<PAGE>
As Filed with the Securities and Exchange Commission on November 7, 1996.
Registration No. 333-12373
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
PRE-EFFECTIVE AMENDMENT NO. 2 TO FORM SB-2
Registration Statement
Under the
Securities Act of 1933
Southern Community Bancshares, Inc.
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(Name of Small Business Issuer in Its Charter)
Delaware 6120 63-1176408
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(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Incorporation Industrial Classification Identification No.)
or Organization) Code Number)
325 Second Street, S.E., Cullman, Alabama 35055, (205) 734-4863
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(Address and Telephone Number of Principal Executive Offices)
325 Second Street, S.E., Cullman, Alabama 35055
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(Address of Principal Place of Business or Intended Principal Place of Business)
Andrew C. Lynch, Esq., Bayh, Connaughton & Malone, P.C.
1350 Eye Street, N.W., Suite 200, Washington, D.C. 20005, (202) 289-8660
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(Name, Address and Telephone Number of Agent for Service)
Approximate Date of Proposed Sale to the Public: As soon as practicable
after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Each Proposed Proposed
Class of Dollar Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered Per Unit Price Fee (1)
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<S> <C> <C> <C> <C>
Common Stock, $.01 568,675 $20.00 $11,373,500 $271
par value per share
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</TABLE>
(1) A filing fee of $3,649 was paid with the original registration
statement.
The registrant hereby amends this registration statement on such date or dates
as may be neccessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration shall
therefter 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.
<PAGE>
PROSPECTUS
SOUTHERN COMMUNITY BANCSHARES, INC.
(Proposed Holding Company for
First Federal Savings and Loan Association of Cullman)
Cullman, Alabama
Up to 494,500 Common Shares, $20.00 Purchase Price Per Share
Southern Community Bancshares, Inc., a Delaware corporation (the "Holding
Company"), is offering for sale up to 494,500 common shares, par value $0.01
(the "Common Shares"), in connection with its acquisition of all of the capital
stock to be issued by First Federal Savings and Loan Association of Cullman, a
federal mutual savings and loan association located in Cullman, Alabama (the
"Association"), upon the conversion of the Association from a federal mutual
savings and loan association to a federal stock savings and loan association
(the "Conversion"). The sale of the Common Shares is subject to the approval of
the Association's Plan of Conversion, as amended (the "Plan"), which was adopted
by the Association's Board of Directors on June 10, 1996, by the members of the
Association at a Special Meeting to be held at ____ a.m., Central Time, on
__________, 1996, at 325 2nd Street, S.E., Cullman, Alabama (the "Special
Meeting").
Based on an independent appraisal of the pro forma market value of the
Association, as converted, as of October 18, 1996, the aggregate purchase price
of the Common Shares offered in connection with the Conversion ranges from a
minimum of $7,310,000 to a maximum of $9,890,000 (the "Valuation Range"),
resulting in a range of 365,500 to 494,500 Common Shares at $20.00 per share.
Applicable regulations permit the Holding Company to offer additional Common
Shares in an amount not to exceed 15% above the maximum of the Valuation Range,
which would permit the issuance of up to 568,675 Common Shares with an aggregate
purchase price of $11,373,500. The actual number of Common Shares to be sold in
connection with the Conversion may be adjusted based upon the final valuation of
the Association, as converted, as determined by the independent appraiser upon
the completion of this offering. See "THE CONVERSION - Pricing and Number of
Common Shares to be Sold."
AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY INVOLVES CERTAIN RISKS.
FOR A DISCUSSION OF SUCH RISKS AND OTHER FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS, SEE "RISK FACTORS" BEGINNING ON PAGE 14 OF THIS
PROSPECTUS.
THE COMMON SHARES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), THE OFFICE OF THRIFT
SUPERVISION (THE "OTS"), THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"),
OR THE SECURITIES COMMISSION OF ANY STATE, NOR HAS THE SEC, THE OTS, THE FDIC,
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
THE COMMON SHARES BEING OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
FOR INFORMATION ON HOW TO SUBSCRIBE, PLEASE CALL THE CONVERSION
INFORMATION CENTER AT THE OFFICES OF THE ASSOCIATION AT (205) 737-8916.
<TABLE>
<CAPTION>
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Estimated
Expenses
and Underwriting Estimated Net
Purchase Price Commissions(1) Proceeds(2)
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<S> <C> <C> <C>
Per Share(3)................... $20.00 $1.21 $18.79
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Total Minimum.................. $7,310,000 $497,000 $6,813,000
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Total Mid-point................ $8,600,000 $521,000 $8,079,000
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Total Maximum.................. $9,890,000 $545,000 $9,345,000
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Total Maximum, as adjusted(4).. $11,373,500 $572,000 $10,801,500
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</TABLE>
(1) Estimated costs to the Holding Company and the Association arising from
the Conversion, include $120,504, $144,240, $167,976 and $195,272 in fees
for marketing services and expense reimbursements (including legal fees)
to be paid to Trident Securities, Inc. (the "Agent") in connection with
the Offering (as defined below) if the minimum, midpoint, maximum and 15%
above the maximum number of shares are sold, respectively . Such sales
commissions may be deemed to be underwriting fees. See "THE CONVERSION -
Plan of Distribution." Actual expenses may vary from the estimates. The
Agent will solicit subscriptions for the Common Shares on a "best efforts"
basis and have no obligation to purchase any of the Common Shares.
(2) Includes the net proceeds from purchases intended to be made by the
Southern Community Bancshares, Inc. Employee Stock Ownership Plan (the
"ESOP") with funds borrowed by the ESOP from the Holding Company. See "PRO
FORMA DATA" and "MANAGEMENT - Stock Benefit Plans -- Employee Stock
Ownership Plan."
(3) Based on the midpoint of the Valuation Range. At the minimum, maximum and
15% above the maximum of the Valuation Range, estimated fees and expenses
per share would be $1.36, $1.10 and $1.01, respectively, resulting in
estimated net proceeds per share of $18.64, $18.90 and $18.99,
respectively.
(4) Gives effect to the increase in the number of Common Shares sold in
connection with the Conversion of up to 15% above the maximum of the
Valuation Range. Such shares may be offered without the resolicitation of
persons who subscribe for Common Shares in the Subscription Offering and
the Community Offering (both of which are defined hereinafter). See "THE
CONVERSION -- Pricing and Number of Common Shares to be Sold."
TRIDENT SECURITIES, INC.
ii
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The date of this Prospectus is __________, 1996.
iii
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In accordance with the Plan, nontransferable subscription rights to
purchase Common Shares at a price of $20.00 per share are being offered in a
subscription offering (the "Subscription Offering"), subject to the purchase
rights and priorities established by the Plan, to (a) eligible depositors of the
Association as of March 31, 1995, (b) the ESOP, (c) eligible depositors of the
Association as of September 30, 1996, and (d) members of the Association
eligible to vote at the Special Meeting. All subscription rights to purchase
Common Shares in the Subscription Offering are nontransferable and will expire
at 12:00 noon, Central Time, on __________, 1996, unless extended (the
"Subscription Expiration Date"). See "THE CONVERSION - Subscription Offering."
A community offering (the "Community Offering"), if one is held, is
expected to begin immediately after the Subscription Expiration Date, but may
begin at any time during the Subscription Offering. In the Community Offering,
if any, Common Shares will be offered to the general public with a preference
being given to natural persons residing in Cullman County, Alabama (the
"Community Offering"). See "THE CONVERSION - Community Offering." The Board of
Directors of the Holding Company may terminate the Community Offering, if any,
at any time and in no event will the Community Offering extend beyond
___________, 1996, unless further extended with the consent of the OTS. See "THE
CONVERSION - Subscription Offering; - Community Offering; and - Plan of
Distribution."
The Association has engaged the Agent to act as selling agent and to
consult with and advise the Holding Company and the Association with respect to
the Subscription and Community Offering. Selected dealers may be utilized to
assist in selling stock in the Community Offering in a Syndicated Community
Offering. The Agent has agreed to use its best efforts to assist the Holding
Company and the Association with the sale of Common Shares in the Subscription
Offering and the Community Offering, if any (including any Syndicated Community
Offering). Neither the Agent nor any other broker-dealer is obligated to
purchase Common Shares in the Subscription and Community Offering.
The Plan and the Board of Directors have established certain limitations
in respect of the minimum and the maximum number of Common Shares which may be
subscribed for or ordered by each purchaser in the Subscription Offering and the
Community Offering (when referred to together, the "Offering"). With the
exception of the ESOP, which is expected to purchase 8% of the Common Shares
sold in the Conversion, no person may purchase shares with an aggregate purchase
price of more than $150,000 (or 7,500 shares at $20.00 per share) in the
Subscription Offering or in the Community Offering. No person or entity,
together with Associates (as such term is defined below in "THE CONVERSION --
Limitations on Purchases of Common Shares") of, or persons acting in concert
with, such person or entity, may purchase shares with an aggregate purchase
price of more than $300,000 (or 15,000 shares at $20.00 per share). The purchase
limitations may be increased or decreased in the discretion of the Boards of
Directors of the Holding Company and the Association, subject to certain
conditions. Each person subscribing for Common Shares in the Subscription or
Community Offering must subscribe for at least 25 shares. See "THE CONVERSION -
Limitations on Purchases of Common Shares."
Common Shares may be subscribed for or ordered in the Subscription
Offering by returning the accompanying order form and certification form (the
"Order Form"), along with full payment of the purchase price per share for all
Common Shares for which a subscription is made or an order is submitted, so that
it is received by the Association no later than the Subscription Expiration Date
(12:00 noon, Central Time, ___________, 1996). Common Shares may be ordered in
the Community Offering, if one is held, by returning the Order Form, along with
full payment of the purchase price per share for all Common Shares for which an
order is submitted, so that it is received by the Association prior to the
expiration of the Community Offering, which shall be not later than 12:00
iv
<PAGE>
noon, Central Time, ___________, 1996. See "THE CONVERSION - Procedure for
Purchasing Shares in Subscription and Community Offerings." Payment may be made
in cash, if delivered in person, or by check or money order and will be held at
the Association in a segregated account insured by the FDIC up to the applicable
limits and earning interest at the Association's then current passbook savings
account rate from the date of receipt until the completion of the Conversion.
Payment may also be made by authorized withdrawal from an existing deposit
account at the Association, the amount of which will continue to earn interest
until completion of the Conversion at the rate normally in effect from time to
time for such accounts. See "THE CONVERSION - Procedure for Purchasing Shares in
Subscription and Community Offerings."
An executed Order Form, once received by the Holding Company, may not be
modified, amended or rescinded without the consent of the Holding Company,
unless the Community Offering, if any, is not completed within 45 days after the
Subscription Expiration Date.
THE CONVERSION OF THE ASSOCIATION FROM A FEDERAL MUTUAL SAVINGS AND LOAN
ASSOCIATION TO A FEDERAL STOCK SAVINGS AND LOAN ASSOCIATION IS CONTINGENT UPON
THE APPROVAL OF THE PLAN AND CERTAIN OTHER FACTORS. SEE "THE CONVERSION."
v
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FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CULLMAN
CULLMAN, ALABAMA
[MAP]
vi
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PROSPECTUS SUMMARY
The following information is not complete and is qualified in its
entirety by the detailed information and the financial statements and
accompanying notes appearing elsewhere in this Prospectus.
Southern Community Bancshares, Inc.
The Holding Company is a Delaware corporation recently organized at the
direction of the Association for the purpose of purchasing all of the capital
stock of the Association to be issued in connection with the Conversion. The
Holding Company has not engaged in business operations to date, other than
business related to the Conversion. Upon the consummation of the Conversion, the
Holding Company will be a unitary savings and loan holding company, the
principal assets of which initially will consist of the capital stock of the
Association and the investments made with the net proceeds retained from the
sale of Common Shares in connection with the Conversion. See "USE OF PROCEEDS."
The office of the Holding Company is located at 325 2nd Street, S.E., Cullman,
Alabama and its telephone number is (205) 734-4863.
First Federal Savings and Loan Association of Cullman
The Association is a mutual savings and loan association which was
organized in 1905. As a federal savings and loan association, the Association is
subject to supervision and regulation by the OTS. The Association is a member of
the Federal Home Loan Bank (the "FHLB") of Atlanta, and the deposit accounts of
the Association are insured up to applicable limits by the FDIC in the Savings
Association Insurance Fund (the "SAIF"). See "REGULATION." The Association
conducts business from its offices in Cullman County, Alabama and its executive
office is located at 325 2nd Street, S.E., Cullman, Alabama.
The primary business of the Association is the origination of loans
secured by first mortgages on one- to four-family residential real estate
located in Cullman County, Alabama, the Association's primary market area. The
Association also originates loans secured by multifamily real estate (over four
units) and nonresidential real estate in its market area. In addition to real
estate lending, the Association originates commercial loans and secured and
unsecured consumer loans. See "THE BUSINESS OF THE ASSOCIATION - Lending
Activities." The Association invests in interest-bearing deposits in other
financial institutions, U.S. Government and agency obligations, mortgage-backed
securities and other investments permitted by applicable law. See "THE BUSINESS
OF THE ASSOCIATION - Investment Activities." Funds for lending and other
investment activities are obtained primarily from savings deposits, which are
insured up to applicable limits by the FDIC. See "THE BUSINESS OF THE
ASSOCIATION - Deposits and Borrowings."
The Conversion and the Offerings
The Plan provides for the Conversion of the Association from a federal
mutual savings and loan association to a federal stock savings and loan
association. For a discussion of the reasons for the Conversion, see "THE
CONVERSION --Reasons for the Conversion." The OTS has approved the Plan, subject
to the approval of the Plan by the Association's voting members at the Special
Meeting, and to certain other conditions.
1
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Pursuant to the Plan, subscription rights to purchase Common Shares at a
price of $20.00 per share are being offered to (a) account holders as of March
31, 1995 with aggregate deposits at the close of business on such date of at
least $50 ("Eligible Account Holders"), (b) the ESOP, (c) account holders as of
September 30, 1996 with aggregate deposits at the close of business on such date
of at least $50 ("Supplemental Eligible Account Holders"), and (d) members of
the Association eligible to vote at the Special Meeting ("Other Members"). See
"THE CONVERSION - Subscription Offering." Subscription rights received in any of
the foregoing categories will be subordinate to the subscription rights received
by those in a prior category, with the exception that Common Shares sold in
excess of the maximum of the Valuation Range may first be sold to the ESOP.
After satisfaction of all subscriptions received in the Subscription
Offering and subject to the availability of shares, Common Shares may be offered
in the Community Offering (including any Syndicated Community Offering).
Preference in the Community Offering is being given to natural persons living in
Cullman County, Alabama. The Boards of Directors of the Holding Company and the
Association have the right to reject, in whole or in part, any order for Common
Shares submitted in the Community Offering. See "THE CONVERSION - Community
Offering."
The Subscription Offering will terminate at, and subscription rights will
expire if not exercised by, the Subscription Expiration Date (12:00 noon,
Central Time, on __________, 1996). The Community Offering, if any, may
terminate at any time but not later than 12:00 noon, Central Time, on
__________, 1996. If necessary, the Community Offering may be extended by the
Holding Company and the Association to __________, 1996. Any extension of the
Community Offering beyond __________, 1996, would require the consent of the
OTS, and persons who have subscribed for or ordered Common Shares in the
Offering would be given notice that they have the right to affirm, increase,
decrease or rescind their subscriptions or orders for Common Shares. Persons who
do not affirmatively elect to continue their subscriptions or orders or who
elect to rescind their subscriptions or orders during any such extension will
have all of their funds promptly refunded with interest. Persons who elect to
decrease their subscriptions or orders will have the appropriate portion of
their funds promptly refunded with interest. See "THE CONVERSION - Pricing and
Number of Common Shares to be Sold."
Upon the completion of the Conversion, funds transferred from accounts
held at the Association and used to purchase Common Shares will no longer be
insured by the FDIC or any other government agency. The Common Shares being
offered hereby are not savings accounts or savings deposits and are not insured
by the FDIC or any other government agency.
Restrictions of Transfer of Subscription Rights
OTS regulations prohibit any person from transferring or entering into
any agreement or understanding before the completion of the Conversion to
transfer the ownership of the subscription rights issued in the Conversion or
the shares to be issued upon the exercise of such subscription rights. Persons
attempting to violate such provision may lose their rights to purchase Common
Shares in the Conversion and may be subject to penalties imposed by the OTS.
Each person exercising subscription rights will be required to certify that his
or her purchase of Common Shares is solely for the subscriber's own account and
that there is no agreement or understanding regarding the sale or transfer of
such Common Shares. See "THE CONVERSION - Subscription Offering."
2
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Purchase Limitations
The Plan limits the number of Common Shares which may be purchased. No
person may purchase shares with an aggregate purchase price of more than
$150,000 (or 7,500 shares at $20.00 per share) in the Subscription Offering or
in the Community Offering. No person, together with his or her Associates and
other persons acting in concert with him or her, may purchase Common Shares with
an aggregate purchase price of more than $300,000 (or 15,000 shares at $20.00
per share). Such limitation does not apply to the ESOP, which intends to
purchase up to 8% of the Common Shares sold in the Offering. If the ESOP is
unable to purchase all or part of the Common Shares for which it subscribes, the
ESOP may purchase Common Shares on the open market or may purchase authorized
but unissued Common Shares. If the ESOP purchases authorized but unissued Common
Shares, such purchases could have a dilutive effect on the interests of the
Holding Company's shareholders.
Subject to applicable regulations, the purchase limitation may be
increased or decreased after the commencement of the Offering in the sole
discretion of the Board of Directors. See "THE CONVERSION - Limitations on
Purchases of Common Shares" and "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY AND THE ASSOCIATION." The sale of Common Shares pursuant to
subscriptions or orders received in the Offering will be subject to the approval
of the Plan by the voting members of the Association at the Special Meeting, to
the sale of the requisite number of Common Shares and to certain other
conditions. See "THE CONVERSION - Subscription Offering; - Community Offering;
and - Pricing and Number of Common Shares to be Sold."
Benefits of the Conversion to Officers and Directors
Employee Stock Ownership Plan. In connection with the Conversion, the
Holding Company has established the ESOP, which intends to use a loan from the
Holding Company to purchase 8% of Common Shares issued in the Conversion. The
ESOP intends to repay the loan with discretionary contributions made by the
Association or the Holding Company to the ESOP. As the loan is repaid, the
Common Shares held by the ESOP will be allocated to the accounts of employees of
the Association and the Holding Company, including executive officers. See "PRO
FORMA DATA" for a discussion of the impact of the ESOP on pro forma earnings per
share. All full-time employees of the Holding Company and the Association who
meet certain age and years of service criteria will be eligible to participate
in the ESOP. See "MANAGEMENT - Stock Benefit Plans -- Employee Stock Ownership
Plan."
Stock Option Plan. The Holding Company intends to establish the Southern
Community Bancshares, Inc. Stock Option and Incentive Plan and Trust (the "Stock
Option Plan") after the completion of the Conversion. The Board of Directors of
the Holding Company anticipates that a number of shares equal to 10% of the
Common Shares sold in the Offering will be acquired by the Stock Option Plan
from authorized but unissued common shares or open market purchases and
thereafter awarded to directors, officers and employees under the Stock Option
Plan. Under OTS regulations, no stock options may be awarded during the first
year after the completion of the Conversion, unless the Stock Option Plan is
approved by the shareholders of the Holding Company at the first meeting of
shareholders following the completion of the Conversion, held not sooner than
six months after the completion of the Conversion. If the Stock Option Plan is
approved by the Holding Company's shareholders at such meeting and implemented
during the first year after the completion of the Conversion, the following
restrictions will apply: (i) the number of shares which may be subject to
options awarded under the Stock Option Plan to directors who are not full-time
employees of the
3
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Holding Company may not exceed 5% per person and 30% in the aggregate of the
available awards, (ii) the number of shares which may be subject to options
awarded under the Stock Option Plan to any individual who is a full-time
employee of the Holding Company or its subsidiaries may not exceed 25% of the
shares which may be subject to options awarded under the Stock Option Plan,
(iii) stock options must be awarded with an exercise price at least equal to the
fair market value of common shares of the Holding Company at the time of the
grant, and (iv) stock options will become exercisable at the rate of one-fifth
per year commencing no earlier than one year from the date the Stock Option Plan
is approved by the shareholders, subject to acceleration of vesting only in the
event of the death or disability of a participant. No decision has been made as
to anticipated awards to individuals under the Stock Option Plan. See
"MANAGEMENT - Stock Benefit Plans -- Stock Option Plan."
Management Recognition Plan. The Association intends to establish the
First Federal Savings and Loan Association of Cullman Management Recognition
Plan and Trust (the "MRP") after the completion of the Conversion. The Board of
Directors of the Association anticipates that a number of shares equal to 4% of
the Common Shares will be purchased by, or issued to, the MRP. Shares held in
the MRP will be available for awards to directors, officers and employees of the
Association. Under OTS regulations, no award of MRP shares may be made during
the first year after the completion of the Conversion, until after the approval
of the MRP by the shareholders of the Holding Company at the first meeting of
shareholders following the completion of the Conversion, held not sooner than
six months after the completion of the Conversion. If the MRP is approved by
the Holding Company shareholders at such meeting and implemented during the
first year after the completion of the Conversion, MRP awards will be made in
accordance with OTS regulations. Such regulations provide that (i) no
individual may receive more than 25% of the shares awarded pursuant to the MRP,
(ii) directors who are not employees of the Holding Company or the Association
may not receive more than 5% of such shares individually or 30% in the
aggregate, and (iii) shares awarded pursuant to the MRP will vest at the rate of
one-fifth per year commencing on the date which is one year from the date of
grant of the award, subject to acceleration of vesting only in the event of the
death or disability of a participant. No decision has been made as to
anticipated awards to individuals under the MRP. See "MANAGEMENT - Stock
Benefit Plans -- Management Recognition Plan."
Participation of the Agent in the Offering
The Agent will assist in soliciting subscriptions in the Subscription
Offering and Community Offering, if any. Selected dealers may be utilized to
assist in selling stock in the Community Offering in a Syndicated Community
Offering. Such solicitations will be made on a "best efforts" basis and the
Agent is not obligated to purchase any of the Common Shares. See "THE
CONVERSION - Plan of Distribution."
Pricing of the Common Shares
OTS regulations require the aggregate purchase price of the Common
Shares to be issued in the Conversion to be consistent with an independent
appraisal of the estimated pro forma market value of the Common Shares following
the Conversion. Ferguson & Co., LLP ("Ferguson & Co."), has prepared an
independent valuation of the estimated pro forma market value of the Association
as converted. Ferguson & Co.'s valuation of the estimated pro forma market value
of the Association, as converted, is $8,600,000 as of October 18, 1996 (the "Pro
Forma Value"). Based on the Pro Forma Value of the Association, the Valuation
Range established in accordance with the Plan is $7,310,000 to $9,890,000. The
appraisal of the pro forma market value of the Association, as converted, does
not represent Ferguson & Co.'s opinion as to the price at which the Common
Shares
4
<PAGE>
may trade. There can be no assurance that the Common Shares may later be resold
at the price at which they are purchased in connection with the Conversion. See
"THE CONVERSION - Pricing and Number of Common Shares to be Sold."
In the event that Ferguson & Co. determines at the close of the Offering
that the aggregate pro forma value of the Association is higher or lower than
the Pro Forma Value, but is nevertheless equal to or greater than $7,310,000 or
equal to or less than $11,373,500 (15% above the maximum of the Valuation
Range), the Holding Company will make an appropriate adjustment by raising or
lowering the total number of Common Shares to be sold in the Conversion
consistent with the final valuation. The total number of Common Shares to be
sold in the Conversion will be determined in the discretion of the Board of
Directors consistent with the final valuation. If, due to changing market
conditions, the final valuation is less than $7,310,000 or more than $11,373,500
persons who subscribe to or order Common Shares will be given notice of such
final valuation and the right to affirm increase, decrease or rescind their
subscriptions or orders. Any person who does not affirmatively elect to continue
his subscription or order or elects to rescind his subscription or order before
the date specified in the notice will have all of his funds promptly refunded
with interest. Any person who elects to decrease his subscription or order will
have the appropriate portion of such person's funds promptly refunded with
interest.
Ferguson & Co. was selected by the Board of Directors because Ferguson &
Co. has extensive experience in the valuation of thrift institutions,
particularly in the mutual-to-stock conversion context. The Association and
Ferguson & Co. have no relationship which would affect Ferguson & Co.'s
independence. See "THE CONVERSION - Pricing and Number of Common Shares to be
Sold."
Use of Proceeds
The Holding Company will retain 50% of the net proceeds from the sale of
the Common Shares, or approximately $4.0 million at the mid-point of the
Valuation Range. Such proceeds will be used by the Holding Company to lend funds
to the ESOP and for general corporate purposes, which may include payment of
dividends, purchases of Common Shares and acquisitions of other financial
institutions. The Holding Company presently has no plans to use the proceeds for
any of such purposes, except the loan to the ESOP. The remainder of the net
proceeds received from the sale of the Common Shares, approximately $4.0 million
at the mid-point of the Valuation Range, will be invested by the Holding Company
in the capital stock to be issued by the Association to the Holding Company as a
result of the Conversion. Such investment will increase the regulatory capital
of the Association and will permit the Association to expand its lending and
investment activities and to enhance customer services. The Association
anticipates that the net proceeds will initially be invested in United States
Government and agency securities and mortgage-backed securities. See "USE OF
PROCEEDS."
Market for Common Shares
There is presently no market for the Common Shares. The Holding Company
is uncertain whether it will have 300 stockholders after the Offerings which is
the minimum number of shareholders required to be eligible for listing on the
Nasdaq Small-Cap Market ("Nasdaq"). If the Holding Company does have 300 or more
shareholders, it will use its best efforts to obtain a Nasdaq listing. If the
Holding Company does not qualify for Nasdaq, the Holding Company will request
that the Agent undertake to match offers to buy and offers to sell for the
Common Shares and the Agent intends to list the Common Shares through the
National Daily Quotation Service "pink sheets" published by the National
Quotation Bureau, Inc. In view of the probable number of purchasers of the
Common Shares, however, the development of an active or liquid market for the
Common Shares after the completion of the Conversion is unlikely. See "RISK
FACTORS - Absence of Market for Common Shares" and "MARKET FOR COMMON SHARES."
5
<PAGE>
Dividend Policy
Following the Conversion, the Board of Directors of the Holding Company
currently intends to declare cash dividends on the Common Shares at an initial
annual rate of 3.0% of the $20.00 per share purchase price of the Common Shares
($0.60 per share). However, the declaration and payment of dividends will be
subject to the discretion of the Board of Directors of the Holding Company and
to the earnings and financial condition of the Holding Company. Further, at the
discretion of the Board of Directors of the Holding Company and based on the
earnings and financial condition of the Holding Company, the Holding Company
may, from time to time, declare a non-recurring special dividend. If the Board
of Directors of the Holding Company determines in the exercise of its discretion
that the net income, capital and financial condition of the Holding Company and
the general economy do not support the declaration and payment of dividends by
the Holding Company, dividends may not be paid on the Common Shares. Other than
earnings on the investment of the proceeds retained by the Holding Company and
interest earned on the loan to the ESOP, the only source of income of the
Holding Company will be dividends periodically declared and paid by the Board of
Directors of the Association on the common shares of the Association held by the
Holding Company. The declaration and payment of dividends by the Association to
the Holding Company will be subject to the discretion of the Board of Directors
of the Association, to the earnings and financial condition of the Association,
to general economic conditions and to federal restrictions on the payment of
dividends by thrift institutions. Under regulations of the OTS applicable to
converted associations, the Association will not be permitted to pay a cash
dividend on its capital stock if its regulatory capital would, as a result of
the payment of such dividend, be reduced below the amount required for the
liquidation account or the applicable regulatory capital requirement prescribed
by the OTS. Accordingly, no assurance can be given that dividends will be paid
or, if paid, will be continued. See "DIVIDEND POLICY" and "REGULATION."
Investment Risks
An investment in the Common Shares involves certain risks. Special
attention should be given to the matters discussed under "RISK FACTORS -Interest
Rate Risk; - Below Industry Average Return on Equity After Conversion; -
Recapitalization of SAIF and Related Legislative Activity; - Possible Dilutive
Effect of Stock Option Plan and MRP on Net Income and Shareholders' Equity; -
Absence of Market for Common Shares; - Certain Anti-Takeover Provisions; -
Competition; - Possible Tax Liability Related to Subscription Rights; -
Discretion of Management as to Use of Proceeds; and - Risk of Delayed Offering."
6
<PAGE>
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The following table sets forth certain information concerning the
financial condition, earnings and other data regarding the Association at the
dates and for the periods indicated. Such information should be read in
conjunction with the financial statements and notes thereto appearing elsewhere
herein. The information at June 30, 1996 and 1995 and for the nine months then
ended is derived from unaudited data but, in the opinion of management of the
Association, reflects all adjustments (which comprise only normal recurring
accruals) necessary for a fair presentation of the financial condition and
results of operations. The results of operations for the nine months ended June
30, 1996 are not necessarily indicative of the results of operations for the
full year.
<TABLE>
<CAPTION>
At June 30, At September 30,
----------------- --------------------------------------
Selected financial condition and other data: 1996 1995 1994
----------------- ------------------ ------------------
(Dollars in thousands)
<S> <C> <C> <C>
Total amount of:
Assets $64,381 $62,026 $63,528
Cash and interest-bearing time deposits in other
financial institutions 4,838 6,108 2,984
Investment securities(1) 9,399 10,802 13,181
Mortgage-backed securities(2) 8,963 5,452 5,676
Loans receivable-net 39,869 38,570 39,954
Deposits 58,278 56,008 58,228
Equity 5,853 5,606 4,995
Number of full-service offices 1 1 1
Number of limited-service offices 2 2 3
</TABLE>
- -----------------------
(1) At June 30, 1996 and September 30, 1995, investment securities included
$4,147 and $2,610 of investment securities available-for-sale,
respectively, which are carried at their fair value.
(2) At June 30, 1996 and September 30, 1995, mortgage-backed securities
included $6,213 and $2,243 of mortgage-backed securities available-for-
sale, respectively, which are carried at their fair value.
<TABLE>
<CAPTION>
Nine Months Ended
June 30, Year Ended September 30,
------------------------------ ------------------------------
Summary of earnings: 1996 1995 1995 1994
-------------- -------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest income $3,466 $3,245 $4,399 $3,987
Interest expense 1,936 1,669 2,300 1,983
-------------- -------------- -------------- --------------
Net interest income 1,530 1,576 2,099 2,004
Provision for loan losses -- -- -- 35
-------------- -------------- -------------- --------------
Net interest income after
provision for loan losses 1,530 1,576 2,099 1,969
Noninterest income 183 219 329 17
Noninterest expense 1,070 1,125 1,496 1,610
-------------- -------------- -------------- --------------
Income before income taxes 643 670 932 376
Income tax expense 223 208 310 98
-------------- -------------- -------------- --------------
Net income $419 $462 $622 $279
============== ============== ============== ==============
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
June 30, Year Ended September 30,
------------------------------ ------------------------------
Selected financial ratios 1996 1995 1995 1994
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Performance ratios:
Return on average assets(1) .88% .98% .99% .44%
Return on average equity(2) 9.65 11.88 11.75 5.80
Interest rate spread(3) 2.93 3.18 3.20 3.10
Net interest margin(4) 3.30 3.44 3.45 3.26
Ratio of non-interest expenses to average assets(5) 2.25 2.38 2.38 2.52
Average equity to average assets 9.14 8.24 8.41 7.54
Average interest-earning assets to average
interest-bearing liabilities 108.94 107.00 106.86 105.21
Assets quality ratios:
Nonperforming assets to total assets(6) .35 .63 .34 .51
Nonperforming loans to total loans(6) .49 .29 .34 .09
Allowance for loan losses to total loans 1.54 1.64 1.62 1.58
Allowance for loan losses to non-performing
loans(6) 313.85 558.77 302.91 1,755.56
</TABLE>
(1) Annualized net income divided by average total assets. Average total assets
is based on the month-end carrying value of the assets.
(2) Annualized net income divided by average total equity. Average equity is
based on the month-end total equity balance including the unrealized loss
on securities available-for-sale.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate paid on
interest-bearing liabilities.
(4) Net interest margin represents annualized net interest income as a
percentage of average interest-earning assets.
(5) Annualized non-interest expense divided by total average assets.
(6) Non-performing loans consist of non-accrual loans and accruing loans 90
days or more delinquent and non-performing assets consist of non-performing
loans and real estate owned.
8
<PAGE>
RECENT DEVELOPMENTS
Selected Consolidated Financial Information and Other Data
The following summary of selected consolidated financial information and
other data does not purport to be complete and is qualified in its entirety by
reference to the detailed information and consolidated financial statements and
accompanying notes appearing elsewhere in this Prospectus. The information at
September 30 and June 30, 1996, and for the three months ended September 30,
1996 and 1995, and for the twelve months ended September 30, 1996 is derived
from unaudited financial data but, in the opinion of the management of the
Association, reflects all adjustments (which comprise only normal recurring
accruals) necessary for a fair presentation of the financial condition and
results of operations at those dates and for those periods. The results of
operations for the three months ended September 30, 1996 are not necessarily
indicative of the results of operations for the full year. For additional
information, see the consolidated financial statements and related notes
appearing elsewhere herein.
<TABLE>
<CAPTION>
At At At
Selected financial condition and other data: September 30, June 30, September 30,
----------------- -------------- -----------------
1996 1996 1995
----------------- -------------- -----------------
(Unaudited) (Unaudited)
----------- -----------
(Dollars in thousands)
----------------------
<S> <C> <C> <C>
Total amount of:
Assets $63,413 $64,381 $62,026
Cash and interest-bearing time deposits in other
financial institutions 3,868 4,838 6,108
Investment securities(1) 9,930 9,399 10,802
Mortgage-backed securities(2) 8,450 8,963 5,452
Loans receivable, net 39,601 39,869 38,570
Deposits 57,138 58,278 56,008
Equity 5,688 5,853 5,606
</TABLE>
(1) At September 30 and June 30, 1996 and September 30, 1995, investment
securities included $5,656, $4,147, and $2,610 of investment securities
available for sale, respectively, which are carried at their fair value.
(2) At September 30 and June 30, 1996 and September 30, 1995, mortgage-backed
securities included $5,876, $6,213, and $2,243 of mortgage-backed
securities available for sale, respectively, which are carried at their
fair value.
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
September 30, September 30,
Summary of earnings: ------------------------- -----------------------
1996 1995 1996 1995
------------ ----------- ------------ -----------
(Unaudited) (Unaudited)
----------- -----------
(Dollars in thousands)
-----------------------
<S> <C> <C> <C> <C>
Interest income $1,092 $1,155 $4,558 $4,399
Interest expense 637 632 2,473 2,300
------------ ----------- ------------ -----------
Net interest income 455 523 1,985 2,099
Provision for loan losses 200 0 200 0
------------ ----------- ------------ -----------
Net interest income after provision for loan
losses 255 523 1,785 2,099
Noninterest income, net 70 109 253 329
Noninterest expense, net 629 371 1,699 1,496
------------ ----------- ------------ -----------
Income (loss) before provision for income
taxes (304) 261 339 932
Income tax expense (benefit) (106) 102 118 310
------------ ----------- ------------ -----------
Net income (loss) $ (198) $ 159 $ 221 $ 622
============ =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Ended Twelve Months Ended
Selected financial ratios: September 30, September 30,
------------------------ --------------------------
1996 1995 1996 1995
----------- ----------- ------------ ------------
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C> <C> <C>
Performance ratios:
Return on average assets(1) (1.36)% 1.01% 0.32% 0.99%
Return on average equity(2) (15.02) 11.40 3.53 11.75
Interest rate spread(3) 2.88 3.22 2.90 3.19
Net interest margin(4) 3.01 3.49 3.24 3.45
Ratio of noninterest expenses to average assets(5) 3.97 2.37 2.68 2.38
Average equity to average assets 9.08 8.90 9.07 8.41
Average interest-earning assets to average
interest-bearing liabilities 106.52 106.44 106.88 106.86
Assets quality ratios:
Nonperforming assets to total assets(6) .24 .34 .24 .34
Nonperforming loans to total loans(6) .38 .53 .38 .53
Allowance for loan losses to total loans 2.03 1.62 2.03 1.62
Allowance for loan losses to nonperforming loans(6) 229.80 302.91 229.80 302.91
</TABLE>
(1) Annualized net income divided by average total assets. Average total
assets is based on the month-end carrying value of the assets.
(2) Annualized net income divided by average total equity. Average equity is
based on the month-end total equity balance including the unrealized loss
on securities available-for-sale.
(3) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average rate
paid on interest-bearing liabilities.
(4) Net interest margin represents annualized net interest income as a
percentage of average interest-earning assets.
10
<PAGE>
(5) Annualized noninterest expense divided by total average assets.
(6) Nonperforming loans consist of nonaccrual loans and accruing loans 90
days or more delinquent and nonperforming assets consist of nonperforming
loans and real estate owned.
Regulatory Capital Compliance
At September 30, 1996, the Association exceeded all minimum regulatory
capital requirements. The table below presents certain information relating to
the Association's retained earnings and regulatory capital at that date. For
additional information, see "Historical and Pro Forma Regulatory Capital
Compliance" and "Regulation--Regulation of the Association--Regulatory Capital
Requirements."
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
------------ --------------
(Dollars in thousands)
----------------------
<S> <C> <C>
Total equity $5,688 8.97 %
------------ --------------
Tangible capital $5,875 9.26 %
Tangible capital requirement 951 1.50
------------ --------------
Excess $4,924 7.76 %
============ ==============
Core capital $5,875 9.26 %
Core capital requirement 1,902 3.00
------------ --------------
Excess $3,973 6.26 %
============ ==============
Risk-based capital $6,296 18.72 %
Risk-based capital requirement 2,690 8.00
------------ --------------
Excess $ 3,606 10.72 %
============ ==============
</TABLE>
(1) Based on total assets for purpose of total equity, adjusted total
assets for purposes of the tangible capital and core capital
requirements, and risk-weighted assets for purpose of the risk-
based capital requirement.
Management's Discussion and Analysis of Recent Developments
Comparison of Financial Condition at September 30 and June 30, 1996
Total assets decreased $1.0 million or 2% from $64.4 million at
June 30, 1996 to $63.4 million at September 30, 1996. The decrease in total
assets was primarily attributable to a decrease in cash and interest-bearing
time deposits in other financial institutions as a result of a $1.2 million
decrease in deposits which is representative of local market conditions.
Comparison of Results of Operations for the Three Months Ended September 30,
1996 and 1995
The Association reported a net loss for the three months ended September 30,
1996 of $198,000 and net income of $159,000 for the three months ended
September 30, 1995. The $357,000 decrease between periods was primarily due to
the Association providing a $200,000 provision for loan losses during the three
months ended September 30, 1996 as compared to no provision for loan losses
taken
11
<PAGE>
in the corresponding prior year period and the $370,000 SAIF assessment
recognized on September 30, 1996.
Net Interest Income. Net interest income decreased $68,000 for the three months
ended September 30, 1996 as compared to the same period for 1995. The
Association's decrease resulted from an interest rate spread decline of .3% for
the three months ended September 30, 1996 due to increased rates paid on
deposits to meet local competitive pressures.
Provision for Loan Losses. As discussed earlier, the Association provided
$200,000 to the allowance for loan losses during the three months ended
September 30, 1996. The provision was due primarily to the deterioration of a
commercial loan. The allowance for loan losses provided coverage of 531% of
nonperforming loans at September 30, 1996 as compared to 314% at June 30, 1996
and 303% at September 30, 1995. The provision to the allowance for loan losses
taken during 1996 was primarily due to the deterioration of a single commercial
loan. Provision was made for the outstanding balance of the loan.
Noninterest Income. Noninterest income decreased $39,000 from $109,000 for the
three months ended September 30, 1995 to $70,000 for the three months ended
September 30, 1996.
Noninterest Expense. Noninterest expense increased $258,000, or 70%, from
$371,000 for the three months ended September 30, 1995 to $629,000 for the three
months ended September 30, 1996. The increase was primarily due to the one-time
$370,000 SAIF special assessment. See "REGULATION - Federal Deposit Insurance
Corporation -- Assessments."
Provision for Income Taxes. The Association's effective income tax rate was 35%
for the three months ended September 30, 1996 as compared to 39% for the three
months ended September 30, 1995.
Comparison of Results of Operations for the Years Ended September 30, 1996 and
1995
The Association reported net income for the years ended September 30, 1996 and
1995 of $221,000 and $622,000, respectively. The $401,000 decrease was
attributable to the $370,000 SAIF assessment and $200,000 provision for loan
losses.
Net Interest Income. Net interest showed a slight decrease of $114,000 from
$2.1 million to $2.0 million for the years ended September 30, 1996 and 1995,
respectively, due primarily to higher market rates paid for deposits.
Provision for Loan Losses. As discussed above, the Association provided
$200,000 to the allowance for loan losses during the last quarter of 1996 as
compared to no provision taken during 1995.
Noninterest Income. Noninterest income for 1996 declined $76,000 from the
$329,000 level for 1995. The decrease in noninterest income was due to a
$74,000 gain on sale of premises and equipment recognized in 1995 as a result of
the sale of the East branch building. The East branch was closed in December
1994.
Noninterest Expense. Noninterest expense amounts for 1996 and 1995 were $1.7
million and $1.5 million, respectively. The $200,000 increase in noninterest
expense was primarily due to the one-time $370,000 SAIF special assessment which
was partially offset by a reduction in professional fees.
12
<PAGE>
Provision for Income Taxes. The Association's effective income tax rate was 35%
for 1996 and 33% for 1995.
Liquidity and Capital Resources
The Association continues to maintain a high level of liquid assets in order to
meet its funding requirements. At September 30, 1996, the Association had
approximately $3.9 million in cash on hand and interest-bearing deposits in
other banks which represented 6% of total assets. Additionally, the Association
had designated $11.5 million in investment and mortgage-backed securities
available for sale. At September 30, 1996 and 1995, the Association was in
excess of the minimum OTS liquidity requirements.
At September 30, 1996, the Association had $5.7 million of total equity or
approximately 9.0% of total assets. The Association continues to exceed all
minimum regulatory capital requirements at September 30, 1996. Tangible capital
and core capital were $5.9 million, which represented approximately 9.3% of
adjusted total assets and risk-based capital was $6.3 million which represented
18.7% of total risk-weighted assets at September 30, 1996. Such amounts
exceeded the minimum required ratios of 1.5%, 3.0%, and 8.0%, respectively, by
approximately 7.8%, 6.3%, and 10.7%, respectively. At September 30, 1996, the
Association continued to meet the definition of a "well-capitalized"
institution, the highest of the five categories under the FDICIA prompt
corrective action capital standards.
13
<PAGE>
RISK FACTORS
Investment in the Common Shares involves certain risks. Before investing,
prospective purchasers should carefully consider the following matters.
Interest Rate Risk
The Association's operating results are dependent to a significant degree
on its net interest income, which is the difference between interest income from
loans, interest-bearing deposits in other financial institutions and investment
and mortgage-backed securities, and interest expense on deposits and borrowings.
Like most thrift institutions, the Association's interest income and interest
expense change as interest rates fluctuate and assets and liabilities reprice.
Interest rates fluctuate and assets and liabilities reprice because of a variety
of factors, including general economic conditions, the policies of various
regulatory authorities and other factors beyond the Association's control. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Asset/Liability Management" and "THE BUSINESS OF THE ASSOCIATION -
Lending Activities; and - Deposits and Borrowings."
