<PAGE>
As filed with the Securities and Exchange Commission on May 9, 1997
Registration No. 333-23533
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
PRE-EFFECTIVE AMENDMENT
NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COMMUNITY FIRST BANKING COMPANY
-----------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
GEORGIA 6711 58-2309605
- ---------------------------- ------------------ ------------------------
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Identification No.)
organization) Classification Code
Number)
110 Dixie Street
Carrollton, Georgia 30117
(770) 834-1071
----------------------------
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
GARY D. DORMINEY
110 Dixie Street
Carrollton, Georgia 30117
(770) 834-1071
__________________
(Name, address, including zip code, and
telephone number, including area code, of
agent for service)
Copies to:
WALTER G. MOELING, IV, ESQ. RANDALL A. UNDERWOOD
POWELL, GOLDSTEIN, FRAZER & MURPHY BROOKS, PIERCE, McLENDON,
191 Peachtree Street, N.E. HUMPHREY & LEONARD, LLP
Atlanta, Georgia 30303 2000 Renaissance Plaza
(404) 572-6600 230 North Elm Street
Greensboro, North Carolina 27401
(910) 373-8850
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of Registration
Securities to be Registered /(1)/ Offering Price per Aggregate Offering Fee(3)
Registered Share/(2)/ Price/(2)/
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 2,413,562 Shares $20.00 $48,271,240 $14,628
par value
======================================================================================================================
</TABLE>
/(1)/ Includes 314,812 shares that may be issued in the event of an over-
subscription. See "The Conversion and Reorganization-Stock Pricing and
Number of Shares to be Issued."
/(2)/ Estimated solely for the purpose of determining the registration fee.
/(3)/ Previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
COMMUNITY FIRST BANKING COMPANY
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
Registration Statement Item Number
and Heading Caption in Prospectus
----------- ---------------------
<S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus..... Cover Page; Cross-Reference Sheet;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus.... Inside Front Cover Page of
Prospectus; Outside Back Cover Page
of Prospectus
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges............. Summary; Risk Factors
4. Use of Proceeds................ Use of Proceeds
5. Determination of Offering
Price........................ The Conversion and Reorganization
6. Dilution....................... Not Applicable
7. Selling Security Holders....... Not Applicable
8. Plan of Distribution........... Outside Front Cover Page of
Prospectus; The Conversion and
Reorganization
9. Description of the Securities.. Description of Capital Stock
10. Interests of Named Experts and
Counsel...................... Legal Matters; Experts
11. Information with Respect to the
Registrant................... Prospectus Summary; Risk Factors;
Dividend Policy; Capitalization;
Selected Financial and Other Data;
Community First Banking Company;
Carrollton Federal Bank; CF Mutual
Holdings; Market for Common Stock;
Regulatory Capital; Pro Forma Data;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business of Carrollton
Federal Bank; Regulation; Management
of the Company; Management of the
Savings Bank; Certain Restrictions on
Acquisition of the Company;
Consolidated Financial Statements
12. Disclosure of Commission Position
on Indemnification for
Securities Act Liabilities.... Part II of the Registration Statement
</TABLE>
<PAGE>
PROSPECTUS AND PROXY STATEMENT
COMMUNITY FIRST BANKING COMPANY
(PROPOSED HOLDING COMPANY FOR
CARROLLTON FEDERAL BANK, FSB)
UP TO 2,098,750 SHARES OF COMMON STOCK
(ESTIMATED MAXIMUM)
CF Mutual Holdings, which owns Carrollton Federal Bank, FSB, is
converting from the mutual form to the stock form of organization. As part of
the Conversion and Reorganization, Carrollton Federal Bank, FSB, will become a
wholly owned subsidiary of Community First Banking Company, which was formed in
March 1997. Upon consummation of the Conversion and Reorganization, Community
First Banking Company will own all of the shares of Carrollton Federal Bank,
FSB. The Common Stock of Community First Banking Company is being offered to the
public in the offerings described in this Prospectus and Proxy Statement in
accordance with a Plan of Conversion and Agreement and Plan of Reorganization
that must be approved by the Office of Thrift Supervision and by a majority of
the votes eligible to be cast by members of CF Mutual Holdings. The offerings
will not go forward if CF Mutual Holdings does not receive these approvals or if
Community First Banking Company does not sell at least the minimum number of
shares described below.
SPECIAL MEETING OF MEMBERS
A Special Meeting of Members of CF Mutual Holdings will be held at the
main office of Carrollton Federal Bank, FSB, located at 110 Dixie Street,
Carrollton, Georgia on June ___, 1997 at __:__ ___m. Eastern Time for the
purpose of considering and voting upon the Plan of Conversion which was
unanimously adopted by the Boards of Directors of CF Mutual Holdings and
Carrollton Federal Bank, FSB, and which, if approved by a majority of the total
votes eligible to be cast by the members, will permit CF Mutual Holdings to
convert from a mutual holding company to a stock form of holding company. The
Conversion is contingent upon the Members' approval of the Plan of Conversion at
the Members' Meeting or any adjournment thereof. This document serves as the
Proxy Statement of CF Mutual Holdings with respect to the Members' Meeting, as
well as the Prospectus of Community First Banking Company with respect to the
offerings of Common Stock described herein.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARDS OF DIRECTORS OF CARROLLTON FEDERAL BANK, FSB, AND CF MUTUAL
HOLDINGS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE PLAN OF
CONVERSION. VOTING IN FAVOR OF THE PLAN OF CONVERSION WILL NOT OBLIGATE ANY
PERSON TO PURCHASE STOCK.
OFFERING TERMS
An independent appraiser has estimated the pro forma market value of
Community First Banking Company and Carrollton Federal Bank to be between
$31,025,000 and $41,975,000. As a result of this valuation, between 1,551,250
and 2,098,750 shares are being offered. Subject to Office of Thrift Supervision
approval, up to 2,413,562 shares, which includes an additional 314,812 shares
(15% more than the maximum number of shares) may be offered. Based on these
estimates, Community First Banking Company is offering shares of Common Stock on
the following terms:
<TABLE>
<CAPTION>
<S> <C> <C>
. Price Per Share: $20
. Number of Shares 1,551,250 to 2,098,750
Minimum/Maximum
. Underwriting Fees, Commissions $1,116,890 ($0.72 per share)
and Expenses to
Minimum/Maximum $1,283,111 ($0.61 per share)
. Net Proceeds to Community First $29,908,110 ($19.28 per share)
Banking Company to
. Minimum/Maximum $40,691,889 ($19.39 per share)
</TABLE>
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE __ OF THIS DOCUMENT.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY GOVERNMENT AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF
THRIFT SUPERVISION, OR ANY OTHER STATE SECURITIES REGULATORS
HAVE APPROVED THE SALE OF THESE SECURITIES OR DETERMINED
THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Company has applied to have its Common Stock quoted on the Nasdaq
National Market under the symbol "CFBC." See "Market for Common Stock."
For information on how to subscribe, call the Stock Information Center
at (770) 834-7355.
TRIDENT SECURITIES, INC.
, 1997
<PAGE>
[MAP]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................................................ 0
Selected Financial and Other Data.................................. 0
Recent Developments................................................ 0
Management's Discussion and Analysis of Recent Developments........ 0
Risk Factors....................................................... 0
Community First Banking Company.................................... 0
Carrollton Federal Bank............................................ 0
CF Mutual Holdings................................................. 0
Proposed Management................................................ 0
Use of Proceeds.................................................... 0
Dividend Policy.................................................... 0
Market for the Common Stock........................................ 0
Capitalization..................................................... 0
Regulatory Capital................................................. 0
Pro Forma Data..................................................... 0
Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 0
Business........................................................... 0
Taxation........................................................... 0
Regulation......................................................... 0
Management of the Company.......................................... 0
Management of the Savings Bank..................................... 0
The Conversion and Reorganization.................................. 0
Certain Restrictions on Acquisition of the Company................. 0
Description of Capital Stock....................................... 0
Experts............................................................ 0
Legal Matters...................................................... 0
Additional Information............................................. 0
Glossary........................................................... 0
Index to Consolidated Financial Statements......................... 0
</TABLE>
This document contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" beginning on page __ of this document.
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<PAGE>
SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
Offerings fully, you should read carefully this entire document, including the
consolidated financial statements and the notes to the consolidated financial
statements of CF Mutual Holdings. References to the "Savings Bank" refer to
Carrollton Federal Bank, FSB. References in this document to the "Company" refer
to Community First Banking Company.
Several abbreviated and defined terms appear in this document. To the
extent the abbreviation or definition does not appear with the term, please
refer to the Glossary that begins on page A-1 at the end of this document.
THE COMPANY
Community First Banking Company
110 Dixie Street
Carrollton, Georgia 30117
(770) 834-7355
The Company is not an operating company and has not engaged in any
significant business to date. It was formed in March 1997 as a Georgia stock
corporation to be the holding company for Carrollton Federal Bank after the
Conversion and Reorganization. See "Community First Banking Company."
THE DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND THE SAVINGS BANK
BELIEVE THAT IT IS IN THE BEST INTERESTS OF THE SAVINGS BANK, THE COMPANY AND
THE COMPANY'S SHAREHOLDERS FOR THE COMPANY AND THE SAVINGS BANK TO REMAIN
INDEPENDENT, WITH THE OBJECTIVE OF LONG-TERM ENHANCEMENT OF SHAREHOLDER VALUE.
ACCORDINGLY, AN INVESTMENT IN THE COMMON STOCK OF THE COMPANY MAY NOT BE
SUITABLE FOR INVESTORS WHO ARE SEEKING SHORT-TERM RETURNS THROUGH A SALE OF THE
INSTITUTION.
THE SAVINGS BANK
Carrollton Federal Bank, FSB
110 Dixie Street
Carrollton, Georgia 30117
(770) 834-7355
The Savings Bank is a federally chartered stock savings bank organized
on August 1, 1994 and operates in Carrollton, Georgia and neighboring
communities in western Georgia. Prior to that date, the predecessor of the
Savings Bank had operated as a mutual savings bank since 1929. The Savings Bank
conducts business through 12 branch offices in Carroll, Douglas, Coweta,
Fayette, Haralson, Heard, Henry and Paulding Counties in Georgia. At December
31, 1996, the Savings
<PAGE>
Bank had $351 million of total assets, $325 million of total liabilities,
including $308 million of deposits, and $26 million of equity or 7.4% of assets.
See "Carrollton Federal Bank."
THE MUTUAL HOLDING COMPANY
CF Mutual Holdings
110 Dixie Street
Carrollton, Georgia 30117
(770) 834-7355
The Mutual Holding Company is a federally chartered mutual holding
company formed on August 1, 1994. The Mutual Holding Company was not formed to
raise capital, but to provide a corporate structure that would facilitate
entering new lines of business and possible acquisitions of other financial
institutions. Its primary asset is 100 shares of Savings Bank Common Stock,
which represents all of the outstanding shares of such stock. As part of the
Conversion and Reorganization, the Mutual Holding Company will merge into the
Savings Bank and the Mutual Holding Company will cease to exist. All of the
assets of the Mutual Holding Company will pass to the Company by virtue of the
Conversion and Reorganization. See "CF Mutual Holdings."
INFORMATION RELATING TO VOTING AT THE MEMBERS' MEETING
The Board of Directors of the Mutual Holding Company has fixed the close
of business on [____________], 1997 AS THE RECORD DATE (THE "VOTING RECORD
DATE") FOR THE DETERMINATION OF MEMBERS ENTITLED TO NOTICE OF AND TO VOTE AT THE
MEMBERS' MEETING. ALL HOLDERS OF THE SAVINGS BANK'S DEPOSIT OR OTHER AUTHORIZED
ACCOUNTS AND THE SAVINGS BANK'S BORROWERS AS OF JULY 19, 1990 WHOSE BORROWINGS
REMAINED IN EXISTENCE AS OF ___________, 1997 ARE MEMBERS OF THE MUTUAL HOLDING
COMPANY UNDER ITS CURRENT FEDERAL MUTUAL CHARTER. ALL MEMBERS OF RECORD AS OF
THE CLOSE OF BUSINESS ON THE VOTING RECORD DATE WHO CONTINUE AS SUCH UNTIL THE
DATE OF THE MEMBERS' MEETING WILL BE ENTITLED TO VOTE AT THE MEMBERS' MEETING OR
ANY ADJOURNMENT THEREOF.
Each depositor member will be entitled at the Members' Meeting to cast
one vote for each $100, or fraction thereof, of the aggregate withdrawal value
of all of his or her savings accounts in the Savings Bank as of the Voting
Record Date. Borrower members will be entitled to one vote at the Members'
Meeting in addition to any votes such borrower member may have as a result of
being a depositor in the Savings Bank. No member may cast more than 1,000 votes.
Approval of the Plan of Conversion to be presented at the Members'
Meeting will require the affirmative vote of at least a majority of the total
outstanding votes of the Mutual Holding Company's members eligible to be cast at
the Members' Meeting. As of the Voting Record Date for the Members' Meeting,
there were approximately [________] VOTES ELIGIBLE TO BE CAST, OF WHICH
[________] VOTES CONSTITUTE A MAJORITY.
-2-
<PAGE>
Members may vote at the Members' Meeting or any adjournment thereof in
person or by proxy. All properly executed proxies received by the Mutual Holding
Company will be voted in accordance with the instructions indicated thereon by
the members giving such proxies. If no contrary instructions are given, such
proxies will be voted in favor of the Plan of Conversion described herein. If
any other matters are properly presented before the Members' Meeting and may
properly be voted upon, the proxies will be voted on such matters by the proxy
holders named therein as directed by the Board of Directors of the Mutual
Holding Company. Valid, previously executed general proxies, which typically are
obtained from members when they open their accounts at the Savings Bank, will
not be used to vote for approval of the Plan of Conversion, even if the
respective members do not execute another proxy or attend the Members' Meeting
and vote in person. Any member giving a proxy will have the right to revoke his
or her proxy at any time before it is voted by delivering written notice or a
duly executed proxy bearing a later date to the Secretary of the Mutual Holding
Company, provided that such written notice is received by the Secretary prior to
the Members' Meeting or any adjournment thereof, or by attending the Members'
Meeting and voting in person.
FAILURE TO RETURN AN EXECUTED PROXY FOR THE MEMBERS' MEETING OR TO
ATTEND THE MEMBERS' MEETING AND VOTE IN PERSON WOULD HAVE THE SAME EFFECT AS
VOTING AGAINST THE CONVERSION AND REORGANIZATION.
Proxies may be solicited by officers, directors or other employees of
the Mutual Holding Company and/or the Savings Bank, in person, by telephone or
through other forms of communication. Such persons will be reimbursed by the
Mutual Holding Company only for their expenses incurred in connection with such
solicitation.
The proxies solicited hereby will be used only at the Members' Meeting
and at any adjournment thereof; they will not be used at any other meeting.
PURPOSES OF THE CONVERSION AND REORGANIZATION
The stock holding company form of organization has several advantages
over the existing mutual holding company form. For example, as a stock holding
company, the Company and the Savings Bank will be able to diversify their
business activities and will have a larger capital base and greater access to
capital markets. In addition, the Conversion and Reorganization will result in a
public trading market for the Company's common stock. It will also be easier for
the Company and the Savings Bank to acquire other financial institutions and
attract and retain qualified management. See "The Conversion and
Reorganization --Purposes of the Conversion and Reorganization."
-3-
<PAGE>
DESCRIPTION OF THE CONVERSION AND REORGANIZATION
Under the Plan of Conversion, (i) the Mutual Holding Company will
convert to an interim federal stock savings bank ("Interim Mutual") and
simultaneously will merge with and into the Savings Bank, (ii) the Mutual
Holding Company will cease to exist and the 100 shares or 100% of the
outstanding Savings Bank Common Stock held by the Mutual Holding Company will be
cancelled, and (iii) a second interim savings bank ("Interim CFB") formed by the
Company solely for such purpose will then merge with and into the Savings Bank.
As a result of the merger of Interim CFB with and into the Savings Bank, the
Savings Bank will become a wholly owned subsidiary of the Company operating
under the name "Carrollton Federal Bank." See "The Conversion and
Reorganization."
EFFECT OF THE CONVERSION AND REORGANIZATION ON DEPOSITORS AND BORROWERS OF THE
SAVINGS BANK
General. Each depositor in the Savings Bank has a pro rata ownership
interest in the Mutual Holding Company's retained earnings based upon the
balance in his or her deposit account. However, this ownership interest is tied
to the depositor's account and has no tangible market value separate from the
account. Any other depositor who opens a deposit account obtains a pro rata
interest in the Mutual Holding Company's retained earnings without any
additional payment beyond the amount of the deposit. A depositor who reduces or
closes his or her account receives a portion or all of his or her account
balance but nothing for his or her ownership interest, which is lost to the
extent that the balance in the account is reduced.
Consequently, depositors normally do not have a way to realize the value
of their ownership, which has realizable value only in the unlikely event that
the Mutual Holding Company is liquidated. In such event, the depositors of
record at that time, as owners, would share pro rata in any residual retained
earnings after other claims are paid.
Upon completion of the Conversion and Reorganization, permanent
nonwithdrawable capital stock will be created to represent the ownership of the
Company. The stock is separate and apart from deposit accounts and is not and
cannot be insured by the FDIC. Transferable certificates will be issued to
evidence ownership of the stock, which will enable the stock to be sold or
traded, if a purchaser is available, with no effect on any account held in the
Savings Bank. Under the Plan of Conversion, all of the capital stock of the
Savings Bank will be acquired by the Company in exchange for a portion of the
net proceeds from the sale of the Common Stock in the Conversion and
Reorganization. The Common Stock will represent an ownership interest in the
Company and will be issued upon completion of the Conversion and Reorganization
to persons who elect to purchase the shares being offered.
Continuity. During the Conversion and Reorganization process, the Saving
Bank's normal business of accepting deposits and making loans will continue
without interruption. The Savings Bank will continue to be subject to regulation
by the OTS and the FDIC, and FDIC insurance of accounts will continue without
interruption. After the Conversion and Reorganization, the Savings
-4-
<PAGE>
Bank will continue to provide services for depositors and borrowers under
current policies and by its present management and staff.
The Board of Directors serving the Mutual Holding Company at the time of
the Conversion and Reorganization will serve as the Company's Board of
Directors. All of the Saving Bank's directors and officers at the time of the
Conversion and Reorganization will retain their positions after the Conversion
and Reorganization.
Voting Rights. Upon completion of the Conversion and Reorganization,
depositor and borrower members as such will have no voting rights in the
Company, the Mutual Holding Company or the Savings Bank. As a result, they will
not be able to elect directors of any of these institutions or control their
affairs. Currently, these rights are accorded to depositors and certain
borrowers of the Savings Bank who are the members of the Mutual Holding Company.
After the Conversion and Reorganization, only the shareholders of the Company
will have voting rights, and the Company will own all of the stock of the
Savings Bank. Each holder of Common Stock will be entitled to one vote per share
on any matter to be considered by the shareholders of the Company, subject to
the provisions of the Company's Articles of Incorporation.
Deposit Accounts and Loans. SAVINGS BANK DEPOSIT ACCOUNTS, THE BALANCES
OF INDIVIDUAL ACCOUNTS AND EXISTING FEDERAL DEPOSIT INSURANCE COVERAGE WILL NOT
BE AFFECTED BY THE CONVERSION AND REORGANIZATION. FURTHERMORE, THE CONVERSION
AND REORGANIZATION WILL NOT AFFECT THE LOAN ACCOUNTS, THE BALANCES OF THESE
ACCOUNTS AND THE OBLIGATIONS OF THE BORROWERS UNDER THEIR INDIVIDUAL CONTRACTUAL
ARRANGEMENTS WITH THE SAVINGS BANK.
Tax Effects. The Company and the Savings Bank have received an opinion
of counsel indicating that the Conversion and Reorganization will qualify as a
tax-free reorganization for federal and Georgia income tax purposes. See "Risk
Factors -- Possible Adverse Income Tax Consequences of Distribution of
Subscription Rights" and "The Conversion and Reorganization -- Effects of the
Conversion and Reorganization" and "-- Tax Aspects."
Effect on Liquidation Rights. Were the Mutual Holding Company to
liquidate, its creditors' claims would be paid first. Thereafter, if any assets
remained, members of the Mutual Holding Company would receive such remaining
assets, pro rata, based upon the deposit balances in their deposit accounts at
the Savings Bank immediately prior to liquidation. In the unlikely event that
the Savings Bank were to liquidate after the Conversion and Reorganization, all
creditors' claims (including those of depositors, to the extent of their deposit
balances) also would be paid first, followed by distribution of the "liquidation
account" to certain depositors, with any assets remaining thereafter distributed
to the Company as the holder of the Savings Bank's capital stock. Under OTS
regulations, a merger, sale of bulk assets or similar transaction with another
insured savings institution would not be considered a liquidation for this
purpose, and in such a transaction, the surviving institution would be required
to assume the liquidation account. See "The Conversion and Reorganization --
Liquidation Rights."
