings and loan association to a mutual holding company (all steps in such reorganization are collectively referred to herein as the Reorganization) pursuant to that certain Oconee Federal Savings and Loan Association Plan of Reorganization From a Mutual Savings and Loan Association to a Mutual Holding Company and Stock Issuance Plan (the Plan of Reorganization). Concurrently with the Reorganization, Oconee Federal Financial Corp. will offer for sale up to 49.9% of its Common Stock on a priority basis to depositors and Tax-Qualified Employee Plans of Oconee Federal Savings and Loan Association, with any remaining shares offered to the public in a Community Offering or a Syndicated Community Offering, or a combination thereof. Unless otherwise defined, all terms used herein have the meanings given to such terms in the Plan of Reorganization.
Source of Facts . It has been represented to us that the facts set forth herein apply to the Reorganization. In preparing this letter, we relied on the attached, duly authorized and executed representations regarding the Reorganization. If any of the facts are incorrect or incomplete, our discussion and conclusion may be different than those set forth below. We are under no obligation and we expressly disavow any obligation to advise the Association, the Mutual Holding Company or the Stock Holding Company if we learn that the facts are not as they have been represented to us. We have made such investigations as we have deemed relevant or
Boards of Directors
Oconee Federal Savings and Loan Association
Oconee Federal Financial Corp.
Oconee Federal, MHC
, 2010
Page 2
necessary for the purpose of this opinion. In our examination, we have assumed the authenticity of original documents, the accuracy of copies and the genuineness of signatures. In connection therewith, we have examined the Plan of Reorganization and certain other documents of or relating to the Reorganization, some of which are described or referred to in the Plan of Reorganization and which we deemed necessary to examine in order to issue the opinions set forth below.
In our examination, we have assumed the authenticity of original documents, the accuracy of copies and the genuineness of signatures. We have further assumed the absence of adverse facts not apparent from the face of the instruments and documents we examined.
In issuing our opinions, we have assumed that the Plan of Reorganization has been duly and validly authorized and has been approved and adopted by the board of directors of the Association at a meeting duly called and held, that the Association will comply with the terms and conditions of the Plan of Reorganization, and that the various representations and warranties which are provided to us are accurate, complete, true and correct. Accordingly, we express no opinion concerning the effect, if any, of variations from the foregoing. We specifically express no opinion concerning tax matters relating to the Plan of Reorganization under state and local tax laws and under federal income tax laws except on the basis of the documents and assumptions described above.
Source of Law . In issuing the opinions set forth below, we have referred solely to existing provisions of the Internal Revenue Code of 1986, as amended (the Code), existing and proposed Treasury regulations (Treasury Regulations) thereunder, and upon current Internal Revenue Service (the Service) administrative rulings, notices and procedures and court decisions. Such laws, regulations, administrative rulings, notices and procedures and court decisions are subject to change at any time. Any such change could affect the continuing validity of the opinions set forth below. This opinion is as of the date hereof, and we disclaim any obligation to advise you of any change in any matter considered herein after the date hereof.
In rendering our opinions, we have assumed that the persons and entities identified in the Plan of Reorganization will at all times comply with the requirements of Code Section 351, the other applicable state and federal laws and the representations of the Association. In addition, we have assumed that the activities of the persons and entities identified in the Plan of Reorganization will be conducted strictly in accordance with the Plan of Reorganization. Any variations may affect the opinions we are rendering.
Boards of Directors
Oconee Federal Savings and Loan Association
Oconee Federal Financial Corp.
Oconee Federal, MHC
, 2010
Page 3
We emphasize that the outcome of litigation cannot be predicted with certainty and, although we have attempted in good faith to opine as to the probable outcome of the merits of each tax issue with respect to which an opinion was requested, there can be no assurance that our conclusions are correct or that they would be adopted by the Service or a court.
PROPOSED TRANSACTION
On August 19, 2010, the board of directors of the Association adopted the Plan of Reorganization. For what are represented to be valid business purposes, the Associations board of directors has decided to convert to a mutual holding company structure pursuant to statutes. The following steps are proposed:
(i) | The Association will organize an interim stock savings and loan association as a wholly owned subsidiary (Interim One); |
(ii) | Interim One will organize an interim stock savings and loan association as a wholly owned subsidiary (Interim Two); |
(iii) | Interim One will organize the Stock Holding Company as a separate wholly owned subsidiary; |
(iv) | Association will exchange its charter for that of a federal stock savings and loan association charter, becoming Stock Association (the Conversion). Simultaneously, Interim One will cancel its outstanding shares and exchange its charter for a mutual holding company charter to become the Mutual Holding Company. In the Conversion, Associations members will constructively receive shares of stock in Stock Association in exchange for their mutual ownership interests in Mutual Association; |
(v) | Simultaneously, with steps (iii) and (iv), Interim Two will merge with and into Stock Association (the Merger) with Stock Association surviving and Mutual Holding Company receiving stock of Stock Association. In the Merger, the former members of the Association will exchange the stock of Stock Association constructively received in the Conversion for mutual ownership interests in the Mutual Holding Company (the 351 Transaction); |
(vi) | The Mutual Holding Company will contribute the stock of Stock Association to the Stock Holding Company in a constructive exchange for additional Stock Holding Company stock (the Secondary 351 Transaction), and |
Boards of Directors
Oconee Federal Savings and Loan Association
Oconee Federal Financial Corp.
Oconee Federal, MHC
, 2010
Page 4
(vii) | Contemporaneously, with the contribution set forth in (vi), Stock Holding Company will offer to sell up to 49.9% of its Common Stock in the Subscription Offering and, if applicable, the Community Offering. |
Collectively, the above steps are referred to as the Reorganization. Those persons who, as of the date of the Reorganization (the Effective Date), hold depository rights with respect to Mutual Association will thereafter have such rights solely with respect to Stock Association. Each deposit account with Mutual Association at the time of the exchange will become a deposit account in Stock Association in the same amount and upon the same terms and conditions. Following the completion of the Reorganization, all depositors and borrowers who had membership rights with respect to Mutual Association immediately prior to the Reorganization will continue to have such rights solely with respect to Oconee Federal, MHC so long as they continue to hold deposit accounts or borrowings with Stock Association. All new depositors of Stock Association after the completion of the Reorganization will have ownership rights solely with respect to Oconee Federal, MHC so long as they continue to hold deposit accounts with Stock Association.
The shares of Interim Two common stock owned by the Mutual Holding Company prior to the Reorganization shall be converted into and become shares of common stock of the Stock Association on the Effective Date. The shares of Stock Association common stock constructively received by the Stock Association stockholders (formerly the members of the Association holding liquidation and voting rights in the Association) will be transferred to the Mutual Holding Company by such persons in exchange for equity interests (i.e., liquidation and voting rights) in the Mutual Holding Company.
Following the Reorganization, Stock Holding Company will have the power to issue shares of capital stock (including common and preferred stock) to persons other than the Mutual Holding Company. So long as the Mutual Holding Company is in existence, however, it must own a majority of the voting stock of Stock Holding Company. Stock Holding Company may issue any amount of non voting stock to persons other than Mutual Holding Company. No such non voting stock will be issued as of the date of the Reorganization.
LAW AND ANALYSIS
Code Section 368(a)(1)(F) provides that the term reorganization means a mere change in identity, form, or place of organization of one corporation, however effected.
Boards of Directors
Oconee Federal Savings and Loan Association
Oconee Federal Financial Corp.
Oconee Federal, MHC
, 2010
Page 5
Code Section 351(a) provides that no gain or loss will be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in Code Section 368(c)) of the corporation.
Code Section 368(c) provides that control means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.
Code Section 354(a) provides that, in general, no gain or loss shall be recognized if stock or securities in a corporation that is a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation that is a party to the reorganization.
Application of the Law to the Facts Regarding the Conversion .
We believe that the Conversion of the Association from a federally chartered mutual savings and loan association to a federally chartered stock savings and loan association shall be a mere change in identity, form or place of organization under Code Section 368(a)(1)(F).
In Revenue Ruling 2003-48, 2003-1 C.B. 863, the Service ruled that a mutual savings banks conversion to a stock savings bank in a manner substantially similar to the structure at issue was a tax-free reorganization under Code Section 368(a)(1)(F). In Revenue Ruling 2003-48, a state-chartered mutual bank incorporated a mutual holding company initially organized in stock form. Although the mutual holding company was temporarily organized as a stock corporation solely due to regulatory requirements, the parties intended at the time the mutual holding company was organized that it would operate and function in mutual form. In turn, the mutual holding company incorporated two wholly owned subsidiaries, the stock holding company and a transitory stock corporation.
Thereafter, the following events occurred substantially contemporaneously: (i) the State X chartered mutual bank exchanged its State X mutual bank charter for a State X stock savings bank charter and changed its name to stock bank; (ii) the mutual holding company cancelled its outstanding stock and exchanged its charter for a State X mutual holding company charter; and (iii) the transitory stock corporation merged with and into the stock bank with the stock bank surviving as a wholly owned subsidiary of the mutual holding company with the mutual banks members receiving the mutual holding company membership interests in place of their former mutual bank membership interests. Thereafter, the mutual holding company transferred all of its stock bank stock to the stock holding company in exchange for voting stock of the stock holding company. Under applicable State X law, the stock banks corporate existence as a stock savings bank was a continuation of the state-chartered mutual banks corporate existence as a mutual savings bank. Pursuant to the same plan, the stock holding company issued more than 20 percent but less than 50 percent of its common stock to the public in a stock offering.
Boards of Directors
Oconee Federal Savings and Loan Association
Oconee Federal Financial Corp.
Oconee Federal, MHC
, 2010
Page 6
The Service ruled that the exchange of the banks State X mutual bank charter for a State X stock savings bank charter qualified as a reorganization under Code Section 368(a)(1)(F) because the stock bank was a continuation of the state-chartered mutual bank under applicable state law. Because the stock bank was a continuation of the state-chartered mutual bank, the tax attributes of the state-chartered mutual bank continued as tax attributes of the stock bank. Finally, the Service ruled that the subsequent transfer of the stock bank stock to the stock holding company did not prevent the conversion from qualifying as a reorganization under Code Section 368(a)(1)(F).
Furthermore, the Service noted that because the status of the mutual holding company as a stock holding company was transitory, the conversion of the mutual holding company from a stock holding company to a mutual holding company was disregarded.
Similarly, in the Conversion, the Association will exchange its federal mutual savings and loan association charter for a federal stock savings and loan association charter. Simultaneous with the Conversion and pursuant to the Plan of Reorganization, the Stock Association shareholders (having constructively received shares of Stock Association stock in the Conversion) will transfer all of their stock in Stock Association to Mutual Holding Company in exchange for an ownership interest in the Mutual Holding Company. Following the Conversion, Stock Association will continue to operate as a continuation of Association under federal law with the same deposit accounts, and assets and liabilities. Consequently, we believe that because Stock Association is a continuation of Association under federal law, the Conversion from the Association to the Stock Association qualifies as a tax-free reorganization under Code Section 368(a)(1)(F). The subsequent transfer of Stock Association stock to Stock Holding Company does not prevent the conversion from qualifying as a reorganization under Code Section 368(a)(1)(F).
Application of the Law to the Facts Regarding the 351 Transaction .
In Revenue Ruling 2003-48, the Service also ruled that because the former owners of the state-chartered mutual bank were in control (within the meaning of Code Section 368(c)) of the mutual holding company, their transfer of their equity interests in the state-chartered mutual bank to the mutual holding company, in exchange for membership interests in the mutual holding company, qualified as a transfer described in Code Section 351. Furthermore, that transaction qualified as a transfer described in Code Section 351, even though the mutual holding company transferred all of its stock bank stock to the stock holding company.
Boards of Directors
Oconee Federal Savings and Loan Association
Oconee Federal Financial Corp.
Oconee Federal, MHC
, 2010
Page 7
Similarly, in the 351 Transaction the former members of the Association will exchange the stock of Stock Association constructively received in the Conversion for mutual ownership interests in the Mutual Holding Company, and will immediately thereafter collectively own 100 percent of the equity interests in the Mutual Holding Company. Accordingly, we believe that the 351 Transaction will qualify as a tax-free exchange of property solely for stock (i.e. membership interests in the Mutual Holding Company) under Code Section 351.
Application of the Law to the Facts Regarding the Secondary 351 Transaction .
The Service ruled in Revenue Ruling 2003-48 that the mutual holding companys contribution of the stock of the stock bank to the stock holding company solely in exchange for shares of stock holding companys voting common stock constitutes a transfer described in Code Section 351. Similar to the 351 Transaction, the Mutual Holding Company will contribute the stock of Stock Association received from the former Stock Association shareholders to the Stock Holding Company in a constructive exchange for additional Stock Holding Company stock. Because Mutual Holding Company owns 100 percent of the outstanding shares of stock of Stock Holding Company, no additional shares of Stock Holding Company stock will be issued to Mutual Holding Company. An issuance of additional shares to the Mutual Holding Company would be meaningless. Accordingly, we believe that the Secondary 351 Transaction will also qualify as a tax-free exchange of property solely for stock under Code Section 351.
SUMMARY OF OPINIONS
Based on the facts, representations and assumptions set forth herein, we are of the opinion that:
With Respect to the Conversion:
1. The conversion of Oconee Federal Savings and Loan Associations charter from a mutual savings and loan association charter to a stock savings and loan association charter will qualify as a reorganization within the meaning of Section 368(a)(1)(F) of the Code, and no gain or loss will be recognized by Oconee Federal Savings and Loan Association in either its mutual form or stock form. (Rev. Rul. 2003-48, 2003-19 I.R.B. 863).
2. Stock Associations holding period in the assets received from Mutual Association will include the period during which such assets were held by Mutual Association. (Code Section 1223(2)).
Boards of Directors
Oconee Federal Savings and Loan Association
Oconee Federal Financial Corp.
Oconee Federal, MHC
, 2010
Page 8
3. Stock Associations basis in the assets of Oconee Federal Savings and Loan Association will be the same as the basis of such assets in the hands of Mutual Association immediately prior to the Reorganization. (Code Section 362(b)).
4. Mutual Association members will recognize no gain or loss upon the constructive receipt of solely Stock Association common stock in exchange for their membership interests in Mutual Association. (Code Section 354(a)(1)).
5. Stock Association will succeed to and take into account Mutual Associations earnings and profits or deficit in earnings and profits, as of the date of the Reorganization. (Code Section 381).
6. For purposes of Section 381, Stock Association will be treated the same as Mutual Association, and therefore, Mutual Associations tax year will not end merely as a result of the conversion of Mutual Association to stock form and Stock Association will not be required to obtain a new employee identification number. (Treas. Reg. Section 1.381(b)-2 and Rev. Rul. 73-526, 1973-2 CB. 404).
7. No gain or loss shall be recognized by Eligible Account Holders, Supplemental Eligible Account Holders or Other Members of Mutual Association on the issuance to them of withdrawable deposit accounts in Stock Association plus liquidation rights with respect to Mutual Holding Company, in exchange for their deposit accounts in the Mutual Association or to the other depositors on the issuance to them of withdrawable deposit accounts. (Code Section 354(a)).
8. It is more likely than not that the fair market value of the subscription rights to purchase Common Stock is zero. Accordingly, no gain or loss will be recognized by Eligible Account Holders, Supplemental Eligible Account Holders or Other Members upon the distribution to them of the nontransferable subscription rights to purchase shares of stock of Stock Holding Company. Gain realized, if any, by the Eligible Account Holders, Supplemental Eligible Account Holders and Other Members on the distribution to them of nontransferable subscription rights to purchase shares of Common Stock will be recognized but only in an amount not in excess of the fair market value of such subscription rights. (Code Section 356(a)). Eligible Account Holders and Supplemental Eligible Account Holders will not realize any taxable income as a result of the exercise by them of the nontransferable subscription rights (Rev. Rul. 56-572, 1956-2 C.B. 182).
Boards of Directors
Oconee Federal Savings and Loan Association
Oconee Federal Financial Corp.
Oconee Federal, MHC
, 2010
Page 9
9. The basis of the deposit accounts in the Stock Association to be received by the Eligible Account Holders, Supplemental Eligible Account Holders and Other Members of the Mutual Association will be the same as the basis of their deposit accounts in Mutual Association surrendered in exchange therefor. (Code Section 358(a)(1)). The basis of the interests in the liquidation rights in Mutual Holding Company to be received by the Eligible Account Holders, Supplemental Eligible Account Holders, and Other Members of Mutual Association shall be zero. (Rev. Rul. 71-233, 1971-1 C.B. 113).
With Respect to the 351 Transaction:
10. The exchange of Stock Association common stock constructively received by Eligible Account Holders, Supplemental Eligible Account Holders and Other Members in exchange for membership interests in Mutual Holding Company will constitute a tax-free exchange of property solely for stock pursuant to Section 351 of the Code. (Rev. Rul. 2003-48, 2003-19 I.R.B. 863).
11. Eligible Account Holders, Supplemental Eligible Account Holders and Other Members will recognize no gain or loss upon the transfer of Stock Association common stock (which they constructively received in the conversion of Mutual Association to stock form) to Mutual Holding Company solely in exchange for membership interests in Mutual Holding Company. (Code Section 351).
12. Eligible Account Holders, Supplemental Eligible Account Holders and Other Members basis in the Mutual Holding Company membership interests received in the transaction (which basis is zero) will be the same as the basis of the property transferred in exchange therefor. (Code Section 358(a)(1)).
13. Mutual Holding Company will recognize no gain or loss upon the receipt of property from Eligible Account Holders, Supplemental Eligible Account Holders and Other Members in exchange for membership interests in Mutual Holding Company. (Code Section 1032(a)).
14. Mutual Holding Companys basis in the property received from Eligible Account Holders, Supplemental Eligible Account Holders and Other Members (which basis is zero) will be the same as the basis of such property in the hands of Eligible Account Holders, Supplemental Eligible Account Holders and Other Members immediately prior to the transaction. (Code Section 362(a)).
Boards of Directors
Oconee Federal Savings and Loan Association
Oconee Federal Financial Corp.
Oconee Federal, MHC
, 2010
Page 10
15. Mutual Holding Companys holding period for the property received from Eligible Account Holders, Supplemental Eligible Account Holders and Other Members will include the period during which such property was held by such persons. (Code Section 1223(2)).
With Respect to the Secondary 351 Transaction:
16. Mutual Holding Company and the persons who purchased Common Stock of Stock Holding Company in the Subscription and Community Offering (Minority Stockholders) will recognize no gain or loss upon the transfer of Stock Association stock and cash, respectively, to Stock Holding Company in exchange for stock in Oconee Federal Financial Corp. (Code Section 351(a)).
17. Stock Holding Company will recognize no gain or loss on its receipt of Stock Association stock and cash in exchange for Stock Holding Company Common Stock. (Code Section 1032(a)).
18. Mutual Holding Companys basis in the Stock Holding Company Common Stock received in the Secondary 351 Transaction will be the same as its basis in the Stock Association stock transferred. (Code Section 358(a)(1)).
19. Mutual Holding Companys holding period in the Stock Holding Company Common Stock received will include the period during which it held the Stock Association common stock, provided that such property was a capital asset on the date of the exchange. (Code Section 1223(1)).
20. Stock Holding Companys basis in the Stock Association stock received from Mutual Holding Company will be the same as the basis of such property in the hands of Mutual Holding Company. (Code Section 362(a)).
21. Stock Holding Companys holding period for the Stock Association stock received from Mutual Holding Company will include the period during which such property was held by Mutual Holding Company. (Code Section 1223(2)).
22. It is more likely than not that the basis of the Stock Holding Company Common Stock to its stockholders will be the purchase price thereof. (Code Section 1012). The holding period of the Common Stock purchased pursuant to the exercise of subscription rights shall commence on the date on which the right to acquire such stock was exercised. (Code Section 1223(6)).
Boards of Directors
Oconee Federal Savings and Loan Association
Oconee Federal Financial Corp.
Oconee Federal, MHC
, 2010
Page 11
The opinions set forth above represent our conclusions as to the application of existing Federal income tax law to the facts of the instant transaction, and we can give no assurance that changes in such law, or in the interpretation thereof, will not affect the opinions expressed by us. Moreover, there can be no assurance that contrary positions may not be taken by the IRS, or that a court considering the issues would not hold contrary to such opinions.
Our opinion under paragraph 8 above is predicated on the representation that no person shall receive any payment, whether in money or property, in lieu of the issuance of subscription rights. With respect to our opinion under paragraphs 8 and 22, we note that the subscription rights will be granted at no cost to the recipients, will be legally non-transferable and of short duration, and will provide the recipient with the right only to purchase shares of Common Stock at the same price to be paid by members of the general public in any Community Offering. We also note that McAuliffe Financial, LLC has issued a letter to the Board of Directors of Oconee Federal Financial Corp. and Oconee Federal Savings and Loan Association dated , 2010 that the subscription rights will have no ascertainable fair market value. Finally, we note that the Internal Revenue Service has not in the past concluded that subscription rights have value.
If the subscription rights are subsequently found to have a fair market value, income may be recognized by various recipients of the subscription rights (in certain cases, whether or not the rights are exercised) and the Stock Holding Company and/or the Stock Association may be taxable on the distribution of the subscription rights.
All of the opinions set forth above are qualified to the extent that the validity of any provision of any agreement may be subject to or affected by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally. We do not express any opinion as to the availability of any equitable or specific remedy upon any breach of any of the covenants, warranties or other provisions contained in any agreement. We have not examined, and we express no opinion with respect to the applicability of, or liability under, any Federal, state or local law, ordinance, or regulation governing or pertaining to environmental matters, hazardous wastes, toxic substances, asbestos, or the like.
It is expressly understood that the opinions set forth above represent our conclusions based upon the documents reviewed by us and the facts presented to us. Any material amendments to such documents or changes in any significant fact would affect the opinions expressed herein.
Boards of Directors
Oconee Federal Savings and Loan Association
Oconee Federal Financial Corp.
Oconee Federal, MHC
, 2010
Page 12
We have not been asked to, and we do not, render any opinion with respect to any matters other than those expressly set forth above.
We hereby consent to the filing of the opinion as an exhibit to the Associations combined Form MHC-1/MHC-2 Notice of MHC Reorganization and Application for Approval of a Minority Stock Issuance by a Subsidiary of MHC, and as an exhibit to the Stock Holding Companys Application on Form H-(e)1-S, as filed with the OTS and Stock Holding Companys Registration Statement on Form S-1 as filed with the SEC. We also consent to the references to our firm in the Prospectus contained in the Forms MHC-1/MHC-2, H-(e)1-S, and S-1 under the captions The Reorganization and the Stock Offering - Tax Effects of the Reorganization and Legal and Tax Matters, and to the summarization of our opinion in such Prospectus.
Very truly yours, |
LUSE GORMAN POMERENK & SCHICK A Professional Corporation |
Exhibit 10.1
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
EMPLOYEE STOCK OWNERSHIP PLAN
(adopted effective January 1, 2011)
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
EMPLOYEE STOCK OWNERSHIP PLAN
The Oconee Federal Savings and Loan Association Employee Stock Ownership Plan (the Plan) has been executed on , 2010, effective as of the 1 st day of January, 2011, by Oconee Federal Savings and Loan Association, a federally chartered savings association (the Association).
W I T N E S S E T H T H A T
WHEREAS, the Board of Directors of the Association has resolved to adopt an employee stock ownership plan for eligible employees of the Association and subsidiaries of the Association, if any, in accordance with the terms and conditions set forth herein.
NOW, THEREFORE, the Association hereby adopts the Plan setting forth the terms and conditions pertaining to contributions by the Association and the payment of benefits to Participants and Beneficiaries.
IN WITNESS WHEREOF, the Association has adopted this Plan and caused this instrument to be executed by its duly authorized officers as of the above date.
ATTEST: | OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION | |||||
|
By: |
|
||||
Secretary | President and Chief Executive Officer |
C O N T E N T S
Page No. | ||||
Section 1. |
Plan Identity |
1 | ||
1.1 |
Name |
1 | ||
1.2 |
Purpose |
1 | ||
1.3 |
Effective Date |
1 | ||
1.4 |
Fiscal Period |
1 | ||
1.5 |
Single Plan for All Employers |
1 | ||
1.6 |
Interpretation of Provisions |
1 | ||
Section 2. |
Definitions |
1 | ||
Section 3. |
Eligibility for Participation |
9 | ||
3.1 |
Initial Eligibility |
9 | ||
3.2 |
Definition of Eligibility Year |
10 | ||
3.3 |
Terminated Employees |
10 | ||
3.4 |
Certain Employees Ineligible |
10 | ||
3.5 |
Participation and Reparticipation |
10 | ||
3.6 |
Omission of Eligible Employee |
10 | ||
3.7 |
Inclusion of Ineligible Employee |
10 | ||
Section 4. |
Contributions and Credits |
10 | ||
4.1 |
Discretionary Contributions |
10 | ||
4.2 |
Contributions for Exempt Loans |
11 | ||
4.3 |
Conditions as to Contributions |
11 | ||
4.4 |
Rollover Contributions |
11 | ||
Section 5. |
Limitations on Contributions and Allocations |
12 | ||
5.1 |
Limitation on Annual Additions |
12 | ||
5.2 |
Effect of Limitations |
13 | ||
5.3 |
Limitations as to Certain Participants |
13 | ||
5.4 |
Erroneous Allocations |
14 | ||
Section 6. |
Trust Fund and Its Investment |
14 | ||
6.1 |
Creation of Trust Fund |
14 | ||
6.2 |
Stock Fund and Investment Fund |
14 | ||
6.3 |
Acquisition of Stock |
14 | ||
6.4 |
Participants Option to Diversify |
15 | ||
Section 7. |
Voting Rights and Dividends on Stock |
16 | ||
7.1 |
Voting and Tendering of Stock |
16 | ||
7.2 |
Application of Dividends |
16 | ||
Section 8. |
Adjustments to Accounts |
18 | ||
8.1 |
ESOP Allocations |
18 | ||
8.2 |
Charges to Accounts |
18 | ||
8.3 |
Stock Fund Account |
18 | ||
8.4 |
Investment Fund Account |
19 | ||
8.5 |
Adjustment to Value of Trust Fund |
19 | ||
8.6 |
Participant Statements |
19 |
Section 9. |
Vesting of Participants Interests |
19 | ||
9.1 |
Deferred Vesting in Accounts |
19 | ||
9.2 |
Computation of Vesting Years |
19 | ||
9.3 |
Full Vesting Upon Certain Events |
20 | ||
9.4 |
Full Vesting Upon Plan Termination |
21 | ||
9.5 |
Forfeiture, Repayment, and Restoral |
21 | ||
9.6 |
Accounting for Forfeitures |
22 | ||
9.7 |
Vesting and Nonforfeitability |
22 | ||
Section 10. |
Payment of Benefits |
22 | ||
10.1 |
Benefits for Participants |
22 | ||
10.2 |
Time for Distribution |
22 | ||
10.3 |
Marital Status |
23 | ||
10.4 |
Delay in Benefit Determination |
24 | ||
10.5 |
Accounting for Benefit Payments |
24 | ||
10.6 |
Options to Receive Stock |
24 | ||
10.7 |
Restrictions on Disposition of Stock |
25 | ||
10.8 |
Continuing Loan Provisions; Creations of Protections and Rights |
25 | ||
10.9 |
Direct Rollover of Eligible Distribution |
25 | ||
10.10 |
Waiver of 30-Day Period After Notice of Distribution |
26 | ||
Section 11. |
Rules Governing Benefit Claims and Review of Appeals |
26 | ||
11.1 |
Claim for Benefits |
26 | ||
11.2 |
Notification by Committee |
26 | ||
11.3 |
Claims Review Procedure |
27 | ||
Section 12. |
The Committee and its Functions |
27 | ||
12.1 |
Authority of Committee |
27 | ||
12.2 |
Identity of Committee |
27 | ||
12.3 |
Duties of Committee |
27 | ||
12.4 |
Valuation of Stock |
28 | ||
12.5 |
Compliance with ERISA |
28 | ||
12.6 |
Action by Committee |
28 | ||
12.7 |
Execution of Documents |
28 | ||
12.8 |
Adoption of Rules |
28 | ||
12.9 |
Responsibilities to Participants |
28 | ||
12.10 |
Alternative Payees in Event of Incapacity |
28 | ||
12.11 |
Indemnification by Employers |
28 | ||
12.12 |
Nonparticipation by Interested Member |
29 | ||
Section 13. |
Adoption, Amendment, or Termination of the Plan |
29 | ||
13.1 |
Adoption of Plan by Other Employers |
29 | ||
13.2 |
Plan Adoption Subject to Qualification |
29 | ||
13.3 |
Right to Amend or Terminate |
29 |
(ii)
Section 14. |
Miscellaneous Provisions |
30 | ||
14.1 |
Plan Creates No Employment Rights |
30 | ||
14.2 |
Nonassignability of Benefits |
30 | ||
14.3 |
Limit of Employer Liability |
30 | ||
14.4 |
Treatment of Expenses |
30 | ||
14.5 |
Number and Gender |
30 | ||
14.6 |
Nondiversion of Assets |
30 | ||
14.7 |
Separability of Provisions |
30 | ||
14.8 |
Service of Process |
30 | ||
14.9 |
Governing State Law |
30 | ||
14.10 |
Employer Contributions Conditioned on Deductibility |
30 | ||
14.11 |
Unclaimed Accounts |
31 | ||
14.12 |
Qualified Domestic Relations Order |
31 | ||
14.13 |
Use of Electronic Media to Provide Notices and Make Participant Elections |
32 | ||
14.14 |
Acquisition of Securities |
32 | ||
Section 15. |
Top-Heavy Provisions |
32 | ||
15.1 |
Top-Heavy Plan |
32 | ||
15.2 |
Definitions |
32 | ||
15.3 |
Top-Heavy Rules of Application |
33 | ||
15.4 |
Minimum Contributions |
34 | ||
15.5 |
Top-Heavy Provisions Control in Top-Heavy Plan |
34 |
(iii)
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION
EMPLOYEE STOCK OWNERSHIP PLAN
Section 1. Plan Identity .
1.1 Name . The name of this Plan is Oconee Federal Savings and Loan Association Employee Stock Ownership Plan.
1.2 Purpose . The purpose of this Plan is to describe the terms and conditions under which contributions made pursuant to the Plan will be credited and paid to the Participants and their Beneficiaries.
1.3 Effective Date . The Effective Date of this Plan is January 1, 2011.
1.4 Fiscal Period . This Plan shall be operated on the basis of a January 1 to December 31 fiscal year for the purpose of keeping the Plans books and records and distributing or filing any reports or returns required by law.
1.5 Single Plan for All Employers . This Plan shall be treated as a single plan with respect to all participating Employers for the purpose of crediting contributions and forfeitures and distributing benefits, determining whether there has been any termination of Service, and applying the limitations set forth in Section 5.
1.6 Interpretation of Provisions . The Employers intend this Plan and the Trust Agreement to be a qualified stock bonus plan under Section 401(a) of the Code and an employee stock ownership plan within the meaning of Section 407(d)(6) of ERISA and Section 4975(e)(7) of the Code. The Plan is intended to have its assets invested primarily in qualifying employer securities of one or more Employers within the meaning of Section 407(d)(3) of ERISA, and to satisfy any requirement under ERISA or the Code applicable to such a plan.
Accordingly, the Plan and Trust Agreement shall be interpreted and applied in a manner consistent with this intent and shall be administered at all times and in all respects in a nondiscriminatory manner.
Section 2. Definitions .
The following capitalized words and phrases shall have the meanings specified when used in this Plan and in the Trust Agreement, unless the context clearly indicates otherwise:
Account means a Participants interest in the assets accumulated under this Plan as expressed in terms of a separate account balance which is periodically adjusted to reflect his Employers contributions, the Plans investment experience, and distributions and forfeitures.
Active Participant means a Participant who has satisfied the eligibility requirements under Section 3 of this Plan and who has at least 1,000 Hours of Service during the current Plan Year. However, a Participant shall not qualify as an Active Participant unless (i) he is in active Service with an Employer as of the last day of the Plan Year (except this requirement shall not apply if the Participant terminated employment during the Plan Year due to Disability, death or Normal Retirement), or (ii) he is on a Recognized Absence as of that date.
Association means Oconee Federal Savings and Loan Association and any entity which succeeds to the business of Oconee Federal Savings and Loan Association and adopts this Plan as its own pursuant to Section 13.1 of the Plan.
Beneficiary means the person or persons who are designated by a Participant to receive benefits payable under the Plan on the Participants death. In the absence of any designation or if all the designated Beneficiaries shall die before the Participant dies or shall die before all benefits have been paid, the Participants Beneficiary shall be his surviving Spouse, if any, or his estate if he is not survived by a Spouse. The Committee may rely upon the advice of the Participants executor or administrator as to the identity of the Participants Spouse.
Break in Service means any Plan Year, or, for the initial eligibility computation period under Section 3.2, the 12-consecutive month period beginning on the first day of which an Employee has an Hour of Service, in which an Employee has 500 or fewer Hours of Service. Solely for this purpose, an Employee shall be considered employed for his normal hours of paid employment during a Recognized Absence (said Employee shall not be credited with more than 501 Hours of Service to avoid a Break in Service), unless he does not resume his Service at the end of the Recognized Absence. Further, if an Employee is absent for any period (i) by reason of the Employees pregnancy, (ii) by reason of the birth of the Employees child, (iii) by reason of the placement of a child with the Employee in connection with the Employees adoption of the child, or (iv) for purposes of caring for such child for a period beginning immediately after such birth or placement, the Employee shall be credited with the Hours of Service which would normally have been credited but for such absence, up to a maximum of 501 Hours of Service.
Code means the Internal Revenue Code of 1986, as amended.
Committee means the committee responsible for the administration of this Plan in accordance with Section 12.
Company means Oconee Federal Financial Corp., the holding company of the Association, and any successor entity which succeeds to the business of the Company.
Compensation means Form W-2, Box 1 income.
For purposes of this Section, the determination of Compensation shall be made by:
(a) including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Sections 125, 132(f)(4), 402(g)(3), or 457 of the Code, and Employee contributions described in Section 414(h)(2) of the Code that are treated as Employer contributions.
(b) including any portion of the Plan Year in which the Employee had not yet entered the Plan (e.g., the period before the Participants Entry Date).
Compensation in excess of $245,000 (or such other amount provided in the Code) shall be disregarded. Such amount shall be adjusted for increases in the cost of living in accordance with Section 40l(a)(17)(B) of the Code, except that the dollar increase in effect on January 1 of any calendar year shall be effective for the Plan Year beginning with or within such calendar year. For any short Plan Year, the Compensation limit shall be an amount equal to the Compensation limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12).
Disability means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. An individual shall not be considered to be permanently and totally disabled unless he furnishes proof of the existence thereof in such form and manner, and at such times, as the Committee may require.
-2-
Eligible Employee means an Employee, other than an Employee identified in Section 3.4, who has both (i) satisfied the age requirement of Section 3.1(ii) and (ii) has performed 1,000 Hours of Service in the applicable Eligibility Year in accordance with Section 3.2.
Employee means any individual who is or has been employed by an Employer. Employee also means an individual employed by a leasing organization who, pursuant to an agreement between an Employer and the leasing organization, has performed services for the Employer and any related persons (within the meaning of Section 414(n)(6) of the Code) on a substantially full-time basis for more than one year, if such services are performed under the primary direction or control of the Employer. However, such a leased employee shall not be considered an Employee if (i) he participates in a money purchase pension plan sponsored by the leasing organization which provides for immediate participation, immediate full vesting, and an annual contribution of at least 10 percent of the Employees 415 Compensation, and (ii) leased employees do not constitute more than 20 percent of the Employers total work force (including leased employees, but excluding Highly Paid Employees and any other Employees who have not performed services for the Employer on a substantially full-time basis for at least one year).
Employer means the Association or any affiliate within the purview of section 414(b), (c) or (m) and 415(h) of the Code, any other corporation, partnership, or proprietorship which adopts this Plan with the Associations consent pursuant to Section 13.1, and any entity which succeeds to the business of any Employer and adopts the Plan pursuant to Section 13.2.
Entry Date means the Effective Date and each January 1, April 1, July 1 and October 1 coincident with or next following the Effective Date.
ERISA means the Employee Retirement Income Security Act of 1974 (P.L. 93-406, as amended).
Exempt Loan means an indebtedness arising from any extension of credit to the Plan or the Trust which satisfies the requirements set forth in Section 6.3 and which was obtained for any or all of the following purposes:
(i) to acquire qualifying Employer securities as defined in Treasury Regulations §54.4975-12;
(ii) to repay such Exempt Loan; or
(iii) to repay a prior exempt loan.
415 Compensation
(a) shall mean wages within the meaning of Code Section 3401(a) and all other payments of compensation to an Employee by the Employer (in the course of the Employers trade or business) for which the Employer is required to furnish the Employee a written statement under Code Sections 6041(d), 6051(a)(3), and 6052. Compensation must be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)).
-3-
(b) 415 Compensation shall include elective contributions. For this purpose, elective contributions are elective deferrals (as defined in Code Section 402(g)(3)) and amounts contributed or deferred by the Employer at the election of the Employee which are not includible in the gross income of the Employee by reason of Code Section 125 (including any deemed Code Section 125 compensation), 132(f)(4), or 457.
(d) Taxable post-severance payments from a non-qualified, unfunded deferred compensation plan shall be included in the definition of Section 415 Compensation, but only if such amounts are paid within the later of (i) 2 1 / 2 months after severance from employment or (ii) the end of the limitation year that includes the date of severance that are payments that, absent a severance from employment, would have been paid to the Participant as regular compensation for services, or payments from accrued bona-fide sick, vacation, or other leave. To the extent permitted by Treasury Regulations Section 1.415-1 et seq ., such limitations shall not apply to disabled Participants and to Participants who severed employment due to qualified military service. Severance from employment shall be interpreted as set forth in Treasury Regulations Section 1.401(k)-1 et seq .
(d) 415 Compensation shall include amounts that are includible in income under Code Section 409A or Code Section 457(f)(1)(A).
(e) 415 Compensation in excess of $245,000 (as indexed) shall be disregarded for all Participants. For purposes of this sub-section, the $245,000 limit shall be referred to as the applicable limit for the Plan Year in question. The $245,000 limit shall be adjusted for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code, effective for the Plan Year which begins within the applicable calendar year. For purposes of the applicable limit, 415 Compensation shall be prorated over short Plan Years and only compensation for the portion of the Plan Year during which the individual was a Participant shall be taken into account.
(f) 415 Compensation shall also include the following types of compensation paid after a Participants severance from employment with the Employer, provided that amounts described in paragraphs (i) or (ii) below shall only be included as 415 Compensation to the extent such amounts are paid by the later of 2 1 / 2 months after severance from employment, or by the end of the limitation year that includes the date of such severance from employment.
(i) Regular Pay. 415 Compensation shall include regular pay after severance from employment if (a) the payment is for regular compensation for services during the Participants regular working hours, or compensation for services outside of the Participants regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments, and (b) the payment would have been paid to the Participant prior to severance from employment if the Participant had continued in employment with the Employer.
(ii) Leave Cashouts. 415 Compensation shall include leave cashouts if those amounts would have been included in the definition of 415 Compensation if they were earned prior to the Participants severance from employment, and the amounts are payment for unused accrued bona fide sick, vacation or other leave, but only if the Participant would have been able to use the leave if his employment had continued.
(g) 415 Compensation shall also include differential wage payments (as defined in Code Section 3401(h)) paid by the Employer to a former Employee who is performing qualified military services (as defined in Code Section 414(u)(1)) but only to the extent that those differential wage payments do not exceed the amounts the individual would have received if the individual had continued to perform services for the Employer rather than entering qualified military service.
-4-
Highly Paid Employee for any Plan Year means an Employee who, during either that or the immediately preceding Plan Year was at any time a five percent owner of the Employer (as defined in Code Section 416(i)(1)) or, during the immediately preceding Plan Year, had 415 Compensation exceeding $110,000 and was among the most highly compensated one-fifth of all Employees (the $110,000 amount is adjusted at the same time and in the same manner as under Code Section 415(d)). For these purposes, the most highly compensated one-fifth of all Employees shall be determined by taking into account all individuals working for all related Employer entities described in the definition of Service, but excluding any individual who has not completed six months of Service, who normally works fewer than 17 1 / 2 hours per week or in fewer than six months per year, who has not reached age 21, whose employment is covered by a collective bargaining agreement, or who is a nonresident alien who receives no earned income from United States sources. The applicable year for which a determination is being made is called a determination year and the preceding 12-month period is called a look-back year.
Hours of Service means hours to be credited to an Employee under the following rules:
(a) Each hour for which an Employee is paid or is entitled to be paid for services to an Employer is an Hour of Service.
(b) Each hour for which an Employee is directly or indirectly paid or is entitled to be paid for a period of vacation, holidays, illness, disability, lay-off, jury duty, temporary military duty, or leave of absence is an Hour of Service. However, except as otherwise specifically provided, no more than 501 Hours of Service shall be credited for any single continuous period which an Employee performs no duties. No more than 501 Hours of Service will be credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period). Further, no Hours of Service shall be credited on account of payments made solely under a plan maintained to comply with workers compensation, unemployment compensation, or disability insurance laws, or to reimburse an Employee for medical expenses.
(c) Each hour for which back pay (ignoring any mitigation of damages) is either awarded or agreed to by an Employer is an Hour of Service. However, no more than 501 Hours of Service shall be credited for any single continuous period during which an Employee would not have performed any duties. The same Hours of Service will not be credited both under paragraph (a) or (b) as the case may be, and under this paragraph (c). These hours will be credited to the employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award agreement or payment is made.
(d) Hours of Service shall be credited in any one period only under one of the foregoing paragraphs (a), (b) and (c); an Employee may not get double credit for the same period.
(e) If an Employer finds it impractical to count the actual Hours of Service for any class or group of non-hourly Employees, each Employee in that class or group shall be credited with 45 Hours of Service for each weekly pay period in which he has at least one Hour of Service. However, an Employee shall be credited only for his normal working hours during a paid absence.
(f) Hours of Service to be credited on account of a payment to an Employee (including back pay) shall be recorded in the period of Service for which the payment was made. If the period overlaps two or more Plan Years, the Hours of Service credit shall be allocated in proportion to the
-5-
respective portions of the period included in the several Plan Years. However, in the case of periods of 31 days or less, the Administrator may apply a uniform policy of crediting the Hours of Service to either the first Plan Year or the second.
(g) In all respects an Employees Hours of Service shall be counted as required by Section 2530.200b-2(b) and (c) of the Department of Labors regulations under Title I of ERISA.
Investment Fund means that portion of the Trust Fund consisting of assets other than Stock. Notwithstanding the above, assets from the Investment Fund may be used to purchase Stock in the open market or otherwise, or used to pay on the Exempt Loan, and shares so purchased will be allocated to a Participants Stock Fund.
Normal Retirement means retirement on or after the Participants Normal Retirement Date.
Normal Retirement Date means the first day of the month coincident with or next following the Participants 65 th birthday.
Participant means any Eligible Employee who is an Active Participant participating in the Plan, or Eligible Employee or former Employee who was previously an Active Participant and still has a balance credited to his Account.
Period of Uniformed Service means the length of time that an Employee serves in the Uniformed Services.
Plan Year means the twelve-month period commencing January 1, 2011 and ending December 31, 2011 and each period of 12 consecutive months beginning on January 1 of each succeeding year.
Recognized Absence means a period for which
(a) an Employer grants an Employee a leave of absence for a limited period, but only if an Employer grants such leave on a nondiscriminatory basis; or
(b) an Employee is temporarily laid off by an Employer because of a change in business conditions; or
(c) an Employee is on active military duty, but only to the extent that his employment rights are protected by the Military Selective Service Act of 1967 (38 U.S.C. Sec. 2021).
Reemployment After a Period of Uniformed Service
(a) Reemployment (or Reemployed) After a Period of Uniformed Service means that an Employee returned to employment with a Participating Employer, within the time frame set forth in subparagraph (b) below, after a Period of Uniformed Service in the Uniformed Services and the following rules corresponding to provisions of the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) apply: (i) he or she gives sufficient notice of leave to the Participating Employer prior to commencing a Period of Uniformed Service, or is excused from providing such notice; (ii) his or her employment with the Participating Employer prior to a Period of Uniformed Service was not of a brief, nonrecurrent nature that would preclude a reasonable expectation that such employment would continue indefinitely or for a significant period; (iii) the Participating Employers circumstances have not changed so that reemployment is unreasonable or an undue hardship to the Participating Employer; and (iv) the applicable cumulative Periods of Uniformed Service under USERRA equals five years or less, unless service in the Uniformed Services:
(1) in excess of five years is required to complete an initial Period of Uniformed Service;
-6-
(2) prevents the Participant from obtaining orders releasing him or her from such Period of Uniformed Service prior to the expiration of a five-year period (through no fault of the Participant);
(3) is required in the National Guard for drill and instruction, field exercises or active duty training, or to fulfill necessary additional training, or to fulfill necessary additional training requirements certified in writing by the Secretary of the branch of Uniformed Services concerned; or
(4) for a Participant is
(A) required other than for training under any provisions of law during a war or national agency declared by the President or Congress;
(B) required (other than for training) in support of an operational mission for which personnel have been ordered to active duty other than during war or national emergency;
(C) required in support of a critical mission or requirement of the Uniformed Services; or
(D) the result of being called into service as a member of the National Guard by the President in the case of rebellion or danger of rebellion against the authority of the United States Government or if the President is unable to execute the laws of the United States with the regular forces.
(b) The applicable statutory time frames within which an Employee must report to a Participating Employer after a Period of Uniformed Service are as follows:
(1) If the Period of Uniformed Service was less than 31 days,
(A) not later than the beginning of the first full regularly scheduled work period on the first full calendar day following the completion of the Period of Uniformed Service and the expiration of eight hours after a period of time allowing for the safe transportation of the Employee from the place of service in the Uniformed Services to the Employees residence; or
(B) as soon as possible after the expiration of the eight-hour period of time referred to in Clause (A), if reporting within the period referred to in such clause is impossible or unreasonable through no fault of the Employee.
(2) In the case of an Employee whose Period of Uniformed Service was for more than 30 days but less than 181 days, by submitting an application for reemployment with a Participating Employer not later than 14 days after the completion of the Period of Uniformed Service or, if submitting such application within such period is impossible or unreasonable through no fault of the Employee, the next first full calendar day when submission of such application becomes reasonable.
-7-
(3) In the case of an Employee whose Period of Uniformed Service was for more than 180 days, by submitting an application for reemployment with a Participating Employer not later than 90 days after the completion of the Period of Uniformed Service.
(4) In the case of an Employee who is hospitalized for, or convalescing from, an illness or injury related to the Period of Uniformed Service the Employee shall apply for reemployment with a Participating Employer at the end of the period that is necessary for the Employee to recover. Such period of recovery shall not exceed two years, unless circumstances beyond the Employees control make reporting as above unreasonable or impossible.
(c) Notwithstanding subparagraph (a), Reemployment After a Period of Uniformed Service terminates upon the occurrence of any of the following:
(1) a dishonorable or bad conduct discharge from the Uniformed Services;
(2) any other discharge from the Uniformed Services under circumstances other than an honorable condition;
(3) a discharge of a commissioned officer from the Uniformed Services by court martial, by commutation of sentence by court martial, or, in time of war, by the President; or
(4) a demotion of a commissioned officer in the Uniformed Services for absence without authorized leave of at least 3 months confinement under a sentence by court martial, or confinement in a federal or state penitentiary after being found guilty of a crime under a final sentence.
Service means an Employees period(s) of employment with an Employer, excluding for initial eligibility purposes any period in which the individual was a nonresident alien and did not receive from an Employer any earned income which constituted income from sources within the United States. An Employees Service shall include any Service which constitutes Service with a predecessor Employer within the meaning of Section 414(a) of the Code, provided, however, that Service with an acquired entity shall not be considered Service under the Plan unless required by applicable law or agreed to by the parties to such transaction. An Employees Service shall also include any Service with an entity which is not an Employer, but only either (i) in which the other entity is a member of a controlled group of corporations or is under common control with other trades and businesses within the meaning of Section 414(b) or 414(c) of the Code, and a member of the controlled group or one of the trades and businesses is an Employer, (ii) for a period in which the other entity is a member of an affiliated service group within the meaning of Section 414(m) of the Code, and a member of the affiliated service group is an Employer, or (iii) all Employers aggregated with the Employer under Section 414(o) of the Code (but not until the Proposed Regulations under Section 414(o) become effective). Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code.
Spouse means the individual, if any, to whom a Participant is lawfully married on the date benefit payments to the Participant are to begin, or on the date of the Participants death, if earlier. A former Spouse shall be treated as the Spouse or surviving Spouse to the extent provided under a qualified domestic relations order as described in section 414(p) of the Code.
-8-
Stock means common stock issued by the Employer (or by a corporation which is a member of the same controlled group) which is readily tradable on an established securities market. In the event there is no common stock which meets the requirements of the preceding sentence, then Stock means common stock issued by the Employer (or by a corporation which is a member of the same controlled group) having a combined voting power and dividend rights equal to or in excess of (A) that class of common stock of the Employer (or of any other such corporation) having the greatest voting power; and (B) that class of common stock of the Employer (or of any other such corporation) having the greatest dividend rights.
Stock Fund means that portion of the Trust Fund consisting of Stock.
Trust or Trust Fund means the trust fund created under this Plan.
Trust Agreement means the agreement between the Association and the Trustee concerning the Trust Fund. If any assets of the Trust Fund are held in a co-mingled trust fund with assets of other qualified retirement plans, Trust Agreement shall be deemed to include the trust agreement governing that co-mingled trust fund. With respect to the allocation of investment responsibility for the assets of the Trust Fund, the provisions of Article II of the Trust Agreement are incorporated herein by reference.
Trustee means one or more corporate persons or individuals selected from time to time by the Association to serve as trustee or co-trustees of the Trust Fund.
Unallocated Stock Fund means that portion of the Stock Fund consisting of the Plans holding of Stock which have been acquired in exchange for one or more Exempt Loans and which have not yet been allocated to the Participants Accounts in accordance with Section 4.2.
Uniformed Service means the performance of duty on a voluntary or involuntary basis in the uniformed service of the United States, including the U.S. Public Health Services, under competent authority and includes active duty, active duty for training, initial activity duty for training, inactive duty training, full-time National Guard duty, and the period for which a person is absent from a position of employment for purposes of an examination to determine the fitness of the person to perform any such duty.
Valuation Date means each business day provided the Stock is readily tradable on an established securities market. If the Stock is not readily tradable on an established securities market, then Valuation Date shall mean the last day of the Plan Year and each other date as of which the Committee shall determine the investment experience of the Investment Fund and adjust the Participants Accounts accordingly.