When interest rates are rising, the interest income earned on assets may
not increase as rapidly as the interest expense paid on the Association's
liabilities. As a result, the earnings of the Association may be adversely
affected when the cost of the Association's liabilities increases more rapidly
than the income earned on the Association's assets. The degree to which such
earnings will be adversely affected depends upon the rapidity and extent of the
increase in interest rates. In addition, rising interest rates may negatively
affect the Association's earnings due to diminished loan demand and the
increased risk of delinquencies due to increased payment amounts as adjustable-
rate loans reprice in a rising interest rate environment.
Below Industry Average Return on Equity After Conversion
Return on equity (net income for a given period divided by average equity
during that period) is a ratio used by many investors to compare the performance
of a particular financial institution to its peers. The Holding Company's post-
Conversion return on equity will initially be below the average return on equity
for publicly traded thrift institutions and their holding companies. See
"SELECTED FINANCIAL INFORMATION AND OTHER DATA" for information regarding the
Association's historical return on equity and "CAPITALIZATION" for a discussion
of the Holding Company's estimated pro forma consolidated capitalization as a
result of the Conversion. In addition, the expenses associated with the ESOP and
the MRP (see "PRO FORMA DATA"), along with other post-Conversion expenses, are
expected to contribute initially to reduced earnings levels. The Association
intends to deploy the net proceeds of the Offering to increase earnings per
share and book value per share, without assuming undue risk, with the goal of
achieving a return on equity comparable to the average for publicly traded
thrift institutions and their holding companies. This goal will likely take a
number of years to achieve, and no assurances can be given that this goal can be
attained. Consequently, investors should not expect a return on equity which
will meet or exceed the average return on equity for publicly traded thrift
institutions for the foreseeable future.
14
<PAGE>
Recapitalization of SAIF and Related Legislative Activity
The deposits of the Association are currently insured by the SAIF. Both
the SAIF and the Bank Insurance Fund ("BIF"), the federal deposit insurance fund
that covers the deposits of state and national banks and certain state savings
banks, are required by law to attain and thereafter maintain a reserve ratio of
1.25% of insured deposits. The BIF has achieved the required reserve rate, and,
as discussed below, during the past year the FDIC reduced the average deposit
insurance premium paid by BIF-insured banks to a level substantially below the
average premium paid by savings institutions.
On November 4, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. That reduced deposit insurance premiums for BIF member
institutions to zero basis points (subject to a $2,000 minimum) for institutions
in the lowest risk category, while holding deposit insurance premiums for SAIF
members at their current levels (23 basis points for institutions in the lowest
risk category). The reduction was effective with respect to the semiannual
premium assessment beginning January 1, 1996.
Banking legislation was enacted September 30, 1996 to eliminate the
premium differential between SAIF-insured institutions and BIF-insured
institutions. The FDIC Board of Directors met October 8,1996 and approved a rule
that, except for the possible impact of certain exemptions for de novo and
"weak" institutions, established the special assessment necessary to
recapitalize the SAIF at 65.7 basis points of SAIF assessable deposits held by
affected institutions as of March 31, 1995. The legislation provides that all
SAIF member institutions shall pay a special one-time assessment to recapitalize
the SAIF, which in the aggregate is sufficient to bring the reserve ratio in the
SAIF to 1.25% of insured deposits. It is anticipated that after recapitalization
of the SAIF, premiums paid by SAIF-insured institutions will be reduced to match
those currently being assessed by BIF-insured commercial banks. The legislation
also provides for the merger of the BIF and the SAIF, with such merger being
conditioned upon the prior elimination of the thrift charter.
Based upon its level of SAIF deposits as of March 31, 1995, the
Association will pay a special assessment of approximately $370,000, or $237,000
net of related tax benefits. Accordingly, an accrual for that amount was
provided in the quarter ended September 30, 1996.
Possible Dilutive Effect of Stock Option Plan and MRP on Net Income and
Shareholders' Equity
Following the completion of the Conversion, the Holding Company intends
to adopt the Stock Option Plan and the MRP. Under the MRP, directors, officers
and employees of the Association could be awarded an aggregate amount of common
shares equal to 4% of the shares sold in the Offering. Under the Stock Option
Plan, directors, officers and employees of the Association may be granted
options to purchase common shares of the Holding Company. The aggregate amount
of common shares as to which such options might be granted may equal 10% of the
Common Shares at exercise prices equal to the market price of the Holding
Company common shares on the date of grant. The Holding Company intends to
submit the Stock Option Plan and the MRP to the Holding Company's shareholders
for their approval at the first annual meeting or a special meeting of
shareholders following the completion of the Conversion. Such meeting will not
be held sooner than six months after the completion of the Conversion.
The shares issued to participants under the MRP could be newly issued
shares or, subject to regulatory restrictions, shares purchased in the open
market. In the event the shares issued under the MRP consist of newly issued
common shares, the voting power and economic interests of then existing
15
<PAGE>
Holding Company shareholders would be diluted. Shares issued upon the exercise
of options granted under the Stock Option Plan are anticipated to be issued from
the Holding Company's authorized but unissued shares (such shares could,
however, be from shares purchased in the open market) and will also dilute the
voting power and may dilute the economic interests of then existing Holding
Company shareholders, depending on the book value per share and fair market
value per share of the common shares on the date of option exercise. See "PRO
FORMA DATA" and "MANAGEMENT - Stock Benefit Plans."
Absence of Market for Common Shares
There is presently no market for the Common Shares. The Holding Company
is uncertain whether it will have 300 stockholders after the Offerings which is
the minimum number of shareholders required to be eligible for listing on the
Nasdaq. If the Holding Company does have 300 or more shareholders, it will use
its best efforts to obtain a Nasdaq listing. If the Holding Company does not
qualify for Nasdaq, the Holding Company will request that the Agent undertake to
match offers to buy and offers to sell for the Common Shares and the Agent
intends to list the Common Shares through the National Daily Quotation Service
"pink sheets" published by the National Quotation Bureau, Inc. A public trading
market for the stock of any issuer, including the Holding Company, depends upon
the presence of both willing buyers and sellers at any given time, over which
neither the Holding Company nor any market maker has any control. In view of the
probable number of purchasers of the Common Shares in this Offering, however,
the development of an active or liquid market for the Common Shares after the
completion of the Conversion is unlikely. Investors should consider, therefore,
the potentially illiquid and long-term nature of an investment in the Common
Shares.
The aggregate offering price for the Common Shares is based upon an
independent appraisal of the Association. The appraisal is not a recommendation
as to the advisability of purchasing the Common Shares. See "THE CONVERSION -
Pricing and Number of Common Shares to be Sold." No assurance can be given that
persons purchasing Common Shares will thereafter be able to sell such shares at
a price at or above the offering price.
Certain Anti-Takeover Provisions
Provisions of Governing Instruments and Governing Law. The Certificate of
Incorporation and Bylaws of the Holding Company contain certain provisions that
could deter or prohibit non-negotiated changes in the control of the Holding
Company and the Association. Such provisions include a restriction on the
acquisition, directly or indirectly, of more than 10% of the outstanding shares
of the Holding Company by any person or any persons acting in concert during the
five-year period following the effective date of the Conversion without prior
approval of the Board of Directors, the ability to issue additional common
shares and a super majority voting requirement for certain transactions. See
"DESCRIPTION OF AUTHORIZED SHARES" and "RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY AND THE ASSOCIATION."
The Certificate of Incorporation provides that for five years after the
effective date of the Conversion, no person or persons acting in concert, except
the ESOP, may acquire, directly or indirectly, the beneficial ownership of more
than 10% of any class of outstanding equity securities of the Holding Company.
If such a prohibited acquisition occurs, the securities owned by such person in
excess of the 10% limit may not be voted on any matter submitted to the
shareholders of the Holding Company. The ability of management or any other
person to solicit revocable proxies from shareholders and vote on behalf of such
shareholders will not be restricted by such 10% limit.
The Certificate of Incorporation also provides that if the Board of
Directors recommends that shareholders approve certain matters, including
mergers, acquisitions of a majority of the shares of the
16
<PAGE>
Holding Company or the transfer of substantially all of the assets of the
Holding Company, the affirmative vote of the holders of only a majority of the
voting shares of the Holding Company is required to approve such matter. If,
however, the Board of Directors recommends against the approval of any such
matter, the affirmative vote of the holders of at least 80% of the voting shares
of the Holding Company is required to approve such matters. The existence of
such 80% provision in the Certificate of Incorporation may have the effect of
precluding a corporate transaction which certain shareholders may deem to be in
their best interests.
The various provisions of the Certificate of Incorporation, may have the
effect of facilitating the perpetuation of current management and discouraging
proxy contests and takeover attempts. The Boards of Directors of the Holding
Company and the Association believe that such provisions will be in the best
interests of shareholders by encouraging prospective acquirers to negotiate a
proposed acquisition with the directors. Such provisions could, however,
adversely affect the market value of the Common Shares or deprive shareholders
of the opportunity to sell their shares for premium prices.
Regulations of the OTS also restrict the ability of any person, or
persons acting in concert, to acquire the beneficial ownership of more than 10%
of any class of voting equity security of the Association or the Holding Company
without the prior written approval of or lack of objection by the OTS. Such
restrictions could restrict the use of revocable proxies. Federal and Delaware
law also restrict the acquisition of control of the Holding Company and the
Association. Any or all of these provisions may facilitate the perpetuation of
current management and discourage proxy contests or takeover attempts not first
negotiated with the Board of Directors. See "RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY AND THE ASSOCIATION."
Voting Control of Officers and Directors. Officers and directors of the
Holding Company and their Associates are expected to purchase approximately 34%
of the Common Shares sold in the Offering. In addition, the ESOP intends to
purchase approximately 8% of the shares sold in the Offering. The ESOP trustee
will vote shares allocated under the ESOP as directed by the participants to
whom the shares are allocated and will vote unallocated shares in the same
proportion with the vote of participants with respect to allocated shares.
Following approval of the MRP and the Stock Option Plan by the shareholders of
the Holding Company at the first annual meeting or a special meeting of the
shareholders, which will not be held sooner than six months following the
completion of the Conversion, the MRP is expected to acquire Common Shares in
the open market or acquire authorized but unissued common shares from the
Holding Company in an amount equal to up to 4% of the Common Shares sold in the
Offering and the Stock Option Plan is expected to acquire authorized but
unissued common shares from the Holding Company or acquire Common Shares in the
open market in an amount equal to up to 10% of the Common Shares sold in the
Offering. The MRP and the Stock Option Plan trustees, who are expected to be
directors of the Association, will vote shares awarded but not distributed under
the MRP and the Stock Option Plan. See "MANAGEMENT - Stock Benefit Plans --
Employee Stock Ownership Plan; -- Stock Option Plan; and -- Management
Recognition Plan."
As a result of the proposed purchases of Common Shares by directors and
officers of the Holding Company and the Association and their Associates and as
a result of purchases under the ESOP, the MRP and the Stock Option Plan,
directors and executive officers of the Holding Company and the Association
could acquire the power to vote approximately 55% of total outstanding shares
(including shares owned by the ESOP, the MRP and the Stock Option Plan). Such
voting control would constitute a majority for purposes of any shareholder vote
and could render it difficult or
17
<PAGE>
impossible to approve a stockholder proposal opposed by the Board of Directors
of the Holding Company and management.
Competition
The Association experiences significant competition in its local market
area in originating loans and attracting deposits. The most direct competition
comes from commercial banks, thrift institutions and mortgage banking companies.
Commercial banks and thrift institutions are in an industry which has
experienced increasing consolidation. In the event of a downturn in the economy
or increased competitive pressures resulting from industry consolidation, the
Association may experience reduced demand for mortgage loans and may have
difficulty attracting deposits. Trends toward the consolidation of the banking
industry and the lifting of interstate banking and branching restrictions may
make it more difficult for smaller institutions, such as the Association, to
compete effectively with large national and regional banking institutions.
Market Area
The Association's primary market for lending and deposit activity is
Cullman County, Alabama. Cullman County's economy is principally agricultural,
light industry, and manufacturing. Since the primary market of the Association
is a single county, Cullman County, the Association will be heavily dependent on
the economy and real estate market in Cullman County. See "THE BUSINESS OF THE
ASSOCIATION."
Possible Tax Liability Related to Subscription Rights
As part of the Conversion, subscription rights have been granted to
(i) Eligible Account Holders; (ii) the ESOP; (iii) Supplemental Eligible Account
Holders; and (iv) Other Members. The Association has received an opinion from
Ferguson & Co. to the effect that the subscription rights to be received by
Eligible Account Holders and other eligible subscribers do not have any value
because they are acquired by the recipients without cost, are non-transferable
and of short duration, and afford the recipients a right only to purchase Common
Shares at a price equal to their estimated fair market value, the same price as
the purchase price paid for Common Shares by the general public in the Community
Offering.
Notwithstanding the opinion from Ferguson & Co., if the subscription
rights are subsequently found to have a fair market value, income may be
recognized by the recipients of the subscription rights (in certain cases,
whether or not the rights are exercised) and the Holding Company and/or the
Association may be taxed on the distribution of such subscription rights. In
this regard, the subscription rights may be taxed partially or entirely at
ordinary income tax rates.
Discretion of Management as to Use of Proceeds
Management of the Holding Company and the Association will have
substantial discretion, subject to applicable regulations, regarding the use of
proceeds of the Offering. See "USE OF PROCEEDS."
Risk of Delayed Offering
18
<PAGE>
The Holding Company and the Association expect to complete the Conversion
by ________, 1996. It is possible, however, that adverse market, economic or
other factors could delay the completion of the Conversion. If the Community
Offering, if any, is extended beyond ________, 1996, each subscriber will be
given a notice of such delay and the right to affirm, increase, decrease or
rescind his subscription. In such event, any person who does not affirmatively
elect to continue his subscription or elects to rescind his subscription will
have all of his funds promptly refunded with interest. Any person who elects to
decrease his subscription will have the appropriate portion of his funds
promptly refunded with interest. If the Community Offering, if any, is extended,
the cost of the Conversion could increase and the valuation of the Association
could change.
SOUTHERN COMMUNITY BANCSHARES, INC.
The Holding Company is a Delaware corporation recently organized at the
direction of the Association for the purpose of acquiring all of the capital
stock of the Association to be issued in connection with the Conversion. The
Holding Company has not engaged in business operations to date, other than
business related to the Conversion. The office of the Holding Company is located
at 325 2nd Street, S.E., Cullman, Alabama and its telephone number is
(205) 734-4863.
The Holding Company will have no material assets or liabilities prior
to the consummation of the Conversion. Upon the consummation of the Conversion,
the only material asset of the Holding Company will be the capital stock of the
Association and that portion of the net proceeds of the Conversion that the
Holding Company retains. See "USE OF PROCEEDS," for information as to how the
Holding Company plans to invest the net proceeds retained from the Conversion.
Following the Conversion, the Holding Company will be engaged in the business of
managing its investments and directing, planning and coordinating the business
activities of the Association. In the future, the Holding Company may acquire
or organize other operating subsidiaries, although there are no current plans or
agreements to do so.
The Holding Company's application to become a savings and loan holding
company under the Home Owners' Loan Act ("HOLA") will have been approved by the
OTS prior to the Conversion. Upon completion of the Conversion, the Holding
Company will be subject to regulation by OTS. See "REGULATION - Office of Thrift
Supervision -- Holding Company Regulation."
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CULLMAN
The Association is a mutual savings and loan association which was
organized in 1905. As a federal savings and loan association, the Association
is subject to supervision and regulation by the OTS. The Association is a
member of the FHLB of Atlanta, and the deposit accounts of the Association are
insured up to applicable limits by the FDIC in the SAIF. See "REGULATION." The
Association conducts business from its offices in Cullman County, Alabama and
its executive office is located at 325 2nd Street, S.E., Cullman, Alabama.
The primary business of the Association is the origination of loans
secured by first mortgages on one- to four-family residential real estate
located in Cullman County, Alabama, the Association's primary market area. The
Association also originates loans secured by multifamily real estate (over four
units) and nonresidential real estate in its market area. In addition to real
estate lending, the
19
<PAGE>
Association originates commercial loans and secured and unsecured consumer
loans. See "THE BUSINESS OF THE ASSOCIATION - Lending Activities." The
Association invests in interest-bearing deposits in other financial
institutions, U.S. Government and agency obligations, mortgage-backed securities
and other investments permitted by applicable law. See "THE BUSINESS OF THE
ASSOCIATION - Investment Activities." Funds for lending and other investment
activities are obtained primarily from savings deposits, which are insured up to
applicable limits by the FDIC, and principal repayments on loans. See "THE
BUSINESS OF THE ASSOCIATION - Deposits and Borrowings."
USE OF PROCEEDS
The following table presents the estimated gross and net proceeds from
the sale of the Common Shares, based on the Valuation Range:
<TABLE>
<CAPTION>
Minimum Mid-point Maximum Maximum, as adjusted
------- --------- ------- --------------------
<S> <C> <C> <C> <C>
Gross proceeds $7,310,000 $8,600,000 $9,890,000 $11,373,500
Less estimated expenses 497,000 521,000 545,000 572,000
------------ ------------ ------------ --------------------
Total net proceeds $6,813,000 $8,079,000 $9,345,000 $10,801,500
============ ============ ============ ====================
</TABLE>
The net proceeds may vary depending upon financial and market conditions
at the time of the completion of the Offering. See "THE CONVERSION -Pricing and
Number of Common Shares to be Sold." The expenses detailed above are estimated.
Estimated expenses include fixed expenses of approximately $417,000 and
estimated sales commissions payable to the Agent. Sales commissions have been
computed on the basis of the following assumptions: (i) approximately 34% of the
Common Shares sold in the Offering at the Mid-point of the Valuation Range will
be purchased by directors, officers, and employees of the Association and their
Associates; and (ii) 8% of the Common Shares sold in the Offering will be
purchased by the ESOP. Actual expenses may be more or less than estimated. See
"THE CONVERSION - Plan of Distribution."
The Holding Company will retain 50% of the net proceeds from the sale of
the Common Shares, approximately $4.0 million at the mid-point of the Valuation
Range. Such proceeds will be used by the Holding Company to lend up to $688,000,
at the mid-point of the Valuation Range, to the ESOP to acquire Common Shares in
the Offering and for general corporate purposes, which may include payment of
dividends, purchases of common shares and acquisitions of other financial
institutions. The Holding Company presently has no specific plans to use the
proceeds for any such purposes, except for the loan to the ESOP. The Holding
Company's loan to the ESOP shall be for a term of ten years and shall bear
interest at the prime rate. See "MANAGEMENT - Stock Benefit Plans -- Employee
Stock Ownership Plan" and "THE CONVERSION - Restrictions on Repurchase of Common
Shares."
The remainder of the net proceeds received from the sale of the Common
Shares, approximately $4.0 million at the mid-point of the Valuation Range, will
be invested by the Holding Company in the capital stock to be issued by the
Association to the Holding Company as a result of the Conversion. Such
investment will increase the regulatory capital of the Association and will
permit the Association to expand its lending and investment activities and to
enhance customer services. A
20
<PAGE>
portion of the net proceeds in the amount of $344,000 are intended to be used to
purchase common shares for awards pursuant to the MRP. For liquidity purposes,
the remainder of the funds will be invested initially in U.S. Treasury and
government agency securities with maturities of three years or less and short-
term interest-bearing deposits. Eventually, such funds will be used to originate
mortgage loans and possibly nonmortgage loans in the Association's market area.
MARKET FOR COMMON SHARES
There is presently no market for the Common Shares. The Holding Company
is uncertain whether it will have 300 stockholders after the Offerings which is
the minimum number of shareholders required to be eligible for listing on the
Nasdaq. If the Holding Company does have 300 or more shareholders, it will use
its best efforts to obtain a Nasdaq listing. If the Holding Company does not
qualify for Nasdaq, the Holding Company will request that the Agent undertake
to match offers to buy and offers to sell for the Common Shares and the Agent
intends to list the Common Shares through the National Daily Quotation Service
"pink sheets" published by the National Quotation Bureau, Inc. A public trading
market for the stock of any issuer, including the Holding Company, depends upon
the presence of both willing buyers and sellers at any given time, over which
neither the Holding Company nor any market maker has any control. In view of the
probable number of purchasers of the Common Shares, however, the development of
an active or liquid market for the Common Shares after the completion of the
Conversion is unlikely. See "RISK FACTORS - Absence of Market for the Common
Shares."
The appraisal of the pro forma market value of the Association, as
converted, does not represent Ferguson & Co.'s opinion as to the price at which
the Common Shares may trade. There can be no assurance that the Common Shares
may later be resold at the price at which they are purchased in connection with
the Conversion.
DIVIDEND POLICY
Following the Conversion, the Board of Directors of the Holding Company
currently intends to declare cash dividends on the Common Shares at an initial
annual rate of 3.0% of the $20.00 per share purchase price of the Common Shares
($0.60 per share). However, the declaration and payment of dividends will be
subject to the discretion of the Board of Directors of the Holding Company and
to the earnings and financial condition of the Holding Company. Further, at the
discretion of the Board of Directors of the Holding Company and based on the
earnings and financial condition of the Holding Company, the Holding Company
may, from time to time, declare a non-recurring special dividend. If the Board
of Directors of the Holding Company determines in the exercise of its discretion
that the net income, capital and financial condition of the Holding Company and
the general economy do not support the declaration and payment of dividends by
the Holding Company, dividends may not be paid on the Common Shares.
Accordingly, no assurance can be given that dividends will be paid or, if paid,
will be continued.
Other than earnings on the investment of the proceeds retained by the
Holding Company and interest earned on the loan to the ESOP, the only source of
income of the Holding Company will be dividends periodically declared and paid
by the Board of Directors of the Association on the common shares of the
Association held by the Holding Company. The declaration and payment of
dividends by the Association to the Holding Company will be subject to the
discretion of the Board of Directors of the Association, to the earnings and
financial condition of the Association, to general economic conditions and to
federal restrictions on the payment of dividends by thrift institutions.
Under regulations of the OTS applicable to converted associations, the
Association will not be permitted to pay a cash dividend on its capital stock if
its regulatory capital would, as a result of the payment of
21
<PAGE>
such dividend, be reduced below the amount required for the liquidation account
or the applicable regulatory capital requirement prescribed by the OTS. See "THE
CONVERSION -Principal Effects of the Conversion -- Liquidation Account" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -Capital Resources; and - Liquidity." The Association may not pay a
dividend unless such dividend also complies with a regulation of the OTS
limiting capital distributions by savings and loan associations generally.
Capital distributions, for purposes of such regulation, include, without
limitation, payments of cash dividends, repurchases and certain other
acquisitions by an association of its shares and payments to stockholders of
another association in an acquisition of such other association. See
"REGULATION - Office of Thrift Supervision -- Limitations on Capital
Distributions."
22
<PAGE>
REGULATORY CAPITAL COMPLIANCE
The following table sets forth the historical and pro forma regulatory
capital of the Association at June 30, 1996, based on the receipt of 50% of the
net proceeds for the number of Common Shares indicated. Estimated expenses used
in determining the net proceeds are $497,000, $521,000, $545,000 and $572,000
at the minimum, mid-point, maximum and maximum, as adjusted, respectively, of
the Valuation Range:
<TABLE>
<CAPTION>
Pro forma capital at June 30, 1996, assuming the sale of:
-------------------------------------------------------------------------------
365,500 430,000 494,500 568,675
Historical at Common Shares Common Shares Common Shares Common Shares
June 30, 1996 (At $20 per share) (At $20 per share) (At $20 per share) (At $20 per share)
----------------- ------------------ ------------------ ------------------ -------------------
(Dollars in thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles, before
adjustments(1) $5,853 9.09% $8,383 12.42% $8,861 13.02% $9,339 13.60% $9,889 14.26%
======= ===== ======= ===== ====== ===== ====== ===== ======= ======
Tangible capital:
Capital level $6,070 9.40% $8,600 12.70% $9,078 13.29% $9,556 13.87% $10,106 14.53%
Requirement(2) 969 1.50 1,016 1.50 1,024 1.50 1,033 1.50 1,043 1.50
------- ----- ------- ----- ------ ----- ------ ----- ------- ------
Excess $5,101 7.90% $7,584 11.20% $8,054 11.79% $8,523 12.37% $9,063 13.03%
======= ===== ======= ===== ====== ===== ====== ===== ======= ======
Core capital:
Capital level $6,070 9.40% $8,600 12.70% $9,078 13.29% $9,556 13.87% $10,106 14.53%
Requirement(2) 1,938 3.00 2,031 3.00 2,049 3.00 2,066 3.00 2,086 3.00
------- ----- ------- ----- ------ ----- ------ ----- ------- ------
Excess $4,132 6.40% $6,569 9.70% $7,029 10.29% $7,490 10.87% $8,020 11.53%
======= ===== ======= ===== ====== ===== ====== ===== ======= ======
Risk-based capital:(3)
Capital level(4) $6,480 19.30% $9,020 26.37% $9,498 27.68% $9,976 28.97% $10,526 30.45%
Requirement(2) 2,686 8.00 2,736 8.00 2,745 8.00 2,755 8.00 2,765 8.00
------- ----- ------- ----- ------ ----- ------ ----- ------- ------
Excess $3,794 11.30% $6,284 18.37% $6,753 19.68% $7,221 20.97% $7,761 22.45%
======= ===== ======= ===== ====== ===== ====== ===== ======= ======
</TABLE>
- --------------------
(1) Pro forma amounts reflect a reduction for unearned ESOP and MRP shares
equal to 8% and 4%, respectively, of the Offering.
(2) Tangible and core capital are shown as a percent of adjusted total assets
and risk-based capital levels are shown as a percent of risk-weighted
assets in accordance with OTS regulations. The calculations in the table
above do not take into account the interest rate risk component added by
the OTS to its risk-based capital requirements. See "REGULATION - Office
of Thrift Supervision --Regulatory Capital Requirements."
(3) Assumes that the net proceeds received by the Association will be
invested in assets having a risk-weighting of 20%.
(4) Risk-weighted capital includes $410,000 of qualifying general loan loss
allowances.
23
<PAGE>
CAPITALIZATION
Set forth below is the historical capitalization of the Association at
June 30, 1996, and the pro forma consolidated capitalization of the Holding
Company as adjusted to give effect to the sale of Common Shares based on the
Valuation Range and estimated expenses. See "USE OF PROCEEDS" and "THE
CONVERSION - Pricing and Number of Common Shares to be Sold."
<TABLE>
<CAPTION>
Pro forma capitalization of the Holding Company at June 30, 1996, assuming the sale
of
-----------------------------------------------------------------------------------
Historical 365,500 430,000 494,500 568,675
Capitalization at Common Shares (At Common Shares (At Common Shares (At Common Shares
June 30, 1996 $20 per share) $20 per share) $20 per share) (At $20 per share)
------------------- ------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Deposits(1) $58,278 $58,278 $58,278 $58,278 $58,278
Borrowings -- -- -- -- --
------------------- ------------------- ------------------- ------------------- --------------------
Total deposits and
borrowings 58,278 58,278 58,278 58,278 58,278
=================== =================== =================== =================== ====================
Equity:
Preferred Shares, $0.01
par value per share;
authorized - 100,000
shares; none issued or -- -- -- -- --
outstanding
Common Shares, $0.01 par
value per share;
authorized - 3,000,000
shares; assumed
outstanding - as shown(2) -- 4 4 5 6
Paid-in capital -- 6,809 8,075 9,340 10,796
Less Common Shares acquired
by the ESOP(3) -- (585) (688) (791) (910)
Less Common Shares acquired
by the MRP(4) -- (292) (344) (396) (455)
Retained earnings,
substantially restricted(5) 6,070 6,070 6,070 6,070 6,070
Unrealized losses on
available-for-sale
securities, net (217) (217) (217) (217) (217)
------------------- ------------------- ------------------- ------------------- --------------------
Total equity $ 5,853 $11,789 $12,900 $14,011 $15,290
=================== =================== =================== =================== ====================
</TABLE>
- --------------------------
(1) No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing Common Shares in the Conversion. Any such withdrawals
will reduce pro forma deposits by the amounts of such withdrawals.
(2) The number of Common Shares to be issued will be determined on the basis of
the final valuation of the Association. See "THE CONVERSION - Pricing and
Number of Common Shares to be Sold." Common Shares assumed outstanding does
not reflect the issuance of any common shares which may be reserved for
issuance under the Stock Option Plan. See "MANAGEMENT - Stock Benefit
Plans -- Stock Option Plan." Reflects receipt of the proceeds from the sale
of the Common Shares, net of estimated expenses. Estimated expenses include
fixed expenses of approximately $417,000 and estimated sales commissions
payable to the Agent. Such sales commission have been computed based on the
following assumptions: (i) approximately 34% of the Common Shares sold in
the Offering at the Mid-point of the Valuation Range will be purchased by
directors, officers and employees of the Association and their Associates;
and (ii) 8% of the Common Shares sold in the Offering will be purchased by
the ESOP.
(3) Assumes that 8% of the Common Shares sold in connection with the Conversion
will be acquired by the ESOP with funds borrowed by the ESOP from the
Holding Company for a term of ten years at the prime rate of interest. The
ESOP loan will be secured solely by the Common Shares purchased by the ESOP.
The Association has agreed, however, to use its best efforts to fund the
ESOP based on future earnings, which funding will reduce the Association's
total capital and retained earnings, as reflected in the table. If the ESOP
is unable to purchase all or part of the Common Shares for which it
subscribes, the ESOP may purchase common shares on the open market or may
purchase authorized but unissued shares of the Holding Company. If the ESOP
purchases authorized but unissued shares from the Holding Company, such
purchases would have a dilutive effect of approximately 7.4% on the
ownership interests of the Holding Company's shareholders. See "MANAGEMENT -
Stock Benefit Plan -- Employee Stock Ownership Plan."
(4) Assumes that 4% of the Common Shares will be acquired in the open market by
the MRP after the Conversion at a price of $20 per share. There can be no
assurance that the MRP will be implemented, that a sufficient number of
shares will be available for purchase by the MRP, that shares could be
purchased at a price of $20 per share or that the shareholders will approve
the MRP if it is implemented during the first year after the Conversion. A
higher price per share, assuming the purchase of the entire 4% of the
shares, would reduce pro forma net earnings and pro forma shareholders'
equity. The MRP may purchase shares in the open market or may purchase
authorized but unissued shares from the Holding Company. If authorized but
unissued shares are purchased, the ownership interests of existing
shareholders would be diluted approximately 3.85%. See "MANAGEMENT - Stock
Benefit Plans -- Management Recognition Plan."
(5) See Note 10 of the Notes to Financial Statements for information regarding
restrictions on retained earnings. See "THE CONVERSION - Principal Effects
of the Conversion -- Liquidation Account" for information concerning the
Liquidation Account to be established in connection with the Conversion and
"TAXATION - Federal Taxation," for information concerning restricted
retained earnings for federal tax purpose.
24
<PAGE>
PRO FORMA DATA
Set forth below are the pro forma consolidated net income of the Holding
Company for the periods indicated, and the pro forma consolidated shareholders'
equity as of dates indicated, along with the related pro forma earnings per
share amounts, giving effect to the sale of the Common Shares. The computations
are based on the assumed issuance of 365,500 Common Shares (minimum of the
Valuation Range), 430,000 Common Shares (mid-point of the Valuation Range),
494,500 Common Shares (maximum of the Valuation Range) and 568,675 Common Shares
(15% above the maximum of the Valuation Range). See "THE CONVERSION -Pricing and
Number of Common Shares to be Sold." The pro forma data is based on the
following assumptions: (i) the sale of the Common Shares occurred at the
beginning of the period and yielded the net proceeds indicated; (ii) such net
proceeds were invested at the beginning of the period to yield annualized after-
tax net returns of 3.65% for the periods indicated; and (iii) no withdrawals
from existing deposit accounts were made to purchase the Common Shares. The
assumed returns are based on the one-year U.S. Treasury bill yield of 5.80% in
effect as of the dates indicated, reduced by combined federal and state income
tax estimated at 37%. This rate was used as an alternative to the arithmetic
average of the Association's interest-earning assets and interest-bearing
deposits. Management believes that because the proceeds of the offering will
initially be invested and will only over time be utilized to increase the
deposit base of the Association, the U.S. Treasury bill yield is indicative of
the rate of return that can be achieved on the investment of the Conversion
proceeds. Actual yields may differ, however, from the assumed returns. The pro
forma consolidated net income amounts derived from the assumptions set forth
herein should not be considered indicative of the actual results of operations
of the Holding Company that would have been attained for any period if the
Conversion had been actually consummated at the beginning of such period.
As the table demonstrates, pro forma consolidated earnings per share and
pro forma consolidated shareholders' equity per share decrease as the amount of
Common Shares sold moves from the minimum of the Valuation Range to the adjusted
maximum of the Valuation Range. Conversely, the offering price as a multiple of
pro forma earnings per share and as a percent of pro forma shareholders' equity
per share increases as the amount of Common Shares sold moves from the minimum
of the Valuation Range to the adjusted maximum of the Valuation Range.
THE PRO FORMA DATA AND ACCOMPANYING NOTES SHOULD BE READ IN CONJUNCTION
WITH THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE HEREIN. THE
PRO FORMA DATA IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT PURPORT
TO REPRESENT WHAT THE HOLDING COMPANY'S FINANCIAL POSITION OR RESULTS OF
OPERATIONS ACTUALLY WOULD HAVE BEEN HAD THE AFOREMENTIONED TRANSACTIONS BEEN
COMPLETED AS OF THE DATE OR AT THE BEGINNING OF THE PERIODS INDICATED, OR TO
PROJECT THE HOLDING COMPANY'S FINANCIAL POSITION OR RESULTS OF OPERATIONS AT ANY
FUTURE DATE OR FOR ANY FUTURE PERIOD. THE STOCKHOLDERS' EQUITY IS NOT INTENDED
TO REPRESENT, THE FAIR MARKET VALUE OF THE COMMON SHARES NOR DOES IT REPRESENT
AMOUNTS THAT WOULD BE AVAILABLE FOR DISTRIBUTION TO SHAREHOLDERS IN THE EVENT OF
LIQUIDATION.
25
<PAGE>
<TABLE>
<CAPTION>
568,675
365,500 430,000 494,500 Common Shares
Common Shares Common Shares Common Shares At $20 per share
At $20 per share At $20 per share At $20 per share (Maximum, as
(Minimum) (Midpoint) (Maximum) adjusted)(7)
---------------------- ---------------------- ---------------------- ----------------------
Nine Nine Nine Nine
Months Year Months Year Months Year Months Year
Ended Ended Ended Ended Ended Ended Ended Ended
6/30/96 9/30/95 6/30/96 9/30/95 6/30/96 9/30/95 6/30/96 9/30/95
--------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross proceeds $ 7,310 7,310 $ 8,600 8,600 $ 9,890 $ 9,890 $11,374 $11,374
Less offering expenses
and Commissions (497) (497) (521) (521) (545) (545) (572) (572)
--------- --------- --------- --------- --------- --------- --------- ---------
Estimated net conversion
proceeds 6,813 6,813 8,079 8,079 9,345 9,345 10,802 10,802
Less common stock acquired
by the ESOP(1) (585) (585) (688) (688) (791) (791) (910) (910)
Less common stock acquired
by the MRP(2) (292) (292) (344) (344) (396) (396) (455) (455)
--------- --------- --------- --------- --------- --------- --------- ---------
Estimated proceeds
available for investment $ 5,936 $ 5,936 $ 7,047 $ 7,047 $ 8,158 $ 8,158 $ 9,437 $ 9,437
========= ========= ========= ========= ========= ========= ========= =========
Net income:
Historical(3) $ 419 $ 622 $ 419 $ 622 $ 419 $ 622 $ 419 $ 622
Pro forma adjustments:
Net income from proceeds 163 217 193 257 224 298 259 345
ESOP (28) (37) (33) (43) (37) (50) (43) (57)
MRP (28) (37) (33) (43) (37) (50) (43) (57)
--------- --------- --------- --------- --------- --------- --------- ---------
Pro forma net income $ 526 $ 765 $ 547 $ 793 $ 568 $ 820 $ 592 $ 852
========= ========= ========= ========= ========= ========= ========= =========
Per share(4)(8):
Historical(3)(6) $1.24 $1.83 $1.05 $1.56 $0.91 $1.36 $0.79 $1.18
Pro forma adjustments:
Net income from proceeds 0.48 0.64 0.48 0.65 0.49 0.65 0.49 0.65
ESOP (0.08) (0.11) (0.08) (0.11) (0.08) (0.11) (0.08) (0.11)
MRP (0.08) (0.11) (0.08) (0.11) (0.08) (0.11) (0.08) (0.11)
--------- --------- --------- --------- --------- --------- --------- ---------
Pro forma $1.55 $2.26 $1.37 $1.99 $1.24 $1.79 $1.12 $1.61
========= ========= ========= ========= ========= ========= ========= =========
Stockholders' equity (book
value)(5):
Historical $ 5,853 $ 5,606 $ 5,853 $ 5,606 $ 5,853 $ 5,606 $ 5,853 $ 5,606
Estimated net
conversion proceeds 6,813 6,813 8,079 8,079 9,345 9,345 10,802 10,802
Less common stock
acquired by:
ESOP (585) (585) (688) (688) (791) (791) (910) (910)
MRP (292) (292) (344) (344) (396) (396) (455) (455)
--------- --------- --------- --------- --------- --------- --------- ---------
Pro forma $ 11,789 $ 11,542 $ 12,900 $ 12,653 $ 14,011 $ 13,764 $ 15,290 $ 15,043
========= ========= ========= ========= ========= ========= ========= =========
Per share:
Historical(6)(8) $16.01 $15.34 $13.61 $13.04 $11.84 $11.34 $10.29 $9.86
Estimated net
conversion proceeds 18.64 18.64 18.79 18.79 18.90 18.90 18.99 18.99
Less common stock
acquired by:
ESOP (1.60) (1.60) (1.60) (1.60) (1.60) (1.60) (1.60) (1.60)
MRP (0.80) (0.80) (0.80) (0.80) (0.80) (0.80) (0.80) (0.80)
--------- --------- --------- --------- --------- --------- --------- ---------
Pro forma $32.25 $31.58 $30.00 $29.43 $28.33 $27.83 $26.89 $26.45
========= ========= ========= ========= ========= ========= ========= =========
Pro forma price to book value 62.01% 63.34% 66.67% 67.97% 70.59% 71.85% 74.39% 75.61%
========= ========= ========= ========= ========= ========= ========= =========
Pro forma price to
earnings (annualized) 9.67x 8.87x 10.94x 10.07x 12.12x 11.19x 13.38x 12.39x
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
NOTE: Totals may not add due to rounding.
26
<PAGE>
(1) Assumes that 8.0% of the Common Shares sold in connection with the
Conversion will be purchased by the ESOP and that the funds used to acquire
such shares will be borrowed by the Association from the Holding Company
with repayment thereof secured solely by the Common Shares purchased by the
ESOP. The Association has agreed, however, to use its best efforts to fund
the ESOP based on future earnings, which will reduce the income on the
equity raised in connection with the Conversion, as reflected in the table.
Assumes level amortization of the ESOP loan over a ten-year period with
interest at the prime rate and assumed tax benefits of 37%. If the ESOP is
unable to purchase all or part of the Common Shares for which it
subscribes, the ESOP may purchase common shares on the open market or may
purchase authorized but unissued shares of the Holding Company. If the ESOP
purchases authorized but unissued shares from the Holding Company, such
purchases would have a dilutive effect of 7.4% on the ownership interests
of the Holding Company's shareholders. See "MANAGEMENT - Stock Benefit
Plans -- Employee Stock Ownership Plan."
(2) Assuming the receipt of shareholder approval at the Holding Company's first
meeting of shareholders, the Association intends to implement the MRP.
Assuming such implementation, the MRP will eventually purchase an amount of
shares equal to 4% of the Common Shares sold in the conversion for issuance
to directors, officers, and employees of the Holding Company and the
Association. Such shares may be purchased from authorized but unissued
shares or on the open market. The Holding Company currently intends that
the MRP will purchase the shares on the open market, and the estimated net
conversion proceeds have been reduced for the purchase of the shares in
determining estimated proceeds available for investment. Shares under the
MRP are assumed to vest at the rate of 20% per year. The Common Shares to
be purchased by the MRP represent unearned compensation and are shown as a
reduction to pro forma shareholders' equity. As Common Shares granted
pursuant to the MRP vest, a corresponding reduction in the charge against
capital will occur. In the event that authorized but unissued shares are
acquired, the interests of existing shareholders will be diluted by
approximately 3.85%. Assuming that 430,000 Common Shares are issued in the
Conversion and that all awards under the MRP are from authorized but
unissued shares, the Holding Company estimates that the per share book
value for the Common Shares would be diluted by $.38 per share, or 1.27%,
at June 30, 1996, and $.37 per share, or 1.26%, at September 30, 1995. The
Holding Company estimates that, at the midpoint, earnings per share would
be diluted by $.03 per share, or 2.19%, for the nine months ended June 30,
1996, and by $.06 per share, or 3.02% for the year ended September 30,
1995. See "MANAGEMENT - Stock Benefit Plans -- Management Recognition
Plan."
(3) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Shares in the Conversion.
(4) Assuming the receipt of shareholder approval at the Holding Company's first
meeting of shareholders, the Holding Company intends to implement the Stock
Option Plan. Assuming such implementation, common shares in an aggregate
amount equal to 10% of the shares issued in the Conversion will be reserved
for issuance by the Holding Company upon the exercise of the stock options
granted under the Stock Option Plan. No effect has been given to the common
shares reserved for issuance under the Stock Option Plan. Upon the exercise
of stock options granted under the Stock Option Plan, the interests of
existing shareholders will be diluted. Assuming the issuance of 430,000
shares in the conversion and the exercise of 43,000 options at an exercise
price of $20.00 per share, the Holding Company estimates that the per share
book value for the Common Shares would be diluted by $.91 per share, or
3.03%, at June 30, 1996, and $.86 per share, or 2.92%, at September 30,
1995. The Holding Company estimates that earnings per share would be
diluted by $.08 per share, or 5.84%, for the nine months ended June 30,
1996, and by $.13 per share, or 6.53%, for the year ended September 30,
1995. See "MANAGEMENT - Stock Benefit Plans -- Stock Option Plan."
(5) The effect of the Liquidation Account is not included in these
computations. For additional information concerning the Liquidation
Account, see "THE CONVERSION - Principal Effects of the Conversion --
Liquidation Account." The amounts shown do not reflect the federal income
tax consequences of the potential restoration of the bad debt reserves to
income for tax purposes, which would be required in the event of
liquidation and is required under recent amendments to the Code. See
"TAXATION - Federal Taxation" and "REGULATION."
(6) Historical per share amounts have been computed as if the Common Shares
expected to be issued in the Conversion had been outstanding during the
period or on the dates shown, but without any adjustment of historical net
income or historical net equity to reflect the investment of the estimated
net proceeds of the sale of Common Shares in the Conversion, the additional
ESOP expense, or the proposed MRP expense as described above.
(7) As adjusted to give effect to an increase in the number of Common Shares
occurring due to an increase in the Valuation Range of up to 15% to reflect
changes in market and financial conditions following the commencement of
the Offering.