-5-
<PAGE>
THE OFFERINGS
Between 1,551,250 and 2,098,750 shares of Common Stock are being offered
at $20 per share. As a result of changes in market and financial conditions
prior to completion of the Conversion or to fill the order of the Company's ESOP
and subject to OTS approval, the Company may increase the number of shares being
offered to 2,413,562 without further notice to you. See "The Conversion and
Reorganization -- The Offerings" and "-- Stock Pricing and Number of Shares to
be Issued."
STOCK PURCHASES
The shares of Common Stock will be offered on the basis of priorities.
Depositors and certain borrowers of the Savings Bank will receive subscription
rights to purchase shares in the Subscription Offering. The shares will be
offered first in the Subscription Offering and any remaining shares will be
offered to the general public in a Community Offering and a Syndicated Community
Offering. See "The Conversion and Reorganization -- The Offerings."
PURCHASE LIMITATIONS
The minimum purchase is 25 shares (or $500). The maximum purchase is
24,135 shares (or $482,700). For purposes of calculating your maximum purchase,
your purchase will be grouped together with those of persons or entities who are
your "associates" or with whom you are "acting in concert." Also, when more than
one person or entity is an owner of a particular deposit account or obligor of a
particular loan account, the orders of such persons and entities pursuant to
subscription rights related to those accounts may not exceed $482,700 in the
aggregate. See "The Conversion and Reorganization -- Purchase Limitations."
PAYMENT FOR SUBSCRIPTIONS FOR COMMON STOCK
If you subscribe for Common Stock in the Offerings, you may pay for the
Common Stock in cash, by check or money order or by authorizing a withdrawal
from your deposit account with the Savings Bank. You may not pay for your shares
by wire transfer. Your payment will be deposited in a separate account at the
Savings Bank and will earn interest at the Savings Bank's passbook rate of
interest from the date the Savings Bank receives payment until the Conversion
and Reorganization is completed or terminated. If you pay by authorization of
withdrawal from a deposit account, the funds to be withdrawn will continue to
accrue interest at the contractual rate, but will not be available to you until
completion or termination of the Conversion and Reorganization. See "Conversion
and Reorganization -- Procedure for Purchasing Shares in the Offering."
-6-
<PAGE>
SUBSCRIPTION RIGHTS
You may not transfer or agree to transfer your subscription rights under
the Plan or the shares of Common Stock to be issued upon the exercise of your
subscription rights. If you subscribe for Common Stock, you will be required to
certify that your purchase of Common Stock is solely for your own account and
that there is no agreement or understanding regarding the sale or transfer of
the shares. A false certification on the subscription form may constitute a
federal criminal offense. See "The Conversion and Reorganization --Restrictions
on Transfer of Subscription Rights and Shares."
SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE AND PERSONS FOUND TO BE
ATTEMPTING TO TRANSFER SUBSCRIPTION RIGHTS WILL BE SUBJECT TO THE FORFEITURE OF
SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE OFFICE
OF THRIFT SUPERVISION. THE COMPANY AND THE SAVINGS BANK WILL REFER TO THE OFFICE
OF THRIFT SUPERVISION ANY SITUATION THAT THEY BELIEVE MAY INVOLVE A TRANSFER OF
SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS THAT THEY SUSPECT TO INVOLVE THE
TRANSFER OF SUCH RIGHTS. IN ADDITION, REFERRALS WILL BE MADE TO THE OFFICE OF
THE UNITED STATES ATTORNEY.
THE OFFERING RANGE AND DETERMINATION OF THE PRICE PER SHARE
The offering range is based on an independent appraisal of the pro forma
market value of the Common Stock by Ferguson & Company, an appraisal firm
experienced in appraisals of savings institutions. Ferguson has estimated that
in its opinion, as of February 27, 1997, the aggregate pro forma market value of
the Company and the Savings Bank ranged between $31,025,000 and $41,975,000
(with a midpoint of $36,500,000). This range is called the "Valuation Price
Range." The pro forma market value of the Company and the Savings Bank gives
effect to the sale of shares in the Offerings. The appraisal was based in part
upon the Savings Bank's financial condition and operations and the effect of the
additional capital to be raised by the sale of Common Stock in the Offerings.
The $20.00 price per share was determined by the Company's Board of Directors.
The independent appraisal will be updated prior to the consummation of the
Conversion. Subject to OTS approval, the Company may increase or decrease the
Valuation Price Range to reflect changes in market and economic conditions or to
fill the order of the ESOP before completion of the Conversion and
Reorganization. This would result in an increase or decrease in the number of
shares of Common Stock sold. The Company will not resolicit subscribers or
permit them to modify or cancel their subscriptions unless the final appraised
valuation is less than $31,025,000 or more than $48,271,250 (15% above the
maximum of the Valuation Price Range). See "The Conversion and Reorganization --
Stock Pricing and Number of Shares to be Issued."
-7-
<PAGE>
TERMINATION OF THE OFFERINGS
The Subscription Offering will terminate at 12:00 noon, Eastern Time, on
[JUNE 17], 1997 (THE "EXPIRATION DATE"), UNLESS IT IS EXTENDED FOR A PERIOD OF
UP TO 45 DAYS OR, WITH OTS APPROVAL, FOR ADDITIONAL PERIODS NOT BEYOND [JUNE
16], 1999. THE COMMUNITY OFFERING AND/OR ANY SYNDICATED COMMUNITY OFFERING MAY
TERMINATE AT ANY TIME AFTER SUCH OFFERINGS BEGIN BUT MUST BE COMPLETED ON OR
BEFORE [AUGUST 1], 1997, UNLESS EXTENDED WITH OTS APPROVAL. ORDERS SUBMITTED ARE
IRREVOCABLE UNTIL THE COMPLETION OF THE CONVERSION AND REORGANIZATION. HOWEVER,
IF THE CONVERSION AND REORGANIZATION IS NOT COMPLETED ON OR BEFORE [AUGUST 1],
1997 OR EXTENDED BEYOND THAT DATE WITH OTS APPROVAL, THE COMPANY WILL PROMPTLY
RETURN ALL FUNDS TO SUBSCRIBERS WITH INTEREST AND WILL CANCEL ALL WITHDRAWAL
AUTHORIZATIONS.
BENEFITS TO MANAGEMENT FROM THE OFFERINGS
Full-time employees of the Savings Bank and the Company will participate
in the Offerings through purchases of Common Stock by the Company's ESOP, which
is a form of retirement plan. Following the completion of the Conversion and
Reorganization, management intends to implement a stock award plan and a stock
option plan. These plans will benefit directors and key employees. However,
under OTS regulations, the stock award plan and stock option plan may not be
adopted until after the Conversion and are subject to shareholder approval.
Certain members of management also have employment agreements with the Savings
Bank. See "Management of the Company -- Benefits" and "-- Employment Agreements"
and "Risk Factors -- Possible Dilutive Effect of Issuance of Additional Shares."
USE OF PROCEEDS RAISED FROM THE SALE OF COMMON STOCK
The Company will contribute up to 50% of the net proceeds from the
Offerings to the Savings Bank. The balance of the funds will be retained as the
Company's initial capitalization, with a portion of those funds being loaned to
the ESOP to fund its purchase of Common Stock in the Offerings. The Company may
use the funds it retains to support future expansion of operations or
diversification into other banking-related businesses and for other business or
investment purposes, although management has no current plans regarding such
activities. Subject to applicable limitations, the Company may also use
available funds to repurchase shares of Common Stock and for the payment of
dividends. Funds contributed to the Savings Bank will be invested initially in
short-to intermediate-term United States government and agency securities. The
Savings Bank will also use the proceeds to support its lending and investment
activities and to enhance its ability to serve the borrowing and other financial
needs of the communities it serves. See "Use of Proceeds."
-8-
<PAGE>
DIVIDENDS
The Company intends initially to pay quarterly cash dividends on the
Common Stock at an annual rate of at least $0.60 per share (3% of the $20.00 per
share purchase price) after the Conversion and Reorganization. However, the
payment of dividends will be subject to the discretion of the Board of Directors
and to the Company's earnings and financial condition. If the Company's Board of
Directors determines in its discretion that the net income, capital and
financial condition of the Company, the general economy or the best interests of
the Company's shareholders do not support the payment of dividends, the Company
may not pay dividends on the Common Stock. A primary source of income to the
Company will be dividends periodically declared and paid by the Savings Bank on
the Savings Bank common stock held by the Company. The declaration and payment
of dividends by the Savings Bank are subject to the Savings Bank's earnings and
financial condition, general economic conditions and federal restrictions.
Accordingly, dividends may not be paid or, if paid, may be discontinued. See
"Dividend Policy" and "Regulation."
MARKET FOR THE COMMON STOCK
The Company has applied to have the Common Stock listed on Nasdaq under
the symbol "CFBC." No assurance can be given that an active and liquid trading
market will develop or be maintained. Investors should have a long-term
investment intent. Persons purchasing shares may not be able to sell their
shares or at a price equal to or above $20.00. See "Market for Common Stock."
IMPORTANT RISKS IN OWNING COMMON STOCK OF THE COMPANY
Before you decide to purchase Common Stock in the Offerings, you should
read the section of this document entitled "Risk Factors."
-9-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth certain selected consolidated financial
and other data regarding the Mutual Holding Company and the Savings Bank.
The data at December 31, 1996, 1995 and 1994, and for the years then ended,
have been derived from audited consolidated financial statements of CF
Mutual Holdings and subsidiaries, including the audited Consolidated
Financial Statements and related Notes included elsewhere herein. The data
at December 31, 1993 and 1992 and for the years then ended have been
derived from audited financial statements of the Carrollton Federal Bank,
FSB and subsidiary.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Balance Sheet Data (Year End) (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans, gross 272,435 273,171 283,476 262,154 256,224
Earning assets 326,443 314,706 330,801 292,047 284,759
Assets 352,532 334,477 353,351 312,109 302,100
Deposits 307,756 289,288 289,328 269,624 270,050
Retained Earnings 25,278 25,030 22,083 19,700 17,261
Statement of Earnings Data
Net interest income 13,409 13,217 13,224 13,418 11,694
Provision for loan losses 1,143 250 99 822 1,061
Noninterest income 3,244 3,118 2,137 2,003 1,864
Noninterest expense(3) 15,276 11,764 12,324 11,168 9,733
Deposit insurance premiums(3) 2,340 636 682 717 605
Net earnings 248 2,947 2,384 2,438 1,803
Asset Quality Ratios
Non-performing assets to total assets(1) 1.82% 0.76% 1.16% 1.45% 1.43%
Net charge-offs to average loans 0.31% 0.13% 0.14% 0.06% 0.19%
Allowance for loan losses to total loans 0.95% 0.84% 0.84% 1.02% 0.79%
[Allowance for loan losses to non- 40.50% 89.74% 58.50% 59.29% 46.77%
performing assets(1)]
Key Performance Ratios
Return on average assets 0.07% 0.86% 0.72% 0.78% 0.59%
Return on average capital 0.99% 12.51% 11.41% 13.19% 11.02%
Net interest margin to earning assets 4.21% 4.07% 4.15% 3.97% 3.74%
Average capital to average assets 7.32% 6.85% 6.28% 6.02% 5.38%
Noninterest expense to average assets(3) 4.45% 3.42% 3.70% 3.64% 3.20%
Noninterest expense to average assets(4) 3.95% 3.42% 3.70% 3.64% 3.20%
Efficiency ratio(2)(3) 91.73% 72.01% 80.23% 72.42% 71.78%
Efficiency ratio(2)(4) 81.39% 72.01% 80.23% 72.42% 71.78%
Other Data
Number of full service offices 12 7 8 8 8
</TABLE>
_________________________
(1) Non-performing assets include nonaccrual loans and other real estate owned.
(2) The efficiency ratio is calculated by dividing noninterest expense by the
sum of net interest income plus noninterest income.
(3) Includes one-time SAIF assessment of $1,722,575 in 1996.
(4) Excludes one-time SAIF assessment of $1,722,575 in 1996.
RECENT DEVELOPMENTS
The following summary of selected financial information and other data does
not purport to be complete and is qualified in its entirety by reference to the
detailed information and Financial Statements and accompanying Notes appearing
elsewhere in this Prospectus. Selected financial information as of and for the
three months ended March 31, 1997 and 1996 has been derived from unaudited
financial information. In the opinion of the management of the Mutual Holding
Company, such information reflects all adjustments (which consist only of
normal, recurring adjustments) necessary for a fair presentation of the selected
financial information and other data. The results of operations for the three
months ended March 31, 1997 are not necessarily indicative of the results which
may be expected for any other period.
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Loans, gross $280,619 $272,435
Earning assets 341,194 326,443
Assets 365,509 352,532
Deposits 319,611 307,756
Retained Earnings 25,665 25,278
</TABLE>
<TABLE>
<CAPTION>
As of and for the
three months
ended March 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
OPERATING DATA:
Net interest income $ 3,173 $ 2,821
Provision for loan losses 95 90
Noninterest income 721 735
Noninterest expense (3) 3,214 2,818
Deposit insurance premiums (3) 12 153
Net earnings 387 445
ASSET QUALITY RATIOS:
Nonperforming assets to total assets (1) 1.68% 1.20%
Net chargeoffs to average loans (4) 0.36% 0.15%
Allowance for loan losses to total loans 0.87% 0.84%
Allowance for loan losses to
nonperforming assets 39.85% 56.64%
KEY PERFORMANCE RATIOS:
Return on average assets (4) 0.43% 0.53%
Return on average stockholders' equity (4) 6.08% 7.09%
Net interest margin (4) 3.80% 3.55%
Average equity to average assets 7.09% 7.48%
Noninterest expense to average assets (3)(4) 3.58% 3.36%
Efficiency ratio (2)(3) 83.09% 79.36%
OTHER DATA:
Number of full service offices 12 8
</TABLE>
(1) Nonperforming assets include nonaccrual loans and other real estate owned
(2) The efficiency ratio is calculated by dividing noninterest expense by the
sum of net interest income plus noninterest income
(3) Excludes one-time SAIF assessment
(4) Annualized
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND DECEMBER 31, 1996
Mutual Holding Company consolidated assets at March 31, 1997 grew
approximately 3.7% to $366 million from $353 million at December 31, 1996. Total
loans grew $8.2 million, or 3%, through March 31, 1997. This loan growth was
primarily funded through an increase in deposits of approximately $12 million,
or 3.9%, from $308 million at December 31, 1996 to $320 million at March 31,
1997. The Bank continued to substantially exceed all regulatory capital
requirements at March 31, 1997.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996
Net earnings totaled approximately $387,000 through March 31, 1997 as
compared to $445,000 for the three months ended March 31, 1996. Return on
average assets and return on average equity for the three months ended March 31,
1997 were .43% and 6.08% on an annualized basis as compared to .53% and 7.09%
for the three-month period ended March 31, 1996. The decreases over the prior
year primarily are due to increased data processing fees related to the
increased transaction account activity in 1997 as well as an increase in
occupancy expenses due to the Company's opening of four Walmart branches during
the last three quarters of 1996.
Net interest income increased 12.7% to $3.2 million at March 31, 1997 as
compared to $2.8 million through March 31, 1996. This increase was a result of
the continuing change in the mix of the loan portfolio from adjustable rate
mortgage loans into higher yielding commercial and consumer loans.
The provision for loan losses was $95,000 and $90,000 for the quarters
ended March 31, 1997 and 1996, respectively. Nonperforming assets decreased from
$6.4 million at December 31, 1996 to $6.1 million at March 31, 1997. Net
charge-offs totaled $248,000 through March 31, 1997 as compared to $99,000
through March 31, 1996.
Noninterest income decreased slightly from $735,000 for the quarter ended
March 31, 1996 to $721,000 for the quarter ended March 31, 1997. Noninterest
expense increased 14.1% from $2.8 million for the three-month period ended
March 31, 1996 to $3.2 million through March 31, 1997. This increase is
primarily due to increases in salaries and employee benefits and occupancy
expenses associated with the Company's opening of the four Walmart branches
during the last three quarters of 1996.
-10-
<PAGE>
RISK FACTORS
The following factors, in addition to those discussed elsewhere in
this Prospectus, should be carefully considered by investors in deciding
whether to purchase the Common Stock offered hereby.
Ability of Executive Officers and Directors to Control Corporate Action
Directors and executive officers of the Company expect to purchase
approximately 12.1% of the shares of Common Stock issued in the Offerings
based upon the midpoint of the Valuation Price Range. See "Proposed
Management Purchases." Directors, executive officers and employees are
also expected to eventually control the voting of 4% of the shares of
Common Stock issued through the MRP. In addition, 8% of the shares issued
in the Offerings are expected to be acquired by the ESOP. Employees will
vote the shares allocated to them under the ESOP. The ESOP trustees will
vote unallocated shares and allocated shares for which no voting
designation has been made. Accordingly, directors and executive officers
as a group, together with the ESOP and the MRP, may have effective control
over as much as 24.1%, at the midpoint of the Valuation Price Range, of the
Common Stock issued and outstanding at the completion of the Conversion and
Reorganization.
In addition, following the Conversion and Reorganization, executive
officers and directors are expected to be granted options under the Option
Plan to purchase an amount of Common Stock equal to 10% of the shares of
Common Stock issued in the Offerings. If all of the options were issued to
directors and executive officers and exercised, and if the Company did not
issue any additional shares of Common Stock, the shares held by directors
and executive officers and their associates as a group, including (i)
shares purchased outright in the Offerings, (ii) all shares issued by the
MRP and ESOP and (iii) shares purchased pursuant to the exercise of stock
options, would give such persons effective control over as much as 34.1%,
at the midpoint of the Valuation Price Range, of the Common Stock issued
and outstanding. Because the Company's Articles of Incorporation will
require the affirmative vote of 80% of the outstanding shares entitled to
vote in order to approve certain mergers, consolidations or other business
combinations without the prior approval of two-thirds of the Company's
directors, the officers and directors and their associates, as a group,
could effectively block such transactions. See "Certain Restrictions on
Acquisition of the Company-Mergers, Consolidations and Sales of Assets."
Intent to Remain Independent; Unsuitability as Short-Term Investment
The directors and executive officers of the Company and the Savings
Bank believe that it is in the best interests of the Savings Bank, the
Company and the Company's shareholders for the Company and the Savings Bank
to remain independent, with the objective of long-term enhancement of
shareholder value. Accordingly, an investment in the Common Stock of the
Company may not be suitable for investors who are seeking short-term
returns through a sale of the institution.
Provisions Discouraging Transactions that Might Benefit Shareholders
The Articles of Incorporation and Bylaws of the Company and the
Savings Bank contain certain restrictions that are intended to discourage
non-negotiated attempts to acquire control of the Company or Savings Bank.
These provisions, among other things, (i) provide that the Board of
Directors be divided into three classes, with the members of each class
being elected for three-year terms and one class being elected annually;
(ii) provide the authority to issue preferred stock with such terms as are
determined by the Board of Directors; (iii) require a supermajority vote
for certain mergers, acquisitions and similar transactions, as well as for
the removal of a director without cause or a change in the number of
directors; and (iv) state that the Company will be governed by the
"business combination" and "fair price" provisions of the Georgia Business
Corporation Act. The Company's Board of Directors believes that these
provisions encourage potential acquirors to negotiate directly with the
Board of Directors. However, these provisions may discourage an attempt to
acquire control of the Company that a majority of the shareholders might
deem to be in their best interests or in which they might receive a premium
over the then market price of their shares. These provisions may also
render difficult the removal of a
-11-
<PAGE>
director and may deter or delay changes in control that have not received
the requisite approval of the Company's Board of Directors. Other facts,
such as voting control of directors and officers and agreements with
employees, may also have an anti-takeover effect. See "- Voting Control of
Officers and Directors" and "Certain Restrictions on Acquisition of the
Company."
Anticipated Low Return on Equity Following Conversion and Reorganization
At December 31, 1996, the Savings Bank's ratio of capital to assets
was 7.42%. On a pro forma basis at December 31, 1996, assuming the sale of
1,551,250, 1,825,000 and 2,098,750 shares of Common Stock in the Offerings
at the minimum, midpoint and maximum of the Valuation Price Range,
respectively, and the distribution of 50% of the net proceeds to the
Savings Bank, the Savings Bank's ratio of capital to assets would have been
10.93%, 11.58%, and 12.22%, respectively. With its higher capital position
as a result of the Conversion and Reorganization, it is doubtful that the
Company will be able to quickly deploy the capital raised in the Offerings
in loans and other assets in a manner consistent with its business plan and
operating philosophies and in a manner which will generate earnings to
support its high capital position. As a result, it is expected that the
Company's return on equity initially will be below industry norms.