Valuation Period means the period following a Valuation Date and ending with the next Valuation Date.
Vesting Year means a unit of Service credited to a Participant pursuant to Section 9.2 for purposes of determining his vested interest in his Account.
Section 3. Eligibility for Participation .
3.1 Initial Eligibility . All Eligible Employees employed on the Effective Date shall enter the Plan as of the Plans Effective Date. Thereafter, an Eligible Employee shall enter the Plan as of the Entry Date coincident with or next following the later of the following dates:
(i) the last day of the Eligible Employees Eligibility Year, and
(ii) the Eligible Employees 21st birthday.
-9-
3.2 Definition of Eligibility Year . Eligibility Year means an applicable eligibility period (as defined below) in which the Eligible Employee has completed 1,000 Hours of Service for the Employer. For this purpose, an Eligible Employees first eligibility period is the 12-consecutive month period beginning on the first day on which he has an Hour of Service, and subsequent eligibility periods shall commence on the first anniversary of the date on which the Employee first completed an Hour of Service for the Employer.
3.3 Terminated Employees . No Employee shall have any interest or rights under this Plan if he is never in active Service with an Employer on or after the Effective Date.
3.4 Certain Employees Ineligible .
3.4-1 No Employee shall participate in the Plan while his Service is covered by a collective bargaining agreement between an Employer and the Employees collective bargaining representative if (i) retirement benefits have been the subject of good faith bargaining between the Employer and the representative and (ii) the collective bargaining agreement does not provide for the Employees participation in the Plan.
3.4-2 Leased Employees are not eligible to participate in the Plan.
3.4-3 Employees who are nonresident aliens with no earned income (within the meaning of Code Section 911(d)(2)) from the Employer which constitutes income from sources within the United States (within the meaning of Code Section 861(a)(3)).
3.5 Participation and Reparticipation . Subject to the satisfaction of the foregoing requirements, an Eligible Employee shall participate in the Plan during each period of his Service from the date on which he first becomes eligible until his termination. For this purpose, an Eligible Employee who returns before five (5) consecutive one year Breaks in Service who previously satisfied the initial eligibility requirements or who returns after five (5) consecutive one year Breaks in Service with a vested Account balance in the Plan shall re-enter the Plan as of the date of his return to Service with an Employer.
3.6 Omission of Eligible Employee . If, in any Plan Year, any Eligible Employee who should be included as a Participant in the Plan is erroneously omitted and discovery of such omission is not made until after a contribution by his Employer for the year has been made, the Employer shall make a subsequent contribution with respect to the omitted Eligible Employee in the amount which the said Employer would have contributed regardless of whether or not it is deductible in whole or in part in any taxable year under applicable provisions of the Code.
3.7 Inclusion of Ineligible Employee . If, in any fiscal year, any person who should not have been included as a Participant in the Plan is erroneously included and discovery of such incorrect inclusion is not made until after a contribution for the year has been made, the Employer shall not be entitled to recover the contribution made with respect to the ineligible person regardless of whether or not a deduction is allowable with respect to such contribution. In such event, the amount contributed with respect to the ineligible person shall constitute a forfeiture for the fiscal year in which the discovery is made.
Section 4. Contributions and Credits .
4.1 Discretionary Contributions .
4.1-1 The Employer shall from time to time contribute, with respect to a Plan Year, such amounts as it may determine from time to time. The Employer shall have no obligation to contribute any amount under this Plan except as so determined in its sole discretion. The Employers contributions and available forfeitures for a Plan Year shall be credited as of the last day of the year to the Accounts of the Active Participants in the manner set forth in Section 8.1-2.
-10-
4.1-2 Upon a Participants Reemployment After a Period of Uniformed Service, the Employer shall make an additional contribution on behalf of such Participant that would have been made on his or her behalf during the Plan Year or Years corresponding to the Participants Period of Uniformed Service.
4.2 Contributions for Exempt Loans . If the Trustee, upon instructions from the Committee, incurs any Exempt Loan upon the purchase of Stock, the Employer may contribute for each Plan Year an amount sufficient to cover all payments of principal and interest as they come due under the terms of the Exempt Loan. If there is more than one Exempt Loan, the Employer shall designate the one to which any contribution is to be applied. Investment earnings realized on Employer contributions and any dividends paid by the Employer on Stock held in the Unallocated Stock Account, shall be applied to the Exempt Loan related to that Stock, subject to Section 7.2.
In each Plan Year in which Employer contributions, earnings on contributions, or dividends on Stock in the Unallocated Stock Fund are used as payments under an Exempt Loan, a certain number of shares of the Stock acquired with that Exempt Loan which is then held in the Unallocated Stock Fund shall be released for allocation among the Participants. The number of shares released shall bear the same ratio to the total number of those shares then held in the Unallocated Stock Fund (prior to the release) as (i) the principal and interest payments made on the Exempt Loan in the current Plan Year bears to (ii) the sum of (i) above, and the remaining principal and interest payments required (or projected to be required on the basis of the interest rate in effect at the end of the Plan Year) to satisfy the Exempt Loan.
At the direction of the Committee, the current and projected payments of interest under an Exempt Loan may be ignored in calculating the number of shares to be released in each year if (i) the Exempt Loan provides for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for 10 years, (ii) the interest included in any payment is ignored only to the extent that it would be determined to be interest under standard loan amortization tables, and (iii) the term of the Exempt Loan, by reason of renewal, extension, or refinancing, has not exceeded 10 years from the original acquisition of the Stock.
4.3 Conditions as to Contributions . Employers contributions shall in all events be subject to the limitations set forth in Section 5. Contributions may be made in the form of cash, or securities and other property to the extent permissible under ERISA, including Stock, and shall be held by the Trustee in accordance with the Trust Agreement. In addition to the provisions of Section 13.3 for the return of an Employers contributions in connection with a failure of the Plan to qualify initially under the Code, any amount contributed by an Employer due to a good faith mistake of fact, or based upon a good faith but erroneous determination of its deductibility under Section 404 of the Code, shall be returned to the Employer within one year after the date on which the contribution was originally made, or within one year after its nondeductibility has been finally determined. However, the amount to be returned shall be reduced to take account of any adverse investment experience within the Trust Fund in order that the balance credited to each Participants Account is not less that it would have been if the contribution had never been made.
4.4 Rollover Contributions . This Plan shall not accept a direct rollover or rollover contribution of an eligible rollover distribution as such term is defined in Section 10.9-1 of the Plan.
-11-
Section 5. Limitations on Contributions and Allocations .
5.1 Limitation on Annual Additions . Notwithstanding anything herein to the contrary, allocation of Employer contributions for any Plan Year shall be subject to the following:
5.1-1 No more than one-third of the Employer contributions used for repayment of any Exempt Loan in accordance with Section 4.2 shall be allocated to the accounts of Highly Paid Employees (within the meaning of Code Section 414(q)), with the remaining Employer contributions to be made to Non-Highly Compensated Employees in the manner specified under Section 8.1. Such adjustments shall be made before any allocations occur.
5.1-2 After adjustment, if any, required by the preceding paragraph, the annual additions during any Plan Year to any Participants Account under this and any other defined contribution plans maintained by the Employer or an affiliate (within the purview of Section 414(b), (c) and (m) and Section 415(h) of the Code, which affiliate shall be deemed the Employer for this purpose) shall not exceed the lesser of $49,000 (or such other dollar amount which results from cost-of-living adjustments under Section 415(d) of the Code) (the dollar limitation) or 100 percent of the Participants 415 Compensation for such limitation year (the percentage limitation). The percentage limitation shall not apply to any contribution for medical benefits after separation from service (within the meaning of Section 401(h) or Section 419A(f)(2) of the Code) which is otherwise treated as an annual addition. In the event the annual additions exceed the limits of Code Section 415 described above, the annual additions for such year shall be reduced and reallocated in accordance with the Employee Plans Compliance Resolution System (EPCRS) as set forth in Rev. Proc. 2008-50 or any subsequent guidance issued by the Internal Revenue Service.
5.1-3 For purposes of this Section 5.1, the annual addition to a Participants Accounts means the sum of (i) Employer contributions, (ii) Employee contributions, if any, and (iii) forfeitures. Annual additions to a defined contribution plan also include amounts allocated to an individual medical account, as defined in Section 415(l)(2) of the Internal Revenue Code, which is part of a pension or annuity plan maintained by the Employer, amounts derived from contributions paid or accrued in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a Key Employee under a welfare benefit fund, as defined in Section 419A(d) of the Internal Revenue Code, maintained by the Employer.
Annual additions to the Participants Account shall not include a restorative payment in accordance with Treasury Regulation Section 1.415(c)-1(b)(2)(C) that is made to restore losses to the Plan resulting from actions by a fiduciary for which there is a reasonable risk of liability for breach of fiduciary duty under ERISA or other applicable federal and state law.
In the event Stock is released from the Unallocated Stock Fund and allocated to a Participants Account for a particular Plan Year, the Employer may determine for such year that an annual addition shall be calculated on the basis of the fair market value of the Stock so released and allocated (such fair market value to be based on the valuation as of the Valuation Date immediately preceding the Plan Year in respect of which the release and allocation are made) if the annual addition, as so calculated, is lower than the annual addition calculated on the basis of Employer contributions.
5.1-4 Notwithstanding the foregoing, if no more than one-third of the Employer contributions to the Plan for a year which are deductible under Section 404(a)(9) of the Code are allocated to Highly Paid Employees (within the meaning of Section 414(q) of the Internal Revenue Code), the limitations imposed herein shall not apply to:
(i) forfeitures of Employer securities (within the meaning of Section 409 of the Code) under the Plan if such securities were acquired with the proceeds of a loan described in Section 404(a)(9)(A) of the Code), or
-12-
(ii) Employer contributions to the Plan which are deductible under Section 404(a)(9)(B) and charged against a Participants Account.
5.1-5 If the Employer contributes amounts, on behalf of Eligible Employees covered by this Plan, to other defined contribution plans as defined in Section 3(34) of ERISA, the limitation on annual additions provided in this Section shall be applied to annual additions in the aggregate to this Plan and to such other plans. Reduction of annual additions, where required, shall be accomplished first by reductions under such other plan pursuant to the directions of the named fiduciary for administration of such other plans or under priorities, if any, established under the terms of such other plans and then by allocating any remaining excess for this Plan in the manner and priority set out above with respect to this Plan.
5.1-6 A limitation year shall mean each 12 consecutive month period ending on December 31 within the Plan Year.
5.2 Effect of Limitations . The Committee shall take whatever action may be necessary from time to time to assure compliance with the limitations set forth in Section 5.1. Specifically, the Committee shall see that each Employer restrict its contributions for any Plan Year to an amount which, taking into account the amount of available forfeitures, may be completely allocated to the Participants consistent with those limitations. Where the limitations would otherwise be exceeded by any Participant, further allocations to the Participant shall be curtailed to the extent necessary to satisfy the limitations. Where an excessive amount is contributed on account of a mistake as to one or more Participants compensation, or there is an amount of forfeitures which may not be credited in the Plan Year in which it becomes available, the amount shall be corrected in accordance with Section 5.1-2 of the Plan. If it is determined at any time that the Committee and/or Trustee has erred in accepting and allocating any contributions or forfeitures under this Plan, or in allocating net gain or loss pursuant to Sections 8.2 and 8.3, then the Committee, in a uniform and nondiscriminatory manner, shall determine the manner in which such error shall be corrected and shall promptly advise the Trustee in writing of such error and of the method for correcting such error. The Accounts of any or all Participants may be revised, if necessary, in order to correct such error.
5.3 Limitations as to Certain Participants . Aside from the limitations set forth in Section 5.1, if the Plan acquires any Stock in a transaction as to which a selling shareholder or the estate of a deceased shareholder is claiming the benefit of Section 1042 of the Code, the Committee shall see that none of such Stock, and no other assets in lieu of such Stock, are allocated to the Accounts of certain Participants in this Plan or be allocated directly or indirectly under any plan of the Employer meeting the requirements of Code Section 401(a) during the non-allocation period, in order to comply with Code Section 409(n).
This restriction shall apply at all times to a Participant who owns (taking into account the attribution rules under Section 318(a) of the Code, without regard to the exception for employee plan trusts in Section 318(a)(2)(B)(i)) more than 25 percent of (i) any class of outstanding stock of a corporation and (ii) the total value of any class of outstanding stock of a corporation which issued the Stock acquired by the Plan, or another corporation within the same controlled group, as defined in Section 409(l)(4) of the Code (any such class of stock hereafter called a Related Class). For this purpose, a Participant who owns more than 25 percent of Related Class at any time within the one year preceding the Plans purchase of the Stock shall be subject to the restriction as to all allocations of the Stock, but any other Participant shall be subject to the restriction only as to allocations which occur at a time when he owns more than 25 percent of any Related Class.
-13-
Further, this restriction shall apply to the selling shareholder claiming the benefit of Section 1042 and any other Participant who is related to such a shareholder within the meaning of Section 267(b) of the Code, during the period beginning on the date of sale and ending on the later of (1) the date that is ten years after the date of sale, or (2) the date of the Plan allocation attributable to the final payment of acquisition indebtedness incurred in connection with the sale.
This restriction shall not apply to any Participant who is a lineal descendant of a selling shareholder if the aggregate amounts allocated under the Plan for the benefit of all such descendants do not exceed five percent of the Stock acquired from the shareholder.
5.4 Erroneous Allocations . No Participant shall be entitled to any annual additions or other allocations to his Account in excess of those permitted under Section 5. If it is determined at any time that the administrator and/or Trustee have erred in accepting and allocating any contributions or forfeitures under this Plan, or in allocating investment adjustments, or in excluding or including any person as a Participant, then the administrator, in a uniform and nondiscriminatory manner, shall determine the manner in which such error shall be corrected, after taking into consideration Sections 3.6 and 3.7, if applicable, and shall promptly advise the Trustee in writing of such error and of the method for correcting such error. The Accounts of any or all Participants may be revised, if necessary, in order to correct such error.
Section 6. Trust Fund and Its Investment .
6.1 Creation of Trust Fund . All amounts received under the Plan from Employers and investments shall be held as the Trust Fund pursuant to the terms of this Plan and of the Trust Agreement between the Association and the Trustee. The benefits described in this Plan shall be payable only from the assets of the Trust Fund, and none of the Association, any other Employer, its board of directors or trustees, its stockholders, its officers, its employees, the Committee, and the Trustee shall be liable for payment of any benefit under this Plan except from the Trust Fund.
6.2 Stock Fund and Investment Fund . The Trust Fund held by the Trustee shall be divided into the Stock Fund, consisting entirely of Stock, and the Investment Fund, consisting of all assets of the Trust other than Stock. The Trustee shall have no investment responsibility for the Stock Fund, but shall accept any Employer contributions made in the form of Stock, and shall acquire, sell, exchange, distribute, and otherwise deal with and dispose of Stock in accordance with the instructions of the Committee. The Trustee shall have full responsibility for the investment of the Investment Fund, except to the extent such responsibility may be delegated from time to time to one or more investment managers pursuant to Section 2.3 of the Trust Agreement, or to the extent the Committee directs the Trustee to purchase Stock with the assets in the Investment Fund.
6.3 Acquisition of Stock . From time to time the Committee may, in its sole discretion, direct the Trustee to acquire Stock from the issuing Employer or from shareholders, including shareholders who are or have been Employees, Participants, or fiduciaries with respect to the Plan. The Trustee shall pay for such Stock no more than its fair market value, which shall be determined conclusively by the Committee pursuant to Section 12.4. The Committee may direct the Trustee to finance the acquisition of Stock by incurring or assuming indebtedness to the seller or another party which indebtedness shall be called an Exempt Loan. The term Exempt Loan shall refer to a loan made to the Plan by a disqualified person within the meaning of Section 4975(e)(2) of the Code, or a loan to the Plan which is guaranteed by a disqualified person. An Exempt Loan includes a direct loan of cash, a purchase-money transaction, and an assumption of an obligation of a tax-qualified employee stock ownership plan under Section 4975(e)(7) of the Code (ESOP). For these purposes, the term guarantee shall include an unsecured guarantee and the use of assets of a disqualified person as collateral for a loan, even though the use of assets may not be a guarantee under applicable state law. An
-14-
amendment of an Exempt Loan in order to qualify as an exempt loan is not a refinancing of the Exempt Loan or the making of another Exempt Loan. The term exempt loan refers to a loan that satisfies the provisions of this paragraph. A non-exempt loan fails to satisfy this paragraph. Any Exempt Loan shall be subject to the following conditions and limitations:
6.3-1 An Exempt Loan shall primarily be for the benefit of Plan Participants and Beneficiaries, shall be for a specific term, shall not be payable on demand except in the event of default, and shall bear a reasonable rate of interest, such that the interest rate and the price of the securities to be acquired with the Exempt Loan will not cause the Plans assets to be drained off in violation of Treasury Regulation Section 54.4975-7(b)(3).
6.3-2 An Exempt Loan may, but need not, be secured by a collateral pledge of either the Stock acquired in exchange for the Exempt Loan, or the Stock previously pledged in connection with a prior Exempt Loan which is being repaid with the proceeds of the current Exempt Loan. No other assets of the Plan and Trust may be used as collateral for an Exempt Loan, and no creditor under an Exempt Loan shall have any right or recourse to any Plan and Trust assets other than Stock remaining subject to a collateral pledge.
6.3-3 Any pledge of Stock to secure an Exempt Loan must provide for the release of pledged Stock in connection with payments on the Exempt Loan in the ratio prescribed in Section 4.2.
6.3-4 Repayments of principal and interest on any Exempt Loan during any Plan Year must not exceed an amount equal to the sum of contributions and earnings received during or prior to such Plan Year, less such payments in prior Plan Years and from cash dividends received on Stock, in the last case, however, subject to the further requirements of Section 7.2. All contributions and earnings shall be separately accounted for in the Plans records until the Exempt Loan is repaid.
6.3-5 In the event of default of an Exempt Loan, the value of Plan assets transferred in satisfaction of the Exempt Loan must not exceed the amount of the default. If the lender is a disqualified person within the meaning of Section 4975 of the Code, an Exempt Loan must provide for a transfer of Plan assets upon default only upon and to the extent of the failure of the Plan to meet the payment schedule of said Exempt Loan. For purposes of this paragraph, the making of a guarantee does not make a person a lender.
6.4 Participants Option to Diversify . The Committee shall provide for a procedure under which each Participant may, during the qualified election period, elect to diversify a portion of the Employer Stock allocated to his Account, as provided in Section 401(a)(28)(B) of the Code. An election to diversify must be made on the prescribed form and filed with the Committee within the period specified herein. For each of the first five (5) Plan years in the qualified election period, the Participant may elect to diversify an amount which does not exceed 25% of the number of shares allocated to his Account since the inception of the Plan, less all shares with respect to which an election under this Section has already been made. For the last year of the qualified election period, the Participant may elect to have up to 50 percent of the value of his Account committed to other investments, less all shares with respect to which an election under this Section has already been made. The term qualified election period shall mean the six (6) Plan Year period beginning with the first Plan Year in which a Participant has both attained age 55 and completed 10 years of participation in the Plan. A Participants election to diversify his Account may be made within each year of the qualified election period and shall continue for the 90-day period immediately following the last day of each year in the qualified election period. Once a Participant makes such election, the Plan must complete diversification in accordance with such election within 90 days after the end of the period during which the election could be made for the Plan Year. In the discretion of the Committee, the Plan may satisfy the diversification requirement by any of the following methods:
6.4-1 The Plan may distribute all or part of the amount subject to the diversification election.
-15-
6.4-2 The Plan may offer the Participant at least three other distinct investment options, if available under the Plan. The other investment options shall satisfy the requirements of Regulations under Section 404(c) of the Employee Retirement Income Security Act of 1974, as amended (ERISA).
6.4-3 The Plan may transfer the portion of the Participants Account subject to the diversification election to another qualified defined contribution plan of the Employer that offers at least three investment options satisfying the requirements of the Regulations under Section 404(c) of ERISA.
Section 7. Voting Rights and Dividends on Stock .
7.1 Voting and Tendering of Stock .
7.1-1 The Trustee generally shall vote all shares of Stock held under the Plan in accordance with the written instructions of the Committee. However, if any Employer has registration-type class of securities within the meaning of Section 409(e)(4) of the Code, or if a matter submitted to the holders of the Stock involves a merger, consolidation, recapitalization, reclassification, liquidation, dissolution, or sale of substantially all assets of an entity, then (i) the shares of Stock which have been allocated to Participants Accounts shall be voted by the Trustee in accordance with the Participants written instructions, and (ii) the Trustee shall vote any unallocated Stock and allocated Stock for which it has received no voting instructions in the same proportions as it votes the allocated Stock for which it has received instructions from Participants. In the event no shares of Stock have been allocated to Participants Accounts at the time Stock is to be voted, each Participant shall be deemed to have one share of Stock allocated to his or her Account for the sole purpose of providing the Trustee with voting instructions.
Notwithstanding any provision hereunder to the contrary, all unallocated shares of Stock must be voted by the Trustee in a manner determined by the Trustee to be for the exclusive benefit of the Participants and Beneficiaries. Whenever such voting rights are to be exercised, the Employers shall provide the Trustee, in a timely manner, with the same notices and other materials as are provided to other holders of the Stock, which the Trustee shall distribute to the Participants. The Participants shall be provided with adequate opportunity to deliver their instructions to the Trustee regarding the voting of Stock allocated to their Accounts. The instructions of the Participants with respect to the voting of allocated shares hereunder shall be confidential.
7.1-2 In the event of a tender offer, Stock shall be tendered by the Trustee in the same manner as set forth above with respect to the voting of Stock. Notwithstanding any provision hereunder to the contrary, Stock must be tendered by the Trustee in a manner determined by the Trustee to be for the exclusive benefit of the Participants and Beneficiaries.
7.2 Application of Dividends .
7.2-1 Stock Dividends . Dividends on Stock which are received by the Trustee in the form of additional Stock shall be retained in the Stock Fund, and shall be allocated among the Participants Accounts and the Unallocated Stock Fund in accordance with their holdings of the Stock on which the dividends are paid.
-16-
7.2-2 Cash Dividends . The treatment of dividends paid in cash shall be determined after consideration to whether the cash dividends are paid on Stock held in Participants Accounts or the Unallocated Stock Fund.
(i) On Stock in Participants Accounts .
(A) Employer Exercises Discretion . Dividends on Stock credited to Participants Accounts which are received by the Trustee in the form of cash shall, at the direction of the Employer paying the dividends, either (i) be credited to the Accounts in accordance with Section 8.4(c) and invested as part of the Investment Fund, (ii) be distributed immediately to the Participants in proportion with the Participants Stock Fund Account balance (iii) be distributed to the Participants within 90 days of the close of the Plan Year in which paid in proportion with the Participants Stock Fund Account balance or (iv) be used to make payments on the Exempt Loan. If dividends on Stock allocated to a Participants Account are used to repay the Exempt Loan, Stock with a fair market value equal to the dividends so used must be allocated to such Participants Account in lieu of the dividends.
(B) Participant Exercises Discretion over Dividend . In addition, in the sole discretion of the Employer, the Employer may grant Participants the right to elect: (I) to have cash dividends paid on shares of Stock credited to such Participants Stock Fund Accounts distributed to the Participant, or (II) to leave the cash dividends allocated to the Participants Account in the Plan, to be credited to the Stock Fund Account and invested in shares of Stock. Dividends on which such election may be made will be fully vested in the Participant (even if not otherwise vested, absent the ability to make such election). Accordingly, the Employer may choose to offer this election only to Participants who are fully vested in their Account. In the event the Employer elects to give Participants the right to determine the treatment of such dividends, the Participants election shall be made by filing with the Committee the appropriate written direction as provided by the Committee at such time and in accordance with such procedures and limitations which the Committee may from time to time establish; provided, however, that the procedures established by the Committee shall provide a reasonable opportunity to change the election at least annually, may establish a default election if a Participant fails to make an affirmative election within the time established for making elections, may provide that the election is applicable for the Plan Year and cannot be revoked with respect to such Plan Year, shall otherwise be implemented in a manner such that the dividends paid or reinvested will constitute applicable dividends which may be deducted under Code Section 404(k), and are in accordance with applicable guidance issued or to be issued by the Secretary of the Treasury. If the Employer elects to give Participants the right to exercise the discretion in this Paragraph 7.2-2(i)(B), the ability to make such election shall be available to the Participant with respect to dividends paid for the entire Plan Year.
(ii) On Stock in the Unallocated Stock Fund . Dividends received on shares of Stock held in the Unallocated Stock Fund shall be applied to the repayment of principal and interest then due on the Exempt Loan used to acquire such shares. Notwithstanding the
-17-
foregoing dividends paid on a share of Stock may not be used to make payments on a particular Exempt Loan unless the share was acquired with the proceeds of such loan or a refinancing of such loan.
Section 8. Adjustments to Accounts .
8.1 ESOP Allocations . Amounts available for allocation for a particular Plan Year will be divided into two categories. The first category relates to shares of Stock released from the Unallocated Stock Fund attributable to using cash dividends to make Exempt Loan payments. The second category relates to contributions made by the Employer and shares of Stock released from the Unallocated Stock Fund on the basis of such Employer contributions and amounts forfeited from Stock Fund Accounts pursuant to Section 9.5.
8.1-1 Shares of Stock attributable to the first category will be allocated to the Stock Fund Accounts of eligible Participants as follows:
(i) first, if dividends paid on shares of Stock held in Participants Stock Fund Accounts are used to make payments on an Exempt Loan, there shall be allocated to each such account a number of shares of Stock released from the Unallocated Stock Fund with a fair market value (determined as of the Valuation Date coincident with or immediately preceding the loan payment date) that at least equals the amount of dividends so used,
(ii) second, if necessary, any remaining shares of Stock shall be applied to reinstate amounts forfeited from Stock Fund Accounts of former employees who are entitled to a reinstatement under Section 9.5, and
(iii) finally, any remaining shares of Stock shall be allocated as a general investment gain in proportion to the number of shares held in the Active Participants Stock Fund Accounts as of the last Valuation Date of the Plan Year for which they are allocated in the same manner as described in Section 7.2-2(i).
8.1-2 Shares of Stock or cash attributable to the second category (i.e., Employer contributions, Stock released from the Unallocated Stock Fund on the basis of Employer contributions, and amounts forfeited) will be allocated to the Stock Fund Accounts or Investment Fund Accounts, as the case may be, pro rata, in proportion to the Compensation of each Active Participant that was earned by such Participant for the Plan Year during which he or she was a Participant compared to Compensation for all Active Participants.
8.1-3 Shares of Stock or cash attributable to contributions made under Section 4.1-2 shall be allocated specifically to the Participants on whose behalf such contributions were made.
8.2 Charges to Accounts . When a Valuation Date occurs, any distributions made to or on behalf of any Participant or Beneficiary since the last preceding Valuation Date shall be charged to the proper Accounts maintained for that Participant or Beneficiary.
8.3 Stock Fund Account . Subject to the provisions of Sections 5 and 8.1, as of the last day of each Plan Year, the Trustee shall credit to each Participants Stock Fund Account: (a) the Participants allocable share of Stock purchased by the Trustee or contributed by the Employer to the Trust Fund for that year; (b) the Participants allocable share of the Stock that is released from the Unallocated Stock Fund for that year; (c) the Participants allocable share of any forfeitures of Stock arising under the Plan during that year; and (d) any stock dividends declared and paid during that year on Stock credited to the Participants Stock Fund Account.
-18-
8.4 Investment Fund Account . Subject to the provisions of Sections 5 and 8.1 as of the last day of each Plan Year, the Trustee shall credit to each Participants Investment Fund Account: (a) the Participants allocable share of any contribution for that year made by the Employer in cash or in property other than Stock that is not used by the Trustee to purchase Employer Stock or to make payments due under an Exempt Loan; (b) the Participants allocable share of any forfeitures from the Investment Fund Accounts of other Participants arising under the Plan during that year; (c) any cash dividends paid during that year on Stock credited to the Participants Stock Fund Account, other than dividends which are paid directly to the Participant and other than dividends which are used to repay Exempt Loan; and (d) the share of the net income or loss of the Trust Fund properly allocable to that Participants Investment Fund Account, as provided in Section 8.5.
8.5 Adjustment to Value of Trust Fund . As of the last day of each Plan Year, the Trustee shall determine: (i) the net worth of that portion of the Trust Fund which consists of properties other than Stock (the Investment Fund); and (ii) the increase or decrease in the net worth of the Investment Fund since the last day of the preceding Plan Year. The net worth of the Investment Fund shall be the fair market value of all properties held by the Trustee under the Trust Agreement other than Stock, net of liabilities other than liabilities to Participants and their beneficiaries. The Trustee shall allocate to the Investment Fund Account of each Participant that percentage of the increase or decrease in the net worth of the Investment Fund equal to the ratio which the balances credited to the Participants Investment Fund Account bear to the total amount credited to all Participants Investments Fund Accounts. This allocation shall be made after application of Section 7.2, but before application of Sections 8.1, 8.4 and 5.1.
8.6
Participant Statements
. Each Plan Year, the Trustee will provide each Participant with a statement of his or her
Section 9. Vesting of Participants Interests .
9.1 Deferred Vesting in Accounts . A Participants vested interest in his Account shall be based on his Vesting Years in accordance with the following table, subject to the balance of this Section 9:
Vesting Years |
Percentage of Interest Vested | |||
Fewer than 2 |
0% | |||
2 |
20% | |||
3 |
40% | |||
4 |
60% | |||
5 |
80% | |||
6 or more |
100% |
9.2 Computation of Vesting Years . For purposes of this Plan, a Vesting Year means generally a Plan Year in which an Employee has performed at least 1,000 Hours of Service, beginning with the first Plan Year in which the Employee has completed an Hour of Service with the Employer, and including Service with other Employers as provided in the definition of Service. Notwithstanding the above, an Employee employed with the Association shall receive credit for vesting purposes for each calendar year of continuous employment with the Association, prior to the adoption of the Plan, in which such Employee completed at least 1,000 Hours of Service (such years shall also be referred to as Vesting Years). However, a Participants Vesting Years shall be computed subject to the following conditions and qualifications:
9.2-1 A Participants Vesting Years shall not include any Service prior to the date on which an Eligible Employee attains age 18.
-19-
9.2-2 To the extent applicable, a Participants vested interest in his Account accumulated before five (5) consecutive one year Break in Service shall be determined without regard to any Service after such five consecutive Breaks in Service. Further, if a Participant has five (5) consecutive one year Break in Service before his interest in his Account has become vested to some extent, pre-Break in Service years of Service shall not be required to be taken into account for purposes of determining his post-Break in Service vested percentage.
9.2-3 To the extent applicable, in the case of a Participant who has 5 or more consecutive one year Break in Service, the Participants pre-Break in Service will count in vesting of the Employer-derived post-Break in Service accrued benefit only if either:
(i) such Participant has any nonforfeitable interest in the accrued benefit attributable to Employer contributions at the time of separation from Service, or
(ii) upon returning to Service the number of consecutive one year Breaks in Service is less than the number of years of Service.
9.2-4 Notwithstanding any provision of the Plan to the contrary, calculation of service for determining Vesting Years with respect to qualified military service will be provided in accordance with Section 414(u) of the Code.
9.2-5 To the extent applicable, if any amendment changes the vesting schedule, including an automatic change to or from a top-heavy vesting schedule, any Participant with three (3) or more Vesting Years may, by filing a written request with the Employer, elect to have his vested percentage computed under the vesting schedule in effect prior to the amendment. The election period must begin not later than the later of sixty (60) days after the amendment is adopted, the amendment becomes effective, or the Participant is issued written notice of the amendment by the Employer or the Committee.
9.3 Full Vesting Upon Certain Events .
9.3-1 Notwithstanding Section 9.1, a Participants interest in his Account shall fully vest on the Participants Normal Retirement Date. The Participants interest shall also fully vest in the event that his Service is terminated by Disability or by death.
9.3-2 The Participants interest in his Account shall also fully vest in the event of a Change in Control of the Association or the Company. For these purposes, Change in Control shall mean a change in control of a nature that: (i) would be required to be reported in response to Item 5.01 of the Current Report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act); or (ii) results in a Change in Control of the Association or the Company within the meaning of the Home Owners Loan Act, as amended (HOLA), and applicable rules and regulations promulgated thereunder, as in effect at the time of the Change in Control; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (a) any person (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of Companys outstanding securities except for any securities purchased by the Associations employee stock ownership plan or trust; or (b) individuals who constitute the Board on the date hereof (the Incumbent Board) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was
-20-
approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Companys stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Association or the Company or similar transaction in which the Association or Company is not the surviving institution occurs; or (d) a proxy statement soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the Plan are to be exchanged for or converted into cash or property or securities not issued by the Company; or (e) a tender offer is made for 25% or more of the voting securities of the Company and the shareholders owning beneficially or of record 25% or more of the outstanding securities of the Company have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror. Notwithstanding anything herein to the contrary, the reorganization of the Association from the mutual to stock form shall not be considered a Change in Control.
9.3-3 Upon a Change in Control described in 9.3-2, the Plan shall be terminated.
9.3-4 Notwithstanding the foregoing, Participants who die or suffer a Disability while performing qualified military service (as defined in accordance with Code Section 414(u)(1)) shall be deemed to be fully vested, in accordance with the HEART Act of 2008.
9.4 Full Vesting Upon Plan Termination . Notwithstanding Section 9.1, a Participants interest in his Account shall fully vest upon termination of this Plan or upon the permanent and complete discontinuance of contributions by his Employer. In the event of a partial termination, the interest of each affected Participant shall fully vest with respect to that part of the Plan which is terminated.
9.5 Forfeiture, Repayment, and Restoral . If a Participants Service terminates before his interest in his Account is fully vested, that portion which has not vested shall be forfeited if he either (i) receives a distribution of his entire vested interest pursuant to Section 10.1, or (ii) incurs five consecutive one-year Breaks in Service. If a Participants Service terminates prior to having any portion of his Account become vested, such Participant shall be deemed to have received a distribution of his vested interest immediately upon his termination of Service.
If a Participant who has suffered a forfeiture of the nonvested portion of his Account returns to Service before he has five (5) consecutive one-year Break in Service, the nonvested portion shall be restored, provided that, if the Participant had received a distribution of his vested Account balance, the amount distributed shall be repaid prior to such restoral. The Participant may repay such amount at any time within five years after he has returned to Service. The amount repaid shall be credited to his Account at the time it is repaid; an additional amount equal to that portion of his Account which was previously forfeited shall be restored to his Account at the same time from other Employees forfeitures and, if such forfeitures are insufficient, then from amounts allocated in accordance with Section 8.1-1(ii), and if insufficient, then from a special contribution by his Employer for that year. A Participant who was deemed to have received a distribution of his vested interest in the Plan shall have his Account restored as of the first day on which he performs an Hour of Service after his return.
For purposes of this Section and Section 5.1 of the Plan, if a portion of a Participants account is forfeited, Stock allocated from an Exempt Loan will be forfeited only after other assets. If interests in more than one class of Stock have been allocated to a Participants Account, the Participant must be treated as forfeiting the same proportion of each such class.
-21-
9.6 Accounting for Forfeitures . If a portion of a Participants Account is forfeited, Stock allocated to said Participants Account shall be forfeited only after other assets are forfeited. If interests in more than one class of Stock have been allocated to a Participants Account, the Participant must be treated as forfeiting the same proportion of each class of Stock. A forfeiture shall be charged to the Participants Account as of the first day of the first Valuation Period in which the forfeiture becomes certain pursuant to Section 9.5. Except as otherwise provided in that Section, a forfeiture shall be added to the contributions of the terminated Participants Employer which are to be credited to other Participants pursuant to Section 4.1 as of the last day of the Plan Year in which the forfeiture becomes certain.
9.7 Vesting and Nonforfeitability . A Participants interest in his Account which has become vested shall be nonforfeitable for any reason.
Section 10. Payment of Benefits.
10.1 Benefits for Participants . For a Participant whose Service ends for any reason, distribution will be made to or for the benefit of the Participant or, in the case of the Participants death, his Beneficiary, by payment in a lump sum, in accordance with Section 10.2. Notice to the Participant with regard to having the right to elect the manner in which his vested Account balance will be distributed to him may be given up to 180 days before the first day of the first period for which an amount is payable. A Participant may modify such an election at any time, provided any new benefit payment date is at least 30 days after a modified election is delivered to the Committee. Notwithstanding any provision to the contrary, if the value of a Participants vested Account balance at the time of any distribution does not exceed $1,000, then such Participants vested Account shall be distributed in a lump sum within 60 days (or as soon as administratively feasible) after the end of the Plan Year in which employment terminates. If the value of a Participants vested Account balance is in excess of $5,000, then his benefits shall not be paid prior to the later of the time he has attained Normal Retirement or age 62, unless he elects an early payment date in a written election filed with the Committee. Failure of a Participant to consent to a distribution prior to the later of Normal Retirement or age 62 shall be deemed to be an election to defer commencement of payment of any benefit under this section. Notwithstanding the foregoing, in the event a distribution of more than $1,000 but not exceeding $5,000 is made in accordance with the above without the Participants consent, then the Plan administrator shall pay the distribution in a direct rollover to an individual retirement plan designated by the Plan administrator in accordance with Code Section 401(a)(31)(B) and the regulations promulgated thereunder. All distributions of $5,000 or less that are made pursuant to this Section without the Participants consent shall be made in cash.
10.2 Time for Distribution .
10.2-1 If the Participant and, if applicable, with the consent of the Participants spouse, elects the distribution of the Participants Account balance in the Plan, distribution shall commence as soon as practicable following his termination of Service, but no later than (i) one year after the close of the Plan Year in which the Participant separates from service by reason of attainment of Normal Retirement Age under the Plan, Disability, or death, or (ii) which is the fifth (5 th ) Plan Year following the Plan Year in which the Participant otherwise separates from service, except that this clause shall not apply if the Participant is reemployed by the Employer before distribution is required to begin under this Section 10.2-1.
10.2-2 Unless the Participant elects otherwise, the distribution of the balance of a Participants Account shall commence not later than the 60th day after the latest of the close of the Plan Year in which -
(i) the Participant attains the age of 65;
-22-
(ii) occurs the tenth anniversary of the year in which the Participant commenced participation in the Plan; or
(iii) the Participant terminates his Service with the Employer.
10.2-3 Notwithstanding anything to the contrary, (1) with respect to a 5-percent owner (as defined in Code Section 416), distribution of a Participants Account shall commence (whether or not he remains in the employ of the Employer) not later than the April 1 of the calendar year next following the calendar year in which the Participant attains age 70 1 / 2 , and (2) with respect to all other Participants, payment of a Participants benefit will commence not later than April 1 of the calendar year following the calendar year in which the Participant attains age 70 1 / 2 , or, if later, the year in which the Participant retires. A Participants benefit from that portion of his Account committed to the Investment Fund shall be calculated on the basis of the most recent Valuation Date before the date of payment.
10.2-4 Distribution of a Participants Account balance after his death shall comply with the following requirements:
(i) If a Participant dies before his distributions have commenced, distribution of his Account to his Beneficiary shall commence not later than one year after the end of the Plan Year in which the Participant died; however, if the Participants Beneficiary is his surviving Spouse, distributions may commence on the date on which the Participant would have attained age 70 1 / 2 . In either case, distributions shall be completed within five years after they commence.
(ii) If the Participant dies after distribution has commenced pursuant to Section 10.1 but before his entire interest in the Plan has been distributed to him, then the remaining portion of that interest shall, in accordance with Section 401(a)(9) of the Code, be distributed at least as rapidly as under the method of distribution being used under Section 10.1 at the date of his death.
(iii) If a married Participant dies before his benefit payments begin, then unless he has specifically elected otherwise, the Committee shall cause the balance in his Account to be paid to his Spouse. No election by a married Participant of a different Beneficiary shall be valid unless the election is accompanied by the Spouses written consent, which (i) must acknowledge the effect of the election, (ii) must explicitly provide either that the designated Beneficiary may not subsequently be changed by the Participant without the Spouses further consent, or that it may be changed without such consent, and (iii) must be witnessed by the Committee, its representative, or a notary public. (This requirement shall not apply if the Participant establishes to the Committees satisfaction that the Spouse may not be located.)
10.2-5 All distributions under this section shall be determined and made in accordance with Code Section 401(a)(9) and final Treasury Regulations Sections 1.401(a)(9)-1 through 1.401(a)(9)-9, including the minimum distribution incidental benefit requirements of Code Section 401(a)(9)(G). These provisions override any distribution options in the Plan inconsistent with Code Section 401(a)(9).
10.3 Marital Status . The Committee, the Plan, the Trustee, and the Employers shall be fully protected and discharged from any liability to the extent of any benefit payments made as a result of the Committees good faith and reasonable reliance upon information obtained from a Participant and his Employer as to his marital status.
-23-
10.4 Delay in Benefit Determination . If the Committee is unable to determine the benefits payable to a Participant or Beneficiary on or before the latest date prescribed for payment pursuant to Section 10.1 or 10.2, the benefits shall in any event be paid within 60 days after they can first be determined, with whatever makeup payments may be appropriate in view of the delay.
10.5 Accounting for Benefit Payments . Any benefit payment shall be charged to the Participants Account as of the first day of the Valuation Period in which the payment is made.
10.6 Options to Receive Stock . Unless ownership of virtually all Stock is restricted to active Employees and qualified retirement plans for the benefit of Employees pursuant to the certificates of incorporation or by-laws of the Employers issuing Stock, a terminated Participant or the Beneficiary of a deceased Participant may instruct the Committee to distribute the Participants entire vested interest in his Account in the form of Stock. In the event the Participant elects to receive all Stock, the Committee shall apply the Participants vested interest in the Investment Fund to purchase sufficient Stock from the Stock Fund or from any owner of Stock to make the required distribution. In all other cases, other than as specifically set forth in Section 10.1, the Participants vested interest in the Stock Fund shall be distributed in shares of Stock, and his vested interest in the Investment Fund shall be distributed in cash.
Any Participant who receives Stock pursuant to Section 10.1, and any person who has received Stock from the Plan or from such a Participant by reason of the Participants death or incompetence, by reason of divorce or separation from the Participant, or by reason of a rollover contribution described in Section 402(a)(5) of the Code, shall have the right to require the Employer which issued the Stock to purchase the Stock for its current fair market value (hereinafter referred to as the put right). The put right shall be exercisable by written notice to the Committee during the first 60 days after the Stock is distributed by the Plan, and, if not exercised in that period, during the first 60 days in the following Plan Year after the Committee has communicated to the Participant its determination as to the Stocks current fair market value. However, the put right shall not apply to the extent that the Stock, at the time the put right would otherwise be exercisable, may be sold on an established market in accordance with federal and state securities laws and regulations. Similarly, the put option shall not apply with respect to the portion of a Participants Account which the Employee elected to have reinvested under Code Section 401(a)(28)(B). If the put right is exercised, the Trustee may, if so directed by the Committee in its sole discretion, assume the Employers rights and obligations with respect to purchasing the Stock. Notwithstanding anything herein to the contrary, in the case of a plan established by a bank (as defined in Code Section 581), the put option shall not apply if prohibited by a federal or state law and Participants are entitled to elect their benefits be distributed in cash.
The Employer or the Trustee, as the case may be, may elect to pay for the Stock in equal periodic installments, not less frequently than annually, over a period beginning not later than 30 days after the exercise of the put right and not exceeding five years, with adequate security and interest at a reasonable rate on the unpaid balance, all such terms to be set forth in a promissory note delivered to the seller with normal terms as to acceleration upon any uncured default.
Nothing contained herein shall be deemed to obligate any Employer to register any Stock under any federal or state securities law or to create or maintain a public market to facilitate the transfer or disposition of any Stock. The put right described herein may only be exercised by a person described in the second preceding paragraph, and may not be transferred with any Stock to any other person. As to all Stock purchased by the Plan in exchange for any Exempt Loan, the put right shall be nonterminable. The put right for Stock acquired through an Exempt Loan shall continue with respect to such Stock after the Exempt Loan is repaid or the Plan
-24-
ceases to be an employee stock ownership plan. Notwithstanding anything in the Plan to the contrary, if securities acquired with the proceeds of an Exempt Loan available for distribution consist of more than one class, a distributee must receive substantially the same proportion of each such class, in accordance with Treasury Regulations Section 54.4975-11(f)(2).
10.7 Restrictions on Disposition of Stock . Except in the case of Stock which is traded on an established market, a Participant who receives Stock pursuant to Section 10.1, and any person who has received Stock from the Plan or from such a Participant by reason of the Participants death or incompetence, by reason of divorce or separation from the Participant, or by reason of a rollover contribution described in Section 402(a)(5) of the Code, shall, prior to any sale or other transfer of the Stock to any other person, first offer the Stock to the issuing Employer and to the Plan at the greater of (i) its current fair market value, or (ii) the purchase price offered in good faith by an independent third party purchaser. This restriction shall apply to any transfer, whether voluntary, involuntary, or by operation of law, and whether for consideration or gratuitous. Either the Employer or the Trustee may accept the offer within 14 days after it is delivered. Any Stock distributed by the Plan shall bear a conspicuous legend describing the right of first refusal under this Section 10.7, as well as any other restrictions upon the transfer of the Stock imposed by federal and state securities laws and regulations.
10.8 Continuing Loan Provisions; Creations of Protections and Rights . Except as otherwise provided in Sections 10.6 and 10.7 and this Section, no shares of Employer Stock held or distributed by the Trustee may be subject to a put, call or other option, or buy-sell arrangement. The provisions of this Section shall continue to be applicable to such Stock even if the Plan ceases to be an employee stock ownership plan under Section 4975(e)(7) of the Code.
10.9 Direct Rollover of Eligible Distribution . A Participant or distributee may elect, at the time and in the manner prescribed by the Trustee or the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the Participant or distributee in a direct rollover.
10.9-1 An eligible rollover is any distribution that does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the Participant and the Participants Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); any hardship distribution described in Section 401(k)(2)(B)(i)(IV) of the Code; and the portion of any distribution that is not included in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). A portion of a distribution shall not fail to be an eligible rollover distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be transferred only to an individual retirement account or annuity described in section 408(a) or (b) of the Code, or to a qualified defined contribution plan described in section 401(a) or 403(a) of the Code that agrees to separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible.
10.9-2 An eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the distributees eligible rollover distribution. An eligible retirement plan shall also include an annuity contract described in Section 403(b) of the Code and an eligible plan under Section 457(b) of the Code which is maintained by a state, or any agency or instrumentality of a state or political subdivision
-25-
of a state and which agrees to separately account for amounts transferred into such plan from this Plan. Effective on the first day of the Plan Year beginning on or after January 1, 2009, an eligible retirement plan shall also include a deemed individual retirement account described in Code Section 408(q) and a Roth individual retirement account in accordance with Code Section 408A(e).
10.9-3 A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee.
10.9-4 The term distributee shall refer to a deceased Participants Spouse or a Participants former Spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), and shall include non-spouse Beneficiaries pursuant to Code Section 402(c)(11).
10.9-5 The Administrator shall provide Participants or other distributes of eligible rollover distributions with a written notice designed to comply with the requirements of Code Section 402(f). Such notice shall be provided within a reasonable period of time before making an eligible rollover distribution. Such notice may be provided up to 180 days before the first day of the first period for which an amount is payable.
10.10 Waiver of 30-Day Period After Notice of Distribution . If a distribution is one to which Sections 402(f) and 411(a)(11) of the Code apply, such distribution may commence less than 30 days after the notice required under Section 1.402(f)-1 or 1.411(a)-11(c) of the Treasury Regulations is given, provided that:
(i) the Trustee or Committee, as applicable, clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a rollover or a distribution (and, if applicable, a particular option), and
(ii) the Participant, after receiving the notice, affirmatively elects a distribution.
Section 11. Rules Governing Benefit Claims and Review of Appeals.
11.1 Claim for Benefits . Any Participant or Beneficiary who qualifies for the payment of benefits shall file a claim for his benefits with the Committee on a form provided by the Committee. The claim, including any election of an alternative benefit form, shall be filed at least 30 days before the date on which the benefits are to begin. If a Participant or Beneficiary fails to file a claim by the day before the date on which benefits become payable, he shall be presumed to have filed a claim for payment for the Participants benefits in the standard form prescribed by Sections 10.1 or 10.2.
11.2 Notification by Committee . Within 90 days after receiving a claim for benefits (or within 180 days, if special circumstances require an extension of time and written notice of the extension is given to the Participant or Beneficiary within 90 days after receiving the claim for benefits), the Committee shall notify the Participant or Beneficiary whether the claim has been approved or denied. If the Committee denies a claim in any respect, the Committee shall set forth in a written notice to the Participant or Beneficiary:
(i) each specific reason for the denial;
(ii) specific references to the pertinent Plan provisions on which the denial is based;
(iii) a description of any additional material or information which could be submitted by the Participant or Beneficiary to support his claim, with an explanation of the relevance of such information; and
-26-
(iv) an explanation of the claims review procedures set forth in Section 11.3.
11.3 Claims Review Procedure . Within 60 days after a Participant or Beneficiary receives notice from the Committee that his claim for benefits has been denied in any respect, he may file with the Committee a written notice of appeal setting forth his reasons for disputing the Committees determination. In connection with his appeal the Participant or Beneficiary or his representative may inspect or purchase copies of pertinent documents and records to the extent not inconsistent with other Participants and Beneficiaries rights of privacy. Within 60 days after receiving a notice of appeal from a prior determination (or within 120 days, if special circumstances require an extension of time and written notice of the extension is given to the Participant or Beneficiary and his representative within 60 days after receiving the notice of appeal), the Committee shall furnish to the Participant or Beneficiary and his representative, if any, a written statement of the Committees final decision with respect to his claim, including the reasons for such decision and the particular Plan provisions upon which it is based.
Section 12. The Committee and its Functions.
12.1 Authority of Committee . The Committee shall be the plan administrator within the meaning of ERISA and shall have exclusive responsibility and authority to control and manage the operation and administration of the Plan, including the interpretation and application of its provisions, except to the extent such responsibility and authority are otherwise specifically (i) allocated to the Association, the Employers, or the Trustee under the Plan and Trust Agreement, (ii) delegated in writing to other persons by the Association, the Employers, the Committee, or the Trustee, or (iii) allocated to other parties by operation of law. The Committee shall have exclusive responsibility regarding decisions concerning the payment of benefits under the Plan. The Committee shall have no investment responsibility with respect to the Investment Fund except to the extent, if any, specifically provided in the Trust Agreement. In the discharge of its duties, the Committee may employ accountants, actuaries, legal counsel, and other agents (who also may be employed by an Employer or the Trustee in the same or some other capacity) and may pay their reasonable expenses and compensation.