27
<PAGE>
(8) Uncommitted ESOP shares are not considered shares outstanding for earnings
per share calculations, in accordance with accounting standards set forth
in Statement of Position 93-6. Uncommitted ESOP shares are considered
shares outstanding for purposes of calculating equity per share. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Impact of New Accounting Standards -- Accounting for ESOP."
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The principal business of the Association consists of accepting deposits
from the general public and investing those funds in loans secured by one- to
four-family residential properties located in the Association's primary market
area. The Association's securities portfolio consists primarily of U.S. Treasury
notes and government agency securities and mutual funds backed by mortgage-
backed securities. See "THE BUSINESS OF THE ASSOCIATION -- Investment
Activities" for a description of these investments.
The Association's earnings are primarily dependent upon its net interest
income, the difference between interest income and interest expense. Interest
income is a function of the balances of loans and investments outstanding during
a given period and the yield earned on such loans and investments. Interest
expense is a function of the amount of deposits outstanding during the same
period and interest rates paid on such deposits. The Association's earnings are
also affected by provisions for loan losses, service charges and other non-
interest income, operating expenses and income taxes.
The Association is significantly affected by prevailing economic
conditions, as well as government policies and regulations concerning, among
other things, monetary and fiscal affairs, housing and financial institutions.
See "REGULATION." Deposit flows are influenced by a number of factors, including
interest rates paid on competing investments, account maturities and level of
personal income and savings within the Association's market. In addition,
deposit growth is affected by how customers perceive the stability of the
financial services industry amid various current events such as regulatory
changes, failures of other financial institutions and financing of the deposit
insurance fund. Lending activities are influenced by the demand for and supply
of housing lenders, the availability and cost of funds and various other items.
Sources of funds for lending activities of the Association include deposits and
income provided from operations.
Asset/Liability Management
Net interest income, the primary component of the Association's net income,
is determined by the difference or "spread" between the yield earned on the
Association's interest-earning assets and the rates paid on its interest-bearing
liabilities and the relative amounts of such assets and liabilities. Key
components of a successful asset/liability strategy are the monitoring and
managing of interest rate sensitivity on both the interest-earning assets and
interest-bearing liabilities. The matching of the Association's assets and
liabilities may be analyzed by examining the extent to which its assets and
liabilities are interest rate sensitive and by monitoring the expected effects
of interest rate changes on an institution's net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the
Association's assets mature or reprice more quickly or to a greater extent than
its liabilities, the Association's net portfolio value and net interest income
would
28
<PAGE>
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. If the Association's assets mature or reprice
more slowly or to a lesser extent than its liabilities, the Association's net
portfolio value and net interest income would tend to decrease during periods of
rising interest rates but increase during periods of falling interest rates.
In recent years, the Association has utilized the following strategies to
manage interest rate risk: (i) emphasizing the origination of one- to four-
family adjustable rate and balloon mortgage loans; (ii) limiting the terms of
certain fixed rate loan originations to 15 years and selling certain longer term
fixed rate one- to four-family residential loans in the secondary market at
origination; (iii) diversifying into other types of lending consisting primarily
of short-term consumer loans (such as indirect auto lending and home equity
lending); (iv) maintaining its investments in short-term (five years or less) or
adjustable rate instruments and limiting the portfolios of certain fixed rate
loans to the amount of the Association's equity and transactions accounts to
achieve non-interest sensitive funding; (v) holding its investments as
available-for sale; (vi) reducing the interest rate sensitivity of its
liabilities by offering attractive rates on longer term certificates of deposit
and implementing programs to attract low cost demand deposits; and (vii)
maintaining a strong capital position, which provides for a favorable level of
interest-earning assets relative to interest-bearing liabilities.
The Association's interest rate sensitivity is monitored by management,
through the use of a model produced by the OTS, on a quarterly basis based upon
data submitted on the Association's quarterly Thrift Financial Reports. The
model generates estimates of the change in net portfolio value ("NPV") over a
range of interest rate scenarios. NPV is the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts. These computations estimate the effect on the Association's NPV of
sudden and sustained 1% to 4% increases and decreases in market interest rates.
The table below presents, as of June 30, 1996, an analysis of the Association's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100 basis point increments in market interest rates. The
first column of the table consists of hypothetical incremental changes in such
interest rates. The second column contains the policy limits set by the Board of
Directors of the Association as the maximum change in NPV that the Board of
Directors deems advisable in the event of various changes in interest rates.
Such limits have been established with consideration of the dollar impact of
various rate changes and the Association's strong capital position. The
remaining columns set forth the effect that a particular change in market
interest rates would have on the Association's NPV.
29
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1996
----------------------------------------
Change in interest Board limit $ change % change
rate (basis points) % change in NPV in NPV
- --------------------- --------------- ---------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C>
+400 -50% $(1,801) (24)%
+300 -40 (1,255) (16)
+200 -20 (744) (10)
+100 -10 (305) (4)
0 0
-100 10 144 2
-200 20 157 2
-300 40 286 4
-400 50 601 8
</TABLE>
These calculations indicate that the Association would not be deemed to
have more than a normal level of interest rate risk under applicable regulatory
capital requirements. See "REGULATION -- Office of Thrift Supervision --
Regulatory Capital Requirements." Changes in interest rates also may affect the
Association's net interest income, with increases in rates expected to decrease
income and decreases in rates expected to increase income, as the Association's
interest-bearing liabilities would be expected to mature or reprice more quickly
than the Association's interest-earning assets. "REGULATION -- Office of Thrift
Supervison - Regulatory Capital Requirements."
While management cannot predict future interest rates or their effects on
the Association's NPV or net interest income, management does not expect current
interest rates to have a material adverse effect on the Association's NPV or net
interest income in the future. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments and deposit run-offs and
should not be relied upon as indicative of actual results. Certain shortcomings
are inherent in such computations. Although certain assets and liabilities may
have similar maturity or periods of repricing they may react at different times
and in different degrees to changes in the market interest rates. The interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while rates on other types of assets and
liabilities may lag behind changes in market interest rates. Certain assets,
such as adjustable rate mortgages, generally have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
In the event of a change in interest rates, prepayments and early withdrawal
levels could deviate significantly from those assumed in making calculations set
forth above. Additionally, an increased credit risk may result as the ability of
many borrowers to service their debt may decrease in the event of an interest
rate increase. Finally, virtually all of the adjustable rate loans in the
Association's portfolio contain conditions which restrict the periodic change in
interest rate.
The Association's Board of Directors is responsible for reviewing the
Association's asset and liability policies. On at least a quarterly basis, the
Board reviews interest rate risk and trends, as well as liquidity and capital
ratios and requirements. The Association's management is responsible for
administering the policies and determinations of the Board of Directors with
respect to the Association's asset and liability goals and strategies.
Management expects that the Association's asset and liability policies and
strategies will continue as described above so long as competitive and
regulatory conditions in the financial institution industry and market interest
rates continue as they have in recent years.
30
<PAGE>
Average Balances, Interest and Average Yields and Rates
The following tables set forth certain information relating to the
Association's average interest-earning assets and interest-bearing liabilities
and reflects the average yield of interest-earning assets and the average cost
of interest-bearing liabilities for the periods and at the dates indicated.
Average balances are derived from month-end balances. Management does not
believe that the use of month-end balances instead of daily balances has caused
any material difference in the information presented. Securities include the
aggregate of securities available for sale, held to maturity and trading, as
applicable. The average balance and average yield on securities is based on the
amortized cost of the securities. The average balance of loans includes
delinquent loans, which are not considered significant.
The tables also present information for the periods indicated and at the
dates indicated, with respect to the difference between the weighted average
yield earned on interest-earning assets and the weighted average rate paid on
interest-bearing liabilities, or "interest rate spread," which savings
institutions have traditionally used as an indicator of profitability. Another
indicator of an institution's net interest income is its "net interest margin,"
which is its net interest income divided by the average balance of interest-
earning assets. Net interest income is affected by the interest rate spread and
by the relative amounts of interest- earning assets and interest-bearing
liabilities. Whenever interest-earning assets equal or exceed interest-bearing
liabilities, any positive interest rate spread will generate net interest
income.
31
<PAGE>
<TABLE>
<CAPTION>
At June 30,
-------------------------------
1996
-------------------------------
(Dollars in thousands)
Balance Yield/rate
<S> <C> <C>
Interest-earning assets:
Interest-bearing deposits in other financial institutions $ 4,464 5.20%
Investment Securities and FHLB stock 9,399 5.65
Mortgage-backed securities 8,963 6.10
Loans receivable 39,869 8.60
------------ ------------
Total interest-earning assets 62,695 7.56
Non-interest-earning assets 1,686
------------ ------------
Total assets $64,381
============
Interest-bearing liabilities:
NOW accounts 11,670 2.40
Money market accounts 1,300 3.15
Passbook savings accounts 8,374 2.84
Certificates of deposit 36,934 5.60
------------ ------------
Total deposits 58,278 4.51
FHLB advances -- --
------------ ------------
Total interest-bearing liabilities 58,278 4.51
Non-interest-bearing liabilities 250 --
------------ ------------
Total liabilities 58,528
Equity 5,853
------------
Total liabilities and retained earnings $64,381
============
Net interest income
Interest rate spread 3.05%
============
Net interest margin (net interest income as a
percentage of average interest-earning assets)
Average interest-earning assets to average
interest-bearing liabilities
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended June 30,
----------------------------------------------
1996
----------------------------------------------
Average
outstanding Interest Average
balance earned/paid yield/rate
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in other financial institutions $ 4,879 $ 174 4.76%
Investment Securities and FHLB stock 10,446 440 5.62
Mortgage-backed securities 7,528 342 6.06
Loans receivable 38,946 2,510 8.59
------------- ---------- ---------
Total interest-earning assets 61,799 3,466 7.48
------------- ---------- ---------
Non-interest-earning assets 1,547
-------------
Total assets $63,346
=============
Interest-bearing liabilities:
NOW accounts 11,107 200 2.40
Money market accounts 1,411 22 2.08
Passbook savings accounts 6,840 143 2.79
Certificates of deposit 37,372 1,571 5.60
------------- ---------- ---------
Total deposits 56,730 1,936 4.55
FHLB advances -- -- --
------------- ---------- ---------
Total interest-bearing liabilities 56,730 1,936 4.55
Non-interest-bearing liabilities 828 -- --
-------------
Total liabilities 57,558
Equity 5,788
-------------
Total liabilities and retained earnings $63,346
=============
Net interest income $1,530
==========
Interest rate spread 2.93%
=========
Net interest margin (net interest income as a
percentage of average interest-earning assets) 3.30%
=========
Average interest-earning assets to average
interest-bearing liabilities 108.94%
=========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended June 30,
----------------------------------------------
1995
----------------------------------------------
Average
outstanding Interest Average
balance earned/paid yield/rate
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in other financial institutions $ 2,335 $ 63 3.60%
Investment Securities and FHLB stock 13,578 571 5.61
Mortgage-backed securities 5,394 234 5.78
Loans receivable 39,760 2,376 7.97
------------- ---------- ---------
Total interest-earning assets 61,067 3,244 7.08
------------- ---------- ---------
Non-interest-earning assets 1,979
-------------
Total assets $63,046
=============
Interest-bearing liabilities:
NOW accounts 12,331 208 2.25
Money market accounts 1,267 28 2.95
Passbook savings accounts 7,637 166 2.90
Certificates of deposit 35,836 1,267 4.71
------------- ---------- ---------
Total deposits 57,071 1,669 3.90
FHLB advances -- -- --
------------- ---------- ---------
Total interest-bearing liabilities 57,071 1,669 3.90
Non-interest-bearing liabilities 779
------------- ---------- ---------
Total liabilities 57,850
Equity 5,196
-------------
Total liabilities and retained earnings $63,046
=============
Net interest income $ 1,575
==========
Interest rate spread 3.18%
=========
Net interest margin (net interest income as a
percentage of average interest-earning assets) 3.44%
=========
Average interest-earning assets to average
interest-bearing liabilities 107.00%
=========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------------------------------------------------------------------------
1995 1994
----------------------------------------------- ---------------------------------------------------
Average Average
outstanding Interest Average outstanding Interest Average
balance earned/paid yield/rate balance earned/paid yield/rate
----------- ----------- ---------- ----------- ----------- ----------
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits in
other financial institutions $ 3,140 $ 131 4.17% $ 3,646 $ 99 2.72%
Investment securities and FHLB
stock 12,994 740 5.69 11,245 533 4.74
Mortgage-backed securities 5,329 305 5.72 5,612 311 5.54
Loans receivable 39,318 3,223 8.20 40,876 3,044 7.45
----------- ----------- --------- ---------- ---------- ---------
Total interest-earning assets 60,781 4,399 7.24 61,379 3,987 6.50
----------- ----------- --------- ---------- ---------- ---------
Non-interest-earning assets 2,175 2,409
----------- ----------
Total assets $62,956 $63,788
=========== ==========
Interest-bearing
liabilities:
NOW accounts 12,872 287 2.23 13,400 316 2.36
Money market accounts 1,324 38 2.87 1,535 37 2.41
Passbook savings accounts 7,979 229 2.87 8,413 229 2.72
Certificates of deposit 34,703 1,746 5.03 34,992 1,401 4.00
------------ ----------- --------- ----------- ---------- ----------
Total deposits 56,878 2,300 4.04 58,340 1,983 3.40
FHLB advances -- -- -- -- -- --
------------ ----------- --------- ----------- ---------- ----------
Total interest-bearing
liabilities 56,878 2,300 4.04 58,340 1,983 3.40
Non-interest-bearing
liabilities 786 641
------------ ----------
Total liabilities 57,664 58,981
Equity 5,292 4,807
------------- -----------
Total liabilities and retained
earnings $62,956 $63,788
-------------- -----------
Net interest income $2,099 $2,004
----------- -----------
Interest rate spread 3.20% 3.10%
--------- ----------
Net interest margin (net interest 3.45% 3.26%
income as a percentage of --------- ----------
average interest-earning
assets)
Average interest-earning
assets to average 106.86% 105.21%
interest-bearing liabilities --------- ----------
</TABLE>
33
<PAGE>
Rate/Volume-Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Association for the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to: (i) changes in
volume (changes in volume multiplied by prior period rate) and (ii) changes in
rates (change in rate multiplied by prior period volume). Changes in rate-volume
(changes in rate multiplied by changes in volume) are allocated proportionately
between changes in volume and changes in rates.
<TABLE>
<CAPTION>
Nine Months Ended June 30, Year Ended September 30,
1996 v. 1995 1995 v. 1994
Increase (Decrease) due to Increase (Decrease) due to
--------------------------------- ---------------------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits in other $ 77 $ 34 $ 111 $ (11) $ 43 $ 32
financial institutions
Investment securities (112) (19) (131) 90 117 207
Mortgage-backed securities 96 12 108 (18) 12 (6)
Loans receivable (47) 181 134 (106) 285 179
--------- --------- --------- --------- --------- ---------
Total interest income 14 208 222 (45) 457 412
--------- --------- --------- --------- --------- ---------
Interest expense attributable to:
NOW accounts (24) 16 (8) (12) (17) (29)
Money market accounts 3 (9) (6) (3) 4 1
Passbook savings accounts (17) (6) (23) 0 0 0
Certificates of deposit 58 247 304 (12) 357 345
--------- --------- --------- --------- --------- ---------
Total deposits 20 248 267 (27) 344 317
--------- --------- --------- --------- --------- ---------
FHLB advances -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total interest expense $ 19 $ 248 $ 267 $ (27) $ 344 $ 317
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net interest
income $ (45) $ 95
========= =========
</TABLE>
Comparison of Financial Condition at June 30, 1996 and September 30, 1995
Total assets remained relatively stable from September 30, 1995 to June 30,
1996, increasing only $2.4 million, or 3.8%, from $62.0 million at September 30,
1995 to $64.4 million at June 30, 1996. This increase was funded primarily by
deposits which increased $2.3 million, or 4.1%, from $56.0 million at September
30, 1995 to $58.3 million at June 30, 1996. Small increases or decreases in
deposits are not unusual and are expected in the ordinary course of business.
Loans receivable increased $1.3 million, or 3.4%, from $38.6 million at
September 30, 1995 to $39.9 million June 30, 1996. Such growth occurred
primarily in the Association's one to four family residential portfolio, which
increased $575,000 in response to moderating interest rates.
The remaining balance sheet growth for the nine month period ended June 30,
1996 occurred in the mortgage-backed securities portfolio of the Association
which increased $3.5 million, or 64.4%, over that period. This growth was, in
part, reflective of the reinvestment of $3.9 million in proceeds from maturing
investment securities during the period.
34
<PAGE>
Comparison of Financial Condition at September 30, 1995 and September 30, 1994
Total assets decreased approximately $1.5 million, or 2.4%, from $63.5
million at September 30, 1994 to $62.0 million at September 30, 1995. The
balance sheet contraction was primarily due to reduction of deposit levels in
response to lower loan demand which resulted from higher market interest rates.
This was reflected in decreased deposits of $2.2 million, or 3.8%, from $58.2
million at September 30, 1994 to $56 million at September 30, 1995. Small
increases or decreases in deposits are not unusual and are expected in the
ordinary course of business.
The balance of loans receivable fell $1.4 million, or 3.5%, from $40
million at September 30, 1994 to $38.6 million September 30, 1995. The largest
decline was in the one to four family residential loan portfolio which decreased
$900,000 during fiscal year 1995.
During fiscal year 1995, the Association elected to remain liquid in
response to the changed rate environment by raising its interest bearing
deposits in banks from the $2.3 million level at September 30, 1994 to $5.6
million at September 30, 1995.
Also during fiscal year 1995, $6.5 million in maturities of investment
securities reduced the Association's portfolio holdings, offset by $3.5 million
in reinvestments, to $10.8 million. Also during the year the Association
segmented this portfolio in connection with the adoption of SFAS No. 115,
designating $2.6 million of this portfolio as available-for-sale. Likewise, $2.2
million of the Association's mortgage-backed security portfolio was designated
as available-for-sale. However, the Association's total mortgage-backed holdings
remained relatively stable at September 30, 1995 at $5.4 million, down only 3.9%
from the September 30, 1994 level.
Accrued interest payable on deposits increased $65,000 from September 30,
1994 to September 30, 1995 due to an increase in certificates of deposit of $1.1
million, and the weighted average rate on those certificates of deposits
increased from 4.24% at September 30, 1994 to 5.62% at September 30, 1995. The
increase in rates was in response to competitors raising rates on certificates
of deposit.
Comparison of Results of Operation for the Nine Months Ended June 30, 1996 and
June 30, 1995
The Association reported net income for the nine months ended June 30, 1996
and 1995 of $419,000 and $463,000, respectively. The decline of $44,000 during
such nine month periods was due primarily to a $46,000 decrease in net interest
income.
Interest Income. Total interest income increased $222,000 from $3,244,000
for the nine months ended June 30, 1995 to $3,466,000 for the nine months ended
June 30, 1996. This increase was almost totally in response to higher portfolio
yields provided by the Association's loans receivable portfolio, resulting from
new loan originations at higher rates. Higher volumes of mortgage-backed
securities and interest-bearing deposits in other financial institutions also
contributed to the increase of total interest income.
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Interest Expense. Interest expense of the Association consisted totally of
interest paid on customers' deposits, as the Association had no borrowed funds
during the nine months ended June 30, 1996 and 1995 respectively. Interest
expense increased $267,000 from $1,669,000 for the nine months ended June 30,
1995 to $1,936,000 for the nine months ended June 31, 1996. This was due
primarily to higher market interest rates paid on the Association's time
deposits in response to competition.
Net Interest Income. Net interest income was $1,530,000 and $1,575,000 for
the nine months ended June 30, 1996 and 1995, respectively. The $45,000 decline
resulted from deposit funding costs increasing in excess of the Association's
portfolio yields.
Provision for Loan Losses. Provisions for loan losses are based on
management's analysis of the various factors which affect the loan portfolio and
management's desire to maintain the allowance for loan losses at a level
considered adequate to provide for losses. Management determined that no
provisions were necessary for the nine months ended June 30, 1996 and 1995 due
to the Association having experienced a low level of charge-offs during the
periods, the loan portfolio consisting substantially of one-to-four family
residential mortgages and loans secured by other real estate retaining the same
risk characteristics and remaining fairly stable in dollar amount and the
prevailing economic conditions in the Association's market area generally. At
June 30, 1996 the allowance for loan losses provided coverage of 314% of non-
accrual loans and accruing loans 90 days past due. The Association maintains its
allowance for loan losses based on management's quarterly review and
classification of the loan portfolio and analyses of borrower's ability to pay,
historical charge-off experience, risk characteristics of individual loans or
groups of similar loans and underlying collateral, current and prospective
economic conditions, status of non-performing loans and regulatory reviews. In
establishing the allowance for loan losses, management recognizes that a
substantial portion of the Association's loans, including non-accrual loans and
accruing loans 90 days past due, are secured by mortgages on residential real
estate and loans secured by other real estate.
The Association has been able to maintain high quality asset performance
because of its conservative underwriting standards. Non-performing assets as a
percentage of total assets was .35% at June 30, 1996. See "THE BUSINESS OF THE
ASSOCIATION -- Allowance for Loan Losses" for additional information regarding
the Association's allowance for loan losses and nonperforming assets. Ultimate
losses may vary from management's estimates; however, estimates are reviewed
periodically and, as adjustments become necessary, losses are reported in
earnings in the periods in which they become known. In addition, various
regulatory agencies periodically review the Association's allowance for loan
losses and may require the Association to recognize additions to the allowance
based on judgments about information available to them at the time of their
review.
Non-interest Income. Non-interest income for the nine months ended June 30,
1996 and 1995 was $183,000 and $220,000, respectively. The $37,000 decline in
the overall level of non-interest income was due primarily to an $84,000 decline
in net income from real estate operations from the $85,000 level experienced
through the nine months ended June 30, 1995. The 1995 interim results were due
to the gain on sale of foreclosed real estate which had a $215,000 valuation
allowance. This decline was offset, however, by a $48,000 improvement in service
charges on deposit accounts. This increase was a result of the Association's
increasing the pricing of its deposit products subsequent to an analysis by the
Association of local market conditions.
Non-interest Expense. Non-interest expense for the nine months ended June
30, 1996 and 1995 totaled $1,070,000 and $1,125,000, respectively. The $55,000
reduction in non-interest expense
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<PAGE>
was primarily representative of salary and other operating cost savings which
resulted from the closure of the Association's East branch in December, 1994.
The East branch was closed because the branch was not needed and not cost-
effective due to its geographic proximity to the Association's other
offices.
The Association's operating efficiency ratio (non-interest expense divided
by the total of net interest income and non-interest income) for the nine months
ended June 30, 1996 and 1995 was 62.5% and 62.6%.
Income Taxes. The Association's effective tax rates for the nine months
ended June 30, 1996 and 1995 were 34.8% and 31.0%, respectively. See Note 9 to
the Association's Financial Statements for further analysis of income tax
levels.
Comparison of Results of Operation for the Fiscal Years Ended September 30, 1995
and September 30, 1994
The Association reported net income of $622,000 for the year ended
September 30, 1995 compared to net income of $279,000 for the year ended
September 30, 1994. This $343,000 improvement was primarily attributable to
significantly increased levels of non-interest income, including a reduction in
the level of loss from real estate operations, as well as reduced non-interest
expense.
Interest Income. Interest income totaled $4,399,000 and $3,987,000 for the
years ended September 30, 1995 and 1994, respectively. The $412,000, or 10.3%,
increase in interest income was due largely to the impact of increased market
rates which raised portfolio yields on loans and investment securities. The
increase in loan rates offset a volume decline as the average balance of loans
fell from $40.9 million to $39.3 million.
Interest Expense. For the two-year period ended September 30, 1995, the
Association's interest-bearing liabilities consisted totally of customers'
deposits, as the Association had no borrowed funds during that period. Interest
expense increased $317,000, or 16%, from $1,983,000 for the year ended September
30, 1994 to $2,300,000 for the year ended September 30, 1995. The increase was
due almost entirely to higher interest rates paid on the Association's
certificates of deposits in response to competition, which dramatically offset a
slight decrease in volume. Interest rates paid were increased in response to
market conditions and rate increases by the Association's competitors in its
local market area, which factors generally determine the rates paid by the
Association on customers' deposits.
Net Interest Income. Net interest income was $2,099,000 and $2,004,000 for
the years ended September 30, 1995 and 1994. The $95,000 improvement in 1995 was
representative of the Association's favorable loan portfolio yields which
exceeded higher costs of certificates of deposits.
Provision for Loan Losses. The Association's provision for loan losses was
zero in 1995 and $35,000 in 1994. The Association's provisions have been minimal
due to the Association's low level of charge-offs and high asset quality for
each of the two years. See "THE BUSINESS OF THE ASSOCIATION -- Allowance for
Loan Losses," for additional information regarding the Association's allowance
for loan losses and non-performing assets.
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<PAGE>
Non-interest Income. Non-interest income for the years ended September 30,
1995 and 1994 was $329,000 and $17,000, respectively. Non-interest income
consists primarily of customer service fees related to customers' deposit
accounts and loan accounts, income or loss from real estate operations and gains
on the sale of premises and equipment. The $312,000 increase in non-interest
income was in large part due to income from real estate operations for 1995 of
$51,000, from the gain on sale of foreclosed real estate, as compared to 1994's
loss from real estate operations of $122,000, primarily from the write-down of
foreclosed real estate . The Association recognized a $74,000 gain on sale of
premises and equipment for the year ended September 30, 1995 related to the
closure of the Association's East branch and subsequent sale of the building.
Also contributing to the increase in non-interest income was a $60,000, or
43.5%, improvement in service charge income from deposit accounts. This resulted
from a repricing of the Association's deposits consistent with rates in the
Association's market area, and increased collection of service charges.
Non-interest expense. Non-interest expense for the years ended September
30, 1995 and 1994 was $1,496,000 and $1,610,000, respectively. Compensation and
benefits expense represents the largest component of the Association's non-
interest expense. The $114,000, or 7.1%, reduction in non-interest expense was
primarily representative of salary and other operating cost savings which
resulted from the closure of the Association's East Branch in December, 1994.
The Association's operating efficiency improved with a ratio (non-interest
expense divided by the total of net interest income and non-interest income) of
61.6% and 79.7% for the years ended September 30, 1995 and 1994, respectively.
The ratio of non-interest expense to average total assets ratio was 2.38% and
2.56% for the years ended September 30, 1995 and 1994.
Income Taxes. The Association's effective tax rate remained relatively
stable for each of the two years ended September 30, 1995. A reconciliation of
the difference between provision for income taxes calculated by applying the 34%
statutory federal tax rate is provided in Note 9 of the Consolidated Financial
Statements presented elsewhere herein.
Capital Resources
The Association has historically maintained substantial levels of capital.
The assessment of capital adequacy is dependent on several factors including
asset quality, earnings trends, liquidity, and economic conditions. Maintenance
of adequate capital levels is integral to provide stability to the Association.
The Association seeks to maintain high levels of regulatory capital to give it
maximum flexibility in the changing regulatory environment and to respond to
changes in the market and economic conditions. These levels of capital have been
achieved through consistent earnings enhanced by low levels of non-interest
expense and have been maintained at those high levels as a result of its policy
of moderate growth generally confined to its market area. Average equity to
average total assets at June 30, 1996 and September 30, 1995 and 1994 was 9.14%,
8.41% and 7.54%, respectively. At June 30, 1996 and September 30, 1995, the
Association exceeded all current regulatory capital requirements and met the
definition of a "well-capitalized" institution, the highest of five regulatory
categories. For additional information on the Association's compliance with its
regulatory capital requirements and a reconciliation between the Association's
capital under generally accepted accounting principles and regulatory capital,
see "REGULATORY CAPITAL COMPLIANCE."
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The following table summarizes the Association's regulatory capital and
actual capital at September 30, 1995:
<TABLE>
<CAPTION>
Excess of actual
capital over current Applicable
Actual capital Current requirement requirement asset total
---------------------- ----------------------- -------------------------- ------------
Amount Percent Amount Percent Amount Percent
------- ---------- -------- ---------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $5,651 9.11% $ 931 1.50% $4,720 7.61% $62,026
Core capital 5,651 9.11 1,861 3.00 3,790 6.11 62,026
Risked-based capital 6,061 18.53 2,616 8.00 3,444 10.53 32,706
</TABLE>
The Association will, as a result of the Conversion, have substantially
increased capital. Although it is expected that the Association could therefore
pay substantial dividends permitted by the OTS regulations, there can be no
assurance the Holding Company's resources of funds will be sufficient to satisfy
the liquidity needs of the Holding Company in the future. See "SELECTED
FINANCIAL INFORMATION AND OTHER DATA," "CAPITALIZATION," "PRO FORMA DATA,"
"REGULATORY CAPITAL COMPLIANCE" and "REGULATION -- Office of Thrift
Supervision--Regulatory Capital Requirements."
Liquidity
Following completion of the Conversion, the Holding Company initially will
have no business other than that of the Association. Management expects that the
net proceeds of the Conversion to be retained by the Holding Company, together
with dividends that may be paid from the Association to the Holding Company
following the Conversion, will provide sufficient funds for its initial
operations. The Holding Company's primary sources of liquidity in the future
will be dividends paid by the Association and repayment of the ESOP loan. The
Association will be subject to certain regulatory limitations with respect to
the payment of dividends to the Holding Company. See "DIVIDENDS" and
"REGULATION --Office of Thrift Supervision -- Limitations on Capital
Distributions."
The Association is required to maintain minimum levels of liquid assets as
defined by the OTS regulations. This requirement which may be varied at the
discretion of the OTS depending on economic conditions and deposit outflows, is
based upon a percentage of deposits and short-term borrowings. Current OTS
regulations require that a savings association maintain liquid assets of not
less than 5% of its average daily balance of net withdrawal deposit accounts and
borrowings payable in one year or less, of which short-term liquid assets must
consist of not less than 1%. At June 30, 1996, the Association's liquidity, as
measured for regulatory purposes, was 33.3% or $16 million in excess of the
minimum OTS liquidity requirement of 5% and 17.2% or $4 million in excess of the
OTS short term liquidity requirement of 1%. Management of the Association seeks
to maintain a relatively high level of liquidity in order to retain flexibility
in terms of investment opportunities and deposit pricing and in order to meet
funding needs of deposit outflows and loan commitments. Historically, the
Association has been able to meet its liquidity demands through internal sources
of funding.
The Association's most liquid assets are cash and cash equivalents, which
are short-term highly liquid investments with original maturities of less than
three months that are readily convertible to known amounts of cash, and
interest-bearing deposits in other banks. The levels of these assets are
dependent on the Association's operating, financing and investing activities
during any given period.
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<PAGE>
At June 30, 1996 and September 30, 1995 and 1994, cash and cash equivalents
totaled $4.8 million, $6.1 million and $3.0 million, respectively.
The Association's primary source of funds is deposits, proceeds from
principal and interest payments on loans and mortgage-backed securities,
interest payments and maturities of investment securities, and earnings. While
scheduled principal repayments on loans and mortgage-backed securities and
interest payments on investment securities are a relatively predictable source
of funds, deposit flows and loan and mortgage-backed prepayments are greatly
influenced by general interest rates, economic conditions, competition and other
factors. The Association does not solicit deposits outside of its market area
through brokers or other financial institutions.
The Association has also designated certain securities as available for
sale in order to meet liquidity demands. At June 30, 1996, the Association had
designated securities with a fair value of $10,361,000 as available for sale. In
addition to internal sources of funding, the Association as a member of the FHLB
has substantial borrowing authority with the FHLB. The Association's use of a
particular source of funds is based on need, comparative total costs and
availability.
Another source of liquidity is the anticipated net proceeds of the
Conversion. Following the completion of the Conversion, the Association will
receive at least half of the net proceeds of the Conversion. These funds are
expected to be used by the Association for its business activities, including
investment in interest-earning assets. See "USE OF PROCEEDS."
For additional information about cash flows from the Association's
operating, investing and financing activities see the consolidated financial
statements presented elsewhere herein.
At June 30, 1996, the Association had no outstanding commitments to
originate loans. At the same date, the total amount of certificates of deposits
which are scheduled to mature in one year or less was $26.1 million. Management
anticipates that the Association will have adequate resources to meet its
current commitments through internal funding sources described above.
Historically, the Association has been able to retain a significant amount of
its deposits as they mature.
Management is not aware of any current recommendations by its regulatory
authorities, legislation, competition, trends in interest rate sensitivity, new
accounting guidance or other material events and uncertainties that would have a
material effect on the Association's ability to meet its liquidity demands.
Impact of Inflation and Changing Prices
The consolidated financial statements and accompanying notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation.
Virtually all of the Association's assets and liabilities are monetary in
nature. As a result, changes in interest rates have a greater impact on the
Association's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services. For additional information, see "RISK
FACTORS -- Interest Rate Risk."
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<PAGE>
Impact of New Accounting Standards
The following are recently issued accounting standards which the
Association has yet to adopt. For a discussion of recent accounting standards
which the Association has adopted, see the notes to the consolidated financial
statements, presented elsewhere herein, for the impact of the adoption on the
Association's financial position and results of operations.
Disclosures of Fair Value of Financial Instruments. In December 1991, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value of
Financial Instruments." SFAS No. 107 requires all entities to disclose the fair
value of financial instruments (both assets and liabilities recognized and not
recognized in the statements of financial condition) for which it is practicable
to estimate the fair value, except those financial instruments specifically
excluded by this statement. The disclosure shall be either in the body of the
financial statements or in the accompanying notes and shall include the methods
and assumptions used to estimate the fair value of a financial instrument or a
class of financial instruments as well as why it is not practicable to estimate
the fair value. SFAS No. 107 is effective for entities with assets of less than
$150 million for fiscal years ending after December 15, 1995.
In October 1994, the FASB issued SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." SFAS No. 119
requires expanded disclosures regarding derivative financial instruments and is
effective for financial statements issued for fiscal years ending after December
15, 1995 for entities with less than $150 million in total assets.
The Association currently intends to adopt the disclosure requirements of
SFAS No. 107 and 119 for the fiscal year ending September 30, 1996, which would
result in the disclosure of the fair value of financial instruments in a
footnote.
Accounting for Impairment of Long-Lived Assets. In March 1995, the FASB
issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. The
statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the review for
recoverability, based on undiscounted expected future cash flows, indicates that
impairment exists, the loss should be measured based on the fair value of the
asset. The fair value of an asset is the amount at which the asset could be
bought or sold in a current transaction between willing parties, that is, other
than in a forced liquidation sale. An entity that recognizes an impairment loss
shall disclose additional information in the financial statements related to the
impaired asset. All long-lived assets and certain identifiable intangibles to be
disposed of and for which management has committed to a plan to dispose of the
assets, whether by sale or abandonment, shall be reported at the lower of the
carrying amount or fair value less cost to sell. Subsequent revisions in
estimates of fair value less cost to sell shall be reported as adjustments to
the carrying amount of assets to be disposed of, provided that the carrying
amount of the asset does not exceed the carrying amount of the asset before an
adjustment was made to reflect the decision to dispose of the asset. This
statement requires additional disclosure in the footnotes regarding assets to be
disposed of.
The Association will adopt the provisions of the standard on October 1,
1996. Management does not believe that the adoption of SFAS No. 121 will have a
significant impact on the Association's
41
<PAGE>
financial position or on the results of its operations as long-lived assets are
not significant, and management has no plans to dispose of any long-lived
assets.
Accounting for Mortgage Service Rights. In May 1995, the FASB issued SFAS
No. 122 "Accounting for Mortgage Servicing Rights," an amendment to SFAS No. 65
"Accounting for Certain Mortgage Banking Activities." Prior to the issuance of
SFAS No. 122, SFAS No. 65 required separate capitalization of the cost of rights
to service mortgage loans for others when those rights were acquired through a
purchase transaction but prohibited separate capitalization when those rights
were acquired through loan origination activities. As a result, mortgage banking
enterprises often reported losses on the sale of mortgage loans with servicing
rights retained that were acquired through loan origination activities. However,
if the same mortgage loan had been acquired in a purchase transaction, the cost
of the mortgage servicing rights would have been capitalized separately as an
asset and would not have been deducted from the sales price of the mortgage
loans.
This statement amends certain provisions of SFAS No. 65 to eliminate the
accounting distinction between rights to service mortgage loans for others that
are acquired through loan-origination activities and those acquired through
purchase transactions. When a mortgage banking enterprise purchases or
originates mortgage loans, the cost of acquiring those loans includes the cost
of the related mortgage servicing rights. If the mortgage banking enterprise
sells or securitizes the loans and retains the mortgage service rights, the
enterprise should allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans without the mortgage servicing rights based on
their relative fair values if it is practicable to estimate those fair values.
If it is not practicable to estimate the fair values of the mortgage servicing
rights and the mortgage loans without the mortgage servicing right, the entire
cost of acquiring the loans should be allocated to the mortgage loans without
the mortgage servicing rights and no cost should be allocated to the mortgage
servicing rights. Any cost allocated to mortgage servicing rights should be
recognized as a separate asset. Mortgage servicing rights should be amortized in
proportion to and over the period of estimated net servicing income. Mortgage
servicing rights capitalized should be assessed for impairment based on the fair
value of those rights. A mortgage banking enterprise should stratify its
mortgage servicing rights that are capitalized based on one or more of the
predominant risk characteristics of the underlying loans. Impairment should be
recognized through a valuation allowance for each impaired stratum.
This statement applies prospectively in fiscal years beginning after
December 15, 1995, to transactions in which mortgage banking enterprise sells or
securitizes mortgage loans with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing rights, including
those purchased before adoption of this statement.
The Association will adopt the provisions of the Standard on October 1,
1996. Based on the Association's current operating activities, management does
not believe that the adoption of this statement will have a material impact on
the Association's financial condition or results of operations. However, with
the Conversion the Association may increase its mortgage banking activities, and
the statement may have more of an impact on the Association's financial
condition or results of operations.
Accounting for ESOPs. The Accounting Standards Division of the American
Institute of Certified Public Accountants ("AICPA") approved Statement of
Position ("SOP") 93-6, "Employers' Accounting for Employee Stock Ownership
Plans," which is effective for fiscal years beginning after December 15, 1993,
and which applies to shares of capital stock of sponsoring employers acquired by
ESOPs after December 31, 1992, that have not been committed to be released as of
the beginning of
42
<PAGE>
the year in which the ESOP is adopted. This statement will, among other things,
change the measure of compensation recorded by employers from the cost of ESOP
shares.
In connection with the Conversion, the Association has adopted an ESOP.
Since the fair value of the shares following the Offering cannot be reasonably
predicted, the Association cannot reasonably estimate the impact of SOP 93-6 on
its consolidated financial statements.
Disclosure of Certain Risks. In December 1994, the Accounting Standards
Division of the AICPA approved SOP 94-6, "Disclosure of Certain Significant
Risks and Uncertainties." SOP 94-6 requires disclosures in the financial
statements beyond those now being required or generally made in the financial
statements about the risk and uncertainties existing as of the date of those
financial statements in the following areas: nature of operations, use of
estimates in the preparation of financial statements, certain significant
estimates, current vulnerability due to certain concentrations. This statement
is effective for financial statements issued for fiscal years ending after
December 15, 1995.
Accounting for Stock Based Compensation. In October 1995, the FASB issued
SFAS No. 123, "Accounting for Stock-Based Compensation," establishing financial
accounting and reporting standards for stock-based employee compensation plans.
This statement encourages all entities to adopt a new method of accounting to
measure compensation cost of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. Companies are,
however, allowed to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting, which generally does not result
in compensation expense recognition for most plans. Companies that elect to
remain with the existing accounting are required to disclose in a footnote to
the financial statements pro forma net income and, if presented, earnings per
share, as if this Statement had been adopted. The accounting requirements of
this Statement are effective for transactions entered into in fiscal years that
begin after December 15, 1995; however, companies are required to disclose
information for awards granted in their first fiscal year beginning after
December 15, 1994.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996, the FASB issued SFAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished.
This statement is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive application is not
permitted.
The Association will adopt the provisions of the Standard on January 1,
1997. Based on the Association's current operating activities, management does
not believe that the adoption of this statement will have a material impact on
the Association's financial condition or results of operations.
43
<PAGE>
THE BUSINESS OF THE HOLDING COMPANY
General
The Holding Company was organized at the direction of the Board of
Directors of the Association for the purpose of becoming a holding company to
own all of the outstanding capital stock of the Association. Upon consummation
of the Conversion, the Association will become a wholly-owned subsidiary of the
Holding Company.
Business
The Holding Company currently is not an operating company. Following the
Conversion, the Holding Company will be primarily engaged in the business of
managing its investments and directing, planning and coordinating the business
activities of the Association. In the future, the Holding Company may become an
operating company or acquire or organize other operating subsidiaries, including
other financial institutions. Presently, there are no agreements or
understandings for an expansion of the Holding Company's operations.
Initially, the Holding Company will not maintain offices separate from
those of the Association or employ any persons other than its officers who will
not be separately compensated for such service.
THE BUSINESS OF THE ASSOCIATION
General
The Association is a mutual savings and loan association which was
organized in 1905. Subject to supervision and regulation by the OTS and the
FDIC, the Association is a member of the FHLB of Atlanta and the deposits of the
Association are insured up to applicable limits by the FDIC in the SAIF. See
"REGULATION."
The Association is principally engaged in the business of originating
mortgage loans secured by first mortgages on one- to four-family residential
real estate located in Cullman County, Alabama, the Association's primary market
area. The Association also originates loans for the construction of residential
real estate and construction and permanent mortgage loans secured by multifamily
real estate (over four units) and nonresidential real estate in its primary
market area. In addition to real estate lending, the Association originates a
limited number of commercial loans and secured and unsecured consumer loans. See
"Lending Activities." For liquidity and interest rate risk management purposes,
the Association invests in interest-bearing deposits in other financial
institutions, U.S. Government and agency obligations, mortgage-backed securities
and other investments permitted by applicable law. See "Investment Activities."
Funds for lending and other investment activities are obtained primarily from
savings deposits, which are insured up to applicable limits by the FDIC, and
loan principal repayments. See "Deposits and Borrowings."
Historically, the Association has operated as a traditional savings and
loan association, emphasizing the origination of loans secured by single-family
residences. The Association has recently focused on increasing consumer and
commercial lending and has added a loan officer experienced in the commercial
lending area. The Association has also taken steps to increase its non-interest
income by repricing certain of its deposit products and service charges. See
"MANAGEMENT'S
44
<PAGE>
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Interest on loans and investments is the Association's primary source
of income. The Association's principal expense is interest paid on deposit
accounts. Operating results are dependent to a significant degree on the net
interest income of the Association, which is the difference between interest
income earned on loans, mortgage-backed securities and other investments and
interest paid on deposits and borrowings. Like most thrift institutions, the
Association's interest income and interest expense are significantly affected by
general economic conditions and by the policies of various regulatory
authorities. See "RISK FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Market Area
The Association conducts business from its office in Cullman, Alabama.
The Association's primary market area for lending and deposit activity is
Cullman County, Alabama.
Cullman County's economy is principally agricultural, light industry,
and manufacturing. Cullman County is among the largest poultry producing
counties in the United States. For the period 1994 to 1999, the population of
Cullman County is projected to grow by 5.20% and the City of Cullman's
population is projected to grow by 7.73%. The projected population growth of
5.20% for the County is projected to be above that of Alabama at 3.47% and level
with the United States at 5.28%. The projected population growth for the City
at 7.73% exceeds the projections for the United States, Alabama, and Cullman
County.