Consequently, investors expecting a return on equity which will meet or
exceed industry norms for the foreseeable future should carefully evaluate
and consider the risk that such returns will not be achieved.
Following the Conversion and Reorganization, management may consider
plans to reduce capital if the opportunities to deploy it are not found.
Such plans may include payment of cash dividends and repurchasing shares.
Any such steps would be taken based on conditions as they exist following
the Conversion and Reorganization, and in compliance with applicable
regulations that limit the Company's ability to pay dividends and
repurchase its stock. See "Use of Proceeds," "Dividend Policy" and
"Regulation."
Potential Adverse Effects of Changes in Interest Rates and the Current
Interest Rate Environment
Effect on Net Interest Income. The operations of the Savings Bank are
substantially dependent on its net interest income, which is the difference
between the interest income earned on its interest-earning assets and the
interest expense paid on its interest-bearing liabilities. Like most
savings institutions, the Savings Bank's earnings are affected by changes
in market interest rates and other economic factors beyond its control. If
an institution's interest-earning assets have longer effective maturities
than its interest-bearing liabilities, the yield on the institution's
interest-earning assets generally will adjust more slowly than the cost of
its interest-bearing liabilities and, as a result, the institution's net
interest income generally would be adversely affected by material and
prolonged increases in interest rates and positively affected by comparable
declines in interest rates. In recent years, the assets of many savings
institutions, including the Savings Bank, have been negatively "gapped" --
which means that the dollar amount of interest-bearing liabilities which
reprice within specific time periods, either through maturity or rate
adjustment, exceeds the dollar amount of interest-earning assets which
reprice within such time periods. As a result, the net interest income of
these savings institutions, including the Savings Bank, would be expected
to be negatively impacted by increases in interest rates.
At December 31, 1996, the Mutual Holding Company's cumulative one year
gap as a percentage of total interest-earning assets was negative 13.06%.
The Mutual Holding Company computes its gap position using certain
prepayment, deposit decay and other assumptions used by the OTS in making
gap computations. The results of the gap computations could
be substantially different if other assumptions were used.
-12-
<PAGE>
The Savings Bank has actively sought to reduce the vulnerability of
its operations to changes in interest rates through an analysis of its
interest rate risk undertaken by measuring changes in the market value of
its portfolio equity ("NPV") and annual net interest income ("NII") for
instantaneous and sustained parallel shifts in market interest rates. These
methods have enabled the Savings Bank to maintain its net interest income
at a relatively constant level of $13.4 million in 1996 as compared to
$13.2 million in each of 1995 and 1994. These strategies have also allowed
improvement in the negative gap as a percentage of interest-earning assets
from (53.18%) at December 31, 1994 to (13.06%) at December 31, 1996.
Pursuant to such analysis, the Savings Bank determined that a theoretical
200 basis point increase in market interest rates as of December 31, 1996
would have resulted in a $2.8 million, or 8%, decrease in the Savings
Bank's NPV and a decrease in NII of $672,000, or 9.3%, while a theoretical
200 basis point decrease in market interest rates would have resulted as of
December 31, 1996 in a $301,000, or 1%, decrease in the Savings Bank's NPV
and an increase in NII of $147,000, or 2%. Computations of an interest rate
gap and computations of the prospective effects of hypothetical interest
rate changes on NPV and NII are based on numerous assumptions, including
relative levels of market interest rates, loan prepayments and deposit
decay and should not be relied upon as indicative of actual results.
Furthermore, the computations do not incorporate any actions management may
undertake in response to changes in interest rates.
Effect on Securities. In addition to affecting interest income and
expenses, changes in interest rates also can affect the value of the
Savings Bank's securities portfolio, which is comprised of fixed and
adjustable-rate instruments. Generally, the value of fixed-rate
instruments fluctuates inversely with changes in interest rates. The
Savings Bank has sought to reduce the vulnerability to changes in interest
rates by managing the nature and composition of its securities portfolio.
As a consequence of the fluctuation in interest rates, the carrying value
of the Savings Bank's held-to-maturity securities can differ from the
market value of such securities. See "Business of Carrollton Federal Bank
- Investment Securities."
Prepayment Risk. Changes in interest rates also can affect the
average life of loans and mortgage-backed securities. Historically low
interest rates in recent periods have resulted in increased prepayments of
loans and mortgage-backed securities, as borrowers refinanced to reduce
borrowing costs. Under these circumstances, the Savings Bank is subject to
reinvestment risk to the extent that it is not able to reinvest such
prepayments at rates which are comparable to the rates on the maturing
loans or securities. In periods of declining interest rates, reinvestment
of these prepayment proceeds can result in a decrease in the weighted
average yield of the loan portfolio. In periods of rising interest rates,
the prepayment speed of loans will decrease (fewer refinances and payoffs),
resulting in a lower volume of dollars to be reinvested by the bank into
higher yielding loans and investments. This situation can also lead to a
lower weighted average yield on the portfolio than can be realized in a
more stable rate environment. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Jumbo Certificates. The inflows and outflows of deposits, which are
the Savings Bank's primary source of funds for lending and other investment
purposes, are significantly influenced by general interest rates and money
market conditions. In order to maintain the Savings Bank's desired level
of deposits, it must offer rates of interest and other terms that its
customers judge to be competitive with those offered by other financial
institutions and viable investment alternatives. While all deposits are
more susceptible to outflow during periods of low market interest rates or
when viable investment alternatives offer higher rates of return,
depositors with larger account balances generally review more thoroughly
the available options and are more likely to withdraw their funds as the
gap between expected returns widens and the perceived risks remain
relatively equal.
As of December 31, 1996, the Savings Bank's total deposit liabilities
included 204 certificates of deposit with principal amounts of $100,000 or
more. These accounts amounted to $47.2 million
-13-
<PAGE>
or 15.3% of the Savings Bank's total deposit liabilities as of that date.
While the holders of these accounts are generally from the Savings Bank's
market area and have had relatively large deposits with the Savings Bank
for several years, a decision by a relatively small number of depositors to
move their deposits to investment alternatives would result in a relatively
large outflow of the Savings Bank's total deposits. Under such
circumstances, in order to maintain the requisite level of funds for
lending and other investment purposes, the Savings Bank would either
increase its deposits by seeking funds outside its primary market area or
by offering higher interest rates and more attractive account terms than
its local competitors. The Savings Bank could also borrow funds from the
Federal Home Loan Bank of Atlanta (the "FHLB") or other sources on a short-
or long-term basis. The use of these alternative sources of funds may
result in an increase in the Savings Bank's total cost of funds which would
decrease its net income.
Risk of Loan Losses from Non-Performing Assets
At December 31, 1996, the Savings Bank's non-performing assets, which
consist of non-accrual loans, accruing loans greater than 90 days
delinquent and real estate acquired through foreclosure or by deed in lieu
thereof, amounted to $6.4 million or 1.82% of the Savings Bank's total
assets. This represents an increase of $3.9 million, or 152%, from non-
performing assets at December 31, 1995. One large commercial relationship,
totaling approximately $4.75 million or 1.35% of total assets, accounted
for this increase. See "Business of Carrollton Federal Bank - Lending
Activities - Non-Performing Assets".
Risk of Loan Losses from Increasing Loan to Deposit Ratio
The Savings Bank's loan to deposit ratio was 88% at December 31, 1996,
as compared to 94% at December 31, 1995. The Savings Bank has
significantly increased its consumer and commercial lending in recent years
and intends to continue to increase the amounts of such loans in the near
future as it continues its transition from a traditional thrift institution
to a community retail bank. Such an increase entails additional loan loss
and other risks relating to the higher proportion of loans issued by the
Savings Bank. See "Business of Carrollton Federal Bank - Lending
Activities."
Risk of Loan Losses from Consumer Lending and Indirect Automobile Lending
At December 31, 1996, approximately $6.7 million, or 2.5%, of the
Savings Bank's loan portfolio consisted of indirect automobile loans
originated by the Savings Bank through a network of automobile dealers in
the Local Community. The Savings Bank initiated its indirect automobile
lending program in 1996 and intends to increase such lending in the future.
Originating indirect automobile loans is a relatively new business activity
for the Savings Bank, and its ability to maintain or expand its indirect
automobile lending business will depend upon the volume of sales of new and
used automobiles and demand by consumers for financing in connection
therewith. These factors are beyond the Savings Bank's control. While the
Savings Bank attempts to employ prudent credit standards in originating
indirect automobile loans, there is an inherent risk that a portion of
these loans will default. In such instances, the repossessed automobile
securing the loan may not be sufficient for repayment of the loan and the
Savings Bank may not be able to collect the remaining deficiency. The
Savings Bank does not have recourse to the automobile dealer in the event
of a default of an indirect automobile loan. Loans secured by assets that
depreciate rapidly, such as automobiles, are generally considered to entail
greater risk than residential mortgage loans. There is one significant
relationship of approximately $500,000 in the consumer portfolio that has
defaulted. This customer has been a borrower from the Savings Bank since
1987. The loan is secured by real estate. No additional loss is anticipated
due to this credit. At December 31, 1996, management was aware of no
material problems associated with the indirect lending program.
In light of these risks, the Savings Bank currently maintains
allowances for loan losses with respect to its indirect automobile loans.
There can be no assurance, however, that the allowance for loan losses will
prove sufficient to cover actual losses on indirect automobile loans or
other loans in the future.
-14-
<PAGE>
Risk of Loan Losses from Commercial Lending
As of December 31, 1996, the Savings Bank had $57.8 million in
outstanding commercial loans, representing 21% of its net loan portfolio.
At December 31, 1996, one significant commercial loan, totalling
approximately $4.75 million, was in default. This loan is secured by
commercial real estate. No significant loss is anticipated. Commercial
loans, whether or not secured by real estate, generally entail significant
additional risks as compared to one-to-four family residential mortgage
lending and carry larger loan balances. The increased credit risk is a
result of several factors, including the concentration of principal in a
smaller number of loans and borrowers, the effects of general economic
conditions on income-producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment
of loans secured by commercial real estate is typically dependent upon the
successful operation of the related property. If the cash flow from the
property is reduced, the borrower's ability to repay the loan may be
impaired. Loans secured by commercial real estate may also involve a
greater degree of environmental risk.
Potential Absence of Active, Liquid Market for Common Stock
The Company and the Savings Bank have never issued capital stock,
other than one share of Common Stock issued in connection with the
incorporation of the Company, and the 100 shares of Savings Bank stock
issued to the Mutual Holding Company in connection with the MHC
Reorganization, which shares will be cancelled upon completion of the
Conversion and Reorganization. Consequently, there is no existing market
for the Common Stock. The Company has applied to have its Common Stock
quoted on Nasdaq under the symbol "CFBC" upon completion of the Conversion
and Reorganization and will seek to encourage and assist at least two
market makers to make a market in its Common Stock. Trident has indicated
that it intends to serve as one of the market makers.
Making a market in securities involves maintaining bid and ask
quotations and being able, as principal, to effect transactions in
reasonable quantities at those quoted prices, subject to various laws and
other regulatory requirements. The development of a public trading market
depends upon the existence of willing buyers and sellers, the presence of
which is not within the control of the Company, the Savings Bank, or any
market maker. Accordingly, there can be no assurance that an active and
liquid trading market for the Common Stock will develop or that purchasers
in the Offering will be able to sell their shares at or above the Purchase
Price. The absence of a liquid and active trading market, or the
discontinuance thereof, may have an adverse effect on both the price and
the liquidity of the Common Stock. See "Market for Common Stock."
Possible Dilutive Effect of Issuance of Additional Shares
Various possible and planned issuances of Common Stock could dilute
the interests of prospective stockholders of the Company or existing
stockholders of the Company following consummation of the Conversion and
Reorganization, as noted below.
The number of shares to be sold in the Conversion and Reorganization
may be increased as a result of an increase in the Valuation Price Range of
up to 15% to reflect changes in market and financial conditions prior to
the completion of the Conversion and Reorganization or to allow the ESOP to
purchase up to 8% of the shares offered in the Offerings. In the event that
the Valuation Price Range is so increased, it is expected that the Company
will issue up to 2,413,562 shares of Common Stock at the Purchase Price for
an aggregate price of up to $48,271,250. An increase in the number of
shares will decrease net income per share and equity per share on a pro
forma basis and will increase the Company's consolidated equity and net
income. See "Capitalization" and "Pro Forma Data."
-15-
<PAGE>
The ESOP intends to purchase 8.0% of the Common Stock to be issued in
the Offerings. In the event that there are insufficient shares available
to fill the ESOP's order due to an oversubscription by Eligible Account
Holders, the Company may issue authorized but unissued shares of Common
Stock to the ESOP in an amount sufficient to fill the ESOP's order and/or
the ESOP may purchase such shares in the open market. In the event that
additional shares of Common Stock are issued to the ESOP to fill its order,
stockholders would experience dilution of their ownership interests (by up
to 7.4% at the maximum of the Valuation Price Range, assuming the ESOP
purchased no shares in the Offerings) and pro forma per share equity and
pro forma per share net income would decrease as a result of an increase in
the number of outstanding shares of Common Stock. See "Management of the
Company - Benefits - Employee Stock Ownership Plan" and "The Conversion and
Reorganization - The Offerings - Subscription Offering" and "- Priority 2:
ESOP."
If the Recognition Plan is approved by stockholders at a special or
annual meeting of the Company's stockholders not earlier than six months
after the completion of the Conversion and Reorganization, an amount of
Common Stock equal to 4.0% of the shares of Common Stock issued in the
Offerings will be reserved under the Recognition Plan. Such shares of
Common Stock may be acquired in the open market or from authorized but
unissued shares of Common Stock. In the event that additional shares of
Common Stock are issued to the Recognition Plan, shareholders would
experience dilution of their ownership interests (by 3.8% at the maximum of
the Valuation Price Range) and pro forma per share equity and pro forma per
share net income would decrease as a result of an increase in the number of
outstanding shares of Common Stock. See "Pro Forma Data" and "Management
of the Company - Benefits - Management Recognition Plan and Trust."
If the Company's Option Plan is approved by stockholders at a special
or annual meeting of the Company's stockholders not earlier than six months
after the completion of the Conversion and Reorganization, the Company will
reserve for future issuance pursuant to such plan a number of authorized
shares of Common Stock equal to an aggregate of 10% of the Common Stock
issued in the Offerings (209,875 shares, based on the maximum of the
Valuation Price Range). Alternatively, the Company could purchase shares
in the open market to be distributed when options are exercised. If
additional shares of Common Stock are issued, shareholders would experience
dilution in their ownership interests (by 9.1% at the maximum of the
Valuation Price Range) and, if all options were exercised at a Purchase
Price of $20.00 per share, pro forma per share equity and pro forma per
share net income would decrease as a result of the increase in the number
of shares outstanding. See "Pro Forma Data" and "Management of the Company
- Benefits - 1997 Stock Option Plan."
Potential Adverse Impact of Changes in Regulation and Legislation
The Savings Bank is subject to regulation by the OTS, as its
chartering authority and by the Federal Deposit Insurance Corporation
("FDIC"), which regulates the Savings Bank and insures its deposits to the
fullest extent provided by law. The Company is regulated by the OTS as a
registered savings and loan holding company. The Savings Bank also is
subject to certain regulation by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") and is a member of the FHLB of
Atlanta, one of the 12 regional banks which comprise the FHLB System. Such
supervision and regulation establish a comprehensive framework of
activities in which an institution may engage, and are intended primarily
for the protection of the SAIF and depositors. This regulatory structure
also provides the OTS and the FDIC with significant discretion in
connection with their supervisory and enforcement activities. Any change
in such regulation, whether by the OTS or the FDIC or as a result of
legislation subsequently enacted by the Congress of the United States,
could have a substantial impact on the Savings Bank and its operations.
See "Regulation."
-16-
<PAGE>
Competition
The Savings Bank faces significant competition both in making loans
and in attracting deposits principally from national, regional and local
commercial banks, savings banks, savings and loan associations, credit
unions, broker-dealers, mortgage banking companies (including FNMA) and
insurance companies. Its most direct competition for deposits has
historically come from commercial banks, savings banks, savings and loan
associations and credit unions. The Savings Bank faces additional
competition for deposits from short-term money market funds, other
corporate and government securities funds and from other financial
institutions such as brokerage firms and insurance companies. In addition,
the Savings Bank may face additional competition from commercial banks
headquartered outside of the State of Georgia as a result of the enactment
of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,
which becomes fully effective on June 1, 1997. The "Georgia Interstate
Banking Act," which became effective July 1, 1995, provides that (i)
interstate acquisitions by institutions located in Georgia are permitted in
states which also allow national interstate acquisitions, and (ii)
interstate acquisitions of institutions located in Georgia are permitted by
institutions located in states which also allow national interstate
acquisitions; provided, however, that if the board of directors of a
Georgia savings and loan institution adopts a resolution to except such
thrift or holding company from being acquired pursuant to the provisions of
the Georgia Interstate Banking Act and properly files a certified copy of
such resolution with the Georgia Department, such savings and loan
institution or holding company may not be acquired by an institution
located outside of the State of Georgia.
Possible Adverse Income Tax Consequences of the Distribution of
Subscription Rights
The Primary Parties have received an opinion of Ferguson that
subscription rights granted to Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members have no ascertainable value.
However, this opinion is not binding on the Internal Revenue Service
("IRS"). If the subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members are deemed to have
an ascertainable value, receipt of such rights likely would be taxable only
to those Eligible Account Holders, Supplemental Eligible Account Holders
and Other Members who exercise the subscription rights (either as capital
gain or ordinary income) in an amount equal to such value. Whether
subscription rights are considered to have ascertainable value is an
inherently factual determination. See "The Conversion and Reorganization -
Effects of the Conversion and Reorganization" and "- Tax Aspects."
COMMUNITY FIRST BANKING COMPANY
The Company was organized in March 1997 at the direction of the Board
of Directors of the Savings Bank for the purpose of holding all of the
capital stock of the Savings Bank and in order to facilitate the Conversion
and Reorganization. The Company has applied for the approval of the OTS to
become a savings institution holding company and as such will be subject to
regulation by the OTS. After completion of the Conversion and
Reorganization, the Company will conduct business initially as a unitary
savings institution holding company. See "Regulation - The Company." Upon
consummation of the Conversion and Reorganization, the Company will have no
significant assets other than all of the outstanding shares of Savings Bank
Common Stock, the note evidencing the Company's loan to the ESOP and the
portion of the net proceeds from the Offerings retained by the Company, and
the Company will have no significant liabilities. See "Use of Proceeds."
Initially, the management of the Company and the Savings Bank will be
substantially similar and the Company will neither own nor lease any
property, but will instead use the premises, equipment and furniture
-17-
<PAGE>
of the Savings Bank. At the present time, the Company does not intend to
employ any persons other than officers who are also officers of the Savings
Bank, and the Company will utilize the support staff of the Savings Bank
from time to time. Additional employees will be hired as appropriate to
the extent the Company expands or changes its business in the future.
Management believes that the stock holding company structure will
provide the Company with additional flexibility to diversify and expand,
should it decide to do so, its business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with other
financial institutions and financial services related companies. Although
there are no current arrangements understandings or agreements regarding
any such opportunities or transactions, the Company will be in a position
after the Conversion and Reorganization, subject to regulatory limitations
and the Company's financial position, to take advantage of any such
acquisition and expansion opportunities that may arise. The initial
activities of the Company are anticipated to be funded by the proceeds to
be retained by the Company and earnings thereon, as well as dividends from
the Savings Bank. See "Dividend Policy."
The directors and executive officers of the Company believe that it is
in the best interests of the Company and its shareholders for the Company
to remain an independent company, and the Articles of Incorporation of the
Company contain a number of provisions that may have an anti-takeover
effect. See "Certain Restrictions on Acquisition of the Company."
The Company's principal executive office is located at the home office
of the Savings Bank at 110 Dixie Street, Carrollton, Georgia 30117, and its
telephone number is (770) 834-7355.
CARROLLTON FEDERAL BANK
Carrollton Federal Bank, a federally chartered stock savings bank that
was organized on August 1, 1994 as a subsidiary of the Mutual Holding
Company, operates in Carrollton, Georgia and neighboring communities in
western Georgia. Prior to that date, the Savings Bank's predecessor, the
Mutual Bank, had operated since 1929. The Savings Bank operates 12 branch
offices in Carroll, Douglas, Coweta, Fayette, Haralson, Heard, Henry and
Paulding counties in Georgia (the "Primary Market Area").