12.2 Identity of Committee . The Committee shall consist of three or more individuals selected by the Association. Any individual, including a director, trustee, shareholder, officer, or Employee of an Employer, shall be eligible to serve as a member of the Committee. The Association shall have the power to remove any individual serving on the Committee at any time without cause upon 10 days written notice, and any individual may resign from the Committee at any time upon 10 days written notice to the Association. The Association shall notify the Trustee of any change in membership of the Committee.
12.3 Duties of Committee . The Committee shall keep whatever records may be necessary to implement the Plan and shall furnish whatever reports may be required from time to time by the Association. The Committee shall furnish to the Trustee whatever information may be necessary to properly administer the Trust. The Committee shall see to the filing with the appropriate government agencies of all reports and returns required of the Plan under ERISA and other laws.
Further, the Committee shall have exclusive responsibility and authority with respect to the Plans holdings of Stock and shall direct the Trustee in all respects regarding the purchase, retention, sale, exchange, and pledge of Stock and the creation and satisfaction of Exempt Loans. The Committee shall at all times act consistently with the Associations long-term intention that the Plan, as an employee stock ownership plan, be invested primarily in Stock. In determining the proper extent of the Trusts investment in Stock, the Committee shall be authorized to employ investment counsel, legal counsel, appraisers, and other agents and to pay their reasonable expenses and compensation.
-27-
12.4 Valuation of Stock . If the Stock is not readily tradable on an established securities market, the valuation of such Stock shall be determined by an independent appraiser. For purposes of the preceding sentence, the term independent appraiser means any appraiser meeting requirements similar to the requirements of the regulations prescribed under Code Section 170(a)(1). The Valuation Date for all Plan transactions, including transactions between the Plan and a disqualified person, shall be the date of the transaction, in accordance with Treasury Regulations Section 54.4975-11(d)(5).
12.5 Compliance with ERISA . The Committee shall perform all acts necessary to comply with ERISA. Each individual member or employee of the Committee shall discharge his duties in good faith and in accordance with the applicable requirements of ERISA.
12.6 Action by Committee . All actions of the Committee shall be governed by the affirmative vote of a number of members which is a majority of the total number of members currently appointed, including vacancies.
12.7 Execution of Documents . Any instrument executed by the Committee shall be signed by any member or employee of the Committee.
12.8 Adoption of Rules . The Committee shall adopt such rules and regulations of uniform applicability as it deems necessary or appropriate for the proper administration and interpretation of the Plan.
12.9 Responsibilities to Participants . The Committee shall determine which Employees qualify to enter the Plan. The Committee shall furnish to each Eligible Employee whatever summary plan descriptions, summary annual reports, and other notices and information may be required under ERISA. The Committee also shall determine when a Participant or his Beneficiary qualifies for the payment of benefits under the Plan. The Committee shall furnish to each such Participant or Beneficiary whatever information is required under ERISA (or is otherwise appropriate) to enable the Participant or Beneficiary to make whatever elections may be available pursuant to Sections 6 and 10, and the Committee shall provide for the payment of benefits in the proper form and amount from the assets of the Trust Fund. The Committee may decide in its sole discretion to permit modifications of elections and to defer or accelerate benefits to the extent consistent with applicable law and the Plan document and the best interests of all Participants and Beneficiaries in a non-discriminatory manner.
12.10 Alternative Payees in Event of Incapacity . If the Committee finds at any time that an individual qualifying for benefits under this Plan is a minor or is incompetent, the Committee may direct the benefits to be paid, in the case of a minor, to his parents, his legal guardian, or a custodian for him under the Uniform Gifts to Minors Act, or, in the case of an incompetent, to his spouse, or his legal guardian, the payments to be used for the individuals benefit. The Committee and the Trustee shall not be obligated to inquire as to the actual use of the funds by the person receiving them under this Section 12.10, and any such payment shall completely discharge the obligations of the Plan, the Trustee, the Committee, and the Employers to the extent of the payment.
12.11 Indemnification by Employers . Except as separately agreed in writing, the Committee, and any member or employee of the Committee, shall be indemnified and held harmless by the Employer, jointly and severally, to the fullest extent permitted by ERISA, and subject to and conditioned upon compliance with 12 C.F.R. Section 545.121, to the extent applicable, against any and all costs, damages, expenses, and liabilities reasonably incurred by or imposed upon it or him in connection with any claim made against it or him or in which it or he may be involved by reason of its or his being, or having been, the Committee, or a member or employee of the Committee, to the extent such amounts are not paid by insurance.
-28-
12.12 Nonparticipation by Interested Member . Any member of the Committee who also is a Participant in the Plan shall take no part in any determination specifically relating to his own participation or benefits, unless his abstention would leave the Committee incapable of acting on the matter.
Section 13. Adoption, Amendment, or Termination of the Plan.
13.1 Adoption of Plan by Other Employers . With the consent of the Association, any entity may become a participating Employer under the Plan by (i) taking such action as shall be necessary to adopt the Plan, (ii) becoming a party to the Trust Agreement establishing the Trust Fund, and (iii) executing and delivering such instruments and taking such other action as may be necessary or desirable to put the Plan into effect with respect to the entitys Employees.
13.2 Plan Adoption Subject to Qualification . Notwithstanding any other provision of the Plan, the adoption of the Plan and the execution of the Trust Agreement are conditioned upon their being determined initially by the Internal Revenue Service to meet the qualification requirements of Section 401(a) of the Code, so that the Employers may deduct currently for federal income tax purposes their contributions to the Trust and so that the Participants may exclude the contributions from their gross income and recognize income only when they receive benefits. In the event that this Plan is held by the Internal Revenue Service not to qualify initially under Section 401(a), the Plan may be amended retroactively to the earliest date permitted by U.S. Treasury Regulations in order to secure qualification under Section 401(a). If this Plan is held by the Internal Revenue Service not to qualify initially under Section 401(a) either as originally adopted or as amended, each Employers contributions to the Trust under this Plan (including any earnings thereon) shall be returned to it and this Plan shall be terminated. In the event that this Plan is amended after its initial qualification and the Plan as amended is held by the Internal Revenue Service not to qualify under Section 401(a), the amendment may be modified retroactively to the earliest date permitted by U.S. Treasury Regulations in order to secure approval of the amendment under Section 401(a). In addition, reversions of Employer contributions (including earnings or losses attributable thereto) are permitted within one year after the applicable determination date, if the reversion is due to a good faith mistake of fact.
13.3 Right to Amend or Terminate . The Association intends to continue this Plan as a permanent program. However, each participating Employer separately reserves the right to suspend, supersede, or terminate the Plan at any time and for any reason, as it applies to that Employers Employees, and the Association reserves the right to amend, suspend, supersede, merge, consolidate, or terminate the Plan at any time and for any reason, as it applies to the Employees of each Employer. No amendment, suspension, supersession, merger, consolidation, or termination of the Plan shall (i) reduce any Participants or Beneficiarys proportionate interest in the Trust Fund, (ii) reduce or restrict, either directly or indirectly, the benefit provided any Participant prior to the amendment, or (iii) divert any portion of the Trust Fund to purposes other than the exclusive benefit of the Participants and their Beneficiaries prior to the satisfaction of all liabilities under the Plan. Moreover, there shall not be any transfer of assets to a successor plan or merger or consolidation with another plan unless, in the event of the termination of the successor plan or the surviving plan immediately following such transfer, merger, or consolidation, each participant or beneficiary would be entitled to a benefit equal to or greater than the benefit he would have been entitled to if the plan in which he was previously a participant or beneficiary had terminated immediately prior to such transfer, merger, or consolidation. Following a termination of this Plan by the Association, the Trustee shall continue to administer the Trust and pay benefits in accordance with the Plan as amended from time to time and the Committees instructions.
-29-
Section 14. Miscellaneous Provisions.
14.1 Plan Creates No Employment Rights . Nothing in this Plan shall be interpreted as giving any Employee the right to be retained as an Employee by an Employer, or as limiting or affecting the rights of an Employer to control its Employees or to terminate the Service of any Employee at any time and for any reason, subject to any applicable employment or collective bargaining agreements.
14.2 Nonassignability of Benefits . No assignment, pledge, or other anticipation of benefits from the Plan will be permitted or recognized by the Employer, the Committee, or the Trustee. Moreover, benefits from the Plan shall not be subject to attachment, garnishment, or other legal process for debts or liabilities of any Participant or Beneficiary, to the extent permitted by law. This prohibition on assignment or alienation shall apply to any judgment, decree, or order (including approval of a property settlement agreement) which relates to the provision of child support, alimony, or property rights to a present or former spouse, child or other dependent of a Participant pursuant to a state domestic relations or community property law, unless the judgment, decree, or order is determined by the Committee to be a qualified domestic relations order within the meaning of Section 414(p) of the Code, as more fully set forth in Section 14.12 hereof.
14.3 Limit of Employer Liability . The liability of the Employer with respect to Participants under this Plan shall be limited to making contributions to the Trust from time to time, in accordance with Section 4.
14.4 Treatment of Expenses . All expenses incurred by the Committee and the Trustee in connection with administering this Plan and Trust Fund shall be paid by the Trustee from the Trust Fund to the extent the expenses have not been paid or assumed by the Employer or by the Trustee. The Committee may determine that, and shall inform the Trustee when, reasonable expenses may be charged directly to the Account or Accounts of a Participant or group of Participants to whom or for whose benefit such expenses are allocable, subject to the guidelines set forth in Field Assistance Bulletin 2003-03, to the extent not superseded, or any successor directive issued by the Department of Labor.
14.5 Number and Gender . Any use of the singular shall be interpreted to include the plural, and the plural the singular. Any use of the masculine, feminine, or neuter shall be interpreted to include the masculine, feminine, or neuter, as the context shall require.
14.6 Nondiversion of Assets . Except as provided in Sections 5.2 and 14.12, under no circumstances shall any portion of the Trust Fund be diverted to or used for any purpose other than the exclusive benefit of the Participants and their Beneficiaries prior to the satisfaction of all liabilities under the Plan.
14.7 Separability of Provisions . If any provision of this Plan is held to be invalid or unenforceable, the other provisions of the Plan shall not be affected but shall be applied as if the invalid or unenforceable provision had not been included in the Plan.
14.8 Service of Process . The agent for the service of process upon the Plan shall be the president of the Association, or such other person as may be designated from time to time by the Association.
14.9 Governing State Law . This Plan shall be interpreted in accordance with the laws of the State of South Carolina to the extent those laws are applicable under the provisions of ERISA.
14.10 Employer Contributions Conditioned on Deductibility . Employer Contributions to the Plan are conditioned on deductibility under Code Section 404. In the event that the Internal Revenue Service shall determine that all or any portion of an Employer Contribution is not deductible under that Section, the nondeductible portion shall be returned to the Employer within one year of the disallowance of the deduction. In addition, reversions of Employer contributions (including earnings or losses attributable thereto) are
-30-
permitted within one year after the applicable determination date, if the reversion is due to a good faith mistake of fact. The maximum amount that may be returned to the Employer in the case of a mistake of fact or the disallowance of a deduction is the excess of (1) the amount contributed, over, as relevant, (2) (A) the amount that would have been contributed had no mistake of fact occurred, or (B) the amount that would have been contributed had the contribution been limited to the amount that is deductible after any disallowance by the Internal Revenue Service.
14.11 Unclaimed Accounts . Neither the Employer nor the Trustees shall be under any obligation to search for, or ascertain the whereabouts of, any Participant or Beneficiary. The Employer or the Trustees, by certified or registered mail addressed to his last known address of record with the Employer, shall notify any Participant or Beneficiary that he is entitled to a distribution under this Plan, and the notice shall quote the provisions of this Section. If the Participant or Beneficiary fails to claim his benefits or make his whereabouts known in writing to the Employer or the Trustees within seven (7) calendar years after the date of notification, the benefits of the Participant or Beneficiary under the Plan will be disposed of as follows:
(i) If the whereabouts of the Participant is unknown but the whereabouts of the Participants Beneficiary is known to the Trustees, distribution will be made to the Beneficiary.
(ii) If the whereabouts of the Participant and his Beneficiary are unknown to the Trustees, the Plan will forfeit the benefit, provided that the benefit is subject to a claim for reinstatement if the Participant or Beneficiary make a claim for the forfeited benefit.
Any payment made pursuant to the power herein conferred upon the Trustees shall operate as a complete discharge of all obligations of the Trustees, to the extent of the distributions so made.
14.12 Qualified Domestic Relations Order . Section 14.2 shall not apply to a qualified domestic relations order defined in Code Section 414(p), and such other domestic relations orders permitted to be so treated under the provisions of the Retirement Equity Act of 1984. Further, to the extent provided under a qualified domestic relations order, a former Spouse of a Participant shall be treated as the Spouse or surviving Spouse for all purposes under the Plan.
In the case of any domestic relations order received by the Plan:
(i) The Employer or the Committee shall promptly notify the Participant and any other alternate payee of the receipt of such order and the Plans procedures for determining the qualified status of domestic relations orders, and
(ii) Within a reasonable period after receipt of such order, the Employer or the Committee shall determine whether such order is a qualified domestic relations order and notify the Participant and each alternate payee of such determination. The Employer or the Committee shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders.
During any period in which the issue of whether a domestic relations order is a qualified domestic relations order is being determined (by the Employer or Committee, by a court of competent jurisdiction, or otherwise), the Employer or the Committee shall segregate in a separate account in the Plan or in an escrow account the amounts which would have been payable to the alternate payee during such period if the order had been determined to be a qualified domestic relations order. If within eighteen (18) months the order (or modification thereof) is determined to be a qualified domestic relations order, the Employer or the Committee shall pay the segregated amounts (plus any interest thereon) to the person or persons entitled thereto. If within eighteen (18) months it is determined that the order is not a qualified domestic relations order, or the issue as to
-31-
whether such order is a qualified domestic relations order is not resolved, then the Employer or the Committee shall pay the segregated amounts (plus any interest thereon) to the person or persons who would have been entitled to such amounts if there had been no order. Any determination that an order is a qualified domestic relations order which is made after the close of the eighteen (18) month period shall be applied prospectively only. The term alternate payee means any Spouse, former Spouse, child or other dependent of a Participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefit payable under a Plan with respect to such Participant.
14.13 Use of Electronic Media to Provide Notices and Make Participant Elections . Pursuant to Treasury Regulations Section 1.401(a)-21, the Plan may elect to use electronic media to provide notices required to be provided to Participants under the Plan and will accept elections from Participants communicated to the Plan using such electronic media.
14.14 Acquisition of Securities . Notwithstanding any other provision of the Plan to the contrary, at no time shall the Plan be obligated to acquire securities from a particular security holder at an indefinite time determined upon the happening of an event such as the death of the security holder, pursuant to Treasury Regulations Section 54.4975-11(a)(7)(i).
Section 15. Top-Heavy Provisions .
15.1 Top-Heavy Plan . This Plan is top-heavy if any of the following conditions exist:
(i) If the top-heavy ratio for this Plan exceeds sixty percent (60%) and this Plan is not part of any required aggregation group or permissive aggregation group;
(ii) If this Plan is a part of a required aggregation group (but is not part of a permissive aggregation group) and the aggregate top-heavy ratio for the group of Plans exceeds sixty percent (60%); or
(iii) If this Plan is a part of a required aggregation group and part of a permissive aggregation group and the aggregate top-heavy ratio for the permissive aggregation group exceeds sixty percent (60%).
15.2 Definitions . In making this determination, the Committee shall use the following definitions and principles:
15.2-1 The Determination Date, with respect to the first Plan Year of any plan, means the last day of that Plan Year, and with respect to each subsequent Plan Year, means the last day of the preceding Plan Year. If any other plan has a Determination Date which differs from this Plans Determination Date, the top-heaviness of this Plan shall be determined on the basis of the other plans Determination Date falling within the same calendar years as this Plans Determination Date.
15.2-2 A Key Employee means any employee or former employee (including any deceased employee) who at any time during the plan year that includes the determination date was an officer of the employer having annual compensation greater than $160,000 (as adjusted under section 416(i)(1) of the Code), a 5-percent owner of the employer, or a 1-percent owner of the employer having annual compensation of more than $150,000. For this purpose, annual compensation means compensation within the meaning of section 415(c)(3) of the Code. The determination of who is a key employee will be made in accordance with section 416(i)(1) of the Code and the applicable regulations and other guidance of general applicability issued thereunder.
-32-
15.2-3 A Non-key Employee means an Employee who at any time during the five years ending on the top-heavy Determination Date for the Plan Year has received compensation from an Employer and who has never been a Key Employee, and the Beneficiary of any such Employee.
15.2-4 A required aggregation group includes (a) each qualified Plan of the Employer in which at least one Key Employee participates in the Plan Year containing the Determination Date and (b) any other qualified Plan of the Employer which enables a Plan described in (a) to meet the requirements of Code Sections 401(a)(4) or 410. For purposes of the preceding sentence, a qualified Plan of the Employer includes a terminated Plan maintained by the Employer within the period ending on the Determination Date. In the case of a required aggregation group, each Plan in the group will be considered a top-heavy Plan if the required aggregation group is a top-heavy group. No Plan in the required aggregation group will be considered a top-heavy Plan if the required aggregation group is not a top-heavy group. All Employers aggregated under Code Sections 414(b), (c) or (m) or (o) (but only after the Code Section 414(o) regulations become effective) are considered a single Employer.
15.2-5 A permissive aggregation group includes the required aggregation group of Plans plus any other qualified Plan(s) of the Employer that are not required to be aggregated but which, when considered as a group with the required aggregation group, satisfy the requirements of Code Sections 401(a)(4) and 410 and are comparable to the Plans in the required aggregation group. No Plan in the permissive aggregation group will be considered a top-heavy Plan if the permissive aggregation group is not a top-heavy group. Only a Plan that is part of the required aggregation group will be considered a top-heavy Plan if the permissive aggregation group is top-heavy.
15.3 Top-Heavy Rules of Application . For purposes of determining the value of Account balances and the present value of accrued benefits the following provisions shall apply:
15.3-1 The value of Account balances and the present value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the twelve (12) month period ending on the Determination Date.
15.3-2 For purposes of testing whether this Plan is top-heavy, the present value of an individuals accrued benefits and an individuals Account balances is counted only once each year.
15.3-3 The Account balances and accrued benefits of a Participant who is not presently a Key Employee but who was a Key Employee in a Plan Year beginning on or after January 1, 1984 will be disregarded.
15.3-4 Employer contributions attributable to a salary reduction or similar arrangement will be taken into account. Employer matching contributions also shall be taken into account for purposes of satisfying the minimum contribution requirements of Section 416(c)(2) of the Code and the Plan.
15.3-5 When aggregating Plans, the value of Account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year.
15.3-6 The present values of accrued benefits and the amounts of account balances of an employee as of the determination date shall be increased by the distributions made with respect to the employee under the plan and any plan aggregated with the plan under Section 416(g)(2) of the Code during the 1-year period ending on the determination date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the plan under Section 416(g)(2)(A)(i) of the Code. In the case of a distribution made for a reason other than separation from service, death, or disability, this provision shall be applied by substituting five (5) year period for one (1) year period.
-33-
15.3-7 Accrued benefits and Account balances of an individual shall not be taken into account for purposes of determining the top-heavy ratios if the individual has performed no services for the Employer during the one (1) year period ending on the applicable Determination Date. Compensation for purposes of this subparagraph shall not include any payments made to an individual by the Employer pursuant to a qualified or non-qualified deferred compensation plan.
15.3-8 The present value of the accrued benefits or the amount of the Account balances of any Employee participating in this Plan shall not include any rollover contributions or other transfers voluntarily initiated by the Employee except as described below. If this Plan transfers or rolls over funds to another Plan in a transaction voluntarily initiated by the Employee, then this Plan shall count the distribution for purposes of determining Account balances or the present value of accrued benefits. A transfer incident to a merger or consolidation of two or more Plans of the Employer (including Plans of related Employers treated as a single Employer under Code Section 414), or a transfer or rollover between Plans of the Employer, shall not be considered as voluntarily initiated by the Employee.
15.4 Minimum Contributions . For any Top-Heavy Year, each Employer shall make a special contribution on behalf of each Participant to the extent that the total allocations to his Account pursuant to Section 4 is less than the lesser of:
(i) three percent of his 415 Compensation for that year, or
(ii) the highest ratio of such allocation to 415 Compensation received by any Key Employee for that year. For purposes of the special contribution of this Section, a Key Employees 415 Compensation shall include amounts the Key Employee elected to defer under a qualified 401(k) arrangement. Such a special contribution shall be made on behalf of each Participant who is employed by an Employer on the last day of the Plan Year, regardless of the number of his Hours of Service, and shall be allocated to his Account.
If the Employer maintains a qualified plan in addition to this Plan and more than one such plan is determined to be Top-Heavy, a minimum contribution or a minimum benefit shall be provided in one of such other plans, including a plan that consists solely of a cash or deferred arrangement which meets the requirements of Section 401(k)(12) of the Code and matching contributions with respect to which the requirements of Section 401(m)(11) of the Code are met.
15.5 Top-Heavy Provisions Control in Top-Heavy Plan . In the event this Plan becomes top-heavy and a conflict arises between the top-heavy provisions herein set forth and the remaining provisions set forth in this Plan, the top-heavy provisions shall control.
-34-
Exhibit 10.2
STATE OF SOUTH CAROLINA
COUNTY OF OCONEE
*
NON-QUALIFIED SALARY CONTINUATION AGREEMENT
PLEASE TAKE NOTICE THAT PURSUANT TO §15-48-10 OF THE CODE OF LAWS OF SOUTH CAROLINA [1976], AS AMENDED, THIS AGREEMENT CONTAINS A PROVISION FOR THE SUBMISSION OF ANY CONTROVERSY ARISING HEREUNDER TO ARBITRATION.
THIS AGREEMENT made and entered into this 16th day of January. 1997 by and between OCONEE FEDERAL SAVINGS & LOAN ASSOCIATION as Employer and T. RHETT EVATT as Employee.
FOR THE CONSIDERATIONS set forth herein and the mutual benefits flowing to each party thereby, the Employer and the Employee agree as follows, to wit:
I. | RECITALS |
1.1: The Employee has served the Employer as its President and chief executive officer for a number of years, and has experience and expertise which is valuable to the Employer in the management of its affairs.
1.2: The Employer recognizes that the competent and faithful efforts of the Employee have contributed significantly to the success and growth of the Employers business, and the Employer values the efforts, abilities and accomplishments of the Employee and believes his services are vital to its continued growth and profits in the future.
1.3: The Employer believes it to be in its best interests to provide incentive to the Employee to continue his services to the Employer and the parties have reached agreement concerning such incentive, the terms of which are reduced to writing by this Agreement.
II. | EMPLOYMENT |
The Employee is presently employed as President and Chief Executive Officer of the Employers business and will continue in that position until changed by the Board of Directors of the Employer. Provided, however, the Employer may terminate the Employee at any time for reasonable cause.
III. | BENEFITS UPON RETIREMENT |
3.1: It is mutually understood and agreed that the Retirement Date as used herein shall mean the Employees seventy-fifth (75th) birthday, unless such Retirement Date is hereafter changed or modified by mutual agreement of the Employee and the Board of Directors of the Employer, which agreement is reduced to writing and signed by both parties.
3.2: On his Retirement Date, the Employee shall retire from the active and daily service of the Employer. Commencing on the first day of the month next following the Employees Retirement Date and continuing for a period of fifteen (15) years, the Employer shall pay to the Employee the sum of ten thousand ($10,000) dollars per annum, to be due and payable in one hundred eighty (180) monthly installments of eight hundred thirty-three and 33 / 100 ($833.33) dollars each.
(Page #1)
3.3: If the Employee dies after the Retirement Date but prior to receiving the full one hundred eighty (180) monthly installments, the remainder of the monthly installments agreed upon here shall be paid to the Employees designated beneficiary or beneficiaries, who shall receive all the remaining monthly installments which the Employee would have received had he survived, until the total sum of one hundred fifty thousand ($150,000) dollars provided by this Agreement has been paid in full. If the Employee fails to designate a beneficiary in writing to the Employer or if no designated beneficiary is then living, the balance of the monthly installments remaining at the time of his death shall be commuted on the basis of seven and one-half (7.5%) percent per annum compound interest and paid to the legal representative of the estate of the last survivor of the Employee or his designated beneficiary.
IV. | BENEFITS IN EVENT OF DEATH PRIOR TO RETIREMENT |
In the event the Employee shall die before his Retirement Date and while still in the active employment of the Employer, the Employer agrees to pay to the Employees beneficiary designated in writing to the Employer the sum of eight hundred thirty-three and 33 / 100 ($833.33) dollars per month for one hundred eighty (180) consecutive months, commencing on the first day of the month next following the Employees death. If the Employee shall not have designated any such person or persons or if all named beneficiaries die before the Employees death, any payments remaining at the Employees death shall be commuted on the basis of seven and one-half (7.5%) percent per annum compound interest and paid to the legal representative of the estate of the last survivor of the Employee or his designated beneficiary.
V. | DISABILITY PRIOR TO RETIREMENT |
5.1: Should the Employee become totally and permanently disabled, either mentally or physically (as defined by §5.2 hereof) prior to his Retirement Date, the Employer agrees to pay to the Employee or to his legally appointed Committee or attorney-in-fact or to his designated beneficiary the sum of eight hundred thirty-three and 33 / 100 ($833.33) dollars per month for one hundred eighty (180) consecutive months, commencing on the first day of the month next following the ninetieth (90th) day after the Employee has been determined by the Employer, based on appropriate medical advice, to be totally and permanently disabled. PROVIDED, HOWEVER, in the event the Employee becomes entitled to and is awarded Disability Benefits by the Employer under the terms hereof, then the Employee shall not be entitled to the benefits provided by Articles III and IV hereof, the provisions of which shall thereafter become null and void. Provided, however, should the Employee recover from his disability so that he is no longer eligible to receive disability benefits and provided that all funds due him under the provisions of this Article have not been paid in full, then in such an event the payment of disability benefits to the Employee shall cease on and after notice to the Employer that he is ineligible to receive disability benefits and any benefits remaining to the Employees credit under the terms of this Agreement shall be distributed to him under the appropriate provisions of Article III or IV hereof, whichever shall first apply.
5.2: As used herein, the term total and permanent disability shall mean the inability of the Employee, because of bodily injury or disease, to perform the material duties and functions of his regular occupation. However, after twenty-four (24) consecutive months of such disability, total disability will mean the Employees complete inability to engage in any gainful occupation for which he is reasonably fitted by education, training or experience. Also considered as total disability is the complete and irrevocable loss of sight of both eyes, or the use of both hands or both feet, or of one hand and one foot. Any such loss will be presumed to be total disability even if the Employee engages in any occupation. Intentionally self-inflicted injury or bodily injury or disease resulting from service in the armed forces of any country at war, including declared and undeclared war and resistance to armed aggression, shall not constitute total Disability within the meaning of this Article.
(Page #2)
VI. | CONDITIONS |
6.1: Should the services of the Employee with the Employer be terminated, voluntarily or involuntarily, for any cause other than death or disability prior to the Employees Retirement Date, the obligation of the Employer to make the payments agreed upon herein shall terminate. Provided, however, the service of the Employee shall not be deemed to have been terminated or interrupted due to his absence from active service on account of illness, disability, during any authorized vacation or during temporary leaves of absence granted by the Employer for reasons of professional advancement, education, health or government service if the Employee shall resume his employment with the Employer following such interruption.
6.2: The Employee agrees that all rights to compensation following his Retirement Date shall be forfeited by him if he engages in competition with the Employer, without the prior written consent of the Employer, within a radius of fifty (50) miles from the Employers principal place of business for a period of fifteen (15) years coinciding with the number of years that the Employee shall receive such compensation.
6.3: The obligation of the Employer to make payments under this Agreement shall be cancelled and terminated in any event where intentional injury, sickness, disease or death occurs.
VII. | ASSIGNMENT OR ANTICIPATION |
No portion of the benefits payable hereunder shall be pledged, assigned, transferred, sold, or in any manner whatsoever be anticipated, charged or encumbered by the Employee or any beneficiary or be in any manner liable to seizure for the debts, contracts, obligations or engagements of the Employee or any beneficiary, voluntary or involuntary, or for any claims, legal or equitable, against the Employee or any beneficiary.
VIII. | EMPLOYMENT AFTER RETIREMENT DATE |
Notwithstanding any other provision of this Agreement, with the consent of the Employer the Employee may continue in active employment after his Retirement Date, in which event the Employer may defer the start of the payments provided for herein until the date of actual retirement.
IX. | EMPLOYERS RIGHTS |
This Agreement does not constitute a contract of employment between the parties, nor shall any provision of this Agreement restrict the right of the Employers shareholders to replace the Employee, or the right of the Employee to terminate his services.
X. | NON-EXCLUSIVE BENEFIT |
Anything to the contrary notwithstanding, the amounts paid pursuant to this Agreement shall be in addition to any benefits to which the Employee may be entitled under any other retirement plan provided by the Employer, or Social Security.
(Page #3)
XI. | PERIOD OF ECONOMIC HARDSHIP |
Notwithstanding any other provision of this Agreement, if, in any year, payments made under this agreement would, in the sole judgment of the Board of Directors of the Employer, create economic hardship for the Employers depositors, the Board of Directors shall have sole and full authority to postpone such payments or adjust the amount of payments.
XII. | ARBITRATION |
Should any dispute arise between the parties concerning any of the terms or conditions of this Agreement, they mutually agree to submit such dispute to arbitration under the Rules of the American Arbitration Employer. The arena for such arbitration shall be a convenient location in Oconee County, South Carolina, regardless of the various places of business of the Employer, or the place of residence of the Employee.
XIII. | MISCELLANEOUS PROVISIONS |
13.1: Binding Effect
The terms of this Agreement shall be binding upon the parties hereto and upon the successors and assigns of the Employer and the heirs and legal representatives of the Employee.
13.2: Governing Law
This Agreement shall be construed under and governed by the laws of the State of South Carolina, notwithstanding the fact that the Employee may at any time be a resident of another state, or that the Employer may do business in another state.
TO ALL OF WHICH the Employee and the Employer have heretofore agreed, and in witness whereof, have hereunto placed their Seals and caused these presents to be executed, individually by the Employee and by the officers and agents of the Employer authorized to do so, this day and date first above written.
Witness:
(As to Employee)
/s/ |
Laurel M. Smith |
|||||||||
/s/ T. Rhett Evatt |
[SEAL] | |||||||||
/s/ |
Geraldine A. Ford |
T. RHETT EVATT, Employee | ||||||||
(As to Employer) |
OCONEE FEDERAL SAVINGS & LOAN ASSOCIATION, Employer |
[SEAL] | ||||||||
/s/ |
Laurel M. Smith |
|||||||||
By: |
/s/ W. M. Poore |
, Ex. VP | ||||||||
/s/ |
Geraldine A. Ford |
Attest: |
/s/ Illegible |
, Sec. |
(Page #4)
Exhibit 10.3
STATE OF SOUTH CAROLINA
COUNTY OF OCONEE
*
DEFERRED COMPENSATION AGREEMENT
PLEASE TAKE NOTICE THAT PURSUANT TO §15-48-10 OF THE CODE OF LAWS OF SOUTH CAROLINA [1976], AS AMENDED, THIS AGREEMENT CONTAINS A PROVISION FOR THE SUBMISSION OF ANY CONTROVERSY ARISING HEREUNDER TO ARBITRATION.
THIS AGREEMENT made and entered into this 1st day of February, 1996 by and between OCONEE FEDERAL SAVINGS & LOAN ASSOCIATION (the Association) and W. MAURICE POORE (the Director).
FOR THE CONSIDERATIONS set forth herein and the mutual benefits flowing to each party thereby, the Association and the Director agree as follows, to wit:
I. | RECITALS |
1.1: The Director has served the Association on its Board for a number of years, and has experience and expertise which is valuable to the Association in the management of its affairs.
1.2: The Association recognizes that the competent and faithful efforts of the Director have contributed significantly to the success and growth of the Association, and the Association values the efforts, abilities and accomplishments of the Director, and believes his services are vital to its continued growth and profits in the future.
1.3: The Association believes it to be in its best interests to provide incentive to the Director to continue his services on its Board, if elected, for a period not to exceed the Directors attaining the age of sixty-five and one-half (65 1 / 2 ) years, and the parties have reached agreement concerning such incentive, the terms of which are reduced to writing by this Agreement.
II. | DEFERRED COMPENSATION |
For his services to it for a period not to exceed the Directors attaining the age of sixty-five and one-half (65 1 / 2 ) years, the Association agrees to pay to the Director Deferred Compensation in the sum of five hundred forty thousand ($540,000) dollars, payable in equal monthly installments of three thousand ($3,000) dollars each, commencing on the first day of the month following the Directors attaining the age of sixty-five and one-half (65 1 / 2 ) years and continuing for a total of one hundred eighty (180) months OR until the death of the Director, whichever shall first occur.
III. | DEATH OF THE DIRECTOR |
3.1: Death Prior to Age Sixty-five and one-half
In the event the Director shall die before reaching age sixty-five and one-half (65 1 / 2 ) years, the Association agrees to pay to the Directors beneficiary designated in writing to the Association, the sum of three thousand ($3,000) dollars per month for one hundred eighty (180) consecutive months, commencing on the first day of the month next following the Directors death.
(Page #1)
3.2: Death After Age Sixty-five and one-half
If the Director dies after he attains the age of sixty-five and one-half (65 1 / 2 ) years but prior to receiving the full one hundred eighty (180) monthly installments, the remainder of the monthly installments agreed upon here shall be paid to the Directors designated beneficiary or beneficiaries, who shall receive all the remaining monthly installments which the Director would have received had he survived, until the total sum of five hundred forty thousand ($540,000) dollars provided by Article II hereof has been paid in full. If the Director fails to designate a beneficiary in writing to the Association, the balance of the monthly installments remaining at the time of his death shall be paid to the legal representative of the estate of the Director.
IV. | DISABILITY PRIOR TO RETIREMENT |
4.1: Disability Benefits
Should the Director become totally and permanently disabled, either mentally or physically (as defined by §4.2 hereof prior to his retirement or prior to his attaining the age of sixty-five and one-half (65 1 / 2 ) years, the Association agrees to pay to the Director or to his legally appointed Committee or attorney-in-fact or to his designated beneficiary the sum of three thousand ($3,000) dollars per month for one hundred eighty (180) consecutive months, commencing on the first day of the month next following the ninetieth (90th) day after the Director has been determined by the Association, based on appropriate medical advice, to be totally and permanently disabled. PROVIDED, HOWEVER, in the event the Director becomes entitled to and is awarded Disability Benefits by the Association under the terms hereof, then the Director shall not be entitled to the benefits provided by Articles II and III hereof, the provisions of which shall thereafter become null and void.
In this regard, should the Director recover from his disability so that he is no longer eligible to receive disability benefits and provided that all funds due him under the provisions of this Article have not been paid in full, then in such an event the payment of disability benefits to the Director shall cease on and after notice to the Association that he is ineligible to receive disability benefits and any benefits remaining to the Directors credit under the terms of this Agreement shall be distributed to him under the appropriate provisions of Article II or III hereof, whichever shall first apply.
4.2: Definition
As used herein, the term total and permanent disability shall mean the inability of the Director, because of bodily injury or disease, to perform the material duties and functions of his regular occupation. However, after twenty-four (24) consecutive months of such disability, total disability will mean the Directors complete inability to engage in any gainful occupation for which he is reasonably fitted by education, training or experience. Also considered as total disability is the complete and irrevocable loss of sight of both eyes, or the use of both hands or both feet, or of one hand and one foot. Any such loss will be presumed to be total disability even if the Director engages in any occupation. Intentionally self-inflicted injury or bodily injury or disease resulting from service in the armed forces of any country at war, including declared and undeclared war and resistance to armed aggression, shall not constitute total Disability within the meaning of this Article.
V. | TERMINATION OF SERVICE |
Should the services of the Director with the Association be terminated, voluntarily or involuntarily, for any cause other than death or disability within the next ensuing thirteen (13) years, the Association agrees to pay to the Director a prorated amount of Adjusted Deferred Compensation which
(Page #2)
shall be the same percentage of total compensation required by Article II hereof, as the percentage of the thirteen year term which is actually completed by the Director prior to his termination. That is, the total compensation shall be multiplied by the percentage of the thirteen year term actually completed by the Director prior to his termination, and the resulting figure shall be the Adjusted Deferred Compensation. The Adjusted Deferred Compensation shall be paid to the Director, or to his designated beneficiary, in one hundred eighty (180) equal monthly installments, commencing on the first day of the month next following the date the Director shall attain the age of sixty-five and one-half (65 1 / 2 ) years or his prior death, whichever shall first occur.
VI. | INTERRUPTION OF SERVICE |
The service of the Director shall not be deemed to have been terminated or interrupted due to his absence from active service on account of illness, disability, during any authorized vacation or during temporary leaves of absence granted by the Association for reasons of professional advancement, education, health or government service, or during military leave for any period of time, if the Director is elected to serve on the Board following such interruption.
VII. | CAVEAT |
Notwithstanding any other provision of this Agreement, it is mutually understood and agreed that upon the death, disability or retirement of the Director, or the Directors election to receive benefits after he attains sixty-five and one-half (65 1 / 2 ) years of age, the terms of this agreement may be modified by the Association in its sole discretion, based upon the actual date certain of death, disability or retirement of the Director, so as to comply with the following conditions:
i. | the actual cost of compliance with the terms of this Agreement by the Association shall not exceed the actual cost which the Association would have incurred had it paid the Directors fees due the Director over the period of deferment not to exceed thirteen (13) years from the date of this Agreement; AND |
ii. |
the benefits due the Director hereunder shall be actuarially recalculated annually upon the event of and commensurate with his death, retirement or disability, or election to start receiving benefits after attaining sixty-five and one-half (65 1 / 2 ) years of age, so as to provide that in no event shall the benefits paid the Director be less than the after tax cost incurred by the Association. |
VIII. | FORFEITURE OF COMPENSATION BY COMPETITION |
The Director agrees that all rights to compensation following sixty-five and one-half (65 1 / 2 ) years of age shall be forfeited by him if he engages in competition with the Association, without the prior written consent of the Association, within a radius of fifty (50) miles from the Associations principal place of business for a period of fifteen (15) years coinciding with the number of years that the Director shall receive such compensation.
IX. | ASSOCIATIONS RIGHTS |
This Agreement does not constitute a contract of employment between the parties, nor shall any provision of this Agreement restrict the right of the Associations shareholders to replace the Director, or the right of the Director to terminate his services.
(Page #3)
X. | DIRECTORS RIGHTS |
10.1: Rights Non-Assignable
None of the rights to compensation under this Agreement are assignable by the Director or any beneficiary or designee of the Director, and any attempt to anticipate, sell, transfer, assign, pledge, encumber or change the Directors right to receive compensation, shall be void.
10.2: Status of Directors Rights
The rights granted to the Director or any designated beneficiary of the Director under this Agreement shall be solely those of an unsecured creditor of the Association.
10.3: Non-Secured Promise
If the Association shall acquire an insurance policy or any other asset in connection with the liabilities assumed by it hereunder, it is expressly understood and agreed that neither the Director nor any beneficiary of the Director shall have any right with respect to, or claim against, such policy or other asset. Such policy or asset shall not be deemed to be held under any trust for the benefit of the Director or his beneficiaries, or to be held in any way as collateral or security for the fulfilling of the obligations of the Association under this Agreement, but shall be and remain a general, unpledged, unrestricted asset of the Association.
XI. | PERIOD OF ECONOMIC HARDSHIP |
Notwithstanding any other provision of this Agreement, if, in any year, payments made under this agreement would, in the sole judgment of the Board of Directors of the Association, create economic hardship for the Associations depositors, the Board of Directors shall have sole and full authority to postpone such payments or adjust the amount of payments.
XII. | ARBITRATION |
Should any dispute arise between the parties concerning any of the terms or conditions of this Agreement, they mutually agree to submit such dispute to arbitration under the Rules of the American Arbitration Association. The arena for such arbitration shall be a convenient location in Oconee County, South Carolina, regardless of the various places of business of the Association, or the place of residence of the Director.
XIII. | MISCELLANEOUS PROVISIONS |
13.1: Binding Effect
The terms of this Agreement shall be binding upon the parties hereto and upon the successors and assigns of the Association and the heirs and legal representatives of the Director.
13.2: Governing Law
This Agreement shall be construed under and governed by the laws of the State of South Carolina, notwithstanding the fact that the Director may at any time be a resident of another state, or that the Association may do business in another state.
(Page #4)
TO ALL OF WHICH the Director and the Association have heretofore agreed, and in witness whereof, have hereunto placed their Seals and caused these presents to be executed, individually by the Director and by the officers and agents of the Association authorized to do so, this day and date first above written.
Signed, Sealed, and Delivered
in the Presence of:
(As to Director)
|
||||||||
/s/ W. Maurice Poore |
[SEAL] | |||||||
|
W. MAURICE POORE, Director | |||||||
(As to Association) |
OCONEE SAVINGS & LOAN ASSOCIATION [Association] [SEAL] |
|||||||
|
By: |
/s/ T. Rhett Evatt |
, Pres. | |||||
|
By: |
Illegible |
, Sec. |
(Page #5)
Exhibit 10.4
STATE OF SOUTH CAROLINA
COUNTY OF OCONEE
*
DEFERRED COMPENSATION AGREEMENT
PLEASE TAKE NOTICE THAT PURSUANT TO § 15-48-10 OF THE CODE OF LAWS OF SOUTH CAROLINA [1976], AS AMENDED, THIS AGREEMENT CONTAINS A PROVISION FOR THE SUBMISSION OF ANY CONTROVERSY ARISING HEREUNDER TO ARBITRATION.
THIS AGREEMENT made and entered into this 10 th day of December, 1990, by and between OCONEE SAVINGS & LOAN ASSOCIATION (the Association) and CECIL T. SANDIFER, JR. (the Director),
FOR THE CONSIDERATIONS set forth herein and the mutual benefits flowing to each party thereby, the Association and the Director agree as follows, to wit:
I. | RECITALS |
1.1: The Director has served the Association on its Board for a number of years, and has experience and expertise which is valuable to the Association in the management of its affairs.
1.2: The Association recognizes that the competent and faithful efforts of the Director have contributed significantly to the success and growth of the Association, and the Association values the efforts, abilities and accomplishments of the Director, and believes his services are vital to its continued growth and profits in the future.
1.3: The Association believes it to be in its best interests to provide incentive to the Director to continue his services on its Board, if elected, for a period not to exceed his sixty-fifth (65th) birthday, and the parties have reached agreement concerning such incentive, the terms of which are reduced to writing by this Agreement.
II. | DEFERRED COMPENSATION |
For his services to it for a period not to exceed the sixty-fifth (65th) birthday of the Director, the Association agrees to pay to the Director Deferred Compensation in the sum of seven hundred fifty thousand ($750,000) dollars, payable in equal monthly installments of four thousand one hundred sixty-six and 66 / 100 ($4,166.66) dollars each, commencing on the first day of the month following the Directors sixty-fifth (65th) birthday and continuing for a total of one hundred eighty (180) months OR until the death of the Director, whichever shall first occur.
(Page #1)
III. | DEATH OF THE DIRECTOR |
3.1: Death Prior to Age Sixty-five
In the event the Director shall die before reaching age sixty-five (65) years, the Association agrees to pay to the Directors beneficiary designated in writing to the Association, the sum of three thousand three hundred thirty-three and 33 / 100 ($3,333.33) dollars per month for one hundred eighty (180) consecutive months, commencing on the first day of the month next following the Directors death.
3.2: Death After Age Sixty-five
If the Director dies after age sixty-five (65) years, but prior to receiving the full one hundred eighty (180) monthly installments, the remainder of the monthly installments agreed upon here shall be paid to the Directors designated beneficiary or beneficiaries, who shall receive all the remaining monthly installments which the Director would have received had he survived, until the total sum of seven hundred fifty thousand ($750,000) dollars provided by Article II hereof has been paid in full. If the Director fails to designate a beneficiary in writing to the Association, the balance of the monthly installments remaining at the time of his death shall be paid to the legal representative of the estate of the Director.
IV. | DISABILITY PRIOR TO RETIREMENT |
4.1: Prorated Benefits
Should the Director become totally and permanently disabled, either mentally or physically (as hereinafter defined) within the next ensuing twenty-two (22) years and prior to his retirement or other termination of service, the Association agrees to pay to the Director a prorated amount of Deferred Compensation which shall be the same percentage of total compensation required by Article II hereof, as the percentage of the twenty-two (22) year term which is actually completed by the Director prior to his disability. That is, the total compensation shall be multiplied by the percentage of the twenty-two (22) year term actually completed by the Director, and the resulting figure shall be the Adjusted Deferred Compensation. The Adjusted Deferred Compensation shall be paid to the Director, or to his legally appointed Committee or attorney-in-fact, or to his designated beneficiary, in one hundred eighty (180) equal monthly installments, commencing on the first day of the month next following the Directors sixty-fifth (65th) birthday.
4.2: Definition
As used herein, the term total and permanent disability shall mean the inability of the Director, because of bodily injury or disease, to perform the material duties and functions of his regular occupation. However, after twenty-four (24) consecutive months of such disability, total disability will mean the Directors complete inability to engage in any gainful occupation for which he is reasonably fitted by education, training or experience. Also considered as total disability is the complete and irrevocable loss of sight of both eyes, or the use of both hands or both feet, or of one hand and one foot. Any such loss will be presumed to be total disability even if the Director engages in any occupation. Intentionally self-inflicted injury or bodily injury or disease resulting from service in the armed forces of any country at war, including declared and undeclared war and resistance to armed aggression, shall not constitute total Disability within the meaning of this Article.
(Page #2)
V. | TERMINATION OF SERVICE |
Should the services of the Director with the Association be terminated, voluntarily or involuntarily, for any cause other than death or disability within the next ensuing twenty-two (22) years, the Association agrees to pay to the Director a prorated amount of Adjusted Deferred Compensation which shall be the same percentage of total compensation required by Article II hereof, as the percentage of the twenty-two (22) year term which is actually completed by the Director prior to his termination. That is, the total compensation shall be multiplied by the percentage of the twenty-two (22) year term actually completed by the Director prior to his termination, and the resulting figure shall be the Adjusted Deferred Compensation. The Adjusted Deferred Compensation shall be paid to the Director, or to his designated beneficiary, in one hundred eighty (180) equal monthly installments, commencing on the first day of the month next following the date of the Directors sixty-fifth (65th) birthday or his prior death, whichever shall first occur.
VI. | INTERRUPTION OF SERVICE |
The service of the Director shall not be deemed to have been terminated or interrupted due to his absence from active service on account of illness, disability, during any authorized vacation or during temporary leaves of absence granted by the Association for reasons of professional advancement, education, health or government service, or during military leave for any period of time, if the Director is elected to serve on the Board following such interruption.
VII. | CAVEAT |
Notwithstanding any other provision of this Agreement, it is mutually understood and agreed that upon the death, disability or retirement of the Director, or the Directors election to receive benefits after he attains the age of sixty-five (65) years, the terms of this agreement may be modified by the Association in its sole discretion, based upon the actual date certain of death, disability or retirement of the Director, so as to comply with the following conditions;
i. the actual cost of compliance with the terms of this Agreement by the Association shall not exceed the actual cost which the Association would have incurred had it paid the Directors fees due the Director over the period of deferment not to exceed twenty-two (22) years from the date of this Agreement; AND
ii. the benefits due the Director hereunder shall be actuarially recalculated annually upon the event of and commensurate with his death, retirement or disability, or election to start receiving benefits after attaining age sixty-five (65), so as to provide that in no event shall the benefits paid the Director be less than the after tax cost incurred by the Association.
VIII. | FORFEITURE OF COMPENSATION BY COMPETITION |
The Director agrees that all rights to compensation following age sixty-five (65) years shall be forfeited by him if he engages in competition with the Association, without the prior written consent of the Association, within a radius of fifty (50) miles from the Associations principal place of business for a period of fifteen (15) years coinciding with the number of years that the Director shall receive such compensation.
(Page #3)
IX. | ASSOCIATIONS RIGHTS |
This Agreement does not constitute a contract of employment between the parties, nor shall any provision of this Agreement restrict the right of the Associations shareholders to replace the Director, or the right of the Director to terminate his services.
X. | DIRECTORS RIGHTS |
10.1: Rights Non-Assignable
None of the rights to compensation under this Agreement are assignable by the Director or any beneficiary or designee of the Director, and any attempt to anticipate, sell, transfer, assign, pledge, encumber or change the Directors right to receive compensation, shall be void.
10.2: Status of Directors Rights
The rights granted to the Director or any designated beneficiary of the Director under this Agreement shall be solely those of an unsecured creditor of the Association.
10.3: Non-Secured Promise
If the Association shall acquire an insurance policy or any other asset in connection with the liabilities assumed by it hereunder, it is expressly understood and agreed that neither the Director nor any beneficiary of the Director shall have any right with respect to, or claim against, such policy or other asset. Such policy or asset shall not be deemed to be held under any trust for the benefit of the Director or his beneficiaries, or to be held in any way as collateral or security for the fulfilling of the obligations of the Association under this Agreement, but shall be and remain a general, unpledged, unrestricted asset of the Association.
XI. | PERIOD OF ECONOMIC HARDSHIP |
Notwithstanding any other provision of this Agreement, if, in any year, payments made under this agreement would, in the sole judgment of the Board of Directors of the Association, create economic hardship for the Associations depositors, the Board of Directors shall have sole and full authority to postpone such payments or adjust the amount of payments.
XII. | ARBITRATION |
Should any dispute arise between the parties concerning any of the terms or conditions of this Agreement, they mutually agree to submit such dispute to arbitration under the Rules of the American Arbitration Association. The arena for such arbitration shall be a convenient location in Oconee County, South Carolina, regardless of the various places of business of the Association, or the place of residence of the Director.
XIII. | MISCELLANEOUS PROVISIONS |
13.1: Binding Effect
The terms of this Agreement shall be binding upon the parties hereto and upon the successors and assigns of the Association and the heirs and legal representatives of the Director.
(Page #4)
13.2: Governing Law
This Agreement shall be construed under and governed by the laws of the State of South Carolina, notwithstanding the fact that the Director may at any time be a resident of another state, or that the Association may do business in another state.
TO ALL OF WHICH the Director and the Association have heretofore agreed, and in witness whereof, have hereunto placed their Seals and caused these presents to be executed, individually by the Director and by the officers and agents of the Association authorized to do so, this day and date first above written.