Income levels in Cullman County are below averages for the State of
Alabama and the United States according to demographic statistics. For 1994,
average per capita income for Cullman County was 12% below and 30% below,
respectively, average per capita income for Alabama and the United States,
respectively. For 1999, average per capita income for Cullman County is
projected to be 12% below and 31% below, respectively, average per capita income
for Alabama and the United States, respectively.
Cullman County has no single, dominant employer. The largest employer
in the county is the Wal-Mart Distribution Center with approximately 1,500
employees.
The Association is one of two thrift institutions based in Cullman
County and had a 46% share of the County's thrift deposits and a 8.2% share of
all deposits in the County, as of June 30, 1995.
Lending Activities
General. The Association's principal lending activity is the
origination of conventional real estate loans, including construction loans,
secured by one- to four-family homes located in the Association's primary market
area. Loans secured by multifamily properties containing five units or more and
by nonresidential real estate and loans for the construction of residences and
other properties are also offered by the Association. In addition to real
estate lending, the Association originates commercial loans and consumer loans,
including loans secured by deposit accounts, automobile loans and a limited
number of other secured and unsecured loans.
45
<PAGE>
Loan Portfolio Composition. The following table presents certain
information in respect of the composition of the Association's loan portfolio at
the dates indicated:
<TABLE>
<CAPTION>
At June 30, At September 30,
-------------------------------- -------------------------------------------------------------------
1996 1995 1994
-------------------------------- -------------------------------- --------------------------------
Percent of Percent of Percent of
Amount total loans Amount total loans Amount total loans
------------- ------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
Real estate loans:
<S> <C> <C> <C> <C> <C> <C>
One-to four family $23,804 59.71% $23,230 60.23% $24,124 60.37%
Multifamily 4,105 10.30 4,188 10.86 3,540 8.86
Nonresidential 8,671 21.75 8,180 21.21 9,464 23.69
Construction 755 1.89 624 1.62 400 1.00
------------- ------------- ------------- ------------- ------------- -------------
Total real estate 37,335 93.64 36,222 93.91 37,528 93.92
loans ------------- ------------- ------------- ------------- ------------- -------------
Commercial loans 1,157 2.90 378 .98 71 .18
Consumer loans:
Automobile loans 1,230 3.09 1,051 2.72 1,252 3.13
Loans on deposits 596 1.49 534 1.38 347 .87
Other consumer loans 565 1.42 1,396 3.62 1,580 3.95
------------- ------------- ------------- ------------- ------------- -------------
Total consumer 2,391 6.00 2,981 7.73 3,179 7.96
loans ------------- ------------- ------------- ------------- ------------- -------------
Total loans: 40,883 102.54 39,581 102.62 40,778 102.06
------------- ------------- ------------- ------------- ------------- -------------
Less:
Undisbursed
portion of loans 247 .62 266 .69 91 .23
in progress
Unearned and
deferred income 155 .39 121 .31 101 .25
Allowances for loan
losses 612 1.54 624 1.62 632 1.58
------------- ------------- ------------- ------------- ------------- -------------
Net loans $39,869 100.00% $38,570 100.00% $39,954 100.00%
============= ============= ============= ============= ============= =============
</TABLE>
Loan Maturity. The following table sets forth certain information as of
September 30, 1995, regarding the dollar amount of loans maturing in the
Association's portfolio based on their contractual terms to maturity. Demand
loans, home equity loans and other loans having no stated schedule of repayments
or no stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
Due during the year ending Due more
September 30, Due 4-5 Due 6-10 Due 11-15 than 15
---------------------------------- years after years after years after years after
1996 1997 1998 9/30/95 9/30/95 9/30/95 9/30/95 Total
---------- ---------- ---------- ----------- ----------- ----------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four- $ 369 $126 $449 $ 966 $6,561 $ 9,751 $5,008 $23,230
family
Multifamily 561 370 13 154 2,876 6,525 1,869 12,368
and
non-residential
Construction 624 -- -- -- -- -- -- 624
Commercial loans 0 378 -- -- -- -- -- 378
Consumer loans 1,184 424 531 665 177 -- -- 2,981
---------- ---------- ---------- ----------- ----------- ----------- ----------- ---------
Total $2,738 $1,298 $993 $1,785 $9,614 $16,276 $6,877 $39,581
========== ========== ========== =========== =========== =========== =========== =========
</TABLE>
46
<PAGE>
The table below sets forth the dollar amount of all loans due after one
year from September 30, 1995, which have predetermined interest rates and have
floating or adjustable interest rates:
Due more than one year
after
September 30, 1995
--------------------------
(Dollars in thousands)
Fixed rates of interest $15,769
Adjustable rates of interest 21,074
Loans Secured by One- to Four-Family Residences. The principal
lending activity of the Association is the origination of conventional loans
secured by first mortgages on one- to four-family residences, primarily single-
family residences located within the Association's primary market area. At June
30, 1996, the Association's one- to four-family residential loans totaled
approximately $23.8 million, or 59.7% of total loans. Of the total of one- to
four-family residential loans, approximately $22.4 million were secured by first
mortgages and approximately $1.4 were secured by second mortgages.
OTS regulations limit the amount which the Association may lend in
relationship to the appraised value at the time of loan origination of the real
estate and improvements which will secure the loan (the "LTV"). In accordance
with such regulations and laws, and as a matter of policy established by the
Board of Directors of the Association, the Association makes loans secured by
one- to four-family residences for not more than a 85% LTV.
ARMs are currently offered by the Association for terms of up to 20
years. On ARMs currently offered by the Association, the interest rate
adjustment periods are one year and rates are adjusted in accordance with the
weekly average yield on United States Treasury securities adjusted to a constant
maturity of one year. The new interest rate at each change date is determined
by adding a margin of 2.75% to the prevailing index. On ARMs currently offered
by the Association, the maximum allowable adjustment at each adjustment date is
2.0% and the maximum allowable adjustment over the term of the loan is 6.0%.
Although ARMs decrease the Association's interest rate risk, such
loans involve other risks. As interest rates rise, for example, the payment by
the borrower increases to the extent permitted by the terms of the loan. Such
increase in the payment may increase the potential for default. Moreover, the
marketability of the underlying property may be adversely affected by a general
increase in interest rates. The Association believes that such risks have not
had a material adverse effect on the Association to date.
The Association currently offers fixed rate loans for terms of 15, 20
and 30 years. The fixed-rate loans are competitively priced based on market
conditions and the Association's cost of funds.
Loans Secured by Multifamily Residences. In addition to loans on one-
to four-family properties, the Association originates loans secured by
multifamily properties which contain more than four units. At June 30, 1996,
loans secured by multifamily residences totaled approximately $4.1 million, or
10.3% of total loans. At June 30, 1996, the largest single loan secured by a
multifamily residence was $1,447,518 and was performing in accordance with its
terms. Multifamily loans are offered with adjustable or fixed rates for terms
of up to 20 years and have LTVs up to 80%.
47
<PAGE>
Multifamily lending is generally considered to involve a higher degree
of risk than one- to four-family residential lending because the borrower
typically depends upon income generated by the project to cover operating
expenses and debt service. The profitability of a project can be affected by
economic conditions, government policies and other factors beyond the control of
the borrower. The Association attempts to reduce the risk associated with
multifamily lending by evaluating the creditworthiness of the borrower and the
projected income from the project and by obtaining personal guarantees on loans
made to corporations and partnerships.
Loans Secured by Nonresidential Real Estate. The Association also
originates loans for the purchase of nonresidential real estate. At June 30,
1996, approximately $8.7 million, or 21.8%, of the Association's total loans
were secured by mortgages on nonresidential real estate. At such date, the
largest single loan secured by nonresidential real estate was $1,615,000 and was
performing in accordance with its terms. The Association's nonresidential real
estate loans have adjustable rates or fixed rates, terms of up to 30 years and
LTVs of up to 80%. The Association also makes loans for the construction of
nonresidential real estate. See "- Construction Loans."
Although loans secured by nonresidential real estate have higher
interest rates than one- to four-family residential real estate loans,
nonresidential real estate lending is generally considered to involve a higher
degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. The Association has endeavored to
reduce such risk by evaluating the credit history and past performance of the
borrower, the location of the real estate, the financial condition of the
borrower, the quality and characteristics of the income stream generated by the
property and appraisals supporting the property's valuation.
Construction Loans. The Association makes loans for the construction
of single-family houses, multifamily properties and nonresidential real estate
projects. Of the loans made by the Association for construction of single-
family residences, all are made to owner-occupants or to professional builders.
Construction loans are offered with adjustable or fixed rates for
terms of up to one year. At June 30, 1996, the Association's loan portfolio
included $750,000 million in construction loans, or 1.9% of total loans. The
majority of construction loans were for construction of residential properties.
Construction loans, particularly loans involving nonresidential real
estate, generally involve greater underwriting and default risks than do loans
secured by mortgages on existing properties. Loan funds are advanced upon the
security of the project under construction, which is more difficult to value
before the completion of construction. Moreover, because of the uncertainties
inherent in estimating construction costs, it is relatively difficult to
evaluate accurately the LTV and the total loan funds required to complete a
project. In the event a default on a construction loan occurs and foreclosure
follows, the Association would have to take control of the project and attempt
either to arrange for completion of construction or dispose of the unfinished
project.
All of the Association's construction loans are secured by
property in the Association's primary market area.
Commercial Loans. The Association makes commercial loans to
businesses in its primary market area. Such loans are typically secured by a
security interest in equipment, nonresidential real
48
<PAGE>
estate or other assets of the borrower. At June 30, 1996, the Association's
commercial loan portfolio totaled $1.2 million, or 2.9% of total loans.
Consumer Loans. The Association makes various types of consumer
loans, including loans made to depositors on the security of their deposit
accounts, automobile loans, home improvement loans and other secured loans and
unsecured personal loans. Consumer loans are made at variable or fixed rates of
interest and for varying terms based on the type of loan. At June 30, 1996, the
Association had approximately $2.4 million, or 6.0% of total loans, invested in
consumer loans.
Consumer loans, particularly consumer loans which are unsecured or are
secured by depreciating assets such as automobiles, may entail greater risk than
residential real estate loans. Repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance. The risk of default on consumer loans increases during periods of
recession, high unemployment and other adverse economic conditions.
Loan Solicitation and Processing. Loan originations are developed
from a number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by the Association's lending
staff and walk-in customers.
Loan applications for permanent real estate loans are taken by loan
personnel at the Association's office. The Association typically obtains a
credit report, verification of employment and other documentation concerning the
creditworthiness of the borrower. An appraisal of the fair market value of the
real estate which will be given as security for the loan is prepared by an
appraiser approved by the Board of Directors. Upon the completion of the
appraisal and the receipt of information on the credit history of the borrower,
the application for a loan is submitted for review in accordance with the
Association's underwriting guidelines. All real estate loans are approved by
the Loan Committee of the Association (which Loan Committee is comprised of two
members, Mr. Eston Jones and Mr. Daniel Keel). Loans not secured by real estate
may be approved by the President or the Vice President-Lending of the
Association for amounts less than $20,000. Loans not secured by real estate in
amounts in excess of $20,000 require approval of the Loan Committee. Any loan
in an amount in excess of $250,000 requires the approval of the full Board of
Directors of the Association.
If a mortgage loan application is approved, the Association typically
obtains an attorney's opinion of title. The Association obtains title insurance
on only approximately 5% of its loans secured by real estate. Borrowers are
required to carry satisfactory fire and casualty insurance and flood insurance,
if applicable, and to name the Association as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. The
Association also evaluates the feasibility of the proposed construction project
and the experience and record of the builder. Once approved, the construction
loan is disbursed in portions based upon periodic inspections of construction
progress.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
Loan Originations. The Association currently originates a variety of
mortgage loans, including adjustable and fixed rate loans. The Association is
an approved seller/servicer for the Federal Home Loan Mortgage Corporation and
as such, originates loans for the various programs of
49
<PAGE>
FHLMC. Further, the Association originates certain first and second mortgage
loans secured by single family dwellings which are non-conforming.
50
<PAGE>
The following table presents the Association's loan origination activity
for the periods indicated:
<TABLE>
<CAPTION>
Nine Months ended
June 30, Year ended September 30,
----------------------- ------------------------
1996 1995 1995 1994
----------- ----------- ----------- -----------
(Dollars in thousands)
Loans originated:
<S> <C> <C> <C> <C>
One- to four-family residential $ 5,699 $4,304 $ 6,127 $ 6,986
Multifamily residential -- 693 693 115
Nonresidential 533 180 458 381
Construction 2,083 740 1,036 1,199
Commercial 575 577 823 245
Consumer 1,799 1,407 1,957 2,949
-------- ------- -------- --------
Total loans originated 10,689 7,901 11,094 11,875
-------- ------- -------- --------
Principal repayments (10,138) (8,967) (12,665) (13,889)
-------- ------- -------- --------
Increase (decrease) in other items, net(1) 748 (43) 187 (180)
-------- ------- -------- --------
Net increase (decrease) $ 1,299 $(1,109) $(1,384) $(2,194)
======== ======= ======== ========
</TABLE>
(1) Other items consist of deferred loan fees, allowance for loan losses and
the undisbursed portion of construction loans.
At June 30, 1996, the Association owns loan participation interests in
eleven loans with an aggregate outstanding balance of approximately $5.3
million. These loans consist of both adjustable and fixed rate loans. The
Association is the lead lender on one loan of the eleven, which loan has an
outstanding balance of $306,376 at June 30, 1996. The remaining ten loans are
serviced by other lending institutions. All participation loans are performing
and secured by first mortgages. The participation loans are secured by various
types of properties, including multifamily residences, shopping centers, office
buildings and a country club, some of which are outside of the Association's
primary market area. The Association does not currently intend to originate or
purchase additional loan participations.
OTS regulations generally limit the aggregate amount that a savings
association may lend to any one borrower to an amount equal to 15% of the
association's total capital for risk-based purposes plus any loan reserves not
already included in total capital (collectively, "Unimpaired Capital"). A
savings association may lend to one borrower an additional amount not to exceed
10% of the association's Unimpaired Capital if the additional amount is fully
secured by certain forms of "readily marketable collateral." Real estate is not
considered "readily marketable collateral." In addition, the regulations
require that loans to certain related or affiliated borrowers be aggregated for
purposes of such limits. The aggregate amount which the Association could lend
to one borrower as of June 30, 1996 was $972,000.
The largest amount the Association had outstanding to one borrower and
related persons or entities at June 30, 1996, was $1,615,000, consisting of one
loan. Such loan is secured by real estate and was performing in accordance with
its terms on June 30, 1996. Such loan was originated prior to
51
<PAGE>
the effective date of current OTS regulations regarding loans to one borrower
and therefore does not violate such regulations.
Loan Origination and Other Fees. The Association realizes loan origination
fees and other fee income from its lending activities and also realizes income
from late payment charges, application fees and fees for other miscellaneous
services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with SFAS No. 91 as
an adjustment to yield over the life of the related loan.
Delinquent Loans, Nonperforming Assets and Classified Assets. Payments on
loans made by the Association are due on the first day of the month. When a
loan payment has not been received by the sixteenth of the month, a late notice
is sent. If payment is not received by the thirtieth day, a second notice is
sent. Telephone calls are made to the borrower in connection with both the 15-
and 30-day notices. Each of the loans bears a late payment penalty which is
assessed as soon as such loan is more than 15 days delinquent. The late penalty
is 5% of the payment due.
When a loan secured by real estate becomes more than 90 days delinquent, a
letter is sent to the borrower by the Association to inform the borrower that
foreclosure proceedings will begin if the loan is not brought current within 30
days. If the loan has not been brought current within such 30-day period, the
Board of Directors normally refers the loan to an attorney to commence
foreclosure proceedings.
The following table reflects the amount of loans in a delinquent status as
of the dates indicated:
<TABLE>
<CAPTION>
At June 30, At September 30,
----------------------------- -------------------------------------------------------------
1996 1995 1994
----------------------------- -------------------------------------------------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in thousands)
Loans delinquent for:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30-59 days 31 $581 1.46% 20 $403 1.04% 25 $547 1.37%
60-89 days 5 66 .17 15 143 .37 9 231 .58
90 days and over 8 195 .49 21 206 .53 4 36 .09
-------- ------ -------- ------ ----- ------ ------ ------ -------
Total 44 $842 2.11% 56 $752 1.95% 38 $814 2.04%
</TABLE>
Nonperforming assets include nonaccruing loans, real estate acquired by
foreclosure or by deed-in-lieu thereof, in-substance foreclosures and
repossessed assets. The Association ceases to accrue interest on real estate
loans if the collateral value is not adequate, in the opinion of management, to
cover the outstanding principal and interest. The Association reviews loans
which are 90 days or more delinquent and makes a determination, based upon its
estimation of collectibility, whether to continue to accrue, or to cease
accruing, interest on such loan. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
52
<PAGE>
The following table sets forth information with respect to the accrual and
nonaccrual status of the Association's loans and other nonperforming assets at
the dates indicated:
<TABLE>
<CAPTION>
At June 30, At September 30,
-------------- --------------------
1996 1995 1994
-------------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Accruing loans delinquent 90+ days $ 161 $ 157 $ 14
Loans accounted for on a nonaccrual basis: --------- -------- --------
Real estate
One-to four-family 34 49 22
Multifamily -- -- --
Nonresidential -- -- --
Consumer -- -- --
--------- -------- --------
Total nonaccrual loans 34 49 22
Total nonperforming loans 195 206 36
--------- -------- --------
Real estate owned 28 5 286
--------- -------- --------
Total nonperforming assets $ 223 $ 211 $ 322
========= ======== ========
Allowance for loan losses $ 612 $ 624 $ 632
========= ======== ========
Nonperforming assets as a percent of .56% .55% .81%
total loans ========= ======== ========
Nonperforming loans as a percent of .49 .53 .09
total loans ========= ======== ========
Allowance for loan losses as a percent of
nonperforming loans 313.85% 302.91% 1,755.56%
========= ======== ========
</TABLE>
Real estate acquired by the Association as a result of foreclosure
proceedings is classified as real estate owned ("REO") until it is sold. When
property is so acquired, such property is recorded by the Association at the
fair value of the real estate, less estimated selling expenses, at the date of
acquisition and any write-down resulting therefrom is charged to the allowance
for loan losses. All costs incurred in maintaining REO property are expenses
from the date the property is acquired. Costs relating to the development and
improvement of the property are capitalized to the extent of fair value. At June
30, 1996, the Association had two REO properties with an aggregate book value of
$27,601.
The Association classifies its own assets on a quarterly basis in
accordance with federal regulations and Association policy. Problem assets are
classified as "substandard," "doubtful" or "loss." "Substandard" assets have
one or more defined weaknesses and are characterized by the distinct possibility
that the Association will sustain some loss if the deficiencies are not
corrected. "Doubtful" assets have the same weaknesses as "substandard" assets,
with the additional characteristics that (i) the weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions and
values, questionable and (ii) there is a high possibility of loss. An asset
classified "loss" is considered uncollectible and of such little value that its
continuance as an asset of the Association is not warranted.
53
<PAGE>
The aggregate amounts of the Association's classified loans at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At June 30, At September 30,
------------- -------------------
1996 1995 1994
------------- -------------------
(Dollars in thousands)
Classified loans:
<S> <C> <C> <C>
Substandard $ 472 $ 771 $ 583
Doubtful -- -- --
Loss 98 105 235
-------------- -------- --------
Total classified loans $ 570 $ 876 $ 818
============== ======== ========
</TABLE>
The Association establishes general allowances for loan losses for any
loan classified as substandard or doubtful. If an asset, or portion thereof, is
classified as loss, the Association establishes specific allowances for losses
in the amount of 100% of the portion of the asset classified loss. See
"Allowance for Loan Losses." Generally, the Association charges off the portion
of any real estate loan deemed to be uncollectible.
The Association analyzes each classified asset on a quarterly basis to
determine whether changes in the classifications are appropriate under the
circumstances. Such analysis focuses on a variety of factors, including the
amount of any delinquency and the reasons for the delinquency, if any, the use
of the real estate securing the loan, the status of the borrower and the
appraised value of the real estate. As such factors change, the classification
of the asset will change accordingly.
Allowance for Loan Losses. Senior management, with oversight by the Board
of Directors, reviews on a quarterly basis the allowance for loan losses as it
relates to a number of relevant factors, including, but not limited to, trends
in the level of delinquent and nonperforming assets and classified loans,
current and anticipated economic conditions in the primary lending area, past
loss experience and possible losses arising from specific problem assets. To a
lesser extent, management also considers loan concentrations to single borrowers
and changes in the composition of the loan portfolio. While management believes
that it uses the best information available to determine the allowance for loan
losses, unforeseen market conditions could result in adjustments and net income
could be significantly affected if circumstances differ substantially from the
assumptions used in making the final determination. The amounts in the
provisions for loan losses shown in the table below for 1994 through 1996 were
determined based upon past loan experience, a review of individual specific
problem loans, if any, the estimated value of the underlying collateral and the
prevailing economic conditions.
54
<PAGE>
The following table sets forth an analysis of the Association's
allowance for loan losses for the periods indicated:
<TABLE>
<CAPTION>
Nine Months ended
June 30 Year ended September 30,
--------------------- -------------------------
1996 1995 1995 1994
-------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $624 $632 $632 $756
Charge-offs (20) (4) (17) (175)
Recoveries 8 8 9 16
-------- ------- -------- --------
Net (charge-offs) recoveries (12) 4 (8) (159)
Provision for loan losses -- -- -- 35
-------- ------- -------- --------
Balance at end of year $612 $636 $624 $632
======== ======= ======== ========
Ratio of net (charge-offs)
recoveries to average loans
outstanding during the period (.03)% .01% (.02)% (.38)%
======== ======= ======== ========
Ratio of allowance for loan
losses to total loans 1.54 1.64 1.62 1.58
======== ======= ======== ========
</TABLE>
The following table sets forth the allocation of the Association's
allowance for loan losses by type of loan at the dates indicated:
<TABLE>
<CAPTION>
At June 30, At September 30,
------------------------ --------------------------------------------------------------
1996 1995 1994
------------------------ --------------------------- ----------------------------
Percent of Percent of Percent of
loans in each loans in each loans in each
category of category of category of
Amount total loans Amount total loans Amount total loans
-------- --------------- -------- --------------- -------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at year end
applicable to:
Real estate loans $495 95.80% $502 93.91% $511 93.92%
Commercial loans 54 2.62 54 .98 55 .18
Consumer loans 63 6.00 68 7.73 66 7.96
Unallocated -- -- -- -- -- --
---------- ---------- ---------- ---------- --------- -------------
Total $612 104.42% $624 102.62% $632 102.06%
========== ========== ========== ========== ========= =============
</TABLE>
The allowance for loan losses is based on estimates and is, therefore,
monitored quarterly and adjusted as necessary to provide an adequate allowance.
Investment Activities
Federal regulations permit the Association to invest in various types of
investments, including interest-bearing deposits in other financial
institutions, U.S. Treasury and agency obligations,
55
<PAGE>
mortgage-backed securities and certain other specified investments. The Board of
Directors of the Association has adopted an investment policy which authorizes
management to make investments in U.S. Government and agency securities,
deposits in the FHLB, certificates of deposit in federally-insured financial
institutions, mortgage-backed securities and mutual funds backed by mortgage-
backed securities. William R. Faulk, the Association's President, and Beth B.
Knight, its Vice President-Finance and Chief Financial Officer, have primary
responsibility for implementation of the investment policy. The Association's
investment policy is designed primarily to provide and maintain liquidity within
regulatory guidelines, to maintain a balance of high quality investments to
minimize risk and to maximize return without sacrificing liquidity and safety.
The following table sets forth the composition of the Association's
interest bearing deposits, investment securities and mortgage-backed securities
at the dates indicated:
<TABLE>
<CAPTION>
At June 30, At September 30,
------------------------ -----------------------------------------------------
1996 1995 1994
------------------------ ---------------------------- -----------------------
Carrying Carrying Carrying
Value Fair Value Value Fair Value Value Fair Value
------------ ------------ ------------ ------------ ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Total interest-bearing deposits $ 4,464 $ 4,464 $ 5,637 $ 5,637 $ 2,279 $ 2,279
Investment securities:
U.S. Treasury securities
and obligations of state and
political subdivisions (1) 7,219 7,175 8,696 8,644 11,194 11,004
Mortgage-backed securities (2) 8,963 8,963 5,452 5,422 5,676 5,401
Other Investments 2,179 2,179 2,106 2,106 1,987 1,987
------------ ------------ ------------ ------------ ---------- -----------
Total $22,825 $22,781 $21,891 $21,809 $21,136 $20,671
============ ============ ============ ============ ========== ===========
</TABLE>
(1) At June 30, 1996 and September 30, 1995, U.S. Treasury securities and
obligations of state and political subdivisions included $1,968 and $503
of securities available-for -sale, respectively, which are carried at
their fair value .
(2) At June 30, 1996 and September 30, 1995, mortgage-backed securities
included $6,213 and $2,243 of mortgage-backed securities available-for -
sale, respectively, which are carried at their fair value.
56
<PAGE>
The maturities of the Association's interest-bearing deposits and
investment securities at September 30, 1995, are indicated in the following
table:
<TABLE>
<CAPTION>
At September 30, 1995
----------------------------------------------------------------------------------------------------------------
After one through After five through After ten
One year or less five years ten years years Total
----------------- ------------------ ------------------ ------------------ ----------------------------
Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Fair Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
-------- ------- -------- ------- -------- ------- -------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing
deposits in
other financial
institutions $5,637 5.65% $ -- --% $ -- --% $ -- --% $ 5,637 $ 5,637 5.65%
U.S. Treasury
securities and
obligations of
U.S. Govt
agencies 2,748 6.10 5,948 5.71 -- -- -- -- 8,696 8,644 5.83
Mortgage-backed
securities 118 7.30 4,199 5.92 941 5.51 194 8.00 5,452 5,422 5.95
Other
Investments -- -- -- -- -- -- 2,106 6.37 2,106 2,106 6.37
------ ---- ------- ---- ---- ---- ------ ---- ------- ------- ----
Total $8,503 5.81% $10,147 5 .80% $941 5.51% $2,300 6.51% $21,891 $21,809 5.87%
====== ==== ======= ===== ==== ===== ====== ===== ======= ======= ==== =
</TABLE>
Deposits and Borrowings
General. Deposits have traditionally been the primary source of the
Association's funds for use in lending and other investment activities. In
addition to deposits, the Association derives funds from interest payments and
principal repayments on loans and income on earning assets. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." Loan
payments are a relatively stable source of funds, while deposit inflows and
outflows fluctuate in response to general interest rates and money market
conditions. The Association has the ability to use FHLB advances as an
alternative source of funds but has not utilized such source in the recent past.
Deposits. Deposits are attracted principally from within the
Association's market area through the offering of a broad selection of deposit
instruments, including NOW accounts, demand deposit accounts, money market
accounts, regular passbook savings accounts, term certificate accounts and
Individual Retirement Accounts ("IRAs"). Interest rates paid, maturity terms,
service fees and withdrawal penalties for the various types of accounts are
established periodically by management of the Association based on the
Association's liquidity requirements, growth goals and interest rates paid by
competitors. The Association does not use brokers to attract deposits. The
amount of deposits from outside the Association's market area is not
significant.
At June 30, 1996, the Association's transactions accounts (NOW accounts,
passbook savings accounts and money market accounts) totaled approximately $21.3
million, or 36.6%, of total deposits. At June 30, 1996, the Association's
certificates of deposit totaled approximately $36.9 million, or 63.4% of total
deposits. Of such amount, approximately $28.0 million in certificates of
deposit mature within one year. Based on past experience and the Association's
prevailing pricing strategies, management believes that a substantial percentage
of such certificates will be renewed with
57
<PAGE>
the Association at maturity. If there is a significant deviation from historical
experience, the Association can utilize borrowings from the FHLB of Atlanta as
an alternative source of funds.
The following table sets forth the dollar amount of deposits in the various
types of accounts offered by the Association at the dates indicated:
<TABLE>
<CAPTION>
At June 30, At September 30,
------------------------------------------------------------------------------------------------------
1996 1995 1995 1995
----------------------- ------------------------ ------------------------ -----------------------
Percent Percent Percent Percent
of total of total of total of total
Amount deposits Amount deposits Amount deposits Amount deposits
------- -------- ------ --------- ------- -------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts:
NOW accounts (1) $11,670 20.0% $11,953 21.2% $11,722 20.9% $13,849 23.8%
Passbook savings
accounts (2) 8,374 14.4 7,675 13.6 7,471 13.3 8,627 14.8
Money market accounts (3) 1,300 2.2 1,325 2.3 1,340 2.5 1,366 2.3
-------- ------- ------- ------- -------- ------- -------- --------
Total transaction
accounts 21,344 36.6 20,953 37.1 20,533 36.7 23,842 40.9
-------- ------- ------- ------- -------- ------- -------- --------
Certificates of deposit:
4.00% or less 9 -- 2,758 4.9 522 .9 18,950 32.6
4.01 - 6.00% 32,498 55.8 25,566 45.4 27,507 49.1 13,742 23.6
6.01 - 8.00% 4,277 7.3 6,530 11.6 7,030 12.6 1,051 1.8
8.01 - 10.00% 150 .3 588 1.0 416 .7 643 1.1
-------- ------- ------- ------- -------- ------- -------- --------
Total certificates of
deposit (4) 36,934 63.4 35,442 62.9 35,475 63.3 34,386 59.1
-------- ------- ------- ------- -------- ------- -------- --------
Total deposits $58,278 100.0% $56,395 100.0% $56,008 100.0% $58,228 100.0%
======== ======= ======= ======= ======== ======= ======== ========
</TABLE>
(1) The weighted average rate on NOW accounts at June 30, 1996 was 2.40%.
(2) The weighted average rate on passbook savings accounts at June 30, 1996
was 2.84%.
(3) The weighted average rate on money market accounts at June 30, 1996 was
2.84%.
(4) The weighted average rate on all certificates of deposit, including IRA
accounts, at June 30, 1996 was 5.6%.
The following table shows rate and maturity information for the Association's
certificates of deposit at June 30, 1996:
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------------------------------------------
Over 1 year Over 2 years
Rate Up to one year to 2 years to 3 years Over 3 years Total
- ---- --------------- ------------- --------------- -------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
4.00% or less $ 9 $ -- $ -- $ -- $ 9
4.01% to 6.00% 25,614 4,521 1,644 719 32,498
6.01% to 8.00% 2,390 974 71 842 4,277
8.01% to 10.00% -- -- 150 -- 150
--------------- ------------- --------------- -------------- ------------
Total certificates of deposit $28,013 $5,495 $1,865 $1,561 $36,934
=============== ============= =============== ============== ============
</TABLE>
58
<PAGE>
The following table presents the amount of the Association's certificates
of deposit of $100,000 or more by the time remaining until maturity at June 30,
1996:
Maturity Amount
----------------------------- --------------------------------
(Dollars in thousands)
Three months or less $1,178
Over 3 months to 6 months 681
Over 6 months to 12 months 3,064
Over 12 months 893
--------------------------------
Total $5,816
================================
The following table sets forth the Association's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Nine months ended June 30, Year ended September 30,
------------------------------ ----------------------------
1996 1995 1995 1994
-------------- -------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Beginning balance $56,008 $58,228 $58,228 $58,087
Net increase (decrease) in deposits
before interest credited 1,424 (2,518) (3,173) (615)
Interest credited 846 685 953 756
Ending balance 58,278 56,395 56,008 58,228
-------------- -------------- ------------- -------------
Net increase (decrease) $ 2,270 $(1,833) $(2,200) $ 141
============== ============== ============= =============
</TABLE>
Borrowings. The FHLB system functions as a central reserve bank providing
credit for its member institutions and certain other financial institutions.
See "REGULATION - Federal Home Loan Banks." As a member in good standing of the
FHLB of Atlanta, the Association is authorized to apply for advances from the
FHLB of Atlanta, provided certain standards of creditworthiness have been met.
Under current regulations, an association must meet certain qualifications to
be eligible for FHLB advances. The extent to which an association is eligible
for such advances will depend upon whether it meets the Qualified Thrift Lender
Test (the "QTL Test"). See "REGULATION - Office of Thrift Supervision --
Qualified Thrift Lender Test." If an association meets the QTL Test, the
Association will be eligible for 100% of the advances it would otherwise be
eligible to receive. If an association does not meet the QTL Test, the
Association will be eligible for such advances only to the extent it holds
specified QTL Test assets. At June 30, 1996, the Association was in compliance
with the QTL Test and had no advances from the FHLB.
Competition
The Association competes for deposits with other savings and loan
associations, savings banks, commercial banks and credit unions and with
issuers of commercial paper and other securities, including shares in money
market mutual funds. The primary factors in competition for deposits are
customer service and convenience of office location. In making loans, the
Association competes with other savings banks, savings and loan associations,
commercial banks, mortgage brokers, consumer
59
<PAGE>
finance companies, credit unions, leasing companies and other lenders. The
Association competes for loan originations primarily through the interest rates
and loan fees it charges and through the efficiency and quality of services it
provides to borrowers. Competition is intense and is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not
readily predictable. The Association does not offer all of the products and
services offered by some of its competitors, particularly commercial banks. The
Association monitors the product offerings of its competitors and adds new
products when it can do so competitively and cost effectively.
Properties
The following table sets forth certain information at June 30, 1996,
regarding the office facilities of the Association:
<TABLE>
<CAPTION>
Owned or Date Net book
Location Leased acquired value
- ---------------------- ----------------- ------------- ------------
<S> <C> <C> <C>
325 Second Street SE Owned 1968 $202,000
Cullman, AL
(Main Office)
1414 Second Ave., NW Owned 1988 $222,000
Cullman, AL
(Branch)
1602 Second Ave., SW Leased (2) 1979 $ 13,000
Cullman, AL
(Branch)
</TABLE>
(1) Cost less accumulated depreciation and amortization at June 30, 1996.
(2) Lease expires March 31, 2000.
Employees
As of June 30, 1996, the Association had 20 full-time employees. The
Association believes that relations with its employees are excellent. The
Association offers health and disability benefits and a defined contribution
profit sharing plan. None of the employees of the Association are represented
by a collective bargaining unit.
Legal Proceedings
The Association is not presently involved in any material legal
proceedings. From time to time, the Association is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans made by the Association.
60
<PAGE>
MANAGEMENT
Directors and Executive Officers
The Holding Company. The Board of Directors of the Holding Company
currently consists of nine directors, each of whom is also a director of the
Association. The directors of the Holding Company are divided into three
classes. Each director is elected for a three-year term and until his
successor is elected or until his or her earlier resignation, removal from
office or death. All of the directors of the Holding Company were initially
elected to the Board of Directors in 1996.
The executive officers of the Holding Company are identified below:
Name Position
---- --------
William R. Faulk President and Chief Executive Officer
Beth B. Knight Secretary and Treasurer
The Association. The Board of Directors of the Association currently
consists of nine directors, divided into three classes. One class of directors
is elected each year. Each director serves for a three-year term. The Board
of Directors met twelve times during 1995 for regular and special meetings. No
director attended fewer than 75% of the aggregate of such meetings and all
meetings of the committees of which such director was a member.
The following table presents certain information with respect to the
present directors of the Association and the executive officers of the
Association:
<TABLE>
<CAPTION>
Year of
Position(s) with Commencement Term
Name Age the Association of directorship expires
- ---------------------- --- ------------------- --------------- -------
<S> <C> <C> <C> <C>
Finis E. St. John, IV 39 Director, Chairman 1985 1999
William R. Faulk 35 Director, President 1996 1997
Joseph S. Franey 56 Director 1985 1997
Phillip W. Freeman 45 Director 1992 1998
Maxie T. Hudson 63 Director 1980 1999
Eston E. Jones 77 Director 1976 1999
W. Daniel Keel 61 Director 1970 1999
Ronald P. Martin 52 Director 1988 1998
Wells R. Turner 53 Director 1986 1998
</TABLE>
Presented below is certain information concerning the directors of the
Association, including their principal occupations for the past five years:
Finis E. St. John, IV. Mr. St. John is a partner in St. John & St. John,
L.L.P., a law firm located in Cullman. Mr. St. John is also an executive
officer of Cullman Environmental, Inc., a waste service concern serving
Cullman, Alabama.
Mr. William R. Faulk. Mr. Faulk has a BS in economics and an MBA in finance,
both from the University of Alabama at Birmingham. He is a graduate of the
Stonier School of Banking. He joined
61
<PAGE>
First Federal in 1986 and served in a variety of positions before becoming
President and Chief Executive Officer in 1994.
Joseph S. Franey. Mr. Franey is a retired trucking company executive.
Phillip W. Freeman. Dr. Phillip Freeman is a physician practicing with Cullman
Internal Medicine Incorporated. Dr. Freeman is a member of the Cullman Area
Chamber of Commerce.
Maxie T. Hudson. Mr. Hudson is the immediate past President of the
Association. Prior to joining the Association, Mr. Hudson was employed as an
accountant.
Eston E. Jones. Mr. Jones was the President of the Association prior to Mr.
Hudson. Mr. Jones currently serves on the Loan Committee of the Board of
Directors.
W. Daniel Keel. Mr. Keel is a retired insurance and real estate executive.
Mr. Keel currently serves on the Loan Committee of the Board of Directors.
Ronald P. Martin. Mr. Martin is a Certified Public Accountant in private
practice. Mr. Martin has worked in both public and private accounting during
his career. Prior to entering private practice, Mr. Martin was Chief Financial
Officer of a regional construction company.
Wells R. Turner. Mr. Turner is a pharmacist and real estate developer. Mr.
Turner currently operates two retail pharmacological sales businesses in
Cullman, Alabama. Mr. Turner is a member of the Board of Directors of Hospice
of Cullman County.
After the Conversion, each director and executive officer will continue to
serve the Holding Company and the Association.
Shares to be Purchased by Management Pursuant to Subscription Rights
The following table sets forth certain information regarding the
subscription rights intended to be exercised by the directors and executive
officers of the Association and their Associates and persons with whom they are
acting in concert:
62
<PAGE>
<TABLE>
<CAPTION>
Percent of total
Name Total shares(2) offering (1) Aggregate purchase price(2)
- -------------------------- ----------------- ---------------- -----------------------------
<S> <C> <C> <C>
William R. Faulk 14,575 3.38% $ 291,500
Joseph S. Franey 14,575 3.38 291,500
Phillip W. Freeman 10,000 2.33 200,000
Maxie T. Hudson 5,000 1.16 100,000
Eston E. Jones 14,575 3.38 291,500
W. Daniel Keel 14,575 3.38 291,500
Ronald P. Martin 14,575 3.38 291,500
Finis E. St. John, IV 14,575 3.38 291,500
Wells R. Turner 14,575 3.38 291,500
Beth B. Knight 14,575 3.38 291,500
Raymond A. Williams 14,575 3.38 291,500
All directors and executive
officers and their
Associates as a group 146,175 33.91% $2,923,500
</TABLE>
(1) Assumes that 430,000 Common Shares will be sold in connection with the
Conversion at $20.00 per share and that a sufficient number of Common
Shares will be available to satisfy the intended purchase by directors and
executive officers. See "- Pricing and Number of Shares to be Sold."
(2) Amounts under "Total Shares" and "Aggregate purchase price" may increase in
the event that more than 430,000 Common Shares are sold in connection
with the Conversion.
All purchases by executive officers and directors of the Association are
being made for investment purposes only and with no present intent to resell.
Committees of Directors
The Board of Directors of the Association has a Loan Committee and an Asset
Liability Management Committee. The full Board of Directors serves as a
nominating committee.
The members of the Loan Committee are Messrs. Jones and Keel. The Loan
Committee reviews and approves all real estate loans made by the Association.
The Loan Committee reviews and approves all loans not secured by real estate
made by the Association in an amount greater than $20,000. All loans made by
the Association in amounts in excess of $250,000 are reviewed and approved by
the full Board of Directors.
The Asset Liability Management Committee is comprised of Messrs. Martin and
Faulk and Ms. Knight. The function of the Asset Liability Management Committee
is to review the interest rate risk of the Association and to report and
recommend action to the full Board of Directors with regard thereto. The Asset
Liability Management Committee met four times during 1995.
63
<PAGE>
Compensation
Each director of the Association currently receives a fee of $750 per
meeting of the full Board of Directors attended. In addition, each member of
the Loan Committee receives $450 per month.
During the fiscal year ended September 30, 1995, no executive officer of
the Association received annual compensation in an amount equal to or greater
than $100,000. The following table presents certain information regarding the
annual compensation received by Mr. Faulk during such period:
Summary Compensation Table
Annual Compensation
-------------------
Name and Principal Position Salary Bonus Other
--------------------------- ------ ----- -----
William R. Faulk, $52,333 $3,000 $3,808
President
Executive Officers of Association Who Are Not Directors
Presented below is certain information regarding the executive officers of
the Association who are not directors:
Name Age Position
---- --- --------
Beth B. Knight 34 Vice President-Finance and Chief
Financial Officer
Raymond A. Williams 43 Vice President-Lending and Chief
Lending Officer
Beth B. Knight. Ms. Knight has a BS in accounting from the University of
Alabama and she is a Certified Public Accountant. She joined the Association
in 1992 and has served in her current capacity since joining the Association.
Raymond A. Williams. Mr. Williams worked for a major commercial bank for 15
years prior to joining the Association in 1995 as chief lending officer.
Stock Benefit Plans
Profit Sharing Plan. The Association currently maintains a defined
contribution profit sharing plan (the "Profit Sharing Plan") to provide
employees eligible to participate in the Profit Sharing Plan the opportunity to
establish tax-favored savings plans. The Profit Sharing Plan is a qualified
plan under Section 401(k) of the Code. William R. Faulk and Finis E. St. John
IV, as President and Chairman of the Association, respectively, are the co-
trustees under the Profit Sharing Plan.
64
<PAGE>
All employees who are age 20 1/2 or older are eligible to participate in
the Profit Sharing Plan. An employee may elect to contribute a portion of his
or her compensation, up to a maximum of 15%, to his or her account under the
Profit Sharing Plan. Any such contribution defers the amount of compensation
so contributed, and the participating employee is not taxed on that
compensation, if at all, until he or she withdraws such amount from the Profit
Sharing Plan. A participant may not make any other contributions to the Profit
Sharing Plan.
The Association may, in its sole discretion, elect to match contributions
made by employees. In addition, the Association may, in its sole discretion,
elect in any year to make a designated qualified nonelective contribution to
the Profit Sharing Plan for the benefit of "Nonhighly Compensated Employees"
(as defined in the Profit Sharing Plan). The Association may also, in its sole
discretion, make nonelective contributions to the Profit Sharing Plan for the
benefit of all participants. The allocation of any such nonelective
contributions is in proportion to each participant's compensation for the plan
year in which such contributions are made. A participant is eligible to
receive an allocation of a nonelective contribution by the Association if that
participant is employed by the Association at the end of the plan year in which
such contribution is made and if that participant had completed at least 501
hours of service with the Association during that plan year, except that these
requirements do not apply to any employee whose employment with the Association
terminates during such plan year by reason of death, disability or retirement
at the normal retirement age or later.
Employee Stock Ownership Plan. The Holding Company has established the
ESOP for the benefit of employees of the Holding Company and its subsidiaries,
including the Association, who are age 20 1/2 or older and who have completed
at least one year of service with the Holding Company and its subsidiaries.
ESOP participants must have completed 1,000 hours of service during a plan year
in order to receive an allocation of common shares for that plan year. The
Board of Directors of the Holding Company believes that the ESOP will be in the
best interests of the Holding Company and its shareholders.