The Savings Bank is primarily engaged in attracting deposits from the
general public and using that and other available sources of funds to
originate mortgage loans primarily located in the counties in which it has
offices and to originate commercial and consumer and other secured and
unsecured loans. At December 31, 1996, mortgage loans amounted to $147
million or 54% of the Savings Bank's total net loan portfolio; commercial
loans amounted to $58 million or 21% of the Savings Bank's total net loan
portfolio; and consumer and other installment loans had a total balance of
$68 million or 25% of the Savings Bank's total net loan portfolio. The
Savings Bank also has an investment portfolio consisting of U.S. Government
and agency obligations, obligations of the State of Georgia and its
political subdivisions and FHLB stock. As of December 31, 1996, the
carrying value of securities that management has the intent and ability to
hold until maturity was $7.8 million, the carrying value of securities that
were available for sale was $33.9 million, and the carrying value of other
investments, including FHLB stock, was $2.5 million. In addition, as of
that same date, the Savings Bank's aggregate cash and interest-bearing
deposits in other banks totaled $14.4 million and federal funds sold
balances were $7.4 million.
The Savings Bank is a community-oriented retail banking institution
that emphasizes customer service and convenience. To enhance its earnings,
the Savings Bank has adopted a business strategy
-18-
<PAGE>
that emphasizes retail lending and deposit products and an increased emphasis on
commercial and consumer lending. The Savings Bank is subject to regulation by
the OTS and by the FDIC, which insures the Savings Bank's deposits up to
applicable limits.
The Mutual Holding Company and the Savings Bank have recently formed
three operating units to engage in new businesses: CFB Securities, CFB
Financial and CFB Insurance. CFB Securities offers traditional brokerage
services and products such as mutual funds, stocks and bonds through an
NASD member firm. CFB Financial services the loan needs of consumers
traditionally associated with small loan companies. CFB Insurance has not
commenced operations, but intends to offer various insurance products,
including property and casualty insurance, to existing customers of the
Savings Bank and to the general public.
CF MUTUAL HOLDINGS
CF Mutual Holdings is a federally chartered mutual holding company
chartered on August 1, 1994 in connection with the MHC Reorganization. The
Mutual Holding Company's primary asset is 100 shares of Savings Bank Common
Stock, which represents 100% of the shares of Savings Bank Common Stock
outstanding as of the date of this Prospectus. The Mutual Holding
Company's other assets consist of a deposit account with the Savings Bank
in the amount of $2,044 and a correspondent bank account and federal funds
sold totalling $1,325,290. The Mutual Holding Company also holds 3,500
shares of West Georgia National Bank (WGNB) stock with a cost basis of
$112,000 or $32 per share. This investment represents less than 1% of the
outstanding common stock of WGNB and is carried at cost. As part of the
MHC Reorganization, the Mutual Holding Company will convert to Interim
Mutual and simultaneously merge into the Savings Bank, with the Savings
Bank being the surviving entity.
PROPOSED MANAGEMENT PURCHASES
The following table sets forth, for each of the Company's directors and
executive officers and for all of the directors and executive officers as a
group, their proposed purchases of Common Stock, assuming sufficient shares are
available to satisfy their subscriptions and in each case assuming that
1,825,000 shares of Common Stock are sold, which is the midpoint of the
Valuation Price Range.
<TABLE>
<CAPTION>
Percentage of
Number of Common Stock
Name Amount Shares to be Held
---- ------ --------- -------------
<S> <C> <C> <C>
T. Aubrey Silvey $ 482,700 24,135 1.32%
Gary M. Bullock 200,000 10,000 .55
Dean B. Talley 482,700 24,135 1.32
Anna L. Berry 150,000 7,500 .41
Michael P. Steed 482,700 24,135 1.32
Thomas S. Upchurch 375,000 18,750 1.03
Jerry L. Clayton 482,700 24,135 1.32
Gary D. Dorminey 482,700 24,135 1.32
T. E. Reeve, Jr. 482,700 24,135 1.32
D. Lane Poston 482,700 24,135 1.32
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Anyce C. Fox 200,000 10,000 .55
C. Lynn Gable 100,000 5,000 .27
---------- ------- -----
Total $4,403,900 220,195 12.07%
========== ======= =====
</TABLE>
In addition, the ESOP intends to purchase 8.0% of the Common Stock
issued in the Conversion for the benefit of officers and employees. Stock
option and stock grants may also be granted in the future to directors,
officers and employees upon the receipt of stockholder approval of the
Company's proposed stock benefit plans. See "Management of the Company -
Benefits" for a description of these plans.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Offerings are completed, it is presently
anticipated that the net proceeds from the sale of the Common Stock will be
between $29.9 million and $40.7 million ($46.9 million assuming an increase
in the Valuation Price Range by 15%). See "Pro Forma Data" as to the
assumptions used to arrive at such amounts.
While the amount of net proceeds received by the Savings Bank will
further strengthen the Savings Bank's capital position, which already exceeds
all regulatory requirements, it should be noted that the Savings Bank is not
converting primarily to raise capital. After the Conversion and Reorganization,
the Savings Bank's tangible capital ratio (at the midpoint of the Valuation
Price Range) on a pro forma basis at December 31, 1996 is expected to be 11.02%
(after receipt by the Savings Bank of 50% of the net Conversion proceeds).
See "Regulatory Capital." As a result, the Savings Bank will continue to be a
highly capitalized institution. The Savings Bank intends to continue after the
Conversion and Reorganization with its strategy of emphasizing capital strength
and continued growth in assets and earnings.
It is expected that the Company's return on equity will initially be
lower than historical levels as the Company and the Savings Bank deploy the
proceeds from the Offerings. While the Board of Directors and management
recognize this challenge will exist for the foreseeable future, the Company
intends to manage capital through controlled growth, the payment of regular cash
dividends and the possible payment of periodic special dividends. Management
does not expect to pay any dividends that would be characterized as a tax-free
return of capital. The Company may repurchase the Common Stock as market and
regulatory limits permit. However, there can be no assurance that any dividends
will be paid on the Common Stock or that the Company will repurchase any shares.
See "Dividend Policy" and "Regulation."
The Company will purchase all of the capital stock of the Savings Bank
to be issued in the Conversion in exchange for up to 50% of the net Conversion
proceeds, and the Company will retain the remaining 50% of the net proceeds or
more, if permitted. The Company intends to use a portion of the net proceeds
that it retains to make a loan directly to the ESOP to enable the ESOP to
purchase up to 8.0% of the Common Stock. Based upon the issuance of 1,551,250
shares or 2,098,750 shares at the minimum and maximum of the Valuation Price
Range, respectively, the loan to the ESOP would be $2.5 million and $3.4
million, respectively. See "Management of the Company -Benefits- Employee Stock
Ownership Plan." The remaining net proceeds retained by the Company will be
initially used to invest primarily in short-term investment securities and
deposits in or loans to the Savings Bank. The portion of the net proceeds
retained by the Company may ultimately be used to support the Savings Bank's
lending activities, to support the future expansion
-20-
<PAGE>
of operations through establishment of additional branch offices or other
customer facilities, acquisitions of other financial institutions, expansion
into other lending markets or diversification into other banking related
businesses (although no such transactions are specifically being considered at
this time), and for other business and investment purposes, including the
payment of regular cash dividends and possible repurchases of the Common Stock
and special dividends. Management of the Company may consider expanding or
diversifying, should such opportunities become available. Funds contributed to
the Savings Bank will be invested initially in short- to intermediate-term
United States government and agency securities. The proceeds also will be used
to support the Savings Bank's lending and investment activities and thereby
enhance the Savings Bank's capabilities to serve the borrowing and other
financial needs of the communities it serves. Neither the Savings Bank nor the
Company has any specific plans, arrangements, or understandings regarding any
acquisitions or diversification of activities at this time, nor have criteria
been established to identify potential candidates for acquisition.
Following the one-year anniversary of the completion of the Conversion
(or sooner if permitted by the OTS), and based upon then existing facts and
circumstances, the Company's Board of Directors may determine to repurchase
shares of Common Stock, subject to any applicable statutory and regulatory
requirements. Such facts and circumstances may include but are not limited to
(i) market and economic factors such as the price at which the stock is trading
in the market, the volume of trading, the attractiveness of other investment
alternatives in terms of the rate of return and risk involved in the investment,
the ability to increase the book value and/or earnings per share of the
remaining outstanding shares, and an improvement in the Company's return on
equity; (ii) the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans; and (iii) any other circumstances in which repurchases
would be in the best interests of the Company and its stockholders. Any stock
repurchases will be subject to the determination of the Company's Board of
Directors that both the Company and the Savings Bank will be capitalized in
excess of all applicable regulatory requirements after any such repurchases and
to receipt of necessary regulatory approvals or non-objections from the OTS. The
payment of dividends or repurchase of stock, however, would be prohibited if
equity would be reduced below the amount required for the liquidation account.
See "Dividend Policy," "Regulation - Bank Regulation - Prompt Corrective
Action -Capital Distributions," and "The Conversion and Reorganization - Certain
Restrictions on Purchase or Transfer of Shares after the Conversion and
Reorganization."
The Company will be a unitary savings and loan holding company which,
under existing laws, would generally not be restricted as to the types of
business activities in which it may engage, provided that the Savings Bank
continues to be a qualified thrift lender ("QTL"). See "Regulation - The
Company" for a description of certain regulations applicable to the Company. Any
portion of the net proceeds in excess of the amount retained by the Company will
be added to the Savings Bank's general funds to be used for general corporate
purposes, including increased lending activities and purchases of investment and
mortgage-backed securities.
The net proceeds may vary because total expenses of the Conversion and
Reorganization may be more or less than those estimated. The net proceeds will
also vary if the number of shares to be issued in the Offerings is adjusted to
reflect a change in the estimated pro forma market value of the Savings Bank.
Payments for shares made through withdrawals from existing deposit accounts at
the Savings Bank will not result in the receipt of new funds for investment by
the Savings Bank but will result in a reduction of the Savings Bank's interest
expense and liabilities as funds are transferred from interest-bearing
certificates or other deposit accounts.
-21-
<PAGE>
DIVIDEND POLICY
Upon completion of the Conversion and Reorganization, the Board of
Directors of the Company will have the authority to declare dividends on the
Common Stock, subject to statutory and regulatory requirements. The Board of
Directors of the Company intends to adopt a policy of paying quarterly cash
dividends on the Common Stock following consummation of the Conversion and
Reorganization at an initial annual rate of not less than 3.0% of the $20.00 per
share purchase price of the Common Stock ($0.60 per share) commencing with the
first full quarter following consummation of the Conversion and Reorganization.
Declarations of dividends by the Board of Directors will depend upon a number of
factors including the amount of net proceeds from the Offerings retained by the
Company, investment opportunities available to the Company or the Savings Bank,
capital requirements, regulatory limitations, the Company's and the Savings
Bank's financial condition and results of operations, tax considerations and
general economic conditions. Consequently, there can be no assurance that
dividends will in fact be paid on the Common Stock or that, if paid, such
dividends will not be reduced or eliminated in future periods.
Dividends from the Company will depend, in part, upon receipt of
dividends from the Savings Bank, because the Company initially will have no
source of income other than dividends from the Savings Bank, earnings from the
investment of the portion of the net proceeds from the sale of Common Stock
retained by the Company, and interest payments with respect to the Company's
loan to the ESOP. A regulation of the OTS imposes limitations on "capital
distributions" by savings institutions, including cash dividends, payments by a
savings institution to repurchase or otherwise acquire its stock, payments to
stockholders of another savings institution in a cash-out merger and other
distributions charged against capital. The regulation establishes a three-tiered
system, with the greatest flexibility being afforded to well-capitalized or Tier
1 savings institutions and the least flexibility being afforded to under-
capitalized or Tier 3 savings institutions. As of December 31, 1996, the Savings
Bank was a Tier I savings institution and is expected to continue to so qualify
immediately following the consummation of the Conversion and Reorganization. See
"Regulation -Bank Regulation - Prompt Corrective Action - Capital
Distributions."
Unlike the Savings Bank, the Company is not subject to the
aforementioned regulatory restrictions on the payment of dividends to its
stockholders, although the source of such dividends will be, in part, dependent
upon dividends from the Savings Bank in addition to the net proceeds retained by
the Company and earnings thereon. The Company is subject, however, to the
requirements of Georgia law which state that a corporation may not pay dividends
if, as a result of the dividend, the corporation would be unable to pay its
debts as they come due in the ordinary course of business or its total assets
would be less than the sum of its total liabilities plus liquidation
preferences.
MARKET FOR COMMON STOCK
The Company has never issued capital stock and consequently there is no
established market for its Common Stock. Therefore, there can be no assurance
that an active and liquid trading market for the Common Stock will develop or if
developed, will be maintained. The Company has applied to have the Common Stock
quoted on Nasdaq under the symbol "CFBC." The Common Stock can be quoted on
Nasdaq if, among other qualifications, the Company has at least 400 stockholders
of record and two market makers. Trident has agreed to act as a market maker for
the Common Stock following the Conversion and Reorganization. The Company
believes that it will meet all of these qualifications.
-22-
<PAGE>
The development of a public market having the desirable characteristics
of depth, liquidity and orderliness depends on the existence of willing buyers
and sellers, the presence of which is not within the control of the Company, the
Savings Bank or any market maker. Since there can be no assurance that an active
and liquid trading market for the Common Stock will develop or that, if
developed, it will continue, investors in the Common Stock could have difficulty
disposing of their shares and should not view the Common Stock as a short-term
investment. The absence of an active and liquid trading market for the Common
Stock could affect the price and liquidity of the Common Stock.
-23-
<PAGE>
CAPITALIZATION
The following table presents the consolidated historical capitalization of
the Mutual Holding Company at December 31, 1996, and the pro forma consolidated
capitalization of the Company after giving effect to the Conversion and
Reorganization based upon the sale of the number of shares shown below and the
other assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
The Company - Pro Forma Consolidated Capitalization
Based Upon Sale at $20.00 Per Share
-----------------------------------------------------------
The Mutual
Holding Company 1,551,250 1,825,000 2,098,750 2,413,562
- Historical Shares Shares Shares Shares(1)
Consolidated (Minimum of (Midpoint of (Maximum of (15% above
Capitalization Range) Range) Range) Maximum of Range)
-----------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(2) $ 307,756 $ 307,756 $ 307,756 $ 307,756 $ 307,756
Borrowings 18,295 18,295 18,295 18,295 18,295
---------- ---------- ---------- ---------- ----------
Total deposits and borrowings $ 326,051 $ 326,051 $ 326,051 $ 326,051 $ 326,051
========== ========== ========== ========== ==========
Capital stock:
Preferred stock, no par
value per share: authorized
10,000,000 shares; assumed
outstanding - none $ - $ - $ - $ - $ -
Common Stock, $.01 par value
per share, authorized -
10,000,000 shares; shares to
be outstanding - as shown(3) - 16 18 21 24
Paid-in capital(3) - 29,892 35,282 40,671 46,868
Less:
Common stock acquired
by ESOP(4) - (2,482) (2,920) (3,358) (3,862)
Common Stock attributable
to MRP(5) - (1,241) (1,460) (1,679) (1,931)
Retained earnings - substantially
restricted(6) 25,278 25,278 25,278 25,278 25,278
Net unrealized loss on
available for sale securities (20) (20) (20) (20) (20)
---------- ---------- ---------- ---------- ----------
Total capital(6) $ 25,258 $ 51,443 $ 56,178 $ 60,913 $ 66,357
========== ========== ========== ========== ==========
</TABLE>
- ------------------
(1) As adjusted to give effect to an increase in the number of shares that
could occur due to an increase in the Valuation Price Range of up to 15% to
reflect changes in market and financial conditions prior to the completion
of the Conversion and Reorganization or to fill the order of the ESOP.
(2) Withdrawals from deposit accounts for the purchase of Common Stock have
not been reflected. Any such withdrawals will reduce pro forma deposits by
the amount thereof.
(3) The sum of the par value and paid-in capital accounts equals the net
proceeds from the Offerings. No effect has been given to the issuance of
additional shares of Common Stock pursuant to the Company's proposed Option
Plan. The Company intends to adopt the Option Plan and to submit it to
stockholders at a special or annual meeting no earlier than six months
after the completion of the Conversion and Reorganization. If the Option
Plan is approved by stockholders, an amount equal to 10% of the shares of
Common Stock will be reserved for issuance under the
-24-
<PAGE>
plan. See "Pro Forma Data" and "Management of the Company -Benefits - 1997
Stock Option Plan."
(4) Assumes that 8.0% of the Common Stock sold in the Offerings will be
purchased by the ESOP. The Common Stock acquired by the ESOP is reflected
as a reduction of equity. Assumes the funds used to acquire the ESOP
shares will be borrowed from the Company. See Note 1 to the table set
forth under "Pro Forma Data" and "Management of the Company- Employee Stock
Ownership Plan."
(5) Gives effect to the Recognition Plan, which is expected to be adopted
by the Company following the Conversion and Reorganization and presented to
stockholders for approval at a special or annual meeting of stockholders no
earlier than six months following the Conversion and Reorganization. If
the Recognition Plan is approved by stockholders, it is expected to issue a
number of shares of Common Stock equal to 4.0% of the shares of Common
Stock issued in the Offerings or 62,050, 73,000, 83,950 and 96,542 shares
at the minimum, midpoint, maximum and 15% above the maximum of the
Valuation Price Range. The table assumes that stockholder approval has
been obtained and that shares purchased in the open market will be used to
fund the awards. The Common Stock thus issued by the Recognition Plan is
reflected as a reduction in equity. If the shares are purchased at prices
higher or lower than the Purchase Price, such purchases would have a
greater or lesser impact, respectively, on equity. If the Recognition Plan
utilizes authorized but unissued shares from the Company, such issuance
would dilute the voting interests of existing shareholders by approximately
3.8% if 2,098,750 shares are sold in the Offerings. See "Pro Forma Data"
and "Management of the Company-Benefits - 1997 Management Recognition Plan
and Trust."
(6) The retained earnings of the Savings Bank will be substantially
restricted after the Conversion and Reorganization. See "Dividend Policy"
and "The Conversion and Reorganization - Liquidation Rights."
-25-
<PAGE>
REGULATORY CAPITAL
The following table presents the historical regulatory capital of the
Savings Bank, assuming the merger of the Mutual Holding Company into the Savings
Bank after its conversion to Interim Mutual at December 31, 1996, and the pro
forma regulatory capital of the Savings Bank after giving effect to the
Conversion and Reorganization, based upon the sale of the number of shares shown
below and the other assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
Historical 1,551,250 Shares 1,825,000 Shares 2,098,750 Shares 2,413,562 Shares
Regulatory Capital Sold at $20.00 Sold at $20.00 Sold at $20.00 Sold at $20.00
at December 31, Per Share Per Share Per Share Per Share
1996(1)(2) (min)(1)(2) (mid)(1)(2) (max)(1)(2) (max)(1)(2)
------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Assets Amount Assets Amount Assets Amount Assets Amount Assets
--------- -------- --------- --------- --------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital under GAAP $25,258 7.16% $40,212 10.93% $42,908 11.58% $45,604 12.22% $48,704 12.94%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Tangible capital $22,946 6.54% $37,900 10.36% $40,596 11.02% $43,292 11.67% $46,392 12.40%
Tangible capital
requirement 5,261 1.50% 5,485 1.50% 5,526 1.50% 5,566 1.50% 5,613 1.50%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess $17,685 5.04% $32,415 8.86% $35,070 9.52% $37,726 10.17% $40,779 10.90%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Core capital $22,946 6.54% $37,900 10.36% $40,596 11.02% $43,292 11.67% $46,392 12.40%
Core capital requirement(3) 10,522 3.00% 10,971 3.00% 11,052 3.00% 11,133 3.00% 11,226 3.00%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess $12,424 3.54% $26,929 7.36% $29,544 8.02% $32,159 8.67% $35,166 9.40%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Total risk-based
capital(4)(5) $24,976 10.56% $39,930 16.67% $42,626 17.76% $45,322 18.84% $48,422 20.08%
Total risk-based capital
requirement 18,920 8.00% 19,159 8.00% 19,202 8.00% 19,245 8.00% 19,295 8.00%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess $ 6,056 2.56% $20,771 8.67% $23,424 9.76% $26,077 10.84% $29,127 12.08%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- -------------------
(1) Under OTS policy, net unrealized gains or losses on debt securities
classified as available for sale are excluded for purposes of computing
regulatory capital.