Signed, Sealed, and Delivered
In the Presence of:
(As to Director)
/s/ Illegible |
/s/ Cecil T. Sandifer, Jr. |
[SEAL] | ||||||
CECIL T. SANDIFER, JR., Director | ||||||||
/s/ Illegible |
||||||||
(As to Association) |
OCONEE SAVINGS & LOAN ASSOCIATION [Association] [SEAL] |
|||||||
/s/ Lois H. Nix |
By: |
/s/ T. R. Evatt |
, Pres. | |||||
/s/ Laurel M. Smith |
Attest: |
/s/ Illegible |
, Sec. |
(Page #5)
STATE OF SOUTH CAROLINA
COUNTY OF OCONEE
AMENDMENT TO
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT made and entered into this 10 th day of December, 1994, by and between OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION (the Association) and CECIL T. SANDIFER, JR. (the Director) by way of AMENDMENT TO AND IN MODIFICATION OF the prior DEFERRED COMPENSATION AGREEMENT between them dated December 10, 1990.
The parties hereby mutually covenant and agree to revoke and rescind §4.1 of Article IV of their Agreement of December 10, 1990, and instead and in lieu thereof, hereby adopt the following:
4.1: Disability Benefits
Should the Director become totally and permanently disabled, either mentally or physically (as defined by §4.2 of the Deferred Compensation Agreement) prior to his retirement or prior to his sixty-fifth (65th) birthday, the Association agrees to pay to the Director or to his legally appointed Committee or attorney-in-fact or to his designated beneficiary the sum of three thousand three hundred thirty-three and 33 / 100 ($3,333.33) dollars per month for one hundred eighty (180) consecutive months, commencing on the first day of the month next following the ninetieth (90th) day after the Director has been determined by the Association, based on appropriate medical advice, to be totally and permanently disabled. PROVIDED, HOWEVER, in the event the Director becomes entitled to and is awarded Disability Benefits by the Association under the terms hereof, then the Director shall not be entitled to the benefits provided by Articles II and III hereof, the provisions of which shall thereafter become null and void as shall any other provision of the parties original Agreement which shall be in direct conflict with the provisions of this Amendment.
In this regard, should the Director recover from his disability so that he is no longer eligible to receive disability benefits and provided that all funds due him under the provisions of this Article have not been paid in full, then in such an event the payment of disability benefits to the Director shall cease on and after notice to the Association that he is ineligible to receive disability benefits and any benefits remaining to the Directors credit under the terms of this Agreement shall be distributed to him under the appropriate provisions of Article II or III hereof, whichever shall first apply.
IN ALL OTHER RESPECTS, the parties ratify and confirm the provisions of their Deferred Compensation Agreement, as modified and amended hereby, and declare that these two writings constitute their entire agreement.
(Page #1)
IN WITNESS WHEREOF, the Association and the Director have hereunto placed their Hands and Seals, individually and by the Associations officers and agents authorized to do so, this day and date first above written.
Signed, Sealed and Delivered in the Presence of:
(As to the Association)
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION [SEAL] |
||||||||
/s/ Lois H. Nix |
By: |
/s/ T. R. Evatt |
, Pres. | |||||
/s/ W. M. Poore |
Attest: |
/s/ Illegible |
, Sec. | |||||
(As to Director) | ||||||||
/s/ Lois H. Nix |
||||||||
/s/ Cecil T. Sandifer, Jr. |
[SEAL] | |||||||
/s/ W. M. Poore |
CECIL T. SANDIFER, JR., Director |
(Page #2)
Exhibit 10.5
[FORM OF]
EMPLOYMENT AGREEMENT
This Employment Agreement (this Agreement) is made effective as of , 2010 (the Effective Date), by and between Oconee Federal Savings and Loan Association, a federally chartered savings and loan association (the Association) and T.R. Evatt (Executive). The Association and Executive are sometimes collectively referred to herein as the parties. Any reference to the Company shall mean Oconee Federal Financial Corp., the mid-tier holding company of the Association. The Company is a signatory to this Agreement for the purpose of guaranteeing the Associations performance hereunder.
WITNESSETH
WHEREAS , Executive is currently employed as President and Chief Executive Officer of the Association; and
WHEREAS , the Association has adopted a Plan of Reorganization pursuant to which the Association will convert to a federally chartered stock savings and loan association and become a wholly owned subsidiary of the Company; and
WHEREAS , the Association desires to assure itself of the continued availability of the Executives services as provided in this Agreement; and
WHEREAS , the Executive is willing to serve the Association on the terms and conditions hereinafter set forth.
NOW, THEREFORE , in consideration of the mutual covenants herein contained, and upon the terms and conditions hereinafter provided, the parties hereby agree as follows:
1. | POSITION AND RESPONSIBILITIES |
During the term of this Agreement, Executive shall serve as a member of the board of directors of the Association (the Board), President and Chief Executive Officer of the Association. Executive shall be responsible for the overall management of the Association, and shall be responsible for establishing the business objectives, policies and strategic plan of the Association, in conjunction with the Board. Executive also shall be responsible for providing leadership and direction to all departments or divisions of the Association, and shall be the primary contact between the Board and the staff. As Chief Executive Officer, Executive shall directly report to the Board. Executive also shall be nominated as a member of the Board, subject to election by members or shareholders of the Association, as the case may be. Executive also agrees to serve, if elected, as an officer and director of any affiliate of the Association.
2. | TERM AND DUTIES |
(a) Three Year Contract; Annual Renewal . The term of this Agreement will begin as of the Effective Date and shall continue thereafter for a period of three (3) years. Beginning on the first annual anniversary date of this Agreement, and on each annual anniversary date thereafter, the term of this Agreement shall be extended for a period of one year in addition to the then-remaining term; provided that (1) the Association has not given notice to the Executive in writing at least ninety (90) days prior to such renewal date that the term of this Agreement shall not be extended further; and (2) prior to such renewal date, the disinterested members of the Board of Directors of the Association (the Board) have explicitly reviewed and approved the extension and the results thereof shall be included in the minutes of the Boards meeting. On an annual basis prior to the deadline for the notice period referenced above, the Board shall conduct a performance review of the Executive for purposes of determining whether to provide notice of non-renewal. Reference herein to the term of this Agreement shall refer to both such initial term and such extended terms.
(b) Termination of Agreement . Notwithstanding anything contained in this Agreement to the contrary, either Executive or the Association may terminate Executives employment with the Association at any time during the term of this Agreement, subject to the terms and conditions of this Agreement.
(c) Continued Employment Following Expiration of Term . Nothing in this Agreement shall mandate or prohibit a continuation of Executives employment following the expiration of the term of this Agreement, upon such terms and conditions as the Association and Executive may mutually agree.
(d) Duties; Membership on Other Boards . During the term of this Agreement, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence approved by the Board, Executive shall devote substantially all of his business time, attention, skill, and efforts to the faithful performance of his duties hereunder, including activities and services related to the organization, operation and management of the Association; provided, however, that, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, business companies or business or civic organizations, which, in the Boards judgment, will not present any conflict of interest with the Association, or materially affect the performance of Executives duties pursuant to this Agreement. Executive shall provide the Board of Directors annually for its approval a list of organizations for which the Executive acts as a director or officer.
3. | COMPENSATION, BENEFITS AND REIMBURSEMENT |
(a) Base Salary . In consideration of Executives performance of the duties set forth in Section 2, the Association shall provide Executive the compensation specified in this Agreement. The Association shall pay Executive a salary of $ per year (Base Salary). The Base Salary shall be payable biweekly, or with such other frequency as officers of the Association are generally paid. During the term of this Agreement, the Base Salary shall be reviewed at least annually by the Board or by a committee designated by the Board, and the Association may increase, but not decrease (except for a decrease that is generally applicable to all employees) Executives Base Salary. Any increase in Base Salary shall become Base Salary for purposes of this Agreement.
2
(b) Bonus and Incentive Compensation . Executive shall be entitled to equitable participation in incentive compensation and bonuses in any plan or arrangement of the Association or the Company in which Executive is eligible to participate. Nothing paid to Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which Executive is entitled under this Agreement.
(c) Employee Benefits . The Association shall provide Executive with employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or from which he was deriving benefit immediately prior to the commencement of the term of this Agreement, and the Association shall not, without Executives prior written consent, make any changes in such plans, arrangements or perquisites that would adversely affect Executives rights or benefits thereunder, except as to any changes that are applicable to all participating employees. Without limiting the generality of the foregoing provisions of this Section 3(c), Executive will be entitled to participate in and receive benefits under any employee benefit plans including, but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident insurance plans, medical coverage or any other employee benefit plan or arrangement made available by the Association and/or the Company in the future to its senior executives, including any stock benefit plans, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements.
(d) Paid Time Off . Executive shall be entitled to paid vacation time each year during the term of this Agreement (measured on a fiscal or calendar year basis, in accordance with the Associations usual practices), as well as sick leave, holidays and other paid absences in accordance with the Associations policies and procedures for senior executives. Any unused paid time off during an annual period shall be treated in accordance with the Associations personnel policies as in effect from time to time.
(e) Expense Reimbursements . The Association shall also pay or reimburse Executive for all reasonable travel, entertainment and other reasonable expenses incurred by Executive during the course of performing his obligations under this Agreement, including, without limitation, fees for memberships in such clubs and organizations as Executive and the Board shall mutually agree are necessary and appropriate in connection with the performance of his duties under this Agreement, upon presentation to the Association of an itemized account of such expenses in such form as the Association may reasonably require, provided that such payment or reimbursement shall be made as soon as practicable but in no event later than March 15 of the year following the year in which such right to such payment or reimbursement occurred.
(f) Automobile and Social Club . The Association shall provide Executive with either (i) the use of an automobile suitable to the Executives position, or (ii) a monthly cash allowance to cover the expenses of such an automobile. The Association shall annually include on Executives Form W-2 any amount attributable to Executives personal use of such automobile. In addition, the Association shall reimburse or pay Executive amounts sufficient to establish or maintain membership in any club or organization (business, social or otherwise) which will benefit the Association (including such fees or dues relating to the use of the club or organization).
3
4. | PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION |
(a) Upon the occurrence of an Event of Termination (as herein defined) during the term of this Agreement, the provisions of this Section 4 shall apply; provided, however, that in the event such Event of Termination occurs within eighteen (18) months following a Change in Control (as defined in Section 5 hereof), Section 5 shall apply instead. As used in this Agreement, an Event of Termination shall mean and include any one or more of the following:
(i) the involuntary termination of Executives employment hereunder by the Association for any reason other than termination governed by Section 5 (in connection with or following a Change in Control), Section 6 (due to Disability or death), Section 7 (due to Retirement), or Section 8 (for Cause), provided that such termination constitutes a Separation from Service within the meaning of Section 409A of the Internal Revenue Code (Code); or
(ii) Executives resignation from the Associations employ upon any of the following, unless consented to by Executive:
(A) failure to appoint Executive to the position set forth in Section 1, or a material change in Executives function, duties, or responsibilities, which change would cause Executives position to become one of lesser responsibility, importance, or scope from the position and responsibilities described in Section 1, to which Executive has not agreed in writing (and any such material change shall be deemed a continuing breach of this Agreement by the Association);
(B) a relocation of Executives principal place of employment to a location that is more than 20 miles from the location of the Associations principal executive offices as of the date of this Agreement;
(C) a material reduction in the benefits and perquisites, including Base Salary, to Executive from those being provided as of the Effective Date (except for any reduction that is part of a reduction in pay or benefits that is generally applicable to officers or employees of the Association);
(D) a liquidation or dissolution of the Association; or
(E) a material breach of this Agreement by the Association.
Upon the occurrence of any event described in clause (ii) above, Executive shall have the right to elect to terminate his employment under this Agreement by resignation for Good Reason upon not less than thirty (30) days prior written notice given within a reasonable period of time (not to exceed ninety (90) days) after the event giving rise to the right to elect, which termination by
4
Executive shall be an Event of Termination. The Association shall have thirty (30) days to cure the condition giving rise to the Event of Termination, provided that the Association may elect to waive said thirty (30) day period.
(b) Upon the occurrence of an Event of Termination, the Association shall pay Executive, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, the Base Salary and bonuses that Executive would be entitled to for the remaining unexpired term of the Agreement. For purposes of determining the bonus(es) payable hereunder, the bonus(es) will be deemed to be (i) equal to the highest bonus paid at any time during the prior three years, and (ii) otherwise paid at such time as such bonus would have been paid absent an Event of Termination. Such payments shall be paid in a lump sum within ten (10) days of the Executives Separation from Service (within the meaning of Section 409A of the Code) and shall not be reduced in the event Executive obtains other employment following the Event of Termination. Notwithstanding the foregoing, Executive shall not be entitled to any payments or benefits under this Section 4 unless and until Executive executes a release of his claims against the Association, the Company and any affiliate, and their officers, directors, successors and assigns, releasing said persons from any and all claims, rights, demands, causes of action, suits, arbitrations or grievances relating to the employment relationship, including claims under the Age Discrimination in Employment Act, but not including claims for benefits under tax-qualified plans or other benefit plans in which Executive is vested, claims for benefits required by applicable law or claims with respect to obligations set forth in this Agreement that survive the termination of this Agreement.
(c) Upon the occurrence of an Event of Termination, the Association shall pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, a lump sum cash payment reasonably estimated to be equal to the present value of the contributions that would have been made on the Executives behalf under the Associations defined contribution plans (e.g., 401(k) Plan, ESOP, and any other defined contribution plan maintained by the Association), as if Executive had continued working for the Association for the remaining unexpired term of the Agreement following such Event of Termination, earning the salary that would have been achieved during such period. Such payments shall be paid in a lump sum within ten (10) days of the Executives Separation from Service and shall not be reduced in the event Executive obtains other employment following the Event of Termination.
(d) Upon the occurrence of an Event of Termination, the Association shall provide, at the Associations expense, for the remaining unexpired term of the Agreement, nontaxable medical and dental coverage and life insurance coverage substantially comparable, as reasonably available, to the coverage maintained by the Association for Executive prior to the Event of Termination, except to the extent such coverage may be changed in its application to all Association employees.
(e) For purposes of this Agreement, a Separation from Service shall have occurred if the Association and Executive reasonably anticipate that either no further services will be performed by the Executive after the date of the Event of Termination (whether as an employee or as an independent contractor) or the level of further services performed will not exceed 49% of the average level of bona fide services in the 12 months immediately preceding the Event of
5
Termination. For all purposes hereunder, the definition of Separation from Service shall be interpreted consistent with Treasury Regulation Section 1.409A-1(h)(ii). If Executive is a Specified Employee, as defined in Code Section 409A and any payment to be made under sub-paragraph (b) or (c) of this Section 4 shall be determined to be subject to Code Section 409A, then if required by Code Section 409A, such payment or a portion of such payment (to the minimum extent possible) shall be delayed and shall be paid on the first day of the seventh month following Executives Separation from Service.
5. | CHANGE IN CONTROL |
(a) Any payments made to Executive pursuant to this Section 5 are in lieu of any payments that may otherwise be owed to Executive pursuant to this Agreement under Section 4, such that Executive shall either receive payments pursuant to Section 4 or pursuant to Section 5, but not pursuant to both Sections.
(b) For purposes of this Agreement, the term Change in Control shall mean:
(i) a change in control of a nature that would be required to be reported in response to Item 5.01(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act); or
(ii) a change in control of the Association within the meaning of the Home Owners Loan Act, as amended (HOLA), and applicable rules and regulations promulgated thereunder, as in effect at the time of the Change in Control; or
(iii) any of the following events, upon which a Change in Control shall be deemed to have occurred:
(A) any person (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Association or the Company representing 25% or more of the combined voting power of such outstanding securities, except for any securities purchased by any employee stock ownership plan or trust established by the Association or the Company; or
(B) individuals who constitute the Board on the Effective Date (the Incumbent Board) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the Effective Date whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by stockholders of the Association or the Company was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this subsection (B), considered as though they were members of the Incumbent Board; or
6
(C) a sale of all or substantially all the assets of the Association or the Company, or a plan of reorganization, merger, consolidation, or similar transaction occurs in which the security holders of the Association or the Company immediately prior to the consummation of the transaction do not own at least 50.1% of the securities of the surviving entity to be outstanding upon consummation of the transaction; or
(D) a proxy statement is issued soliciting proxies from stockholders of the Association or the Company by someone other than the current management of the Association or the Company of the Association, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Association or the Company, or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan are to be exchanged for or converted into cash or property or securities not issued by the Association or the Company; or
(E) a tender offer is made for 25% or more of the voting securities of the Association or the Company, and stockholders owning beneficially or of record 25% or more of the outstanding securities of the Association or the Company have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror.
(F) Notwithstanding anything herein to the contrary, a Change in Control shall not be deemed to have occurred in connection with the initial reorganization and conversion of the Association to a stock Association as a subsidiary of the Company, or upon any subsequent second-step conversion of Oconee Federal, MHC to stock form.
(c) Upon the occurrence of a Change in Control followed within eighteen (18) months by an Event of Termination (as defined in Section 4 hereof), Executive, shall receive as severance pay or liquidated damages, or both, a lump sum cash payment equal to three times the sum of (i) Executives highest annual rate of Base Salary paid to Executive at any time under this Agreement, plus (ii) the highest bonus paid to Executive with respect to the three completed fiscal years prior to the Change in Control. Such payment shall be paid in a lump sum within ten (10) days of the Executives Separation from Service (within the meaning of Section 409A of the Code) and shall not be reduced in the event Executive obtains other employment following the Event of Termination.
(d) Upon the occurrence of a Change in Control followed within eighteen (18) months by an Event of Termination (as defined in Section 4 hereof), the Association shall pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, a lump sum cash payment reasonably estimated to be equal to the present value of the contributions that would have been made on Executives behalf under the Associations defined contribution plans (e.g., 401(k) Plan, ESOP, and any other defined contribution plan maintained by the Association), as if Executive had continued working for the
7
Association for thirty-six (36) months after the effective date of such termination of employment, earning the salary that would have been achieved during such period. Such payments shall be paid in a lump sum within ten (10) days of the Executives Separation from Service and shall not be reduced in the event Executive obtains other employment following the Event of Termination. If Executive is a Specified Employee, as defined in Code Section 409A and any payment to be made under this sub-paragraph (c) or (d) of this Section 5 shall be determined to be subject to Code Section 409A, then if required by Code Section 409A, such payment or a portion of such payment (to the minimum extent possible) shall be delayed and shall be paid on the first day of the seventh month following Executives Separation from Service.
(e) Upon the occurrence of a Change in Control followed within eighteen (18) months by an Event of Termination (as defined in Section 4 hereof), the Association (or its successor) shall provide at the Associations (or its successors) expense, nontaxable medical and dental coverage and life insurance coverage substantially comparable, as reasonably available, to the coverage maintained by the Association for Executive prior to his termination, except to the extent such coverage may be changed in its application to all Association employees and then the coverage provided to Executive shall be commensurate with such changed coverage. Such coverage shall cease thirty-six (36) months following the termination of Executives employment.
(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 in the event of a Change in Control would be deemed to include an excess parachute payment under Section 280G of the Internal Revenue Code or any successor thereto, then such payments or benefits shall be reduced to an amount, the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executives base amount, as determined in accordance with Section 280G of the Code. In the event a reduction is necessary, then the cash severance payable by the Association pursuant to Section 5 shall be reduced by the minimum amount necessary to result in no portion of the payments and benefits payable by the Association under Section 5 being non-deductible to the Association pursuant to Section 280G of the Code and subject to excise tax imposed under Section 4999 of the Code.
6. | TERMINATION FOR DISABILITY OR DEATH |
(a) Termination of Executives employment based on Disability shall be construed to comply with Section 409A of the Internal Revenue Code and shall be deemed to have occurred if: (i) Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, or last for a continuous period of not less than 12 months; (ii) by reason of any medically determinable physical or mental impairment that can be expected to result in death, or last for a continuous period of not less than 12 months, Executive is receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Association or the Company; or (iii) Executive is determined to be totally disabled by the Social Security Administration. The provisions of Sections 6(b) and (c) shall apply upon the termination of the Executives employment based on Disability. Upon the determination that Executive has suffered a Disability, disability payments hereunder shall commence within thirty (30) days.
8
(b) Executive shall be entitled to receive benefits under any short-term or long-term disability plan maintained by the Association. To the extent such benefits are less than Executives Base Salary, the Association shall pay Executive an amount equal to the difference between such disability plan benefits and the amount of Executives Base Salary for the longer of one (1) year following the termination of his employment due to Disability or the remaining term of this Agreement, which shall be payable in accordance with the regular payroll practices of the Association.
(c) The Association shall cause to be continued life insurance coverage and non-taxable medical and dental coverage substantially comparable, as reasonable available, to the coverage maintained by the Association for Executive prior to the termination of his employment based on Disability, except to the extent such coverage may be changed in its application to all Association employees or not available on an individual basis to an employee terminated based on Disability. This coverage shall cease upon the earlier of (i) the date Executive returns to the full-time employment of the Association; (ii) Executives full-time employment by another employer; (iii) expiration of the remaining term of this Agreement; or (iv) Executives death.
(d) In the event of Executives death during the term of this Agreement, his estate, legal representatives or named beneficiaries (as directed by Executive in writing) shall be paid Executives Base Salary at the rate in effect at the time of Executives death in accordance with the regular payroll practices of the Association for a period of one (1) year from the date of Executives death, and the Association shall continue to provide non-taxable medical, dental and other insurance benefits normally provided for Executives family (in accordance with its customary co-pay percentages) for twelve (12) months after Executives death. Such payments are in addition to any other life insurance benefits that Executives beneficiaries may be entitled to receive under any employee benefit plan maintained by the Association for the benefit of Executive, including, but not limited to, the Associations tax-qualified retirement plans.
7. | TERMINATION UPON RETIREMENT |
Termination of Executives employment based on Retirement shall mean termination of Executives employment at any time after Executive reaches age 65 or in accordance with any retirement policy established by the Board with Executives consent with respect to him. Upon termination of Executive based on Retirement, no amounts or benefits shall be due Executive under this Agreement, and Executive shall be entitled to all benefits under any retirement plan of the Association and other plans to which Executive is a party.
8. | TERMINATION FOR CAUSE |
(a) The Association may terminate Executives employment at any time, but any termination other than termination for Cause, as defined herein, shall not prejudice Executives right to compensation or other benefits under this Agreement. Executive shall have no right to receive compensation or other benefits for any period after termination for Cause. The term Cause as used herein, shall exist when there has been a good faith determination by the Board that there shall have occurred one or more of the following events with respect to the Executive: (i) the conviction of the Executive of a felony or of any lesser criminal offense involving moral turpitude; (ii) the willful commission by the Executive of a criminal or other act that, in the
9
judgment of the Board will likely cause substantial economic damage to the Company or the Association or substantial injury to the business reputation of the Company or the Association; (iii) the commission by the Executive of an act of fraud in the performance of his duties on behalf of the Company or the Association; (iv) the continuing willful failure of the Executive to perform his duties to the Company or the Association (other than any such failure resulting from the Executives incapacity due to physical or mental illness) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to the Executive by the Board; or (v) an order of a federal or state regulatory agency or a court of competent jurisdiction requiring the termination of the Executives employment by the Company. Notwithstanding the foregoing, Cause shall not be deemed to exist unless there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive to be heard before the Board), finding that in the good faith opinion of the Board the Executive was guilty of conduct described above and specifying the particulars thereof. Prior to holding a meeting at which the Board is to make a final determination whether Cause exists, if the Board determines in good faith at a meeting of the Board, by not less than a majority of its entire membership, that there is probable cause for it to find that the Executive was guilty of conduct constituting Cause as described above, the Board may suspend the Executive from his duties hereunder for a reasonable period of time not to exceed fourteen (14) days pending a further meeting at which the Executive shall be given the opportunity to be heard before the Board. Upon a finding of Cause, the Board shall deliver to the Executive a Notice of Termination, as more fully described in Section 10 below.
(b) For purposes of this Section 8, no act or failure to act, on the part of Executive, shall be considered willful unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executives action or omission was in the best interests of the Association. Any act, or failure to act, based upon the direction of the Board or based upon the advice of counsel for the Association shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Association.
9. | RESIGNATION FROM BOARDS OF DIRECTORS |
In the event of Executives termination of employment due to an Event of Termination, Executives service as a director of the Association, the Company, and any affiliate of the Association or the Company shall immediately terminate. This Section 9 shall constitute a resignation notice for such purposes.
10. | NOTICE |
(a) Any purported termination by the Association for Cause shall be communicated by Notice of Termination to Executive. If, within thirty (30) days after any Notice of Termination for Cause is given, Executive notifies the Association that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration, as provided in Section 20. Notwithstanding the pendency of any such dispute, the Association shall discontinue paying Executives compensation until the dispute is finally resolved in accordance with this Agreement. If it is determined that Executive is entitled to compensation and benefits under
10
Section 4 or 5, the payment of such compensation and benefits by the Association shall commence immediately following the date of resolution by arbitration, with interest due Executive on the cash amount that would have been paid pending arbitration (at the prime rate as published in The Wall Street Journal from time to time).
(b) Any other purported termination by the Association or by Executive shall be communicated by a Notice of Termination (as defined in Section 10(c)) to the other party. 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, the parties shall promptly proceed to arbitration as provided in Section 20. Notwithstanding the pendency of any such dispute, the Association shall continue to pay Executive his Base Salary, and other compensation and benefits in effect when the notice giving rise to the dispute was given (except as to termination of Executive for Cause); provided, however, that such payments and benefits shall not continue beyond the date that is 36 months from the date the Notice of Termination is given. In the event the voluntary termination by Executive of his employment is disputed by the Association, and if it is determined in arbitration that Executive is not entitled to termination benefits pursuant to this Agreement, he shall return all cash payments made to him pending resolution by arbitration, with interest thereon at the prime rate as published in The Wall Street Journal from time to time, if it is determined in arbitration that Executives voluntary termination of employment was not taken in good faith and not in the reasonable belief that grounds existed for his voluntary termination. If it is determined that Executive is entitled to receive severance benefits under this Agreement, then any continuation of Base Salary and other compensation and benefits made to Executive under this Section 10 shall offset the amount of any severance benefits that are due to Executive under this Agreement.
(c) For purposes of this Agreement, a Notice of Termination shall mean a written notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executives employment under the provision so indicated.
11. | POST-TERMINATION OBLIGATIONS |
(a) Executive hereby covenants and agrees that, for a period of one year following his termination of employment with the Association, he shall not, without the written consent of the Association, either directly or indirectly:
(i) solicit, offer employment to, or take any other action intended (or that a reasonable person acting in like circumstances would expect) to have the effect of causing any officer or employee of the Association or the Company, or any of their respective subsidiaries or affiliates, to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any business whatsoever that competes with the business of the Association or the Company, or any of their direct or indirect subsidiaries or affiliates or has headquarters or offices within 20 miles of the locations in which the Association or the Company has business operations or has filed an application for regulatory approval to establish an office;
11
(ii) become an officer, employee, consultant, director, independent contractor, agent, sole proprietor, joint venturer, greater than 5% equity owner or stockholder, partner or trustee of any savings bank, savings and loan association, savings and loan holding company, credit union, bank or bank holding company, insurance company or agency, any mortgage or loan broker or any other financial services entity or business that competes with the business of the Association or its affiliates or has headquarters or offices within twenty-five (25) miles of any office of the Association as of the date of this Agreement; provided, however, that this restriction shall not apply if Executives employment is terminated following a Change in Control or if Executive does not have any right to or waives (or returns to the Association) any payments under Section 4 hereof; or
(b) As used in this Agreement, Confidential Information means information belonging to the Association which is of value to the Association in the course of conducting its business and the disclosure of which could result in a competitive or other disadvantage to the Association. Confidential Information includes, without limitation, financial information, reports, and forecasts; inventions, improvements and other intellectual property; trade secrets; know-how; designs, processes or formulae; software; market or sales information or plans; customer lists; and business plans, prospects and opportunities (such as possible acquisitions or dispositions of businesses or facilities) which have been discussed or considered by the management of the Association. Confidential Information includes information developed by the Executive in the course of the Executives employment by the Association, as well as other information to which the Executive may have access in connection with the Executives employment. Confidential Information also includes the confidential information of others with which the Association has a business relationship. Notwithstanding the foregoing, Confidential Information does not include information in the public domain. The Executive understands and agrees that the Executives employment creates a relationship of confidence and trust between the Executive and the Association with respect to all Confidential Information. At all times, both during the Executives employment with the Association and after its termination, the Executive will keep in confidence and trust all such Confidential Information, and will not use or disclose any such Confidential Information without the written consent of the Association, except as may be necessary in the ordinary course of performing the Executives duties to the Association.
(c) Executive shall, upon reasonable notice, furnish such information and assistance to the Association as may reasonably be required by the Association, in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party; provided, however, that Executive shall not be required to provide information or assistance with respect to any litigation between the Executive and the Association or any of its subsidiaries or affiliates.
(d) All payments and benefits to Executive under this Agreement shall be subject to Executives compliance with this Section 11. The parties hereto, recognizing that irreparable injury will result to the Association, its business and property in the event of Executives breach of this Section 11, agree that, in the event of any such breach by Executive, the Association will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive and all persons acting for or with Executive. Executive represents and admits that Executives 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
12
Association, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Association or the Company from pursuing any other remedies available to them for such breach or threatened breach, including the recovery of damages from Executive.
12. | SOURCE OF PAYMENTS |
All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Association. The Company may accede to this Agreement but only for the purpose of guaranteeing payment and provision of all amounts and benefits due hereunder to Executive.
13. | EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS |
This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Association or any predecessor of the Association and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement.
14. | NO ATTACHMENT; BINDING ON SUCCESSORS |
(a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect 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 and the Association 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 be 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. | REQUIRED PROVISIONS |
(a) The Association may terminate Executives employment at any time, but any termination by the Board other than termination for Cause shall not prejudice Executives right to compensation or other benefits under this Agreement. Executive shall have no right to receive compensation or other benefits for any period after termination for Cause.
13
(b) If Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Associations affairs by a notice served under Section 8(e)(3) [12 USC §1818(e)(3)] or 8(g)(1) [12 USC §1818(g)(1)] of the Federal Deposit Insurance Act, the Associations obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Association may in its discretion (i) pay Executive all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate (in whole or in part) any of its obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from participating in the conduct of the Associations affairs by an order issued under Section 8(e)(4) [12 USC §1818(e)(4)] or 8(g)(1) [12 USC §1818(g)(1)] of the Federal Deposit Insurance Act, all obligations of the Association under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.
(d) If the Association is in default as defined in Section 3(x)(1) [12 USC §1813(x)(1)] of the Federal Deposit Insurance Act, all obligations of the Association under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations under this Agreement shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the Association, (i) by the Director of the OTS or his or her designee, at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Association under the authority contained in Section 13(c) [12 USC §1823(c)] of the Federal Deposit Insurance Act; or (ii) by the Director or his or her designee at the time the Director or his or her designee approves a supervisory merger to resolve problems related to operation of the Association or when the Association is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action.
(f) Notwithstanding anything herein contained to the contrary, any payments to Executive by the Association or the Company, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1828(k), and the regulations promulgated thereunder in 12 C.F.R. Part 359.
17. | 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.
14
18. | 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.
19. | GOVERNING LAW |
This Agreement shall be governed by the laws of the State of South Carolina except to the extent superseded by federal law.
20. | ARBITRATION |
Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by binding arbitration, as an alternative to civil litigation and without any trial by jury to resolve such claims, conducted by a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the main office of the Association, in accordance with the rules of the American Arbitration Associations National Rules for the Resolution of Employment Disputes (National Rules) then in effect. One arbitrator shall be selected by Executive, one arbitrator shall be selected by the Association and the third arbitrator shall be selected by the arbitrators selected by the parties. If the arbitrators are unable to agree within fifteen (15) days upon a third arbitrator, the arbitrator shall be appointed for them from a panel of arbitrators selected in accordance with the National Rules. Judgment may be entered on the arbitrators award in any court having jurisdiction.
21. | INDEMNIFICATION |
(a) Executive shall be provided with coverage under a standard directors and officers liability insurance policy, and shall be indemnified for the term of this Agreement and for a period of six years thereafter to the fullest extent permitted under applicable law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Association or any affiliate (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys fees and the cost of reasonable settlements (such settlements must be approved by the Board), provided, however, Executive shall not be indemnified or reimbursed for legal expenses or liabilities incurred in connection with an action, suit or proceeding arising from any illegal or fraudulent act committed by Executive. Any such indemnification shall be made consistent with Section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. §1828(k), and the regulations issued thereunder in 12 C.F.R. Part 359.
(b) Any indemnification by the Association shall be subject to compliance with any applicable regulations of the Federal Deposit Insurance Corporation.
15
22. | NOTICE. |
For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below:
To the Association: |
T. Curtis Evatt 115 E. North 2 nd Street Seneca, South Carolina 29678-1039 |
|
To Executive: |
T.R. Evatt At the address last appearing on the personnel records of the Association |
16
SIGNATURES
IN WITNESS WHEREOF , the Association and the Company have caused this Agreement to be executed by their duly authorized representatives, and Executive has signed this Agreement, on the date first above written.
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION | ||
By: |
|
|
Curtis T. Evatt | ||
OCONEE FEDERAL FINANCIAL CORP. | ||
By: |
|
|
Curtis T. Evatt | ||
EXECUTIVE | ||
|
||
T.R. Evatt President and Chief Executive Officer |
17
Exhibit 10.6
[FORM OF]
EMPLOYMENT AGREEMENT
This Employment Agreement (this Agreement) is made effective as of , 2010 (the Effective Date), by and between Oconee Federal Savings and Loan Association, a federally chartered savings and loan association (the Association) and Curtis T. Evatt (Executive). The Association and Executive are sometimes collectively referred to herein as the parties. Any reference to the Company shall mean Oconee Federal Financial Corp., the mid-tier holding company of the Association. The Company is a signatory to this Agreement for the purpose of guaranteeing the Associations performance hereunder.
WITNESSETH
WHEREAS , Executive is currently employed as Executive Vice President & Treasurer of the Association; and
WHEREAS , the Association has adopted a Plan of Reorganization pursuant to which the Association will convert to a federally chartered stock savings and loan association and become a wholly owned subsidiary of the Company; and
WHEREAS , the Association desires to assure itself of the continued availability of the Executives services as provided in this Agreement; and
WHEREAS , the Executive is willing to serve the Association on the terms and conditions hereinafter set forth.
NOW, THEREFORE , in consideration of the mutual covenants herein contained, and upon the terms and conditions hereinafter provided, the parties hereby agree as follows:
1. | POSITION AND RESPONSIBILITIES |
During the term of this Agreement, Executive shall serve as a member of the board of directors of the Association (the Board), Executive Vice President & Treasurer of the Association. Executive shall have such duties, responsibilities and powers as are customary and appropriate for such offices, including without limitation, keeping the President and Chief Executive Officer fully informed of his activities. Executive also shall be nominated as a member of the Board, subject to election by members or shareholders of the Association, as the case may be. Executive also agrees to serve, if elected, as an officer and director of any affiliate of the Association.
2. | TERM AND DUTIES |
(a) Three Year Contract; Annual Renewal . The term of this Agreement will begin as of the Effective Date and shall continue thereafter for a period of three (3) years. Beginning on the first annual anniversary date of this Agreement, and on each annual anniversary date thereafter, the term of this Agreement shall be extended for a period of one year in addition to
the then-remaining term; provided that (1) the Association has not given notice to the Executive in writing at least ninety (90) days prior to such renewal date that the term of this Agreement shall not be extended further; and (2) prior to such renewal date, the disinterested members of the Board of Directors of the Association (the Board) have explicitly reviewed and approved the extension and the results thereof shall be included in the minutes of the Boards meeting. On an annual basis prior to the deadline for the notice period referenced above, the Board shall conduct a performance review of the Executive for purposes of determining whether to provide notice of non-renewal. Reference herein to the term of this Agreement shall refer to both such initial term and such extended terms.
(b) Termination of Agreement . Notwithstanding anything contained in this Agreement to the contrary, either Executive or the Association may terminate Executives employment with the Association at any time during the term of this Agreement, subject to the terms and conditions of this Agreement.
(c) Continued Employment Following Expiration of Term . Nothing in this Agreement shall mandate or prohibit a continuation of Executives employment following the expiration of the term of this Agreement, upon such terms and conditions as the Association and Executive may mutually agree.
(d) Duties; Membership on Other Boards . During the term of this Agreement, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence approved by the Board, Executive shall devote substantially all of his business time, attention, skill, and efforts to the faithful performance of his duties hereunder, including activities and services related to the organization, operation and management of the Association; provided, however, that, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, business companies or business or civic organizations, which, in the Boards judgment, will not present any conflict of interest with the Association, or materially affect the performance of Executives duties pursuant to this Agreement. Executive shall provide the Board of Directors annually for its approval a list of organizations for which the Executive acts as a director or officer.
3. | COMPENSATION, BENEFITS AND REIMBURSEMENT |
(a) Base Salary . In consideration of Executives performance of the duties set forth in Section 2, the Association shall provide Executive the compensation specified in this Agreement. The Association shall pay Executive a salary of $ per year (Base Salary). The Base Salary shall be payable biweekly, or with such other frequency as officers of the Association are generally paid. During the term of this Agreement, the Base Salary shall be reviewed at least annually by the Board or by a committee designated by the Board, and the Association may increase, but not decrease (except for a decrease that is generally applicable to all employees) Executives Base Salary. Any increase in Base Salary shall become Base Salary for purposes of this Agreement.
(b) Bonus and Incentive Compensation . Executive shall be entitled to equitable participation in incentive compensation and bonuses in any plan or arrangement of the Association or the Company in which Executive is eligible to participate. Nothing paid to Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which Executive is entitled under this Agreement.
2
(c) Employee Benefits . The Association shall provide Executive with employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or from which he was deriving benefit immediately prior to the commencement of the term of this Agreement, and the Association shall not, without Executives prior written consent, make any changes in such plans, arrangements or perquisites that would adversely affect Executives rights or benefits thereunder, except as to any changes that are applicable to all participating employees. Without limiting the generality of the foregoing provisions of this Section 3(c), Executive will be entitled to participate in and receive benefits under any employee benefit plans including, but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident insurance plans, medical coverage or any other employee benefit plan or arrangement made available by the Association and/or the Company in the future to its senior executives, including any stock benefit plans, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements.
(d) Paid Time Off . Executive shall be entitled to paid vacation time each year during the term of this Agreement (measured on a fiscal or calendar year basis, in accordance with the Associations usual practices), as well as sick leave, holidays and other paid absences in accordance with the Associations policies and procedures for senior executives. Any unused paid time off during an annual period shall be treated in accordance with the Associations personnel policies as in effect from time to time.
(e) Expense Reimbursements . The Association shall also pay or reimburse Executive for all reasonable travel, entertainment and other reasonable expenses incurred by Executive during the course of performing his obligations under this Agreement, including, without limitation, fees for memberships in such clubs and organizations as Executive and the Board shall mutually agree are necessary and appropriate in connection with the performance of his duties under this Agreement, upon presentation to the Association of an itemized account of such expenses in such form as the Association may reasonably require, provided that such payment or reimbursement shall be made as soon as practicable but in no event later than March 15 of the year following the year in which such right to such payment or reimbursement occurred.
(f) Automobile and Social Club . The Association shall provide Executive with either (i) the use of an automobile suitable to the Executives position, or (ii) a monthly cash allowance to cover the expenses of such an automobile. The Association shall annually include on Executives Form W-2 any amount attributable to Executives personal use of such automobile. In addition, the Association shall reimburse or pay Executive amounts sufficient to establish or maintain membership in any club or organization (business, social or otherwise) which will benefit the Association (including such fees or dues relating to the use of the club or organization).
3
4. | PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION |
(a) Upon the occurrence of an Event of Termination (as herein defined) during the term of this Agreement, the provisions of this Section 4 shall apply; provided, however, that in the event such Event of Termination occurs within eighteen (18) months following a Change in Control (as defined in Section 5 hereof), Section 5 shall apply instead. As used in this Agreement, an Event of Termination shall mean and include any one or more of the following:
(i) the involuntary termination of Executives employment hereunder by the Association for any reason other than termination governed by Section 5 (in connection with or following a Change in Control), Section 6 (due to Disability or death), Section 7 (due to Retirement), or Section 8 (for Cause), provided that such termination constitutes a Separation from Service within the meaning of Section 409A of the Internal Revenue Code (Code); or
(ii) Executives resignation from the Associations employ upon any of the following, unless consented to by Executive:
(A) failure to appoint Executive to the position set forth in Section 1, or a material change in Executives function, duties, or responsibilities, which change would cause Executives position to become one of lesser responsibility, importance, or scope from the position and responsibilities described in Section 1, to which Executive has not agreed in writing (and any such material change shall be deemed a continuing breach of this Agreement by the Association);
(B) a relocation of Executives principal place of employment to a location that is more than 20 miles from the location of the Associations principal executive offices as of the date of this Agreement;
(C) a material reduction in the benefits and perquisites, including Base Salary, to Executive from those being provided as of the Effective Date (except for any reduction that is part of a reduction in pay or benefits that is generally applicable to officers or employees of the Association);
(D) a liquidation or dissolution of the Association; or
(E) a material breach of this Agreement by the Association.
Upon the occurrence of any event described in clause (ii) above, Executive shall have the right to elect to terminate his employment under this Agreement by resignation for Good Reason upon not less than thirty (30) days prior written notice given within a reasonable period of time (not to exceed ninety (90) days) after the event giving rise to the right to elect, which termination by Executive shall be an Event of Termination. The Association shall have thirty (30) days to cure the condition giving rise to the Event of Termination, provided that the Association may elect to waive said thirty (30) day period.
4
(b) Upon the occurrence of an Event of Termination, the Association shall pay Executive, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, the Base Salary and bonuses that Executive would be entitled to for the remaining unexpired term of the Agreement. For purposes of determining the bonus(es) payable hereunder, the bonus(es) will be deemed to be (i) equal to the highest bonus paid at any time during the prior three years, and (ii) otherwise paid at such time as such bonus would have been paid absent an Event of Termination. Such payments shall be paid in a lump sum within ten (10) days of the Executives Separation from Service (within the meaning of Section 409A of the Code) and shall not be reduced in the event Executive obtains other employment following the Event of Termination. Notwithstanding the foregoing, Executive shall not be entitled to any payments or benefits under this Section 4 unless and until Executive executes a release of his claims against the Association, the Company and any affiliate, and their officers, directors, successors and assigns, releasing said persons from any and all claims, rights, demands, causes of action, suits, arbitrations or grievances relating to the employment relationship, including claims under the Age Discrimination in Employment Act, but not including claims for benefits under tax-qualified plans or other benefit plans in which Executive is vested, claims for benefits required by applicable law or claims with respect to obligations set forth in this Agreement that survive the termination of this Agreement.
(c) Upon the occurrence of an Event of Termination, the Association shall pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, a lump sum cash payment reasonably estimated to be equal to the present value of the contributions that would have been made on the Executives behalf under the Associations defined contribution plans (e.g., 401(k) Plan, ESOP, and any other defined contribution plan maintained by the Association), as if Executive had continued working for the Association for the remaining unexpired term of the Agreement following such Event of Termination, earning the salary that would have been achieved during such period. Such payments shall be paid in a lump sum within ten (10) days of the Executives Separation from Service and shall not be reduced in the event Executive obtains other employment following the Event of Termination.
(d) Upon the occurrence of an Event of Termination, the Association shall provide, at the Associations expense, for the remaining unexpired term of the Agreement, nontaxable medical and dental coverage and life insurance coverage substantially comparable, as reasonably available, to the coverage maintained by the Association for Executive prior to the Event of Termination, except to the extent such coverage may be changed in its application to all Association employees.
(e) For purposes of this Agreement, a Separation from Service shall have occurred if the Association and Executive reasonably anticipate that either no further services will be performed by the Executive after the date of the Event of Termination (whether as an employee or as an independent contractor) or the level of further services performed will not exceed 49% of the average level of bona fide services in the 12 months immediately preceding the Event of Termination. For all purposes hereunder, the definition of Separation from Service shall be interpreted consistent with Treasury Regulation Section 1.409A-1(h)(ii). If Executive is a Specified Employee, as defined in Code Section 409A and any payment to be made under sub-paragraph (b) or (c) of this Section 4 shall be determined to be subject to Code Section 409A,
5
then if required by Code Section 409A, such payment or a portion of such payment (to the minimum extent possible) shall be delayed and shall be paid on the first day of the seventh month following Executives Separation from Service.
5. | CHANGE IN CONTROL |
(a) Any payments made to Executive pursuant to this Section 5 are in lieu of any payments that may otherwise be owed to Executive pursuant to this Agreement under Section 4, such that Executive shall either receive payments pursuant to Section 4 or pursuant to Section 5, but not pursuant to both Sections.
(b) For purposes of this Agreement, the term Change in Control shall mean:
(i) a change in control of a nature that would be required to be reported in response to Item 5.01(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act); or
(ii) a change in control of the Association within the meaning of the Home Owners Loan Act, as amended (HOLA), and applicable rules and regulations promulgated thereunder, as in effect at the time of the Change in Control; or
(iii) any of the following events, upon which a Change in Control shall be deemed to have occurred:
(A) any person (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Association or the Company representing 25% or more of the combined voting power of such outstanding securities, except for any securities purchased by any employee stock ownership plan or trust established by the Association or the Company; or
(B) individuals who constitute the Board on the Effective Date (the Incumbent Board) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the Effective Date whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by stockholders of the Association or the Company was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this subsection (B), considered as though they were members of the Incumbent Board; or
(C) a sale of all or substantially all the assets of the Association or the Company, or a plan of reorganization, merger, consolidation, or similar transaction occurs in which the security holders of the Association or the Company immediately prior to the consummation of the transaction do not own at least 50.1% of the securities of the surviving entity to be outstanding upon consummation of the transaction; or
6
(D) a proxy statement is issued soliciting proxies from stockholders of the Association or the Company by someone other than the current management of the Association or the Company of the Association, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Association or the Company, or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan are to be exchanged for or converted into cash or property or securities not issued by the Association or the Company; or
(E) a tender offer is made for 25% or more of the voting securities of the Association or the Company, and stockholders owning beneficially or of record 25% or more of the outstanding securities of the Association or the Company have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror.
(F) Notwithstanding anything herein to the contrary, a Change in Control shall not be deemed to have occurred in connection with the initial reorganization and conversion of the Association to a stock Association as a subsidiary of the Company, or upon any subsequent second-step conversion of Oconee Federal, MHC to stock form.
(c) Upon the occurrence of a Change in Control followed within eighteen (18) months by an Event of Termination (as defined in Section 4 hereof), Executive, shall receive as severance pay or liquidated damages, or both, a lump sum cash payment equal to three times the sum of (i) Executives highest annual rate of Base Salary paid to Executive at any time under this Agreement, plus (ii) the highest bonus paid to Executive with respect to the three completed fiscal years prior to the Change in Control. Such payment shall be paid in a lump sum within ten (10) days of the Executives Separation from Service (within the meaning of Section 409A of the Code) and shall not be reduced in the event Executive obtains other employment following the Event of Termination.
(d) Upon the occurrence of a Change in Control followed within eighteen (18) months by an Event of Termination (as defined in Section 4 hereof), the Association shall pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, a lump sum cash payment reasonably estimated to be equal to the present value of the contributions that would have been made on Executives behalf under the Associations defined contribution plans (e.g., 401(k) Plan, ESOP, and any other defined contribution plan maintained by the Association), as if Executive had continued working for the Association for thirty-six (36) months after the effective date of such termination of employment, earning the salary that would have been achieved during such period. Such payments shall be paid in a lump sum within ten (10) days of the Executives Separation from Service and shall not be reduced in the event Executive obtains other employment following the Event of Termination.
7
If Executive is a Specified Employee, as defined in Code Section 409A and any payment to be made under this sub-paragraph (c) or (d) of this Section 5 shall be determined to be subject to Code Section 409A, then if required by Code Section 409A, such payment or a portion of such payment (to the minimum extent possible) shall be delayed and shall be paid on the first day of the seventh month following Executives Separation from Service.
(e) Upon the occurrence of a Change in Control followed within eighteen (18) months by an Event of Termination (as defined in Section 4 hereof), the Association (or its successor) shall provide at the Associations (or its successors) expense, nontaxable medical and dental coverage and life insurance coverage substantially comparable, as reasonably available, to the coverage maintained by the Association for Executive prior to his termination, except to the extent such coverage may be changed in its application to all Association employees and then the coverage provided to Executive shall be commensurate with such changed coverage. Such coverage shall cease thirty-six (36) months following the termination of Executives employment.
(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 in the event of a Change in Control would be deemed to include an excess parachute payment under Section 280G of the Internal Revenue Code or any successor thereto, then such payments or benefits shall be reduced to an amount, the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executives base amount, as determined in accordance with Section 280G of the Code. In the event a reduction is necessary, then the cash severance payable by the Association pursuant to Section 5 shall be reduced by the minimum amount necessary to result in no portion of the payments and benefits payable by the Association under Section 5 being non-deductible to the Association pursuant to Section 280G of the Code and subject to excise tax imposed under Section 4999 of the Code.
6. | TERMINATION FOR DISABILITY OR DEATH |
(a) Termination of Executives employment based on Disability shall be construed to comply with Section 409A of the Internal Revenue Code and shall be deemed to have occurred if: (i) Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, or last for a continuous period of not less than 12 months; (ii) by reason of any medically determinable physical or mental impairment that can be expected to result in death, or last for a continuous period of not less than 12 months, Executive is receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Association or the Company; or (iii) Executive is determined to be totally disabled by the Social Security Administration. The provisions of Sections 6(b) and (c) shall apply upon the termination of the Executives employment based on Disability. Upon the determination that Executive has suffered a Disability, disability payments hereunder shall commence within thirty (30) days.
(b) Executive shall be entitled to receive benefits under any short-term or long-term disability plan maintained by the Association. To the extent such benefits are less than Executives Base Salary, the Association shall pay Executive an amount equal to the difference
8
between such disability plan benefits and the amount of Executives Base Salary for the longer of one (1) year following the termination of his employment due to Disability or the remaining term of this Agreement, which shall be payable in accordance with the regular payroll practices of the Association.
(c) The Association shall cause to be continued life insurance coverage and non-taxable medical and dental coverage substantially comparable, as reasonable available, to the coverage maintained by the Association for Executive prior to the termination of his employment based on Disability, except to the extent such coverage may be changed in its application to all Association employees or not available on an individual basis to an employee terminated based on Disability. This coverage shall cease upon the earlier of (i) the date Executive returns to the full-time employment of the Association; (ii) Executives full-time employment by another employer; (iii) expiration of the remaining term of this Agreement; or (iv) Executives death.