The ESOP trust intends to borrow funds from the Holding Company with which
to acquire up to 8.0% of the Common Shares sold in the Conversion. Such loan
will be secured by the Common Shares purchased with the proceeds , will be
repaid by the ESOP over a period of ten years and will bear interest at the
prime rate of interest. The primary source of repayment will be contributions
made to the ESOP by the Association. Common Shares purchased with such loan
proceeds will be held in a suspense account for allocation among ESOP
participants as the loan is repaid. If the ESOP is unable to purchase all or
part of the Common Shares for which it subscribes, the ESOP may purchase common
shares on the open market or may purchase authorized but unissued common
shares. If the ESOP purchases authorized but unissued common shares, such
purchases could have a dilutive effect on the interests of the Holding
Company's shareholders.
The Holding Company, or a committee appointed by the Board of Directors of
the Holding Company will administer the ESOP. The common shares and other ESOP
funds will be held by a trustee selected and appointed by the Holding Company
(the "ESOP Trustee"). The ESOP Trustee will vote all common shares of the
Holding Company held in the ESOP that are allocated to the accounts of ESOP
participants in accordance with the instructions of such participants. Common
shares held by the ESOP that are not directed by participants or which are not
allocated to participants' accounts will be voted by the ESOP Trustee in the
same proportion with the vote of participants with respect to allocated shares.
65
<PAGE>
Contributions will be made to the ESOP by the Association based upon the
understanding that the ESOP will be a tax-qualified plan under the Code.
Although no assurances can be given, the Holding Company expects a favorable
result when the ESOP is submitted to the Internal Revenue Service for a
determination in respect of such tax qualification.
Stock Option Plan. After the completion of the Conversion, the Board of
Directors of the Holding Company intends to adopt the Stock Option Plan,
subject to approval by the shareholders of the Holding Company. The purposes
of the Stock Option Plan include retaining and providing incentives to the
directors, officers and employees of the Holding Company and its subsidiaries
by facilitating their purchase of a stock interest in the Holding Company.
Options granted under the Stock Option Plan may be "incentive stock
options" within the meaning of Section 422 of the Code (an "ISO") or may not be
ISOs ("Non-qualified Options"). The option exercise price will be determined
by the Stock Option Committee at the time of grant. However, the exercise
price for an ISO or for any option must not be less than 100% of the fair
market value of the shares on the date of the grant if the Stock Option Plan is
implemented by the Holding Company during the first year following the
completion of the Conversion. No stock option will be exercisable after the
expiration of ten years from the date that it is granted. However, in the case
of an ISO granted to an employee who owns more than 10% of the Holding
Company's outstanding common shares at the time an ISO is granted under the
Stock Option Plan, the exercise price of the ISO may not be less than 110% of
the fair market value of the shares on the date of the grant and the ISO may
not be exercisable after the expiration of five years from the date of grant.
A director who is not a director at the time the Stock Option Plan is
adopted but is later elected may also be granted options pursuant to the Stock
Option Plan on or after the date of his or her election. The Stock Option
Committee may grant options under the Stock Option Plan to the officers and
employees of the Holding Company and the Association at such times as they deem
most beneficial to the Holding Company on the basis of the individual
participant's responsibility, tenure and future potential.
An option recipient cannot transfer or assign an option other than by will,
in accordance with the laws of descent and distribution or pursuant to a
domestic relations order issued by a court of competent jurisdiction.
"Termination for cause," as defined in the Stock Option Plan, will result in
the annulment of any outstanding options.
The Holding Company will receive no monetary consideration for the granting
of options under the Stock Option Plan. Upon the exercise of options, the
Holding Company will receive payment of cash, common shares of the Holding
Company or a combination of cash and common shares from option recipients in
exchange for shares issued.
A number of shares equal to 10% of the Common Shares sold in the Offering
is expected to be acquired by the Stock Option Plan from authorized but
unissued common shares of the Holding Company (the Holding Company may,
however, determine to acquire Common Shares in open market purchases to fund
some or all of the shares subject to the Stock Option Plan), which shares
thereafter may be acquired upon the exercise of options to be granted to
certain directors, officers and employees of the Holding Company and its
subsidiaries from time to time under the Stock Option Plan. No determination
has been made regarding the recipients of awards under the Stock Option Plan or
the number of shares to be awarded to individual recipients. In accordance
with OTS regulations, the following restrictions will apply if the Stock Option
Plan is implemented by the Holding Company
66
<PAGE>
during the first year following the completion of the Conversion: (i) the Stock
Option Plan must be approved by the shareholders of the Holding Company at the
first annual or a special meeting of shareholders, in either case to be held no
sooner than six months after the completion of the Conversion; (ii) awards to
directors who are not full-time employees of the Holding Company or the
Association may not exceed 5% per person and 30% in the aggregate of the total
number of shares reserved for issuance under the plan; (iii) awards to
directors or other persons who are full-time employees of the Holding Company
or the Association may not exceed 25% per person; and (iv) options will become
exercisable at the rate of one-fifth per year commencing no earlier than one
year from the date the Stock Option Plan is approved by the shareholders,
subject to acceleration of vesting only in the event of the death or disability
of a participant.
The Board of Directors of the Holding Company intends to create a "grantor
trust" to acquire the common shares to be awarded under the Stock Option Plan.
For corporate law purposes, such shares shall be deemed to be issued and
outstanding when acquired by the trust. Common shares held by the trust will
be voted by the trustees of the Stock Option Plan who are expected to be
directors of the Association. Dividends or distributions payable with respect
to shares held by the trust shall be allocated to the participants' accounts
under the Stock Option Plan. When a participant in the Stock Option Plan
acquires shares pursuant to the exercise of options, such shares and amounts
equal to accrued dividends and distributions thereon, shall be released from
the trust to the participant and the exercise price paid by the participant
with respect to the options shall be remitted to the Holding Company.
The Stock Option Plan will be administered by a committee comprised of
directors of the Holding Company (the "Stock Option Committee"). Persons
eligible for awards under the Stock Option Plan will consist of directors,
officers and key employees of the Holding Company or the Association who hold
positions with significant responsibilities or whose performance or potential
contribution in the judgment of the Stock Option Committee, will contribute to
the future success of the Holding Company or the Association. The Stock Option
Committee will consider the position, duties and responsibilities of the
officers and key employees of the Holding Company and the Association, the
value of their services to the Holding Company and the Association and any
other factors the Stock Option Committee may deem relevant.
Management Recognition Plan. After the completion of the Conversion, the
Association intends to adopt the MRP. The purpose of the MRP is to provide
directors, officers and certain key employees of the Association with an
ownership interest in the Association in a manner designed to compensate such
directors, officers and key employees for services to the Association. The
Association expects to contribute sufficient funds to enable the MRP to
purchase up to 4% of the Common Shares sold in the Offering. Such shares may
be purchased in the market following the Conversion or may be purchased from
the authorized but unissued shares of the Holding Company.
The Board of Directors of the Holding Company intends to create a "grantor
trust" to acquire the common shares to be awarded under the MRP. For corporate
law purposes, such shares shall be deemed to be issued and outstanding when
acquired by the trust. Common shares held by the trust will be voted by the
trustees of the MRP who are expected to be directors of the Association.
Dividends or distributions payable with respect to shares held by the trust
shall be allocated to the participants' accounts under the MRP. When a
participant in the MRP earns shares pursuant to his or her vesting schedule,
such shares and amounts equal to accrued dividends and distributions thereon,
shall be released from the trust to the participant.
67
<PAGE>
The MRP will be administered by a committee comprised of directors of the
Association (the "MRP Committee"). In selecting the officers and employees and
directors to whom awards will be granted and the number of shares covered by
such awards, the MRP Committee will consider the position, duties and
responsibilities of such officers and employees or directors, the value of
their services to the Association and any other factors the MRP Committee may
deem relevant. Compensation expense in the amount of the fair market value of
the MRP shares will be recognized as the shares are earned. In addition, a
director who is not a director at the time the MRP is approved but is later
elected may also be granted common shares pursuant to such formula on or after
the date of his or her election.
No determination has been made regarding recipients of MRP awards or the
number of shares to be awarded to individual recipients. In accordance with
OTS regulations, the following restrictions will apply if the MRP is
implemented during the first year following the completion of the Conversion:
(i) the MRP must be approved by the shareholders of the Holding Company at the
first annual or a special meeting of shareholders, in either case to be held no
sooner than six months after the completion of the Conversion; (ii) awards to
directors who are not full-time employees of the Holding Company or the
Association may not exceed 5% per person and 30% in the aggregate of the total
number of shares reserved for issuance under the plan; (iii) awards to
directors or other persons who are full-time employees of the Holding Company
or the Association may not exceed 25% per person; and (iv) MRP shares will be
earned and nonforfeitable at the rate of one-fifth per year on each of the
first five anniversaries of the award, subject to acceleration only in the
event of the death or disability of a participant.
Employment Agreements
The Association intends to enter into employment agreements with William R.
Faulk, President of the Association and Ms. Beth B. Knight, Vice-President-
Finance and Chief Financial Officer of the Association (the "Employment
Agreements"). The Association currently has no employment agreements with any
of its officers. The Employment Agreements will become effective upon the
completion of the Conversion and will each provide for a term of three years,
renewing at the end of each year at the option of the Association, with salary
in any year to be not less that the first year of the term and with performance
and salary review to be undertaken by the Board of Directors not less often
than annually. The initial salary of Mr. Faulk and Ms. Knight under the
Employment Agreements shall be $78,750 and $49,875, respectively. The
Employment Agreements will also provide for the inclusion of Mr. Faulk and Ms.
Knight in any formally established employee benefit, bonus, pension and profit-
sharing plans for which senior management personnel are eligible.
Each Employment Agreement will be terminable by the Association at any
time. In the event of termination by the Association for "just cause," as
defined in the Employment Agreement, Mr. Faulk and/or Ms. Knight will have no
right to receive any compensation or other benefits for any period after such
termination. In the event of termination by the Association other than for
just cause, Mr. Faulk and/or Ms. Knight will be entitled to a continuation of
salary payments for a period of time equal to the term of the Employment
Agreement and a continuation of benefits substantially equal to those being
provided at the date of termination of employment until the earliest to occur
of the end of the term of the Employment Agreement or the date on which Mr.
Faulk and/or Ms. Knight becomes employed full-time by another employer.
Each Employment Agreement also will contain provisions with respect to the
occurrence within one year of a "change of control" of (1) the termination of
employment of the employee for any
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reason other than just cause, retirement or termination at the end of the term
of the agreement, or (2) a constructive termination resulting from change in
the capacity or circumstances in which the employee is employed or a material
reduction in his responsibilities, authority, compensation or other benefits
provided under the Employment Agreement without the employee's written consent.
In the event of any such occurrence, the employee will be entitled to payment
of an amount equal to (a) the amount of compensation to which he would be
entitled for the remainder of the term of the Employment Agreement, plus (b)
the difference between (i) three times the employee's average annual
compensation for the three taxable years immediately preceding the termination
of employment less (ii) the amount paid to the employee as compensation for the
remainder of the employment term. In addition, the employee will be entitled to
continued coverage under all benefit plans until the earliest of the end of the
term of the Employment Agreement or the date on which he is included in another
employer's benefit plans as a full-time employee. The maximum which the
employee may receive, however, is limited to an amount which will not result in
the imposition of a penalty tax pursuant to Section 28OG(b)(3) of the Code.
"Change of Control," as defined in the Employment Agreement, generally refers
to the acquisition by any person or entity of the ownership or power to vote
10% or more of the voting stock of the Association or the Holding Company, the
control of the election of a majority of the directors of the Association or
the Holding Company or the exercise of a controlling influence over the
management or policies of the Association or the Holding Company.
Certain Transactions with the Association
In accordance with the OTS regulations, the Association makes loans
to executive officers and directors of the Association in the ordinary course
of business and on the same terms and conditions, including interest rates and
collateral, as those of comparable loans to other persons. All outstanding
loans to executive officers and directors comply with such policy, do not
involve more than the normal risk of collectibility or present other
unfavorable features and are current in their payments. Loans to all directors
and executive officers of the Association and their related interests totaled
$689,788 at June 30, 1996. Any future transactions between the Holding Company
and the Association or any other affiliate of the Holding Company will be on
terms no less favorable than could be approved by a majority of the directors
of the Holding Company including the majority of disinterested directors.
Finis E. St. John, IV, Chairman of the Association and of the Holding
Company, serves as general counsel to the Association. The Association expects
to continue to engage Mr. St. John in such capacity in the future.
REGULATION
General
As a federally chartered savings and loan association, the Association is
subject to regulation, examination and oversight by the OTS. Because the
Association's deposits are insured by the FDIC, the Association also is subject
to general oversight by the FDIC. The Association must file periodic reports
with the OTS and the FDIC concerning its activities and financial condition.
Examinations are conducted periodically by federal regulators to determine
whether the Association is in compliance with various regulatory requirements
and is operating in a safe and sound manner. The Association is a member of
the FHLB of Atlanta.
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The Holding Company will be a savings and loan holding company within the
meaning of the Home Owners Loan Act, as amended (the "HOLA"). Consequently,
the Holding Company will be subject to regulation, examination and oversight by
the OTS and will be required to submit periodic reports thereto. Because the
Holding Company is a corporation organized under Delaware law, the Holding
Company is also subject to the provisions of the Delaware General Corporation
Law applicable to Delaware corporations generally.
The United States Congress recently enacted legislation to recapitalize
the SAIF. See "- Federal Deposit Insurance Corporation -- Assessments." The
legislation provides for the merger of the BIF with the SAIF, with such merger
being conditioned on the prior elimination of the thrift charter. The
Association may subsequently be regulated under federal law in the same fashion
as banks. As a result, the Association may become subject to additional
regulation, examination and oversight by the FDIC. In addition, the Holding
Company might become a bank holding company, subject to examination, regulation
and oversight by the Board of Governors of the Federal Reserve ("FRB"),
including greater activity and capital requirements than imposed on it by the
OTS.
Office of Thrift Supervision
General. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all federally chartered
savings and loan associations and all other savings and loan associations the
deposits of which are insured by the FDIC. The OTS issues regulations
governing the operation of savings and loan associations, regularly examines
such associations and imposes assessments on savings associations based on
their asset size to cover the costs of this supervision and examination. The
OTS also may initiate enforcement actions against savings and loan associations
and certain persons affiliated with them for violations of laws or regulations
or for engaging in unsafe or unsound practices. If the grounds provided by law
exist, the OTS may appoint a conservator or receiver for a savings and loan
association.
Regulatory Capital Requirements. The Association is required by OTS
regulations to meet certain minimum capital requirements. For information
regarding the Association's regulatory capital at June 30, 1996 and at
September 30, 1996, and pro forma regulatory capital after giving effect to the
Conversion, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Capital Resources; - Liquidity;" "REGULATORY
CAPITAL COMPLIANCE" and "RECENT DEVELOPMENTS."
Current capital requirements call for tangible capital of 1.5% of adjusted
total assets, core capital of 3.0% of adjusted total assets and risk-based
capital of 8.0% of risk-weighted assets (assets, including certain off-balance
sheet items, are weighted at percentage levels ranging from 0% to 100%
depending on the relative risk).
The OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and an acceptable
level of risk will be required to maintain core capital of from 4% to 5%,
depending on the association's examination rating and overall risk. The
Association does not anticipate that it will be adversely affected if the core
capital requirement regulation is amended as proposed.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure the effect of an immediate 200 basis point change in interest
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rates on the value of its portfolio as determined under the methodology of the
OTS. If the measured interest rate risk is above the level deemed normal under
the regulation, the association will be required to deduct one-half of such
excess exposure from its total capital when determining its risk-based capital.
In general, an association with less than $300 million in assets and a risk-
based capital ratio in excess of 12% will not be subject to the interest rate
risk component, and the Association qualifies for such exemption. Pending
implementation of the interest rate risk component, the OTS has the authority
to impose a higher individualized capital requirement on any savings
association it deems to have excess interest rate risk. The OTS also may adjust
the risk-based capital requirement on an individualized basis to take into
account risks due to concentrations of credit and non-traditional activities.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Asset/Liability Management."
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings and
loan associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. The OTS has
defined these capital levels as follows: (i) well-capitalized associations must
have total risk-based capital of at least 10%, core risk-based capital
(consisting only of items that qualify for inclusion in core capital) of at
least 6% and core capital of at least 5%; (ii) adequately capitalized
associations are those that meet the regulatory minimum of total risk-based
capital of 8% core risk-based capital (consisting only of items that qualify
for inclusion in core capital) of 4%, and core capital of 4% (except for
associations receiving the highest examination rating, in which case the level
is 3%) but are not well-capitalized; (iii) undercapitalized associations are
those that do not meet regulatory limits, but that are not significantly
undercapitalized; (iv) significantly undercapitalized associations have total
risk-based capital of less than 6%, core risk-based capital (consisting only of
items that qualify for inclusion in core capital) of less than 3% or core
capital of less than 3%; and (v) critically undercapitalized associations are
those with core capital of less than 2% of total assets. In addition, the OTS
generally can downgrade an association's capital category, notwithstanding its
capital level, if, after notice and opportunity for hearing, the association is
deemed to be engaging in an unsafe or unsound practice because it has not
corrected deficiencies that resulted in it receiving a less than satisfactory
examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition. An undercapitalized association must submit a
capital restoration plan to the OTS within 45 days after it becomes
undercapitalized. Undercapitalized associations will be subject to increased
monitoring and asset growth restrictions and will be required to obtain prior
approval for acquisitions, branching and engaging in new lines of business.
Critically undercapitalized institutions must be placed in conservatorship or
receivership within 90 days of reaching that capitalization level, except under
limited circumstances. The Association's capital at June 30, 1996, meets the
standards for a well-capitalized institution.
Federal law prohibits a savings and loan association from making a capital
distribution to anyone or paying management fees to any person having control
of the association if, after such distribution or payment, the association
would be undercapitalized. In addition, each company controlling an
undercapitalized association must guarantee that the association will comply
with its capital plan until the association has been adequately capitalized on
an average during each of four preceding calendar quarters and must provide
adequate assurances of performance. The aggregate liability pursuant to such
guarantee is limited to the lesser of (i) an amount equal to 5% of the
association's total assets at the time the association became undercapitalized,
or (ii) the amount that is necessary to bring the association into compliance
with all capital standards applicable to such association at the time the
association fails to comply with its capital restoration plan.
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Liquidity. OTS regulations require that savings associations maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Federal regulations also require each member institution to maintain an average
daily balance of short-term liquid assets of not less than 1% of the total of
its net withdrawable savings accounts and borrowings payable in one year or
less. Monetary penalties may be imposed upon member institutions failing to
meet liquidity requirements. The eligible liquidity of the Association at June
30, 1996, was approximately 33.3%, which exceeded the 5% liquidity requirement
by approximately $16 million. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Capital Resources; and -
Liquidity."
Qualified Thrift Lender Test. Savings and loan associations are required
to maintain a specified level of investments in assets that are designated as
qualifying thrift investments. Such investments are generally related to
domestic residential real estate and manufactured housing and include stock
issued by any FHLB, the Federal Home Loan Mortgage Corporation or the Federal
National Mortgage Association. The QTL test requires that 65% of an
institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business and 20% of liquid assets)
consist of qualified thrift investments on a monthly average basis in 9 out of
every 12 months. The OTS may grant exceptions to the QTL test under certain
circumstances. If a savings and loan association fails to meet the QTL Test,
the association and its holding company will be subject to certain operating
restrictions. A savings and loan association that fails to meet the QTL Test
will not be eligible for new FHLB advances. See "- Federal Home Loan Banks."
At June 30, 1996, the Association had QTL investments in excess of 80% of its
total portfolio assets.
Lending Limit. OTS regulations generally limit the aggregate amount that a
savings association can lend to one borrower or group of related borrowers to
an amount equal to 15% of the association's unimpaired capital, which is
defined for this purpose as total capital for regulatory purposes. At June 30,
1996, the Association's lending limit was $972,000. A savings association may
loan to one borrower an additional amount not to exceed 10% of the
association's unimpaired capital if the additional amount is fully secured by
certain forms of "readily marketable collateral." Real estate is not considered
"readily marketable collateral." Notwithstanding the level of unimpaired
capital and surplus, a savings association may lend up to $500,000 to any one
borrower or group of related borrowers. See "THE BUSINESS OF THE ASSOCIATION -
Lending Activities -- Loan Originations."
Transactions with Insiders and Affiliates. Loans to insiders are also
subject to Section 22(g) and (h) of the Federal Reserve Act ("FRA"), which
place restrictions on loans to executive officers, directors and principal
shareholders and their related interests. Generally, such loans must conform
to the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's unimpaired capital and surplus or
200% of unimpaired capital and surplus for eligible adequately capitalized
institutions with less than $100 million in assets. See "- Lending Limit."
Most loans to directors, executive officers and principal shareholders must be
approved in advance by a majority of the "disinterested" members of the board
of directors of the association with any "interested" director not
participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions with the general public. Loans to executive officers
are subject to additional limits. The Association was in compliance with such
restrictions at June 30, 1996. See "MANAGEMENT - Certain Transactions with the
Association."
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Savings associations must comply with Sections 23A and 23B of the FRA,
pertaining to transactions with affiliates. An affiliate of a savings
association is any company or entity that controls, is controlled by or is
under common control with the savings and loan association. The Holding
Company will be an affiliate of the Association. Generally, Sections 23A and
23B of the FRA (i) limit the extent to which a savings and loan association or
its subsidiaries may engage in "covered transactions" with any one affiliate to
an amount equal to 10% of such institution's capital stock and surplus, (ii)
limit the aggregate of all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus, and (iii) require that all such
transactions be on terms substantially the same, or at least as favorable to
the association, as those provided in transactions with a non-affiliate. The
term "covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and other similar types of transactions. In addition
to the limits in Sections 23A and 23B, a savings association may not make any
loan or other extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for a bank holding company and may not
purchase or invest in securities of any affiliate except shares of a
subsidiary. The Association was in compliance with these requirements and
restrictions at June 30, 1996.
Limitations on Capital Distributions. The OTS imposes various restrictions
or requirements on the ability of associations to make capital distributions,
according to ratings of associations based on their capital level and
supervisory condition. Capital distributions for purposes of such regulation
include, without limitation, payments of cash dividends, repurchases and
certain other acquisitions by an association of its shares and payments to
stockholders of another association in an acquisition of such other
association.
The first rating category is Tier 1, consisting of associations that,
before and after the proposed capital distribution, meet their fully phased-in
capital requirement. Associations in this category may make capital
distributions during any calendar year equal to the greater of 100% of their
net income, current year-to-date, plus 50% of the amount by which the lesser of
such association's tangible, core or risk-based capital exceeds its fully
phased-in capital requirement for such capital component, as measured at the
beginning of the calendar year, or the amount authorized for a Tier 2
association. The second category, Tier 2, consists of associations that,
before and after the proposed capital distribution, meet their current minimum,
but not fully phased-in capital requirement. Associations in this category may
make capital distributions up to 75% of their net income over the most recent
four quarters. Tier 3 associations do not meet their current minimum capital
requirement and must obtain OTS approval of any capital distribution. A Tier 1
association deemed to be in need of more than normal supervision by the OTS may
be downgraded to a Tier 2 or Tier 3 association.
The Association meets the requirements for a Tier 1 association and has not
been notified of any need for more than normal supervision. The Association
will also be prohibited from declaring or paying any dividends or from
repurchasing any of its stock if, as a result, the net worth of the Association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with the Conversion. In addition, as a
subsidiary of the Holding Company, the Association will also be required to
give the OTS 30 day's notice prior to declaring any dividend on its stock. The
OTS may object to the dividend during that 30-day period based on safety and
soundness concerns. Moreover, the OTS may prohibit any capital distribution
otherwise permitted by regulation if the OTS determines that such distribution
would constitute an unsafe or unsound practice.
In December 1994, the OTS issued a proposal to amend the capital
distributions limits. Under that proposal, associations not owned by a holding
company with a CAMEL examination rating of 1 or
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2 could make a capital distribution without notice to the OTS, if they remain
adequately capitalized, as described above, after the distribution is made. Any
other association seeking to make a capital distribution that would not cause
the association to fall below the capital levels to qualify as adequately
capitalized or better, would have to provide notice to the OTS. Except under
limited circumstances and with OTS approval, no capital distributions would be
permitted if it caused the association to become undercapitalized or worse.
Holding Company Regulation. After the Conversion, the Holding Company will
be a savings and loan holding company within the meaning of the HOLA. As such,
the Holding Company will register with the OTS and will be subject to OTS
regulations, examination, supervision and reporting requirements. Congress is
considering legislation which may require that the Holding Company become a
bank holding company regulated by the FRB. Bank holding companies with more
than $150 million in assets are subject to capital requirements similar to
those imposed on the Association and have more extensive interstate acquisition
authority than savings and loan holding companies. They are also subject to
more restrictive activity and investment limits than savings and loan holding
companies. No assurances can be given that such legislation will be enacted,
and the Holding Company cannot be certain of the legislation's impact on its
future operations until it is enacted.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings and loan association or savings and loan holding
company, without prior approval of the OTS, or from acquiring or retaining more
than 5% of the voting shares of a savings and loan association or holding
company thereof, which is not a subsidiary. Under certain circumstances, a
savings and loan holding company is permitted to acquire, with the approval of
the OTS, up to 15% of the previously unissued voting shares of an
undercapitalized savings and loan association for cash without such savings and
loan association being deemed to be controlled by such holding company. Except
with the prior approval of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock may also acquire control of any savings
institution, other than a subsidiary institution, or any other savings and loan
holding company.
The Holding Company will be a unitary savings and loan holding company.
Under current law, there are generally no restrictions on the activities of
unitary savings and loan holding companies and such companies are the only
financial institution holding companies which may engage in commercial,
securities and insurance activities without limitation. The broad latitude
under current law is restricted if the OTS determines that there is reasonable
cause to believe that the continuation by a savings and loan holding company of
an activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings and loan association. The OTS may impose
such restrictions as deemed necessary to address such risk, including limiting
(i) payment of dividends by the savings and loan association; (ii) transactions
between the savings and loan association and its affiliates; and (iii) any
activities of the savings and loan association that might create a serious risk
that the liabilities of the holding company and its affiliates may be imposed
on the savings and loan association. Notwithstanding the foregoing rules as to
permissible business activities of a unitary savings and loan holding company,
if the savings and loan association subsidiary of a holding company fails to
meet the QTL Test, then such unitary holding company would become subject to
the activities restrictions applicable to multiple holding companies. At June
30, 1996, the Association met the QTL Test. See "- Qualified Thrift Lender
Test."
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If the Holding Company were to acquire control of another savings
institution, other than through a merger or other business combination with the
Association, the Holding Company would become a multiple savings and loan
holding company. Unless the acquisition is an emergency thrift acquisition and
each subsidiary savings and loan association meets the QTL Test, the activities
of the Holding Company and any of its subsidiaries (other than the Association
or other subsidiary savings and loan associations) would thereafter be subject
to activity restrictions. The HOLA provides that, among other things, no
multiple savings and loan holding company or subsidiary thereof that is not a
savings institution shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary
thereof, any business activity other than (i) furnishing or performing
management services for a subsidiary savings institution; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv) holding
or managing properties used or occupied by a subsidiary savings institution;
(v) acting as trustee under deeds of trust; (vi) those activities previously
directly authorized by federal regulation as of March 5, 1987 to be engaged in
by multiple holding companies; or (vii) those activities authorized by the FRB
as permissible for bank holding companies, unless the OTS by regulation
prohibits or limits such activities for savings and loan holding companies, and
which have been approved by the OTS prior to being engaged in by a multiple
holding company.
The OTS may approve an acquisition resulting in the formation of a multiple
savings and loan holding company that controls savings and loan associations in
more than one state, only if the multiple savings and loan holding company
involved controls a savings and loan association that operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or
if the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). As under prior law, the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
and loan associations in more than one state in the case of certain emergency
thrift acquisitions.
No subsidiary savings and loan association of a savings and loan holding
company may declare or pay a dividend on its permanent or nonwithdrawable stock
unless it first, gives the OTS 30 days advance notice of such declaration and
payment. Any dividend declared during such period or without the giving of
such notice shall be invalid.
Federal Deposit Insurance Corporation
Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the BIF for commercial banks and
state savings banks and the SAIF for savings associations and banks that have
acquired deposits from savings associations. The FDIC is required to maintain
designated levels of reserves in each fund. The reserves of the SAIF are
currently below the level required by law, primarily because a significant
portion of the assessments paid into the SAIF have been used to pay the cost of
prior thrift failures while the reserves of the BIF met the level required by
law in May, 1995. Thrifts are generally prohibited from converting from one
insurance fund to the other until the SAIF meets its designated reserve level,
except with the prior approval of the FDIC in certain limited cases, and
provided certain fees are paid. The insurance fund conversion provisions do
not prohibit a SAIF member from converting to a bank charter or merging with a
bank during the moratorium as long as
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the resulting bank continues to pay the applicable insurance assessments to the
SAIF during such period and as long as certain other conditions are met.
The Association is a member of the SAIF and its deposit accounts are
insured by the FDIC up to the prescribed limits. The FDIC has examination
authority over all insured depository institutions, including the Association,
and has authority to initiate enforcement actions against federally insured
savings associations if the FDIC does not believe the OTS has taken appropriate
action to safeguard safety and soundness and the deposit insurance fund.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of
the SAIF. The FDIC may increase assessment rates for either fund if necessary
to restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both
SAIF and BIF members. Under this system, assessments vary depending on the
risk the institution poses to its deposit insurance fund. Such risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
Both the SAIF and the BIF are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of insured deposits. The BIF has achieved
the required reserve rate, and, as discussed below, the FDIC recently
substantially reduced the average deposit insurance premium paid by BIF-insured
banks to a level substantially below the average premium paid by savings
institutions.
The deposits of the Association are currently insured by the SAIF. Both
the SAIF and the Bank Insurance Fund ("BIF"), the federal deposit insurance
fund that covers the deposits of state and national banks and certain state
savings banks, are required by law to attain and thereafter maintain a reserve
ratio of 1.25% of insured deposits. The BIF has achieved the required reserve
rate, and, as discussed below, during the past year the FDIC reduced the
average deposit insurance premium paid by BIF-insured banks to a level
substantially below the average premium paid by savings institutions.
On November 4, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. That rule reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to a $2,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their current levels (23 basis points for
institutions in the lowest risk category). The reduction was effective with
respect to the semiannual premium assessment beginning January 1, 1996.
Banking legislation was enacted September 30, 1996 to eliminate the
premium differential between SAIF-insured institutions and BIF-insured
institutions. The FDIC Board of Directors met October 8,1996 and approved a
rule that, except for the possible impact of certain exemptions for de novo and
"weak" institutions, established the special assessment necessary to
recapitalize the SAIF at 65.7 basis points of SAIF assessable deposits held by
affected institutions as of March 31, 1995. The legislation provides that all
SAIF member institutions pay a special one-time assessment to recapitalize the
SAIF, which in the aggregate is sufficient to bring the reserve ratio in the
SAIF to 1.25% of insured deposits. It is anticipated that after
recapitalization of the SAIF, premiums paid by SAIF-insured institutions will
be reduced to match those currently being assessed by BIF-insured commercial
banks. The legislation also provides for the merger of the BIF and the SAIF,
with such merger being conditioned upon the prior elimination of the thrift
charter.
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Based upon its level of SAIF deposits as of March 31, 1995, the
Association will pay a special assessment of approximately $370,000, or
$237,000 net of related tax benefits. Accordingly, an accrual for that amount
was provided in the quarter ended September 30, 1996.
FRB Reserve Requirements
FRB regulations currently require savings associations to maintain reserves
of 3% of net transaction accounts (primarily NOW accounts) up to $52.0 million
in such accounts (subject to an exemption of $4.3 million) and of 10% of net
transaction accounts over $52.0 million. At June 30, 1996, the Association was
in compliance with the FRB's reserve requirements.
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Federal Home Loan Banks
The FHLBs provide credit to their members in the form of advances. See
"THE BUSINESS OF THE ASSOCIATION - Deposits and Borrowings." The Association
is a member of the FHLB of Atlanta and must maintain an investment in the
capital stock of the FHLB of Atlanta in an amount equal to the greater of 1% of
the aggregate outstanding principal amount of the Association's residential
mortgage loans, home purchase contracts and similar obligations at the
beginning of each year, and 5% of its advances from the FHLB. The Association
is in compliance with this requirement with an investment in stock of the FHLB
of Atlanta of $429,800 at June 30, 1996.
FHLB advances to members such as the Association who meet the QTL Test are
generally limited to the lower of (i) 25% of the member's assets and (ii) 20
times the member's investment in FHLB stock. The granting of advances is
subject also to the FHLB's collateral and credit underwriting guidelines. Upon
the origination or renewal of a loan or advance, the FHLB of Atlanta is
required by law to obtain and maintain a security interest in collateral in one
or more of the following categories: fully disbursed, whole first mortgage
loans on improved residential property or securities representing a whole
interest in such loans; securities issued, insured or guaranteed by the U.S.
Government or an agency thereof; deposits in any FHLB; or other real estate
related collateral (up to 30% of the member association's capital) acceptable
to the applicable FHLB, if such collateral has a readily ascertainable value
and the FHLB can perfect its security interest in the collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's
performance under the Community Reinvestment Act and its record of lending to
first-time home buyers. All long-term advances by each FHLB must be made only
to provide funds for residential housing finance. The FHLBs have established
an "Affordable Housing Program" to subsidize the interest rate of advances to
member associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. The FHLB of
Atlanta reviews and accepts proposals for subsidies under that program twice a
year. The Association has not participated in such program.
TAXATION
Federal Taxation
The Holding Company is subject to the federal tax laws that apply to
corporations generally. With certain exceptions, the Association is also
subject to the federal tax laws and regulations which apply to corporations
generally.
One such exception is related to special bad debt reserve deductions that
have in the past been available to thrift institutions such as the Association.
Under Section 593 of the Code, thrift institutions meeting certain definitional
tests primarily relating to their assets and the nature of their business, have
been permitted to establish a tax reserve for bad debts and to make annual
additions thereto, which additions could, within specified limitations, be
deducted in arriving at their taxable income. Under Section 593, for purposes
of the bad debt reserve deduction, loans were categorized as "qualifying real
property loans," which generally included loans secured by improved real
estate, and "nonqualifying loans," which included all other types of loans.
The amount of the bad debt reserve deduction for "nonqualifying loans" was
computed using an amount based on the Association's actual loss experience (the
"experience method"). A thrift institution could elect annually to compute its
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allowable addition to its bad debt reserves for qualifying loans under either
the experience method or based on a percentage equal to 8.0% of the
institution's taxable income (the "percentage of taxable income method").
The Association used the percentage of taxable income method for its fiscal
year ending September 30, 1995 and was allowed a bad-debt reduction of $54,000.
The Association has accumulated $1.8 million in its tax bad debt reserves as of
September 30, 1995.
The prior availability of the percentage of taxable income method permitted
qualifying thrift institutions to be taxed at a lower effective federal income
tax rate than that applicable to corporations generally. The Small Business
Job Protection Act of 1995 eliminates the lower effective federal income tax
rate for thrift institutions such as the Association.
In August, 1996 Congress enacted, and the President signed into law, the
Small Business Job Protection Act. Under the Small Business Job Protection
Act, Section 593 of the Code and the percentage of taxable income method are
repealed and the Association will hereafter be permitted to use only the
experience method of computing additions to its bad debt reserve. In addition,
the Association will be required to recapture (i.e., take into income) over a
six-year period the excess of the balance of its bad debt reserves as of
December 31, 1995 over the balance of such reserves as of December 31, 1987.
However, under the legislation, such recapture requirements would be suspended
for each of two successive taxable years beginning January 1, 1996, in which
the Association originates a minimum amount of certain residential loans based
upon the average of the principal amounts of such loans made by the Association
during its six taxable years preceding 1996. The Association is expected to
recapture approximately $32,000 of its tax bad debt reserves. The recapture
will not have an effect on the Association's financial statements because the
related tax expense has previously been accrued.
In addition to the regular income tax, the Association is subject to a
minimum tax. An alternative minimum tax is imposed at a minimum tax rate of
20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments and tax
preference items), less any available exemption. Such tax preference items
include (i) 100% of the excess of a thrift institution's bad debt deduction
over the amount that would have been allowable based on actual experience and
(ii) interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current
earnings" exceeds its alternative minimum taxable income computed without
regard to this preference item and prior to reduction by net operating losses,
is included in alternative minimum taxable income. Net operating losses can
offset no more than 90% of alternative minimum taxable income. The alternative
minimum tax is imposed to the extent it exceeds the corporation's regular
income tax. Payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years.
If the Association distributes cash or property to its stockholders, and
the distribution is treated as being from its accumulated bad debt reserves,
the distribution will cause the Association to have additional taxable income.
A distribution is deemed to have been made from accumulated bad debt reserves
to the extent that (a) the reserves exceed the amount that would have been
accumulated on the basis of actual loss experience, and (b) the distribution is
a "non-qualified distribution." A distribution with respect to stock is a non-
qualified distribution to the extent that, for federal income tax purposes,
(i) it is in redemption of shares, (ii) it is pursuant to a liquidation of the
institution, or (iii) in the case of a current distribution, together with all
other such distributions during the taxable year, it exceeds the institution's
current and post-1951 accumulated earnings and profits. The amount of
additional
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taxable income created by a non-qualified distribution is an amount
that when reduced by the tax attributable to it is equal to the amount of the
distribution.
The tax returns of the Association have been closed by statute or audited
through 1992. In the opinion of management, any examination of open returns
would not result in a deficiency which could have a material adverse effect on
the financial condition of the Association.
State Taxation
The State of Alabama imposes a 6.0% excise tax on the earnings of financial
institutions such as the Association. The 6.0% excise tax also would apply to
the Holding Company. In addition to the excise taxes, the State of Alabama
imposes an annual state franchise tax for domestic and foreign corporations. A
domestic corporation, including a federally chartered stock savings bank
domiciled in Alabama, is assessed a domestic franchise tax of approximately
1.0% based on the par value of its common stock. Foreign corporations, such as
the Holding Company which is incorporated in Delaware, are assessed a foreign
franchise tax of 0.3% based on a total of capital (as determined by statute)
deemed to be employed in the state of Alabama. The foreign corporation's
investment in the capital of an Alabama corporation is excluded from the
taxable base. The Holding Company will also be subject to the Delaware
franchise tax.
THE CONVERSION
THE OTS HAS APPROVED THE PLAN, SUBJECT TO THE APPROVAL OF THE PLAN BY THE
MEMBERS OF THE ASSOCIATION ENTITLED TO VOTE ON THE PLAN AND SUBJECT TO THE
SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS. OTS APPROVAL DOES
NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN.
General
On June 10, 1996, the Board of Directors of the Association unanimously
adopted the Plan pursuant to which the Association will be converted from a
federal mutual savings and loan association to a federal stock savings and loan
association. The Plan was amended on September 16, 1996.
The Plan provides generally that the Holding Company and the Association
will offer Common Shares for sale in the Subscription Offering to Eligible
Account Holders, the ESOP, Supplemental Eligible Account Holders and Other
Members. The Holding Company may offer the Common Shares not subscribed for in
the Subscription Offering in a Community Offering to certain members of the
general public. See "- Community Offering." The Association and the Holding
Company have the right in their sole discretion to accept or reject, in whole
in or part, any orders to purchase shares of the Common Shares received in the
Community Offering.
The aggregate price of the shares of Common Shares to be issued in the
Conversion within the Valuation Range, currently estimated to be between
$7,310,000 and $9,890,000, will be determined based upon an independent
appraisal of the estimated pro forma market value of the Common Shares of the
Association. All shares of Common Shares to be issued and sold in the
Conversion will be sold at the same price. The independent appraisal will be
affirmed or, if necessary, updated at the completion of the Subscription and
Community Offerings, if all shares are subscribed for, or at the
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completion of the Syndicated Community Offering. The appraisal has been
performed by Ferguson & Co., an independent consulting firm experienced in the
valuation and appraisal of savings institutions. See "- Pricing and Number of
Common Shares to be Sold" for more information as to the determination of the
estimated pro forma market value of the Common Shares.
The following is a brief summary of all material aspects of the
Conversion. The summary is qualified in its entirety by reference to the
provisions of the Plan. A copy of the Plan is available for inspection at each
branch of the Association and at the offices of the OTS, 1700 G Street, N.W.,
Washington, D.C. 20552 and 1475 Peachtree Street, N.E., Atlanta, Georgia
30348. See "ADDITIONAL INFORMATION."
Reasons for the Conversion
As a mutual institution, the Association does not have shareholders and has
no authority to issue capital stock. The Board of Directors of the Association
believes that the ability to issue and sell stock will provide additional
capital for investment, increase the Association's operational flexibility and
enable the Association to operate in the form used by commercial banks, most
business corporations and an increasing number of thrift institutions. The
formation of the Holding Company will provide greater flexibility than the
Association would have alone for growth and diversification of business
activities. The Conversion also will enable the Association to utilize stock-
related incentive programs, which the Board of Directors believes will benefit
the Association and its shareholders by enabling it to attract and retain well-
qualified directors, management and staff.
In adopting the Plan, the Board of Directors of the Association determined
that the Association will derive substantial benefits from the Conversion and
that the Conversion is in the best interests of the Association and its
members. The net proceeds from the sale of shares of stock will increase the
Association's regulatory capital and thereby enable further growth, with the
result that additional funds will be available for lending and other investment
purposes.
The Conversion will also give members of the Association, at their option,
the opportunity to become shareholders of the Holding Company. No member of
the Association will be obligated to subscribe or not to subscribe for Common
Shares by voting on the Plan, nor will any member's savings account be
converted into Common Shares by such vote.
Principal Effects of the Conversion
Continuity. During and after completion of the Conversion, the Association
will continue to provide the services presently offered to depositors and
borrowers, will maintain its existing offices and will retain its existing
management and employees. The Association will continue to be subject to
regulation by the OTS and FDIC.
Voting Rights. Savings account holders who are members of the Association
in its mutual form will have no voting rights in the Association as converted
and will not participate, therefore, in the election of directors or otherwise
control the Association's affairs. Voting rights in the Holding Company will
be held exclusively by its shareholders, and voting rights in the Association
will be held exclusively by the Holding Company. Each holder of the Holding
Company's common shares will be entitled to one vote for each share owned on
any matter to be considered by the Holding Company's shareholders. See
"DESCRIPTION OF AUTHORIZED SHARES."
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Effect on Savings Accounts and Loans. Savings accounts in the Association,
as converted, will be equivalent in amount, interest rate and other terms to
the present savings accounts in the Association, and the existing FDIC
insurance on such deposits will not be affected by the Conversion. The
Conversion will not affect the terms of loan accounts or the rights and
obligations of borrowers under their individual contractual arrangements with
the Association.