(2) Tangible and core capital are computed as a percentage of adjusted total
assets of $351 million prior to the consummation of the Offerings and $366
million, $368 million, $371 million and $374 million following the issuance of
1,551,250, 1,825,000, 2,098,750 and 2,413,562 shares in the Conversion and
Reorganization, respectively. Risk-based capital is computed as a percentage of
adjusted risk-weighted assets of $236 million prior to the consummation of the
Offerings and $239 million, $240 million, $241 million and $241 million
following the issuance of 1,551,250, 1,825,000, 2,098,750 and 2,413,562 shares
in the Conversion and Reorganization, respectively.
(3) Does not reflect, in the case of the core capital requirement, the 4.0%
requirement to be met in order for an institution to be "adequately capitalized"
under applicable laws and regulations. See "Regulation - The Savings Bank -
Prompt Corrective Action."
(4) The pro forma risked-based capital ratios (i) reflect the receipt by the
Savings Bank of the assets held by the Mutual Holding Company and of 50% of the
estimated net proceeds from the Offerings, (ii) assume the investment of the net
remaining proceeds received by the Savings Bank in assets which have a risk-
weight of 20% under applicable regulations, as if such net proceeds had been
received and so applied at December 31, 1996.
(5) Includes the $2.0 million general allowance for loan losses that was
included in risk-based capital as of December 31, 1996.
-26-
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion and Reorganization are completed. However, net
proceeds are currently estimated to be between $29.9 million and $40.7 million
(or $46.9 million in the event the Valuation Price Range is increased by 15%)
based upon the following assumptions: (i) all shares of Common Stock will be
sold in the Subscription Offering and Community Offering; (ii) 22.2%, 20.3%,
18.5% and 17.1% of the Common Stock sold in the Subscription Offering at the
minimum, midpoint, maximum and 15% above the maximum of the Valuation Price
Range will be sold to the ESOP, directors and executive officers and their
associates; (iii) fees will be payable to Trident as set forth in "The
Conversion and Reorganization -Marketing Arrangements;" and (iv) expenses,
excluding the marketing fees paid to Trident, will approximate $699,000. Actual
expenses may vary from those estimated, and the fees paid to Trident will vary
from the amounts estimated if the amount of Common Stock sold in the different
categories varies from the amounts assumed above.
Pro forma net income and equity have been calculated for the year ended
December 31, 1996 as if the Common Stock to be issued in the Offerings had been
sold at the beginning of the period and the net proceeds had been invested at
5.5%, which represents the yield on one-year U.S. Government securities at
December 31, 1996 (which, in light of changes in interest rates in recent
periods, are deemed to more accurately reflect pro forma reinvestment rates than
the arithmetic average method). The effect of withdrawals from deposit accounts
for the purchase of Common Stock has not been reflected. An effective combined
federal and state income tax rate of 38% has been assumed for the period,
resulting in after-tax yield of 3.41% for the year ended December 31, 1996.
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of Common
Stock, as adjusted to give effect to the shares purchased by the ESOP. See Note
4 to the tables below. No effect has been given in the pro forma equity
calculations for the assumed earnings on the net proceeds. As discussed under
"Use of Proceeds," the Company intends to contribute up to 50% of the net
proceeds from the Offerings to the Savings Bank.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma equity represents the difference between the
stated amount of assets and liabilities of the Company computed in accordance
with generally accepted accounting principles ("GAAP"). The pro forma
stockholders' equity is not intended to represent the fair market value of the
Common Stock and may be different than amounts that would be available for
distribution to stockholders in the event of liquidation. No effect has been
given in the tables to (i) the Company's results of operations after the
Conversion and Reorganization or (ii) the market price of the Common Stock after
the Conversion and Reorganization.
The following tables summarize historical data of the Mutual Holding
Company and consolidated pro forma data of the Company at or for the dates and
periods indicated based on assumptions set forth above and in the tables and
should not be used as a basis for projections of the market value of the Common
Stock following the Conversion and Reorganization.
-27-
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1996
-------------------------------------------------------
2,413,562
1,551,250 1,825,000 2,098,750 Shares Sold
Shares Sold Shares Sold Shares Sold at $20.00 Per
at $20.00 at $20.00 at $20.00 Share (15%
Per Share Per Share Per Share above
(Minimum of (Midpoint (Maximum of Maximum of
Range) of Range) Range) Range)(7)
----------- ----------- ----------- -------------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds $ 31,025 $ 36,500 $ 41,975 $ 48,271
Less offering expenses and commissions (1,117) (1,200) (1,283) (1,379)
---------- ---------- ---------- ----------
Estimated net Conversion proceeds 29,908 35,300 40,692 46,892
Less Common Stock acquired by ESOP(1) (2,482) (2,920) (3,358) (3,862)
Less Common Stock attributable to
MRP(2) (1,241) (1,460) (1,679) (1,931)
---------- ---------- ---------- ----------
Estimated proceeds available for
investment(3) $ 26,185 $ 30,920 $ 35,655 $ 41,099
========== ========== ========== ==========
Net Earnings
Historical $ 248 $ 248 $ 248 $ 248
Pro Forma adjustments:
Net earnings from proceeds 893 1,054 1,216 1,401
ESOP(1) (220A) (259A) (297A) (342A)
MRP(2) (154A) (181A) (208A) (239A)
---------- ---------- ---------- ----------
Pro forma net earnings $ 767 $ 862 $ 959 $ 1,068
========== ========== ========== ==========
Per share(4)
Historical $ 0.17 $ 0.15 $ 0.13 $ 0.11
Pro Forma Adjustments:
Net income from proceeds 0.62 0.62 0.62 0.62
ESOP(1) (0.15A) (0.15A) (0.15A) (0.15A)
MRP(2) (0.11A) (0.11A) (0.11A) (0.11A)
---------- ---------- ---------- ----------
Pro Forma $ 0.53 $ 0.51 $ 0.49 $ 0.47
========== ========== ========== ==========
Number of shares used in calculating
earnings per share 1,444,879 1,699,857 1,954,836 2,248,061
========== ========== ========== ==========
Stockholders' equity (book value)(9)
Historical(5)(6) $ 25,258 $ 25,258 $ 25,258 $ 25,258
Estimated net Conversion proceeds 29,908 35,300 40,692 46,892
Less common stock acquired
by/attributable to:
ESOP(1) (2,482A) (2,920A) (3,358A) (3,862A)
MRP(2) (1,241A) (1,460A) (1,679A) (1,931A)
---------- ---------- ---------- ----------
Pro Forma(6)(8) $ 51,443 $ 56,178 $ 60,913 $ 66,357
========== ========== ========== ==========
Per Share(4)
Historical $ 16.28 $ 13.84 $ 12.03 $ 10.47
Estimated net Conversion proceeds 19.28 19.34 19.39 19.43
Less common stock acquired
by/attributable to:
ESOP(1) (1.60) (1.60) (1.60) (1.60)
MRP(2) (0.80) (0.80) (0.80) (0.80)
---------- ---------- ---------- ----------
Pro Forma(6)(8) $ 33.16 $ 30.78 $ 29.02 $ 27.50
========== ========== ========== ==========
Pro forma price to book
value(3)(5)(6)(8) 60.3% 65.0% 68.9% 72.7%
========== ========== ========== ==========
Pro forma price to earnings (P/E
ratio) 37.7 39.2 40.8 42.6
========== ========== ========== ==========
Number of shares used in calculating
book value per share(4) 1,551,250 1,825,000 2,098,750 2,413,562
========== ========== ========== ==========
</TABLE>
- ------------------------
(1) It is assumed that 8.0% of the shares of Common Stock issued in the
Conversion and Reorganization will be purchased by the ESOP. For purposes of
this table, the funds used to acquire such shares are assumed to have been
borrowed by the ESOP from the Company. The Company intends to make annual
contributions to the ESOP over a seven-year period in an amount at least equal
to the principal and interest requirement (which interest rate shall be at the
prime rate) of the debt. The pro forma net earnings assumes (i) that the ESOP
expense for each respective period is equivalent to the principal payment for
the respective period and was made at the end of each respective period; (ii)
that 17,729, 20,857, 23,986 and 27,584 shares were committed to be released at
the minimum, midpoint, maximum and 15% above the maximum of the Valuation Price
Range,
-28-
<PAGE>
respectively; and (iii) only ESOP shares committed to be released during
the respective period were considered outstanding for purposes of the net
earnings per share calculations.
(2) The adjustment is based upon the assumed share repurchases to fund
awards under the Recognition Plan of 62,050, 73,000, 83,950 and 96,542
shares at the minimum, midpoint maximum and 15% above the maximum of the
Valuation Price Range, assuming that: (i) stockholder approval of the
Recognition Plan has been received; (ii) the shares were repurchased at the
beginning of the period shown through open market purchases at the Purchase
Price: (iii) the amortized expense for the year ended December 31, 1996 was
20% of the amount contributed; and (iv) the effective tax rate applicable
to such employee compensation expense was 38%. If the Recognition Plan
issues authorized but unissued shares instead of repurchasing shares, the
voting interests of existing stockholders would be diluted by approximately
3.8% and pro forma net earnings per share for the year ended December 31,
1996 would be $0.53, $0.51, $0.50 and $0.48, and pro forma stockholders'
equity per share at December 31, 1996 would be $32.66, $30.37, $28.68 and
$27.21, in each case at the minimum, midpoint, maximum and 15% above the
maximum of the Valuation Price Range, respectively. See "Management of the
Company - Benefits - Management Recognition Plan and Trust."
(3) Estimated proceeds available for investment consist of the estimated
net proceeds from the Offerings less (i) the proceeds attributable to the
purchase by the ESOP and (ii) the value of the shares to be issued by the
Recognition Plan, subject to shareholder approval, after the Conversion and
Reorganization at an assumed purchase price of $20.00 per share.
(4) Net earnings per share computations are determined by taking the number
of shares assumed to be sold in the Conversion and Reorganization and
subtracting the ESOP shares which have not been committed for release
during the respective period. See Note 1 above.
(5) Assumes the merger of the Mutual Holding Company after its conversion
to Interim Mutual into the Savings Bank.
(6) The retained earnings of the Savings Bank will be substantially
restricted after the Conversion by virtue of the liquidation account to be
established in connection with the Conversion and Reorganization. See
"Dividend Policy" and "The Conversion and Reorganization - Liquidation
Rights."
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Valuation Price Range of up to 15% to
reflect changes in market and financial conditions prior to the completion
of the Conversion and Reorganization or to satisfy the subscription of the
ESOP.
(8) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Option Plan. If the Option Plan is approved by
stockholders, an amount equal to 10% of the Common Stock issued in the
Conversion and Reorganization, or 155,125, 182,500, 209,875 and 241,356
shares at the minimum, midpoint, maximum and 15% above the maximum of the
Valuation Price Range, respectively, will be reserved for future issuance
upon the exercise of options to be granted under the Option Plan.
(9) Book value represents the excess of the assets of the Company over its
liabilities stated in accordance with generally accepted accounting
principals. This amount is not intended to represent fair market value or
amounts, if any, that would be available for distribution to depositors
in the unlikely event of liquidation. Book value does not take into account
the effect of the liquidation account to be established in the Conversion
and Reorganization or the effect of the recapture of the accumulated bad
debt reserve in the event of a liquidation.
-29-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
As is the case with most savings institutions, the profitability of
the Savings Bank depends primarily on its net interest income, which is the
difference between interest and dividend income on interest-earning assets,
principally loans and investment securities, and interest expense on
interest-bearing deposits. The Savings Bank's net earnings also are
dependent, to a lesser extent, on the level of provision for loan losses,
its non-interest income and non-interest expenses, such as salaries and
related benefits, occupancy and equipment, deposit insurance premiums, and
miscellaneous other expenses, as well as provisions for federal and state
income tax.
The Savings Bank has historically operated as a traditional savings
and loan, raising money by offering savings products of relatively short
duration and lending this money for the purpose of home financing. As
regulations affecting the savings and loan industry changed, the Savings
Bank began offering primarily adjustable rate mortgages (ARM's) in 1981.
Additional authority for checking accounts and consumer and commercial
loans also allowed the Savings Bank to offer additional services to its
traditional customer bases.
The change from primarily mortgage loans in the 1980s to the current
loan portfolio mix of approximately 54% mortgage and 46%
consumer/commercial has allowed the Savings Bank to better manage its asset
and liability maturities and increase its net interest margin. The
institution's emphasis on shorter term consumer lending and prime rate
based commercial lending, along with one-year ARMs tied to an index, has
dramatically reduced the institution's interest rate risk.
The change from a traditional thrift investing in mortgages to a
financial institution offering a wider array of financial services has also
been necessary to counteract increasing competition from government-
sponsored entities for mortgage loans. The change from mortgage lender to
a financial services provider has lessened the institution's exposure to
any single economic cycle, while at the same time more closely tying the
institution's products and services to the customer's financial needs. At
December 31, 1996, approximately 31.6% of the Savings Bank's deposits were
in the form of transaction accounts and 46% of its net loans are classified
consumer or commercial, thus allowing a balanced source of funds and a
balanced investment opportunity.
Tradition and Market Share
The Savings Bank has operated in its local community since 1929.
Management estimates that the Savings Bank has a 30% market share in
Carroll County, a 20% market share in each of Haralson and Heard Counties,
and a one percent market share in each of Coweta, Douglas, Fayette, Henry
and Paulding Counties.
Interest Rate Risk
The change from primarily providing traditional long-term fixed rate
mortgages to primarily providing a variety of shorter term and interest-
sensitive loan products has resulted in a significant reduction in the risk
associated with vulnerability to changes in interest rates.
-30-
<PAGE>
High Levels of Regulatory Capital and Moderate Growth
The Savings Bank seeks to maintain capital levels that will permit it
to be characterized as "well-capitalized" by regulatory standards in order
to give it maximum flexibility in the changing regulatory environment and
to respond to changes in the market and economic conditions. The Savings
Bank has sought to strengthen its capital position through consistent
earnings. At December 31, 1996, the Savings Bank's tangible, core and
total risk-based capital ratios amounted to 6.9%, 6.9% and 10.9%,
respectively, which exceeded the requirements for a well capitalized
institution of 5%, 5% and 10%, respectively, by $6.1 million, $6.1 million
and $2.0 million, respectively. As a result of the Conversion and
Reorganization, assuming that 1,825,000 shares of Common Stock are sold in
the Offerings, the Savings Bank's pro forma tangible, core and risk-based
capital ratios at December 31, 1996 would be 11.02%, 11.02% and 17.76%,
respectively. See "Regulatory Capital."
Proactive Responses to Economic Changes
Deregulation of financial service providers throughout the United
States has necessitated the expansion of the Savings Bank's products and
services from traditional mortgages to a full array of financial products
and services. Management believes the Savings Bank has the largest deposit
market share of any local institution in the Carroll County, Georgia area.
Accordingly, it has been necessary for the Savings Bank to expand its
service territory in order to attain necessary growth.
These changes in product mix have created a need for more
sophisticated technology and a more labor-intensive service delivery
system. Additionally, the need for expansion to fuel growth has increased
the cost of the delivery system. Now that its infrastructure has been
expensed, management believes the Savings Bank is poised for asset growth
without the necessity of corresponding expenses. While the Savings Bank
has higher non-interest expense than traditional savings institutions, its
noninterest expense ratio compares favorably with that of full service
banking institutions.
Asset Quality
At December 31, 1996, the Savings Bank's non-performing assets, which
consist of non-accrual loans, accruing loans greater than 90 days
delinquent and real estate acquired through foreclosure or by deed in lieu
thereof, amounted to $6.4 million or 1.82% of the Savings Bank's total
assets. The ratio of non-performing assets to total assets at year end has
averaged 1.2% over the last five years. See "Business of Carrollton
Federal Bank - Lending Activities - Asset Quality" and "- Non-Performing
Assets" for an explanation of the increase in non-performing assets.
Asset/Liability Management
The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained
during fluctuations in prevailing interest rates. Interest rate
sensitivity is a measure of the difference between amounts of interest-
earning assets and interest-bearing liabilities that either reprice or
mature within a given period of time. The difference, or the interest rate
repricing "gap", provides an indication of the extent to which an
institution's interest rate spread will be affected by changes in interest
rates. A gap is considered positive when the amount of interest rate
sensitive assets maturing or repricing within a given period exceeds the
amount of interest rate sensitive liabilities maturing or repricing within
such period, and is considered negative when the amount of interest rate
sensitive liabilities maturing or repricing within a given
-31-
<PAGE>
period exceeds the amount of interest rate sensitive assets maturing or
repricing within such period. Generally, during a period of rising interest
rates, a negative gap within shorter maturities would adversely affect net
interest income, while a positive gap within shorter maturities would result in
an increase in net interest income, and during a period of falling interest
rates, a negative gap within shorter maturities would result in an increase in
net interest income while a positive gap within shorter maturities would have
the opposite effect.
The lending activities of savings associations have historically
emphasized long-term, fixed-rate loans secured by one-to-four family residences,
and the primary source of funds of such institutions has been deposits. The
deposit accounts of savings associations generally bear interest rates that
reflect market rates and largely mature, or are subject to repricing, within a
short period of time. This factor, in combination with substantial investments
in long-term, fixed-rate loans, has historically caused the income earned by
savings associations on their loan portfolios to adjust more slowly to changes
in interest rates than their cost of funds.
The Savings Bank originates consumer, commercial and traditional
mortgage products in its primary service areas. Terms are limited primarily to
five years or less with the emphasis being prime based commercial lending,
consumer loans of five years or less and mortgage loans with terms not to exceed
30 years, repricing annually with the one-year treasury constant maturity.
At December 31, 1996, the Savings Bank had $146.6 million in real
estate mortgage loans, of which $88.1 million were one-year ARMs and $30.8
million were fixed rate loans. In addition, $68.0 million of consumer loans and
$57.8 million of commercial loans were outstanding at December 31, 1996. Both
consumer and commercial loans include some loans secured by real estate, such as
consumer home equity loans and commercial real estate loans.
As market demand for mortgage loans has declined and the Savings Bank
has been unable to replace all of the amortized mortgage portfolio with consumer
or commercial loans, excess funds have been placed in the investment portfolio
with the emphasis being in U.S. government agency obligations, collateralized
mortgage obligations, tax free municipal securities and preferred agency stocks.
Management anticipates continuing its efforts to shorten asset term by
offering a broad array of consumer loans primarily for area families and prime
based commercial loans primarily for small to medium sized community businesses,
as well as residential adjustable rate mortgages. In addition to shortening
asset maturities, the Savings Bank has placed a significant emphasis on changing
its mix of liabilities from almost entirely savings products to a larger number
of transaction based accounts.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1996 that are
projected to reprice or mature in each of the future time periods shown. Except
as stated below, the amounts of assets and liabilities shown that reprice or
mature within a particular period were determined in accordance with the
contractual terms of the assets or liability. Loans with adjustable rates are
shown as being due at the end of the next upcoming adjustment period. Passbook
accounts, money market deposit accounts and negotiable order of withdrawal or
other transaction accounts are assumed to be subject to immediate repricing and
depositor availability and have been placed in the shortest period. In making
the gap computations, none of the assumptions sometimes made regarding
prepayment rates and deposit decay rates have been used for any other interest-
earning assets or interest-bearing liabilities. In addition, the table does not
reflect scheduled principal payments that will be received throughout the
32
<PAGE>
lives of the loans. The interest rate sensitivity of the Mutual Holding
Company's assets and liabilities illustrated in the following table would vary
substantially if different assumptions were used or if actual experience differs
from that indicated by such assumptions.
<TABLE>
<CAPTION>
Terms to Repricing at December 31, 1996
-----------------------------------------------------------------------
One Through Four Through
Three Twelve One Through Over
Months Months Five Years Five Years Total
------ ------ ----------- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Interest bearing deposits and federal funds sold $ 12,036 $ - $ - $ - $ 12,036
Investment securities 9,178 5,303 15,677 11,533 41,691
Other investments 2,000 - - 600 2,600
Loans (including mortgage loans held for sale) 72,166 109,427 66,317 22,207 270,117
Total interest earning assets 95,380 114,730 81,994 34,340 326,444
Interest-bearing liabilities:
Interest-bearing demand and savings deposits 81,365 - - - 81,365
Time deposits 38,864 94,862 76,762 210,488
FHLB advances 10,000 - 3,007 3,288 16,295
Subordinated debentures - - 2,000 - 2,000
Total interest-bearing liabilities 130,229 94,862 81,769 3,288 310,148
Interest sensitivity gap per period (34,849) 19,868 225 31,062 16,296
Cumulative interest sensitivity gap (34,849) (14,981) (14,756) 16,296
Cumulative gap as a percentage of total
interest-earning assets -36.54% -13.06% -18.00% 47.45%
Cumulative interest-earning assets as a percentage
of cumulative interest-bearing liabilities 73.24% 93.34% 95.19% 105.25%
</TABLE>
Presented below, as of December 31, 1996, is an analysis of the
Savings Bank's interest rate risk as measured by changes in net portfolio value
("NPV") and net interest income ("NII") for instantaneous and sustained parallel
shifts in market interest rates. The NPV table also contains the change limits
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
impact of various rate changes and the Savings Bank's current capital position.