(d) In the event of Executives death during the term of this Agreement, his estate, legal representatives or named beneficiaries (as directed by Executive in writing) shall be paid Executives Base Salary at the rate in effect at the time of Executives death in accordance with the regular payroll practices of the Association for a period of one (1) year from the date of Executives death, and the Association shall continue to provide non-taxable medical, dental and other insurance benefits normally provided for Executives family (in accordance with its customary co-pay percentages) for twelve (12) months after Executives death. Such payments are in addition to any other life insurance benefits that Executives beneficiaries may be entitled to receive under any employee benefit plan maintained by the Association for the benefit of Executive, including, but not limited to, the Associations tax-qualified retirement plans.
7. | TERMINATION UPON RETIREMENT |
Termination of Executives employment based on Retirement shall mean termination of Executives employment at any time after Executive reaches age 65 or in accordance with any retirement policy established by the Board with Executives consent with respect to him. Upon termination of Executive based on Retirement, no amounts or benefits shall be due Executive under this Agreement, and Executive shall be entitled to all benefits under any retirement plan of the Association and other plans to which Executive is a party.
8. | TERMINATION FOR CAUSE |
(a) The Association may terminate Executives employment at any time, but any termination other than termination for Cause, as defined herein, shall not prejudice Executives right to compensation or other benefits under this Agreement. Executive shall have no right to receive compensation or other benefits for any period after termination for Cause. The term Cause as used herein, shall exist when there has been a good faith determination by the Board that there shall have occurred one or more of the following events with respect to the Executive: (i) the conviction of the Executive of a felony or of any lesser criminal offense involving moral turpitude; (ii) the willful commission by the Executive of a criminal or other act that, in the judgment of the Board will likely cause substantial economic damage to the Company or the Association or substantial injury to the business reputation of the Company or the Association; (iii) the commission by the Executive of an act of fraud in the performance of his duties on
9
behalf of the Company or the Association; (iv) the continuing willful failure of the Executive to perform his duties to the Company or the Association (other than any such failure resulting from the Executives incapacity due to physical or mental illness) after written notice thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to the Executive by the Board; or (v) an order of a federal or state regulatory agency or a court of competent jurisdiction requiring the termination of the Executives employment by the Company. Notwithstanding the foregoing, Cause shall not be deemed to exist unless there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive to be heard before the Board), finding that in the good faith opinion of the Board the Executive was guilty of conduct described above and specifying the particulars thereof. Prior to holding a meeting at which the Board is to make a final determination whether Cause exists, if the Board determines in good faith at a meeting of the Board, by not less than a majority of its entire membership, that there is probable cause for it to find that the Executive was guilty of conduct constituting Cause as described above, the Board may suspend the Executive from his duties hereunder for a reasonable period of time not to exceed fourteen (14) days pending a further meeting at which the Executive shall be given the opportunity to be heard before the Board. Upon a finding of Cause, the Board shall deliver to the Executive a Notice of Termination, as more fully described in Section 10 below.
(b) For purposes of this Section 8, no act or failure to act, on the part of Executive, shall be considered willful unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executives action or omission was in the best interests of the Association. Any act, or failure to act, based upon the direction of the Board or based upon the advice of counsel for the Association shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Association.
9. | RESIGNATION FROM BOARDS OF DIRECTORS |
In the event of Executives termination of employment due to an Event of Termination, Executives service as a director of the Association, the Company, and any affiliate of the Association or the Company shall immediately terminate. This Section 9 shall constitute a resignation notice for such purposes.
10. | NOTICE |
(a) Any purported termination by the Association for Cause shall be communicated by Notice of Termination to Executive. If, within thirty (30) days after any Notice of Termination for Cause is given, Executive notifies the Association that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration, as provided in Section 20. Notwithstanding the pendency of any such dispute, the Association shall discontinue paying Executives compensation until the dispute is finally resolved in accordance with this Agreement. If it is determined that Executive is entitled to compensation and benefits under Section 4 or 5, the payment of such compensation and benefits by the Association shall commence immediately following the date of resolution by arbitration, with interest due Executive on the cash amount that would have been paid pending arbitration (at the prime rate as published in The Wall Street Journal from time to time).
10
(b) Any other purported termination by the Association or by Executive shall be communicated by a Notice of Termination (as defined in Section 10(c)) to the other party. 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, the parties shall promptly proceed to arbitration as provided in Section 20. Notwithstanding the pendency of any such dispute, the Association shall continue to pay Executive his Base Salary, and other compensation and benefits in effect when the notice giving rise to the dispute was given (except as to termination of Executive for Cause); provided, however, that such payments and benefits shall not continue beyond the date that is 36 months from the date the Notice of Termination is given. In the event the voluntary termination by Executive of his employment is disputed by the Association, and if it is determined in arbitration that Executive is not entitled to termination benefits pursuant to this Agreement, he shall return all cash payments made to him pending resolution by arbitration, with interest thereon at the prime rate as published in The Wall Street Journal from time to time, if it is determined in arbitration that Executives voluntary termination of employment was not taken in good faith and not in the reasonable belief that grounds existed for his voluntary termination. If it is determined that Executive is entitled to receive severance benefits under this Agreement, then any continuation of Base Salary and other compensation and benefits made to Executive under this Section 10 shall offset the amount of any severance benefits that are due to Executive under this Agreement.
(c) For purposes of this Agreement, a Notice of Termination shall mean a written notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executives employment under the provision so indicated.
11. | POST-TERMINATION OBLIGATIONS |
(a) Executive hereby covenants and agrees that, for a period of one year following his termination of employment with the Association, he shall not, without the written consent of the Association, either directly or indirectly:
(i) solicit, offer employment to, or take any other action intended (or that a reasonable person acting in like circumstances would expect) to have the effect of causing any officer or employee of the Association or the Company, or any of their respective subsidiaries or affiliates, to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any business whatsoever that competes with the business of the Association or the Company, or any of their direct or indirect subsidiaries or affiliates or has headquarters or offices within 20 miles of the locations in which the Association or the Company has business operations or has filed an application for regulatory approval to establish an office;
(ii) become an officer, employee, consultant, director, independent contractor, agent, sole proprietor, joint venturer, greater than 5% equity owner or
11
stockholder, partner or trustee of any savings bank, savings and loan association, savings and loan holding company, credit union, bank or bank holding company, insurance company or agency, any mortgage or loan broker or any other financial services entity or business that competes with the business of the Association or its affiliates or has headquarters or offices within twenty-five (25) miles of any office of the Association as of the date of this Agreement; provided, however, that this restriction shall not apply if Executives employment is terminated following a Change in Control or if Executive does not have any right to or waives (or returns to the Association) any payments under Section 4 hereof; or
(b) As used in this Agreement, Confidential Information means information belonging to the Association which is of value to the Association in the course of conducting its business and the disclosure of which could result in a competitive or other disadvantage to the Association. Confidential Information includes, without limitation, financial information, reports, and forecasts; inventions, improvements and other intellectual property; trade secrets; know-how; designs, processes or formulae; software; market or sales information or plans; customer lists; and business plans, prospects and opportunities (such as possible acquisitions or dispositions of businesses or facilities) which have been discussed or considered by the management of the Association. Confidential Information includes information developed by the Executive in the course of the Executives employment by the Association, as well as other information to which the Executive may have access in connection with the Executives employment. Confidential Information also includes the confidential information of others with which the Association has a business relationship. Notwithstanding the foregoing, Confidential Information does not include information in the public domain. The Executive understands and agrees that the Executives employment creates a relationship of confidence and trust between the Executive and the Association with respect to all Confidential Information. At all times, both during the Executives employment with the Association and after its termination, the Executive will keep in confidence and trust all such Confidential Information, and will not use or disclose any such Confidential Information without the written consent of the Association, except as may be necessary in the ordinary course of performing the Executives duties to the Association.
(c) Executive shall, upon reasonable notice, furnish such information and assistance to the Association as may reasonably be required by the Association, in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party; provided, however, that Executive shall not be required to provide information or assistance with respect to any litigation between the Executive and the Association or any of its subsidiaries or affiliates.
(d) All payments and benefits to Executive under this Agreement shall be subject to Executives compliance with this Section 11. The parties hereto, recognizing that irreparable injury will result to the Association, its business and property in the event of Executives breach of this Section 11, agree that, in the event of any such breach by Executive, the Association will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive and all persons acting for or with Executive. Executive represents and admits that Executives experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Association, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Association or the Company from pursuing any other remedies available to them for such breach or threatened breach, including the recovery of damages from Executive.
12
12. | SOURCE OF PAYMENTS |
All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Association. The Company may accede to this Agreement but only for the purpose of guaranteeing payment and provision of all amounts and benefits due hereunder to Executive.
13. | EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS |
This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Association or any predecessor of the Association and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement.
14. | NO ATTACHMENT; BINDING ON SUCCESSORS |
(a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect 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 and the Association 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 be 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. | REQUIRED PROVISIONS |
(a) The Association may terminate Executives employment at any time, but any termination by the Board other than termination for Cause shall not prejudice Executives right to compensation or other benefits under this Agreement. Executive shall have no right to receive compensation or other benefits for any period after termination for Cause.
13
(b) If Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Associations affairs by a notice served under Section 8(e)(3) [12 USC §1818(e)(3)] or 8(g)(1) [12 USC §1818(g)(1)] of the Federal Deposit Insurance Act, the Associations obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Association may in its discretion (i) pay Executive all or part of the compensation withheld while its contract obligations were suspended and (ii) reinstate (in whole or in part) any of its obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from participating in the conduct of the Associations affairs by an order issued under Section 8(e)(4) [12 USC §1818(e)(4)] or 8(g)(1) [12 USC §1818(g)(1)] of the Federal Deposit Insurance Act, all obligations of the Association under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.
(d) If the Association is in default as defined in Section 3(x)(1) [12 USC §1813(x)(1)] of the Federal Deposit Insurance Act, all obligations of the Association under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations under this Agreement shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the Association, (i) by the Director of the OTS or his or her designee, at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Association under the authority contained in Section 13(c) [12 USC §1823(c)] of the Federal Deposit Insurance Act; or (ii) by the Director or his or her designee at the time the Director or his or her designee approves a supervisory merger to resolve problems related to operation of the Association or when the Association is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action.
(f) Notwithstanding anything herein contained to the contrary, any payments to Executive by the Association or the Company, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1828(k), and the regulations promulgated thereunder in 12 C.F.R. Part 359.
17. | 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.
18. | 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.
14
19. | GOVERNING LAW |
This Agreement shall be governed by the laws of the State of South Carolina except to the extent superseded by federal law.
20. | ARBITRATION |
Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by binding arbitration, as an alternative to civil litigation and without any trial by jury to resolve such claims, conducted by a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the main office of the Association, in accordance with the rules of the American Arbitration Associations National Rules for the Resolution of Employment Disputes (National Rules) then in effect. One arbitrator shall be selected by Executive, one arbitrator shall be selected by the Association and the third arbitrator shall be selected by the arbitrators selected by the parties. If the arbitrators are unable to agree within fifteen (15) days upon a third arbitrator, the arbitrator shall be appointed for them from a panel of arbitrators selected in accordance with the National Rules. Judgment may be entered on the arbitrators award in any court having jurisdiction.
21. | INDEMNIFICATION |
(a) Executive shall be provided with coverage under a standard directors and officers liability insurance policy, and shall be indemnified for the term of this Agreement and for a period of six years thereafter to the fullest extent permitted under applicable law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Association or any affiliate (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys fees and the cost of reasonable settlements (such settlements must be approved by the Board), provided, however, Executive shall not be indemnified or reimbursed for legal expenses or liabilities incurred in connection with an action, suit or proceeding arising from any illegal or fraudulent act committed by Executive. Any such indemnification shall be made consistent with Section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. §1828(k), and the regulations issued thereunder in 12 C.F.R. Part 359.
(b) Any indemnification by the Association shall be subject to compliance with any applicable regulations of the Federal Deposit Insurance Corporation.
15
22. | NOTICE |
For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below:
To the Association: |
T. R. Evatt 115 E. North 2 nd Street Seneca, South Carolina 29678-1039 |
|
To Executive: |
Curtis T. Evatt At the address last appearing on the personnel records of the Association |
16
SIGNATURES
IN WITNESS WHEREOF , the Association and the Company have caused this Agreement to be executed by their duly authorized representatives, and Executive has signed this Agreement, on the date first above written.
OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION | ||
By: |
|
|
Chairman of the Board | ||
OCONEE FEDERAL FINANCIAL CORP. | ||
By: |
|
|
Chairman of the Board | ||
EXECUTIVE | ||
|
||
Curtis T. Evatt Executive Vice President & Treasurer |
17
Exhibit 21
Subsidiaries of the Registrant
The following is a list of subsidiaries of Oconee Federal Financial Corp. following the reorganization:
Name |
State of Incorporation |
|
Oconee Federal Savings and Loan Association |
Federal |
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Oconee Federal Savings and Loan Association
We consent to the use in this Registration Statement of Oconee Federal Financial Corp. (Proposed Holding Company) on Form S-1 filed with the Securities Exchange Commission and Form MHC-1/MHC-2 of Oconee Federal Savings and Loan Association filed with the Office of Thrift Supervision of our report dated September 8, 2010, related to the audits of the financial statements of Oconee Federal Savings and Loan Association at June 30, 2010 and 2009, and for each of the years in the two year period ended June 30, 2010, included herein and to the reference to our firm under the heading Experts and Legal and Tax Matters in this Registration Statement on Form S-1 and Form MHC-1/MHC-2.
Greenville, South Carolina
September 13, 2010
Exhibit 23.3
McAuliffe Financial, LLC
September 13, 2010
Board of Directors
Oconee Federal Savings and Loan Association
115 E. North 2 nd Street
Seneca, South Carolina 29678
Dear Board Members:
We hereby consent to the use of our firms name in (i) the Registration Statement on Form S-1 to be filed by Oconee Federal Financial, Corp., with the Securities and Exchange Commission, and (ii) the Forms MHC-1 and MHC-2 to be filed by Oconee Federal Savings and Loan Association, with the Office of Thrift Supervision, in each case as amended and supplemented. We also hereby consent to the inclusion of, summary of and references to our appraisal and our statement concerning subscription rights in such filings including the prospectus of Oconee Federal Financial Corp.
Sincerely, |
/s/ J. Kevin McAuliffe |
J. Kevin McAuliffe President McAuliffe Financial, LLC |
19457 Olson Avenue, Lake Oswego, OR 97034
503-638-9685
www.mcauliffefinancial.com
Exhibit 99.1
McAuliffe Financial, LLC
August 19, 2010
Mr. T. Rhett Evatt
President and Chief Executive Officer
Oconee Federal Savings and Loan Association
115 East North First Street
Seneca, SC 29678
Dear Mr Evatt:
This letter sets forth the agreement between Oconee Federal Savings and Loan Association, Seneca, South Carolina (the Association), and McAuliffe Financial, LLC. (McAuliffe Financial) for the independent appraisal services in connection with the stock to be issued concurrent with the mutual holding company reorganization and offering of stock. The specific appraisal services to be rendered by McAuliffe Financial are described below.
Description of Conversion Appraisal Services
Prior to preparing the valuation report, McAuliffe Financial will conduct a financial due diligence, including on-site interviews of senior management and reviews of financial and other documents and records, to gain insight into the Associations operations, financial condition, profitability, market area, risks and various internal and external factors which impact the pro forma value of the Association.
McAuliffe Financial will prepare a written detailed valuation report of the Association that will be fully consistent with applicable regulatory guidelines and standard pro forma valuation practices. In this regard, the applicable regulatory guidelines are those set forth in the Office of Thrift Supervisions (OTS) October 21, 1994 Guidelines for Appraisal Reports for the Valuation of Savings and Loan Associations Converting from Mutual to Stock Form of Organization, which have been endorsed by the Federal Deposit Insurance Corporation (FDIC) and various state banking agencies.
The appraisal report will include an in-depth analysis of the Associations financial condition and operating results, as well as an assessment of the Associations interest rate risk, credit risk and liquidity risk. The appraisal report will describe the Associations business strategies, market area, prospects for the future and the intended use of proceeds both in the short term and over the longer term. A peer group analysis relative to publicly-traded savings institutions will be conducted for the purpose of determining appropriate valuation adjustments relative to the group.
We will review pertinent sections of the applications and offering documents to obtain necessary data and information for the appraisal, including the impact of key deal elements on the appraised value, such as dividend policy, use of proceeds and reinvestment rate, tax rate, conversion expenses, characteristics of stock plans and charitable foundation contribution. The appraisal report will conclude with a midpoint
19457 Olson Avenue, Lake Oswego, OR 97034
503-638-9685
www.McAuliffefinancial.com
McAuliffe Financial, LLC
pro forma market value that will establish the range of value, and reflect the offering price per share determined by the Associations Board of Directors. The appraisal report may be periodically updated prior to the commencement of the conversion offering and the appraisal is required to be updated just prior to the closing of the conversion offering.
McAuliffe Financial agrees to deliver the valuation appraisal and subsequent updates, in writing, to the Association at the above address in conjunction with the filing of the regulatory application. Subsequent updates will be filed promptly as certain events occur which would warrant the preparation and filing of such valuation updates. Further, McAuliffe Financial agrees to perform such other services as are necessary or required in connection with the regulatory review of the appraisal and respond to the regulatory comments, if any, regarding the valuation appraisal and subsequent updates.
Fee Structure and Payment Schedule
The Association agrees to pay McAuliffe Financial a fixed fee of $40,000 for preparation and delivery of the original appraisal report, plus reimbursable expenses. Payment of these fees shall be made according to the following schedule:
|
$5,000 upon execution of the letter of agreement engaging McAuliffe Financials appraisal services; |
|
$35,000 upon delivery of the completed original appraisal report. |
Additionally, the Association will pay $5,000 for each valuation update that may be required, provided that the transaction is not delayed for reasons described below.
The Association will reimburse McAuliffe Financial for out-of-pocket expenses incurred in preparation of the valuation. Such out-of-pocket expenses will likely include travel, printing, shipping, and data services. McAuliffe Financial will agree to limit reimbursable expenses to $5,000, subject to written authorization from the Association to exceed such level.
In the event the Association shall, for any reason, discontinue the proposed reorganization and offering prior to delivery of the completed documents set forth above and payment of the respective progress payment fees, the Association agrees to compensate McAuliffe Financial according to McAuliffe Financials standard billing rates for consulting services based on accumulated and verifiable time expenses, not to exceed the respective fee caps noted above, after giving full credit to the initial retainer fee. McAuliffe Financials standard billing rates range from $75 per hour for research associates to $350 per hour for managing directors.
If during the course of the proposed transaction, unforeseen events occur so as to materially change the nature or the work content of the services described in this contract, the terms of said contract shall be subject to renegotiation by the Association and McAuliffe Financial. Such unforeseen events shall include, but not be limited to, major changes in the conversion regulations, appraisal guidelines or processing procedures as
19457 Olson Avenue, Lake Oswego, OR 97034
503-638-9685
www.McAuliffefinancial.com
McAuliffe Financial, LLC
they relate to appraisals, major changes in management or procedures, operating policies or philosophies, and excessive delays or suspension of processing of conversion applications by the regulators such that completion of the transaction requires the preparation by McAuliffe Financial of a new appraisal.
Representations and Warranties
The Association and McAuliffe Financial agree to the following:
1. The Association agrees to make available or to supply to McAuliffe Financial such information with respect to its business and financial condition as McAuliffe Financial may reasonably request in order to provide the aforesaid valuation. Such information heretofore or hereafter supplied or made available to McAuliffe Financial shall include: annual financial statements, periodic regulatory filings and material agreements, debt instruments, off balance sheet assets or liabilities, commitments and contingencies, unrealized gains or losses and corporate books and records. All information provided by the Association to McAuliffe Financial shall remain strictly confidential (unless such information is otherwise made available to the public), and if the mutual-to-stock conversion is not consummated or the services of McAuliffe Financial are terminated hereunder, McAuliffe Financial shall upon request promptly return to the Association the original and any copies of such information.
2. The Association hereby represents and warrants to McAuliffe Financial that any information provided to McAuliffe Financial does not and will not, to the best of the Associations knowledge, at the times it is provided to McAuliffe Financial, contain any untrue statement of a material fact or fail to state a material fact necessary to make the statements therein not false or misleading in light of the circumstances under which they were made.
3. (a) The Association agrees that it will indemnify and hold harmless McAuliffe Financial, any affiliates of McAuliffe Financial, the respective directors, officers, agents, contractors and employees of McAuliffe Financial or their successors and assigns who act for or on behalf of McAuliffe Financial in connection with the services called for under this agreement (hereinafter referred to as McAuliffe Financial), from and against any and all losses, claims, damages and liabilities (including, but not limited to, all losses and expenses in connection with claims under the federal securities laws) attributable to (i) any untrue statement or alleged untrue statement of a material fact contained in the financial statements or other information furnished or otherwise provided by the Association to McAuliffe Financial, either orally or in writing; (ii) the omission or alleged omission of a material fact from the financial statements or other information furnished or otherwise made available by the Association to McAuliffe Financial; or (iii) any action or omission to act by the Association, or the Associations respective officers, Directors, employees or agents which action or omission is willful or negligent. The Association will be under no obligation to indemnify McAuliffe Financial hereunder if a court determines that McAuliffe Financial was negligent or acted in bad faith with respect to any actions or omissions of McAuliffe Financial related to a matter for which indemnification is sought hereunder. Any time devoted by employees of
19457 Olson Avenue, Lake Oswego, OR 97034
503-638-9685
www.McAuliffefinancial.com
McAuliffe Financial, LLC
McAuliffe Financial to situations for which indemnification is provided hereunder, shall be an indemnifiable cost payable by the Association at the normal hourly professional rate chargeable by such employee.
(b) McAuliffe Financial shall give written notice to the Association of such claim or facts within thirty days of the assertion of any claim or discovery of material facts upon which McAuliffe Financial intends to base a claim for indemnification hereunder. In the event the Association elects, within ten business days of the receipt of the original notice thereof, to contest such claim by written notice to McAuliffe Financial, McAuliffe Financial will be entitled to be paid any amounts payable by the Association hereunder within five days after the final determination of such contest either by written acknowledgement of the Association or a final judgment (including all appeals therefrom) of a court of competent jurisdiction. If the Association does not so elect, McAuliffe Financial shall be paid promptly and in any event within thirty days after receipt by the Association of the notice of the claim.
(c) The Association shall pay for or reimburse the reasonable expenses, including attorneys fees, incurred by McAuliffe Financial in advance of the final disposition of any proceeding within thirty days of the receipt of such request if McAuliffe Financial furnishes the Association: (1) a written statement of McAuliffe Financials good faith belief that it is entitled to indemnification hereunder; and (2) a written undertaking to repay the advance if it ultimately is determined in a final adjudication of such proceeding that it or he is not entitled to such indemnification. The Association may assume the defense of any claim (as to which notice is given in accordance with 3(b)) with counsel reasonably satisfactory to McAuliffe Financial, and after notice from the Association to McAuliffe Financial of its election to assume the defense thereof, the Association will not be liable to McAuliffe Financial for any legal or other expenses subsequently incurred by McAuliffe Financial (other than reasonable costs of investigation and assistance in discovery and document production matters). Notwithstanding the foregoing, McAuliffe Financial shall have the right to employ their own counsel in any action or proceeding if McAuliffe Financial shall have concluded that a conflict of interest exists between the Association and McAuliffe Financial which would materially impact the effective representation of McAuliffe Financial. In the event that McAuliffe Financial concludes that a conflict of interest exists, McAuliffe Financial shall have the right to select counsel reasonably satisfactory to the Association which will represent McAuliffe Financial in any such action or proceeding and the Association shall reimburse McAuliffe Financial for the reasonable legal fees and expenses of such counsel and other expenses reasonably incurred by McAuliffe Financial. In no event shall the Association be liable for the fees and expenses of more than one counsel, separate from its own counsel, for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same allegations or circumstances. The Association will not be liable under the foregoing indemnification provision in respect of any compromise or settlement of any action or proceeding made without its consent, which consent shall not be unreasonably withheld.
(d) In the event the Association does not pay any indemnified loss or make advance reimbursements of expenses in accordance with the terms of this agreement, McAuliffe Financial shall have all remedies available at law or in equity to enforce such obligation.
19457 Olson Avenue, Lake Oswego, OR 97034
503-638-9685
www.McAuliffefinancial.com
McAuliffe Financial, LLC
It is understood that, in connection with McAuliffe Financials above-mentioned engagement, McAuliffe Financial may also be engaged to act for the Association in one or more additional capacities, and that the terms of the original engagement may be incorporated by reference in one or more separate agreements. The provisions of Paragraph 3 herein shall apply to the original engagement, any such additional engagement, any modification of the original engagement or such additional engagement and shall remain in full force and effect following the completion or termination of McAuliffe Financials engagement(s). This agreement constitutes the entire understanding of the Association and McAuliffe Financial concerning the subject matter addressed herein, and such contract shall be governed and construed in accordance with the laws of the State of Oregon. This agreement may not be modified, supplemented or amended except by written agreement executed by both parties.
The Association and McAuliffe Financial are not affiliated, and neither the Association nor McAuliffe Financial has an economic interest in, or is held in common with, the other and has not derived a significant portion of its gross revenues, receipts or net income for any period from transactions with the other.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as indicated below and returning to McAuliffe Financial a signed and dated copy of this letter, together with the initial retainer fee of $5,000.
Sincerely, | ||||
/s/
|
||||
J. Kevin McAuliffe President |
||||
Agreed To and Accepted By: |
/s/ T. Rhett Evatt |
|||
T. Rhett Evatt President & Chief Executive Officer |
Upon Authorization by the Board of Directors For: Oconee Federal Savings and Loan Association
19457 Olson Avenue, Lake Oswego, OR 97034
503-638-9685
www.McAuliffefinancial.com
Exhibit 99.2
|
Capital Resources Group, Inc. 24162 Rochester Lane Aldie, VA 20105 Tel (703) 464-9055 Fax (703) 327-3837 |
May 21, 2010
Mr. T. Rhett Evatt
President and Chief Executive Officer
Oconee Federal Savings and Loan
115 E. North 2nd Street
P.O. Box 1039.
Seneca, SC 29679-1039
Dear Mr. Evatt:
This letter describes the consulting services that Capital Resources Group, Inc. (Capital Resources) proposes to provide Oconee Federal Savings and Loan Association (Oconee Federal or the Bank), Oconee Federal Savings and Loan MHC (the MHC) and the to-be-formed Mid-Tier Holding Company (the Holding Company) in connection with the proposed reorganization of Oconee Federal (the Reorganization) and offer and sale of certain shares of the common stock of the Holding Company (the Offering).
Capital Resources proposes to provide consulting services and serve as your Data Processing Agent pursuant to your Plan of Reorganization (the Plan) and Offering. Specifically, the services to be provided shall consist of the following:
I. Reorganization and Offering Consulting
|
Meet with the Board of Directors and senior management, as needed, to inform, educate and answer questions before, during and after the Reorganization, and Offering. |
|
Accompany management to the mandatory meeting with OTS-Atlanta to discuss Oconee Federals intentions and plans to form a MHC and offer stock to its members. Capital Resources will assist management with the preparation of materials for presentation to the OTS. |
|
Assist the Bank in soliciting and evaluating proposals of outside parties necessary for the successful completion of the Reorganization and Offering |
|
Lead the Board of Directors and management through the process to ensure a timely, efficient and orderly conclusion of the Reorganization and Offering. |
|
Work with management to interface with other outside parties to coordinate data and information requests to minimize duplicative requests, thus relieving management of unnecessary work and minimizing time and effort. |
CAPITAL RESOURCES GROUP, INC.
Mr. T. Rhett Evatt
May 21, 2010
Page 2
II. Business Plan Assistance
|
Assist management in preparing the regulatory business plan required by the OTS. The business plan will include financial projections for a three year period in a quarterly format in a format acceptable to the OTS for both the Holding Company and Bank reflecting the Reorganization and Holding Company and showing the effects of the Offering. |
|
Revise and update the business plan as necessary during the regulatory approval process. |
III. Data Processing Services
A. Conversion and Consolidation of Member Files
|
Convert depositor and borrower records of Oconee Federal to establish a file (Member Database) for the initial mailing of Reorganization and Offering materials, including: |
1. | Members holding savings accounts as of the specified eligibility record date; |
2. | Members holding savings accounts as of the supplemental eligibility record date; and |
3. | Members holding savings accounts and loans as of the Other Member date. |
|
Build an interim data base as of the latest practical date for the purposes of providing a suspected same ownership report and performing trial test runs with your financial printer. |
|
Review and edit Member Database in conjunction with the input of Oconee Federal personnel to identify and correct records with missing names, addresses, phone numbers and/or other incomplete information. |
|
Perform a final review of the Member Database to ensure that complete and correct data has been converted. |
|
Consolidate accounts with the same registration. |
|
Segregate accounts coded Bad Address and No Mail. |
|
Sort and group households for account holders residing at the same address. |
|
Provide financial printer with processed data output for imprinting and grouping consolidated household accounts for mailings to minimize mailing costs. |
CAPITAL RESOURCES GROUP, INC.
Mr. T. Rhett Evatt
May 21, 2010
Page 3
B. File Analysis/Solicitation Aids
|
Provide a household aggregate dollar balance range survey for determining a target group for stock order solicitation. |
|
Provide zip code surveys for determining a plan for the mailing of Reorganization and Offering packages. |
|
Provide geographic surveys for determining the Blue Sky states. |
|
Provide a telephone deck for stock order solicitation. |
|
Provide a list of eligible subscribers coded by eligibility categories according to the requirements of your Plan. |
|
Code request cards or subscription forms with eligibility category according to the requirements of your Plan. |
C. Proxy Form Preparation and Analysis
|
Provide list of all members entitled to receive a proxy for voting on the Plan. |
|
Provide vote range survey for determining a target group for proxy solicitation (if applicable). |
|
Provide financial printer with processed data output for imprinting name, address and eligible votes on proxy cards. Processed data to include household and zip code sorts targeted to reduce postage expense. |
|
Code IRA and Keogh accounts as applicable. |
|
Segregate and produce proxies coded Bad Address or No Mail. |
D. Subscription Preparation
|
Provide financial printer with processed data output for imprinting name, address and eligibility category on stock subscription forms. |
|
Coordinate proxy and subscription materials mailing(s) with financial printer. |
CAPITAL RESOURCES GROUP, INC.
Mr. T. Rhett Evatt
May 21, 2010
Page 4
FEE SCHEDULE
Fees for the services offered and described above are as follows:
I. | Reorganization and Offering Consulting: Our consulting fee is $20,000 payable at the rate of $4,000 per month beginning the first month upon acceptance of this agreement. |
II. | Business Plan Assistance: Our fee is $40,000 payable in full upon completion of the business plan and its acceptance by the Board of Directors. |
III. | Data Processing Services: Our fee is $40,000, payable as follows; $10,000 payable upon execution of this proposal and the commencement of our services; $15,000 upon filing of the; Plan of Reorganization; and, $15,000 upon regulatory approval of the Plan of Reorganization;. Any unusual or additional items or duplication of service required as a result of a material change in the regulations or the Plan or the Reorganization or the Offering or a material delay or other similar events may result in extra charges that will be covered in a separate agreement if and when they occur. |
The fees above are exclusive of direct out-of-pocket expenses incurred by us in performing our duties. Such expenses, which typically include items such as travel, lodging, meals, communication, shipping/postage, and supplies, will be itemized and billed separately and shall not exceed $10,000 without prior approval of Oconee Federal.
ADDITIONAL PROVISIONS
1. Oconee Federal will provide or provide access to all information Capital Resources may normally request in order to carry out the duties under this Agreement. The information shall include, but not be limited to financial data including audits, Reports of Examination, budgets, customer names, addresses and tax identification numbers of all persons or entities holding deposits and loans in Oconee Federal.
2. Capital Resources may subcontract with any one or more of its affiliates to perform part or all of its obligations herein with diligence and in a workmanlike manner, and shall not be liable or responsible for delays or errors occurring by reason of circumstances beyond its control, including acts of civil or military authority, national emergencies, labor difficulties, fire, mechanical or electronic devices breakdown, flood or catastrophe, acts of God, insurrection, war, riots or failure of communication or power supply.
3. Oconee Federal agrees to indemnify and hold Capital Resources and its affiliates and their respective partners, directors, officers, employees, agents and controlling persons (Capital Resources and each such person being an Indemnified Party) harmless from and against any and all losses, damages, liabilities, claims and expenses including legal fees for counsel, joint or
CAPITAL RESOURCES GROUP, INC.
Mr. T. Rhett Evatt
May 21, 2010
Page 5
several, to which such Indemnified Party may become subject under applicable federal or state law, or otherwise, related to or arising out of the engagement, unless caused in whole or in part by the gross negligence or willful misconduct by Capital Resources under this Agreement, as determined by a court of competent jurisdiction to have resulted primarily from Capital Resources willful misconduct, bad faith or gross negligence. Under no circumstances shall Capital Resources be responsible for special or consequential damages arising out of Capital Resources performance of its duties under this Agreement.
4. All data relating to Oconee Federal and provided to Capital Resources pursuant to this Agreement will be safeguarded by us. Capital Resources will not disclose confidential information to third persons except as provided in Paragraph 5 below.
5. While all data submitted by Oconee Federal hereunder is regarded to be disclosed in confidence, nothing herein shall prevent or prohibit disclosure by Capital Resources of any information if it has been made public or if required to be disclosed by any provision of law, rule or regulation, or in those cases where Capital Resources is satisfied that it is liable to any governmental agency or third person, or will be held in contempt for failure to disclose such information.
6. Capital Resources shall have no duties or obligations other than those specifically set forth herein.
7. Should Oconee Federal decide, at any time during the Reorganization process, to discontinue such Reorganization, Oconee Federal shall be required to pay Capital Resources only for such work as has been completed up to the time that the Reorganization process was stopped, based on an equitable proration of the fee.
MISCELLANEOUS
The following addresses shall be sufficient for written notices to each other:
If to you: | If to us: | |
Oconee Federal Savings and Loan | Capital Resources Group, Inc. | |
Association | 24162 Rochester Lane | |
115 E. North 2 nd Street | Aldie, VA 20105 | |
P.O. Box 1039 | ||
Seneca, SC 29679-1039 | Attention: David P. Rochester | |
Attention: Mr. T. Rhett Evatt |
CAPITAL RESOURCES GROUP, INC.
Mr. T. Rhett Evatt
May 21, 2010
Page 6
This Agreement constitutes the entire Agreement between the parties and cannot be changed orally.
To engage our services, please sign two copies of this letter in the space provided below and return one of the signed copies to me along with the initial retainer.
We look forward to working with you and the others at Oconee Federal on this most important project.
Sincerely, |
CAPITAL RESOURCES GROUP, INC. |
David P. Rochester Chairman and Chief Executive Officer |
Agreed To and Accepted By:
Oconee Federal Savings and Loan Association
/s/ T. Rhett Evatt |
Date: |
6/11/10 |
||
T. Rhett Evatt. |
||||
President and Chief Executive Officer |
Exhibit 99.3
OCONEE FEDERAL
SAVINGS AND LOAN ASSOCIATION
SENECA, SOUTH CAROLINA
Conversion Valuation Appraisal Report
As of September 3, 2010
Prepared by:
McAuliffe Financial, LLC
19457 Olson Ave., Lake Oswego, OR 97034
McAuliffe Financial, LLC
September 3, 2010
Board of Directors
Oconee Federal Savings and Loan Association
115 E. North 2 nd Street
Seneca, South Carolina 29678
Dear Board Members:
At your request, we have completed and hereby provide an independent appraisal (Appraisal) of the estimated pro forma market value of the common stock which is to be offered in connection with the mutual-to-stock conversion transaction described below.
This Appraisal is furnished pursuant to the conversion regulations promulgated by the Office of Thrift Supervision (OTS). This Appraisal has been prepared in accordance with the written valuation guidelines promulgated by the OTS, most recently updated as of October 21, 1994. Specifically, this Appraisal has been prepared in accordance with the Guidelines for Appraisal Reports for the Valuation of Savings and Loan Associations Converting from Mutual to Stock Form of Organization of the OTS, dated as of October 21, 1994; and applicable regulatory interpretations thereof.
Description of Reorganization
The Board of Directors of Oconee Federal Savings and Loan Association (Oconee Federal or the Association) has adopted a plan of reorganization pursuant to which Oconee Federal will convert and reorganize into a mutual holding company structure. As part of the reorganization, Oconee Federal will become a wholly-owned subsidiary of Oconee Federal Financial Corp. (Oconee Federal Financial or the Holding Company), a federal corporation, and Oconee Federal Financial will issue a majority of its common stock to Oconee Federal, MHC (the MHC) a federally-chartered mutual holding company, and sell a minority of its common stock to the public. It is anticipated that the public shares will be offered in a Subscription offering to the Associations Eligible Account Holders, Tax-Qualified Employee Plans, including the employee stock ownership plan (the ESOP), Supplemental Eligible Account Holders and Other Members. To the extent that shares remain available for purchase after satisfaction of all subscriptions received in the Subscription offering, the shares may be offered for sale in a Community offering. In addition, as part of the reorganization, the Association will establish a charitable foundation (the Foundation) to further the Associations commitment to the local community. The Foundation will be funded with $2,500,000 of Oconee Federal Financial stock and cash. The total shares offered for sale to the public and issued to the Foundation will constitute a minority of the Holding Companys stock. As a result of the reorganization, it is anticipated that public stockholders will own 33% of the total stock issued by the Holding Company and the Foundation and the MHC will own 2% and 65%, respectively.
McAuliffe Financial, LLC
Page 2
The aggregate amount of stock sold by the Holding Company cannot exceed the appraised value of the Association. Immediately following the offering, the primary assets of the Holding Company will be the capital stock of the Association and the net offering proceeds remaining after contributing proceeds to the Association in exchange for 100 percent of the capital stock of the Association. The Holding Company will contribute at least 50 percent of the net offering proceeds in exchange for the Associations capital stock. The remaining net offering proceeds, retained at the Holding Company, will be used to fund a loan to the ESOP and provide general working capital.
McAuliffe Financial, LLC
McAuliffe Financial, LLC. (McAuliffe Financial) is a financial consulting firm serving the financial services industry that, among other things, specializes in financial valuations and analyses of business enterprises and securities. The background and experience of McAuliffe Financial is detailed in Exhibit VI-1. We believe that, except for the fee we will receive for our appraisal, we are independent of the Association and the other parties engaged by Oconee Federal Financial to assist in the corporate reorganization and stock issuance process.
Valuation Methodology
In preparing our appraisal, we have reviewed the Associations and the Holding Companys regulatory applications, including the prospectus as filed with the OTS and the Securities and Exchange Commission (SEC). We have conducted a financial analysis of the Association that has included a review of its audited financial information for fiscal years ended June 30, 2005 through June 30, 2010, various unaudited information and internal financial reports through June 30, 2010 and due diligence related discussions with the Associations management; Cherry, Bekaert & Holland, L.L.P., the Associations independent auditor; Luse Gorman Pomerenk & Schick, P.C., the Associations counsel in connection with the reorganization and stock offering; and Mutual Securities, Inc., the Associations marketing advisor in connection with the Holding Companys stock offering. All conclusions set forth in the Appraisal were reached independently from such discussions. In addition, where appropriate, we have considered information based on other available published sources that we believe are reliable. While we believe the information and data gathered from all these sources are reliable, we cannot guarantee the accuracy and completeness of such information.
We have investigated the competitive environment within which the Association operates and have assessed the Associations relative strengths and weaknesses. We have kept abreast of the changing regulatory and legislative environment for financial institutions and analyzed the potential impact on the Association and the industry as a whole. We have analyzed the potential effects of conversion on the Associations operating characteristics and financial performance as they relate to the pro forma market value. We have reviewed the economy in the Associations primary market area and have compared the Associations financial performance and condition with publicly-traded thrifts in mutual holding company form, as well as all publicly-traded thrifts. We have reviewed conditions in the securities markets in general and in the market for thrift stocks in particular, including the market for existing thrift issues and the market for initial public offerings by thrifts. We have considered the market for the stock of all publicly-traded mutual holding companies. We have also considered the expected market for the Associations
McAuliffe Financial, LLC
Page 3
public shares. We have excluded from such analyses thrifts subject to announced or rumored acquisition, mutual holding company institutions that have announced their intent to pursue second step conversions, and/or those institutions that exhibit other unusual characteristics.
Our Appraisal is based on the Associations representation that the information contained in the regulatory applications and additional information furnished to us by the Association, its independent auditors, legal counsel and other authorized agents are truthful, accurate and complete. We did not independently verify the financial statements and other information provided by the Association, its independent auditors, legal counsel and other authorized agents nor did we independently value the assets or liabilities of the Association. The valuation considers the Association only as a going concern and should not be considered as an indication of the Associations liquidation value.
Our appraised value is predicated on a continuation of the current operating environment for the Association, the MHC and the Holding Company and for all thrifts and their holding companies. Changes in the local, state and national economy, the legislative and regulatory environment for financial institutions and mutual holding companies, the stock market, interest rates, and other external forces (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the value of thrift stocks as a whole or the Associations value alone. It is our understanding that there are no current or long-term plans for pursuing a second step conversion or for selling control of the Holding Company or the Association following the offering. To the extent that such factors can be foreseen, they have been factored into our analysis.
Pro forma market value is defined as the price at which the Holding Companys stock, immediately upon completion of the offering, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.
Valuation Conclusion
It is our opinion that, as of September 3, 2010, the estimated aggregate pro forma market value of the shares to be issued immediately following the offering, total shares issued to public stockholders, the Foundation as well as to the MHC, was $48,000,000 at the midpoint, equal to 4,800,000 shares issued at a per share value of $10.00. Pursuant to conversion guidelines, the 15 percent offering range indicates a minimum value of $40,800,000 and a maximum value of $55,200,000. Based on the $10.00 per share offering price determined by the Board, this valuation range equates to total shares outstanding of 4,080,000 shares at the minimum to 5,520,000 shares at the maximum. In the event that the appraised value is subject to an increase, the aggregate pro forma market value may be increased up to a supermaximum value of $63,480,000 without a resolicitation. Based on the $10.00 per share offering price, the supermaximum value would result in total shares outstanding of 6,348,000. The Board of Directors has established a public offering range such that the public ownership of the Holding Company will constitute a 33% ownership interest of the Holding Company. In addition to the shares issued publicly, the Foundation will hold a 2% ownership interest in the Holding Company. Accordingly, the offering range of the public stock will be $13,464,000 at the
McAuliffe Financial, LLC
Page 4
minimum, $15,840,000 at the midpoint, $18,216,000 at the maximum and $20,948,400 at the top of the super range. Based on the public offering range, plus shares issued to the Foundation, the public ownership of the shares will represent 35% of the shares issued, with the MHC owning the majority of the shares.
Limiting Factors and Considerations
Our valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of the common stock. Moreover, because such valuation is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons who purchase shares of common stock in the conversion will thereafter be able to buy or sell such shares at prices related to the foregoing valuation of the pro forma market value thereof.
McAuliffe Financials valuation was determined based on the financial condition and operations of Oconee Federal as of June 30, 2010, the date of the financial data included in the regulatory applications and prospectus.
McAuliffe Financial is not a seller of securities within the meaning of any federal and state securities laws and any report prepared by McAuliffe Financial shall not be used as an offer or solicitation with respect to the purchase or sale of any securities.
The valuation will be updated as provided for in the conversion regulations and guidelines. These updates will consider, among other things, any developments or changes in the Associations financial performance and condition, management policies, and current conditions in the equity markets for thrift shares. These updates may also consider changes in other external factors which impact value including, but not limited to: various changes in the legislative and regulatory environment, the stock market and the market for thrift stocks, and interest rates. Should any such new developments or changes be material, in our opinion, to the valuation of the shares, appropriate adjustments to the estimated pro forma market value will be made. The reasons for any such adjustments will be explained in the update at the date of the release of the update.
McAuliffe Financial, LLC
Table of Contents
I. |
DESCRIPTION OF OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION | 3 | ||||
Overview of the Association | 3 | |||||
Balance Sheet Trends | 3 | |||||
Lending Activities |
6 | |||||
Asset Quality |
9 | |||||
Funding Composition |
10 | |||||
Interest Rate Risk Management and Asset/Liability Management |
12 | |||||
Capital |
14 | |||||
Profitability Trends | 14 | |||||
Properties | 18 | |||||
Subsidiary Activities | 19 | |||||
Legal Proceedings | 19 | |||||
II. |
MARKET AREA ANALYSIS | 20 | ||||
Introduction | 20 | |||||
Demographics | 21 | |||||
Unemployment Rates | 23 | |||||
Competition in Oconee County | 23 | |||||
Summary | 24 | |||||
III. |
COMPARISONS WITH PUBLICLY TRADED THRIFT | 26 | ||||
Introduction | 26 | |||||
Selection Process | 26 | |||||
Review of the Comparable Group | 28 | |||||
Asset Size |
28 | |||||
Balance Sheet Mix |
29 | |||||
Asset Quality |
29 | |||||
Equity to Asset Level |
29 | |||||
Profitability |
29 |
McAuliffe Financial, LLC
Page 2
Conclusion | 30 | |||||
Key Financial Measures | 30 | |||||
IV. |
MARKET VALUE ADJUSTMENTS | 31 | ||||
Introduction | 31 | |||||
Financial Condition | 31 | |||||
Balance Sheet Growth | 36 | |||||
Earnings Performance | 37 | |||||
Market Area Review | 39 | |||||
Cash Dividends | 40 | |||||
Liquidity of the Issue | 46 | |||||
Management | 46 | |||||
Regulatory Impacts | 47 | |||||
Marketing of the Issue | 48 | |||||
Summary of Valuation Adjustments | 53 | |||||
V. |
MARKET VALUE DETERMINATION | 54 | ||||
Introduction | 54 | |||||
Discussion of Pricing Ratios | 54 | |||||
Price to Earnings Ratio | 54 | |||||
Price to Book Value/Price to Tangible Book Value Ratio | 55 | |||||
Price to Assets Ratio | 55 | |||||
Fully Converted Pro Forma Value | 55 | |||||
MHC Valuation | 57 | |||||
MHC Pricing Multiple Comparison | 59 | |||||
Valuation Conclusion | 59 |
McAuliffe Financial, LLC
Page 3
I. | DESCRIPTION OF OCONEE FEDERAL SAVINGS AND LOAN ASSOCIATION |
Overview of the Association
Oconee Federal was originally chartered in 1924 and the Association was issued a federal charter in 1992. Oconee Federal operates a main office in Seneca, South Carolina and three branch offices, all in Oconee County, in northwestern South Carolina. At June 30, 2010, the Associations total assets equaled $333.5 million. The Associations primary market area of Oconee County is largely rural, with no major population centers. Oconee County is called the Golden Corner of South Carolina with its abundance of lakes and rivers in the northwest corner of the state.
Historically, Oconee Federals lending efforts have focused on the origination of permanent one-to-four family residential mortgage loans that are retained in portfolio. To a much lesser extent, the Association has originated various other nonresidential real estate, construction and consumer loans to increase the interest rate sensitivity and improve loan yields. At June 30, 2010, 93.8% of the Associations total loan portfolio was comprised of permanent one-to-four family residential mortgage loans.
Oconee Federals business plan states that current policies and guidelines limit the Associations lending area to Oconee County and the nearby surrounding communities and townships in adjacent counties (predominately Pickens and Anderson Counties) in South Carolina. The business plan further states that Oconee Federal prides itself in being a community oriented Association. Management believes that Oconee Federal has maintained a very positive image in Oconee County over the years. Management believes in promoting home ownership in the local communities. For that reason, the Associations primary focus has been and will continue to be on residential mortgage lending. The primary liability funding source for Oconee Federal is retail deposits raised through the Associations four retail offices. Currently, the Association only accepts deposits from individuals and entities that have a verifiable address in Oconee County. The Association does not and will not solicit brokered deposits.
Balance Sheet Trends
Table 1.1 presents key balance sheet data for Oconee Federal for the six fiscal years ended June 30, 2005 through June 30, 2010. Over this period, Oconee Federals asset base has increased overall by $29.9 million to $333.5 million at June 30, 2010. This represents a total growth rate of 9.9%, or 1.9% on an annualized basis.
McAuliffe Financial, LLC
Page 4
Table 1.1
Oconee Federal Savings and Loan Association
Selected Balance Sheet Items
(Dollars in Thousands)
At June 30, | ||||||||||||||||||||||||||||||||||||||||||
2005 | % Assets | 2006 | % Assets | 2007 | % Assets | 2008 | % Assets | 2009 | % Assets | 2010 | % Assets | |||||||||||||||||||||||||||||||
Total Assets |
$ | 303,636 | 100.00 | % | $ | 300,109 | 100.00 | % | $ | 296,872 | 100.00 | % | $ | 309,504 | 100.00 | % | $ | 311,584 | 100.00 | % | $ | 333,546 | 100.00 | % | ||||||||||||||||||
Cash and Cash Equivalents |
9,552 | 3.15 | % | 6,802 | 2.27 | % | 19,674 | 6.63 | % | 38,970 | 12.59 | % | 50,709 | 16.27 | % | 49,792 | 14.93 | % | ||||||||||||||||||||||||
Investment Securities |
75,156 | 24.75 | % | 54,570 | 18.18 | % | 34,903 | 11.76 | % | 21,318 | 6.89 | % | 50 | 0.02 | % | 33 | 0.01 | % | ||||||||||||||||||||||||
Mortgage Backed Securities |
2,012 | 0.66 | % | 1,501 | 0.50 | % | 1,199 | 0.40 | % | 951 | 0.31 | % | 8,914 | 2.86 | % | 12,117 | 3.63 | % | ||||||||||||||||||||||||
FHLB Stock |
624 | 0.21 | % | 969 | 0.32 | % | 535 | 0.18 | % | 537 | 0.17 | % | 540 | 0.17 | % | 540 | 0.16 | % | ||||||||||||||||||||||||
Loans Receivable, net |
211,275 | 69.58 | % | 230,941 | 76.95 | % | 234,855 | 79.11 | % | 242,203 | 78.26 | % | 245,969 | 78.94 | % | 264,328 | 79.25 | % | ||||||||||||||||||||||||
Real Estate owned |
126 | 0.04 | % | | 0.00 | % | | 0.00 | % | 58 | 0.02 | % | 100 | 0.03 | % | 751 | 0.23 | % | ||||||||||||||||||||||||
Other Assets |
4,891 | 1.61 | % | 5,326 | 1.77 | % | 5,706 | 1.92 | % | 5,467 | 1.77 | % | 5,302 | 1.70 | % | 5,985 | 1.79 | % | ||||||||||||||||||||||||
Deposits (incl Escrows) |
247,888 | 81.64 | % | 234,709 | 78.21 | % | 237,092 | 79.86 | % | 251,777 | 81.35 | % | 252,750 | 81.12 | % | 272,606 | 81.73 | % | ||||||||||||||||||||||||
Borrowings |
| 0.00 | % | 8,000 | 2.67 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | ||||||||||||||||||||||||
Other Liabilities |
3,886 | 1.28 | % | 3,080 | 1.03 | % | 3,506 | 1.18 | % | 2,197 | 0.71 | % | 1,766 | 0.57 | % | 1,279 | 0.38 | % | ||||||||||||||||||||||||
Total Liabilities |
251,774 | 82.92 | % | 245,789 | 81.90 | % | 240,598 | 81.04 | % | 253,974 | 82.06 | % | 254,516 | 81.68 | % | 273,885 | 82.11 | % | ||||||||||||||||||||||||
Retained Earnings |
48,617 | 16.01 | % | 51,490 | 17.16 | % | 53,258 | 17.94 | % | 54,752 | 17.69 | % | 57,068 | 18.32 | % | 59,661 | 17.89 | % | ||||||||||||||||||||||||
Accum Other Comp Income |
3,245 | 1.07 | % | 2,830 | 0.94 | % | 3,016 | 1.02 | % | 778 | 0.25 | % | | 0.00 | % | | 0.00 | % | ||||||||||||||||||||||||
Equity |
51,862 | 17.08 | % | 54,320 | 18.10 | % | 56,274 | 18.96 | % | 55,530 | 17.94 | % | 57,068 | 18.32 | % | 59,661 | 17.89 | % | ||||||||||||||||||||||||
Tangible Equity / Tg. Assets |
17.08 | % | 18.10 | % | 18.96 | % | 17.94 | % | 18.32 | % | 17.89 | % | ||||||||||||||||||||||||||||||
Loans / Deposits |
85.23 | % | 98.39 | % | 99.06 | % | 96.20 | % | 97.32 | % | 96.96 | % | ||||||||||||||||||||||||||||||
Source: Oconee Federals audited financial statements and Offering Prospectus
McAuliffe Financial, LLC
Page 5
Loans, net of the allowance for loan losses, comprise the largest component of assets, equaling $264.3 million (79.3% of assets) as of June 30, 2010. Between June 30, 2005 and June 30, 2010, the Associations loan portfolio increased by $53.1 million or 25%. The largest component of the loan portfolio has consisted of permanent one-to-four family mortgage loans, which has exceeded over 90% of total loans during recent years.