Tax Consequences. The consummation of the Conversion is expressly
conditioned on receipt by the Association of a private letter ruling from the
Internal Revenue Service or an opinion of counsel to the effect that the
Conversion will constitute a tax-free reorganization as defined in Section
368(a) of the Code. The Association intends to proceed with the Conversion
based upon an opinion rendered by its special counsel, Bayh, Connaughton &
Malone, P.C., to the following effect: (1) The Conversion constitutes a
reorganization within the meaning of Section 368(a)(1)(F) of the Code, and no
gain or loss will be recognized by the Association in its mutual form or in its
stock form as a result of the Conversion; (2) No gain or loss will be
recognized by the Association upon the receipt of money from the Holding
Company in exchange for the capital stock of the Association, as converted;
(3) The basis of the assets of the Association will be the same immediately
after the Conversion as the basis in the Association's hands immediately prior
to the Conversion; (4) The holding period of the assets of the Association
after the Conversion will include the period during which the assets were held
by the Association before the Conversion; (5) No gain or loss will be
recognized by the deposit account holders of the Association upon the
constructive issuance to them, in exchange for their respective withdrawable
deposit accounts in the Association immediately prior to the Conversion, of
withdrawable deposit accounts of equal dollar amount in the Association
immediately after the Conversion, plus, in the case of Eligible Account Holders
and Supplemental Eligible Account Holders, the interests in the Liquidation
Account of the Association, as described below; (6) The basis of the deposit
accounts in the Association held by its deposit account holders immediately
after the Conversion will be the same as the basis of their deposit accounts in
the Association immediately prior to the Conversion; (7) The basis of the
interests in the Liquidation Account received by the Eligible Account Holders
and Supplemental Eligible Account Holders will be zero and the basis of the
nontransferable subscription rights received by Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members will be zero (assuming
that at distribution such rights have no ascertainable fair market value); (8)
No gain or loss will be recognized by Eligible Account Holders, Supplemental
Eligible Account Holders or Other Members upon the issuance to them of
nontransferable subscription rights to purchase Common Shares (assuming that at
issuance such rights have no ascertainable fair market value), and no taxable
income will be realized by such Eligible Account Holders, Supplemental Eligible
Account Holders or Other Members as a result of their exercise of such
nontransferable subscription rights; (9) The basis of the Common Shares to its
shareholders will be the actual purchase price ($20.00) thereof (assuming that
subscription rights of such shareholder, if any, have no ascertainable fair
market value) and the holding period of such shares will commence on the day
after the date of the purchase; (10) Immediately, after the Conversion, the
Association in its stock form will succeed to and take into account the tax
attributes of the Association in its mutual form immediately prior to the
Conversion, including the Association's earnings and profits or deficit in
earnings and profits; and (11) The Association in its stock form will succeed
to and take into account the dollar amounts of those accounts of the
Association in its mutual form which represent bad debt reserves in respect of
which the Association in its mutual form has taken a bad debt deduction for
taxable years ending on or before the Conversion.
The Association has also received the opinion of Miller, Hamilton, Snider &
Odom, L.L.C., that no gain or loss will be recognized by the Association as a
result of the Conversion for purposes of Alabama tax law. Miller, Hamilton,
Snider & Odom, L.L.C. is counsel for the Agent in the offering,
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however, as Alabama counsel experienced in tax matters, the firm has been
retained by the Association, with the consent of the Agent, for the limited
purpose of giving the Alabama tax opinion.
The Association has received an opinion from Ferguson & Co. to the effect
that the subscription rights have no ascertainable fair market value because
the rights are received by specified persons at no cost, may not be transferred
and are of short duration. The IRS could challenge the assumption that the
subscription rights have no ascertainable fair market value.
Liquidation Account. In the unlikely event of a complete liquidation of
the Association in its present mutual form, each depositor in the Association
would receive a pro rata share of any assets of the Association remaining after
payment of the claims of all creditors, including the claims of all depositors
to the withdrawable value of their savings accounts. A depositor's pro rata
share of such remaining assets would be the same proportion of such assets as
the value of such depositor's savings deposits bears to the total aggregate
value of all savings deposits in the Association at the time of liquidation.
In the event of a complete liquidation of the Association in its stock form
after the Conversion, each savings depositor would have a claim of the same
general priority as the claims of all other general creditors of the
Association. Except as described below, each depositor's claim would be solely
in the amount of the balance in such depositor's savings account plus accrued
interest. The depositor would have no interest in the assets of the
Association above that amount. Such assets would be distributed to the
shareholders of the Association.
For the purpose of granting a limited priority claim to the assets of the
Association in the event of a complete liquidation thereof to Eligible Account
Holders and Supplemental Eligible Account Holders who continue to maintain
savings accounts at the Association after the Conversion, the Association will,
at the time of Conversion, establish the Liquidation Account in an amount equal
to the regulatory capital of the Association as of June 30, 1996. The function
of the Liquidation Account is to establish a priority on liquidation, and the
existence of the Liquidation Account shall not operate to restrict the use or
application of any of the net worth accounts of the Association.
The Liquidation Account shall be maintained by the Association subsequent
to Conversion for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who retain their savings accounts in the Association.
Each Eligible Account Holder and Supplemental Eligible Account Holder shall,
with respect to each savings account held, have a related inchoate interest in
a portion of the Liquidation Account (referred to herein as the "subaccount
balance").
The initial subaccount balance for a savings account held by an Eligible
Account Holder and/or a Supplemental Eligible Account Holder shall be
determined by multiplying the opening balance in the Liquidation Account by a
fraction of which the numerator is the amount of the Qualifying Deposit in the
related savings account and the denominator is the total amount of the
Qualifying Deposits of all Eligible Account Holders and Supplemental Eligible
Account Holders in the Association. Such initial subaccount balance shall not
be increased but shall be subject to downward adjustment as provided below.
If the deposit balance in any savings account of an Eligible Account Holder
or Supplemental Eligible Account Holder to which the subaccount relates at the
close of business on the last day of any fiscal year of the Association
subsequent to the Eligibility Record Date or Supplemental Eligibility Record
Date is less than the lesser of (i) the deposit balance in such savings account
at the close of
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business on the last day of the fiscal year of the Association subsequent to
the Eligibility Record Date or the Supplemental Eligibility Record Date, or
(ii) the amount of the Qualifying Deposit in such savings account on the
Eligibility Record Date or the Supplemental Eligibility Record Date, then the
subaccount balance for such savings account shall be adjusted by reducing such
subaccount balance in an amount proportionate to the reduction in such deposit
balance. In the event of a downward adjustment, the subaccount balance shall
not be subsequently increased, notwithstanding any increase in the deposit
balance of the related savings account. If any such savings account is closed,
the related subaccount balance shall be reduced to zero. The subaccount of an
account holder will be maintained for so long as the account holder maintains
an account with the same Social Security or taxpayer identification number.
In the event of a complete liquidation of the Association (and only in such
event), each Eligible Account Holder and Supplemental Eligible Account Holder
shall be entitled to receive a liquidation distribution from the Liquidation
Account in the amount of the then-current adjusted subaccount balances for
savings accounts then held before any liquidation distribution may be made to
shareholders of the Association. A merger, consolidation, sale of bulk assets
or similar combination or transaction with another institution insured by the
Federal Deposit Insurance Corporation would not be considered to be a complete
liquidation for these purposes. In such transactions, the Liquidation Account
would be assumed by the surviving institution.
Common Shares. SHARES ISSUED UNDER THE PLAN CANNOT AND WILL NOT BE INSURED
BY THE FDIC. Upon the completion of the Conversion, funds transferred from
accounts held at the Association and used to purchase Common Shares will no
longer be insured by the FDIC or any other government agency. For a
description of the characteristics of the Common Shares, see "DESCRIPTION OF
AUTHORIZED SHARES."
Subscription Offering
The Subscription Offering will expire on the Subscription Expiration Date
(12:00 noon, Central Time, on ________, 1996) unless extended. Subscription
rights not exercised before the Subscription Expiration Date will be void,
whether or not the Association has been able to locate each person entitled to
such subscription rights.
Nontransferable subscription rights to purchase Common Shares are being
issued at no cost to all eligible persons and entities in accordance with the
preference categories established by the Plan, as described below. Each
subscription right may be exercised only by the person to whom it is issued and
only for his or her own account. Each person subscribing for Common Shares
must represent to the Association that he or she is purchasing the Common
Shares for his or her own account and that he or she has no agreement or
understanding with any other person for the sale or transfer of the Common
Shares. The Association will not honor stock orders known by it to involve the
transfer of subscription rights or to contain false or misleading information.
Any person who attempts to transfer his or her subscription rights may be
subject to penalties and sanctions, including loss of the subscription rights.
The number of Common Shares which a person who has subscription rights may
purchase will be determined, in part, by the total number of Common Shares to
be issued and the availability of Common Shares for purchase under the
preference categories set forth in the Plan and certain other limitations. See
"- Limitations on Purchases of Common Shares." The sale of any Common Shares
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pursuant to subscriptions received is contingent upon approval of the Plan by
the voting members of the Association at the Special Meeting.
The preference categories and purchase limitations which have been
established by the Plan, in accordance with applicable regulations, for the
allocation of Common Shares are as follows:
(a) Subscription Rights of Eligible Account Holders. Eligible Account
Holders shall have the following rights to subscribe for and purchase Common
Shares:
(i) Each Eligible Account Holder shall receive, without payment,
nontransferable Subscription Rights to purchase Common Shares in an amount
equal to the greater of (a) $150,000 or (b) 15 times the product (rounded down
to the next whole number) obtained by multiplying the total number of Common
Shares to be issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Eligible Account Holder and the denominator is the
total amount of Qualifying Deposits of all Eligible Account Holders, in each
case on the Eligibility Record Date.
(ii) In the event of an oversubscription for Common Shares by Eligible
Account Holders, Common Shares shall be allocated among subscribing Eligible
Account Holders so as to permit each such Eligible Account Holder, to the
extent possible, to purchase a number of Common Shares sufficient to make his
or her total allocation equal to 100 shares or the total amount of his or her
subscription, whichever is less. Any shares not so allocated shall be
allocated among the subscribing Eligible Account Holders on an equitable basis,
in proportion to the amounts of their respective aggregate Qualifying Deposits,
as compared to the total aggregate Qualifying Deposits of all subscribing
Eligible Account Holders, in each case on the Eligibility Record Date.
(iii) Subscription Rights to purchase Common Shares received by Officers
and directors of the Association and any Associate thereof, based on increased
deposits of such person in the Association in the one year period preceding the
Eligibility Record Date shall be subordinate to the Subscription Rights of all
other Eligible Account Holders.
(b) Subscription Rights of the ESOP. The ESOP shall receive, without
payment, nontransferable Subscription Rights to purchase up to 10% of the
Common Shares issued in the Conversion. Subscription rights of the ESOP shall
be subordinated to the Subscription Rights received by Eligible Account Holders
pursuant to paragraph (a) above, provided that Common Shares, if any, sold in
excess of the high end of the valuation range may be first sold to the ESOP.
Although the Plan and OTS regulations permit the ESOP to purchase up to 10% of
the Common Shares, the Holding Company anticipates that the ESOP will purchase
8% of the Common Shares. If the ESOP is unable to purchase all or part of the
Common Shares for which it subscribes, the ESOP may purchase Common Shares on
the open market or may purchase authorized but unissued Common Shares. If the
ESOP purchases authorized but unissued Common Shares, such purchases could have
a dilutive effect on the interests of the Holding Company's shareholders.
(c) Subscription Rights of Supplemental Eligible Account Holders.
Supplemental Eligible Account Holders shall have the following rights to
subscribe for and purchase Common Shares:
(i) Each Supplemental Eligible Account Holder shall receive, without
payment, nontransferable Subscription Rights to purchase Common Shares in an
amount equal to the greater of (a) $150,000 or (b) 15 times the product
(rounded down to the next whole number) obtained by
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multiplying the total number of the Common Shares to be issued by a fraction of
which the numerator is the amount of the Qualifying Deposit of the Supplemental
Eligible Account Holder and the denominator is the total amount of the
Qualifying Deposits of all Supplemental Eligible Account Holders, in each case
on the Supplemental Eligibility Record Date.
(ii) Subscription Rights of Supplemental Eligible Account Holders shall be
subordinate to the Subscription Rights received by the Eligible Account Holders
and by the ESOP pursuant to paragraphs (a) and (b) above.
(iii) Subscription Rights to purchase shares received by an Eligible
Account Holder in accordance with paragraph (a) above shall reduce to the
extent thereof, the Subscription Rights to be distributed to such Eligible
Account Holder pursuant to this paragraph (c).
(iv) In the event of an oversubscription for Common Shares from
Supplemental Eligible Account Holders, Common Shares shall be allocated among
the subscribing Supplemental Eligible Account Holders so as to permit each such
Supplemental Eligible Account Holder, to the extent possible, to purchase a
number of Common Shares sufficient to make his or her total allocation
(including the number of Common Shares, if any, allocated in accordance with
paragraph (a) above) equal to 100 Common Shares or the total amount of his or
her subscription, whichever is less. Any shares not so allocated shall be
allocated among the subscribing Supplemental Eligible Account Holders on an
equitable basis, in proportion to the amounts of their respective aggregate
Qualifying Deposits as compared to the total aggregate Qualifying Deposits of
all subscribing Supplemental Eligible Account Holders, in each case on the
Supplemental Eligibility Record Date.
(d) Subscription Rights of Other Members. Other Members shall have the
following rights to subscribe for and purchase Common Shares:
(i) Each Other Member shall receive, without payment, nontransferable
Subscription Rights to purchase Common Shares in an amount equal to $150,000.
(ii) Subscription Rights of Other Members shall be subordinate to the
Subscription Rights of Eligible Account Holders, Tax-Qualified Employee Stock
Benefit Plans and Supplemental Eligible Account Holders pursuant to Sections
5(a), 5(b) and 5(c) of the Plan.
(iii) In the event of an oversubscription for Common Shares of Other
Members, the Common Shares available shall be allocated among subscribing Other
Members so as to permit each subscribing Other Member, to the extent possible,
to purchase a number of shares sufficient to make his or her total allocation
of Common Shares equal to 100 shares or the number of shares subscribed for by
the Other Member, whichever is less. The shares remaining thereafter will be
allocated among subscribing Other Members whose subscriptions remain
unsatisfied on an equitable basis as determined by the Board of Directors.
Community Offering
Common Shares may be offered in the Community Offering to the extent such
shares remain available after the satisfaction of all subscriptions received in
the Subscription Offering. The Community Offering, if any, is expected to
begin immediately after the Subscription Expiration Date, but may commence at
any time after the beginning of the Subscription Offering.
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The Community Offering, if one is held, may be terminated at any time, but
shall terminate not later than 12:00 noon, Central Time, __________, 1996,
unless extended with the consent of the OTS.
If subscriptions are received in the Subscription Offering for up to
365,500 Common Shares, Common Shares may not be available in the Community
Offering. In the event shares are available for the Community Offering, each
person may purchase up to 7,500 Common Shares, subject to the limitation that
no person, together with such person's Associates and other persons acting in
concert with such person, may purchase more than 15,000 of the Common Shares
sold in connection with the Conversion. If an insufficient number of Common
Shares is available to fill all of the orders received in the Community
Offering, the available Common Shares will be allocated in a manner to be
determined by the Boards of Directors of the Holding Company and the
Association, subject to the following:
(i) Preference will be given to natural persons who are residents of
Cullman County, Alabama, the county in which the main office of the Association
is located;
(ii) Orders received in the Community Offering will first be filled up to
2% of the total number of Common Shares offered, with any remaining shares
allocated on an equal number of shares per order basis until all orders have
been filled; and
(iii) The right of any person to purchase Common Shares in the Community
Offering is subject to the right of the Holding Company and the Association to
accept or reject such purchases in whole or in part.
The term "resident," as used herein with respect to the Community Offering,
means any natural person who, on the date of submission of an Order Form,
maintains a bona fide residence within Cullman County, Alabama.
Persons in Nonqualified States or Foreign Countries
The Association and the Holding Company will make reasonable efforts to
comply with the securities laws of all jurisdictions in the United States in
which Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members reside. However, no person will be offered or sold any Common Shares
if such person resides in a foreign country or in a jurisdiction of the United
States with respect to which: (a) a small number of persons otherwise eligible
to subscribe for Common Shares reside in such foreign country or jurisdiction,
(b) the granting of Subscription Rights or the offer or sale of Common Shares
to such person would require the Holding Company or the Association or their
employees to register under the securities laws of such foreign country or
jurisdiction, as a broker, dealer, salesman or agent or to register or
otherwise qualify its securities for sale in such foreign country or
jurisdiction, or (c) the Association determines such registration or
qualification would be impracticable or burdensome for reasons of cost or
otherwise.
Plan of Distribution
The offering of the Common Shares is made only pursuant to this Prospectus,
copies of which are available at the office of the Association. Officers and
directors of the Association will be available to answer questions about the
Conversion and may also hold informational meetings for interested persons.
Such officers and directors will not be permitted to make statements about the
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Holding Company or the Association unless such information is also set forth in
this Prospectus, nor will they render investment advice.
To assist the Holding Company and the Association in marketing the Common
Shares, the Association has retained the services of the Agent, a broker-dealer
registered with the SEC and a member of the National Association of Securities
Dealers ("NASD"). The Agent will assist the Association in (1) training and
educating the Association's employees regarding the mechanics and regulatory
requirements of the conversion process; (2) conducting information meetings for
subscribers and other potential purchasers; (3) keeping records of all stock
subscriptions; and (4) obtaining proxies from the Association's members with
respect to the Special Meeting. For providing these services, the Association
has agreed to pay the Agent a marketing fee of 2.0% of the aggregate dollar
amount of Common Shares sold in the Subscription Offering and the Community
Offering, excluding shares sold by Selected Brokers (as defined below), if any,
and shares purchased by the ESOP and directors, officers, and employees (and
members of their immediate families) of the Association. The Agent is not
obligated to purchase any Common Shares. It is anticipated that the Agent will
act as a market maker in the Common Shares following the Conversion.
The Association has also agreed to reimburse the Agent for its out-of-
pocket expenses and legal fees and disbursements in an amount not to exceed
$40,000 without the Association's consent. The Association and the Holding
Company have also agreed to indemnify the Agent, under certain circumstances,
against liabilities and expenses (including legal fees) arising out of or based
upon untrue statements or omissions contained in the materials used in the
Offering or in various documents submitted to regulatory authorities in respect
of the Conversion, including liabilities under the Securities Act of 1933 (the
"Act").
Selected Dealers
If Common Shares remain available after the Subscription Offering, the
Agent may enter into an agreement with certain dealers (the "Selected Dealers")
to assist in the sale of shares in the Community Offering. If Selected Dealers
are used, the Agent shall receive commissions of no more than 5.5% of the
aggregate purchase price of the Common Shares sold in the Community Offering
and will pay to the Selected Dealers a portion of the 5.5% commissions pursuant
to selected dealer agreements. During the Community Offering, Selected Dealers
may only solicit indications of interest from their customers to place orders
in the Association as of a certain date (the "Order Date") for the purchase of
Common Shares. When and if the Association believes that enough indications of
interest and orders have been received in the Community Offering to consummate
the Conversion, the Agent will request, as of the Order Date, Selected Dealers
to submit orders to purchase shares for which they have previously received
indications of interest from the customers. Selected Dealers will send
confirmations of the orders to such customers on the next business day after
the Order Date. Selected Dealers will debit the accounts of their customers on
the date which will be three business days from the Order Date (the "Settlement
Date"). On the Settlement Date, funds received by Selected Dealers will be
remitted to the Association. It is anticipated that the Conversion will be
consummated on the Settlement Date. However, if consummation is delayed after
payment has been received by the Association from Selected Dealers, funds will
earn interest at the passbook rate.
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Limitations on Purchases of Common Shares
The Plan provides for certain additional limitations to be placed upon the
purchase of Common Shares. No person may purchase fewer than 25 Common Shares
in the Conversion, to the extent such shares are available.
Officers and directors of the Association and the Holding Company, and
Associates thereof, may not purchase in the aggregate more than 34% of the
Common Shares issued in the Conversion. An "Associate" of any person means (a)
any corporation or organization (other than the Association, the Holding
Company or a majority-owned subsidiary of the Association or the Holding
Company) of which such person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of equity
securities, (b) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, except that such term shall not include the
ESOP, and (c) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a director or Officer of
the Association or the Holding Company, or any of their subsidiaries.
No person may purchase Common Shares with an aggregate purchase price of
more than $150,000 (or 7,500 shares at $20.00 per share) in the Subscription
Offering or in the Community Offering. Purchases of Common Shares in the
Conversion by any person, when aggregated with purchases by any Associate of
that person, or a group of persons Acting in Concert, shall not exceed $300,000
of the Common Shares (or 15,000 shares at $20.00 per share), except that the
ESOP may purchase up to 10% of the total Common Shares to be issued in the
Conversion. Shares purchased by the ESOP and attributable to a person shall
not be aggregated with shares purchased directly by or otherwise attributable
to such person. Directors of the Holding Company and the Association shall not
be deemed to be Associates or a group Acting in Concert with other directors
solely as a result of membership on the Board of Directors of the Holding
Company or the Association or any of their subsidiaries. For purposes of the
Conversion, "Acting in Concert" means (a) knowing participation in a joint
activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an express agreement, or (b) 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.
Subject to any required regulatory approval and applicable laws and
regulations, the Holding Company and the Association may increase or decrease
any of the purchase limitation amounts at any time. If such amount is increased
after commencement of the Subscription Offering, any person who subscribed for
the maximum number of Common Shares shall be permitted to purchase an
additional number of shares up to the then maximum number of shares permitted
to be subscribed for by such person, subject to the rights and preferences of
any person who has priority Subscription Rights. In the event that the
purchase limitation amount is decreased after commencement of the Subscription
Offering, the orders of any person who subscribed for the maximum number of
Common Shares shall be decreased by the minimum amount necessary so that such
person shall be in compliance with the then maximum number of shares permitted
to be subscribed for by such person.
The Subscription Rights granted under the Plan are nontransferable. Each
Subscription Right may be exercised only by the person to whom issued and only
for such person's own account. The Association and the Holding Company shall
have the right to take such action as they may, in their sole discretion, deem
necessary, appropriate or advisable in order to monitor and enforce the terms,
conditions, limitations and restrictions set forth herein, in the Plan and the
Order Form, including,
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without limitation, the right to reject, limit or revoke acceptance of any
subscription or order and to delay, terminate or refuse to consummate any sale
of Common Shares believed to violate or circumvent the Plan.
Purchases of Common Shares in the Offering are also subject to the change
in control regulations which restrict direct and indirect purchases of 10% or
more of the stock of any savings association by any person or group of persons
acting in concert, under certain circumstances. See "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY AND THE ASSOCIATION - Federal Law and
Regulation."
After the Conversion, Common Shares, except for shares purchased by
affiliates of the Association, will be freely transferable, subject to OTS
regulations.
Procedure for Purchasing Shares in Subscription and Community Offerings
Subscriptions for Common Shares in the Subscription Offering and orders for
Common Shares in the Community Offering may be made only by completing and
submitting an Order Form. Any person who desires to subscribe for Common
Shares in the Subscription Offering must do so by delivering to the
Association, by mail or in person, prior to the Subscription Expiration Date
(12:00 noon, Central Time, on ________, 1996), a properly executed and
completed Order Form, together with full payment of the subscription price of
$20.00 for each Common Share for which subscription is made. Any person who
desires to purchase Common Shares in the Community Offering, if one is held,
must do so by delivering to the Association, by mail or in person, prior to the
termination of the Community offering which shall be not later than 12:00 noon,
Central Time, on ________, 1996, a properly executed and completed Order Form,
together with full payment of the subscription price of $20.00 for each Common
Share for which order is made. Any Order Form which is not received by the
Association prior to the expiration of the Subscription Expiration Date or the
termination date of the Community Offering, as applicable, or for which full
payment has not been received by the Association prior to such time, will not
be accepted. Subscription rights not exercised before the Subscription
Expiration Date will be void, whether or not the Association has been able to
locate each person entitled to such subscription rights. The Holding Company
may, but will not be required to, waive any irregularity relating to any Order
Form or require the submission of a corrected Order Form.
An executed Order Form, once received by the Holding Company, may not be
modified, amended or rescinded without the consent of the Holding Company,
unless the Community Offering, if any, is not completed within 45 days after
the Subscription Expiration Date, in which case persons who have subscribed for
Common Shares in the Subscription Offering or ordered Common Shares in the
Community Offering will receive written notice that they have a right to
affirm, increase, decrease or rescind their subscriptions or orders at any time
prior to 20 days before the end of the extension period. Any person who does
not affirmatively elect to continue his subscription or order or elects to
rescind his subscription or order during any such extension will have all of
his funds promptly refunded with interest. Any person who elects to decrease
his subscription or order during any such extension will have the appropriate
portion of his funds promptly refunded with interest.
Payment for all Common Shares subscribed for in the Subscription Offering
and the Community Offering, if any, must be received in full by the Association
or the Holding Company, together with properly completed and executed Order
Forms, on or prior to the expiration date
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specified on the Order Form, unless such date is extended by the Holding
Company and the Association. Payment for all Common Shares may be made (i) in
cash (delivered in person), (ii) by check or money order, or (iii) if the
subscriber has a savings account in the Association (including a certificate of
deposit), the subscriber may authorize the Association to charge the
subscriber's savings account for the purchase amount. The Association may also
elect to receive payment by wire transfer. The Association shall pay interest
at the passbook rate on all amounts paid in cash or by check or money order to
purchase Common Shares from the date payment is received until the Conversion
is completed or terminated.
If a person authorizes the Association to charge his or her savings
account, the funds will remain in the person's savings account and will
continue to earn interest, but may not be used by such person until all Common
Shares have been sold or the Conversion is terminated, whichever is earlier.
The withdrawal will be given effect concurrently with Conversion and to the
extent necessary to satisfy the subscription at a price equal to the purchase
price of $20.00 per share. The Association will allow persons to purchase
Common Shares by withdrawing funds from certificate accounts without the
assessment of early withdrawal penalties. In the case of early withdrawal of
only a portion of such account, the certificate evidencing such account shall
be canceled if the remaining balance of the account is less than the applicable
minimum balance requirement and in such event, the remaining balance will earn
interest at the passbook rate. The waiver of the early withdrawal penalty is
applicable only to withdrawals made in connection with the purchase of Common
Shares under the Plan.
The ESOP may subscribe for shares by submitting an Order Form, together
with evidence of a loan commitment from the Holding Company or an unrelated
financial institution for the purchase of the Common Shares, during the
Subscription Offering and by making payment for the Common Shares on the date
of the closing of the Conversion.
The Association shall not knowingly loan funds or otherwise extend credit
to any person for the purpose of purchasing Common Shares.
In order to utilize funds in an IRA maintained at the Association, the
funds must be transferred to a self-directed IRA that permits the funds to be
invested in stock. The beneficial owner of the IRA must direct the trustee of
the account to use funds from such account to purchase Common Shares in
connection with the Conversion. This cannot be done through the mail. Persons
who are interested in utilizing IRAs at the Association to subscribe for Common
Shares should contact the Conversion Information Center at the offices of the
Association at (205) 737-8916 for instructions and assistance.
Subscriptions and orders will not be filled by the Association until
subscriptions and orders have been received in the Offering for up to 365,500
Common Shares, the minimum point of the Valuation Range. If the Conversion is
terminated, all funds delivered to the Association for the purchase of Common
Shares will be returned with interest, and all charges to savings accounts will
be rescinded. If subscriptions and orders are received for at least 365,500
Common Shares, subscribers and other purchasers will be notified by mail,
promptly on completion of the sale of the Common Shares, of the number of
shares for which their subscriptions or orders have been accepted. The funds
on deposit with the Association for the purchase of Common Shares will be
withdrawn and paid to the Holding Company in exchange for the Common Shares.
Certificates representing Common Shares will be delivered promptly thereafter.
The Common Shares will not be insured by the FDIC.
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Pricing and Number of Common Shares to be Sold
The aggregate offering price of the Common Shares will be based on the pro
forma market value of the shares as determined by an independent appraisal of
the Association. Ferguson & Co., a firm which evaluates and appraises
financial institutions, was retained by the Association to prepare an appraisal
of the estimated pro forma market value of the Association as converted.
Ferguson & Co. will receive a fee of $30,000 for its appraisal and any updates.
Such amount includes out-of-pocket expenses.
Ferguson & Co. was selected by the Board of Directors of the Association
because Ferguson & Co. has extensive experience in the valuation of thrift
institutions, particularly in the mutual-to-stock conversion context. The
Association and Ferguson & Co. have no relationships which would affect
Ferguson & Co.'s independence.
The appraisal was prepared by Ferguson & Co. in reliance upon the
information contained herein. Ferguson & Co. also considered the following
factors, among others: the present and projected operating results and
financial condition of the Association and the economic and demographic
conditions in the Association's existing market area; certain historical
financial and other information relating to the Association; a comparative
evaluation of the operating and financial statistics of the Association with
those of other thrift institutions; the aggregate size of the Offering; the
impact of the Conversion on the Association's regulatory capital and earnings
potential; the trading market for stock of comparable thrift institutions and
thrift holding companies; and general conditions in the markets for such
stocks.
The Pro Forma Value of the Association, as converted, determined by
Ferguson & Co., is $8,600,000 as of October 18, 1996. The Valuation Range
established in accordance with the Plan is $7,310,000 to $9,890,000, which,
based upon a per share offering price of $20.00, will result in the sale of
between 365,500 and 494,500 Common Shares. The total number of Common
Shares sold in the Conversion will be determined in the discretion of the Board
of Directors, based on the Valuation Range. Pro forma shareholders' equity per
share and pro forma earnings per share decrease moving from the low end to the
high end of the Valuation Range. See "PRO FORMA DATA."
In the event that Ferguson & Co. determines at the close of the Conversion
that the aggregate pro forma value of the Association is higher or lower than
the Pro Forma Value, but is nevertheless within the Valuation Range, or is not
more than 15% above the maximum of the Valuation Range, the Holding Company
will make an appropriate adjustment by raising or lowering the total number of
Common Shares sold in the Conversion consistent with the final Valuation Range.
The total number of Common Shares sold in the Conversion will be determined in
the discretion of the Board of Directors consistent with the Valuation Range.
If, due to changing market conditions, the final valuation is not between the
minimum of the Valuation Range and 15% above the maximum of the Valuation
Range, subscribers will be given a notice of such final valuation and the right
to affirm, increase, decrease or rescind their subscriptions. Any person who
does not affirmatively elect to continue his subscription or elects to rescind
his subscription before the date specified in the notice will have all of his
funds promptly refunded with interest. Any person who elects to decrease his
subscription will have the appropriate portion of his funds promptly refunded
with interest.
The appraisal by Ferguson & Co. is not intended, and must not be construed,
as a recommendation of any kind as to the advisability of purchasing Common
Shares or voting to approve the Conversion. In preparing the valuation,
Ferguson & Co. has relied upon and
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assumed the accuracy and completeness of the audited financial statements and
statistical information provided by the Association. Ferguson & Co. did not
independently verify the financial statements and other information provided by
the Association, nor did Ferguson & Co. value independently 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
liquidation value of the Association. Moreover, because such valuation is
necessarily based upon estimates and projections of a number of matters, all of
which are subject to change from time to time, no assurance can be given that
persons purchasing Common Shares will thereafter be able to sell such shares at
the Conversion purchase price.
A copy of the complete appraisal is on file and open for inspection at the
offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552; at the
Southeast Regional Office of the OTS, 1475 Peachtree Street, N.E., Atlanta,
Georgia 30348; and at the offices of the Association.
Restrictions on Repurchase of Common Shares
OTS regulations generally prohibit the Holding Company from repurchasing
any of its capital stock for three years following the date of completion of
the Conversion, except as part of an open-market stock repurchase program
during the second and third years following the Conversion involving no more
than 5% of the outstanding capital stock during a twelve-month period. The OTS
has recently indicated, however, that it would permit repurchases beginning
after six months following the completion of the Conversion. In addition,
after such a repurchase, the Association's regulatory capital must equal or
exceed all regulatory capital requirements. Before the commencement of a
repurchase program, the Holding Company must provide notice to the OTS, and the
OTS may disapprove the program if the OTS determines that it would adversely
affect the financial condition of the Association or if it determines that
there is no valid business purpose for such repurchase. Such repurchase
restrictions would not prohibit the ESOP or the MRP from purchasing Common
Shares during the first year following Conversion.
Restrictions on Transfer of Common Shares by Directors and Officers
Common Shares purchased by directors and executive officers of the Holding
Company will be subject to the restriction that such shares may not be sold for
a period of one year following completion of the Conversion, except in the
event of the death of the shareholder. Common Shares issued by the Holding
Company to directors and executive officers will bear a legend giving notice of
the restriction on transfer. In addition, the Holding Company will give
appropriate instructions to the transfer agent (if any) for the Holding
Company's common shares in respect of the applicable restriction on transfer of
any restricted shares. Any shares issued as a stock dividend, stock split or
otherwise in respect of restricted shares will be subject to the same
restrictions.
Subject to certain exceptions, for a period of three years following the
Conversion, no director or officer of the Holding Company or the Association,
or any of their Associates, may purchase any common shares of the Holding
Company without the prior written approval of the OTS, except through a broker-
dealer registered with the SEC. This restriction will not apply, however, to
negotiated transactions involving more than 1% of a class of outstanding common
shares of the Holding Company or shares acquired by any stock benefit plan of
the Holding Company or the Association.
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Interpretation and Amendment of the Plan
To the extent permitted by law, all interpretations of the Plan by the
Boards of Directors of the Holding Company and the Association will be final.
The Plan may be amended by the Boards of Directors of the Holding Company and
the Association at any time with the concurrence of the OTS. If the
Association determines, upon advice of counsel and after consultation with the
OTS, that any such amendment is material, subscribers will be notified of the
amendment and will be provided the opportunity to affirm, increase, decrease or
cancel their subscriptions.
Conditions and Termination
The completion of the Conversion requires the approval of the Plan by the
voting members of the Association at the Special Meeting and the sale of the
requisite amount of Common Shares within 24 months following the date of such
approval. If these conditions are not satisfied, the Plan will automatically
terminate and the Association will continue its business in the mutual form of
organization. The Plan may be terminated by the Board of Directors in its sole
discretion at any time before the Special Meeting and at any time thereafter
with the approval of the OTS.
RESTRICTIONS ON ACQUISITION OF
THE HOLDING COMPANY AND THE ASSOCIATION
General
Federal law and regulations, Delaware law, the Certificate of Incorporation
and Bylaws of the Holding Company, and certain employee benefit plans to be
adopted by the Holding Company and the Association contain certain provisions
which may deter or prohibit a change of control of the Holding Company and the
Association. Such provisions are intended to encourage any acquirer to
negotiate the terms of an acquisition with the Board of Directors of the
Holding Company, thereby reducing the vulnerability of the Holding Company to
takeover attempts and certain other transactions which have not been negotiated
with and approved by the Board of Directors.
Anti-takeover devices and provisions may, however, have the effect of
discouraging sudden and other hostile takeover attempts which are not approved
by the Board of Directors, even under circumstances in which shareholders may
deem such takeovers to be in their best interests or in which certain
shareholders may receive a substantial premium for their shares over then-
current market prices. As a result, shareholders who might desire to
participate in such a transaction may not have an opportunity to participate by
virtue of such devices and provisions. Such provisions may also benefit
management by discouraging changes of control in which incumbent management
would be removed from office. The following is a summary of certain provisions
of such laws, regulations and documents.
Federal Law and Regulation
Federal Deposit Insurance Act. The FDIA provides that no person, acting
directly or indirectly or in concert with one or more persons, shall acquire
control of any insured savings and loan, association or holding company unless
60 days' prior written notice has been given to the OTS, and the OTS has not
issued a notice disapproving the proposed acquisition. Control, for purposes
of the FDIA, means the power, directly or indirectly, to direct the management
or policies of an insured
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institution or to vote 25% or more of any class of securities of such
institution. This provision of the FDIA is implemented by the OTS in accordance
with the Regulations for Acquisition of Control of an Insured Institution, 12
C.F.R. Part 574 (the "Control Regulations"). Control, for purposes of the
Control Regulations, exists in situations in which the acquiring party has
direct or indirect voting control of at least 25% of the institution's voting
shares or controls in any manner the election of a majority of the directors of
such institution or the Director of the OTS determines that such person
exercises a controlling influence over the management or policies of such
institution. In addition, control is presumed to exist, subject to rebuttal, if
the acquiring party (which includes a group "acting in concert") has voting
control of at least 10% of the institution's voting stock and any of eight
control factors specified in the Control Regulations exists. There are also
rebuttable presumptions in the Control Regulations concerning whether a group
"acting in concert" exists, including presumed action in concert among members
of an "immediate family." The Control Regulations apply to acquisitions of
Common Shares in connection with the Conversion and to acquisitions after the
Conversiom
Change in Control of Converted Associations. A regulation of the OTS
provides that, for a period of three years after the date of the completion of
the Conversion, no person shall, directly or indirectly, offer to acquire or
acquire beneficial ownership of more than 10% of any class of equity security
of the Holding Company or the Association without the prior written approval of
the OTS. In addition to the actual ownership of more than 10% of a class of
equity securities, a person shall be deemed to have acquired beneficial
ownership of more than 10% of the equity securities of the Holding Company or
the Association if the person holds any combination of stock and revocable
and/or irrevocable proxies of the Holding Company under circumstances that give
rise to a conclusive control determination or rebuttable control determination
under the Control Regulations. Such circumstances include (i) holding any
combination of voting shares and revocable and/or irrevocable proxies
representing more than 25% of any class of voting stock of the Holding Company
enabling the acquirer (a) to elect one-third or more of the directors, (b) to
cause the Holding Company or the Association's shareholders to approve the
acquisition or corporate reorganization of the Holding Company, or (c) to exert
a controlling influence on a material aspect of the business operations of the
Holding Company or the Association, and (ii) acquiring any combination of
voting shares and irrevocable proxies representing more than 25% of any class
of voting shares.
Such three-year restriction does not apply (i) to any offer with a view
toward public resale made exclusively to the Holding Company or the
Association, or any underwriter or selling group acting on behalf of the
Holding Company or the Association, (ii) unless made applicable by the OTS by
prior written advice, to any offer or announcement of an offer which, if
consummated, would result in the acquisition by any person, together with all
other acquisitions by any such person of the same class of securities during
the preceding 12-month period, of not more than 1% of the class of securities,
or (iii) to any offer to acquire or the acquisition of beneficial ownership of
more than 10% of any class of equity security of the Holding Company or the
Association by a corporation whose ownership is or will be substantially the
same as the ownership of the Holding Company or the Association if made more
than one year following the date of the Conversion. The foregoing restriction
does not apply to the acquisition of the capital stock of the Holding Company
or the Association by one or more tax-qualified employee stock benefit plans,
provided that the plan or plans do not have the beneficial ownership in the
aggregate of more than 25% of any class of equity security of the Holding
Company or the Association.
Holding Company Restrictions. Federal law generally prohibits a savings
and loan holding company, without prior approval of the Director of the OTS,
from (i) acquiring control of any other savings and loan association or savings
and loan holding company, (ii) acquiring substantially all of the
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assets of a savings and loan association or holding company thereof, or (iii)
acquiring or retaining more than 5% of the voting shares of a savings and loan
association or holding company thereof which is not a subsidiary.
Under certain circumstances, a savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15%
of the previously unissued voting shares of an undercapitalized savings and
loan association for cash without such savings and loan association being
deemed to be controlled by the Holding Company. Except with the prior approval
of the Director of the OTS, no director or officer of the savings and loan
holding company or person owning or controlling by proxy or otherwise more than
25% of such company's voting shares may acquire control of any savings
institution, other than a subsidiary institution or any other savings and loan
holding company.
Delaware Law
The Delaware General Corporation Law contains a statute designed to provide
Delaware corporations with additional protection against hostile takeovers.
Section 203 of the Delaware General Corporation Law, among other things,
prohibits the Holding Company from engaging in certain business combinations
(including a merger) with a person who is the beneficial owner of 15% or more
of the Holding Company's outstanding voting-stock (an "interested stockholder")
during the three-year period following the date such person became an
interested stockholder. This restriction does not apply if: (1) before such
person became an interested stockholder, the Board of Directors approved the
transaction in which the interested stockholder became an interested
stockholder or approved the business combination; or (2) upon consummation of
the transaction which resulted in the stockholder's becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the Holding Company outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding certain
shares owned by insiders of the corporation; or (3) on or subsequent to the
date such person became an interested stockholder, the business combination is
approved by the Board of Directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock which is not owned by the interested stockholder.
Provisions of the Holding Company's Certificate of Incorporation and Bylaws
Directors. Certain provisions in the Certificate of Incorporation and
Bylaws will impede changes in majority control of the Board of Directors of the
Holding Company. The Certificate of Incorporation provides that the Board of
Directors of the Holding Company will be divided into three classes, with
directors in each class elected for three-year staggered terms. Therefore, it
would take two annual elections to replace a majority of the Holding Company's
Board.
The Certificate of Incorporation also provides that the size of the Board
of Directors shall range between five and ten directors, with the exact number
of directors to be fixed from time to time in accordance with the Bylaws of the
Holding Company.
The Certificate of Incorporation provides that any vacancy occurring in the
Board of Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term only by a
two-thirds vote of the directors then in office. Finally, the Certificate of
Incorporation and the Bylaws impose certain notice and information requirements
in connection with
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the nomination by shareholders of candidates for election to the Board of
Directors or the proposal by shareholders of business to be acted upon at an
annual meeting of shareholders.
The Certificate of Incorporation provides that a director or the entire
Board of Directors may be removed only for cause and only by the affirmative
vote of at least 80% of the shares eligible to vote generally in the election
of directors.
Restrictions on Call of Special Meetings. The Certificate of Incorporation
provides that a special meeting of shareholders may be called only by the
Chairman of the Holding Company or pursuant to a resolution adopted by a
majority of the total number of directors of the Holding Company. Shareholders
are not authorized to call a special meeting.
No Cumulative Voting. The Certificate of Incorporation provides that there
shall be no cumulative voting rights in the election of directors.
Authorization of Preferred Stock. The Certificate of Incorporation
authorizes 100,000 shares of preferred stock, $0.01 par value per share. The
Holding Company is authorized to issue preferred stock from time to time in one
or more series subject to applicable provisions of law, and the Board of
Directors is authorized, without shareholder approval, to fix the designation,
powers, preferences and relative participating, optional and other special
rights of such shares, including voting rights (if any and which could be as a
separate class) and conversion rights. The special rights, including voting and
conversion rights, could adversely the voting power of common shareholders. In
the event of a proposed merger, tender offer or other attempt to gain control
of the Holding Company not approved by the Board of Directors, it may be
possible for the Board of Directors to authorize the issuance of a series of a
preferred stock with rights and preferences that would impede the completion of
such a transaction. An effect of the possible issuance of preferred stock,
therefore, may be to deter a future takeover attempt. The Board of Directors
has no present plans or understanding for the issuance of any preferred stock
and does not intend to issue any preferred stock except on terms which the
Board of Directors deems to be in the best interests of the Holding Company and
its shareholders.
Limitations on 10% Shareholders. The Certificate of Incorporation provides
that for a period of five years from the Conversion: (i) no person shall
directly or indirectly offer to acquire or acquire the beneficial ownership of
more than 10% of any class of equity security of the Holding Company without
the prior approval of the Board of Directors (provided that such limitation
shall not apply to the acquisition of equity securities by any one or more tax-
qualified employee stock benefit plans maintained by the Holding Company); and
that (ii) shares beneficially owned in violation of the stock ownership
restriction described above shall not be entitled to vote and shall not be
voted by any person or counted as voting stock in connection with any matter
submitted to a vote of shareholders.