33
<PAGE>
Net Portfolio Value
- --------------------------------------------------------------------------------
Estimated
Change in NPV as a
Interest Rates Estimated Percentage Amount Board
(basis points) NPV of Assets of Change Percent Limit
- -------------- --------- ---------- ---------- ------- -----
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C> <C>
+400 $28,956 7.9% $(7,695) (21)% (75)%
300 31,592 8.6 (5,059) (14) (50)
200 33,896 9.3 (2,755) (8) (30)
100 35,639 9.7 (1,012) (3) (15)
0 36,651 10.0
- -100 36,757 10.0 106 0 (15)
200 36,350 9.9 (301) (1) (30)
300 36,628 10.0 (23) 0 (50)
400 37,824 10.3 1,173 3 (75)
</TABLE>
-34-
<PAGE>
Net Interest Income
<TABLE>
<CAPTION>
Interest 12/31/96 +200 bp 12/31/96 -200 bp
12/31/96 12/31/96 Income Weighted Anticipated Weighted Anticipated
Assets/Liabilities Weighted or Expense Average Interest Average Interest
Repricing with Average Anticipated Rate Income Rate Income
One Year Rate at 12/31/96 +200 bp or Expense -200 bp or Expense
-------- ---- ----------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets (Dollars in thousands)
Cash $ 3,356 5.20% $ 174 7.20% 242 3.20% 107
Fed funds 7,360 5.20 383 7.20 530 3.20 236
Fixed rate investments/(1)/ 11,975 7.13 853 7.13 854 5.13 614
Lagging/(3)/ 66,200 7.50 4,965 9.50 6,289 5.50 3,641
Current/(3)/ 88,472 9.00 7,963 11.00 9,732 7.00 6,193
Colonial/(3)/ 815 8.00 65 10.00 81 6.00 49
Stock 4,506 7.50 338 9.50 428 5.50 248
Fixed Loans 25,571 9.90 2,532 11.90 3,043 7.90 2,020
--------- --------- ------- -------
$ 208,255 $ 17,273 21,199 13,107
Liabilities
Variable rate deposits/(2)/ $ 86,137 2.67% 2,300 4.67% 4,023 1.00% 861
Fixed rate deposits 133,727 5.40 7,221 7.40 9,896 3.40 4,547
Advances 10,000 5.52 552 7.52 752 3.52 352
--------- --------- ------- -------
$ 229,864 10,073 14,671 5,760
Net Interest Income 7,200 6,528 7,347
Change in net interest income from rate shock (672) 147
- -------------------------------
</TABLE>
/(1)/ Fixed rate investments include callable U.S. government agency obligations
that will be called in a falling interest rate environment but will not
increase in rate in a rising rate environment.
/(2)/ A floor of 1.0% is assumed on variable rate deposits.
/(3)/ Variable rate assets and liabilities will reprice up or down within
contractual limits.
-35-
<PAGE>
In May 1996, all regulatory agencies adopted risk-focused safety and
soundness examination procedures that include interest rate risk (now referred
to as "market risk") factors in the regulatory rating of the institution. Each
financial institution is responsible for monitoring changes in net portfolio
value of equity and net interest income from both parallel and non parallel
shifts in the yield curve. The Savings Bank will be subject to these modified
procedures in 1997.
Changes in Financial Condition
At December 31, 1996, the Mutual Holding Company's consolidated assets
totalled $353 million, as compared to $334 million at December 31, 1995. Total
deposits grew $19 million, or 6%, in 1996 as compared to 1995. This increase is
primarily due to the Savings Bank's increased branch expansion and marketing
efforts related thereto. The increase was funded primarily by increases in time
deposits during 1996. Other liabilities and capital grew marginally in 1996.
Total capital at December 31, 1996 was $25.3 million, as compared to $25.0
million at December 31, 1995.
The Savings Bank opened four branch facilities within Wal*Mart
discount stores during 1996. This expansion helped attract approximately $15
million in deposits during the year. Most of these deposits were invested in
medium term U.S. agency and mortgage backed securities designated as available
for sale to maintain liquidity.
36
<PAGE>
Average Balances, Interest Rates and Yields. The following table presents
for the periods indicated the total dollar amount of interest from average
interest-earning assets and the resultant yield, as well as the interest expense
on average interest-bearing liabilities, expressed both in dollars and rates,
and the net interest margin. Dividends received are included as interest income.
All average balances are based on month-end balances. Management believes that
the use of average month balances is representative of its operations.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1996 1995
------------------------------------ ------------------------------------
Average Interest Average Interest
Balances Income/Expense Yield/Rate Balances Income/Expense Yield/Rate
-------- -------------- ---------- -------- -------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest earning
deposits and fed funds sold $ 15,158 822 5.42% $ 7,993 473 5.92%
Investment securities:
Taxable 30,387 2,411 7.93 36,076 2,652 7.35
Nontaxable 1,236 127 10.28 0 0 0
Total investment securities 31,623 2,538 8.03 36,076 2,652 7.35
Loans (including loan fees)(1) 272,786 24,874 9.12 280,613 24,588 8.76
Total interest-earning assets 319,567 28,234 8.84 324,682 27,713 8.54
Allowance for loan losses (2,446) (2,341)
Cash and due from banks 9,005 7,857
Premises and equipment 8,327 7,782
Other assets 9,322 5,649
-------- --------
Total assets $343,775 $343,629
======== ========
Liabilities and capital:
Interest bearing liabilities:
Deposits:
Demand $ 46,821 1,386 2.96% $ 47,566 1,366 2.87%
Savings 32,991 889 2.69 33,280 828 2.49
Time 202,641 11,338 5.60 195,200 10,444 5.35
Other borrowings 18,650 1,169 6.27 30,555 1,858 6.08
Total interest bearing liabilities 301,103 14,782 4.91 306,601 14,496 4.73
Non-interest bearing demand deposits 15,635 11,104
Other liabilities 1,893 2,367
Capital 25,144 23,557
-------- --------
Total liabilities and capital $343,775 $343,629
======== ========
<CAPTION>
Year Ended December 31,
------------------------------------
1994
------------------------------------
Average Interest
Balances Income/Expense Yield/Rate
-------- -------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Interest earning
deposits and fed funds sold $ 11,110 406 3.65%
Investment securities:
Taxable 33,470 2,414 7.21
Nontaxable 0 0 0
Total investment securities 33,470 2,414 7.21
Loans (including loan fees)(1) 274,135 23,000 8.39
Total interest-earning assets 318,715 25,820 8.10
Allowance for loan losses (2,539)
Cash and due from banks 9,121
Premises and equipment 7,625
Other assets 6,961
--------
Total assets $339,883
========
Liabilities and capital:
Interest bearing liabilities:
Deposits:
Demand $ 52,867 1,184 2.24%
Savings 37,892 1,094 2.89
Time 188,343 8,652 4.59
Other borrowings 28,007 1,666 5.95
Total interest bearing liabilities 307,109 12,596 4.10
Non-interest bearing demand deposits 7,137
Other liabilities 4,386
Capital 21,251
--------
Total liabilities and capital $339,883
========
</TABLE>
-37-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1996 1995
------------------------------------ ------------------------------------
Average Interest Average Interest
Balances Income/Expense Yield/Rate Balances Income/Expense Yield/Rate
-------- -------------- ---------- -------- -------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Excess of interest-bearing
assets over interest-bearing
liabilities $ 18,464 $ 18,081
Ratio of interest-bearing assets to
interest-bearing liabilities 106.13% 105.90%
Net interest income 13,452 13,217
Net interest rate spread 3.93% 3.81%
Net interest margin (2) 4.21% 4.07%
Tax equivalent adjustments
Investment securities (43) 0
Net interest income 13,409 13,217
<CAPTION>
Year Ended December 31,
------------------------------------
1994
------------------------------------
Average Interest
Balances Income/Expense Yield/Rate
-------- -------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Excess of interest-bearing
assets over interest-bearing
liabilities $ 11,606
Ratio of interest-bearing assets to
interest-bearing liabilities 103.78%
Net interest income 13,224
Net interest rate spread 4.00%
Net interest margin (2) 4.15%
Tax equivalent adjustments
Investment securities 0
Net interest income 13,224
</TABLE>
- -------------------------------
(1) Average balances include nonaccrual loans.
(2) Calculated before provision for loan losses.
-38-
<PAGE>
Rate/Volume Analysis
The banking industry often utilizes two key ratios to measure relative
profitability of net interest income. The net interest rate spread measures
the difference between the average yield on earning assets and the average
rate paid on interest bearing sources of funds. The interest rate spread
eliminates the impact of noninterest bearing deposits and gives a direct
perspective on the effect of market interest rate movements. The net
interest margin is defined as net interest income as a percent of average
total earning assets and takes into account the positive impact of
investing noninterest bearing deposits.
The net interest spread was 3.93% in 1996, 3.81% in 1995 and 4.00% in
1994, while the net interest margin was 4.21% in 1996, 4.07% in 1995 and
4.15% in 1994. The increase in the margin and spread during 1996 was
primarily due to reinvestment of maturing mortgage loans into higher
yielding commercial and consumer loans. The decreases in 1995 were a
result of changes in the overall asset and liability mix. The table below
shows the change in net interest income for the past two years due to
changes in volume and rate, on a tax equivalent basis.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
--------------------- ---------------------
Increase (decrease) Increase (decrease)
due to changes in due to changes in
---------------------------- ------------------------------
Yield/ Net Yield/ Net
Volume Rate Change Volume Rate Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Interest income on:
Interest earning deposits
and federal funds sold $ 392 (43) 349 (136) 203 67
Investment securities:
Taxable (439) 198 (241) 190 48 238
Nontaxable 127 - 127 - - -
Loans (including loan fees) (697) 983 286 552 1,036 1,588
----- --- --- --- ----- -----
Total interest-earning assets (617) 1,138 521 606 1,287 1,893
Interest expense on:
Deposits:
Demand (22) 42 20 (128) 310 182
Savings (7) 68 61 (125) (141) (266)
Time 402 492 894 324 1,468 1,792
Other borrowings (745) 56 (689) 155 37 192
----- -- ----- --- -- ---
Total interest bearing
liabilities $ (372) 658 286 226 1,674 1,900
-------- --- --- --- ----- -----
Net interest income (245) 480 235 380 (387) (7)
===== === === === ===== ===
</TABLE>
-39-
<PAGE>
Results of Operations for the Years Ended December 31, 1996, 1995 and 1994
Net earnings totalled approximately $248,000 for 1996, a decrease of
92% from the $2.9 million earned in 1995. Return on average assets and
return on average equity for the year ended December 31, 1996 were .07% and
.99%, respectively, as compared to .86% and 12.5%, respectively, at
December 31, 1995. These decreases are attributable to the $1.7
million increase in deposit insurance premiums during 1996, which was
entirely due to the special one-time SAIF assessment of 65.7 cents per $100
of assessable SAIF deposits effective September 30, 1996. An $893,000
increase in the provision for loan losses during 1996 also contributed to
the reduction in earnings in 1996, as well as additional expenses due to
the opening of four new branch locations during 1996. See "Business of
Carrollton Federal Bank - Allowance for Loan Losses." Net earnings of $2.9
million in 1995 represented a 24% increase over 1994 primarily due to
increases in noninterest income.
Net Interest Income
Net interest income (the difference between interest earned on assets
and the interest paid on deposits and liabilities) is the single largest
component of the Savings Bank's operating income. The Savings Bank actively
manages this income source to provide the largest possible amount of income
while balancing interest rate, credit and liquidity risks.
Net interest income, on a taxable equivalent basis, was $13.4 million
in 1996, compared to $13.2 million in 1995 and 1994. The 2% increase in
1996 was the result of the reinvestment of maturing investments and
mortgage loans into higher yielding investments and commercial and consumer
loans, slightly offset by increases in the cost of funds that were
primarily due to promotions offered as part of the opening of the four new
branches in Wal*Mart stores during 1996. During 1995, increases in the
volumes and rates of interest of earning assets were entirely offset by
rate increases on interest bearing deposits and other liabilities. Total
interest income increased 1.7% and 7.3% in 1996 and 1995, respectively.
Provision for Loan Losses
The Savings Bank's provision for loan losses was $1.1 million during
1996 as compared to $250,000 and $99,400 during 1995 and 1994,
respectively. Provisions for loan losses are charged to earnings to bring
the total loan loss allowance to a level deemed appropriate by management
based on the volume and type of lending conducted by the Savings Bank and
as required by the Savings Bank's loan loss methodology.
The increase in the provision for loan losses over the last two years
is primarily attributable to the increase in non-performing loans to $6.2
million at December 31, 1996 from $2.3 million at December 31, 1995, as
well as the change in the mix of the loan portfolio from mortgage loans to
commercial and consumer loans. Mortgage loans decreased approximately $28.4
million during 1996 while commercial and consumer loans increased by
approximately $30 million. The increased inherent risk due to this shift in
the loan portfolio was the primary reason for the increase in the provision
for loan losses during 1996. See "Business of Carrollton Federal Bank -
Allowance for Loan Losses."
The Savings Bank's methodology for evaluating the adequacy of its
allowance for loan losses conforms with generally accepted accounting
principles and the Interagency Policy Statement on Allowance for Loan and
Lease Losses. The Savings Bank considers collateral valuation, changes in
the loan portfolio mix, the past three years' net charge-offs and other
factors. The methodology also incorporates economic indicators such as
growth in personal income and unemployment rates as well as other economic
indicators affecting the Savings Bank's market area.
-40-
<PAGE>
Noninterest Income
Noninterest income consists primarily of revenues generated from
service charges and fees on deposit accounts, and profits earned through
sales of credit life insurance. In addition, gains or losses realized from
the sale of investment portfolio securities are included in noninterest
income. Total noninterest income for 1996 increased 4% or $126,000 above
that for 1995. Noninterest income for 1995 showed an increase of 46% from
1994. The primary contributor to noninterest income growth in both 1996
and 1995 was the continued growth in service charges on deposits resulting
from an increase in the number of transaction accounts. Approximately 37%
of the 1995 increase is attributable to the increase in sales of securities
available for sale, while the remaining increase was primarily due to
higher service charge revenue.
The growth in noninterest income was the result of management's
continuing efforts to build stable sources of fee income, which includes
service charges on deposits and loans and sales of credit life insurance.
This growth is being accomplished through expansion of the Savings Bank's
locations.
Fee income from service charges on deposit accounts increased over 17%
in 1996 following a 39% increase in 1995. Continued emphasis on low cost
checking account services, appropriate pricing for transaction deposit
accounts and fee collection practices for other deposit services
contributed to the increased levels of income for both years. Increases
during 1996 and 1995 were further influenced by the increase in transaction
deposit accounts.
Net gains on sales of investment securities were $178,000 and
$367,000, respectively, during 1996 and 1995 as management liquidated
certain investment securities to meet loan demand.
Noninterest Expense
Noninterest expense for 1996 increased 30% following a decrease of 5%
in 1995. Salaries and employee benefits increased 21% during 1996 due
primarily to employee additions resulting from the four new branches in
Wal*Mart stores together with increases required to maintain continued
growth. The decrease from 1994 to 1995 was the result of the
reorganization of the loan administration and customer service function
which resulted in staff reductions at the Savings Bank. Net occupancy
expense increased $114,000 or 7.6% in 1996 following a 13.7% increase in
1995. The increases were due primarily to increased depreciation related
to new banking facilities and costs to operate new branches.
Deposit insurance premiums increased $1.7 million as a result of the
September 30, 1996 SAIF assessment. As described earlier, a special one-
time assessment of 65.7 cents per $100 of assessable deposits amounted to
an additional deposit insurance premium of $1,723,000. Exclusive of the
one-time assessment, deposit insurance premiums decreased 3% in 1996 as
compared to 1995. Other operating expenses, including advertising, office
supplies, and data processing increased 13.7 % compared to a 5.3% increase
in 1995. Management continues to emphasize the importance of expense
management and productivity throughout the Savings Bank in order to further
decrease the cost of providing expanded banking services to a growing
market base.
Income Taxes
An income tax benefit of $13,000 was recognized for the year ended
December 31, 1996. The effective tax rate differed from the expected 34%
federal rate applied to earnings before income taxes primarily due to tax
exempt interest income. Income tax expense in 1995 and 1994 totalled
$1,375,000 and $553,000, respectively, and represented an effective tax
rate of 32%
-41-
<PAGE>
and 18%, respectively. During 1996 and 1995, the effective tax rate
differed from the expected 34% Federal rate primarily due to tax-exempt
interest income. The effective rate in 1994 was further reduced by an
adjustment to the valuation allowance for deferred tax amounts totalling
$272,443. See Note (8) of the Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
The Savings Bank is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of
United States Government, federal agency and other investments having
maturities of five years or less. Current OTS regulations require that a
savings association maintain liquid assets of not less than 5% of its
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less, of which short-term liquid assets must consist
of not less than 1%. Monetary penalties may be imposed for failure to meet
applicable liquidity requirements. At December 31, 1996, the Savings
Bank's liquidity, as measured for regulatory purposes, was 13.1% or $24.0
million in excess of the minimum OTS requirement.
Cash was generated by the Savings Bank's operating activities during
the years ended December 31, 1996, 1995 and 1994, primarily as a result of
net income. The adjustments to reconcile net income to cash provided by
operating activities during the periods presented consisted primarily of
amortization of premiums and discounts, proceeds from the sale of loans,
and increases or decreases in interest and dividends receivable, prepaid
income taxes, accrued interest payable, and accrued expenses and other
liabilities. The primary investing activity of the Savings Bank is
lending, which is funded with cash provided by operations, as well as
principal collections and maturities on securities, securities available
for sale and mortgage-backed and related securities, and maturities of
interest-bearing deposits in banks. For additional information about cash
flows from the Savings Bank's operating, financing and investing
activities, see the Consolidated Statements of Cash Flows included in the
Consolidated Financial Statements.
At December 31, 1996, the Savings Bank had outstanding $130,000 in
commitments to originate loans, $16.0 million in undisbursed open end
consumer equity lines and credit cards, $4.1 million in commercial lines of
credit and $108,000 in commercial letters of credit. At the same date, the
total amount of certificates of deposit which are scheduled to mature by
December 31, 1997 was $134 million. The Savings Bank believes that it has
adequate resources to fund commitments as they arise and that it can adjust
the rate on savings certificates to retain deposits in changing interest
rate environments. If the Savings Bank requires funds beyond its internal
funding capabilities, advances from the FHLB of Atlanta are available as an
additional source of funds.
The Savings Bank is required to maintain specified amounts of capital
pursuant to the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA") and regulations promulgated thereunder by the OTS.
The capital standards generally require the maintenance of regulatory
capital sufficient to meet a tangible capital requirement, a core capital
requirement and a risk-based capital requirement. At December 31, 1996,
the Savings Bank's tangible and core capital totalled $23.6 million, or
6.9% of adjusted total assets, which exceeded the respective minimum
requirements at that date by approximately $18.3 million and $9.6 million,
respectively, or 5.4% and 2.9% of total assets, respectively. The Savings
Bank's risk-based capital totalled $25.6 million at December 31, 1996, or
10.9% of risk-weighted assets, which exceeded the current requirement of
8.0% by approximately $6.7 million, or 2.9% of risk-weighted assets. See
"Regulation - The Savings Bank - Regulatory Capital Requirements."
-42-
<PAGE>
Impact of New Accounting Standards
During 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." This new standard will
become effective for the Company during 1997 and will require the Company
to disclose the fair value of employee stock options granted in 1997 and
subsequent years. Management does not expect this new standard to have
a material impact on future consolidated financial statements.
During 1996, the Financial Accounting Standards Board issued SFAS No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This new standard will become effective
for the Company January 1, 1997 and will require the Company to make
certain disclosures regarding its servicing assets and liabilities. The
standard may also affect the classification of certain servicing assets and
liabilities. Management does not expect this standard to have a material
impact on future consolidated financial statements.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein
have been prepared in accordance with GAAP, which requires the measurement
of financial position and operating results in terms of historical dollars,
without considering changes in relative purchasing power over time due to
inflation.
Unlike most industrial companies, virtually all of the Savings Bank's
assets and liabilities are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institutions
performance than does the effect of inflation.