As the Associations loan levels have increased since June 2005, the levels of cash, cash equivalents and investment securities have declined. Cash, cash equivalents and investment securities have gradually declined from $87.4 million or 28.8% of assets at June 30, 2005, to $62.5 million or 18.7% of assets at June 30, 2010. During the last five years, the Association has significantly reduced its investments in U.S. Treasury Notes and has only partially replaced these maturing securities with short-term interest-earning deposits and agency mortgage-backed securities (or MBS) guaranteed or insured by Ginnie Mae and Freddie Mac. At June 30, 2010, the majority of $49.8 million of cash and cash equivalents were concentrated in low yielding and short-term interest-earning deposits. The $12.1 million MBS portfolio included $11.6 million of Ginnie Maes.
The asset base is funded with retail deposits and capital. Oconee Federal has rarely relied on FHLB borrowings to fund loan demand or meet asset/liability goals. The Association repaid all of its FHLB of Atlanta borrowings in November 2006. All of the Associations deposits are local deposits. Declining from $247.9 million to $234.7 million between June 30, 2005 and June 30, 2006, Oconee Federals deposit levels have gradually increased during the last four years and equaled $272.6 million or 81.7% of total assets at June 30, 2010. Overall, between June 30, 2005 and June 30, 2010, the Associations GAAP equity increased from $51.9 million or 17.1% of assets to $59.7 million or 17.9% of assets. With the exception of fiscal year 2008, Oconee Federal experienced an increase in its equity level in each of the last five years. In fiscal 2008, reported net income of $1.5 million was offset by other comprehensive losses of $2.2 million related to unrealized losses on Freddie Mac common stock. As a result, the Associations equity declined by over $700,000 in 2008. The Association is a well capitalized institution pursuant to regulatory standards.
McAuliffe Financial, LLC
Page 6
Lending Activities
As presented in Table 1.2, Oconee Federals lending activities have emphasized the origination of permanent one-to-four family residential mortgage loans. Between June 30, 2006 and June 30, 2010, these types of loans constituted between 93% and 95% of the Associations total loan portfolio.
Table 1.2
Oconee Federal Savings and Loan Association
Loan Portfolio
At June 30, | |||||||||||||||||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Real estate loans: |
|||||||||||||||||||||||||||||||||||
One- to four-family (1) |
$ | 250,390 | 93.81 | % | $ | 232,106 | 93.66 | % | $ | 230,260 | 94.37 | % | $ | 225,424 | 95.29 | % | $ | 222,163 | 95.49 | % | |||||||||||||||
Multi-family |
380 | 0.14 | 395 | 0.16 | 480 | 0.20 | 234 | 0.10 | 284 | 0.12 | |||||||||||||||||||||||||
Home equity/second mortgage |
510 | 0.19 | 892 | 0.36 | 1,239 | 0.51 | 458 | 0.19 | 138 | 0.06 | |||||||||||||||||||||||||
Non-residential |
9,456 | 3.55 | 8,353 | 3..38 | 5,751 | 2.35 | 3,045 | 1.29 | 2,992 | 1.29 | |||||||||||||||||||||||||
Construction and land |
5,158 | 1.93 | 4,867 | 1.96 | 5,116 | 2.10 | 6,304 | 2.67 | 5,914 | 2.54 | |||||||||||||||||||||||||
Total real estate loans |
265,894 | 99.62 | 246,613 | 99.52 | 242,846 | 99.54 | 235,465 | 99.54 | 231,491 | 99.50 | |||||||||||||||||||||||||
Consumer and other loans |
1,012 | 0.38 | 1,194 | 0.48 | 1,141 | 0.47 | 1,102 | 0.47 | 1,158 | 0.50 | |||||||||||||||||||||||||
Total loans |
$ | 266,906 | 100.00 | % | $ | 247,807 | 100.00 | % | $ | 243,987 | 100.00 | % | $ | 236,567 | 100.00 | % | $ | 232,649 | 100.0 | % | |||||||||||||||
Net deferred loan fees |
(1,690 | ) | (1,580 | ) | (1,459 | ) | (1,428 | ) | (1,426 | ) | |||||||||||||||||||||||||
Allowance for losses |
(888 | ) | (258 | ) | (325 | ) | (284 | ) | (282 | ) | |||||||||||||||||||||||||
Loans, net |
$ | 264,328 | $ | 245,969 | $ | 242,203 | $ | 234,855 | $ | 230,941 | |||||||||||||||||||||||||
1. | Includes loans secured by modular and manufactured homes as of June 30, 2010. |
Source: Oconee Federal Financial Corp.s Offering Prospectus.
The Association plans to continue to offer permanent and construction one-to-four family residential mortgage loans, while also originating smaller volumes of multifamily, church loans, home equity and consumer loans. The majority of Oconee Federals one-to-four family residential mortgage loans consist of loans which are conforming to standards set by Freddie Mac or Fannie Mae, notwithstanding the fact that the Association currently holds all the loans it originates for portfolio. The Association seeks to emphasize 15 year and 30 year residential mortgages.
At June 30, 2010, the Associations loan portfolio reflects permanent first mortgage loans secured by one-to-four family residential properties totaling $250.4 million, or 93.8% of total loans. At the same date, construction and land loans (predominantly residential) approximated 1.9% of the loan portfolio while the balance of the loan portfolio consisted of consumer and
McAuliffe Financial, LLC
Page 7
second mortgage/home equity loans (0.6%), and multifamily and nonresidential loans (3.6%). The Association has elected not to make commercial business loans and there are no such loans in portfolio.
Due to consumer demand in the current low interest rate environment, management estimates that approximately 90% of residential loan originations in recent years have been 15- to 30- year fixed-rate loans secured by one-to-four family residential real estate. The Associations current Business Plan anticipates a similar percentage of fixed-rate loan origination volume versus adjustable-rate volume during the next three years.
The Association generally originates fixed-rate one-to-four family residential loans in accordance with Fannie Mae and Freddie Mac secondary market underwriting standards. At June 30, 2010, the Association had $163 million of fixed-rate residential loans with 30 year contractual maturities and $62 million of fixed-rate residential loans with 15 year contractual maturities. However, based on prepayment rates, management estimates that the average life of fixed-rate loans has been 8 to 10 years during recent years.
In order to reduce the term to re-pricing of the loan portfolio, Oconee Federal also originates adjustable-rate one-to-four family residential mortgage loans. Current adjustable-rate mortgage loans carry interest rates that adjust annually at a margin tied to the Federal Housing Finance Boards national average contractual rate on previously occupied homes. The adjustable-rate one- to four-family residential mortgage loans have contractual maturity terms of 15 or 30 years. The adjustable-rate mortgage loans currently offered by the Association generally provide for a 100 basis point annual interest rate change cap and a lifetime upward cap of 500 basis points over the initial rate. At June 30, 2010, $21.1 million, or 8.5% of the one-to-four family residential mortgage loans, had adjustable rates of interest.
The Association currently originates residential mortgage loans for portfolio with loan-to-value ratios of up to 80% for both owner occupied one-to-four family homes and for non-owner occupied homes.
Oconee Federal is an active originator of residential construction loans. The Association offers construction loans both to local home builders and to individuals building custom homes in Oconee County. Typically, a construction loan funded by the Association will convert to a permanent mortgage loan within a year of original funding. At June 30, 2010, construction and land loans outstanding totaled $5.2 million.
McAuliffe Financial, LLC
Page 8
At June 30, 2010, the Association had $9.4 million in nonresidential mortgage loans, representing 3.5% of total loan portfolio. Although the Associations credit underwriting guidelines authorize the origination or purchase of loans secured by a first lien on commercial properties, with maturity terms of up to 5 years and maximum loan-to-value ratios of 75%, the Association does not currently fund these types of loans. Most of the Associations currently outstanding nonresidential loans are secured by church properties. At June 30, 2010, the Association had 5 church loans with balances greater than $500,000. The two largest of these loans had balances of $3.6 million and $1.6 million, respectively. All 5 church loans were secured by properties in Oconee County. At June 30, 2010, all church loans were performing in accordance with their terms.
Pursuant to the Associations credit underwriting guidelines, loans on church properties can have a maximum term of 20 years with a maximum loan-to-value ratio of 75%. All of the Associations church loans have a fixed rate of interest.
Based on the housing stock in the Associations market, multi-family lending has been limited. At June 30, 2010, Oconee Federal had multi-family real estate loans totaling $380,000. The multifamily real estate loans originated generally have a maximum term of 5 years and are secured by small apartment buildings located within the primary market area. The interest rates on these loans are generally slightly higher than the interest rate pricing for single family homes. These loans are generally made in amounts of up to 80% of the lesser of the appraised value or the purchase price of the property with an appropriate projected debt service coverage ratio.
To date, Oconee Federal consumer lending has been limited. At June 30, 2010, the Association had $1.5 million of consumer loans outstanding, including $510,000 of second mortgage/home equity loans, representing 0.6% of the total loan portfolio. At June 30, 2010, the Association also had $956,000 in loans on deposits. While the Associations credit underwriting guidelines authorize the making of automobile, both new and used, boat, mobile home and trailer loans, the Association does not currently engage in these types of loans. This type of lending, if any, is expected to be very limited in the future.
Oconee Federal does not engage in mortgage banking related activities. Presently, all loans originated by Oconee Federal are retained in portfolio. The Association generally originates loans that conform to secondary market guidelines. Although not specifically planned, Oconee Federal may, however, sell loans in the future for interest rate risk management and for liquidity purposes. The Association does not purchase loans nor have participation interests in loans.
McAuliffe Financial, LLC
Page 9
Asset Quality
The deteriorating housing market trends over the last three years in the U.S. have also been experienced in Oconee County. As has been the case nationally, Oconee County has witnessed a decline in housing values. As shown in Table 1.3, Oconee Federals level of non-performing
Table 1.3
Oconee Federal Savings and Loan Association
Non-Performing Assets
At June 30, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Non-accrual loans: |
||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||
One- to four-family |
$ | 3,214 | $ | 1,286 | $ | 1,037 | $ | 528 | $ | 410 | ||||||||||
Multi-family |
| | | | | |||||||||||||||
Home equity |
| | | | | |||||||||||||||
Non-residential |
| 211 | | | | |||||||||||||||
Construction and land |
| | | | | |||||||||||||||
Total real estate loans |
3,214 | 1,497 | 1,037 | 528 | 410 | |||||||||||||||
Consumer and other loans |
| | | | | |||||||||||||||
Total nonaccrual loans |
$ | 3,214 | $ | 1,497 | $ | 1,037 | $ | 528 | $ | 410 | ||||||||||
Accruing loans past due 90 days or more: |
||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||
One- to four-family |
$ | 764 | $ | 452 | $ | 238 | $ | 123 | $ | 294 | ||||||||||
Multi-family |
| | | | | |||||||||||||||
Home equity |
| | | | | |||||||||||||||
Non-residential |
| | | 7 | | |||||||||||||||
Construction and land |
| | | | | |||||||||||||||
Total real estate loans |
764 | 452 | 238 | 130 | 294 | |||||||||||||||
Consumer and other loans: |
||||||||||||||||||||
Total accruing loans past due 90 days or more |
764 | 452 | 238 | 130 | 294 | |||||||||||||||
Total of nonaccrual and 90 days or more past due loans |
$ | 3,978 | $ | 1,949 | $ | 1,275 | $ | 658 | $ | 704 | ||||||||||
Real estate owned: |
||||||||||||||||||||
One- to four-family |
$ | 751 | $ | 100 | $ | 58 | $ | | $ | | ||||||||||
Multi-family |
| | | | | |||||||||||||||
Home equity |
| | | | | |||||||||||||||
Non-residential |
| | | | | |||||||||||||||
Other |
| | | | | |||||||||||||||
Other nonperforming assets |
| | | | | |||||||||||||||
Total nonperforming assets |
$ | 4,729 | $ | 2,0490 | $ | 1,333 | $ | 658 | $ | 704 | ||||||||||
Troubled debt restructurings |
| | | | | |||||||||||||||
Troubled debt restructurings and total nonperforming assets |
$ | 4,729 | $ | 2,049 | $ | 1,333 | $ | 658 | $ | 704 | ||||||||||
Total nonperforming loans to total loans |
1.49 | % | 0.79 | % | 0.52 | % | 0.28 | % | 0.30 | % | ||||||||||
Total nonperforming assets to total assets |
1.42 | % | 0.66 | % | 0.43 | % | 0.22 | % | 0.23 | % | ||||||||||
Total nonperforming assets to loans and real estate owned |
1.77 | % | 0.83 | % | 0.55 | % | 0.28 | % | 0.30 | % |
Source: Oconee Federal Financial Corp.s Offering Prospectus.
McAuliffe Financial, LLC
Page 10
assets (non-accrual loans, accruing loans past due 90 days or more and real estate owned (REO)), increased significantly between June 30, 2007 and June 30, 2010. After more than tripling, from $658,000 to $2.0 million, between June 30, 2007 and June 30, 2009, non-performing assets (NPAs) more than doubled between June 30, 2009 and June 30, 2010, to $4.7 million, or 1.42% of assets. Also, as of June 30, 2009 and June 30, 2010, the Associations had classified assets as follows:
At June 30, 2010 | At June 30, 2009 | |||||
(Dollars in Thousands) | ||||||
Special Mention |
$ | 1,413 | $ | 541 | ||
Substandard |
3,298 | 3,568 | ||||
Doubtful |
771 | 121 | ||||
Total Classified Assets |
5,482 | 4,230 |
Source: Oconee Federal Financial Corps Offering Prospectus
At June 30, 2010, all of the Associations non-performing assets were collateralized by one-to-four family residential properties.
As shown in Table 1.4, Oconee Federals allowance for loan loss levels remained stable between June 30, 2006 and June 30, 2009. Between June 30, 2009 and June 30, 2010, the allowance for loan losses increased from $258,000 (0.10% of total outstanding loans) to $888,000 (0.33% of total outstanding loans). After decreasing from 40.06% to 13.24% of non-performing loans between June 30, 2006 and June 30, 2009, the Associations allowance for loan losses increased to 22.32% of non-performing loans at June 30, 2010.
Funding Composition
Deposits are the major source of funds for lending and other investment purposes. In addition to deposits, the Associations other significant sources of funds include liquidity (cash and short-term interest-earning deposits), repayment of loans, maturing investments and earnings from operations. Based on the Associations growth objectives, these sources should continue to adequately address funding demands.
Retail deposits are raised through Oconee Federals four retail offices. Currently, the Association only accepts deposits from individuals and entities that have a verifiable address in
McAuliffe Financial, LLC
Page 11
Table 1.4
Oconee Federal Savings and Loan Association
Allowance for Loan Losses
Year Ended June 30, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Allowance at beginning of period |
$ | 258 | $ | 325 | $ | 284 | $ | 282 | $ | 254 | ||||||||||
Provision for loan losses |
758 | (27 | ) | 100 | 7 | 62 | ||||||||||||||
Charge offs: |
||||||||||||||||||||
Real estate loans |
||||||||||||||||||||
One- to four-family |
$ | (128 | ) | $ | (36 | ) | $ | (59 | ) | $ | (6 | ) | $ | (39 | ) | |||||
Multi-family |
| | | | | |||||||||||||||
Home equity |
| | | | | |||||||||||||||
Non-residential |
| | | | | |||||||||||||||
Construction and land |
| | | | | |||||||||||||||
Consumer and other loans |
| (4 | ) | | (2 | ) | | |||||||||||||
Total charge-offs |
$ | (128 | ) | $ | (40 | ) | $ | (59 | ) | $ | (8 | ) | $ | (39 | ) | |||||
Recoveries: |
||||||||||||||||||||
Real estate loans |
||||||||||||||||||||
One- to four-family |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Multi-family |
| | | | | |||||||||||||||
Home equity |
| | | | | |||||||||||||||
Non-residential |
| | | | | |||||||||||||||
Construction and land |
| | | | | |||||||||||||||
Consumer and other loans |
| | | 3 | 5 | |||||||||||||||
Total recoveries |
| | | 3 | 5 | |||||||||||||||
Net (charge-offs) recoveries |
$ | (128 | ) | $ | (40 | ) | $ | (59 | ) | $ | (5 | ) | $ | (34 | ) | |||||
Allowance at end of period |
$ | 888 | $ | 258 | $ | 325 | $ | 284 | $ | 282 | ||||||||||
Allowance to nonperforming loans |
22.32 | % | 13.24 | % | 25.49 | % | 43.16 | % | 40.06 | % | ||||||||||
Allowance to total loans outstanding at the end of the period |
0.33 | 0.10 | 0.13 | 0.12 | 0.12 | |||||||||||||||
Net charge-offs (recoveries) to average loans outstanding during the period |
0.05 | 0.02 | 0.02 | 0.00 | 0.02 |
Source: Oconee Federal Financial Corp.s Offering Prospectus
Oconee County. The Association does not solicit brokered deposits. As shown in Table 1.5, certificate of deposits (or CDs) constituted the largest portion of the Associations deposit base, remaining constant at 79% of total deposits during the last three fiscal years. Savings, money market and NOW/demand accounts comprised the remainder of the deposit portfolio with 21% of total deposits. While the Association has historically maintained a heavy concentration of CDs in its deposit base, management believes that this includes a high balance of retirement accounts which have proven to be stable accounts.
McAuliffe Financial, LLC
Page 12
Table 1.5
Oconee Federal Savings and Loan Association
Deposit Portfolio
At June 30, | ||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||
(Dollars in thousands) | ||||||||||||||||||
NOW and demand deposits |
$ | 15,399 | 5.65 | % | $ | 16,661 | 6.59 | % | $ | 17,154 | 6.81 | % | ||||||
Money market deposits |
9,338 | 3.43 | 6,689 | 2.65 | 5,447 | 2.16 | ||||||||||||
Regular savings and other deposits |
32,194 | 11.81 | 29,679 | 11.74 | 29,755 | 11.82 | ||||||||||||
Certificates of deposit - IRA |
59,388 | 21.78 | 54,984 | 21.75 | 51,042 | 20.28 | ||||||||||||
Certificates of deposit - other |
156,287 | 57.33 | 144,738 | 57.27 | 148,378 | 58.93 | ||||||||||||
Total |
$ | 272,606 | 100.00 | % | $ | 252,750 | 100.00 | % | $ | 251,776 | 100.00 | % | ||||||
Source: Oconee Federal Financial Corp.s Offering Prospectus.
Although deposits are the primary source of funds, the Association may utilize borrowings when it is a less costly source of funds and can be invested at a positive interest rate spread. Borrowings are utilized when additional liquidity is required to fund loan demand or when it meets asset/liability management goals. Borrowings have historically consisted of advances from the FHLB of Atlanta. The Associations borrowing capacity is approximately $36 million with the FHLB. At June 30, 2010, the Association did not have any FHLB advances outstanding and had not utilized such borrowings since November 2006, as deposits have been a reliable funding source. Based on anticipated loan volume and liquid asset levels during the next three years, the Association anticipates zero or minimal FHLB borrowings over the foreseeable future.
Interest Rate Risk Management and Asset/Liability Management
Oconee Federal relies heavily on the Interest Rate Risk Exposure Report issued on a quarterly basis by the OTS to monitor and manage the Associations interest rate risk. The Association relies on the net portfolio value (NPV) estimates produced in that report. This methodology measures the changes in equity due to the impact on net interest margin, over a five-year horizon, from instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up 300 and down 100 basis points. Table 1.6 provides the Associations NPV calculation at June 30, 2010.
McAuliffe Financial, LLC
Page 13
Table 1.6
Oconee Federal Savings and Loan Association
Interest Rate Sensitivity of Net Portfolio Value (NPV)
At June 30, 2010
NPV Exposure |
Dollar Change
from Base |
Percentage
Change from Base |
Percentage of
Total Assets |
||||||||||
(Dollars in Thousands) | |||||||||||||
Up 300 basis points |
$ | 46,597 | $ | (29,738 | ) | (39 | )% | 14.5 | % | ||||
Up 200 basis points |
57,973 | (18,362 | ) | (24 | ) | 17.4 | |||||||
Up 100 basis points |
68,533 | (7,803 | ) | (10 | ) | 19.9 | |||||||
Base |
76,335 | | | 21.6 | |||||||||
Down 100 basis points |
80,068 | 3,733 | 5 | 22.4 |
Source: Oconee Federal Financial Corp.s Offering Prospectus.
Management of Oconee Federal believes that the NPV methodology improves the visibility of the effect of current interest rate risk on future earnings under increasing or decreasing interest rate environments. Accordingly, the Association believes it is in a better position to be proactive in reducing future interest rate risk through management of the growth and composition of interest-earning assets and interest-bearing liabilities within a meaningful time horizon.
On the asset side, Oconee Federal is and will continue to focus on being a portfolio lender of single family residential mortgage loans to local communities within Oconee County; the Association does not sell its mortgage loans. Given the limited customer demand for adjustable-rate product, over 90% of the Associations residential mortgage portfolio is comprised of 15 and 30 year fixed-rate loans with an average expected life of nine to ten years. Holdings of adequate levels of short-term interest-earning deposits and U.S. government securities help to satisfy the liquidity needs of the Association. Future types of earning assets to be added to the Associations portfolio may include home equity lines of credit and adjustable-rate mortgage-backed securities.
On the liability side, the strong inflow of core deposits from local customers has substantially limited the Associations need to rely on other borrowing sources; the Association is viewed as safe haven by local depositors. By focusing on deposit inflows versus other
McAuliffe Financial, LLC
Page 14
borrowing sources, the Association has been able to maintain a relatively low cost of funds. The Bank will continue to be competitive in the setting of deposit rates. If needed in the future, the Association can draw upon its $36 million borrowing capacity with the FHLB; however, the Association has not utilized FHLB advances since the end of 2006.
Capital
Oconee Federal exceeded all regulatory capital requirements at June 30, 2010. The Association qualifies as well capitalized on such date. Table 1.7 presents Oconee Federals capital position at June 30, 2010.
Table 1.7
Oconee Federal Savings and Loan Association
Capital Position
Historical at
30-Jun-10 |
||||||
Amount |
Percent
of Assets |
|||||
GAAP capital |
$ | 59,661 | 17.86 | % | ||
Tangible capital: |
||||||
Tangible capital |
$ | 59,661 | 17.86 | % | ||
Requirement |
5,011 | 1.50 | % | |||
Excess |
$ | 54,650 | 16.36 | % | ||
Core capital: |
||||||
Core capital |
$ | 59,661 | 17.86 | % | ||
Requirement |
$ | 10,022 | 3.00 | % | ||
Excess |
$ | 49,639 | 14.86 | % | ||
Risk-based capital: |
||||||
Tier 1 risk-capital |
$ | 59,661 | 37.64 | % | ||
Requirement |
$ | 6,340 | 4.00 | % | ||
Excess |
$ | 53,322 | 33.64 | % | ||
Total risk-based capital: |
||||||
Total risk-based capital |
$ | 60,549 | 38.20 | % | ||
Requirement |
12,681 | 8.00 | % | |||
Excess |
$ | 47,868 | 30.20 | % | ||
Source: Oconee Federal Financial Corp.s Offering Prospectus.
Profitability Trends
Table 1.8 presents income and expense trends for Oconee Federal for the fiscal years ended June 30, 2005 through June 30, 2010. Net income reflected a declining trend between the fiscal years ended June 30, 2005 and June 30, 2008, with net income declining from $3.5
McAuliffe Financial, LLC
Page 15
Table 1.8
Oconee Federal Savings and Loan Association
Income and Expense Trends
(Dollars in Thousands)
For the Fiscal Year Ended June 30, | ||||||||||||||||||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||||||||||||||
($000) | (%) | ($000) | (%) | ($000) | (%) | ($000) | (%) | ($000) | (%) | ($000) | (%) | |||||||||||||||||||||||||
Interest Income |
14,447 | 4.66 | % | 14,966 | 4.96 | % | 15,523 | 5.20 | % | 15,846 | 5.23 | % | 15,473 | 4.98 | % | 15,084 | 4.68 | % | ||||||||||||||||||
Interest Expense |
(5,370 | ) | -1.73 | % | (6,971 | ) | -2.31 | % | (9,091 | ) | -3.05 | % | (9,609 | ) | -3.17 | % | (7,605 | ) | -2.45 | % | (5,980 | ) | -1.85 | % | ||||||||||||
Net Interest Income |
9,077 | 2.93 | % | 7,995 | 2.65 | % | 6,432 | 2.15 | % | 6,237 | 2.06 | % | 7,868 | 2.53 | % | 9,104 | 2.82 | % | ||||||||||||||||||
Loan Loss Provision |
(93 | ) | -0.03 | % | (62 | ) | -0.02 | % | (7 | ) | 0.00 | % | (100 | ) | -0.03 | % | 27 | 0.01 | % | (758 | ) | -0.23 | % | |||||||||||||
Net Interest Inc. after Prov. |
8,984 | 2.90 | % | 7,933 | 2.63 | % | 6,425 | 2.15 | % | 6,137 | 2.02 | % | 7,895 | 2.54 | % | 8,346 | 2.59 | % | ||||||||||||||||||
Noninterest income |
268 | 0.09 | % | 330 | 0.11 | % | 161 | 0.05 | % | 148 | 0.05 | % | 90 | 0.03 | % | 112 | 0.03 | % | ||||||||||||||||||
Gain <Loss> on sale of assets |
| 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | 125 | 0.04 | % | ||||||||||||||||||
General & Admin. Expense |
(3,801 | ) | -1.22 | % | (3,829 | ) | -1.27 | % | (3,890 | ) | -1.30 | % | (4,021 | ) | -1.33 | % | (4,240 | ) | -1.37 | % | (4,583 | ) | -1.42 | % | ||||||||||||
Income Before Income Taxes |
5,451 | 1.76 | % | 4,434 | 1.47 | % | 2,696 | 0.90 | % | 2,264 | 0.75 | % | 3,745 | 1.21 | % | 4,000 | 1.24 | % | ||||||||||||||||||
Income Tax Provision |
(1,976 | ) | -0.64 | % | (1,561 | ) | -0.52 | % | (928 | ) | -0.31 | % | (770 | ) | -0.25 | % | (1,429 | ) | -0.46 | % | (1,407 | ) | -0.44 | % | ||||||||||||
Net Income |
3,475 | 1.12 | % | 2,873 | 0.95 | % | 1,768 | 0.59 | % | 1,494 | 0.49 | % | 2,316 | 0.75 | % | 2,593 | 0.80 | % | ||||||||||||||||||
Return on Equity |
6.94 | % | 5.41 | % | 3.20 | % | 2.67 | % | 4.11 | % | 4.44 | % | ||||||||||||||||||||||||
Source: Oconee Federal's audited financial statements and Offering Prospectus
McAuliffe Financial, LLC
Page 16
million, and a return on assets (ROA) of 112 basis points, in fiscal 2005 to $1.5 million, and an ROA of 49 basis points, in fiscal 2008. The decline in profitability during this time period reflected a reduction in the Associations net interest margins as well as a modest increase in operating expense levels.
Since fiscal 2008, the Associations profitability has improved, with ROA levels of 75 basis points in fiscal 2009 and 80 basis points for the latest fiscal year ended June 30, 2010. The increase in the Associations net income levels in 2009 and 2010 reflect improving net interest margins, as the Association has benefited from a steepening yield curve and more favorable interest rate spreads. In particular, the Association has experienced a substantial decline in its cost of deposits, which has offset the decline in interest-earning asset yields, during the latest two fiscal years. As shown in Table 1.9, Oconee Federals interest rate spread (or yield/cost spread) widened from 1.43% in fiscal 2008 to 2.13% in fiscal 2009 and 2.53% in fiscal 2010.
During fiscal 2010, the Associations higher net interest income level (net interest income and net interest margin levels improved to $9.1 million and 282 basis points, respectively) was partially offset by a substantial increase in loan loss provision levels to $758,000 (23 basis points as a percent of average assets). The substantial increase in loan loss provisions during fiscal 2010, reflected managements decision to raise the Associations allowance for loan losses in response to the deterioration in economic conditions and elevated levels of non-performing assets.
Primarily reflecting a less diversified lending operation, Oconee Federal has maintained a relatively low operating expense ratio. The Associations non-interest operating expense levels have gradually increased during the last five years, with the operating expense ratio increasing from 122 basis points in fiscal 2005 to 142 basis points in fiscal 2010. In recent years, compensation expense (salaries and employee benefits) have ranged between 58% and 62% of total non-interest expenses. During fiscal 2010, the $343,000 increase in non-interest expenses primarily reflected higher compensation expenses, occupancy and equipment expenses, and FDIC deposit insurance premiums.
Non-interest income has been a small source of revenue for the Association and consists primarily of deposit related fees and service charges as well as income on bank owned life insurance. Also, in fiscal 2010, the Association recorded non-operating gains of $125,000 on the sale of foreclosed real estate. Table 1.10 provides McAuliffe Financials calculation of Oconee Federals core net income for the latest fiscal year ended June 30, 2010.
McAuliffe Financial, LLC
Page 17
Table 1.9
Oconee Federal Savings and Loan Association
Average Yields and Costs
For the Years Ended June 30, | |||||||||||||||||||||||||||
2010 | 2009 | 2008 | |||||||||||||||||||||||||
Average
Balance |
Interest
and Dividends |
Yield/Cost |
Average
Balance |
Interest
and Dividends |
Yield/Cost |
Average
Balance |
Interest
and Dividends |
Yield/Cost | |||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||
Assets: |
|||||||||||||||||||||||||||
Interest-earning assets: |
|||||||||||||||||||||||||||
Loans |
$ | 261,915 | $ | 14,604 | 5.58 | % | $ | 242,326 | $ | 14,506 | 5.99 | % | $ | 237,509 | $ | 13,975 | 5.88 | % | |||||||||
Investment securities |
9,789 | 432 | 4.42 | 17,627 | 666 | 3.78 | 28,254 | 805 | 2.85 | ||||||||||||||||||
Other interest-earning assets |
41,217 | 48 | 0.12 | 36,448 | 301 | 0.83 | 24,005 | 1,066 | 4.44 | ||||||||||||||||||
Total interest-earning assets |
312,921 | 15,084 | 4.82 | 296,402 | 15,473 | 5.22 | 289,768 | 15,846 | 5.47 | ||||||||||||||||||
Noninterest-earning assets |
10,434 | 9,787 | 10,562 | ||||||||||||||||||||||||
Total assets |
$ | 323,355 | $ | 306,189 | $ | 300,330 | |||||||||||||||||||||
Liabilities and equity: |
|||||||||||||||||||||||||||
Interest-bearing liabilities: |
|||||||||||||||||||||||||||
NOW and demand deposits |
$ | 13,461 | $ | 69 | 0.51 | $ | 14,503 | $ | 72 | 0.50 | $ | 13,929 | $ | 73 | 0.53 | ||||||||||||
Money market deposits |
7,755 | 105 | 1.35 | 6,083 | 91 | 1.50 | 4,881 | 73 | 1.50 | ||||||||||||||||||
Regular savings and other deposits |
31,126 | 334 | 1.07 | 29,425 | 359 | 1.22 | 29,516 | 360 | 1.22 | ||||||||||||||||||
Certificates of deposit |
208,383 | 5,472 | 2.63 | 195,906 | 7,083 | 3.62 | 190,144 | 9,103 | 4.79 | ||||||||||||||||||
Total interest-bearing deposits |
260,725 | 5,980 | 2.29 | 245,917 | 7,605 | 3.09 | 238,469 | 9,609 | 4.03 | ||||||||||||||||||
Total interest-bearing liabilities |
260,725 | 5,980 | 2.29 | 245,917 | 7,605 | 3.09 | 238,469 | 9,609 | 4.03 | ||||||||||||||||||
Noninterest-bearing demand deposits |
1,869 | 1,797 | 2,266 | ||||||||||||||||||||||||
Other noninterest-bearing liabilities |
2,215 | 2,387 | 3,580 | ||||||||||||||||||||||||
Total liabilities |
264,809 | 250,101 | 244,315 | ||||||||||||||||||||||||
Accumulated other comprehensive income (loss) |
12 | 139 | 2,025 | ||||||||||||||||||||||||
Retained earnings |
58,548 | 55,949 | 53,9909 | ||||||||||||||||||||||||
Total equity |
58,560 | 56,088 | 56,015 | ||||||||||||||||||||||||
Total liabilities and equity |
$ | 323,355 | $ | 306,189 | $ | 300,330 | |||||||||||||||||||||
Net interest income |
$ | 9,104 | $ | 7,868 | $ | 6,237 | |||||||||||||||||||||
Interest rate spread |
2.53 | % | 2.13 | % | 1.43 | % | |||||||||||||||||||||
Net interest margin |
2.91 | % | 2.65 | % | 2.15 | % | |||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities |
1.20X | 1.21X | 1.22X | ||||||||||||||||||||||||
Source: Oconee Federal Financial Corp. Offering Prospectus
McAuliffe Financial, LLC
Page 18
Table 1.10
Oconee Federal Savings and Loan Association
Core Net Income Calculation
($000)
Fiscal Year
Ended June 30, 2010 |
||||
Net Income as Reported |
$ | 2,593 | ||
Pre-Tax Adjustments: |
||||
Less: Gains on Sale of REO |
(125 | ) | ||
Plus: Other Than Temporary Impairment Charges (Freddie Mac Stock) |
17 | |||
Total Adjustments |
(108 | ) | ||
Income Tax Impact (34%) |
37 | |||
After-Tax Adjustment |
(71 | ) | ||
Core Net Income |
$ | 2,522 | ||
Core ROA |
0.78 | % | ||
Core ROE |
4.32 | % | ||
Source: Offering Prospectus and McAuliffe Financial calculation.
Properties
As of June 30, 2010, the net book value of Oconee Federals properties was $3.3 million.
The following is a list of the Associations offices:
Table 1.11
Oconee Federal Savings and Loan Association
Properties
Location |
Leased
or Owned |
Year
Acquired or Leased |
Square
Footage |
Net Book Value of
Real Property |
|||||
(In thousands) | |||||||||
Main Office: |
|||||||||
115 E. North 2 nd St. Seneca, South Carolina |
Owned | 1966 | 7,000 | $ | 1,186 | ||||
Main Office Annex: |
|||||||||
201 E. North 2 nd St. Seneca, South Carolina |
Owned | 1996 | 7,500 | 738 | |||||
Branch Offices: |
|||||||||
813 123 By-Pass Seneca, South Carolina |
Owned | 1985 | 5,250 | 535 | |||||
204 W. North Broad St. Walhalla, South Carolina |
Owned | 1973 | 3,100 | 478 | |||||
111 W. Windsor St. Westminster, South Carolina |
Owned | 1972 | 3,200 | 340 | |||||
$ | 3,277 | ||||||||
Source: Oconee Federal Financial Corp.s Offering Prospectus
McAuliffe Financial, LLC
Page 19
Subsidiary Activities
Oconee Federal Savings and Loan Association has no subsidiaries.
Legal Proceedings
Oconee Federal is not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business. The Association has indicated that it is not involved in any legal proceedings, the outcome of which would be material to its financial condition or results of operations.
McAuliffe Financial, LLC
Page 20
II. | MARKET AREA ANALYSIS |
Introduction
Oconee Federal operates out of 4 offices in the northwestern portion of South Carolina. The Associations primary market area for its lending and deposit gathering base consists of the communities within and contiguous to Oconee County. Oconee County is intersected by Interstate 85 and is located approximately half-way between Atlanta, GA and Charlotte, NC. The eastern border of Oconee County is made up of Lake Jocassee, Lake Keowee and Lake Hartwell while the western border is the Tugaloo River on the Georgia state line. North Carolina borders Oconee Countys northern border.
Oconee County has a hilly landscape that has been used to create man-made lakes. Three large man-made lakes provide residents with fishing, water skiing, sailing as well as hydroelectric power. Hartwell Lake is the biggest and was built by the U.S. Army Corps of Engineers between 1955 and 1963. Lake Keowee is the next biggest lake and the Oconee Nuclear Plant operates by the lake. Lake Jocassee is the third biggest and is also a source for hydroelectric power. Bad Creek Reservoir, located in the mountains above Lake Jocassee, is for generating electricity during peak hours. The abundance of water has made Oconee County a destination for recreation.
Approximately 10 miles east of Seneca, South Carolina is Clemson, the site of Clemson University. The University has approximately 20,000 students and has an influence on the Countys economy. The University employs approximately 3,500 workers.
Despite the proximity of recreational sites and Clemson University, the economic base in Oconee County is largely supported by the manufacturing sector. The largest employers in Oconee County are listed in table 2.1. Though a couple of the largest employers are related to the government and education, a considerable number of the employers manufacture products that support the automotive industry and energy. With a number of layoffs and plant closings at these and other manufactures, the unemployment rate in Oconee County has increased considerably over the past two years.
McAuliffe Financial, LLC
Page 21
Demographics
The population in Oconee County was approximately 74,000 in 2010. The county has experienced modest growth since 2000 and compares similarly to the national average. However, relative to the State of South Carolina, the County has grown at a much slower pace.
Table 2.1
Oconee Federal Savings & Loan Association
Major Employers in Oconee County
2009
Company |
Employees |
Product/Service |
||
Oconee County | ||||
School District of Oconee County |
1,605 | Education | ||
Duke Energy Corporation |
1,500 | Energy | ||
Oconee Memorial Hospital |
1,370 | Health Care | ||
Itron, Inc. |
665 | Electronic measuring devises | ||
Schneider Electric Square D |
655 | Motor control centers | ||
Timken U.S. Corporation |
640 | Thrust bearings | ||
Oconee County Government |
450 | Local Government | ||
Covidien |
423 | Anti-embolism stockings | ||
BASF Catalysts, LLC |
389 | Precious metal catalyst | ||
Sandvik |
347 | Cutting tools | ||
U.S. Engine Valve Company |
309 | Engine Valves | ||
State of South Carolina |
286 | State government | ||
Johnson Controls, Inc. Oconee Plant |
282 | Auto battery parts | ||
Borg Warner Automotive, Inc. |
235 | Transfer cases | ||
Kennametal Inc. |
203 | Twist drills | ||
Lift-Tek Elecar Masts |
194 | Fork lift masts |
Source: Oconee County Economic Development Commission.
Table 2.2 presents economic and demographic data from 2000 through 2009 and forecast data through 2014. From 2000 to 2009, Oconee Countys population expanded 11.3 percent compared to the national average of 10.0 percent throughout the U.S. and 15.9 percent for the State of South Carolina. Similarly, the population growth through 2014 is expected to follow pattern with the County expanding at a pace resembling the U.S. growth rate.
Household growth followed a similar pattern as population growth with the number of households expanding 13.8 percent in Oconee County and projected to grow 6.0 percent through 2014. South Carolina household growth is higher at 17.7 percent and 8.5 percent. The slower growth largely reflects the rural environment of Oconee County and its relatively non-diversified economic base with limited industrial growth.
McAuliffe Financial, LLC
Page 22
Median household income for Oconee County is projected to increase at a slightly faster pace
than the U.S. and South Carolina averages. In 2009, the Oconee County median household income of $45,791 represented 84.1 percent of the national average and by 2014 it is expected to increase to 84.6 percent. Relative to the State of South
Carolina, the median household income in Oconee County was 96.0 percent and by 2014 it is expected to be 96.5 percent. As previously mentioned, the lower median household income levels are indicative of the rural nature and limited industrial
Table 2.2
Economic and Demographic Data for the U.S, the State
of South Carolina and the Primary Market Area of
Oconee Federal Savings & Loan Association
Population (000) |
2000 | 2009 | 2014 |
Percent
Change 2000-2009 |
Percent
Change 2009-2014 |
|||||
United States |
281,421,906 | 309,731,508 | 324,062,684 | 10.06 | 4.63 | |||||
South Carolina |
4,012,012 | 4,649,749 | 5,016,816 | 15.90 | 7.89 | |||||
Oconee County |
66,215 | 73,681 | 77,607 | 11.28 | 5.33 | |||||
Households |
2000 | 2009 | 2014 |
Percent
Change 2000-2009 |
Percent
Change 2009-2014 |
|||||
United States |
105,480,101 | 116,523,156 | 122,109,448 | 10.47 | 4.79 | |||||
South Carolina |
1,533,854 | 1,805,553 | 1,959,502 | 17.71 | 8.53 | |||||
Oconee County |
27,283 | 31,048 | 32,903 | 13.80 | 5.97 | |||||
Median Household Income ($) |
2000 | 2009 | 2014 |
Percent
Change 2000-2009 |
Percent
Change 2009-2014 |
|||||
United States |
42,164 | 54,442 | 61,189 | 29.12 | 12.39 | |||||
South Carolina |
37,137 | 47,704 | 53,665 | 28.45 | 12.50 | |||||
Oconee County |
36,533 | 45,791 | 51,788 | 25.34 | 13.10 | |||||
Per Capita Income ($) |
2000 | 2009 | 2014 |
Percent
Change 2000-2009 |
Percent
Change 2009-2014 |
|||||
United States |
21,587 | 26,739 | 30,241 | 23.87 | 13.10 | |||||
South Carolina |
18,795 | 23,283 | 25,493 | 23.88 | 9.49 | |||||
Oconee County |
18,965 | 23,533 | 25,412 | 24.09 | 7.98 | |||||
Demographic data is provided by ESRI based primarily on US Census data. For non-census year data, ESRI uses
samples and projections to estimate the demographic data.
McAuliffe Financial, LLC
Page 23
The per capital income level in Oconee County follow a similar pattern as the median household income.
Unemployment Rates
Unemployment rates in Oconee County have historically exceeded both State and National rates. In earlier years, the region was dependent upon the textile and furniture industries, which fell on hard times. As previously mentioned, the economy in Oconee County has been supported by manufacturing where plant closings and layoffs have contributed to the higher unemployment rate. The rural nature of the economy results in limited employment opportunities and the ability of workers to easily move from one job to another. When an employer lay off workers, the workers often seek employment outside the county
Table 2.3
Oconee Federal Savings & Loan Association
Unemployment Trends (1)
Region |
July 2010
Unemployment |
July 2009
Unemployment |
||||
United States |
9.5 | % | 9.5 | % | ||
South Carolina |
10.8 | 12.0 | ||||
Oconee County |
12.1 | 14.3 |
(1) | Unemployment rates are not seasonally adjusted. |
Source: U.S. Bureau of Labor Statistics.
Competition in Oconee County
As a savings institution that primarily focuses on real estate lending and the gathering of deposits in northwestern South Carolina, Oconee Federal primary competitors have been (1) other financial institutions with offices in the local market (including commercial banks, thrifts and credit unions); (2) other mortgage loan originators and mortgage brokers (however, these potential competitors have not been much of a factor during the last three years); (3) those depository and lending organizations not physically located within the market but capable of doing business remotely through the Internet or by other means; and (4) other competitors such as investment firms, mutual funds, insurance companies, etc.
Competition among financial institutions in the Associations market for the origination of mortgage loans and the attraction of deposits has been significant. However, Oconee Federal
McAuliffe Financial, LLC
Page 24
has been able to maintain a strong and stable base of loyal customers and depositors from its local communities. As larger institutions compete for market share to achieve economies of scale, the environment for the Associations products and services is expected to remain highly competitive. Community-sized institutions such as Oconee Federal typically compete with larger institutions on pricing or operate in a niche that will allow for operating margins to be maintained at profitable levels.
Oconee Federal competes with thirteen other commercial banks and thrifts for deposits in Oconee County, including the branch offices of large in-state regional banks and out-of-state superregional banks. Table 2.4 displays deposit market share for all FDIC-insured banks and thrifts in Oconee County. Oconee Federal maintains a relatively large market share in Oconee County, where it ranks second with a total deposit market share of approximately 22%. One other community bank holds an approximately 25% market share.
Summary
The overall condition of Oconee Federals primary market area is stable, but with limited economic growth. However, some temporary stress is being currently felt in the local housing market associated with the current economic recession. The employment base in Oconee County has experienced modest diversification as the local economy has become less dependent on the traditional manufacturing base. While foreclosure levels related to the recession have increased significantly since 2008, Oconee County did not experience the real estate asset bubble experienced in other parts of the country. Oconee Federals future organic growth is expected to be primarily oriented toward the offering of deposit and mortgage products in and around Oconee County.
McAuliffe Financial, LLC
Page 25
Table 2.4
Oconee Federal Savings and Loan Association
Competition in Oconee County
2009 Rank |
2008
Rank |
Institution (ST) | Type |
2009
Branches |
2009 Total Deposits in Market ($000) |
2009 Total Market Share (%) |
2008
Total
Market ($000) |
2008 Total Market Share (%) |
||||||||
1 | 1 | Community First Bancorporation (SC) | Bank | 4 | 274,679 | 24.34 | 251,880 | 23.32 | ||||||||
2 | 2 | Oconee FS&LA (SC) | Savings Inst | 4 | 252,752 | 22.39 | 251,777 | 23.31 | ||||||||
3 | 3 | Wells Fargo & Co. (CA) | Bank | 2 | 157,398 | 13.95 | 167,024 | 15.46 | ||||||||
4 | 4 | First Citizens Bancorp. (SC) | Bank | 3 | 72,119 | 6.39 | 73,984 | 6.85 | ||||||||
5 | 7 | Blue Ridge Financial Corp. (SC) | Bank HC | 3 | 67,084 | 5.94 | 54,152 | 5.01 | ||||||||
6 | 6 | Peoples Bancorporation Inc. (SC) | Bank | 1 | 62,633 | 5.55 | 56,562 | 5.24 | ||||||||
7 | 5 | BB&T Corp. (NC) | Bank | 1 | 61,285 | 5.43 | 57,806 | 5.35 | ||||||||
8 | 9 | Bank of America Corp. (NC) | Bank | 1 | 47,254 | 4.19 | 42,646 | 3.95 | ||||||||
9 | 8 | SunTrust Banks Inc. (GA) | Bank | 2 | 45,246 | 4.01 | 43,705 | 4.05 | ||||||||
10 | 10 | Palmetto Bancshares Inc. (SC) | Bank | 1 | 37,740 | 3.34 | 25,125 | 2.33 | ||||||||
Total For Institutions In Market | 26 | 1,128,654 | 1,080,058 | |||||||||||||
Note: Market Share is for U.S. Territories only and non-retail branches are not included.
Source: SNL Financial and FDIC data
McAuliffe Financial, LLC
Page 26
III. | COMPARISONS WITH PUBLICLY TRADED THRIFT |
Introduction
An integral aspect in our valuation of Oconee Federal entails a financial comparison of the Association with a selected group of publicly traded peer thrifts (Comparable Group). For the reasons stated below, the Comparable Group, which was selected based upon similar operating characteristics, are comprised solely of Mutual Holding Companies (MHCs). This section describes the methodologies and key factors utilized in the selection of the appropriate Comparable Group. Based on our comparative financial analysis with the Comparable Group in this section and Section IV and our subsequent review and analysis of the groups pricing multiples in Section V, we are able to determine an appropriate valuation of the Association.
The various characteristics of the Comparable Group provide the basis for applying the appropriate adjustments for Oconee Federals pro forma value. Factors that impact the Associations pro forma value relative to the Comparable Group include balance sheet composition, capital levels, asset quality, profitability level and market area.
Our goal in the selection process for a Comparable Group is to find thrifts with operating characteristics that most closely match those of the Association. However, given the declining universe of actively traded thrifts with similar ownership structures, financial characteristics, business strategies and market areas, it is not possible to select a Comparable Group of thrifts that are exactly similar to the Association.
Selection Process
McAuliffe Financial has determined that MHCs trade at materially different levels relative to fully converted thrifts due to the unique ownership structure. The primary differences between MHCs and fully converted institutions are that MHCs contain a minority interest and have the potential for a second step. MHCs also have the potential for a re-mutualization transaction. Due to these differences, MHC trading multiples are substantially different from fully converted trading multiples. Given that, following the completion of its minority offering, Oconee Federal will demonstrate the same ownership characteristics and will be subject to similar market influences as other publicly traded mutual holding companies, we have concluded that the appropriate Comparable Group should be comprised of MHCs which demonstrate
McAuliffe Financial, LLC
Page 27
sufficient stock liquidity. However, in order to moderate the differences in ownership, pricing and trading characteristics among the Comparable Group companies and to recognize their differences from the universe of publicly traded thrifts that have undertaken full, standard conversions, we will derive their pricing ratios on a fully converted basis by applying pro forma second step conversion parameters to their current structure. We will discuss this process in Section IV.