Evaluation of Offers. The Certificate of Incorporation provides that the
Board of Directors of the Holding Company, when determining to take or refrain
from taking corporate action on any matter, including making or declining to
make any recommendation to the Holding Company's shareholders, may, in
connection with the exercise of its judgment in determining what is in the best
interest of the Holding Company, the Association and the shareholders of the
Holding Company, give due consideration to all relevant factors, including,
without limitation, the social and economic effects of acceptance of such offer
on the Holding Company's customers and the Association's present and future
account holders, borrowers, employees and suppliers; the effect on the
communities in which the Holding Company and the Association operate or are
located; and the effect on the ability of the Holding Company to fulfill the
objectives of a bank holding company and of the Association or future savings
association subsidiaries to fulfill the objectives of a stock savings bank
under applicable
97
<PAGE>
statutes and regulations. The Certificate of Incorporation also authorizes the
Board of Directors to take certain actions to encourage a person to negotiate
for a change of control of the Holding Company or to oppose such a transaction
deemed undesirable by the Board of Directors including the adoption of so-
called shareholder rights plans. By having these standards and provisions in
the Certificate of Incorporation, the Board of Directors may be in a stronger
position to oppose such a transaction if the Board concludes that the
transaction would not be in the best interest of the Holding Company, even if
the price offered is significantly greater than the then market price of any
equity security of the Holding Company.
Procedures for Certain Business Combinations. The Certificate of
Incorporation requires that certain business combinations between the Holding
Company and a 10% or greater shareholder, if not approved by the Board of
Directors of the Holding Company, must be either approved (i) by at least 80%
of the total number of outstanding voting shares of the Holding Company or (ii)
by a majority of the outstanding shares entitled to vote unaffiliated with such
10% or greater shareholder.
Amendments to Certificate of Incorporation and Bylaws. Amendments to the
Certificate of Incorporation must be approved by a two-thirds vote of the
Holding Company's Board of Directors and also by a majority of the shares of
the Holding Company voting at a shareholders meeting; provided, however, that
approval by at least 80% of the outstanding voting shares is required for
certain provisions (i.e., provisions relating to calling of special shareholder
meetings; shareholder nominations and proposals; the number, classification,
and removal of directors; acquisition of capital stock; approval for certain
business combinations; criteria for evaluating certain offers; directors'
liability and indemnification; amendment of the Bylaws; and amendments to
provisions of the Certificate of Incorporation relating to the foregoing).
The Bylaws may be amended only by a two-thirds vote of the Board of
Directors of the Holding Company or by the vote of at least 80% of the
outstanding voting shares of the Holding Company.
Purpose and Effects of the Anti-Takeover Provisions of the Holding
Company's Certificate of Incorporation and Bylaws. The Holding Company's Board
of Directors believes that the provisions described above are prudent and will
reduce the Holding Company's vulnerability to takeover attempts and certain
other transactions which have not been negotiated with and approved by its
Board of Directors. These provisions will also assist in the orderly
deployment of the Conversion proceeds into productive assets during the initial
period after the Conversion. The Board of Directors believes these provisions
are in the best interest of the Association and the Holding Company and its
shareholders. In the judgment of the Board of Directors, the Holding Company's
Board of Directors will be in the best position to determine the true value of
the Holding Company and to negotiate more effectively for what may be in the
best interests of the Holding Company and its shareholders. The Board of
Directors believes that these provisions will encourage potential acquirers to
negotiate directly with the Board of Directors of the Holding Company and
discourage hostile takeover attempts. It is also the view of the Board of
Directors that these provisions should not discourage persons from proposing a
merger or other transactions at prices reflecting the true value of the Holding
Company and which is in the best interests of all shareholders.
Attempts to take over financial institutions and their holding companies
have recently increased. Takeover attempts that have not been negotiated with
and approved by the Board of Directors present to shareholders the risk of a
takeover on terms that may be less favorable than might otherwise be available.
A transaction that is negotiated and approved by the Board of Directors, on the
98
<PAGE>
other hand, can be carefully planned and undertaken at an opportune time to
obtain maximum value for the Holding Company and its shareholders, with due
consideration given to matters such as the management and business of the
acquiring corporation and maximum strategic development of the Holding
Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it to undertake defensive measures at a
great expense. Although a tender offer or other takeover attempt may be made
at a price substantially above then market prices, such offers are sometimes
made for less than all of the outstanding shares of a target company. As a
result, shareholders may be presented with the alternative of partially
liquidating their investment at a time that may be disadvantageous, or
retaining their investment in an enterprise which is under different management
and whose objective may not be similar to that of the remaining shareholders.
The concentration of control, which could result from a tender offer or other
takeover attempt, could also deprive the Holding Company's remaining
shareholders of the benefits of certain protective provisions of the 1934 Act,
if the number of beneficial owners becomes less than the 300 required for
continued registration under the 1934 Act.
Despite the belief of the Holding Company's Board of Directors in the
benefits to shareholders of the foregoing provisions, the provisions may also
have the effect of discouraging future takeover attempts which would not be
approved by the Board of Directors, but which certain shareholders might deem
to be in their best interest or pursuant to which shareholders might receive a
substantial premium for their shares over then current market prices. As a
result, shareholders who might desire to participate in such a transaction may
not have an opportunity to do so. These provisions will also render the
removal of the incumbent Board of Directors and of management more difficult.
The Board of Directors has, however, concluded that the potential benefits of
these restrictive provisions outweigh the possible disadvantages.
The Holding Company's Certificate of Incorporation also provides that there
will be no cumulative voting by stockholders for the election of the Holding
Company's directors. The absence of cumulative voting rights effectively means
that the holders of a majority of the shares voted at a meeting of stockholders
may, if they so chose, elect all directors of the Holding Company to be
selected at that meeting, thus precluding minority stockholder representation
on the Holding Company's Board of Directors.
Employee Benefit Plans
The Stock Option Plan, the ESOP and the MRP also may be deemed to have
certain anti-takeover effects. The ESOP may become the owner of a sufficient
percentage of the total outstanding common shares of the Holding Company that
the decision whether to tender the shares held by the ESOP to a potential
acquirer may prevent a takeover. In addition the acquisition by the directors
and executive officers of the Holding Company of common shares of the Holding
Company upon grants under the MRP or upon the exercise of options granted under
the Stock Option Plan will have the effect of giving the directors and
executive officers greater influence in votes on proposed takeover attempts and
proxy contests. See "DESCRIPTION OF AUTHORIZED SHARES" and "MANAGEMENT Stock
Benefit Plans -- Employee Stock Ownership Plan; -- Stock Option Plan; and --
Management Recognition Plan."
99
<PAGE>
DESCRIPTION OF AUTHORIZED SHARES
General
The Certificate of Incorporation of the Holding Company authorizes the
issuance of 3,000,000 common shares, par value $0.01 per share, and 100,000
preferred shares, par value $0.01 per share. The Holding Company currently
expects to issue 430,000 Common Shares at the midpoint of the Valuation Range
and no shares of preferred stock in the Conversion. Upon receipt by the
Holding Company of the purchase price therefor and subsequent issuance thereof,
each Common Share issued in the Conversion will be fully paid and
nonassessable. The Common Shares will represent nonwithdrawable capital and
will not be insured by the FDIC. Each Common Share will have the same relative
rights and will be identical in all respects to every other Common Share.
The Common Shares will represent nonwithdrawable capital, will not be an
account of an insurable type, and will not be insured by the FDIC or any other
governmental agency.
The following is a summary description of the rights of the common shares
of the Holding Company, including the material express terms of such shares as
set forth in the Holding Company's Certificate of Incorporation.
Liquidation Rights
In the event of the complete liquidation or dissolution of the Holding
Company, the holders of the Common Shares will be entitled to receive all
assets of the Holding Company available for distribution, in cash or in kind,
after payment or provision for payment of (i) all debts and liabilities of the
Holding Company, (ii) any accrued dividend claims, and (iii) any interests in
the Liquidation Account payable as a result of a liquidation of the
Association. See "THE CONVERSION - Principal Effects of the Conversion --
Liquidation Account."
Voting Rights
Except as may otherwise be required by law or by the Certificate of
Incorporation of the Holding Company, each holder of Common Shares will be
entitled to one vote for each share held of record on all matters submitted to
a vote of holders of common shares. See "RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY AND THE ASSOCIATION - Provisions of the Holding Company's
Certificate of Incorporation and Bylaws."
Dividends
The holders of the Common Shares will be entitled to the payment of
dividends when, as and if declared by the Board of Directors and paid out of
funds, if any, available under applicable laws and regulations for the payment
of dividends. The payment of dividends is subject to federal and state
statutory and regulatory restrictions and to the preferential dividend rights
of any outstanding preferred shares. See "DIVIDEND POLICY," "REGULATION -
Office of Thrift Supervision -- Limitations on Capital Distributions" and
"TAXATION - Federal Taxation" for a description of restrictions on the payment
of cash dividends.
100
<PAGE>
Preemptive Rights
After the consummation of the Conversion, no shareholder of the Holding Company
will have, as a matter of right the preemptive right to purchase or subscribe
for shares of any class, now or hereafter authorized, or to purchase or
subscribe for securities or other obligations convertible into or exchangeable
for such shares or which by warrants or otherwise entitle the holders thereof
to subscribe for or purchase any such share.
Restrictions on Alienability
See "THE CONVERSION - Restrictions on Transfer of Common Shares by
Directors and Officers" for a description of certain restrictions on the
transferability of Common Shares purchased by officers and directors; and
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE ASSOCIATION" for
information regarding regulatory restrictions on acquiring Common Shares.
REGISTRATION REQUIREMENTS
The Holding Company will register its Common Shares pursuant to Section
12(g) of the Securities Exchange Act of 1934 (the "Exchange Act") upon the
completion of the Conversion. The proxy and tender offer rules, insider
trading restrictions, annual and periodic reporting and other requirements of
the Exchange Act will apply to the Holding Company. Under the Plan, the
Holding Company has undertaken that it will not terminate such registration for
a period of at least three years following the Conversion.
LEGAL MATTERS
Certain legal matters pertaining to the Common Shares and the federal tax
consequences of the Conversion will be passed upon for the Holding Company and
the Association by Bayh, Connaughton & Malone, P.C., Washington, D.C. Certain
legal matters are being passed upon for the Agent by Miller, Hamilton, Snider &
Odom, L.L.C., Mobile, Alabama, and such firm is providing an opinion to the
Association regarding the tax consequences of the Conversion under Alabama law.
EXPERTS
Ferguson & Co. has consented to the publication herein of the summary of
its letter to the Association setting forth its opinion as to the estimated pro
forma market value of the Association as converted and to the use of its name
and statements with respect to it appearing herein.
The audited financial statements as of September 30, 1995 and 1994, and for
each of the years in the two-year period ended September 30, 1995 included in
this prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included upon the authority of said firm as experts in giving such reports.
101
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form SB-2
under the Securities Act with respect to the Common Shares. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the Registration Statement. Such information can be
examined without charge at the public reference facilities of the SEC located
at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material
can be obtained from the SEC at prescribed rates.
The Association has filed an Application for Conversion (the "Application")
with the OTS. This document omits certain information contained in the
Application. The Application may be inspected at the offices of the OTS, 1700
G Street, N.W., Washington, D.C. 20552 and at the Southeast Regional Office of
the OTS, 1475 Peachtree Street, N.E., Atlanta, Georgia 30348.
102
<PAGE>
First Federal Savings and Loan
Association of Cullman
Financial Statements as of September 30, 1995 and 1994
Together With
Auditors' Report
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CULLMAN
INDEX TO FINANCIAL STATEMENTS
<TABLE>
Page
----
<S> <C>
Report of Independent Public Accountants F-1
Statements of Financial Condition as of September 30, 1995 and 1994 and F-2
Unaudited Statement of Financial Condition as of June 30, 1996
Statements of Income for the Years Ended September 30, 1995 and 1994 and
Unaudited Statements of Income for the Nine Months Ended June 30, 1996 and 1995 F-3
Statements of Equity for the Years Ended September 30, 1995 and 1994 and
Unaudited Statements of Equity for the Nine Months Ended June 30, 1996 and 1995 F-4
Statements of Cash Flows for the Years Ended September 30, 1995 and 1994 and F-5
Unaudited Statements of Cash Flows for the Nine Months Ended June 30,
1996 and 1995
Notes to Financial Statements F-6
</TABLE>
All schedules are omitted because the required information either is not
applicable or is included in the financial statements or related notes.
Separate financial statements of the Company have not been included since it
will not engage in material transactions until after the Conversion. The
Company, which has been inactive to date, has no significant assets,
liabilities, revenues, expenses, or contingent liabilities.
F
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To First Federal Savings and Loan Association
of Cullman:
We have audited the accompanying statements of financial condition of FIRST
FEDERAL SAVINGS AND LOAN ASSOCIATION OF CULLMAN (a federally chartered
association) as of September 30, 1995 and 1994, and the related statements of
income, equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Association's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Federal Savings and Loan
Association of Cullman as of September 30, 1995 and 1994, and the results of
their operations and cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the financial statements, effective October 1, 1994,
the Association changed its method of accounting for investment and
mortgage-backed securities.
Birmingham, Alabama Arthur Andersen LLP
July 18, 1996
F-1
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CULLMAN
STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1995 1994
-------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
CASH AND DUE FROM BANKS $ 373,261 $ 471,425 $ 705,003
INTEREST BEARING DEPOSITS IN BANKS 4,464,332 5,636,672 2,279,000
INVESTMENT SECURITIES AVAILABLE-FOR-SALE, at fair value 4,147,055 2,608,814 0
MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE, at fair value 6,213,484 2,243,430 0
INVESTMENT SECURITIES HELD-TO-MATURITY, fair value of $5,207,429,
$8,141,165, and $12,990,989, respectively 5,251,476 8,193,122 13,180,710
MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY, fair value of $2,749,113,
$3,178,942, and $5,400,596, respectively 2,749,049 3,208,648 5,676,248
LOANS RECEIVABLE, net 39,869,009 38,570,233 39,954,414
ACCRUED INTEREST RECEIVABLE 431,256 383,981 345,468
PREMISES AND EQUIPMENT, net 621,699 600,988 787,519
INCOME TAXES RECEIVABLE 179,910 0 165,197
FORECLOSED REAL ESTATE 27,601 5,444 286,815
OTHER ASSETS 53,142 103,427 148,063
----------- ----------- -----------
Total assets $64,381,274 $62,026,184 $63,528,437
=========== =========== ===========
LIABILITIES AND EQUITY
<CAPTION>
<S> <C> <C> <C>
DEPOSITS $58,277,887 $56,007,970 $58,227,772
INCOME TAXES PAYABLE 0 63,505 0
ACCRUED INTEREST PAYABLE 111,881 113,278 48,016
ACCRUED EXPENSES AND OTHER LIABILITIES 138,860 235,844 257,504
----------- ----------- -----------
Total liabilities 58,528,628 56,420,597 58,533,292
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
RETAINED EARNINGS, substantially restricted 6,069,950 5,650,521 5,028,971
UNREALIZED DEPRECIATION ON CERTAIN MARKETABLE EQUITY SECURITIES 0 0 (33,826)
UNREALIZED LOSS ON AVAILABLE-FOR-SALE SECURITIES, net of
deferred taxes
(217,304) (44,934) 0
----------- ----------- -----------
Total equity 5,852,646 5,605,587 4,995,145
----------- ----------- -----------
Total liabilities and equity $64,381,274 $62,026,184 $63,528,437
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CULLMAN
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Nine Months For the Year
Ended June 30, Ended September 30,
---------------------------- --------------------------
1996 1995 1995 1994
------------ ------------ ------------ ------------
(Unaudited)
INTEREST INCOME:
<S> <C> <C> <C> <C>
Interest and fees on loans $2,509,826 $2,376,181 $3,222,506 $3,044,167
Interest and dividends on investment securities 439,941 570,759 740,396 533,116
Interest on mortgage-backed and related securities
341,911 233,950 305,470 310,920
Other interest income 174,308 63,731 130,907 98,954
------------ ------------ ------------ ------------
Total interest income 3,465,986 3,244,621 4,399,279 3,987,157
------------ ------------ ------------ ------------
INTEREST EXPENSE--DEPOSITS 1,936,152 1,668,472 2,300,245 1,982,803
------------ ------------ ------------ ------------
Net interest income before provision
for loan losses 1,529,834 1,576,149 2,099,034 2,004,354
PROVISION FOR LOAN LOSSES 0 0 0 35,000
------------ ------------ ------------ ------------
Net interest income after provision for
loan losses 1,529,834 1,576,149 2,099,034 1,969,354
------------ ------------ ------------ ------------
NONINTEREST INCOME:
Service charges on deposit accounts 179,499 131,786 198,193 138,149
Income (loss) from real estate operations, net 837 85,048 50,815 (122,443)
Gain on sale of premises and equipment 1,500 0 73,702 772
Gain on sale of securities, net 0 0 0 854
Other 855 2,726 6,040 (480)
Total noninterest income 182,691 219,560 328,750 16,852
NONINTEREST EXPENSE:
Compensation and benefits 549,712 576,354 758,415 824,909
Occupancy and equipment 136,812 137,740 189,158 206,222
SAIF deposit insurance premium 96,513 99,584 131,666 133,744
Data processing 89,085 87,065 114,486 119,952
Professional fees 37,022 62,522 76,358 87,552
Other 160,503 162,010 225,895 237,366
------------ ------------ ------------ ------------
Total noninterest expense 1,069,647 1,125,275 1,495,978 1,609,745
------------ ------------ ------------ ------------
Income before income taxes 642,878 670,434 931,806 376,461
INCOME TAX EXPENSE 223,449 207,834 310,256 97,732
------------ ------------ ------------ ------------
Net income $ 419,429 $ 462,600 $ 621,550 $ 278,729
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CULLMAN
STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
Unrealized
Unrealized Loss on
Depreciation Available for
on Certain Sale Securities,
Retained Marketable Net of Deferred
Earnings Equity Securities Taxes Total
------------ --------------------- ------------------ ------------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1993 $4,750,242 $ 0 $ 0 $4,750,242
Net income 278,729 0 0 278,729
Net unrealized depreciation on certain
marketable equity securities 0 (33,826) 0 (33,826)
---------- ---------- ---------- ----------
BALANCE, September 30, 1994 5,028,971 (33,826) 0 4,995,145
Net income 621,550 0 0 621,550
Adoption of SFAS No. 115 0 33,826 (121,784) (87,958)
Change in net unrealized loss on
securities available-for-sale 0 0 76,850 76,850
---------- ---------- ---------- ----------
BALANCE, September 30, 1995 5,650,521 0 (44,934) 5,605,587
Net income (unaudited) 419,429 0 0 419,429
Change in net unrealized loss on securities
available-for-sale (unaudited) 0 0 (172,370) (172,370)
---------- ---------- ---------- ----------
BALANCE, June 30, 1996 (unaudited) $6,069,950 $ 0 $(217,304) $5,852,646
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
---
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CULLMAN
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months For the Year Ended
Ended June 30, September 30,
-------------------------- ------------------------
1996 1995 1995 1994
------------ ------------ ------------- -----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income $ 419,429 $ 462,600 $ 621,550 $ 278,729
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 61,792 61,259 81,679 80,492
Amortization and accretion on securities (58,615) (54,901) (73,200) (9,921)
Amortization of net deferred loan origination fees (25,871) (23,002) (30,669) (30,048)
Provision (benefit) for deferred income taxes 6,619 49,736 66,314 56,271
Provision for write-down of foreclosed real estate 0 0 0 120,000
Gain on sale of foreclosed real estate, net (1,405) (75,761) (43,040) (17,284)
Gain on sale of premises and equipment, net (1,500) 0 (73,702) (772)
Gain on sale of securities, net 0 0 0 (854)
Change in assets and liabilities:
Increase (decrease) in income taxes receivable/payable (148,310) 169,176 188,288 (7,289)
Increase in accrued interest receivable (47,275) (32,760) (38,513) (37,535)
Decrease (increase) in other assets 50,285 39,427 44,636 (25,642)
Increase (decrease) in accrued interest payable (1,397) 29,608 65,262 (9,548)
Increase (decrease) in accrued expenses and other liabilities (96,984) (41,658) (21,660) 33,013
--------- --------- --------- ----------
Total adjustments (262,661) 121,124 165,395 150,883
--------- --------- --------- ----------
Net cash provided by operating activities 156,768 583,724 786,945 429,612
--------- --------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities/calls of investment securities
available-for-sale 1,000,000 0 0 0
Proceeds from maturities/calls of investment securities
held-to-maturity 2,950,000 4,750,000 6,550,000 4,639,500
Purchases of investment securities available-for-sale (2,576,581) (65,387) (597,769) 0
Purchases of investment securities held-to-maturity 0 (3,236,991) (3,448,595) (8,344,197)
Net loan repayments (originations) (1,311,676) 1,009,059 1,409,406 1,863,694
Proceeds from sales of investment securities 0 0 0 1,533,077
Proceeds from maturities of mortgage-backed securities
available-for-sale 353,100 95,019 498,922 0
Proceeds from maturities of mortgage-backed securities held to
maturity 443,072 303,414 126,578 1,464,279
Purchases of mortgage-backed securities available-for-sale (4,492,120) 0 (490,000) (2,773,344)
Capital expenditures (82,503) 0 (23,512) (88,224)
Proceeds from sale of foreclosed real estate 18,019 80,761 329,855 372,117
Proceeds from sale of fixed assets 1,500 120,792 202,066 17,750
--------- --------- --------- ---------
Net cash provided by (used in) investing activities (3,697,189) 3,056,667 4,556,951 (1,315,348)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits 2,269,917 (1,832,427) (2,219,802) 140,852
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 2,269,917 (1,832,427) (2,219,802) 140,852
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,270,504) 1,807,964 3,124,094 (744,884)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,108,097 2,984,003 2,984,003 3,728,887
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $4,837,593 $ 4,791,967 $ 6,108,097 $2,984,003
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest on deposits $1,937,549 $ 1,638,864 $ 2,234,983 $1,989,406
Income taxes 356,734 838 57,800 106,285
Transfers from loans to real estate acquired through foreclosure 27,600 0 5,444 359,834
========= ========= ========= ==========
CHANGE IN UNREALIZED NET LOSS ON SECURITIES AVAILABLE FOR SALE, net
of deferred taxes $ 172,370 $ 23,831 $ 44,934 $ 0
CHANGE IN UNREALIZED DEPRECIATION ON CERTAIN
MARKETABLE EQUITY SECURITIES 0 0 (33,826) 33,826
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CULLMAN
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1994
AND FOR THE YEARS THEN ENDED
(Information at June 30, 1996 and for the Nine Months
Ended June 30, 1996 and 1995 is Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
First Federal Savings and Loan Association of Cullman (the "Association")
is a mutual savings and loan association which was organized in 1905. Its
principal business consists of accepting deposits and residential mortgage
loan originations in its primary market area of Cullman County, Alabama.
The Association is subject to the regulations of certain federal agencies
and undergoes periodic examinations by those regulatory authorities.
Unaudited Interim Financial Statements
In the opinion of management, the unaudited statement of financial
condition as of June 30, 1996 and the unaudited statements of income and
cash flows for the nine-month periods ended June 30, 1996 and 1995 reflect
all adjustments (which include only normal recurring adjustments)
necessary to present fairly the information set forth therein. The results
of operations for the interim periods are not necessarily indicative of
the results for the full year.
Basis of Financial Statement Presentation
The accounting principles and reporting policies of the Association, and
the methods of applying these principles, conform with generally accepted
accounting principles ("GAAP") and with general practices within the
thrift industry. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the balance sheet and
revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant
changes in the near-term relate to the determination of the allowance for
loan losses and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowances for loan losses and real estate owned,
management obtains independent appraisals for significant properties,
evaluates the overall portfolio characteristics and delinquencies and
monitors economic conditions.
F-6
<PAGE>
A substantial portion of the Association's loans are secured by real estate in
its primary market area. Accordingly, the ultimate collectibility of a
substantial portion of the Association's loan portfolio and the recovery of a
portion of the carrying amount of foreclosed real estate are susceptible to
changes in economic conditions in the Association's primary market areas.
Cash and Cash Equivalents
For purposes of the statements of cash flows and presentation of the statements
of financial condition, the Association considers cash, due from banks and
interest bearing deposits in banks as cash and cash equivalents.
Investment and Mortgage-Backed Securities
Securities classified as held-to-maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts on the constant effective
yield method. The Association has the positive intent and ability to hold these
securities to maturity. Available-for-sale securities are carried at fair value
and include all debt and equity securities not classified as held-to-maturity or
trading. Trading securities are those held principally for the purpose of
selling in the near future and are carried at fair value. The Association does
not currently have any trading securities.
Unrealized holding gains and losses for trading securities are included in
earnings. Unrealized holding gains and losses for available-for-sale securities
are excluded from earnings and reported, net of any income tax effect, as a
separate component of retained earnings. Realized gains and losses for
securities classified as either available-for-sale or held-to-maturity are
reported in earnings based on the adjusted cost of the specific security sold.
Effective October 1, 1994, the Association adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. At the time of adoption, the
Association recognized a net reduction of equity of $87,958, representing the
unrealized loss on investment and mortgage-backed securities. Prior to adoption
of SFAS 115, all investment securities were stated at cost, adjusted for
amortization of premiums and accretion of discounts, similar to the
held-to-maturity category under the provisions of SFAS 115. Securities to be
held for indefinite periods of time would have been reported as held for sale
and carried at the lower of cost or fair value prior to the implementation of
SFAS 115. Additionally, certain marketable equity securities were previously
carried at the lower of cost or market with unrealized losses shown as a
reduction of equity.
Loans Receivable
Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses and net deferred loan origination fees and discounts.
The Association ceases accrual of interest on substantially all loans when
payment on a loan is in excess of 90 days past due. An allowance is established
by a charge to interest income equal to all interest previously accrued.
Interest income is subsequently recognized only to the extent that cash payments
are received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is in accordance with the terms of the
loan agreement; in which case the loan is returned to accrual status.
F-7
<PAGE>
The allowance for loan losses is increased by charges to income and decreased by
loan charge-offs, net of recoveries. The allowance for loan losses is maintained
at a level which management considers adequate to absorb losses inherent in the
loan portfolio at each reporting date. Management's estimation of this amount
includes a review of all loans for which full collectibility is not reasonably
assured and considers, among other factors, prior years' loss experience,
economic conditions, distribution of portfolio loans by risk class, and the
estimated value of the underlying collateral. Though management believes the
allowance for loan losses to be adequate, ultimate losses may vary from their
estimates. However, estimates are reviewed periodically, and as adjustments
become necessary, they are reported in earnings in periods in which they become
known. In addition, various regulatory agencies, as an integral part of their
examination process periodically review the Association's allowance for losses
on loans and the carrying value of foreclosed real estate. Such agencies may
require the Association to recognize additions to the allowances based on their
judgments about information available to them at the time of their examinations.
The Association adopted SFAS No. 114, Accounting by Creditors for Impairment of
a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures, as of October 1, 1995. SFAS No. 114
requires that certain impaired loans be measured based on the present value of
expected future cash flows discounted at each loan's original effective interest
rate. As a practical expedient, impairment may be measured based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a valuation
allowance. The Association had previously measured the allowance for loan losses
using methods similar to those prescribed in SFAS No. 114. As a result of
adopting these statements, no additional provision to the allowance for loan
losses was required as of October 1, 1995. Based on the Association's loan
portfolio composition, which primarily consists of one-to-four family
residential mortgages and consumer installment loans, which are exempt from SFAS
No. 114 when evaluated collectively for impairment as is done by the
Association, the Association had no loans designated as impaired under the
provisions of SFAS No. 114 at October 1, 1995.
Loan Origination Fees and Related Costs
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan over the
remaining period to contractual maturity.
Loan Servicing Income
Loan servicing income represents fees earned in connection with the servicing of
real estate mortgage loans for investors. Such income is recognized concurrent
with the receipt of the related mortgage payments and is based generally on the
outstanding principal balances of the loans serviced.
Gains on Sales of Loan
Gains or losses on sales of mortgages are recognized based upon the difference
between the selling price and the carrying value of the related mortgage loans
sold. Such gains and losses are adjusted by the amount of excess servicing fees
recorded.
F-8
<PAGE>
Foreclosed Real Estate
Real estate acquired through, or in lieu of, loan foreclosure is initially
recorded at fair value at the date of foreclosure, establishing a new cost
basis. Costs to maintain or hold the property are expensed and amounts incurred
to improve the property, to the extent that fair value is not exceeded, are
capitalized. Valuations are periodically performed by management, and an
allowance for losses is established by a charge to income if the carrying value
of a property exceeds its fair value less the estimated costs to sell.
Premises and Equipment
Land is carried at cost. Buildings, leasehold improvements, and furniture,
fixtures and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation is provided using the straight-line and accelerated
methods over the estimated useful lives of the assets. The cost of leasehold
improvements is amortized using the straight-line method over the life of the
lease. The estimated useful lives of furniture, fixtures, and equipment range
from 5 to 15 years and for building and improvements range from 5 to 33 years.
Income Taxes
The Association accounts for income taxes through the use of the asset and
liability method for accounting for deferred income taxes. Under the asset and
liability method, deferred taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory rates applicable to future
years to differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. The effect on deferred taxes of a
change in tax rates would be recognized in income in the period that includes
the enactment date.
Pending Accounting Standards
In December 1991, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 107, Disclosures About Fair Values of Financial Instruments. This standard
requires disclosure of the fair value of financial instruments, both assets and
liabilities recognized and not recognized in the statement of financial
condition. Adoption of this standard is required by the Association for fiscal
years ending after December 31, 1995. The Association will adopt the provisions
of this standard as of September 30, 1996.
In March 1995, the FASB issued SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. This Standard requires that long-lived assets and certain
identifiable intangibles to be held and used be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the review for recoverability, based on undiscounted
expected future cash flows, indicates that impairment exists, the loss should be
measured based on the fair value of the asset. The Association will adopt the
provisions of the Standard on October 1, 1996 and anticipates that the impact
will not be significant.
F-9
<PAGE>
In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage Servicing
Rights, an amendment to SFAS No. 65. This Standard amends certain provisions of
SFAS No. 65 to eliminate the accounting distinction between rights to service
mortgage loans for others that are acquired through loan origination activities
and those acquired through purchase transactions. This Standard applies
prospectively for fiscal years beginning after December 15, 1995 to transactions
in which a mortgage banking enterprise sells or securitizes mortgage loans with
servicing rights retained and to impairment evaluations of all amounts
capitalized as mortgage servicing rights, including those purchased before
adoption of this Standard. Management will adopt the provisions of this Standard
on October 1, 1996. Based on the Association's current operating activities,
management does not believe that the adoption of this Standard will have a
material impact on the Association's financial condition or results of
operations.
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished.
This statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
The Association will adopt the provisions of the Standard on January 1, 1997.
Based on the Association's current operating activities, management does not
believe that the adoption of this statement will have a material impact on the
Association's financial condition or results of operations.
F-10
<PAGE>
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
Details of securities are as follows:
<TABLE>
<CAPTION>
June 30, 1996
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------- ------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury and federal agencies $ 2,022,591 $ 0 $ (54,861) $ 1,967,730
Mutual funds 1,764,127 0 (14,602) 1,749,525
Federal Home Loan Bank stock 429,800 0 0 429,800
------------- ------------ ------------ -------------
Investment securities 4,216,518 0 (69,463) 4,147,055
Mortgage-backed securities 6,488,950 0 (275,466) 6,213,484
------------- ------------ ------------ -------------
Total $10,705,468 $ 0 $(344,929) $10,360,539
============= ============ ============ =============
Held-to-maturity:
U.S. Treasury and federal agencies $ 5,091,576 $ 0 $ (53,606) $ 5,037,970
Obligations of state and political
subdivisions 159,900 9,559 0 169,459
------------- ------------ ------------ -------------
Investment securities 5,251,476 9,559 (53,606) 5,207,429
Mortgage-backed securities 2,749,049 64 0 2,749,113
------------- ------------ ------------ -------------
Total $ 8,000,525 $ 9,623 $ (53,606) $ 7,956,542
============= ============ ============ =============
<CAPTION>
September 30, 1995
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------- ------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury and federal agencies $ 501,963 $ 617 $ 0 $ 502,580
Mutual funds 1,689,141 0 (12,707) 1,676,434
Federal Home Loan Bank stock 429,800 0 0 429,800
------------- ------------ ------------ -------------
Investment securities 2,620,904 617 (12,707) 2,608,814
Mortgage-backed securities 2,302,174 0 (58,744) 2,243,430
------------- ------------ ------------ -------------
Total $ 4,923,078 $ 617 $ (71,451) $ 4,852,244
============= ============ ============ =============
Held-to-maturity:
U.S. Treasury and federal agencies $ 8,033,308 $25,280 $ (90,254) $ 7,968,334
Obligations of state and political
subdivisions 159,814 13,017 0 172,831
------------- ------------ ------------ -------------
Investment securities 8,193,122 38,297 (90,254) 8,141,165
Mortgage-backed securities 3,208,648 16,072 (45,778) 3,178,942
------------- ------------ ------------ -------------
Total $11,401,770 $54,369 $(136,032) $11,320,107
============= ============ ============ =============
</TABLE>
F-11
<PAGE>
<TABLE>
<CAPTION>
September 30, 1994
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ------- --------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury and federal agencies $ 11,034,148 $ 1,168 $(200,060) $ 10,835,256
Obligations of state and political
subdivisions 159,698 9,171 0 168,869
Mutual funds 1,590,890 0 0 1,590,890
Unrealized depreciation on certain
marketable equity securities (33,826) 0 0 (33,826)
Federal Home Loans Bank stock 429,800 0 0 429,800
------------ ------- ---------- ------------
Investment Securities 13,180,710 10,339 (200,060) 12,990,989
Mortgage-backed securities 5,676,248 8,144 (283,796) 5,400,596
------------ ------- ---------- ------------
Total $ 18,856,958 $18,483 $(483,856) $ 18,391,585
============ ======= ========== ============
</TABLE>
The amortized cost and estimated fair value of securities, by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturity because borrowers may have the right to call or prepay obligations:
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------------------------------------
Available for Sale Held-to-Maturity
------------------------------ -----------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
-------------- -------------- --------------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Due in one year or less $ 0 $ 0 $3,754,486 $3,746,498
Due after one year through five years 1,260,690 1,232,030 1,496,990 1,460,931
Due after five years through ten years 761,901 735,700 0 0
Due after ten years 2,193,927 2,179,325 0 0
-------------- -------------- ----------- -----------
4,216,518 4,147,055 5,251,476 5,207,429
Mortgage-backed securities 6,488,950 6,213,484 2,749,049 2,749,113
-------------- -------------- ----------- -----------
Total $10,705,468 $10,360,539 $8,000,525 $7,956,542
============== ============== =========== ===========
<CAPTION>
September 30, 1995
--------------------------------------------------------------
Available for Sale Held-to-Maturity
------------------------------- -----------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 0 $ 0 $ 2,747,450 $ 2,755,905
Due after one year through five years 501,963 502,580 5,445,672 5,385,260
Due after five years through ten years 0 0 0 0
Due after ten years 2,118,941 2,106,234 0 0
------------- ------------- ------------ ------------
2,620,904 2,608,814 8,193,122 8,141,165
Mortgage-backed securities 2,302,174 2,243,430 3,208,648 3,178,942
------------- ------------- ------------ ------------
Total $4,923,078 $4,852,244 $11,401,770 $11,320,107
============= ============= ============ ============
</TABLE>
F-12
<PAGE>
All mortgage-backed securities were issued by either U.S. government
agencies (Government National Mortgage Association) or
government-sponsored enterprises (Federal Home Loan Mortgage Corporation
or Freddie Mac). The mutual funds are backed primarily by Federal Home
Loan Mortgage Association mortgage-backed securities and private issuer
mortgage-backed securities.
There were no sales of securities during the year ended September 30, 1995
and the interim period ended June 30, 1996. Proceeds from sales of
securities during fiscal 1994, prior to adoption of SFAS No. 115, were
$1,533,077 with gross gains of $854 on those sales.
3. LOANS RECEIVABLE, NET
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1995 1994
----------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
Mortgage loans:
Principal balances:
Secured by 1-4 family residences $23,804,276 $23,230,366 $24,123,939
Secured by nonresidential properties 8,670,198 8,180,276 9,463,817
Secured by multifamily properties 4,105,323 4,187,709 3,540,035
Construction loans 755,035 624,000 400,110
----------- ----------- -----------
37,334,832 36,222,351 37,527,901
Less:
Undisbursed portion of mortgage loans (246,191) (265,804) (91,435)
Net deferred loan origination fees (154,950) (121,257) (100,624)
---------- ---------- -----------
Total mortgage loans 36,933,691 35,835,290 37,335,842
Commercial loans 1,157,402 378,126 70,877
Consumer loans:
Principal balances:
Loans secured by automobiles 1,230,415 1,050,545 1,252,061
Loans secured by savings accounts 595,526 534,017 346,526
Other 563,572 1,395,893 1,581,316
----------- ----------- -----------
Total consumer loans 2,389,513 2,980,455 3,179,903
----------- ----------- -----------
Total loans 40,480,606 39,193,871 40,586,622
Less allowance for loan losses 611,597 623,638 632,208
----------- ----------- -----------
Loans receivable, net $39,869,009 $38,570,233 $39,954,414
=========== =========== ===========
</TABLE>
F-13
<PAGE>
In the ordinary course of business, the Bank makes loans to officers,
directors, employees, and other related parties of the Bank. These loans are
made on substantially the same terms as those prevailing for comparable
transactions with others. Such loans do not involve more than normal risk of
collectibility nor do they present other unfavorable features. The amounts
of such related party loans and commitments at September 30, 1995 and
June 30, 1996 were $689,000 and $912,000, respectively. During the interim
period ended June 30, 1996, new loans totaled $376,000 and repayments were
$153,000.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
For the Nine Months For the Years Ended
Ended June 30, September 30
-------------------------- --------------------------
1996 1995 1995 1994
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Balance at beginning of year $623,638 $632,208 $632,208 $756,628
Provision charged to income 0 0 0 35,000
Charge-offs (20,141) (4,252) (17,170) (175,460)
Recoveries 8,100 8,404 8,600 16,040
------------ ------------ ------------ ------------
Balance at end of year $611,597 $636,360 $623,638 $632,208
============ ============ ============ ============
</TABLE>
The Association had loans on nonaccrual status of approximately $49,000 at
September 30, 1995. Interest income foregone on these nonaccrual loans was
not significant for fiscal year 1995. The Association had loans on
nonaccrual status of approximately $34,000 at June 30, 1996 (unaudited).
Interest income foregone on these nonaccrual loans was not significant for
the nine months ended June 30, 1996 (unaudited).
4. LOAN SERVICING
The Association originates and services mortgage loans for Freddie Mac.
Mortgage loans serviced for Freddie Mac are not included in the accompanying
statements of financial condition. Unpaid principal balances of serviced
loans totaled $750,391 at June 30, 1996 (unaudited), $900,246 at
September 30, 1995, and $240,474 at September 30, 1994.
F-14
<PAGE>
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30, 1995 is summarized as follows:
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1995 1994
------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C>
Investment securities $105,482 $ 97,352 $120,556
Mortgage-backed securities 48,542 28,965 29,563
Loans receivable 277,232 257,664 195,349
------------ ------------ -------------
Total $431,256 $383,981 $345,468
============ ============ =============
</TABLE>
6. FORECLOSED REAL ESTATE
Activity in the allowance for losses on foreclosed real estate is
summarized as follows:
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1995 1994
------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C>
Balance at beginning of year $0 $214,609 $ 94,609
Provision charged to income 0 0 120,000
Charge-offs 0 (214,609) 0
------------ ------------ -------------
Balance at end of year $0 $ 0 $214,609
============ ============ =============
</TABLE>
F-15
<PAGE>
7. PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1995 1994
--------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Land $ 163,082 $ 163,081 $ 201,082
Buildings and improvements 751,408 727,144 864,202
Leasehold improvements 30,166 30,166 21,854
Furniture, fixtures, and equipment 726,324 682,904 680,488
--------------- --------------- ---------------
1,670,980 1,603,295 1,767,626
Less accumulated depreciation and amortization 1,049,281 1,002,307 980,107
--------------- --------------- ---------------
Net premises and equipment $ 621,699 $ 600,988 $ 787,519
=============== =============== ===============
</TABLE>
8. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996 September 30, 1995 September 30, 1994
----------------------------------- ----------------------------------- -----------------------
Weighted Weighted
Average Average
Rate Amount Percent Rate Amount Percent Amount Percent
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand and NOW accounts,
including noninterest-
bearing deposits of $113,594
in 1996 and $90,205 in 1995 2.40% $11,670,291 20.0% 2.43% $11,721,404 20.9% $13,848,994 23.8%
Money market accounts 3.15 1,300,033 2.2 3.15 1,339,759 2.4 1,365,561 2.3
Passbook savings 2.84 8,373,587 14.4 3.10 7,471,270 13.3 8,626,621 14.8
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
21,343,911 36.6 20,532,433 36.6 23,841,176 40.9
Certificates of deposit, rates
from 3.15% to 6.41% in 1996
and 5.12% to 6.78% in 1995 5.60 36,933,975 63.4 5.62 35,475,537 63.4 34,386,596 59.1
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total 4.51% $58,277,886 100.0% 4.56% $56,007,970 100.0% $58,227,772 100.0%
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $5,815,582 at June 30, 1996
(unaudited) and $4,910,558 at September 30, 1995. Deposits in excess of
$100,000 are not federally insured.
F-16
<PAGE>
Scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
Years Ending Weighted
September 30 Average Rate Amount
============ ============ =============
<S> <C> <C>
1996 5.47% $26,185,400
1997 5.91 6,112,602
1998 5.96 1,667,904
1999 6.91 1,456,683
2000 6.69 52,948
-------------
$35,475,537
=============
</TABLE>
Interest expense on deposits are summarized as follows:
<TABLE>
<CAPTION>
June 30, June 30, September 30, September 30,
1996 1995 1995 1994
-------------- -------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
NOW accounts $ 199,621 $ 208,163 $ 286,845 $ 316,846
Money market accounts 22,237 27,648 37,731 37,444
Passbook savings 143,230 166,224 229,105 228,676
Certificates of deposit 1,572,635 1,269,300 1,754,606 1,401,551
Withdrawal penalties (1,571) (2,863) (8,042) (1,714)
-------------- -------------- -------------- --------------
Total $1,936,152 $1,668,472 $2,300,245 $1,982,803
============== ============== ============== ==============
</TABLE>
The Association has pledged U.S. government and government agency
obligations totaling $1,120,000 at June 30, 1996 (unaudited) and
September 30, 1995 as collateral against certain large deposits.