-43-
<PAGE>
BUSINESS OF CARROLLTON FEDERAL BANK
General
The Savings Bank is a federally chartered savings bank that was
organized on August 1, 1994 as a subsidiary of the Mutual Holding Company.
Prior to that date, the Savings Bank's predecessors had operated since
1929. At December 31, 1996, the Savings Bank had $351 million of total
assets, $325 million of total liabilities, including $308 million of
deposits, and $26 million of equity or 7.4% of assets.
The Mutual Holding Company and the Savings Bank have recently formed
three new operating units in an effort to broaden the services they offer
to the community. The first such enterprise is CFB Securities, which
offers traditional brokerage services and products such as mutual funds,
stocks and bonds through an NASD member firm. The firm is a wholly owned
subsidiary of the Mutual Holding Company formed in 1996 and is located in
space immediately adjacent to the Savings Bank's main office lobby. CFB
Securities has two full-time employees.
The second unit is CFB Financial, an operating department of the
Savings Bank. This department services the loan needs of consumers
traditionally associated with small loan companies. The group operates
from a branch located in Douglasville, Georgia, has a staff of three full-
time employees and offers a wide range of small loans including loans made
in conformity with the Georgia Industrial Loan Act. Management plans to
open a second location in Villa Rica, Georgia in the future.
The third unit, CFB Insurance, is a wholly owned subsidiary of the
Mutual Hold Company. Formed on December 28, 1995, CFB Insurance has not
begun operations, but management intends to use it as a means of offering
various insurance products, including property and casualty insurance, to
existing Savings Bank customers, as well as the general public.
Market Area
The Savings Bank maintains 12 branch offices in Carroll, Coweta,
Douglas, Fayette, Haralson, Heard, Henry and Paulding counties within the
State of Georgia. In 1996, the Savings Bank opened four branch offices in
Wal*Mart discount stores in Coweta, Henry, Fayette and Paulding counties.
During 1991, the Savings Bank opened a branch office in a Kroger grocery
store in Carroll County and a branch office in a Bruno's grocery store in
Carroll County.
The Savings Bank's main office is located in Carrollton, Georgia, the
county seat of Carroll County, Georgia. Carrollton is located in western
Georgia, approximately 50 miles west of Atlanta, Georgia. Carroll County's
population was 78,000 in 1996, an increase of 1.5% from 1995. Major area
employers that have affected growth are Southwire, Sony, State University
of West Georgia, Tanner Medical Center, Bremen-Bowdon Investment and Gold-
Kist, which collectively employ an aggregate of approximately 6,500
persons. Based on information from the Carroll County Chamber of Commerce,
other factors affecting growth in Carroll County include: (i) an
expected population increase to 83,000 by 2000 and to 105,000 by 2010 due
to migration and birth; (ii) the county's proximity to Atlanta, Georgia;
(iii) commercial and industrial expansion that continue to fuel economic
growth; and (iv) new student enrollment at the State University of West
Georgia, which was recently granted university status.
-44-
<PAGE>
Lending Activities
As a federally chartered savings association, the Savings Bank has
general authority to originate and purchase loans secured by real estate,
secured or unsecured loans for commercial, corporate, business, or
agricultural purposes, loans for personal, family, or household purposes,
and may issue credit cards and extend credit in connection therewith.
Notwithstanding its general lending authority, the Savings Bank may not
make non-real estate commercial purpose loans that exceed 20% of its assets
or non-real estate consumer purpose loans that exceed 35% of its assets.
While not restricted by law, the Savings Bank limits its lending activities
mainly to the counties in which it has offices.
Since the enactment of FIRREA in 1989, a savings association generally
may not make loans to one borrower and related entities in an amount which
exceeds 15% of its unimpaired capital and surplus, although loans in an
amount equal to an additional 10% of unimpaired capital and surplus may be
made to a borrower if the loans are fully secured by readily marketable
securities. See "Regulation - The Savings Bank." At December 31, 1996,
the Savings Bank's loans-to-one borrower limit was $4.0 million and its
five largest loans or groups of loans-to-one borrower, including related
entities, were $3.46 million, $3.08 million, $2.74 million, $1.97 million
and $1.96 million. One of these loans ($1.96 million) is secured by notes
secured by residential real estate and by assignments of the related
security instruments. The other loans are secured by commercial real
estate. One relationship ($4.0 million) was not performing in accordance
with its terms on December 31, 1996. See "- Non-Performing Assets."
Loan Portfolio Composition. The following table sets forth the
composition of the Savings Bank's loan portfolio by type of loan at the
dates indicated.
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994 1993 1992
Amount % Amount % Amount % Amount % Amount %
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans $ 146,577 54% $ 175,039 64% $ 196,761 69% $ 195,682 75% $ 199,443 78%
Real estate construction
loans 34 * 2,348 1 1,451 1 866 * 1,632 *
Commercial loans 57,786 21 43,944 16 38,755 14 27,759 11 24,684 10
Consumer(1) and other
installment loans 68,038 25 51,840 18 46,509 16 37,846 14 30,465 12
--------- --- --------- --- --------- --- --------- --- --------- ---
Total loans 272,435 100% 273,171 100% 283,476 100% 262,153 100% 256,224 100%
==== ==== ==== ==== ====
Less: Allowance for loan
losses 2,601 2,291 2,392 2,686 2,027
--------- --------- --------- --------- ---------
Loans, net $ 269,834 $ 270,880 $ 281,084 $ 259,467 $ 254,197
========= ========= ========= ========= =========
</TABLE>
- --------------
* Indicates less than one percent.
(1) Includes home equity loans secured by residential real estate, as well as
other consumer loans.
Contractual Principal Repayments and Interest Rates. The following
table sets forth certain information at December 31, 1996 regarding the
dollar amount of loans maturing or repricing in the Savings Bank's
portfolio based on the contractual terms to maturity, before giving effect
to net items. Demand loans, loans having no stated schedule of repayments
and no stated maturity or repricing and overdrafts are reported as due in
one year.
-45-
<PAGE>
<TABLE>
<CAPTION>
1 year
Less than through Over
Loan Type 1 year 5 years 5 years Total
-----------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage(1):
Adjustable $ 83,593 $ 7,345 $ 0 $ 90,938
Fixed 2,341 8,726 44,572 55,639
Construction 34 0 0 34
Consumer 35,088 30,132 2,818 68,038
Commercial 38,512 14,657 4,617 57,786
-------- ------- ------- --------
Total $159,568 $60,860 $52,007 $272,435
======== ======= ======= ========
</TABLE>
------------------
(1) Includes second mortgage loans on one-to-four family residential
properties of $13,884.
The following table sets forth, as of December 31, 1996, the dollar
amount of all loans, before net items, maturing or repricing after one year
from December 31, 1996 which have fixed interest rates or which have
adjustable interest rates.
<TABLE>
<CAPTION>
Adjustable
Fixed Rates Rates Total
----------- ---------- -------
(In Thousands)
<S> <C> <C> <C>
Mortgage $ 53,298 $7,345 $ 60,643
Construction -- -- --
Consumer 32,950 -- 32,950
Commercial 17,824 1,450 19,274
-------- ------ --------
Total $104,072 $8,795 $112,867
======== ====== ========
</TABLE>
Scheduled contractual amortization of loans does not reflect the
actual term of the Savings Banks loan portfolio. The average life of loans
is substantially less than their contractual terms because of prepayments
and due-on-sale clauses, which give the Savings Bank the right to declare a
conventional loan immediately due and payable in the event, among other
things, that the borrower sells the real property subject to the mortgage.
-46-
<PAGE>
Originations, Purchases, Servicing and Sales of Loans. The lending
activities of the Savings Bank are subject to written, non-discriminatory
underwriting standards and loan origination procedures established by the
Savings Bank's Board of Directors and management. Loan originations are
obtained by a variety of sources including referrals from real estate
brokers, developers, builders, existing customers, newspaper, radio,
periodical advertising and walk-in customers. Loan applications are taken
by lending personnel, and the loan processing department supervises the
acquisition of credit reports, appraisals and other documentation involved
with a loan. Real property valuations are generally prepared for the
Savings Bank by a qualified independent appraiser selected from a list
approved by the Savings Bank's Board of Directors. The Savings Bank
generally relies on an attorney's opinion of title that each loan
collateralized by real property has been properly secured and may obtain
title insurance on such property. Hazard insurance is also required on all
secured property and flood insurance is required if the property is within
a designated flood plain.
The Savings Bank's loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan and the
adequacy of the value of the property that will secure the loan. A loan
application file is first reviewed by a loan officer of the Savings Bank
and is submitted for approval to the Loan Committee if the loan does not
meet certain criteria.
The following table shows total loans originated, loan reductions and
the net increase in Carrollton's loan portfolio during the periods
indicated.
-47-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
Loan Originations:
<S> <C> <C> <C>
Mortgage $ 25,629 $ 30,102 $ 41,124
Construction 9,031 6,097 5,741
Commercial 15,532 15,290 15,645
Consumer 43,356 29,575 33,166
-------- ------- --------
Total loans
originated 93,548 81,064 95,676
Purchases:
Loans purchased 0 652 18,470
-------- ------- --------
Total loans
originated
and purchased 93,548 81,716 114,146
Sales and loan
principal
repayments:
Loans sold proceeds 10,882 6,605 13,239
Loan repayments 82,587 85,293 80,252
Total loans sold
proceeds
and loan principal
repayments 93,469 91,898 93,491
======== ======= ========
Loan originations
(repayments), net 79 (10,182) 20,655
======== ======= ========
Increase (decrease)
due to other items,
net (1,125) (22) 962
======== ======= ========
Net increase (decrease)
in net loan portfolio (1,046) (10,204) 21,617
======== ======= ========
</TABLE>
Real Estate Mortgage Loans. The Savings Bank originates real estate
mortgage loans, primarily loans secured by first mortgage liens on one-to-
four family residences. At December 31, 1996, $146.6 million or 54.7% of
the Savings Bank's total net loan portfolio consisted of first mortgage
real estate loans. As of such date the average balance of the Savings
Bank's individual one-to-four family mortgage loans was $43,776.
The loan-to-value ratio, maturity and other provisions of the loans
made by the Savings Bank generally have reflected the policy of making less
than the maximum loan permissible under applicable regulations, in
accordance with sound lending practices, market conditions and underwriting
standards established by the Savings Bank. While it has been the Savings
Bank's practice in most cases to allow a loan-to-value ratio of no more
than 85%, the Savings Bank's lending policy on one-to-four family
residential mortgage loans generally limits the maximum loan-to-value ratio
to 95% of the lesser of the appraised value or purchase price of the
property. In cases where loan-to-value ratios exceed 85%, the Savings Bank
generally requires private mortgage insurance. The loan-to-value ratio for
loans originated for the Savings Bank's portfolio is based on appraised
value.
-48-
<PAGE>
The Savings Bank originates fixed rate mortgages with terms of up to
30 years. These loans are generally made in conformity with Federal
National Mortgage Association ("FNMA") standards and are generally sold to
FNMA with the Savings Bank retaining the servicing rights on these
mortgages. From time to time, certain 15-year fixed rate mortgages will be
retained in the Savings Bank's portfolio. At December 31, 1996, the
Savings Bank was servicing $52.4 million in loans for FNMA. At December
31, 1996, the Savings Bank had $41.2 million in portfolio fixed rate
mortgages.
Since 1981, the Savings Bank has been offering adjustable-rate loans
in order to decrease the vulnerability of its operations to changes in
interest rates. The demand for adjustable-rate loans in the Savings Bank's
primary market area has been a function of several factors, including the
level of interest rates, the expectations of changes in the level of
interest rates and the difference between the interest rates offered for
fixed-rate loans and adjustable-rate loans. The relative amount of fixed-
rate and adjustable-rate residential loans that can be originated at any
time is largely determined by the demand for each in a competitive
environment. As interest rates have fluctuated, the demand for fixed-rate
and adjustable-rate loans has changed as the Savings Bank's customers have
preferred adjustable rates in a high interest-rate environment and fixed-
rate loans as interest rates decreased. In order to continue to increase
and then to maintain a high percentage of adjustable-rate one-to-four
family residential loans, the Savings Bank has offered various forms of
adjustable-rate loans and in some cases has purchased adjustable-rate
mortgage loans. As a result, at December 31, 1996, $107.4 million, or
73.5% of the one-to-four family residential loans in the Savings Bank's
loan portfolio (before net items) consisted of adjustable-rate loans.
The Savings Bank's one-to-four family residential adjustable-rate
loans are fully amortizing loans with contractual maturities of up to 30
years. These loans adjust periodically in accordance with a designated
index. The Savings Bank currently offers an adjustable-rate mortgage with
a 2% limit on the rate adjustment per period and a 6% limit on the rate
adjustment over the life of the loan. The Savings Bank's adjustable-rate
loans are not convertible by their terms into fixed-rate loans, are
assumable with the Savings Bank's approval, do not contain prepayment
penalties and do not produce negative amortization. Due to the generally
lower rates of interest prevailing in recent periods, the Savings Bank's
ability to originate adjustable-rate loans has decreased as consumer
preference for fixed-rate loans has increased.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the
terms of the loan, thereby increasing the potential for default. At the
same time, the marketability of the underlying property may be adversely
affected by higher interest rates. The Savings Bank believes that these
risks, which have not had a material adverse effect on the Savings Bank to
date, generally are less than the risks associated with holding fixed-rate
loans in an increasing interest rate environment.
Commercial Loans. At December 31, 1996, $57.8 million, or 21% of the
Savings Bank's total net loan portfolio, consisted of commercial loans.
The vast majority of these loans were secured by existing commercial and
multi-family residential real estate. The Savings Bank's commercial and
multi-family real estate loans include primarily loans secured by small
office buildings, family-owned business establishments and apartment
buildings. The average amount of the Savings Bank's commercial and multi-
family real estate loans was $107,000 at December 31, 1996 and the largest
was $4.0 million. It is anticipated that commercial loans will continue to
be a major component of the Savings Bank's loan portfolio. Originations of
commercial loans amounted to 11.8%, 18.7% and 20.2% of the Savings Bank's
total loan originations in fiscal 1996, 1995 and
-49-
<PAGE>
1994, respectively. The Savings Bank's commercial loans are rarely made
with amortization periods greater than 20 years or interest rate adjustment
periods in excess of five years.
The Savings Bank requires certified appraisals on most real properties
securing commercial loans. In some cases, an evaluation is deemed
adequate. Appraisals are performed by an independent appraiser designated
by the Savings Bank and are reviewed by management. In originating multi-
family residential and commercial real estate loans, the Savings Bank
considers the quality and location of the real estate, the credit of the
borrower, cash flow of the project and the quality of management involved
with the property. Corporate loans generally require the personal guaranty
of the entity's controlling shareholders. Hazard insurance is required as
well as flood insurance if the property is located in a designated flood
zone.
Subject to the restrictions contained in federal laws and regulations,
the Savings Bank is also authorized to make secured and unsecured
commercial business loans for general corporate and agricultural purposes,
including issuing letters of credit. At December 31, 1996, $10.3 million,
or 3.7%, of the Savings Bank's total net loan portfolio, consisted of
commercial business loans, of which $9.7 million were secured by other than
real estate. Commercial business loans accounted for 16.6% of the total
loan originations during the year ended December 31, 1996.
Commercial lending is generally considered to involve a higher degree
of risk than one-to-four family residential lending. Such lending
typically involves large loan balances concentrated in a single borrower or
groups of related borrowers. The payment experience on loans secured by
income-producing properties is typically dependent on the successful
operation of the related real estate project or business and thus may be
subject to a greater extent to adverse conditions in the real estate market
or in the economy generally. In addition, commercial lending generally
requires more complex underwriting and substantially greater oversight
efforts compared to one-to-four family residential real estate lending.
The Savings Bank generally attempts to mitigate the risks associated with
commercial lending by, among other things, lending only in its Primary
Market Area and metropolitan Atlanta and lending only to individuals who
have an established relationship with the Savings Bank and/or who have
substantial ties to the community.
In general, collateral for commercial loans includes real estate and
certain business assets including, but not limited to, equipment,
inventory, furniture, fixtures and accounts receivable. Terms generally
range from three to five years. If real estate is a substantial portion of
the collateral, terms may be extended to 15 years. Commercial loans are
made at both fixed and variable rates. The variable rates primarily adjust
with changes in the prime rate as reported by the Wall Street Journal.
Construction Loans. The Savings Bank makes construction loans to
individuals for the construction of their residences and to developers for
the construction of one-to-four family and multi-family residences.
Construction lending is generally limited to the Savings Bank's Primary
Market Area. At December 31, 1996, construction loans amounted to $34,000
or less than 1% of the Savings Bank's total net loan portfolio.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, owner-occupied real
estate because of the uncertainties of construction, including possible
delays in completing the structure, the possibility of costs exceeding the
initial estimates and the need to obtain a tenant or purchaser if the
property will not be owner occupied. In the event of a delay in the
completion of the construction, the Savings Bank may grant an extension,
but such extensions are generally conditioned upon the payment of interest
in full for the initial term.
Construction loans to individuals are separate from the permanent
financing on the structure. However, a borrower only qualifies for a
construction loan if he or she has obtained a commitment for a permanent
loan at the end of the construction phase. The term of a construction loan
to an individual generally does not exceed the greater of 180 days or the
term of the permanent loan commitment. Interest rates on construction
loans to individuals are based on current local economic conditions. The
loan-to-value ratio on such loans must be 80% or less of the appraised
value of the completed structure.
-50-
<PAGE>
The majority of construction loans to developers are to selected local
developers with whom the Savings Bank is familiar and are for the
construction of single-family dwellings on a pre-sold or on a speculative
basis. The Savings Bank limits the number of unsold houses which a
developer may have under construction in a project. Construction loans to
developers are generally made for a six-month term depending on the size
and scope of the project. Payment of interest generally is required on at
least a monthly basis, and the amount of a loan is generally based on the
owner's equity in the property but may not exceed 80% of appraised value or
contract price. Loan proceeds are disbursed in stages after inspection of
the project indicates that such disbursements are for expenses which have
already been incurred and which have added to the value of the project.
Consumer Loans. Subject to the restrictions contained in federal laws
and regulations, the Savings Bank also is authorized to make loans for a
wide variety of personal or consumer purposes. The Savings Bank's consumer
loans secured by automobiles totalled $26.4 million at December 31, 1996,
while home equity loans totalled $13.9 million as of that date.
Substantially all of the Savings Bank's consumer loan borrowers reside in
its Primary Market Area. As of December 31, 1996, $68.0 million, or 25%,
of the Savings Bank's total net loan portfolio consisted of consumer loans.
In addition to traditional consumer loans, the Savings Bank initiated
in 1996 a relationship with four new car dealerships within its Primary
Market Area to provide "indirect" financing for customers of the
dealerships. Management intends to increase such lending in the future.
At December 31, 1996, $6.8 million of these loans had been originated. Of
this amount, $97,000 in loans had defaulted and $190,000 in loans were 30
days or more delinquent. The Company does not deal in indirect sub-prime
automobile paper.
Home equity and second mortgage loans are also classified as consumer
loans. These loans, which amounted to $13.9 million, or 5.2%, of the
Savings Bank's total net loan portfolio at December 31, 1996, have variable
rates of interest and maximum terms of 10 years with five-year advance
periods. While these loans are secured by a second mortgage on the subject
property, the borrower is not required to use the proceeds of the loan for
property-related purposes. The Savings Bank only takes a second mortgage
in those equity line loans in which it holds the outstanding first mortgage
loan on the property or where it determines that the value of the
underlying collateral is sufficient to provide adequate security for both
the first and second mortgages. The Savings Bank generally applies a loan-
to-value ratio of 85% or less, less the balance of the first mortgage loan.
As of December 31, 1996, the Savings Bank's consumer loans also
consisted of loans secured by accounts at the Savings Bank which amounted
to $4.2 million or 1.6% of its total net loan portfolio. Such a loan is
structured to have a term that ends on the same date as the maturity date
of the certificate securing it or if secured by a passbook account has a
six-month term with a hold on withdrawals that would result in the balance
being lower than the loan balance. Typically these loans require semi-
annual payments of interest only.
Consumer loans generally involve more credit risk than mortgage loans
because of the type and nature of the collateral. In addition, consumer
lending collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness and personal bankruptcy. In many cases, because of its
mobile nature, collateral may not be readily available in the event of a
default. In other cases, repossessed collateral for a defaulted consumer
loan will not provide an adequate source of repayment of the outstanding
loan balance because of improper repair and maintenance or depreciation of
the underlying security. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower.