As of the date of this appraisal, there are a total of 250 publicly traded thrift institutions (inclusive of exchange listed and OTC Bulletin Board and Pink Sheets) that are not targeted for acquisition. Of this total, 184 institutions were not MHCs and were eliminated.
Of the 66 remaining MHCs, there are a total of 34 that do not trade on a major exchange. McAuliffe Financial limited the Comparable Group to institutions whose common stock is listed on a major exchange (defined as the NYSE, NASDAQ or AMEX) since these companies tend to trade regularly. McAuliffe Financial believes that thrifts that trade over the counter or as pink sheets are inappropriate for the Comparable Group, due to irregular trading activity and wide bid/ask spreads, which may skew the trading value and make trading multiples less reliable as an indicator of value.
Institutions that have recently announced a second step transaction were eliminated. Nine institutions were eliminated, leaving a group of 25.
Of the remaining institutions, 9 institutions were eliminated due to their size. An institution was eliminated if total assets were above $1.0 billion.
Also in our selection process, we considered the following factors, to the extent possible:
|
Non-performing asset levels for the Comparable Group should be below industry averages. |
|
The Comparable Group should have a capital level above industry averages. |
|
Members of the Comparable Group should show positive reported income or, at least, positive core earnings. |
|
In general, the Comparable Group should be comprised of community oriented thrifts and, to the extent possible, operating primarily in rural markets (We attempted to exclude institutions whose deposit base was concentrated in a densely populated urban setting or highly populated metropolitan area). |
McAuliffe Financial, LLC
Page 28
This results in a total of 10 Comparable Group thrifts. McAuliffe Financial reviewed the recent publicly available reports and news releases of these 10 thrifts and determined that all 10 were acceptable comparables. Table 3.1 identifies the Comparable Group members.
Table 3.1
Peer Group of Publicly-Traded Thrifts
9/3/2010
Financial Institution |
Ticker | Exchange | Primary Market | State |
Operating
Strategy |
Total
Assets |
Offices |
Conv.
Date |
Stock
Price |
Market
Value |
||||||||||
($) | ($Mil) | |||||||||||||||||||
Cheviot Financial Corp. (MHC) |
CHEV | NASDAQ | Cheviot | OH | Thrift | 351,046 | 6 | 01/06/04 | 8.48 | 75.14 | ||||||||||
Greene County Bancorp, Inc. (MHC) |
GCBC | NASDAQ | Catskill | NY | Thrift | 495,323 | 13 | 12/30/98 | 17.25 | 71.09 | ||||||||||
Kentucky First Federal Bancorp (MHC) |
KFFB | NASDAQ | Hazard | KY | Thrift | 238,355 | 4 | 03/03/05 | 10.00 | 78.41 | ||||||||||
Lake Shore Bancorp, Inc. (MHC) |
LSBK | NASDAQ | Dunkirk | NY | Thrift | 460,441 | 10 | 04/04/06 | 7.95 | 48.21 | ||||||||||
LaPorte Bancorp, Inc. (MHC) |
LPSB | NASDAQ | La Porte | IN | Thrift | 438,455 | 8 | 10/15/07 | 7.15 | 32.78 | ||||||||||
MSB Financial Corp. (MHC) |
MSBF | NASDAQ | Millington | NJ | Thrift | 358,743 | 5 | 01/05/07 | 7.94 | 41.17 | ||||||||||
Pathfinder Bancorp, Inc. (MHC) |
PBHC | NASDAQ | Oswego | NY | Thrift | 396,332 | 14 | 11/16/95 | 6.74 | 16.75 | ||||||||||
Prudential Bancorp, Inc. of Pennsylvania (MHC) |
PBIP | NASDAQ | Philadelphia | PA | Thrift | 538,260 | 7 | 03/30/05 | 7.10 | 71.22 | ||||||||||
SI Financial Group, Inc. (MHC) |
SIFI | NASDAQ | Willimantic | CT | Thrift | 889,435 | 21 | 10/01/04 | 6.03 | 71.02 | ||||||||||
United Community Bancorp (MHC) |
UCBA | NASDAQ | Lawrenceburg | IN | Thrift | 492,104 | 9 | 03/31/06 | 7.25 | 56.88 |
Notes: | (1) | Operating strategies are: Thrift = Traditional Thrift, M.B = Mortgage Banker, R.E. = Real Estate Developer, Div. = Diversified and Ret. = Retail Banking. | ||
(2) | Most Recent Quarter Available. | |||
Source: | SNL Financial, LC |
Review of the Comparable Group
Certain key characteristics of the Comparable Group were examined as they relate and compare to Oconee Federal. The following five characteristics were examined:
1. | Asset size |
2. | Balance Sheet Mix |
3. | Asset Quality |
4. | Equity to Asset Level |
5. | Profitability |
Asset Size
We selected a peer group of MHC thrifts which all had asset sizes below $1.0 billion in order to more closely match the asset size of the Association. Oconee Federals asset size was $333.5 million at June 30, 2010. The Comparable Group had an average asset size of $465.8 million, and range in size from $238.4 million to $889.4 million. Reflective of their small asset size, the Comparable Group thrifts have a below average number of branches that range from 4 to 21.
McAuliffe Financial, LLC
Page 29
Balance Sheet Mix
Since fiscal 2006, Oconee Federal has maintained an above average level of loans relative to assets, and has historically maintained a high percentage of deposits as a liability funding source. For the Association, loans equaled 79.3% of assets and deposits equaled 81.7% of assets at June 30, 2010. While certain members of the Comparable Group also maintained above average levels of loans and deposits, the Comparable Group, on average, maintained loans and deposits levels that were similar to industry averages for all publicly traded MHCs. The average loans to asset ratio and deposits to asset ratio for the Comparable Group was 65.3% and 76.9%, respectively.
Asset Quality
As of June 30, 2010, Oconee Federals non-performing assets (NPAs) to asset ratio had increased to 1.42%. This compared to an average ratio of 1.97% for the Comparable Group. These asset quality ratios for both the Association and the Comparable Group were favorable compared to the MHC industry average of 4.10%.
Equity to Asset Level
At June 30, 2010, the Association showed an equity to asset ratio and tangible equity to tangible assets ratio of 17.9%, which are substantially above thrift industry averages. To the extent appropriate, we included at least 3 Comparable Group thrifts that also showed above average equity ratios. The average equity and tangible equity ratio for the comparative group was 12.7% and 11.9%, respectively.
Profitability
The thrift industry, for the most part, has reported a declining trend in reported profitability during the last two years with significant earnings variability. Profitability results during this time period largely reflect the deterioration in the housing market and the resulting rise in non-performing asset levels and increasing loan loss provisions. Oconee Federals operating performance during the latest fiscal year ended June 30, 2010, also reflects these factors. For the fiscal years ended June 30, 2010, the Association reported a return on assets (ROA) of 0.80% and return on equity (ROE) of 4.44%. Core ROA and ROE for the Association was 0.78% and 4.32%, respectively. The Comparable Group reported an ROA of 0.48% and a ROE of 4.46% and a core ROA and ROE of 0.46% and 4.32%, respectively (see Table 4.6). The core ROA figure for the 10 Comparable Group thrifts ranged between a low of 0.05% to a high of 1.03% while the core ROE figures ranged from a low of 0.22% to a high of 11.50%.
McAuliffe Financial, LLC
Page 30
Both the Associations and Comparable Groups core ROA and ROE levels were above the MHC industry average ROA and ROE of 0.19% and 1.79%, respectively.
Conclusion
Although no single thrift or group of thrifts can be precisely the same as any other due to the numerous variables related to the nature of an institutions condition, operations and environment, based on the foregoing selection criteria as well as the detailed comparative metrics presented in Section IV, we believe that the selected Comparable Group is appropriate, subject to the adjustments applied in the following section.
Key Financial Measures
The following table presents key financial measures for Oconee Federal and the Comparable Group.
McAuliffe Financial, LLC
Page 31
Table 3.2
Key Financial Measures
Oconee Federal
At or for the 12 months ended 06/30/10 |
Comparative Group Median
At or for the 12 months ended 06/30/10 |
|||
Balance Sheet Data |
||||
Net Loans to Deposits |
96.96 | 87.66 | ||
Net Loans to Assets |
79.25 | 66.82 | ||
Cash and Investments to Assets |
18.73 | 26.88 | ||
Deposits to Assets |
81.73 | 77.74 | ||
Borrowings to Assets |
0.00 | 10.05 | ||
Balance Sheet Growth |
||||
(Latest 12 Months) |
||||
Asset Growth Rate |
7.05 | 6.06 | ||
Loan Growth Rate |
7.46 | 2.21 | ||
Deposit Growth Rate |
7.86 | 7.92 | ||
Asset Quality |
||||
NPAs/Assets |
1.42 | 1.37 | ||
Capital |
||||
Equity to Assets |
17.89 | 11.21 | ||
Tang. Equity to Tang. Assets |
17.89 | 10.82 | ||
Intangible Assets to Equity |
0.00 | 0.00 | ||
Equity + Reserves to Assets |
18.15 | 11.81 | ||
Profitability |
||||
ROA |
0.80 | 0.53 | ||
ROE |
4.44 | 3.89 | ||
Core ROA |
0.78 | 0.50 | ||
Core ROE |
0.32 | 3.30 |
Source: Oconee Federal Financial Corps. Offering Prospectus and SNL Financial
IV. | MARKET VALUE ADJUSTMENTS |
Introduction
In this section, we make appropriate adjustments to determine the estimated pro forma market value of Oconee Federal based on a comparison of the Association with the Comparable Group. These adjustments will take into consideration such key items as financial condition, balance sheet growth, earnings performance, market area, cash dividends, liquidity of the stock to be issued, recent regulatory issues, management, subscription interest and thrift equity market conditions.
Based upon the pricing multiples of the Comparable Group and the types of adjustments described above, we will determine an estimated pro forma market value for Oconee Federal.
Financial Condition
In analyzing a thrifts institutions financial condition, investors focus on both balance sheet strength and balance sheet mix. In this connection, we focus on such factors as
McAuliffe Financial, LLC
Page 32
equity/capital levels, balance sheet mix, funding mix, liquidity, interest rate risk and asset quality. Tables 4.1 through 4.4 highlight Oconee Federals key balance sheet, capital and asset
Table 4.1
Key Balance Sheet Data
Company Name |
Ticker |
Total
Assets |
Loans/
Deposits |
Loans/
Assets |
Securities/
Assets |
Cash & Sec.
Assets |
Deposits/
Assets |
Borrowings/
Assets |
||||||||
Cheviot Financial Corp. (MHC) |
CHEV | 351,046 | 100.05 | 69.07 | 21.70 | 27.14 | 68.94 | 10.22 | ||||||||
Greene County Bancorp, Inc. (MHC) |
GCBC | 495,323 | 71.04 | 60.00 | 34.16 | 36.31 | 85.14 | 5.27 | ||||||||
Kentucky First Federal Bancorp (MHC) |
KFFB | 238,355 | 133.84 | 80.58 | 8.84 | 10.31 | 60.60 | 14.12 | ||||||||
Lake Shore Bancorp, Inc. (MHC) |
LSBK | 460,441 | 74.79 | 56.24 | 31.52 | 38.76 | 75.48 | 9.88 | ||||||||
LaPorte Bancorp, Inc. (MHC) |
LPSB | 438,455 | 98.79 | 66.02 | 24.73 | 26.15 | 67.24 | 20.30 | ||||||||
MSB Financial Corp. (MHC) |
MSBF | 358,743 | 89.68 | 74.10 | 13.23 | 19.13 | 82.62 | 5.58 | ||||||||
Pathfinder Bancorp, Inc. (MHC) |
PBHC | 396,332 | 85.63 | 67.61 | 24.21 | 26.55 | 79.64 | 11.45 | ||||||||
Prudential Bancorp, Inc. of Pennsylvania (MHC) |
PBIP | 538,260 | 55.52 | 47.47 | 38.37 | 48.89 | 85.90 | 2.53 | ||||||||
SI Financial Group, Inc. (MHC) |
SIFI | 889,435 | 90.65 | 68.57 | 21.43 | 26.61 | 75.83 | 13.76 | ||||||||
United Community Bancorp (MHC) |
UCBA | 492,104 | 71.96 | 62.91 | 24.38 | 30.88 | 87.42 | 0.58 | ||||||||
Average |
465,849 | 87.20 | 65.26 | 24.26 | 29.07 | 76.88 | 9.37 | |||||||||
Median |
449,448 | 87.66 | 66.82 | 24.30 | 26.88 | 77.74 | 10.05 | |||||||||
Maximum |
889,435 | 133.84 | 80.58 | 38.37 | 48.89 | 87.42 | 20.30 | |||||||||
Minimum |
238,355 | 55.52 | 47.47 | 8.84 | 10.31 | 60.60 | 0.58 | |||||||||
Oconee Federal Savings & Loan Association |
333,546 | 96.96 | 79.25 | 3.64 | 18.73 | 81.73 | 0.00 |
Source: SNL Financial
McAuliffe Financial, LLC
Page 33
Table 4.2
Comparative Group Loan Composition
Ticker |
Const
& Dev |
1-4 Unit Res | MultiFamily | Other |
Total
RE Lns |
Com
Bus |
Consum |
Total
Non-RE |
|||||||||||||||||||
Company Name |
Clsd | Revolv | |||||||||||||||||||||||||
Cheviot Financial Corp. (MHC) |
CHEV | 1.70 | 84.20 | 3.50 | 3.70 | 7.00 | 100.00 | 0.00 | 0.00 | 0.00 | |||||||||||||||||
Greene County Bancorp, Inc. (MHC) |
GCBC | 3.10 | 64.80 | 5.10 | 2.00 | 17.70 | 92.80 | 5.80 | 1.40 | 7.20 | |||||||||||||||||
Kentucky First Federal Bancorp (MHC) |
KFFB | 0.38 | 85.69 | 2.50 | 4.78 | 5.30 | 98.65 | 0.00 | 1.35 | 1.35 | |||||||||||||||||
Lake Shore Bancorp, Inc. (MHC) |
LSBK | 5.10 | 26.00 | 4.30 | 3.40 | 24.90 | 63.80 | 32.70 | 3.50 | 36.20 | |||||||||||||||||
LaPorte Bancorp, Inc. (MHC) |
LPSB | 0.40 | 74.50 | 9.20 | 0.90 | 9.90 | 94.80 | 4.30 | 0.80 | 5.20 | |||||||||||||||||
MSB Financial Corp. (MHC) |
MSBF | 4.30 | 69.10 | 9.80 | 0.90 | 12.10 | 96.10 | 3.50 | 0.30 | 3.90 | |||||||||||||||||
Pathfinder Bancorp, Inc. (MHC) |
PBHC | 2.20 | 54.10 | 5.30 | 3.00 | 20.30 | 84.90 | 13.80 | 1.30 | 15.10 | |||||||||||||||||
Prudential Bancorp, Inc. of Pennsylvania (MHC) |
PBIP | 13.00 | 72.80 | 4.50 | 1.60 | 7.60 | 99.50 | 0.30 | 0.20 | 0.50 | |||||||||||||||||
SI Financial Group, Inc. (MHC) |
SIFI | 2.40 | 50.80 | 3.80 | 2.00 | 34.00 | 93.00 | 6.40 | 0.60 | 7.00 | |||||||||||||||||
United Community Bancorp (MHC) |
UCBA | 2.40 | 44.00 | 9.40 | 15.00 | 23.90 | 94.70 | 2.30 | 3.00 | 5.30 | |||||||||||||||||
Average |
3.50 | 62.60 | 5.74 | 3.73 | 16.27 | 91.83 | 6.91 | 1.25 | 8.18 | ||||||||||||||||||
Median |
2.40 | 66.95 | 4.80 | 2.50 | 14.90 | 94.75 | 3.90 | 1.05 | 5.25 | ||||||||||||||||||
Maximum |
13.00 | 85.69 | 9.80 | 15.00 | 34.00 | 100.00 | 32.70 | 3.50 | 36.20 | ||||||||||||||||||
Minimum |
0.38 | 26.00 | 2.50 | 0.90 | 5.30 | 63.80 | 0.00 | 0.00 | 0.00 | ||||||||||||||||||
Oconee Federal Savings & Loan Association |
1.93 | 93.81 | 0.19 | 0.14 | 3.55 | 99.62 | 0.00 | 0.38 | 0.38 | ||||||||||||||||||
Variance to the Comparable Median |
(0.47 | ) | 26.86 | (4.61 | ) | (2.36 | ) | (11.35 | ) | 4.87 | (3.90 | ) | (0.67 | ) | (4.87 | ) |
Source: SNL Financial
Table 4.3
Comparative Group Capital Ratios
Company Name |
Ticker |
Equity/
Assets |
Tang. Equity/
Tang. Assets |
Intang./
Equity |
Equity+Reserves/
Assets |
|||||
Cheviot Financial Corp. (MHC) |
CHEV | 19.98 | 19.98 | 0.00 | 20.29 | |||||
Greene County Bancorp, Inc. (MHC) |
GCBC | 8.98 | 8.98 | 0.00 | 9.80 | |||||
Kentucky First Federal Bancorp (MHC) |
KFFB | 24.30 | 19.31 | 25.48 | 25.01 | |||||
Lake Shore Bancorp, Inc. (MHC) |
LSBK | 12.52 | 12.52 | 0.00 | 12.90 | |||||
LaPorte Bancorp, Inc. (MHC) |
LPSB | 11.42 | 9.52 | 18.43 | 12.41 | |||||
MSB Financial Corp. (MHC) |
MSBF | 11.14 | 11.14 | 0.00 | 11.85 | |||||
Pathfinder Bancorp, Inc. (MHC) |
PBHC | 7.81 | 6.91 | 12.41 | 8.68 | |||||
Prudential Bancorp, Inc. of Pennsylvania (MHC) |
PBIP | 10.49 | 10.49 | 0.00 | 10.96 | |||||
SI Financial Group, Inc. (MHC) |
SIFI | 9.12 | 8.70 | 5.15 | 9.67 | |||||
United Community Bancorp (MHC) |
UCBA | 11.27 | 11.27 | 0.00 | 11.76 | |||||
Average |
12.70 | 11.88 | 6.15 | 13.33 | ||||||
Median |
11.21 | 10.82 | 0.00 | 11.81 | ||||||
Maximum |
24.30 | 19.98 | 25.48 | 25.01 | ||||||
Minimum |
7.81 | 6.91 | 0.00 | 8.68 | ||||||
Oconee Federal Savings & Loan Association |
17.89 | 17.89 | 0.00 | 18.15 | ||||||
Variance to the Comparable Median |
6.69 | 7.08 | 0.00 | 6.35 |
Source: SNL Financial
McAuliffe Financial, LLC
Page 34
Table 4.4
Comparative Group Asset Quality
Company Name |
Ticker |
NPLs/
Loans |
Reserves/
NPLs |
NPAs
Assets |
NPAs
Equity |
Reserves/
Loans |
||||||||||
Cheviot Financial Corp. (MHC) |
CHEV | 2.01 | 22.48 | 1.86 | 9.29 | 0.45 | ||||||||||
Greene County Bancorp, Inc. (MHC) |
GCBC | 1.11 | 119.51 | 0.79 | 8.45 | 1.34 | ||||||||||
Kentucky First Federal Bancorp (MHC) |
KFFB | 1.54 | 57.04 | 1.30 | 5.22 | 0.87 | ||||||||||
Lake Shore Bancorp, Inc. (MHC) |
LSBK | 1.38 | 49.42 | 0.82 | 6.56 | 0.68 | ||||||||||
LaPorte Bancorp, Inc. (MHC) |
LPSB | 2.13 | 69.96 | 1.50 | 13.12 | 1.49 | ||||||||||
MSB Financial Corp. (MHC) |
MSBF | 5.74 | 16.53 | 7.72 | 72.02 | 0.95 | ||||||||||
Pathfinder Bancorp, Inc. (MHC) |
PBHC | 2.07 | 61.62 | 1.43 | 18.31 | 1.28 | ||||||||||
Prudential Bancorp, Inc. of Pennsylvania (MHC) |
PBIP | 1.01 | 98.49 | 1.07 | 5.02 | 0.99 | ||||||||||
SI Financial Group, Inc. (MHC) |
SIFI | 1.12 | 71.31 | 0.97 | 10.58 | 0.80 | ||||||||||
United Community Bancorp (MHC) |
UCBA | 3.42 | 22.91 | 2.21 | 15.09 | 0.78 | ||||||||||
Average |
2.15 | 58.93 | 1.97 | 16.37 | 0.96 | |||||||||||
Median |
1.78 | 59.33 | 1.37 | 9.94 | 0.91 | |||||||||||
Maximum |
5.74 | 119.51 | 7.72 | 72.02 | 1.49 | |||||||||||
Minimum |
1.01 | 16.53 | 0.79 | 5.02 | 0.45 | |||||||||||
Oconee Federal Savings & Loan Association |
1.49 | 22.32 | 1.42 | 7.93 | 0.33 | |||||||||||
Variance to the Comparable Median |
(0.29 | ) | (37.01 | ) | 0.05 | (2.01 | ) | (0.58 | ) |
Source: SNL Financial
As noted in Table 4.1, the Association and the Comparable Group have a relatively small asset size. Oconee Federals total assets of $333.5 million compares to an average and median asset size of $465.8 million and $449.4 million, respectively, for the comparative group. The Association has four branch offices while the average branch office size of the comparative group is ten offices (median of nine offices).
The Association is a well capitalized institution under regulatory capital standards. The Associations tangible equity to tangible assets ratio (Oconee Federal has no intangible assets) of 17.9% compared to the Comparable Group average and median tangible equity ratios of 11.9% and 10.8%, respectively (See Table 4.3). Oconee Federals pro forma consolidated tangible equity ratio is projected to be 18.8% at the midpoint of the offering valuation range.
The Associations net loans-to-asset ratio is high, at 79.3%, which compares to an average ratio of 65.3% (median ratio of 66.8%) for the comparative group. The Associations higher loans-to-assets ratio indicates a lower level of asset liquidity. During the last five years, while the Association has reduced its balances of investment securities, it has increased the level
McAuliffe Financial, LLC
Page 35
of short-term interest bearing deposits. Oconee Federals level of securities (including MBSs) as a percentage of assets and cash equivalents plus securities as a percentage of assets is 3.6% and 18.7%, respectively. This compared to the Comparable Groups average ratios of 24.3% and 29.1%, respectively.
We have also compared Oconee Federals loan portfolio composition to that of the Comparable Group. As shown in Table 4.2, 93.8% of the Associations total loan portfolio is concentrated in permanent one-to-four family residential loans. While this loan portfolio strategy is expected to reduce the overall credit risk profile of a loan portfolio, it also reduces the overall diversification and revenue growth potential of the portfolio. The Comparable Groups loan portfolio is more diversified. Permanent one-to-four family residential loans constitute 62.6% of the Comparable Groups total loan portfolio, with the remainder of the portfolio concentrated mostly in commercial real estate, commercial business and home equity loans.
Oconee Federals predominant liability funding source has been deposits. The Associations ratio of deposits to assets is 81.7% and it currently does not rely on other types of borrowings as a funding source. The Comparable Groups average ratio of deposits to assets and borrowings to assets is 76.9% and 9.4%, respectively.
Oconee Federals interest rate risk position is presented in Section I. While the Associations interest rate risk position appears to be within the acceptable limits established in its Interest Rate Risk Policy guidelines, it has been noted that the Association retains a high concentration (approximately 90%) of its residential mortgage loans in 15 to 30 year fixed rate product. While no similar interest rate risk data is readily available for the Comparable Group, we have duly noted Oconee Federals high concentration of fixed rate residential mortgage loans.
Asset quality is also an important consideration in assessing Oconee Federals estimated market value. We have performed an analysis of Oconee Federals non-performing assets (NPAs), non-performing loans (NPLs) and allowance for loan loss (reserves) levels compared to the Comparable Group (see Table 4.4).
The Associations level of NPLs to total loans of 1.49% is below the Comparable Group average of 2.15%. The Associations NPA to total assets ratio of 1.42% compared to the comparative group average ratio of 1.97%. However, the Comparable Groups median ratio is lower, at only 1.37%. The Comparable Group maintains a higher reserve level than does Oconee Federal. The Associations reserves level equal 0.33% of total loans versus the higher Comparable Group level of 0.96%. Finally, the Associations ratio of reserves to NPLs of 22.3% compared to the Comparable Groups higher ratio of 58.9%.
McAuliffe Financial, LLC
Page 36
A comparison of Oconee Federal to the Comparable Group is summarized below:
Positive |
Neutral |
Negative |
||
-Higher Capital Ratios | -Liquid Assets Position |
-Smaller Asset Size and Number of Branches |
||
-Higher Deposit Levels |
-Less Diversified Loan Portfolio |
|||
-Lower NPLs |
-Moderate Interest Rate Risk |
|||
-Lower Loan Reserves to Loans |
On balance, and taking into consideration Oconee Federals balance sheet strength relative to the Comparable Group, we believe that a slight upward adjustment is warranted for financial condition.
Balance Sheet Growth
As we discussed in Section I, Oconee Federals annualized asset growth rate since June 2005 has been approximately 1.9%. Loan growth has been higher than total asset growth during this period. Loan growth has been funded from the proceeds of maturing investment securities and modest net deposit inflows.
Table 4.5
Balance Sheet Growth
Company Name |
Ticker |
Asset
Growth |
Net Loan
Growth |
Deposit
Growth |
|||||||
Cheviot Financial Corp. (MHC) |
CHEV | 2.49 | (3.92 | ) | 5.33 | ||||||
Greene County Bancorp, Inc. (MHC) |
GCBC | 7.55 | 10.33 | 5.77 | |||||||
Kentucky First Federal Bancorp (MHC) |
KFFB | (0.64 | ) | 1.96 | 4.35 | ||||||
Lake Shore Bancorp, Inc. (MHC) |
LSBK | 10.04 | 2.45 | 12.74 | |||||||
LaPorte Bancorp, Inc. (MHC) |
LPSB | 12.07 | 14.52 | 14.56 | |||||||
MSB Financial Corp. (MHC) |
MSBF | 1.84 | (3.71 | ) | 8.86 | ||||||
Pathfinder Bancorp, Inc. (MHC) |
PBHC | 14.14 | 7.85 | 12.37 | |||||||
Prudential Bancorp, Inc. of Pennsylvania (MHC) |
PBIP | 4.57 | 0.61 | 6.98 | |||||||
SI Financial Group, Inc. (MHC) |
SIFI | 1.92 | (3.33 | ) | 3.92 | ||||||
United Community Bancorp (MHC) |
UCBA | 22.54 | 12.79 | 26.67 | |||||||
Average |
7.65 | 3.96 | 10.16 | ||||||||
Median |
6.06 | 2.21 | 7.92 | ||||||||
Maximum |
22.54 | 14.52 | 26.67 | ||||||||
Minimum |
(0.64 | ) | (3.92 | ) | 3.92 | ||||||
Oconee Federal Savings & Loan Association |
7.05 | 7.46 | 7.86 | ||||||||
Variance to the Comparable Median |
0.99 | 5.26 | (0.06 | ) |
Source: SNL Financial
McAuliffe Financial, LLC
Page 37
For the latest twelve months ended June 30, 2010, the Associations assets, loans and deposits increased 7.1%, 7.5% and 7.9%, respectively. This compared to average asset, loans and deposit growth of 7.7%, 4.0% and 10.2% (median growth of 7.9%) for the Comparable Group (see Table 4.5).
At least for the short-term, balance sheet growth rates for the thrift industry is expected to be limited due to the overall economic climate and specifically for Oconee Federal, given the Associations residential lending focus in a very weak housing market.
We believe that no specific adjustment is warranted for this item.
Earnings Performance
The earnings performance, including earnings sustainability and consistency of a thrift institution is determined by both internal and external factors. Internal factors include the composition of the balance sheet, the strength of the balance sheet (capital levels, interest rate and credit risk levels), the abilities of management and staff, the size and location of the branch office network and infrastructure in place to execute. External factors include the competitive environment, the interest rate environment, the regulatory climate and national and particularly local economic (including housing market) conditions.
For a small institution such as Oconee Federal that generates a less diversified revenue stream, net income levels are typically based on three major line items: (1) net interest income; (2) loan loss provision; and (3) non-interest (operating) expenses. In this section, we compare Oconee Federals profitability levels to the comparative group level, primarily based on these income/expense items.
As we discussed in Section I, Oconee Federals net income and ROA levels have fluctuated over the last five fiscal years. After declining in each of the three fiscal years ended in June 30, 2008, net income and ROA increased in both fiscal 2009 and 2010. The fluctuation in earnings results for each of those years was primarily driven by the fluctuation in the level of net interest income.
For the latest fiscal year ended June 30, 2010, Oconee Federal generated a reported ROA and ROE of 0.80% and 4.44%, respectively. The Associations core ROA and ROE were 0.78% and 4.32%, respectively. This compares to the Comparable Groups reported ROA of 0.48% (median ROA of 0.53%) and reported ROE of 4.46% (median ROE of 3.89%). The Comparable Groups core ROA and core ROE was 0.46% (median ROA of 0.50%) and 4.32% (median ROE of 3.30%), respectively (see Table 4.6).
McAuliffe Financial, LLC
Page 38
On a pro forma basis, the Associations core ROA and ROE are 0.70% and 3.39%,
Table 4.6
Reported and Core Profitability Ratios
Company Name |
Ticker | ROAA (%) | ROAE (%) | Core ROAA (%) | Core ROAE (%) | |||||||
Cheviot Financial Corp. (MHC) |
CHEV | 0.48 | 2.41 | 0.48 | 2.41 | |||||||
Greene County Bancorp, Inc. (MHC) |
GCBC | 1.03 | 11.50 | 1.03 | 11.50 | |||||||
Kentucky First Federal Bancorp (MHC) |
KFFB | (0.01 | ) | (0.04 | ) | 0.05 | 0.22 | |||||
Lake Shore Bancorp, Inc. (MHC) |
LSBK | 0.65 | 4.97 | 0.65 | 4.97 | |||||||
LaPorte Bancorp, Inc. (MHC) |
LPSB | 0.69 | 5.59 | 0.52 | 4.19 | |||||||
MSB Financial Corp. (MHC) |
MSBF | 0.22 | 2.00 | 0.22 | 2.00 | |||||||
Pathfinder Bancorp, Inc. (MHC) |
PBHC | 0.58 | 7.73 | 0.51 | 6.92 | |||||||
Prudential Bancorp, Inc. of Pennsylvania (MHC) |
PBIP | 0.63 | 5.83 | 0.71 | 6.59 | |||||||
SI Financial Group, Inc. (MHC) |
SIFI | 0.25 | 2.80 | 0.21 | 2.39 | |||||||
United Community Bancorp (MHC) |
UCBA | 0.24 | 1.83 | 0.26 | 1.98 | |||||||
Average |
0.48 | 4.46 | 0.46 | 4.32 | ||||||||
Median |
0.53 | 3.89 | 0.50 | 3.30 | ||||||||
Maximum |
1.03 | 11.50 | 1.03 | 11.50 | ||||||||
Minimum |
(0.01 | ) | (0.04 | ) | 0.05 | 0.22 | ||||||
Oconee Federal Savings & Loan Association |
0.80 | 4.44 | 0.78 | 4.32 | ||||||||
Variance to the Comparable Median |
0.27 | 0.56 | 0.29 | 1.02 |
Source: SNL Financial
Table 4.7 provides the key earnings components for Oconee Federal and the Comparative Group. The Association generated a lower net interest margin than the Comparative Group. The Associations net interest margin of 2.82% compared to the Comparable Groups average net interest margin of 3.28% (median of 3.20%). The lower net interest margin reflected a smaller interest rate spread of 2.53% versus the Comparable Groups average net interest rate spread of 3.12% (median of 3.03%). The Association also generated a lower level of non-interest income compared to the Comparable Group. The Associations non-interest income of only 0.07% compared to 0.57% (median of 0.66%) for the Comparable Group.
McAuliffe Financial, LLC
Page 39
Table 4.7
Earnings Components
Company Name |
Ticker |
Yield
on Earn. Assets |
Cost
of Int. Bear. Liab |
Interest
Spread |
Net
Interest Margin |
Noninterest
Income / Avg Assets |
Loan
Loss Prov / Avg Assets |
Noninterest
Expense / Avg Assets |
Efficiency
Ratio |
Overhead
Ratio |
||||||||||||||||||
Cheviot Financial Corp. (MHC) |
CHEV | 4.82 | 2.00 | 2.82 | 3.16 | 0.23 | 0.15 | 2.35 | 70.34 | 68.13 | ||||||||||||||||||
Greene County Bancorp, Inc. (MHC) |
GCBC | 5.09 | 1.27 | 3.82 | 3.91 | 0.97 | 0.27 | 2.87 | 60.95 | 50.77 | ||||||||||||||||||
Kentucky First Federal Bancorp (MHC) |
KFFB | 5.36 | NA | NA | 2.94 | 0.12 | 0.47 | 2.00 | 69.04 | 67.62 | ||||||||||||||||||
Lake Shore Bancorp, Inc. (MHC) |
LSBK | 4.96 | 1.93 | 3.03 | 3.23 | 0.56 | 0.08 | 2.62 | 73.34 | 68.40 | ||||||||||||||||||
LaPorte Bancorp, Inc. (MHC) |
LPSB | 5.40 | 2.35 | 3.05 | 3.26 | 0.78 | 0.56 | 2.69 | 69.89 | 61.99 | ||||||||||||||||||
MSB Financial Corp. (MHC) |
MSBF | 5.02 | 2.01 | 3.01 | 3.19 | 0.18 | 0.44 | 2.34 | 74.51 | 72.97 | ||||||||||||||||||
Pathfinder Bancorp, Inc. (MHC) |
PBHC | 5.20 | 1.62 | 3.58 | 3.72 | 0.76 | 0.27 | 3.09 | 72.49 | 66.35 | ||||||||||||||||||
Prudential Bancorp, Inc. of Pennsylvania (MHC) |
PBIP | 5.25 | 2.18 | 3.07 | 3.21 | 0.17 | 0.14 | 2.17 | 59.18 | 56.89 | ||||||||||||||||||
SI Financial Group, Inc. (MHC) |
SIFI | 4.96 | 2.23 | 2.73 | 3.00 | 1.15 | 0.15 | 3.54 | 88.53 | 83.86 | ||||||||||||||||||
United Community Bancorp (MHC) |
UCBA | 4.72 | 1.76 | 2.96 | 3.13 | 0.76 | 0.59 | 2.76 | 74.65 | 68.07 | ||||||||||||||||||
Average |
5.08 | 1.93 | 3.12 | 3.28 | 0.57 | 0.31 | 2.64 | 71.29 | 66.51 | |||||||||||||||||||
Median |
5.06 | 2.00 | 3.03 | 3.20 | 0.66 | 0.27 | 2.66 | 71.42 | 67.85 | |||||||||||||||||||
Maximum |
5.40 | 2.35 | 3.82 | 3.91 | 1.15 | 0.59 | 3.54 | 88.53 | 83.86 | |||||||||||||||||||
Minimum |
4.72 | 1.27 | 2.73 | 2.94 | 0.12 | 0.08 | 2.00 | 59.18 | 50.77 | |||||||||||||||||||
Oconee Federal Savings & Loan Association |
4.82 | 2.29 | 2.53 | 2.82 | 0.07 | 0.23 | 1.42 | 49.73 | 47.87 | |||||||||||||||||||
Variance to the Comparable Median |
(0.23 | ) | 0.29 | (0.50 | ) | (0.38 | ) | (0.59 | ) | (0.04 | ) | (1.24 | ) | (21.69 | ) | (19.97 | ) |
Source: SNL Financial
Notwithstanding Oconee Federals lower net interest margin and non-interest income levels, Oconee Federals ROA, as noted above, is higher than the Comparable Groups ROA. This reflects the fact that the Association recorded a non-interest expense ratio that is 122 basis points less than the Comparable Group. Oconee Federals lower operating expense ratio (1.42% versus the Comparable Group average and median ratios of 2.64% and 2.66%) and lower loan loss provision level (0.23% versus average and median ratios of 0.31% and 0.27% for the Comparable Group) more than offset the Associations less favorable net interest margin and non-interest income levels.
Oconee Federals efficiency ratio of 49.73% is more favorable than the Comparable Groups average and median ratios of 71.29% and 71.42%, respectively.
After the MHC reorganization and stock offering, the Associations operating expenses are expected to rise modestly as a result of the stock benefit plans and additional costs of being a public company. This should be partially offset by the income generated from the offering proceeds that are raised and reinvested. However, at least for the short-term, offering proceeds are expected to be redeployed at relatively low average yields. As a result and given the expected continuation of a less steep yield curve, Oconee Federals business plan does not project net income to be materially higher than present levels. With a modestly higher post-conversion equity ratio and with limited earnings growth, Oconee Federals ROE is expected to remain flat.
Based on all the factors discussed above, we believe that no specific adjustment is warranted for Earnings Performance.
Market Area Review
As we previously discussed, Oconee Federals primary market area is concentrated in one county in South Carolina, Oconee County. Oconee County is largely rural with no major
McAuliffe Financial, LLC
Page 40
population centers. Historically, the Countys economy was heavily concentrated in manufacturing, including the textile industry. Plant closings and layoffs contributed to the Countys relatively high unemployment rate. While Oconee County has experienced a limited amount of industrial diversification during recent years, unemployment rates continue to remain above national averages.
Table 4.8 compares certain demographic and economic data for Oconee County with the county data of the Comparable Group thrifts. Two of the Comparable Group thrifts also have their deposit bases concentrated in only one county, while the remaining group members serve multiple counties. Oconee County experienced a population growth of 11.3% between 2000 and 2010 versus an average growth rate of 2.3% for the Comparable Groups primary market areas. Oconee Countys latest median household income of approximately $45,800 compared to the Comparable Group average household income of $54,995 for its markets. The median household income growth for Oconee County between 2000 and 2010 was the 25.3% versus 27.5% growth in Comparable Group markets. As of July 2010, the unemployment rate in Oconee County was 12.1% compared to the average unemployment rate of 9.9% (median rate of 9.4%) in the Comparable Groups market area.
Based on the demographic and economic data discussed herein and given Oconee Countys limited industrial diversification, on balance, we believe that a slight discount downward is warranted for market area.
Cash Dividends
Thrift institutions have been paying cash dividends as a key component of their capital management strategies. In particular, if a thrift has a strong capital position and does not plan significant asset growth, at least a moderate level of cash dividends will typically be paid to stockholders.
As shown in Table 4.9, nine of the ten Comparable Group thrifts are currently paying a cash dividend. The groups average dividend yield is 3% and its payouts ratio is 93.6% (median ratio of 58.5%). Just under 69% of all publicly traded MHCs are paying cash dividends with an average yield of 3.1%.
Oconee Federals holding company, Oconee Federal Financial Corp., intends to declare and pay a quarterly cash dividend of $0.10 per share, or $0.40 annual cash dividend per share, in the first full or partial quarter following the completion of the MHC reorganization and stock offering. This dividend represents a 4% annual yield based on a share price of $10.00.
McAuliffe Financial, LLC
Page 41
Table 4.8
Demographic and Economic Data
Comparable Group Companies
Cheviot Financial Corp. (MHC) (NASDAQ: CHEV)
Demographic Profile (Cheviot Financial Corp. (MHC))
Ownership: Current
Market: County
Ohio (OH)
McAuliffe Financial, LLC
Page 42
Table 4.8 (cont.)
Demographic and Economic Data
Comparable Group Companies
Lake Shore Bancorp, Inc. (MHC) (NASDAQ: LSBK)
Demographic Profile (Lake Shore Bancorp, Inc. (MHC))
Ownership: Current
Market: County
New York (NY)
McAuliffe Financial, LLC
Page 43
Table 4.8 (cont.)
Demographic and Economic Data
Comparable Group Companies
Pathfinder Bancorp, Inc. (MHC) (NASDAQ: PBHC)
Demographic Profile (Pathfinder Bancorp, Inc. (MHC))
Ownership: Current
Market: County
New York (NY)
County |
Market
Rank |
Number
of Branches |
Company
Deposits in Market ($000) |
Deposit
Market Share (%) |
Percent of
State Franchise (%) |
Percent of
National Franchise (%) |
Total
(Actual) |
Population
Change 2000-2010 (%) |
Projected
Population Change 2010-2015 (%) |
Median
($) |
HH
Income Change 2000-2010 (%) |
Projected
Income
|
Unemploy
Rate July 2010 |
|||||||||||||||
Oswego |
1 | 14 | 316,215 | 24.69 | 100.00 | 100.00 | 121,448 | (0.76 | ) | (0.81 | ) | 45,602 | 24.43 | 16.05 | 10.3 | |||||||||||||
NY Totals |
14 | 316,215 | 100.00 | 100.00 | 121,448 | |||||||||||||||||||||||
Weighted Average: New York Franchise |
(0.76 | ) | (0.81 | ) | 45,602 | 24.43 | 16.05 | |||||||||||||||||||||
Aggregate: Entire State of New York |
19,543,731 | 2.99 | 0.99 | 58,128 | 33.38 | 16.17 | ||||||||||||||||||||||
Aggregate: National |
311,212,863 | 10.59 | 3.85 | 54,442 | 29.12 | 12.39 |
Prudential Bancorp, Inc. of Pennsylvania (MHC) (NASDAQ: PBIP)
Demographic Profile (Prudential Bancorp, Inc. of Pennsylvania (MHC))
Ownership: Current
Market: County
Pennsylvania (PA)
County |
Market
Rank |
Number
of Branches |
Company
Deposits in Market ($000) |
Deposit
Market Share (%) |
Percent of
State Franchise (%) |
Percent of
National Franchise (%) |
Total
(Actual) |
Population
Change 2000-2010 (%) |
Projected
Population Change 2010-2015 (%) |
Median
($) |
HH
Income Change 2000-2010 (%) |
Projected
Income
|
Unemploy
Rate July 2010 |
|||||||||||||||
Philadelphia |
12 | 6 | 394,511 | 0.82 | 90.59 | 90.59 | 1,440,459 | (5.08 | ) | (2.69 | ) | 41,221 | 33.92 | 17.13 | 15.9 | |||||||||||||
Delaware |
27 | 1 | 40,957 | 0.38 | 9.41 | 9.41 | 558,034 | 1.30 | (0.11 | ) | 65,948 | 31.62 | 15.11 | 9.5 | ||||||||||||||
PA Totals |
7 | 435,468 | 100.00 | 100.00 | 1,998,493 | |||||||||||||||||||||||
Weighted Average: Pennsylvania Franchise |
(4.48 | ) | (2.45 | ) | 43,547 | 33.70 | 16.94 | |||||||||||||||||||||
Aggregate: Entire State of Pennsylvania |
12,574,407 | 2.39 | 0.50 | 52,723 | 31.45 | 13.30 | ||||||||||||||||||||||
Aggregate: National |
311,212,863 | 10.59 | 3.85 | 54,442 | 29.12 | 12.39 |
SI Financial Group, Inc. (MHC) (NASDAQ: SIFI)
Demographic Profile (SI Financial Group, Inc. (MHC))
Ownership: Current
Market: County
Connecticut (CT)
County |
Market
Rank |
Number
of Branches |
Company
Deposits in Market ($000) |
Deposit
Market Share (%) |
Percent of
State Franchise (%) |
Percent of
National Franchise (%) |
Total
(Actual) |
Population
Change 2000-2010 (%) |
Projected
Population Change 2010-2015 (%) |
Median
($) |
HH
Income Change 2000-2010 (%) |
Projected
HH Income Change 2010-2015 (%) |
Unemploy
Rate July 2010 |
|||||||||||||
Windham |
1 | 7 | 277,171 | 20.17 | 42.45 | 42.45 | 119,504 | 9.55 | 3.66 | 57,890 | 28.32 | 10.66 | 11.3 | |||||||||||||
New London |
7 | 8 | 190,083 | 4.17 | 29.11 | 29.11 | 265,769 | 2.58 | 0.08 | 64,743 | 27.80 | 13.28 | 9.3 | |||||||||||||
Tolland |
6 | 3 | 119,436 | 5.64 | 18.29 | 18.29 | 150,350 | 10.26 | 2.03 | 78,072 | 32.25 | 15.48 | 8.6 | |||||||||||||
Hartford |
22 | 2 | 59,688 | 0.21 | 9.14 | 9.14 | 885,075 | 3.25 | 0.99 | 64,279 | 26.59 | 15.05 | 11.0 | |||||||||||||
Middlesex |
11 | 1 | 6,532 | 0.19 | 1.00 | 1.00 | 167,218 | 7.83 | 2.80 | 76,728 | 29.66 | 14.55 | 8.6 | |||||||||||||
CT Totals |
21 | 652,910 | 100.00 | 100.00 | 1,587,916 | |||||||||||||||||||||
Weighted Average: Connecticut Franchise |
7.05 | 2.07 | 64,350 | 28.74 | 12.75 | |||||||||||||||||||||
Aggregate: Entire State of Connecticut |
3,535,787 | 3.82 | 0.94 | 70,340 | 30.46 | 14.72 | ||||||||||||||||||||
Aggregate: National |
311,212,863 | 10.59 | 3.85 | 54,442 | 29.12 | 12.39 |
McAuliffe Financial, LLC
Page 44
Table 4.8 (cont.)
Demographic and Economic Data
Comparable Group Companies
United Community Bancorp (MHC) (NASDAQ: UCBA)
Demographic Profile (United Community Bancorp (MHC))
Ownership: Current
Market: County
Indiana (IN)
Weighted Average is calculated as the sum of (Percent of State/National Franchise * demographic item) within each market. Banks, Thrifts, and Savings Banks included (Retail Branches Only)
Note: National Franchise does not include deposits held in U.S. Territories and other non-states, excluding District of Columbia.
Demographic data is provided by ESRI based primarily on US Census data. For non-census year data, ESRI uses samples and projections to estimate the demographic data. SNL performs calculations on the underlying data provided by ESRI for some of the data presented on this page.
McAuliffe Financial, LLC
Page 45
When the Holding Company pays dividends on its common stock to public shareholders, it will
also be required to pay dividends to Oconee Federal, MHC, unless Oconee Federal, MHC elects to, and is permitted to, waive the receipt of dividends. In recent years, the OTS has generally approved requests from mutual holding companies to waive
Table 4.9
Dividend Data
Company Name |
Ticker |
Dividend
Yield |
LTM Dividend Payout Ratio (%) | |||
Cheviot Financial Corp. (MHC) |
CHEV | 5.21 | 226.32 | |||
Greene County Bancorp, Inc. (MHC) |
GCBC | 4.06 | 58.47 | |||
Kentucky First Federal Bancorp (MHC) |
KFFB | 4.00 | NM | |||
Lake Shore Bancorp, Inc. (MHC) |
LSBK | 2.92 | 48.94 | |||
LaPorte Bancorp, Inc. (MHC) |
LPSB | 0.00 | 0.00 | |||
MSB Financial Corp. (MHC) |
MSBF | 1.51 | 75.00 | |||
Pathfinder Bancorp, Inc. (MHC) |
PBHC | 1.99 | 16.22 | |||
Prudential Bancorp, Inc. of Pennsylvania (MHC) |
PBIP | 2.98 | 60.61 | |||
SI Financial Group, Inc. (MHC) |
SIFI | 1.93 | 33.33 | |||
United Community Bancorp (MHC) |
UCBA | 6.32 | 323.08 | |||
Average |
3.09 | 93.55 | ||||
Median |
2.95 | 58.47 | ||||
Maximum |
6.32 | 323.08 | ||||
Minimum |
0.00 | 0.00 |
Source: SNL Securities
provides that, after the regulation of savings and loan holding companies is transferred to the Federal Reserve Board, which is expected to occur in approximately one year, a mutual holding company will be required to give the Federal Reserve Board notice before waiving the receipt of dividends. Also, this Act set standards for granting a waiver, including a requirement that waived dividends be considered in determining an appropriate exchange ratio in the event of a conversion of the mutual holding company to stock form. The Federal Reserve Board historically has generally not allowed mutual holding companies to waive the receipt of dividends, and there can be no assurance that the Federal Reserve Board will permit dividend waivers by mutual holding companies such as Oconee Federal.
McAuliffe Financial, LLC
Page 46
While Oconee Federals Holding Company intends to apply for a dividend waiver, it is highly uncertain whether it will be granted. Therefore, Oconee Federals business plan projections assume that cash dividends will also be paid to the mutual holding company. As a result, rather than an annual cash outflow of $600,000 to support a $0.40 per share annual cash dividend solely to the public stockholders, Oconee Federals annual cash outflow will more than triple, to approximately $1.8 million, to support the payment of cash dividends to Oconee Federal, MHC.
We believe that the market price performance of Oconee Federals common stock will likely be adversely affected if dividends to the mutual holding company cannot be waived, since it will have a negative effect on the Associations cash flow and/or could adversely impact the future level of cash dividends to public shareholders. As a result, we believe that a modest downward adjustment is appropriate for this factor.
Liquidity of the Issue
The Comparable Group contains ten companies that trade on the Nasdaq system. The Holding Company has applied and expects to have the common stock quoted on The Nasdaq Capital Market. Given the size of the stock offering, the level of market capitalization of Oconee Federals stock is expected to be at least $15 million. Therefore, it can be expected that the Holding Companys common stock will have at least a modest degree of trading activity and liquidity. The comparative group has experienced varying degrees of trading volume and, therefore, liquidity in their stocks. The market capitalization of the ten Comparable Group thrifts range from $16.80 million to $78.40 million and the average and median capitalization for the group is $56.27 million and $63.94 million, respectively (see Table 4.10). Therefore the Holding Companys stock can be expected to have a modestly lower level of liquidity. Based on the foregoing, we believe that a slight downward adjustment to the pro forma market value of Oconee Federal relative to the Comparable Group is warranted.