F-17
<PAGE>
9. INCOME TAXES
The provisions for income taxes for the periods indicated are as follows:
<TABLE>
<CAPTION>
For the Nine For the Years
Months Ended Ended
June 30, September 30,
---------------------------- ----------------------------
1996 1995 1995 1994
-------------- ------------- -------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Current:
Federal $189,305 $137,566 $212,262 $30,535
State 27,525 20,532 31,680 10,926
-------------- ------------- -------------- -------------
216,830 158,098 243,942 41,461
Deferred:
Federal 5,732 48,631 64,841 53,934
State 887 1,105 1,473 2,337
-------------- ------------- -------------- -------------
6,619 49,736 66,314 56,271
-------------- ------------- -------------- -------------
Total $223,449 $207,834 $310,256 $97,732
============== ============= ============== =============
</TABLE>
The differences between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate of 34% to
income before income taxes were as follows:
<TABLE>
<CAPTION>
For the Nine Months For the Years Ended
Ended June 30, September 30,
------------------------------ -------------------------------
1996 1995 1995 1994
-------------- --------------- ---------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
Expected income tax expense at statutory
federal tax rate $218,579 $227,948 $316,814 $127,997
Increase (decrease) resulting from:
State income tax, net of federal benefit
17,670 14,280 21,882 8,754
Tax-exempt interest income (12,000) (24,000) (28,000) (38,419)
Other, net (800) (10,394) (440) (600)
-------------- --------------- ---------------- --------------
$223,449 $207,834 $310,256 $ 97,732
============== =============== ================ ==============
Effective rate 35% 31% 33% 26%
============== =============== ================ ==============
</TABLE>
F-18
<PAGE>
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to significant portions
of the net deferred tax asset relate to the following:
<TABLE>
<CAPTION>
June 30, September 30, September 30,
1996 1995 1994
-------------- ----------------------- -------------------
(Unaudited)
<S> <C> <C> <C>
Deferred loan fees, net $ 12,499 $ 16,665 $ 20,831
Allowance for loan losses for financial reporting
226,291 230,746 233,917
Unrealized loss on securities available for sale 127,624 25,900 0
Unrealized depreciation on certain marketable
equity securities 0 0 13,531
Other 22,316 25,205 12,004
-------------- ----------------------- -------------------
Deferred tax asset 388,730 298,516 280,283
Allowance for loan losses for the tax reserve in
excess of base year (45,852) (32,130) (12,044)
Depreciation (53,443) (50,049) (44,251)
Other (40,788) (62,795) (16,501)
-------------- ----------------------- -------------------
Deferred tax liability (140,083) (144,974) (72,796)
-------------- ----------------------- -------------------
Net deferred tax asset $248,647 $153,542 $207,487
============== ======================= ===================
</TABLE>
Thrift institutions, in determining taxable income, have historically been
allowed special bad debt deductions based on specified experience formulae
or on a percentage of taxable income before such deductions. The bad debt
deduction based on the latter has been gradually reduced to 8%. On August
2, 1996, Congress passed the Small Business Job Protection Act that, will
among other things, repeal the tax bad debt reserve method for thrifts
effective for taxable years beginning after December 31, 1995. As a
result, thrifts must recapture into taxable income the amount of their
post-1987 tax bad debt reserves over a six-year period beginning after
1995. This recapture can be deferred for up to two years if the thrift
satisfies a residential loan portfolio test. The Bank is expected to
recapture approximately $32,000 of its tax bad debt reserves into taxable
income over six years as a result of this new law. The recapture will not
have any effect on the Association's financial statements because the
related tax expense has already been accrued.
Because of such repeal, thrifts such as the Association may only use the
same tax bad debt reserve that is allowed for banks. Accordingly, a thrift
with assets of $500 million or less may only add to its tax bad debt
reserves based upon its moving six-year average experience of actual loan
losses (i.e., the experience method). A thrift with assets greater than
$500 million can no longer use the reserve method and may only deduct loan
losses as they actually arise (i.e., the specific charge-off method). The
Association expects to continue to use the reserve method.
F-19
<PAGE>
The portion of a thrift's tax bad debt reserve that is not recaptured
under this new law is only subject to recapture at a later date under
similar circumstances. These include stock repurchases redemptions by the
thrift or if the thrift converts to a type of institution (such as a
credit union) that is not considered a bank for tax purposes. However, no
further recapture would be allowed if the thrift converted to a commercial
bank charter or was acquired by a bank. The Association does not
anticipate engaging in any transactions at this time that would require
the recapture of its remaining tax bad debt reserves.
10. EQUITY
Under regulations promulgated by the Association's primary regulator, the
Office of Thrift Supervision ("OTS"), the Association is required to
maintain capital sufficient to meet three requirements, as defined: (1) a
tangible capital requirement equal to 1.5% of adjusted total assets; (2) a
core capital (leverage) requirement of 3% of adjusted total assets, though
it is anticipated that most institutions will be required by regulators to
maintain capital of an additional 100 to 200 basis points; and (3) a
risk-based capital requirement equal to 8% of risk-weighted assets, which
were approximately $32,705,865 at September 30, 1995. Under the risk-based
capital regulations, assets and off-balance sheet commitments are assigned
a credit-risk weighting based upon their relative risk ranging from 0% for
assets backed by the full faith and credit of the United States government
or that pose no credit risk to the Association to 100% for such assets as
commercial loans and delinquent or repossessed assets.
The following is a reconciliation of the Association's equity under
generally accepted accounting principles ("GAAP") to the Association's
tangible, leverage, and risk-based capital available to meet its
regulatory requirements:
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
-------------- -----------------
(Unaudited)
<S> <C> <C>
Total equity, per financial statements $5,852,646 $5,605,587
Unrealized losses on available-for-sale securities allowed
to be added back 217,304 44,934
Intangible assets required to be deducted 0 0
-------------- -----------------
Tangible capital 6,069,950 5,650,521
Required deductions 0 0
-------------- -----------------
Core capital 6,069,950 5,650,521
General allowance for loan losses* 410,000 410,000
-------------- -----------------
Risk-based capital $6,479,950 $6,060,521
============== =================
</TABLE>
*Limited to a maximum of 1.25% of gross risk weighted assets
F-20
<PAGE>
The Association was in compliance with all capital requirements, as set
forth in the following table:
<TABLE>
<CAPTION>
June 30, 1996 September 30, 1995
------------------------------ --------------------------------
Amount Percentage Amount Percentage
-------------- --------------- ---------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C>
Tangible capital, as defined $6,069,950 9.43% $5,650,521 9.11%
Required minimum 965,719 1.50 930,393 1.50
-------------- --------------- --------------- ----------------
Excess $5,104,231 7.93% $4,720,128 7.61%
============== =============== =============== ================
Core capital, as defined $6,069,950 9.43% $5,650,521 9.11%
Required minimum 1,931,438 3.00 1,860,786 3.00
-------------- --------------- --------------- ----------------
Excess $4,138,512 6.43% $3,789,735 6.11%
============== =============== =============== ================
Risk-based capital $6,479,950 19.30% $6,060,521 18.53%
Required minimum 2,686,000 8.00% 2,616,469 8.00
-------------- --------------- --------------- ----------------
Excess $3,793,950 11.30% $3,444,052 10.53%
============== =============== =============== ================
</TABLE>
Core and risk-based capital elements continue to be under study by the
OTS. Management continues to monitor these and contemplated regulatory
changes and believes that the Association will continue to exceed its
regulatory minimums.
Effective December 1992, the capital standards under the Federal Deposit
Insurance Corporation Improvement Act became effective. These regulations
established capital standards in five categories ranging from "critically
undercapitalized" to "well capitalized" and defined "well capitalized" as
at least 5% for leverage capital and at least 10% for risk-based capital.
Institutions with a leverage capital less than 4% or risk-based capital
less than 8% are considered "undercapitalized" and are subject to
increasingly stringent prompt corrective action measures.
11. COMMITMENTS AND CONTINGENCIES
Lease Commitment
The Association leases property utilized as a branch office under a
long-term lease expiring March 31, 2000, at an annual rental of $15,409
plus taxes and maintenance. The Association has three 5-year options to
renew with rentals adjusted to the consumer price index. Rent expense
under this lease totaled $15,661 for the year ended September 30, 1995.
F-21
<PAGE>
At September 30, 1995, projected minimum lease payments for years ending
September 30 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $15,409
1997 15,409
1998 15,409
1999 15,409
2000 7,705
--------
Total $69,341
========
</TABLE>
Financial Instruments With Off-Balance-Sheet Risk
The Association does not engage in transactions involving options, standby
letters of credit, financial guarantees, interest-rate swaps, and forward
and future contracts. Further, the Association does not routinely issue
loan commitments and had none outstanding at September 30, 1995.
Significant Group Concentrations of Credit Risk
The majority of the Association's business activity is with customers
located in Cullman County and surrounding areas. While this area is
heavily involved in agribusiness activities, there is significant
diversified industry with no heavy concentration in any one industry.
FDIC Assessment
The deposits of the Association are currently insured by the Savings
Association Insurance Fund ("SAIF"). Both the SAIF and the Bank Insurance
Fund ("BIF"), the federal deposit insurance fund that covers the deposits
of state and national banks and certain state savings banks, are required
by law to attain and thereafter maintain a reserve ratio of 1.25% of
insured deposits. The BIF has achieved the required reserve rate, and, as
discussed below, the FDIC recently substantially reduced the average
deposit insurance premium paid by BIF-insured banks to a level
substantially below the average premium paid by savings institutions.
On November 4, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule will reduce deposit insurance premiums
for BIF member institutions to zero basis points (subject to a $2,000
minimum) for institutions in the lowest risk category, while holding
deposit insurance premiums for SAIF members at their current level (23
basis points for institutions in the lowest risk category). The reduction
was effective with respect to the semiannual premium assessment beginning
January 1, 1996.
F-22
<PAGE>
Banking legislation was enacted subsequent to June 30, 1996 to eliminate
the premium differential between SAIF-insured institutions and BIF-insured
institutions. The rule later adopted by the FDIC Board of Directors states
that, except for the possible impact of certain exemptions for de novo and
"weak" institutions, the special assessment necessary to recapitalize the
SAIF will be 65.7 basis points of SAIF assessable deposits held by
effected institutions as of March 31, 1995. The legislation provides that
all SAIF member institutions pay a special one-time assessment to
recapitalize the SAIF, which in the aggregate is sufficient to bring the
reserve ratio in the SAIF to 1.25% of insured deposits. It is anticipated
that after recapitalization of the SAIF, premiums paid by SAIF-insured
institutions will be reduced to match those currently being assessed
BIF-insured commercial banks. The legislation also provides for the merger
of the BIF and the SAIF, with such merger being conditioned upon the prior
elimination of the thrift charter.
The Association, based upon it's level of SAIF deposits as of March 31,
1995, will pay approximately $370,000, $237,000 net of related tax
benefits. The assessment will be recognized by a charge to income in the
quarter ended September 30, 1996.
Litigation
The Company is a defendant in certain claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters
is not expected to have a material adverse effect on the financial
position of the Company.
12. PROFIT SHARING PLAN
The Association maintains a defined contribution profit-sharing plan
covering all full-time employees who meet certain eligibility
requirements. Contributions to the Plan are at the discretion of the Board
of Directors and are determined on a calendar-year basis. For the plan
year ended December 31, 1995 management made a contribution of
approximately $20,000, of which $15,000 had been accrued at September 30,
1995. For the year ended December 31, 1994 management made a contribution
of $40,076 of which $30,057 had been accrued at September 30, 1994. For
the nine months ended June 30, 1996, management had accrued approximately
$17,000.
13. STOCK CONVERSION
On June 10, 1996, the Board of Directors approved a plan (the "Stock
Conversion Plan") to convert the Association from the mutual form of
organization to the stock form of organization. A newly formed corporation
will become the holding company of the Association and would offer and
issue shares of stock to members of the Association, certain benefit plans
of the Association, and the public in a subscription and community
offering.
The Stock Conversion Plan provides for the issuance of shares of capital
stock at a price which conforms to an independently apprised pro forma
market value of the Association. The estimated net proceeds to be received
from the offering will be based upon the appraisal to be performed.
F-23
<PAGE>
The costs associated with the Offering are expected to be deducted from
the proceeds of the sale of stock. In the event the conversion is not
consummated, all conversion costs incurred will be charged against current
earnings. Conversion cost incurred through June 30, 1996 totaled $17,500
(unaudited) and none at September 30, 1995. These deferred conversion
costs are included in "Other Assets" in the accompanying consolidated
statements of financial condition.
In connection with the Offering, the Association will establish a
liquidation account in an amount equal to its regulatory capital as of the
latest practicable date prior to consummation of the Offering.
The Company's ability to pay dividends will be largely dependent upon
dividends to the Company from the Association. Pursuant to OTS
regulations, the Association will not be permitted to pay dividends on its
capital stock or repurchase shares of its stock if its stockholders'
equity would be reduced below the amount required for the liquidation
account or if stockholders' equity would be reduced below the amount
required by the OTS.
Pursuant to OTS regulations, an institution that exceeds all fully
phased-in capital requirements before and after a proposed capital
distribution and has not been advised by the OTS that it is in need of
more than the normal supervision can, after prior notice but without the
approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net income to date during the
calendar year plus the amount that would reduce by one-half its "surplus
capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year, or (ii) 75% of its
net income over the most recent four-quarter period. Any additional
capital distributions require prior regulatory approval.Consummation of
the offering is contingent upon regulatory approval.
Consummation of the offering is contingent upon regulatory approval.
F-24
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such information shall not be relied upon as having been authorized by the
Holding Company, the Association or Trident Securities, Inc. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby to any person in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such offer
to solicitation is not qualified to do so, or to any person to whom it is
unlawful. Neither the delivery of this Prospectus nor any sale hereunder shall
under any has been no change in the affairs of the Holding Company or the
Association since any of the dates as of which information is furnished herein
or since the date hereof.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary .......................................................... 1
Selected Financial Information
and Other Data ............................................................ 7
Recent Developments ......................................................... 9
Risk Factors ................................................................ 14
Southern Community Bancshares, Inc........................................... 19
First Federal Savings and Loan Association of Cullman ....................... 19
Use of Proceeds ............................................................. 20
Market for the Common Shares ................................................ 21
Dividend Policy ............................................................. 21
Regulatory Capital Compliance ............................................... 23
Capitalization .............................................................. 24
Pro Forma Data .............................................................. 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................................... 28
The Business of the Holding Company ......................................... 44
The Business of the Association ............................................. 44
Management .................................................................. 61
Regulation .................................................................. 69
Taxation .................................................................... 78
The Conversion .............................................................. 80
Restrictions on Acquisition of the Holding Company
and the Association ....................................................... 94
Description of Authorized Shares ............................................100
Registration Requirements ...................................................101
Legal Matters ...............................................................101
Experts .....................................................................101
Additional Information ......................................................102
</TABLE>
---------------------
Until __________________, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a prospectus. This is an addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
================================================================================
================================================================================
SOUTHERN COMMUNITY
BANCSHARES, INC.
(Holding Company for
FIRST FEDERAL SAVINGS AND
LOAN ASSOCIATION OF CULLMAN)
Up to 494,500 Shares
Common Stock
--------------
PROSPECTUS
--------------
TRIDENT SECURITIES, INC.
________________, 1996
================================================================================
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers of First Federal Savings
and Loan Association of Cullman
As a federal savings and loan association, First Federal Savings and Loan
Association of Cullman (the "Association") is subject to federal regulations
which provide that any person against whom any action, suit or other judicial or
administrative proceeding, or threatened proceeding, whether civil, criminal, or
otherwise, including any appeal or other proceeding for review (an "Action"), is
brought by reason of the fact that such person is or was a director, officer or
employee of the Association shall be indemnified by the Association for the
following:
(i) Reasonable costs and expenses, including reasonable attorney's fees
actually paid or incurred by such person in connection with proceedings
related to the defense or settlement of an Action:
(ii) Any amount for which such person becomes liable by reason of any
judgment in an Action; and
(iii) Reasonable costs and expenses, including reasonable attorney's fees,
actually paid or incurred in any Action to enforce his rights under this
section if the person attains a final judgment in favor of such person in such
Action.
Such indemnification shall be made to such officer, director or employee only
if the following requirements are met:
(i) The Association shall make the indemnification in connection with any
Action which results in a final judgment on the merits in favor of such
director, officer or employee; and
(ii) The Association shall make the indemnification in case of (A)
settlement of any Action, (B) final judgment against such director, officer,
or employee, or (C) final judgment in favor of such director, officer or
employee other than on the merits, only if a majority of the directors of the
Association that such director, officer or employee was acting in good faith
within what he or she reasonably believed under the circumstances was the
scope of his or her employment or authority and for a purpose which he or she
reasonably believed under the circumstances was in the best interest of the
Association.
The Association may authorize payment of reasonable costs and expenses,
including reasonable attorney's fees arising from the defense or settlement of
any Action, to any director, officer or employee if a majority of the directors
of the Association conclude that such person may become entitled to
indemnification. The directors of the Association may impose conditions on such
payment, and, before making an advance payment, the Association shall obtain an
agreement from such person that the Association will be repaid if the person on
whose behalf payment is made is later determined not to be entitled to such
indemnification.
The Association intends to obtain a directors' and officers' liability policy
providing for insurance of directors and officers for liability incurred in
connection with performance of their duties as directors and officers. Such
policy will not, however, provide insurance for losses resulting from willful or
criminal misconduct.
<PAGE>
Indemnification of Directors and Officers of First Federal Savings and Loan
Association of Cullman
Article XVI of the Southern Community Bancshares, Inc., Certificate of
Incorporation provides for the indemnification of officers and directors as
follows:
Article XVI. Indemnification: The Corporation shall, to the fullest extent
---------------
permitted by the provisions of Section 145 of the General Corporate Law of the
State of Delaware, as the same may be amended and supplemented, indemnify any
and all persons whom it shall have the power to indemnify under said section
from and against any and all of the expenses, liabilities or other matters
referred to in or covered by said section, and the indemnification provided for
herein shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any Bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
Item 25. Other Expenses of Issuance and Distribution
<TABLE>
<CAPTION>
Amount
<S> <C> <C>
* Legal Fees and Expenses ..................................... $100,000
* Printing, Postage and Mailing ................................. 60,000
* Appraisal and Business Plan Fees and Expense .................. 30,000
* Accounting Fees and Expenses .................................. 95,000
* Blue Sky Filing Fees and Expenses
(including counsel fees) ...................................... 10,000
Conversion Agent and Proxy Solicitation Fees ................... 7,000
** Marketing Agent Fees and Expenses ............................ 114,240
* Marketing Agent Counsel Fees .................................. 30,000
* Filing Fees (NASD, OTS and SEC) ............................... 25,000
Stock transfer agent & certificates ............................ 7,500
* Other Expenses ................................................ 42,260
------
* Total ....................................................... $521,000
========
</TABLE>
- -----------------------
* Estimated
** Southern Community Bancshares, Inc. has retained Trident Securities,
Inc. ("Trident Securities") to assist in the sale of common stock on a
best efforts basis in the Offerings. Trident Securities will receive
payments for fees and expenses of approximately $114,240, including
estimated expenses of $10,000.
<PAGE>
Item 26. Recent Sales of Unregistered Securities
Not Applicable.
Item 27. Exhibits:
The exhibits filed as part of this registration statement are as follows:
1.1 Engagement Letter between the Association Savings and Loan Association of
Cullman and Trident Securities, Inc.*
1.2 Form of Agency Agreement among Southern Community Bancshares, Inc., the
Association Savings and Loan Association of Cullman and Trident
Securities, Inc.*
2 Plan of Conversion*
3.1 Certificate of Incorporation of Southern Community Bancshares, Inc.*
3.2 Bylaws of Southern Community Bancshares, Inc.*
3.3 Charter of First Federal Savings and Loan Association of Cullman*
3.4 Bylaws of First Federal Savings and Loan Association of Cullman*
4 Form of Common Stock Certificate of Southern Community Bancshares, Inc.*
5 Opinion of Bayh, Connaughton & Malone, P.C., regarding legality of
securities being registered
8.1 Federal Tax Opinion of Bayh, Connaughton & Malone, P.C.
8.2 State Tax Opinion of Miller, Hamilton, Snider & Odom, L.L.C.
8.3 Opinion of Ferguson & Co., LLC, with respect to Subscription Rights*
10.1 Proposed Stock Option Plan and Incentive Plan*
10.2 Proposed Management Recognition Plan and Trust Agreement*
10.3 Proposed Employment Agreement for William R. Faulk and Beth B. Knight
10.4 Proposed Employee Stock Ownership Plan*
23.1 Consent of Bayh, Connaughton & Malone, P.C.
23.2 Consent of Arthur Andersen LLP*
23.3 Consent of Ferguson & Co., L.L.P.*
23.4 Consent of Miller, Hamilton, Snider & Odom, L.L.C.*
24 Power of Attorney (set forth on signature page)*
24.1 Consent of Bayh, Connaughton & Malone, P.C.
<PAGE>
27.1 EDGAR Financial Data Schedule*
99.1 Appraisal Agreement between First Federal Savings and Loan Association of
Cullman and Ferguson & Co., L.L.P.*
99.2 Appraisal Update of Ferguson & Co., L.L.P.*
Appraisal Report of Ferguson & Co., L.L.P.*
99.3 Proxy Statement*
99.4 Marketing Materials*
99.5 Order and Acknowledgment Form*
- ---------------------
* Previously filed
<PAGE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) 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
<PAGE>
was registered) and any duration from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities offered,
and the offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
The small business issuer will provide to the underwriter at the closing
specified in the Underwriting Agreement certificates in such documentation and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer 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 small
business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer 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 small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
questions whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Cullman,
State of Alabama, on November 7, 1996.
Southern Community Bancshares, Inc.
By: *
--------------------------------------------------
William R. Faulk
President and Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
Name Title Date
* Vice President- November 7, 1996
- ----------------------- Chief Financial Officer
* Director November 7, 1996
- -----------------------
* Director November 7, 1996
- -----------------------
* Director November 7, 1996
- -----------------------
* Director November 7, 1996
- -----------------------
* Director November 7, 1996
- -----------------------
* Director November 7, 1996
- -----------------------
* Director November 7, 1996
- -----------------------
* Director November 7, 1996
- -----------------------
* By: /s/ Andrew C. Lynch
-------------------
(Power of Attorney, signed September 20, 1996)
<PAGE>
As Filed with the Securities and Exchange Commission on November 7, 1996
Registration No. 333-12373
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. 2 TO
REGISTRATION STATEMENT
ON
FORM SB-2
----------------------------
Southern Community Bancshares, Inc.
Cullman, Alabama
<PAGE>
EXHIBIT INDEX
1.1 Engagement Letter between the Association Savings and Loan Association of
Cullman and Trident Securities, Inc.*
1.2 Form of Agency Agreement among Southern Community Bancshares, Inc., the
Association Savings and Loan Association of Cullman and Trident
Securities, Inc.*
2 Plan of Conversion *
3.1 Certificate of Incorporation of Southern Community Bancshares, Inc.*
3.2 Bylaws of Southern Community Bancshares, Inc.*
3.3 Charter of First Federal Savings and Loan Association of Cullman *
3.4 Bylaws of First Federal Savings and Loan Association of Cullman *
4 Form of Common Stock Certificate of Southern Community Bancshares, Inc.*
5 Opinion of Bayh, Connaughton & Malone, P.C., regarding legality of
securities being registered
8.1 Federal Tax Opinion of Bayh, Connaughton & Malone, P.C.
8.2 State Tax Opinion of Miller, Hamilton, Snider & Odom, L.L.C.
8.3 Opinion of Ferguson & Co., L.L.C., with respect to Subscription Rights *
10.1 Proposed Stock Option Plan and Incentive Plan and Trust Agreement *
10.2 Proposed Management Recognition Plan and Trust Agreement *
10.3 Proposed Employment Agreement for William R. Faulk and Beth B. Knight
10.4 Proposed Employee Stock Ownership Plan *
23.1 Consent of Bayh, Connaughton & Malone, P.C.
23.2 Consent of Arthur Andersen LLP*
23.3 Consent of Ferguson & Co., L.L.P.*
23.4 Consent of Miller, Hamilton, Snider & Odom, L.L.C.*
24 Power of Attorney (set forth on signature page)*
24.1 Consent of Bayh, Connaughton & Malone P.C.
27.1 EDGAR Financial Data Schedule *
99.1 Appraisal Agreement between First Federal Savings and Loan Association of
Cullman and Ferguson & Co., L.L.P.*
<PAGE>
99.2 Appraisal Update of Ferguson & Co., L.L.P.*
Appraisal Report of Ferguson & Co., L.L.P.*
99.3 Proxy Statement*
99.4 Marketing Materials*
99.5 Order and Acknowledgment Form*
- --------------------
* Previously filed
<PAGE>
September 18, 1996
First Federal Savings and Loan
Association of Cullman
325 2nd Street, S.E.
P.O. Box 249
Cullman, Alabama 35056-0249
Re: Southern Community Bancshares, Inc. Common Stock Offering
Gentleman:
You have requested the opinion of this firm as to certain matters in
connection with the offer and sale (the "Offering") of the Southern Community
Bancshares, Inc. (the "Company") Common Stock, $.01 par value (the "Common
Shares"). We have reviewed the Company's Certificate of Incorporation,
Registration Statement on Form SB-2 ("Form SB-2"), as well as applicable
statutes and regulations governing the Company and the offer and sale of the
Common Shares.
We are of the opinion that upon the effectiveness of the Form SB-2, the
Common Shares, when sold, will be legally issued, fully paid and non-assessable.
This opinion has been prepared solely for the use of the Company in
connection with the Form SB-2 and any amendment thereto, and should not be used
for any other purpose nor relief upon by any other person (except for the
Securities and Exchange Commission in connection with its processing of the Form
SB-2 and any amendment thereto and investors in the Offering), without the
prior written consent of this firm.
Very truly yours,
/s/ Bayh, Connaughton & Malone, P.C.
------------------------------------
BAYH, CONNAUGHTON & MALONE, P.C.
<PAGE>
September 18, 1996
Board of Directors
First Federal Savings and Loan
Association of Cullman
325 2nd Street, S.E.
P.O. Box 249
Cullman, Alabama 35056-0249
RE: Federal Income Tax Consequences Relating to Conversion of First Federal
Savings and Loan Association of Cullman from a Federal Mutual Savings
Institution to a Federal Stock Savings Institution and the Acquisition
of the Stock Institution's Stock by a Stock Holding Company
Gentlemen:
In accordance with your request, set forth herein is the opinion of this
firm relating to the federal income tax consequences of the proposed conversion
("Conversion") of First Federal Savings and Loan Association of Cullman (the
"Association") from a federal mutual savings institution (the Association in its
mutual form is sometimes referred to as the "Mutual Association") to a federal
stock savings and loan association (the Association in its stock form is
sometimes referred to as the "Stock Association"), and the formation of a
holding company parent, Southern Community Bancshares, Inc. (the "Holding
Company"), which will acquire all of the outstanding stock of the Stock
Association.
For purposes of this opinion, we have examined such documents and questions
of law as we have considered necessary or appropriate, including but not limited
to the Plan of Conversion as adopted by the Association on June 10, 1996, as
amended (the "Plan"); the Charter and Bylaws of the Mutual Association; the
Charter and Bylaws of the Stock Association and the Certificate of Incorporation
and Bylaws of the Holding Company. In such examination, we have assumed, and
have not independently verified, the genuineness of all signatures on original
documents where due execution and delivery are requirements to the effectiveness
thereof. Captalized terms used herein and not defined herein, shall have the
same meaning assigned in the Plan.
In issuing our opinion, we have assumed that the Plan 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, and that the various
representations and warranties which are provided to us are accurate, complete,
true and correct. We express no opinion concerning tax matters under Alabama
state law and local tax laws.
<PAGE>
Board of Directors
First Federal Savings and Loan
Associaton of Cullman
Page 2
In issuing the opinion set forth below, we have relied solely on existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
existing and proposed Treasury Regulations (the "Regulations") thereunder,
current 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 shall have no obligation to advise you of any change in any
matter considered herein after the date hereof.
In rendering our opinion, we have assumed that the persons and entities
identified in the Plan will comply with all requirements of Code Section
368(a)(1)(F) and all other applicable state and Federal laws.
For purposes of this opinion, we are relying on the representations
provided to us by the Association, as set forth below.
REPRESENTATIONS
---------------
1. The Conversion has been and shall be implemented in accordance with the
terms of the Plan and all conditions precedent contained in the Plan shall be
performed or waived prior to the consummation of the Conversion.
2. The fair market value of the withdrawable deposit accounts plus
interests in the liquidation account ("Liquidation Account") of Stock
Association to be received under the Plan, in each instance, shall be equal to
the fair market value of the membership interests (i.e., withdrawable deposit
accounts, voting and liquidation rights) in the Association surrendered in
exchange therefor.
3. Holding Company and Stock Association each have no current plan or
intention to redeem or otherwise reacquire any of the stock issued in the
proposed transaction.
4. To the best of the knowledge of the management of the Association,
there is no plan or intention by any member of the Association who holds more
than 1% of the qualifying deposits in the Association, and there is no plan or
intention on the part of the remaining members, to dispose of their withdrawable
deposit accounts in Stock Association that would reduce their aggregate interest
in the Liquidation Account as of the Effective Date of the Conversion, to less
than 50% of the value of their interests in the Association as of the same date.
5. Immediately following the consummation of the proposed transaction,
Stock Association will possess the same assets and liabilities as the Mutual
Association held immediately prior to the proposed transaction, plus proceeds
from the sale of stock of Stock Association to Holding Company.
<PAGE>
Board of Directors
First Federal Savings and Loan
Association of Cullman
Page 3
6. Assets used to pay expenses of the Conversion (without reference to the
expenses of the Community Offering) and all distributions (except for regular
normal interest payments and other payments in the normal course of business
made by the Mutul Association immediately preceding the transaction) will in the
aggregate constitute less than one percent (1%) of the net assets of the
Association.
7. Following the proposed transaction, Stock Association will continue the
historic business of the Mutual Association or use a significant portion of the
Mutual Association's business assets.
8. Stock Association has no plan or intention to sell or otherwise dispose
of any of the assets of the Mutual Association acquired in the proposed
transaction, except for dispositions in the ordinary course of business.
9. There is no plan or intention for Stock Association to be liquidated or
merged with another corporation following the Conversion.
10. Neither the Stock Association nor the Holding Company has any plan or
intention, either currently or at the time of the Conversion, to issue
additional shares of stock following the proposed transaction, other than shares
that may be issued to employees and/or directors pursuant to certain stock
option and stock incentive plans or that may be issued to employee benefit
plans.
11. Stock Association has no current plan or intention to reacquire any of
its stock issued in the proposed transaction.
12. The Association is not under the jurisdiction of a court in any Title
11 or similar case within the meaning of Section 368(a)(3)(A). The proposed
transaction does not involve a receivership, foreclosure, or similar proceeding
before a federal or state agency involving a financial institution to which
Section 585 or 593 of the Code applies.
13. Compensation to be paid to depositor-employees of the Association or
Holding Company will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services.
14. No shares of Holding Company Conversion Stock will be issued to or
purchased by depositor-employees of the Association or Holding Company at a
discount or as compensation in the proposed transaction.
15. No cash or other property will be given to Eligible Account Holders or
others in lieu of (a) non-transferable subscription rights or (b) an interest in
the Liquidation Account of Stock
<PAGE>
Board of Directors
First Federal Savings and Loan
Association of Cullman
Page 4
Association.
16. Association has utilized a reserve for bad debts in accordance with
Section 593 of the Code.
17. At the time of the proposed transaction, the fair market value of the
assets of the Association on a going concern basis will equal or exceed the
amount of its liabilities to be assumed plus the amount of liabilities to which
the transferred assets are subject. Association will have a positive regulatory
net worth at the time of the Conversion.
18. Mutual Association, Stock Association and Holding Company are
corporations within the meaning of Section 7701(a)(3) of the Code. Mutual
Association and Stock Association are domestic building and loan associations
within the meaning of Section 7701(a)(19)(C) of the Code.
19. Neither Mutual Association nor Stock Association is an investment
company as defined in Sections 368(a)(2)(F)(iii) and (iv) of the Code.
20. The exercise price of the subscription rights received by the
Association's Eligible Account Holders and Supplemental Eligible Account Holders
to purchase Holding Company Stock will be equal to the fair market value of the
Holding Company Conversion Stock at the time of the completion of the proposed
transaction as determined by an independent appraisal.
21. The Association has received or will receive an opinion from an
independent appraiser to the effect that the subscription rights to be received
by Eligible Account Holders and Supplemental Eligible Account Holders and other
eligible subscribers do not have any ascertainable fair market value.
22. The Association's savings depositors will pay expenses of the
conversion solely attributable to them, if any. Holding Company and the
Association will pay their own expenses for the transaction and will not pay any
expenses solely attributable to the savings depositors or to the Holding Company
stockholders. The stockholders of Holding Company will pay the expenses
incurred by themselves in connection with the proposed transaction.
23. The Eligible Account Holders', Supplemental Eligible Account Holders',
and Other Members' proprietary interests in the Association arise solely by
virtue of the fact that they are account holders in the Association.
24. No creditors of the Association or the depositors in their role as
creditors, have taken any steps to enforce their claims against the Association
by instituting bankruptcy or other legal proceedings, in either a court or
appropriate regulatory agency, that would eliminate the proprietary
<PAGE>
Board of Directors
First Federal Savings and Loan
Association of Cullman
Page 5
interests of the members prior to the Conversion of the Association including
depositors as equity holders of the Association.
25. The liabilities of the Mutual Association assumed by Stock Association
plus the liabilities, if any, to which the transferred assets are subject were
incurred by the Mutual Association in the ordinary course of its business and
are associated with the assets transferred.
26. Holding Company has no plan or intention to sell or otherwise dispose
of the stock of Stock Association received by it in the proposed transaction.
27. No amount of deposit accounts or deposits as of the Eligibility Record
Date will be excluded from participation in the Liquidation Account.
OPINION
-------
Based on the foregoing, and in reliance thereon, and subject to the
conditions stated herein, it is our opinion that the following federal income
tax consequences will result from the proposed Conversion:
1. The Conversion constitutes a reorganization within the meaning of
Section 368(a)(1)(F) of the Code, and no gain or loss will be
recognized by the Association in its mutual form or in its stock form
as a result of the Conversion.
2. No gain or loss will be recognized by the Association upon the receipt
of money from the Holding Company in exchange for the capital stock of
the Association, as converted.
3. The basis of the assets of the Association will be the same immediately
after the Conversion as the basis in the Association's hands
immediately prior to the Conversion.
4. The holding period of the assets of the Association after the
Conversion will include the period during which the assets were held by
the Association before the Conversion.
5. No gain or loss will be recognized by the deposit account holders of
the Association upon the constructive issuance to them, in exchange for
their respective withdrawable deposit accounts in the Association
immediately prior to the Conversion, of withdrawable deposit accounts
of equal dollar amount in the Association immediately after the
Conversion, plus, in the case of Eligible Account Holders and
<PAGE>
Board of Directors
First Federal Savings and Loan
Association of Cullman
Page 6
Supplemental Eligible Account Holders, the interests in the Liquidation
Account of the Association, as described below.
6. The basis of the deposit accounts in the Association held by its
deposit account holders immediately after the Conversion will be the
same as the basis of their deposit accounts in the Association
immediately prior to the Conversion.
7. The basis of the interests in the Liquidation Account received by the
Eligible Account Holders and Supplemental Eligible Account Holders will
be zero and the basis of the nontransferable subscription rights
received by Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members will be zero (assuming that at distribution
such rights have no ascertainable fair market value).
8. No gain or loss will be recognized by Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members upon the
issuance to them of nontransferable subscription rights to purchase
Common Shares (assuming that at issuance such rights have no
ascertainable fair market value), and no taxable income will be
realized by such Eligible Account Holders, Supplemental Eligible
Account Holders or Other Members as a result of their exercise of such
nontransferable subscription rights.
9. The basis of the Common Shares to its shareholders will be the actual
purchase price ($20.00) thereof (assuming that subscription rights of
such shareholder, if any, have no ascertainable fair market value) and
the holding period of such shares will commence on the day after the
date of the purchase.
10. Immediately, after the Conversion, the Association in its stock form
will succeed to and take into account the tax attributes of the
Association in its mutual form immediately prior to the Conversion,
including the Association's earnings and profits or deficit in
earnings and profits.
11. The Association in its stock form will succeed to and take into
account the dollar amounts of those accounts of the Association in its
mutual form which represent bad debt reserves in respect of which the
Association in its mutual form has taken a bad debt deduction for
taxable years ending on or before the Conversion.
SCOPE OF OPINION
----------------
Our opinion is limited to the federal income tax matters described above
and does not address
<PAGE>
Board of Directors
First Federal Savings and Loan
Association of Cullman
Page 7
any other federal income tax considerations or any federal, state, local,
foreign or other tax considerations. If any of the information on which we have
relied is incorrect, or if changes in the relevant facts occur after the date
hereof, our opinion could be affected thereby. Moreover, our opinion is based
on the case law, Code, Treasury Regulations thereunder and Internal Revenue
Service rulings as they now exist. These authorities are all subject to change,
and such change may be made with retroactive effect. We can give no assurance
that, after such change, our opinion would not be different. We undertake no
responsibility to update or supplement our opinion. This opinion is not binding
on the Internal Revenue Service and there can be no assurance, and none is
hereby given, that the Internal Revenue Service will not take a position
contrary to one or more of the positions reflected in the foregoing opinion, or
that our opinion will be upheld by the courts if challenged by the Internal
Revenue Service.
CONSENT
-------
We hereby consent to the filing of this opinion as an exhibit to the
registration statement on form SB-2 including any amendment thereto
("Registration Statement") of the Holding Company filed with the Securities and
Exchange Commission with respect to the Conversion and as an exhibit to the
application for Conversion on Form AC ("Form AC") of the Association filed with
the OTS with respect to the Conversion. We also hereby consent to the references
to this firm in the prospectus which is a part of both the Registration
Statement and the Form AC.
USE OF OPINION
--------------
This opinion is rendered solely for the benefit of the Holding Company, the
Association and prospective investors in connection with the proposed
transactions described herein and is not to be relied upon or used for any other
purpose without our prior written consent.
Very truly yours,
/s/ Bayh, Connaughton & Malone, P.C.
------------------------------------
BAYH, CONNAUGHTON & MALONE, P.C
<PAGE>
EXHIBIT 8.2
[LETTERHEAD OF MILLER, HAMILTON, SNIDER & ODOM L.L.C. APPEARS HERE]
October 30, 1996
Mobile Office
Board of Directors
First Federal Savings and Loan Association
of Cullman
325 Second Street, S.E.
Post Office Box 249
Cullman, Alabama 35056-0249
Re: Alabama Income Tax Consequences Relating to Conversion of First
Federal Savings and Loan Association of Cullman from a Federal
Mutual Savings Institution to a Federal Stock Savings Institution
and the Acquisition of the Stock Institution's Stock by a Stock
Holding Company
Gentlemen:
We have been requested to provide the opinion of this firm relating to
the Alabama income tax consequences of the proposed conversion ("Conversion") of
First Federal Savings and Loan Association of Cullman (the "Association") from a
federal mutual savings institution (the Association in its mutual form is
sometimes referred to as the "Mutual Association") to a federal
<PAGE>
Board of Directors
November 1, 1996
Page 2
stock savings and loan association (the Association in its stock form is
sometimes referred to as the "Stock Association"), and the formation of a
holding company parent, Southern Community Bancshares, Inc. (the "Holding
Company"), which will acquire all of the outstanding stock of the Stock
Association. For purposes of this opinion, we have examined such documents and
questions of law we have considered necessary or appropriate, including, but not
limited to, the Plan of Conversion as adopted by the Association on June 10,
1996, as amended (the "Plan"), the prospectus of Southern Community Bancshares,
Inc. regarding the proposed transactions contained in the Holding Company's
registration statement on form SB-2, registration no. 333-12373, filed September
20, 1996, and the opinion of Bayh, Connaughton & Malone, P.C., dated September
18, 1996, counsel to the Association, regarding the federal income tax
consequences of the same transactions. We have assumed, and have not
independently verified, the genuineness of all signatures on original documents
where due execution and delivery are requirements to the effectiveness thereof.
Capitalized terms used herein and not defined herein, shall have the same
meaning assigned in the Plan. In issuing our opinion, we have made the same
assumptions and relied on the same representation as reflected in the legal
opinion of Bayh, Connaughton & Malone, P.C., to the Board of Directors regarding
the federal income tax consequences of the above-described transactions and will
not be restated herein.
<PAGE>
Board of Directors
November 1, 1996
Page 3
OPINION
-------
Based on the assumptions and representations and based on the legal
opinion of Bayh, Connaughton & Malone, P.C., regarding the federal income tax
consequences of the above-described transactions it is our opinion that the
following Alabama income tax consequences will result from the proposed
Conversion:
If the Conversion constitutes a reorganization within the meaning of
Section 368(a)(1)(F) of the Internal Revenue Code of 1986, it will likewise
qualify as a reorganization within the meaning of Section 40-18-8(g) and (h) of
the Alabama Code of 1975, as amended, and the consequences to the Association,
the Eligible Account Holders, Supplemental Eligible Account Holders, and Other
Members will be the same for Alabama income tax purposes as for federal income
tax purposes.
SCOPE OF OPINION
----------------
<PAGE>
Board of Directors
November 1, 1996
Page 4
Our opinion is limited to the Alabama income tax matters described
herein and does not address any other Alabama income tax considerations or any
foreign or other tax considerations. If any of the information on which we have
relied is incorrect, or if changes in the relevant facts occur after the date
hereof, our opinion could be affected thereby. Moreover, our opinion is based on
Alabama law, which in turn is based on the Internal Revenue Code of 1986, as
amended, Treasury regulations thereunder, and Internal Revenue Service rulings
as they now exist. Those authorities are all subject to change, and such change
could be made with retroactive effect. We can give no assurance that, after such
change, our opinion would not be different. We undertake no responsibility to
update or supplement our opinion. This opinion is not binding on the Alabama
Department of Revenue and there can be no assurance, and none is hereby given,
that the Alabama Department of Revenue will not take a position contrary to one
or more of the positions reflected in the foregoing opinion, or that our opinion
will be upheld by the courts if challenged by the Alabama Department of Revenue.
CONSENT
-------
<PAGE>
Board of Directors
November 1, 1996
Page 5
We hereby consent to the filing of this opinion as an exhibit to the
registration statement on form SB-2 including any amendment thereto
("Registration Statement") of the Holding Company filed with the Securities &
Exchange Commission with respect to the Conversion and as an exhibit to the
application for Conversion on Form AC ("Form AC") of the Association filed with
the OTS with respect to the Conversion. We also hereby consent to the references
to this firm in the prospectus which is a part of both the Registration
Statement and the Form AC.
USE OF OPINION
--------------
This opinion is rendered solely for the benefit of the Holding Company,
the Association, and prospective investors in connection with the proposed
transactions described herein and is not to be relied upon or used for any other
purpose without our prior written consent.
Very truly yours,
MILLER, HAMILTON, SNIDER
& ODOM, L.L.C.
<PAGE>
Board of Directors
November 1, 1996
Page 6
<PAGE>
[LETTERHEAD OF BAYH, CONNAUGHTON & MALONE, P.C.]
Board of Directors
First Federal Savings and Loan Association
of Cullman
325 Second Street, S.E.
Cullman, Alabama 35055
Gentlemen:
We hereby consent to the use of our firm's name in the Application for
Conversion on Form AC filed by First Federal Savings and Loan Association of
Cullman, and the Registration Statement of Southern Community Bancshares, Inc.,
Form SB-2 and any amendment thereto; and to the reference to our firm name
under the caption "Legal Matters" in the Prospectus which is included in Form AC
and Form SB-2 and any amendment thereto. We also consent to the inclusion of,
summary of and references to our legal opinions concerning legal and tax matters
in such filings including the Prospectus of Southern Community Bancshares, Inc.
Very truly yours,
/s/ Bayh, Connaughton & Malone, P.C.
-------------------------------------
Bayh, Connaughton & Malone, P.C.
Washington, D.C.
November 7, 1996