Management
Exhibit I-3 provides a summary of the resumes of Oconee Federals executive officers and directors. The executive management team is supported by approximately 42 other employees. The Associations management team is small, but it appears to possess the experience and expertise in the key lending and financial service areas that are the focus of the Associations operations. The financial results of the Association suggest that the Board of
McAuliffe Financial, LLC
Page 47
Table 4.10
Market Capitalization and Market Data
Company Name |
Ticker |
Market
Value ($M) |
Mkt Value of
Public Float ($000) |
Stock
Price |
High
Price |
Low
Price |
Book Value
Per Share |
Tang. BV
Per Share |
||||||||
Cheviot Financial Corp. (MHC) |
CHEV | 75.10 | 22,600 | 8.48 | 9.55 | 7.00 | 7.91 | 7.91 | ||||||||
Greene County Bancorp, Inc. (MHC) |
GCBC | 71.10 | 19,794 | 17.25 | 18.50 | 14.00 | 10.80 | 10.80 | ||||||||
Kentucky First Federal Bancorp (MHC) |
KFFB | 78.40 | 31,200 | 10.00 | 13.75 | 7.80 | 7.38 | 5.50 | ||||||||
Lake Shore Bancorp, Inc. (MHC) |
LSBK | 48.20 | 17,906 | 7.95 | 8.50 | 7.46 | 9.49 | 9.49 | ||||||||
LaPorte Bancorp, Inc. (MHC) |
LPSB | 32.80 | 23,456 | 7.15 | 8.04 | 4.14 | 10.92 | 8.91 | ||||||||
MSB Financial Corp. (MHC) |
MSBF | 41.20 | 23,200 | 7.94 | 9.45 | 6.37 | 7.72 | 7.72 | ||||||||
Pathfinder Bancorp, Inc. (MHC) |
PBHC | 16.80 | 4,600 | 6.74 | 8.00 | 5.11 | 9.97 | 8.43 | ||||||||
Prudential Bancorp, Inc. of Pennsylvania (MHC) |
PBIP | 71.20 | 35,100 | 7.10 | 10.89 | 5.52 | 5.63 | 5.63 | ||||||||
SI Financial Group, Inc. (MHC) |
SIFI | 71.00 | 17,800 | 6.03 | 7.00 | 4.15 | 6.89 | 6.54 | ||||||||
United Community Bancorp (MHC) |
UCBA | 56.88 | 16,115 | 7.25 | 8.00 | 6.06 | 7.07 | 7.07 | ||||||||
Average |
56.27 | 21,177 | 8.59 | 10.17 | 6.76 | 8.38 | 7.80 | |||||||||
Median |
63.94 | 21,197 | 7.60 | 8.98 | 6.22 | 7.82 | 7.82 | |||||||||
Maximum |
78.40 | 35,100 | 17.25 | 18.50 | 14.00 | 10.92 | 10.80 | |||||||||
Minimum |
16.80 | 4,600 | 6.03 | 7.00 | 4.14 | 5.63 | 5.50 |
Source: SNL Financial
Directors and senior management have been effective in implementing an overall operating strategy that can be well managed by the current organizational structure. The Association has indicated that there are currently no senior management vacancies.
The relatively small size of Oconee Federal requires that multiple lines responsibilities be concentrated in a small handful of people. Oconee Federals management appears to have established a favorable reputation for the Association in the communities in which it operates. Given the less diversified nature of Oconee Federals operations, there has not been a need to significantly expand the staff size. However, any significant expansion and diversification of mortgage and consumer lending and deposit programs will likely require that the size and experience of staff be expanded.
The Comparable Group thrifts, to vary degrees, have undertaken expansion of their management teams and support staff as part of their expansion and diversification strategies, many of which have had these strategies in place for some time. Most savings institutions have been confronted with the need to expand and restructure their management team in response to significant changes in financial, regulatory and operational challenges.
On balance, we believe that no specific adjustment to Oconee Federals pro forma market value relative to the Comparable Group is warranted for managerial factors.
Regulatory Impacts
Oconee Federal and the Comparable Group will operate in the same ownership structure and, with the one exception noted below, will be supervised in the same regulatory environment. Also, the Association and the Comparable Group members are adequately capitalized institutions and, therefore, are operating with no apparent regulatory restrictions.
McAuliffe Financial, LLC
Page 48
Currently, it is difficult to predict what impact the recently enacted Dodd-Frank Act and its resulting regulations will have on Oconee Federal and other small community banks. The ultimate regulatory impacts may not be felt for well over a year. However, as previously discussed under cash dividends, the provision of the new Act relating to mutual holding company dividend waivers will restrict the ability of newly created MHCs like Oconee Federal to pay dividends. Since we have already adjusted Oconee Federals pro forma market value downward for this factor, no further adjustment is necessary.
Therefore, based on the above, we believe that no adjustment for regulatory impacts is warranted.
Marketing of the Issue
Marketing of the issue takes into consideration: (1) trends and conditions in the overall thrift market, as well as (2) the anticipated impact of the new issue market for thrift conversions on subscription interest for Oconee Federals stock offering.
Beginning in 2007, the long-term positive trend in thrift stocks reversed and accelerated downward during 2008, due to the financial crisis that manifest in the subprime and collateralized debt obligation (CDO) market. Particularly during the second half of 2008 and into the first quarter of 2009, the broader stock market declines followed financial stocks which exhibited significant volatility and declines in value. During this time, the U.S. government placed Fannie Mae and Freddie Mac into conservatorship, as well as seizing and/or forcing the sales of major financial institutions such as IndyMac, Countrywide, Washington Mutual and Lehman Brothers.
Fears and pessimism in the financial markets were directly related to fears of a deepening recession, rising unemployment, the continued housing slump with declines in both sales and home values, and rising levels of delinquencies and foreclosures throughout the country. Concerns mounted regarding larger write-downs on residential mortgages, consumer and corporate debt, as significant write-downs were reported by the largest financial institutions. Notwithstanding the financial stimulus and rescue plans implemented by various agencies of the federal government, commercial bank and thrift stocks continued to lead the stock market lower.
McAuliffe Financial, LLC
Page 49
Based on performance of various indices, the nadir of stock market performance was reached during March 2009. Since March 2009, the time period that appears to be the bottom of the market for the general stock market, a partial recovery in the financial markets appears to have taken hold.
Towards the end of the first quarter of 2009, the sharp declines in the stock market reversed as the credit crisis began to abate in the financial markets. Notwithstanding the improvement in stock and debt market conditions between March 2009 and March 2010, stock prices of most thrifts and smaller community banks did not experience as much overall improvement as did the general markets. Although guarded in their opinions, until very recently most economists believed that a bottom to the recent financial crisis had been reached and the U.S. economy had stabilized. Since April of 2010, however, the financial markets, both the stock market and bond market, have experienced severe volatility due to conflicting signals from both the U.S. and Europe regarding the actual resumption of economic growth. In particular, sovereign debt repayment problems of various European nations has exacerbated the instability in the financial markets in both the U.S. and globally.
Notwithstanding the federal governments efforts to promote fiscal stimulus, signs of economic growth have only been quite modest through the second quarter of 2010. The consensus of both government and private economists is that for at least the remainder of 2010 and 2011, GDP growth will remain only modest, unemployment rates will remain stubbornly high (close to or above 9%) and the timing for any improvement in the housing market still remains highly uncertain.
As shown in Table 4.11, the SNL Thrift Index and Thrift MHC Index peaked early in December 2006 at 2,271.92 and 3,874.74, respectively. Both indexes experienced a drop throughout 2007 and 2008, with particular steep drops in late 2008 and early 2009. These indexes did not begin to recover until March 2009, when the total Thrift Index bottomed out at 1,419.23 and the MHC Index was at 2,718.60. Between June 2009 and April 2010, both indexes resumed an upward path.
However, reflecting the severe volatility in the financial markets since April 2010 and the uncertainty surrounding the new financial reform legislation, between April 30, 2010 and September 3, 2010, the Thrift Index has declined 17.2% and the MHC Index has declined a larger 23.6%.
McAuliffe Financial, LLC
Page 50
Table 4.11
Thrift & MHC Stock Price Trends
December 30, 2005 September 3, 2010
Date |
Index SNL Thrift MHCs Price |
Index SNL Thrift Price |
||
09/03/2010 | 2,609.15 | 1,417.15 | ||
08/31/2010 | 2,515.14 | 1,373.51 | ||
07/30/2010 | 3,058.49 | 1,551.75 | ||
06/30/2010 | 3,070.10 | 1,520.12 | ||
05/28/2010 | 3,178.13 | 1,586.58 | ||
04/30/2010 | 3,414.22 | 1,711.92 | ||
03/31/2010 | 3,314.37 | 1,681.70 | ||
02/26/2010 | 3,147.89 | 1,620.81 | ||
01/29/2010 | 3,017.61 | 1,587.91 | ||
12/31/2009 | 2,962.45 | 1,597.45 | ||
11/30/2009 | 2,794.29 | 1,539.55 | ||
10/30/2009 | 2,844.73 | 1,535.43 | ||
09/30/2009 | 2,950.43 | 1,562.25 | ||
08/31/2009 | 2,863.14 | 1,556.91 | ||
07/31/2009 | 2,943.56 | 1,598.35 | ||
06/30/2009 | 2,891.71 | 1,513.52 | ||
05/29/2009 | 3,001.47 | 1,558.89 | ||
04/30/2009 | 2,965.13 | 1,547.97 | ||
03/31/2009 | 2,899.89 | 1,516.66 | ||
02/27/2009 | 2,718.60 | 1,419.23 | ||
01/30/2009 | 3,094.29 | 1,550.65 | ||
12/31/2008 | 3,383.36 | 1,814.89 | ||
11/28/2008 | 3,401.84 | 1,862.79 | ||
10/31/2008 | 3,574.24 | 1,962.96 | ||
09/30/2008 | 3,624.19 | 2,033.91 | ||
08/29/2008 | 3,601.30 | 1,988.93 | ||
07/31/2008 | 3,468.81 | 1,936.22 | ||
06/30/2008 | 3,259.19 | 1,815.29 | ||
05/30/2008 | 3,525.69 | 1,999.62 | ||
04/30/2008 | 3,437.77 | 2,033.46 | ||
03/31/2008 | 3,431.09 | 2,001.64 | ||
02/29/2008 | 3,321.35 | 1,921.28 | ||
01/31/2008 | 3,352.70 | 1,988.48 | ||
12/31/2007 | 3,293.66 | 1,928.25 | ||
11/30/2007 | 3,449.34 | 1,984.02 | ||
10/31/2007 | 3,608.16 | 2,074.65 | ||
09/28/2007 | 3,602.59 | 2,112.00 | ||
08/31/2007 | 3,516.59 | 2,074.73 | ||
07/31/2007 | 3,297.83 | 1,913.10 | ||
06/29/2007 | 3,558.18 | 2,051.39 | ||
05/31/2007 | 3,743.56 | 2,164.63 | ||
04/30/2007 | 3,753.57 | 2,129.63 | ||
03/30/2007 | 3,773.64 | 2,175.28 | ||
02/28/2007 | 3,782.34 | 2,196.60 | ||
01/31/2007 | 3,849.21 | 2,246.69 | ||
12/29/2006 | 3,874.74 | 2,271.92 | ||
11/30/2006 | 3,839.14 | 2,235.30 | ||
10/31/2006 | 3,663.36 | 2,209.97 | ||
09/29/2006 | 3,526.11 | 2,148.66 | ||
08/31/2006 | 3,378.51 | 2,113.67 | ||
07/31/2006 | 3,312.66 | 2,090.09 | ||
06/30/2006 | 3,252.88 | 2,079.80 | ||
05/31/2006 | 3,165.50 | 2,065.68 | ||
04/28/2006 | 3,159.68 | 2,074.82 | ||
03/31/2006 | 3,144.95 | 2,069.34 | ||
02/28/2006 | 3,013.78 | 2,011.80 | ||
01/31/2006 | 2,972.95 | 1,994.21 | ||
12/30/2005 | 2,912.45 | 1,952.72 |
Source: SNL Financial
McAuliffe Financial, LLC
Page 51
As a result of deteriorating financial market conditions, the number of MHC offerings declined between 2007 and 2008. The number of such offerings declined further in 2009 to just one (Cullman Bancorp, Inc.). The pro forma price to fully converted book value multiples of MHC conversions have trended downward since 2007 (see Table 4.12). Through September 3 of this year, no MHC offering has been successfully completed in 2010. One pending MHC offering, that of Fairfield County Bank Corp. in Connecticut, has been delayed.
Table 4.12
MHC Reorganizations
Since (12/31/2006)
Company |
Ticker |
IPO
Date |
IPO
Price |
% Retained
by MHC |
Net
Proceeds |
Price to Pro Forma
Fully Converted Book Value |
||||||
MSB Financial Corp. (MHC) |
MSBF | 01/05/2007 | 10.00 | 55.00 | 21,372 | 84.26 | ||||||
Polonia Bancorp (MHC) |
PBCP | 01/16/2007 | 10.00 | 55.00 | 11,990 | 84.49 | ||||||
Oritani Financial Corp. |
ORIT | 01/24/2007 | 6.67 | 68.00 | 94,926 | 83.79 | ||||||
Delanco Bancorp, Inc. (MHC) |
DLNO | 04/02/2007 | 10.00 | 55.00 | 5,769 | 74.70 | ||||||
Sugar Creek Financial Corp. (MHC) |
SUGR | 04/04/2007 | 10.00 | 55.00 | 2,868 | 66.38 | ||||||
TFS Financial Corporation (MHC) |
TFSL | 04/23/2007 | 10.00 | 68.34 | 801,450 | 88.33 | ||||||
Hometown Bancorp, Inc. (MHC) |
HTWC | 06/29/2007 | 10.00 | 55.00 | 8,617 | 83.48 | ||||||
Beneficial Mutual Bancorp, Inc. (MHC) |
BNCL | 07/16/2007 | 10.00 | 55.70 | 183,978 | 83.88 | ||||||
FSB Community Bankshares, Inc. (MHC) |
FSBC | 08/15/2007 | 10.00 | 53.00 | 6,485 | 62.14 | ||||||
LaPorte Bancorp, Inc. (MHC) |
LPSB | 10/15/2007 | 10.00 | 52.73 | 9,225 | 73.03 | ||||||
Northfield Bancorp, Inc. (MHC) |
NFBK | 11/08/2007 | 10.00 | 55.00 | 163,317 | 83.00 | ||||||
2007 Average | 78.86 | |||||||||||
2007 Median | 83.48 | |||||||||||
Sound Financial, Inc. (MHC) |
SNFL | 01/09/2008 | 10.00 | 55.00 | 10,439 | 72.80 | ||||||
Meridian Interstate Bancorp, Inc. (MHC) |
EBSB | 01/23/2008 | 10.00 | 55.00 | 86,437 | 74.04 | ||||||
William Penn Bancorp, Inc. (MHC) |
WMPN | 04/16/2008 | 10.00 | 70.00 | 8,054 | 56.42 | ||||||
Malvern Federal Bancorp, Inc. (MHC) |
MLVF | 05/20/2008 | 10.00 | 55.00 | 21,452 | 63.69 | ||||||
Auburn Bancorp, Inc. (MHC) |
ABBB | 08/18/2008 | 10.00 | 55.00 | 1,347 | 59.83 | ||||||
2008 Average | 65.36 | |||||||||||
2008 Median | 63.69 | |||||||||||
Cullman Bancorp, Inc. (MHC) |
CULL | 10/09/2009 | 10.00 | 55.00 | 8,507 | 53.87 | ||||||
2009 Average | 53.87 | |||||||||||
2009 Median | 53.87 |
Source: SNL Financial
As shown in Table 4.13, aftermarket price performance has been weak, with 13 of 16 MHCs trading below their IPO prices. The average and median price declines for the 16 MHC thrifts are 21.8% and 25.1%, respectively.
As a result of limited investor interest and demand for thrift IPO stocks, a total of only 8 conversion offerings, all MHC second steps, have been completed in 2010. Most of these conversion offerings were completed between the minimum and midpoint of the offering range. Reflecting the uncertainty in the financial markets, other conversion offerings have been delayed.
McAuliffe Financial, LLC
Page 52
Table 4.13
Aftermarket Price Performance
Of Mutual Holding Company Offerings
Price Change from IPO | |||||||||||||||||||||
Company |
Ticker | IPO Date | Initial Price |
After
1 Day % |
After
1 week % |
After
1 Month % |
After
3 Months % |
To
Date % |
|||||||||||||
Cullman Bancorp, Inc. (MHC) |
CULL | 10/09/2009 | 10.0000 | 1.00 | 1.20 | 0.20 | 3.50 | (4.00 | ) | ||||||||||||
Auburn Bancorp, Inc. (MHC) |
ABBB | 08/18/2008 | 10.0000 | 0.00 | (5.00 | ) | (5.00 | ) | (3.00 | ) | (33.50 | ) | |||||||||
Malvern Federal Bancorp, Inc. (MHC) |
MLVF | 05/20/2008 | 10.0000 | 9.80 | 10.00 | 10.00 | 2.60 | (25.20 | ) | ||||||||||||
William Penn Bancorp, Inc. (MHC) |
WMPN | 04/16/2008 | 10.0000 | 17.50 | 25.00 | 37.50 | 40.00 | 35.00 | |||||||||||||
Meridian Interstate Bancorp, Inc. (MHC) |
EBSB | 01/23/2008 | 10.0000 | (4.00 | ) | (5.20 | ) | (4.90 | ) | (0.40 | ) | 10.00 | |||||||||
Sound Financial, Inc. (MHC) |
SNFL | 01/09/2008 | 10.0000 | (10.00 | ) | (10.00 | ) | (8.50 | ) | (8.40 | ) | (50.00 | ) | ||||||||
Northfield Bancorp, Inc. (MHC) |
NFBK | 11/08/2007 | 10.0000 | 4.50 | 13.00 | 4.90 | 5.10 | 12.80 | |||||||||||||
LaPorte Bancorp, Inc. (MHC) |
LPSB | 10/15/2007 | 10.0000 | (8.10 | ) | (13.80 | ) | (21.00 | ) | (28.60 | ) | (28.52 | ) | ||||||||
FSB Community Bankshares, Inc. (MHC) |
FSBC | 08/15/2007 | 10.0000 | 0.00 | 0.00 | (5.00 | ) | (5.00 | ) | (25.00 | ) | ||||||||||
Beneficial Mutual Bancorp, Inc. (MHC) |
BNCL | 07/16/2007 | 10.0000 | (7.90 | ) | (6.80 | ) | (11.50 | ) | (1.90 | ) | (13.00 | ) | ||||||||
Hometown Bancorp, Inc. (MHC) |
HTWC | 06/29/2007 | 10.0000 | 0.00 | 0.00 | (5.00 | ) | (19.30 | ) | (48.60 | ) | ||||||||||
TFS Financial Corporation (MHC) |
TFSL | 04/23/2007 | 10.0000 | 17.90 | 18.00 | 23.40 | 18.50 | (2.90 | ) | ||||||||||||
Sugar Creek Financial Corp. (MHC) |
SUGR | 04/04/2007 | 10.0000 | 0.00 | 0.00 | 6.00 | 6.00 | (43.00 | ) | ||||||||||||
Delanco Bancorp, Inc. (MHC) |
DLNO | 04/02/2007 | 10.0000 | 0.00 | 0.00 | (5.00 | ) | (9.00 | ) | (72.50 | ) | ||||||||||
Polonia Bancorp (MHC) |
PBCP | 01/16/2007 | 10.0000 | 1.00 | 1.40 | 0.50 | (0.50 | ) | (40.00 | ) | |||||||||||
MSB Financial Corp. (MHC) |
MSBF | 01/05/2007 | 10.0000 | 23.00 | 21.50 | 19.30 | 16.00 | (20.60 | ) | ||||||||||||
Average |
2.79 | 3.08 | 2.24 | 0.98 | (21.81 | ) | |||||||||||||||
Median |
0.00 | 0.00 | (2.35 | ) | (0.45 | ) | (25.10 | ) |
Source: SNL Financial
Two MHC second step conversions, Capitol Federal Financial, Inc. in Kansas and FedFirst Financial Corp in Pennsylvania, are in the process of re-solicitation after lowering their values.
Bank and Thrift Failures since 2008
McAuliffe Financial, LLC
Page 53
Oconee Federals stock offering will also be competing against the negative media attention given to the heavy concentration of commercial bank and thrift failures in the Southeast (particularly Florida, Georgia and South Carolina) during 2009 and 2010 (see map on previous page). At least 15 bank and thrift failures have been announced in South Carolina and neighboring Georgia during 2009 and 2010.
As we previously discussed, Oconee Federal has effectively limited a predominant portion of its depositors to the local communities in, and contiguous to, Oconee County (approximately 96% of all deposit balances are from the local areas of South Carolina). Therefore, the Association anticipates that most of the subscription interest in its offering will be local, thereby limiting the amount of any potential speculative interest from outside of South Carolina.
Based on the above mentioned factors, i.e., the continuing weakness in thrift equity market conditions, the weakness in the aftermarket
for initial thrift offerings and the continuing weakness in investor demand for thrift IPOs, we believe that a new issue discount applied to the price to book (and tangible book) valuation approach is appropriate in Oconee Federals offering.
Summary of Valuation Adjustments
Overall, based on the factors discussed in this section, we have concluded that Oconee Federals pro forma market value should reflect the following valuation adjustments relative to the Comparable Group:
Valuation Factor |
Valuation Adjustment |
|
Financial Condition | Slight Upward | |
Balance Sheet Growth | No Adjustment | |
Earnings Performance | No Adjustment | |
Market Area | Slight Downward | |
Dividends | Modest Downward | |
Liquidity of the Issue | Slight Downward | |
Management | No Adjustment | |
Recent Regulatory Matters | No Adjustment | |
Marketing of the Issue | Moderate Downward |
McAuliffe Financial, LLC
Page 54
V. | MARKET VALUE DETERMINATION |
Introduction
In accordance with the accepted valuation methodology promulgated by the regulators, i.e., the pro forma market value approach, we have considered three key pricing ratios: (1) price/earnings (or P/E), (2) price/book value (or P/B), and (3) price/assets (or P/A). All of these pricing approaches were calculated on a pro forma basis including the effects of the stock proceeds. We have incorporated the valuation assumptions and parameters disclosed in the Associations offering prospectus for reinvestment rate, effective income tax rate, stock benefit plans and offering expenses. We have also incorporated the assumption that, as part of the conversion offering, the Association will contribute cash and stock of $2.5 million to a newly established charitable foundation.
In our estimate of Oconee Federals pro forma market value, the pricing ratios of the Comparable Group were analyzed. We also assessed the pricing ratios of all publicly traded MHCs as well as recent MHC conversion offerings.
The Comparable Group thrifts pricing ratios have been adjusted to reflect the application of pro forma second stage conversion assumptions to their current MHC structures. Those assumptions include the sale of all MHC shares at their current trading price on September 3, 2010, the reduction of the gross proceeds to recognize the impact of offering expenses and stock benefit plans and the reinvestment of the net proceeds at current short-term market rates and tax affected.
Discussion of Pricing Ratios
Price to Earnings Ratio
We believe that investors place their primary emphasis on making purchase decisions on the recent earnings results and expected profitability of savings institutions. Therefore, we believe it is appropriate to place considerable emphasis on the pro forma price/earnings valuation approach in deriving a fair market value for a converting savings institution. However, price/earnings ratios for some savings institutions are less meaningful as a result of the variability of reported earnings due to non-operating gains and losses, particularly over the last two years. As a proper basis for comparison, the price to core earnings ratio was also utilized for both the Association and Comparable Group to eliminate any non-recurring items.
McAuliffe Financial, LLC
Page 55
Price to Book Value/Price to Tangible Book Value Ratio
We also give considerable weight to the pro forma price/book value approach. This valuation method also is closely analyzed by investors in making investment decisions, particularly for a converting thrift institution. However, it is important to note that the book value of a company is an accounting derived concept that represents the historically accumulated retained earnings of such entity. Such book value does not necessarily take into consideration the current earnings power of the company. Obviously, a converting thrift institution has a base of capital in place prior to the time of conversion. To attempt to value such converting institution at a pro forma price/book value ratio equal to or even close to the price/book value ratios of publicly traded stock institutions will result, in most cases, in an unrealistic valuation that is unacceptable in the marketplace. Thus, a disproportionate reliance on a price/book value approach may result in unrealistic estimated pro forma market value of the Association. This is particularly true since investors will be seeking a certain minimum, and thus reasonable, return on equity (ROE).
Therefore, we believe that in determining an appropriate value for a converting institution such as Oconee Federal, the pro forma price/book value ratio must be balanced against the pro forma price/earnings ratio and the pro forma price/assets ratio. Investors will also price financial institutions on a tangible book basis because it incorporates the price/book approach, adjusted for intangibles, if any.
Price to Assets Ratio
One other valuation method, the pro forma price/assets ratio, is most applicable for valuing savings institutions with low net worth and/or very low operating income or losses. Since this is not the case for Oconee Federal, we have placed less weight on this approach but have considered the reasonableness of the resulting price/assets ratio in our valuation process.
Fully Converted Pro Forma Value
Based upon the adjustments discussed in the previous section, Oconee Federals midpoint value as if fully converted is estimated to be $48,000,000. Based upon a range below and above the midpoint value, the relative values are $40,800,000 at the minimum and $55,200,000 at the maximum, respectively. At the super maximum of the range, the offering value would be $63,480,000.
McAuliffe Financial, LLC
Page 56
At the various levels of the estimated value range, the full offering would result in the
Table 5.1
Value Range Full Offering
(As if Fully Converted)
Total | Price | Total | ||||||
Shares | Per Share | Value | ||||||
Appraised Value Midpoint |
4,800,000 | $ | 10.00 | $ | 48,000,000 | |||
Range: |
||||||||
- Minimum |
4,080,000 | $ | 10.00 | $ | 40,800,000 | |||
- Maximum |
5,520,000 | $ | 10.00 | $ | 55,200,000 | |||
- Super-Maximum |
6,348,000 | $ | 10.00 | $ | 63,480,000 |
Table 5.2 highlights the key pro forma pricing ratios for Oconee Federal, based on the above valuation range, and compares such ratios to the Comparable Groups mean and median pricing ratios.
Table 5.2
As If Fully Converted Pricing Ratios
Oconee Federal | Comparables | All MHCs | ||||||||||
Mean | Median | Mean | Median | |||||||||
Min | 16.95 | |||||||||||
Price-Core Earnings Ratio (P/CoreE) |
Mid | 20.41 | 25.91 | 20.48 | 23.54 | 18.53 | ||||||
Max | 23.81 | |||||||||||
Smax | 28.57 | |||||||||||
Min | 44.03 | |||||||||||
Price-to-Book Ratio (P/B) |
Mid | 48.54 | 65.03 | 67.09 | 56.94 | 56.44 | ||||||
Max | 52.52 | |||||||||||
Smax | 56.53 | |||||||||||
Min | 44.03 | |||||||||||
Price-to-Tangible Book Ratio (P/TB) |
Mid | 48.54 | 67.89 | 67.09 | 57.87 | 57.59 | ||||||
Max | 52.52 | |||||||||||
Smax | 56.53 | |||||||||||
Min | 11.16 | |||||||||||
Price-to-Assets (P/A) |
Mid | 12.91 | 12.36 | 10.87 | 10.23 | 8.96 | ||||||
Max | 14.60 | |||||||||||
Smax | 16.48 |
McAuliffe Financial, LLC
Page 57
Table 5.3 specifically compares the Associations pro forma price/earnings, price/core earnings, price/book (and price/tangible book), and price/assets ratios, based on the $48,000,000 midpoint value, to the Comparable Groups average and median ratios. Based on Oconee Federals midpoint value, the Association is priced at appropriate discounts to the Comparable Group on a price/earnings and price/book value (and price/tangible book value) basis.
Table 5.3
Comparable Group as if Fully Converted
Pricing Multiple Comparison
Price Relative to | |||||||||||
Earnings | Core Earnings | Book | Tangible Book | Assets | |||||||
Oconee Federal (at midpoint) Full Conversion |
19.61 | 20.41 | 48.54 | 48.54 | 12.91 | ||||||
Comparable Group Average |
26.92 | 25.91 | 65.03 | 67.89 | 12.36 | ||||||
Discount (Premium) |
27.15 | 21.23 | 25.36 | 28.50 | (4.46 | ) | |||||
Comparable Group Median |
21.43 | 20.48 | 67.09 | 67.09 | 10.87 | ||||||
Discount (Premium) |
8.49 | 0.32 | 27.65 | 27.65 | (18.77 | ) |
Table 5.4 presents in more detail the pro forma pricing calculations for Oconee Federal and the Comparable Group.
MHC Valuation
The Association pricing at the midpoint for a MHC conversion assuming an issuance of 33% is $15,840,000 (see Table 5.5). Based upon a range below and above the midpoint value, the relative values are $13,464,000 at the minimum and $18,216,000 at the maximum, respectively. At the super maximum of the range, the offering value would be $20,948,400.
Table 5.6 presents Oconee Federals pro forma pricing ratios, based on the $15,840,000 midpoint of the MHC offering range, and
highlights the Associations discounts and premiums to the Comparable Groups unadjusted pricing ratios. Table 5.7 presents in more detail the pro forma MHC pricing calculations for Oconee Federal and the pricing ratios for the Comparable
Table 5.5
Value Range MHC Offering Data
Total | Price | Total | ||||||
MHC Valuation Range |
Shares | Per Share | Value | |||||
Appraised Value Minimum- $40,800,000 @ 33% |
1,346,400 | $ | 10.00 | $ | 13,464,000 | |||
Appraised Value Midpoint - $48,000,000 @ 33% |
1,584,000 | $ | 10.00 | $ | 15,840,000 | |||
Appraised Value Maximum - $55,200,000 @ 33% |
1,821,600 | $ | 10.00 | $ | 18,216,000 | |||
Appraised Value Super-Max - $63,480,000 @ 33% |
2,094,840 | $ | 10.00 | $ | 20,948,400 |
McAuliffe Financial, LLC
Page 58
Table 5.4
Pro Forma Pricing for
Oconee Federal Savings & Loan Association
Implied Market Pricing for Fully Converted MHCs
As of September 3, 2010
Market | Per Share Data (2) | |||||||||||||||||||||||||||||||||||||||||||||||||
Capitalization | Core | Book | Dividends (4) | Financial Characteristics (6) | ||||||||||||||||||||||||||||||||||||||||||||||
Market | 12 Month | Value/ | Pricing Ratios (3) | Amount/ | Payout | Total | Equity/ | Tang Eq./ | NPAs/ | Reported | Core | |||||||||||||||||||||||||||||||||||||||
State | Price (1) | Value | EPS | Share | P/E | P/B | P/TB | P/A | P/Core | Share | Yield | Ratio | Assets | Assets | Assets | Assets | ROA | ROE | ROA | ROE | ||||||||||||||||||||||||||||||
($) | ($Mil) | ($) | ($) | (x) | (%) | (%) | (%) | (x) | ($) | (%) | (%) | ($Mil) | (%) | (%) | (%) | (%) | (%) | (%) | (%) | |||||||||||||||||||||||||||||||
Oconee Federal S & LA |
||||||||||||||||||||||||||||||||||||||||||||||||||
Supermaximum |
$ | 63.48 | $ | 0.35 | $ | 17.69 | 27.78 | 56.53 | 56.53 | 16.48 | 28.57 | |||||||||||||||||||||||||||||||||||||||
Maximum |
$ | 55.20 | $ | 0.42 | $ | 19.04 | 23.26 | 52.52 | 52.52 | 14.60 | 23.81 | |||||||||||||||||||||||||||||||||||||||
Midpoint |
SC | $ | 10.00 | $ | 48.00 | $ | 0.49 | $ | 20.60 | 19.61 | 48.54 | 48.54 | 12.91 | 20.41 | $ | 0.40 | 4.00 | 78.43 | $ | 333,546 | 17.89 | 17.89 | 1.42 | 0.80 | 4.44 | 0.78 | 4.32 | |||||||||||||||||||||||
Minimum |
$ | 40.80 | $ | 0.59 | $ | 22.71 | 16.39 | 44.03 | 44.03 | 11.16 | 16.95 | |||||||||||||||||||||||||||||||||||||||
All MHC Public Companies |
||||||||||||||||||||||||||||||||||||||||||||||||||
Averages |
$ | 7.62 | $ | 139.78 | $ | 0.14 | $ | 8.65 | 32.10 | 56.94 | 57.87 | 10.23 | 23.54 | $ | 0.04 | 1.65 | 88.72 | $ | 903,217 | 11.96 | 11.69 | 4.10 | 0.10 | 0.70 | 0.19 | 1.79 | ||||||||||||||||||||||||
Median |
$ | 7.20 | $ | 22.37 | $ | 0.15 | $ | 7.84 | 23.64 | 56.44 | 57.59 | 8.96 | 18.53 | $ | 0.01 | 0.62 | 33.33 | $ | 275,712 | 10.96 | 10.66 | 2.40 | 0.27 | 2.07 | 0.28 | 2.22 | ||||||||||||||||||||||||
Comparable Group |
||||||||||||||||||||||||||||||||||||||||||||||||||
Averages |
$ | 8.59 | $ | 56.27 | $ | 0.38 | $ | 8.38 | 26.92 | 65.03 | 67.89 | 12.36 | 25.91 | $ | 0.07 | 3.04 | 93.55 | $ | 465,849 | 12.70 | 11.88 | 1.97 | 0.48 | 4.46 | 0.47 | 4.32 | ||||||||||||||||||||||||
Median |
$ | 7.60 | $ | 63.95 | $ | 0.28 | $ | 7.79 | 21.43 | 67.09 | 67.09 | 10.87 | 20.48 | $ | 0.06 | 2.92 | 58.47 | $ | 449,448 | 11.21 | 10.82 | 1.47 | 0.53 | 3.89 | 0.50 | 3.30 | ||||||||||||||||||||||||
Comparable Group |
||||||||||||||||||||||||||||||||||||||||||||||||||
Cheviot Financial Corp. (MHC) |
CHEV | OH | $ | 8.48 | $ | 75.14 | $ | 0.19 | $ | 7.91 | 41.9 | 68.1 | 68.1 | 19.21 | 27.1 | $ | 0.11 | 5.19 | 226.32 | $ | 351,046 | 19.98 | 19.98 | 1.86 | 0.48 | 2.41 | 0.48 | 2.41 | ||||||||||||||||||||||
Greene County Bancorp, Inc. (MHC) |
GCBC | NY | $ | 17.25 | $ | 71.09 | $ | 1.18 | $ | 10.80 | 14.3 | 89.8 | 89.8 | 13.41 | 14.3 | $ | 0.18 | 4.06 | 58.47 | $ | 495,323 | 8.98 | 8.98 | 0.79 | 1.03 | 11.50 | 1.05 | 11.50 | ||||||||||||||||||||||
Kentucky First Federal Bancorp (MHC) |
KFFB | KY | $ | 10.00 | $ | 78.41 | $ | 0.02 | $ | 7.38 | NM | 79.3 | 93.1 | 28.09 | 77.0 | $ | 0.10 | 4.00 | NM | $ | 238,355 | 24.30 | 19.31 | 3.07 | -0.01 | -0.04 | 0.05 | 0.22 | ||||||||||||||||||||||
Lake Shore Bancorp, Inc. (MHC) |
LSBK | NY | $ | 7.95 | $ | 48.21 | $ | 0.47 | $ | 9.49 | 16.3 | 58.3 | 58.3 | 9.95 | 12.7 | $ | 0.06 | 3.02 | 48.94 | $ | 460,441 | 12.52 | 12.52 | 0.60 | 0.65 | 4.97 | 0.65 | 4.97 | ||||||||||||||||||||||
LaPorte Bancorp, Inc. (MHC) |
LPSB | IN | $ | 7.15 | $ | 32.78 | $ | 0.46 | $ | 10.92 | 11.4 | 49.9 | 58.0 | 7.22 | 14.8 | $ | 0.00 | 0.00 | 0.00 | $ | 438,455 | 11.42 | 9.52 | 1.50 | 0.69 | 5.59 | 0.52 | 4.19 | ||||||||||||||||||||||
MSB Financial Corp. (MHC) |
MSBF | NJ | $ | 7.94 | $ | 41.17 | $ | 0.16 | $ | 7.67 | 47.1 | 67.1 | 67.1 | 10.83 | 30.6 | $ | 0.03 | 1.51 | 75.00 | $ | 358,743 | 11.14 | 11.14 | 7.23 | 0.22 | 2.00 | 0.22 | 2.00 | ||||||||||||||||||||||
Pathfinder Bancorp, Inc. (MHC) |
PBHC | NY | $ | 6.74 | $ | 16.75 | $ | 0.65 | $ | 9.97 | 7.7 | 41.6 | 46.0 | 4.13 | 5.3 | $ | 0.03 | 1.78 | 16.22 | $ | 396,332 | 7.81 | 6.91 | 1.43 | 0.58 | 7.73 | 0.51 | 6.92 | ||||||||||||||||||||||
Prudential Bancorp, Inc. of Pennsylvania (MHC) |
PBIP | PA | $ | 7.10 | $ | 71.22 | $ | 0.37 | $ | 5.63 | 21.4 | 69.7 | 69.7 | 12.19 | 14.7 | $ | 0.05 | 2.82 | 60.61 | $ | 538,260 | 10.49 | 10.49 | 0.59 | 0.63 | 5.83 | 0.71 | 6.59 | ||||||||||||||||||||||
SI Financial Group, Inc. (MHC) |
SIFI | CT | $ | 6.03 | $ | 71.02 | $ | 0.15 | $ | 6.89 | 30.1 | 59.5 | 61.6 | 7.66 | 26.2 | $ | 0.03 | 1.99 | 33.33 | $ | 889,435 | 9.12 | 8.70 | 0.97 | 0.25 | 2.80 | 0.21 | 2.39 | ||||||||||||||||||||||
United Community Bancorp (MHC) |
UCBA | IN | $ | 7.25 | $ | 56.88 | $ | 0.14 | $ | 7.11 | 52.0 | 67.0 | 67.0 | 10.91 | 36.5 | $ | 0.11 | 6.07 | 323.08 | $ | 492,104 | 11.27 | 11.27 | 1.61 | 0.24 | 1.83 | 0.26 | 1.98 |
(1) | Closing Price. |
(2) | EPS (estimate core basis) is based on actual trailing 12 month data, adjusted to omit non-operating items on a tax-effective basis, and is shown on a pro forma basis where appropriate. |
(3) | P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB = Price to tangible book value; P/Core = Price to core earnings. |
(4) | Indicated 12 month dividend, based on last quarterly dividend declared. |
(5) | Indicated 12 month dividend as a percent of trailing 12 month estimated core earnings. |
(6) | ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing 12 month common earnings and average common equity and total asset balances. |
(7) | Excludes from averages and medians those companies that are subject of actual or rumored acquisition activities or unusual operating characteristics. |
Source: Corporate reports, offering circulars, SNL Financial, LC and McAuliffe Financial calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
McAuliffe Financial, LLC
Page 59
Table 5.6
Comparable Group
MHC Pricing Multiple Comparison
Price Relative to | ||||||||||||
Earnings | Core Earnings | Book | Tangible Book | Assets | ||||||||
Oconee Federal (at midpoint) MHC |
19.23 | 19.61 | 67.61 | 67.61 | 13.96 | |||||||
Comparable Group Average |
28.58 | 29.05 | 103.84 | 111.66 | 13.52 | |||||||
Discount (Premium) |
32.71 | 32.50 | 34.89 | 39.45 | (3.26 | ) | ||||||
Comparable Group Median |
21.52 | 19.10 | 102.73 | 102.73 | 11.51 | |||||||
Discount (Premium) |
10.64 | (2.67 | ) | 34.19 | 34.19 | (21.24 | ) |
Valuation Conclusion
It is therefore McAuliffe Financials opinion that as of September 3, 2010, the estimated pro forma market value of Oconee Federal on a fully converted basis was $48,000,000 at the midpoint of a range with a minimum of $40,800,000 to a maximum of $55,200,000 at 15% below and 15% above the midpoint of the range, respectively. Based on an adjusted maximum value of 15% above the maximum value, the adjusted maximum value or super maximum value is $63,480,000.
Using the pro forma market values for a full conversion, the amount of stock publicly offered as part of the MHC reorganization issuing 33% to the public stockholders will equal 1,346,400 shares, 1,584,000 shares, 1,821,600 shares and 2,094,840 shares at the minimum, midpoint, maximum and super maximum, respectively, at $10.00 per share.
This appraisal represents an initial valuation for Oconee Federal. Due to the duration of time that passes between the time this appraisal report is written and the time the offering closes, numerous factors could lead McAuliffe Financial to update or revise the appraised value of the Association. Some factors that could lead McAuliffe Financial to adjust the appraised value include: (1) changes in the Associations operations and financial condition; (2) changes in the market valuation or financial condition of the Comparable Group; (3) changes in the financial markets; and (4) changes in the market for thrift conversions. Should there be material changes to any of these factors, McAuliffe Financial will prepare an appraisal update to appropriately adjust the value of the Association. At the time of closing of the stock offering, McAuliffe Financial will prepare a final appraisal to determine if the valuation range is still appropriate and determine the exact valuation amount appropriate for the Association.
McAuliffe Financial, LLC
Page 60
Table 5.7
Pro Forma Pricing for
Oconee Federal Savings & Loan Association
Public Market Pricing
As of September 3, 2010
Market | Per Share Data (2) | |||||||||||||||||||||||||||||||||||||||||||||||||
Capitalization | Core | Book | Dividends (4) | Financial Characteristics (6) | ||||||||||||||||||||||||||||||||||||||||||||||
Market | 12 Month | Value/ | Pricing Ratios (3) | Amount/ | Payout | Total | Equity/ | Tang Eq./ | NPAs/ | Reported | Core | |||||||||||||||||||||||||||||||||||||||
State | Price (1) | Value | EPS | Share | P/E | P/B | P/TB | P/A | P/Core | Share | Yield | Ratio | Assets | Assets | Assets | Assets | ROA | ROE | ROA | ROE | ||||||||||||||||||||||||||||||
($) | ($Mil) | ($) | ($) | (x) | (%) | (%) | (%) | (x) | ($) | (%) | (%) | ($Mil) | (%) | (%) | (%) | (%) | (%) | (%) | (%) | |||||||||||||||||||||||||||||||
Oconee Federal S & LA |
||||||||||||||||||||||||||||||||||||||||||||||||||
Supermaximum |
$ | 63.48 | $ | 0.38 | $ | 11.88 | 26.32 | 84.18 | 84.18 | 18.22 | 27.03 | |||||||||||||||||||||||||||||||||||||||
Maximum |
$ | 55.20 | $ | 0.45 | $ | 13.24 | 22.22 | 75.53 | 75.53 | 15.95 | 23.26 | |||||||||||||||||||||||||||||||||||||||
Midpoint |
SC | $ | 10.00 | $ | 48.00 | $ | 0.52 | $ | 14.79 | 19.23 | 67.61 | 67.61 | 13.96 | 19.61 | $ | 0.40 | 4.00 | 78.43 | $ | 333,546 | 17.89 | 17.89 | 1.42 | 0.80 | 4.44 | 0.78 | 4.32 | |||||||||||||||||||||||
Minimum |
$ | 40.80 | $ | 0.62 | $ | 16.90 | 16.13 | 59.17 | 59.17 | 11.93 | 16.67 | |||||||||||||||||||||||||||||||||||||||
All MHC Public Companies |
||||||||||||||||||||||||||||||||||||||||||||||||||
Averages |
$ | 7.62 | $ | 139.78 | $ | 0.14 | $ | 8.65 | 27.39 | 86.68 | 89.68 | 11.08 | 39.35 | $ | 0.04 | 1.65 | 88.72 | $ | 903,217 | 11.96 | 11.69 | 4.10 | 0.10 | 0.70 | 0.19 | 1.79 | ||||||||||||||||||||||||
Median |
$ | 7.20 | $ | 22.37 | $ | 0.15 | $ | 7.84 | 23.08 | 78.16 | 80.27 | 9.21 | 25.85 | $ | 0.01 | 0.62 | 33.33 | $ | 275,712 | 10.96 | 10.66 | 2.40 | 0.27 | 2.07 | 0.28 | 2.22 | ||||||||||||||||||||||||
Comparable Group |
||||||||||||||||||||||||||||||||||||||||||||||||||
Averages |
$ | 8.59 | $ | 56.27 | $ | 0.38 | $ | 8.38 | 28.58 | 103.84 | 111.66 | 13.52 | 29.05 | $ | 0.07 | 3.04 | 93.55 | $ | 465,849 | 12.70 | 11.88 | 1.97 | 0.48 | 4.46 | 0.47 | 4.32 | ||||||||||||||||||||||||
Median |
$ | 7.60 | $ | 63.95 | $ | 0.28 | $ | 7.79 | 21.52 | 102.73 | 102.73 | 11.51 | 19.10 | $ | 0.06 | 2.92 | 58.47 | $ | 449,448 | 11.21 | 10.82 | 1.47 | 0.53 | 3.89 | 0.50 | 3.30 | ||||||||||||||||||||||||
Comparable Group |
||||||||||||||||||||||||||||||||||||||||||||||||||
Cheviot Financial Corp. (MHC) |
CHEV | OH | $ | 8.48 | $ | 75.14 | $ | 0.19 | $ | 7.91 | 44.6 | 107.2 | 107.2 | 21.41 | 44.7 | $ | 0.11 | 5.19 | 226.32 | $ | 351,046 | 19.98 | 19.98 | 1.86 | 0.48 | 2.41 | 0.48 | 2.41 | ||||||||||||||||||||||
Greene County Bancorp, Inc. (MHC) |
GCBC | NY | $ | 17.25 | $ | 71.09 | $ | 1.18 | $ | 10.80 | 14.6 | 159.7 | 159.7 | 14.34 | 14.6 | $ | 0.18 | 4.06 | 58.47 | $ | 495,323 | 8.98 | 8.98 | 0.79 | 1.03 | 11.50 | 1.05 | 11.50 | ||||||||||||||||||||||
Kentucky First Federal Bancorp (MHC) |
KFFB | KY | $ | 10.00 | $ | 78.41 | $ | 0.02 | $ | 7.38 | NM | 135.5 | 181.9 | 32.94 | NM | $ | 0.10 | 4.00 | NM | $ | 238,355 | 24.30 | 19.31 | 3.07 | -0.01 | -0.04 | 0.05 | 0.22 | ||||||||||||||||||||||
Lake Shore Bancorp, Inc. (MHC) |
LSBK | NY | $ | 7.95 | $ | 48.21 | $ | 0.47 | $ | 9.49 | 16.9 | 83.8 | 83.8 | 10.49 | 16.9 | $ | 0.06 | 3.02 | 48.94 | $ | 460,441 | 12.52 | 12.52 | 0.60 | 0.65 | 4.97 | 0.65 | 4.97 | ||||||||||||||||||||||
LaPorte Bancorp, Inc. (MHC) |
LPSB | IN | $ | 7.15 | $ | 32.78 | $ | 0.46 | $ | 10.92 | 11.5 | 65.5 | 80.3 | 7.48 | 15.4 | $ | 0.00 | 0.00 | 0.00 | $ | 438,455 | 11.42 | 9.52 | 1.50 | 0.69 | 5.59 | 0.52 | 4.19 | ||||||||||||||||||||||
MSB Financial Corp. (MHC) |
MSBF | NJ | $ | 7.94 | $ | 41.17 | $ | 0.16 | $ | 7.67 | 49.6 | 103.5 | 103.5 | 11.47 | 49.6 | $ | 0.03 | 1.51 | 75.00 | $ | 358,743 | 11.14 | 11.14 | 7.23 | 0.22 | 2.00 | 0.22 | 2.00 | ||||||||||||||||||||||
Pathfinder Bancorp, Inc. (MHC) |
PBHC | NY | $ | 6.74 | $ | 16.75 | $ | 0.65 | $ | 9.97 | 9.1 | 67.6 | 80.0 | 4.29 | 10.4 | $ | 0.03 | 1.78 | 16.22 | $ | 396,332 | 7.81 | 6.91 | 1.43 | 0.58 | 7.73 | 0.51 | 6.92 | ||||||||||||||||||||||
Prudential Bancorp, Inc. of Pennsylvania (MHC) |
PBIP | PA | $ | 7.10 | $ | 71.22 | $ | 0.37 | $ | 5.63 | 21.5 | 126.2 | 126.2 | 13.23 | 19.1 | $ | 0.05 | 2.82 | 60.61 | $ | 538,260 | 10.49 | 10.49 | 0.59 | 0.63 | 5.83 | 0.71 | 6.59 | ||||||||||||||||||||||
SI Financial Group, Inc. (MHC) |
SIFI | CT | $ | 6.03 | $ | 71.02 | $ | 0.15 | $ | 6.89 | 33.5 | 87.5 | 92.3 | 7.98 | 39.2 | $ | 0.03 | 1.99 | 33.33 | $ | 889,435 | 9.12 | 8.70 | 0.97 | 0.25 | 2.80 | 0.21 | 2.39 | ||||||||||||||||||||||
United Community Bancorp (MHC) |
UCBA | IN | $ | 7.25 | $ | 56.88 | $ | 0.14 | $ | 7.11 | 55.8 | 102.0 | 102.0 | 11.56 | 51.6 | $ | 0.11 | 6.07 | 323.08 | $ | 492,104 | 11.27 | 11.27 | 1.61 | 0.24 | 1.83 | 0.26 | 1.98 |
(1) | Closing Price. |
(2) | EPS (estimate core basis) is based on actual trailing 12 month data, adjusted to omit non-operating items on a tax-effective basis, and is shown on a pro forma basis where appropriate. |
(3) | P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB = Price to tangible book value; P/Core = Price to core earnings. |
(4) | Indicated 12 month dividend, based on last quarterly dividend declared. |
(5) | Indicated 12 month dividend as a percent of trailing 12 month estimated core earnings. |
(6) | ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing 12 month common earnings and average common equity and total asset balances. |
(7) | Excludes from averages and medians those companies that are subject of actual or rumored acquisition activities or unusual operating characteristics. |
Source: Corporate reports, offering circulars, SNL Financial, LC and McAuliffe Financial calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Exhibit 99.4
McAuliffe Financial, LLC
September 3, 2010
Boards of Directors
Oconee Federal Financial Corp.
Oconee Federal Savings and Loan Association
115 E. North Second Street
Seneca, South Carolina 29678
Re: Subscription Rights Oconee Federal Financial Corp.
Gentlemen:
The purpose of this letter is to provide an opinion of the value of the subscription rights of the to be issued common stock of Oconee Federal Financial Corp. (the Corporation), in regard to the stock offering of the Corporation.
Because the subscription rights to purchase shares of common stock in the Corporation, which are to be issued to the depositors of Oconee Federal Savings and Loan Association and will be acquired by such recipients without cost, will be nontransferable and of short duration and will afford the recipients the right only to purchase shares of common stock at the same price as will be paid by members of the general public in a direct community offering, we are of the opinion that:
(1) | The subscription rights will have no ascertainable fair market value, and; |
(2) | The price at which the subscription rights are exercisable will not be more or less than the fair market value of the shares on the date of the exercise. |
Further, it is our opinion that the subscription rights will have no economic value on the date of distribution or at the time of exercise, whether or not a community offering takes place.
Sincerely, |
McAuliffe Financial, LLC |
/s/ J. Kevin McAuliffe |
J. Kevin McAuliffe |
President |
19457 Olson Avenue, Lake Oswego, OR 97034
503-638-9685
www.mcauliffefinancial.com