-51-
<PAGE>
Loan Origination and Other Fees. In addition to interest earned on
loans, the Savings Bank receives loan origination fees or "points" for
originating loans. Loan points are a percentage of the principal amount of
the mortgage loan and are charged to the borrower in connection with the
origination of the loan.
In accordance with SFAS No. 91, which deals with the accounting for
non-refundable fees and costs associated with originating or acquiring
loans, the Savings Bank's loan origination fees and certain related direct
loan origination costs are offset, and the resulting net amount is deferred
and amortized as interest income over the contractual life of the related
loans as an adjustment to the yield of such loans. At December 31, 1996,
the Savings Bank had $433,000 of net loan fees which had been deferred and
are being recognized as income over the estimated maturities of the related
loans. See Note (1) of the Notes to the Consolidated Financial Statements.
-52-
<PAGE>
Asset Quality
Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1996 in dollar amount and as a percentage of
the Savings Bank's total loan portfolio (before net items). The amounts
presented represent the total outstanding principal balances of the related
loans, rather than the actual payment amounts which are past due.
<TABLE>
<CAPTION>
Mortgage Commercial Consumer Total
------------------- ------------------- ------------------- -------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ----------- ------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Loans delinquent 90 days and over $943 0.37% $3,900 1.54% $1,296 0.51% $6,139 2.42%
</TABLE>
Loans delinquent more than 90 days totalled $2.3 million at December 31, 1995
and $3.2 million at December 31, 1994. The increase in 1996 was due to one large
commercial relationship.
-53-
<PAGE>
Non-Performing Assets. The Savings Bank has adopted a policy under which
all loans are reviewed on a regular basis and are placed on a non-accrual status
when, in the opinion of management, the collection of additional interest is
deemed insufficient to warrant further accrual. Generally, the Savings Bank
places all loans more than 90 days past due on non-accrual status. When a loan
is placed on non-accruing status, total interest accrued to date and not
collected is charged to earnings. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan. A loan is returned to
accrual status when, 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.
Real estate acquired by the Savings Bank by foreclosure is classified as
real estate owned until such time as it is sold. When such property is acquired
it is recorded at the lower of the recorded investment in the loan or fair
value, less estimated costs of disposition. The recorded investment is the sum
of the outstanding principal loan balance plus any accrued interest which has
not been received and acquisition costs associated with the property. Any excess
of the recorded investment in the loan over the fair value of the underlying
property, less estimated costs of disposition, is charged to the allowance for
loan losses at the time of the loan foreclosure. Costs relating to improvement
of property incurred subsequent to the acquisition are capitalized, whereas
costs relating to holding the property are expensed. Valuations are periodically
performed by management and a provision for estimated losses on real estate
owned is charged to earnings when losses are anticipated.
As of December 31, 1996, the Savings Bank's total non-performing loans
amounted to $6.2 million, or 2.31%, of total net loans, compared to $2.3
million, or 0.85% of total net loans, at December 31, 1995. The 1996 increase
was due to one large commercial relationship totalling approximately $4.0
million or 1.4% of net loans.
The following table sets forth the amounts and categories of the Savings
Bank's non-performing assets at the dates indicated. The Savings Bank had no
troubled debt restructuring during the periods shown on the table below.
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Mortgage $ 943 $1,203 $1,411 $2,239 $1,354
Construction 0 0 0 0 0
Commercial 3,900 582 245 39 261
Consumer 1,400 515 1,465 1,451 1,391
Accruing loans greater
than 90 days delinquent:
Mortgage 0 0 0 0 0
Construction 0 0 0 0 0
Commercial 0 0 0 0 0
Consumer 0 0 0 0 0
------ ------ ------ ------ ------
Total non-performing loans 6,243 2,300 3,121 3,729 3,006
</TABLE>
-54-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Real estate owned(1) 180 253 968 801 1,328
------ ------ ------ ------ ------
Total non-performing
assets 6,423 2,553 4,089 4,530 4,334
Total non-performing loans
as a percentage of total
net loans 2.31% 0.85% 1.11% 1.72% 1.44%
Total non-performing
assets as a percentage of
total assets 1.82% 0.76% 1.16% 1.45% 1.43%
- ----------------------------
</TABLE>
(1) Consists of real estate acquired by foreclosure.
Interest income foregone on non-accrual loans in 1996, 1995 and 1994 was
$554,867, $122,336 and $114,829, respectively.
Classified Assets. Federal regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. A
loss classified asset is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Another category
designated "special mention" also must be established and maintained for assets
which do not currently expose an insured institution to a sufficient degree of
risk to warrant classification as substandard, doubtful or loss. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss, or
charge-off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital.
The Savings Bank's problem assets at December 31, 1996 consisted of $8.5
million of loans classified as substandard and $1.4 million of loans classified
as doubtful or loss. As of December 31, 1996, total classified assets amounted
to 2.8% of total assets. In addition, at December 31, 1996, the Savings Bank had
$4.2 million of loans classified as special mention.
-55-
<PAGE>
The following table sets forth the Savings Bank's problem assets at
the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994 1993 1992
----- ----- ----- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Classification:
Substandard 8,529 6,128 5,308 9,038 10,467
Doubtful 1,431 1,126 1,421 1,308 1,986
Loss 0 55 5 669 5
Total classified assets 9,960 7,309 6,734 11,015 12,458
</TABLE>
Allowance for Loan Losses. It is management's policy to maintain an
allowance for estimated loan losses 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, distribution
of portfolio loans by risk class and the estimated value of underlying
collateral. Although management believes the current 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. At December 31, 1996, the allowance for loan loss was increased due
to one large commercial relationship and a change in the portfolio mix
toward higher risk consumer and commercial loans. See "- Asset Quality -
Non-Performing Assets."
At December 31, 1996, the Savings Bank's allowance for loan losses was
$2.6 million compared to $2.3 million at December 31, 1995. As of December
31, 1996, the Savings Bank's general valuation allowance totalled $2.0
million and specific reserves totalled $577,000.
The following table sets forth the activity in the Savings Bank's
allowance for loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $ 2,291 $ 2,392 $ 2,687 $ 2,027 $ 1,464
Provisions 1,143 250 99 822 1,061
Charge-offs
Mortgage Loans 32 82 277 166 260
Commercial loans 117 59 0 0 117
Consumer loans 776 308 181 88 339
Total charge-offs 925 449 458 254 716
Recoveries
Mortgage loans 25 8 40 66 71
Commercial loans 0 0 0 0 13
Consumer loans 67 90 24 25 134
Total Recoveries 92 98 64 91 218
Net charge-offs 833 351 394 163 498
</TABLE>
-56-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Allowance at end of period 2,601 2,291 2,392 2,686 2,027
Allowance for loan losses to
total non-performing loans
at end of period 41.66% 99.61% 76.64% 72.03% 67.43%
Allowance for loan losses to
average loans at end of period 0.95% 0.82% 0.88% 1.04% 0.78%
Net charge-offs to average
loans outstanding during
the period 0.31% 0.13% 0.14% 0.06% 0.19%
Average gross loans(1) $272,803 $278,323 $272,815 $259,189 $258,872
</TABLE>
- -----------------------
(1) Beginning and ending annual period balances were used to calculate
average gross loans.
-57-
<PAGE>
The following table sets forth the composition of the allowance for
loan losses by type of loan at the date indicated. The allowance is
allocated to specific categories of loans for statistical purposes only and
may be applied to loan losses in any loan category.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------- ---------------------- ---------------------- -------------------- ---------------------
% of Loans % of Loans % of Loans % of Loans % of Loans
in Each in Each in Each in Each in Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
--------- ----------- ---------- ----------- ---------- ----------- -------- ----------- --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans $ 441 54% $ 423 65% $ 222 70% $ 373 79% $ 224 82%
Commercial 1,170 21 1,158 16 1,150 14 1,364 12 1,094 11
Consumer loans 996 25 710 19 1,020 11 949 9 709 7
------ --- ------ --- ------ ------ ------ ------ ------ ------
Total allowance for
loan losses 2,607 100% 2,291 100% 2,392 100% 2,686 100% 2,027 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
-58-
<PAGE>
Investment Securities
The Company classifies its securities in one of three categories:
trading, available for sale or held to maturity. There were no trading
securities at December 31, 1996 and 1995. Securities held to maturity are
those securities for which the Savings Bank has the ability and intent to
hold to maturity. All other securities are classified as available for
sale.
Available for sale securities consist of investment securities not
classified as trading securities or held to maturity securities and are
recorded at fair value. Held to maturity securities are recorded at cost,
adjusted for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses, net of the related tax effect, on
securities available for sale are excluded from earnings and are reported
as a separate component of stockholders' equity until realized. Transfers
of securities between categories are recorded at fair value at the date of
transfer. Unrealized holding gains or losses associated with transfers of
securities from held to maturity to available for sale are recorded as a
separate component of stockholders' equity. See Note (1) of the Notes to
Consolidated Financial Statements.
Federally chartered savings institutions such as the Savings Bank also
have authority to invest in various types of liquid assets, including
United States Treasury obligations, securities of various Federal agencies
and of state and municipal governments, certificates of deposit at
federally insured banks and savings and loan associations, certain bankers'
acceptances and Federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and mutual funds, the assets of
which conform to the investments that federally chartered savings
institutions are otherwise authorized to make directly. As of December 31,
1996, the Savings Bank had utilized this investment authority to invest in
U.S. government and agency obligations, obligations of the State of Georgia
and political subdivisions, domestic corporate obligations and mutual
funds, equity securities including FHLB stock and FNMA stock.
At December 31, 1996, approximately 11% of the Savings Bank's
securities portfolio was comprised of mortgage-backed securities that are
insured or guaranteed by the Federal Home Loan Mortgage Corporation (FHLMC)
or FNMA. Collateralized Mortgage Obligations (CMOs) not insured or
guaranteed by FHLMC, FNMA or GNMA comprised 20% of the investment
portfolio. U.S. government agency obligations comprised 51%, preferred
stock of FNMA comprised 4%, FHLB stock comprised 5% and municipal
securities comprised 5% of such portfolio at December 31, 1996. Other
investments, primarily treasury securities, are also included.
The Savings Bank's securities portfolio is managed in accordance with
the Savings Bank's Investment Policy adopted by the Board of Directors and
administered by the Asset/Liability Committee, which consists of an outside
director, the President and Chief Executive Officer, Chief Financial
Officer, Chief Operating Officer, Senior Vice President, Vice President-
Commercial Lending and Assistant Controller of the Savings Bank. The policy
lists specific areas of permissible investments consistent with the Savings
Bank's investment strategy. Under the Savings Bank's policy, at the time of
purchase of an investment or mortgage-backed security or CMO, management
designates the security as either held for maturity or available for sale
based on the Savings Bank's investment objectives, operational needs and
intent. The Savings Bank maintains no trading account portfolio. Investment
activities are monitored to ensure that they are consistent with
established guidelines and objectives.
The following table sets forth certain information regarding the
classifications of Savings Bank's investment securities at December 31,
1996, 1995 and 1994. Securities classified as available
-59-
<PAGE>
for sale are carried at their estimated fair value at December 31, 1996.
There were no securities available for sale at December 31, 1995 or 1994.
Securities held to maturity are carried at amortized cost at all respective
dates. There were no trading securities at December 31, 1996, 1995 or
1994.
Securities available for sale:
<TABLE>
<CAPTION>
1996
----
<S> <C> <C> <C>
U.S. Treasuries $ --
U.S. Government agencies 18,830
State, county and municipals 2,231
Mortgage-backed securities 12,866
-------
$33,927
-------
Securities held to maturity:
1996 1995 1994
---- ---- ----
U.S. Treasuries $ 500 1,251 1,257
U.S. Government agencies 6,216 7,142 31,805
State, county and municipals 115 115 0
Mortgage-backed securities 933 1,870 12,204
------- ------- -------
$ 7,764 $10,378 $45,266
------- ------- -------
Total investment securities $41,691 $10,378 $45,266
======= ======= =======
</TABLE>
-60-
<PAGE>
The following table presents the expected maturity of the total investment
securities portfolio by maturity date and average yields based upon amortized
cost, (for all obligations on a fully taxable basis assuming a 34% tax rate) at
December 31, 1996. It should be noted that the composition and
maturity/repricing distribution of the investment portfolio is subject to change
depending upon rate sensitivity, capital needs and liquidity needs.
Expected Maturity of Investment Securities
<TABLE>
<CAPTION>
After one After five
Within one year but within five years but within ten years After ten years
Amount Yield Amount Yield Amount Yield Amount Yield Totals
------ ----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury Securities 500 5.60% - - - - - - 500
U.S. Government Agencies 582 7.22% 2,634 6.57% 3,000 7.39% - - 6,216
State, county and municipals - - 115 4.55% - - - - 115
Mortgage-backed securities 533 5.45% 239 6.05% 11 7.25% 150 7.21% 933
----- ---- ----- ---- ------ ---- ------ ---- ------
1,615 6.13% 2,988 6.46% 3,011 7.39% 150 7.21% 7,764
===== ==== ===== ==== ====== ==== ====== ==== ======
Securities available for sale:
U.S. Treasury Securities - - - - - - - - -
U.S. Government Agencies - - 3,000 6.88% 11,849 8.93% 4,018 7.12% 18,867
State, county and municipals - - - - - - 2,199 7.27% 2,199
Mortgage-backed securities - - 2,038 6.75% 1,946 6.86% 8,908 7.18% 12,892
----- ---- ----- ---- ------ ---- ------ ---- ------
5,038 6.83% 13,795 8.64% 15,125 7.18% 33,958
===== ==== ===== ==== ====== ==== ====== ==== ======
</TABLE>
-61-
<PAGE>
Cash and Interest-Bearing Deposits in Other Banks
The Savings Bank had cash on hand and cash due from and on deposit
with other banks amounting to $14.4 million and $16.4 million at December
31, 1996 and December 31, 1995, respectively.
Sources of Funds
General. Deposits are the primary source of the Savings Bank's funds
for lending and other investment purposes. In addition to deposits, the
Savings Bank derives funds from loan principal repayments, principal,
interest and dividend payments on investments and other sources. Loan
repayments are a relatively stable source of funds, while deposit inflows
and outflows are significantly influenced by general interest rates and
money market conditions. Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources.
They may also be used on a longer term basis for general business purposes.
Deposits. The Savings Bank's deposits are attracted principally from
within the Savings Bank's primary market area through the offering of a
wide selection of deposit instruments, including NOW accounts, money market
accounts, regular savings accounts, and term certificate accounts.
Included among these deposit products are individual retirement account
certificates of approximately $47 million at December 31, 1996. Deposit
account terms vary, with the principal differences being the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate. As of December 31, 1996, the 204 certificates of deposit
with principal amounts of $100,000 or more totalled $47.2 million.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Savings Bank on a periodic basis.
Determination of rates and terms are predicated on funds acquisition and
liquidity requirements, rates paid by competitors, growth goals and federal
regulations.
The Savings Bank does not advertise for deposits outside its local
market area or utilize the services of deposit brokers. A listing on the
Internet has been established primarily for people relocating to the
Savings Bank's Primary Market Area.
-62-
<PAGE>
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Savings Bank at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Amount Interest Rate Amount Interest Rate Amount Interest Rate
-------- -------------- -------- -------------- -------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Time deposits $210,488 5.6% $198,870 5.6% $188,735 4.7%
Savings accounts 34,077 3.0 31,737 2.6 36,593 2.5
Transaction accounts
NOW and money
market accounts 47,288 2.6 46,626 2.5% 53,624 2.6
Non-interest
bearing accounts 15,903 -- 12,055 -- 10,376 --
-------- -------- --------
Total transaction
accounts 63,191 58,681 64,000
-------- -------- --------
Total deposits $307,756 $289,288 $289,328
======== ======== ========
</TABLE>
The following table sets forth the maturities of the Savings Bank's
certificates of deposit having principal amounts of $100,000 or more at
December 31, 1996.
<TABLE>
<CAPTION>
Certificates of deposit
maturing in: (In Thousands)
-----------------------
<S> <C>
Less than three months $ 8,011
Three to six months 6,866
Six to 12 months 11,680
Over 12 months 20,673
-------
Total certificates of deposit with
balances of $100,000 or more 47,230
=======
</TABLE>
The following table sets forth the amount and maturities of the
Savings Bank's certificates of deposit at December 31, 1996.
<TABLE>
<CAPTION>
2001 and
1997 1998 1999 2000 thereafter
---- ---- ---- ---- ----------
Over One Year Over Two Over Three
One Year Through Years Through Years Through Over Four
Or less Two Years Three Years Four Years Years Totals
--------- ------------- ------------- ------------- --------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
2.00% to 2.99% -- -- -- -- -- --
3.00% to 3.99% 672 -- -- -- -- 672
4.00% to 5.99% 113,286 41,654 4,685 1,613 783 162,021
6.00% to 7.99% 19,741 12,747 7,000 3,573 4,193 47,254
8.00% to 9.99% 165 243 -- 133 -- 541
-------- ------- ------- ------ ------ --------
$133,864 $54,644 $11,685 $5,319 $4,976 $210,488
======== ======= ======= ====== ====== ========
</TABLE>
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<PAGE>
Borrowings. The Savings Bank may obtain advances from the FHLB of
Atlanta upon the security of its FHLB of Atlanta stock and certain of the
Savings Bank's residential mortgage loans, provided certain standards
related to creditworthiness have been met. Such advances are made pursuant
to several credit programs, each of which has its own interest rate and
range of maturities. Such advances are generally available to meet seasonal
and other withdrawals of deposit accounts and to permit increased lending.
See "Regulation - The Savings Bank - Federal Home Loan Bank System."
The Savings Bank had $16.3 million FHLB advances outstanding at
December 31, 1996. Of the advances, $10 million were at an adjustable rate
with a weighted average rate of 5.49%. The remaining $6.3 million fixed
rate advances had a weighted average rate of 5.68%.
The following table sets forth the maximum month-end balance and
average balance of Carrollton's FHLB advances during the periods indicated.
See also Note (6) to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum balance $20,236 $40,277 $37,770
Average balance 16,514 28,257 28,163
Weighted average interest
rate during year 5.56% 6.81% 6.50%
Balance outstanding at
year-end $16,295 $15,595 $37,770
Weighted average interest
rate at year-end 5.90% 6.05% 5.86%
</TABLE>
The following table sets forth certain information as to Carrollton's
long-term (terms to maturity in excess of 90 days) and short-term (terms to
maturity of 90 days or less) FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB long-term advances $ 6,295 $7,095 $11,270
Weighted average interest
rate 5.68% 5.64% 6.13%
FHLB short-term advances $10,000 $8,500 $26,500
Weighted average interest
rate 5.49% 7.78% 6.65%
</TABLE>
Employees. The Savings Bank had 162 full-time employees and 30 part-
time employees at December 31, 1996. CFB Securities had two full-time and
no part-time employees at December 31, 1996, while CFB Insurance had no
employees as of that date. None of these employees is
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<PAGE>
represented by a collective bargaining agreement, and management believes
that it enjoys good relations with its personnel.
Properties. The following table sets forth certain information with
respect to the Company's properties at December 31, 1996.
<TABLE>
<CAPTION>
Leased/ Net Book Value
Description/Address Owned of Property Deposits
------------------- ------- -------------- --------
<S> <C> <C> <C>
(In Thousands)
Main Office 110 Dixie St. Carrollton, GA Owned 2,743 159,346
640 W. Bankhead Hwy, Villa Rica, GA Owned 943 32,197
207 W. College St., Bowdon, GA Owned 303 32,453
501 Alabama Ave., Bremen, GA Leased 50,295
505 Bankhead Hwy., Carrollton, GA
(Grocery Store Branch) Leased 4,787
1355 South Park St., Carrollton, Ga
(Grocery Store Branch) Leased 4,427
9060 Hwy. 27, Franklin, GA Owned 276 10,120
2212 Atlanta Hwy, Hiram, GA (Wal*Mart
Branch) Leased 5,019
5600 N. Henry Blvd. Suite A,
Stockbridge, GA (Wal*Mart Branch) Leased 3,825
1025-A Bullsboro Dr., Newnan, GA
(Wal*Mart Branch) Leased 2,243
125 Pavilion Parkway, Fayetteville, GA
(Wal*Mart Branch) Leased 2,998
3218 Highway 5, Douglasville, GA Leased
</TABLE>
Legal Proceedings
The Savings Bank is involved in routine legal proceedings occurring in
the ordinary course of business which, in the aggregate, are believed by
management to be immaterial to the financial condition of the Savings Bank.
Competition
The Savings Bank has operated in its local community since 1929.
Management estimates that the Savings Bank has a 30% market share in
Carroll County, a 20% market share in each of Haralson and Heard Counties,
and a one percent market share in each of Coweta, Douglas, Fayette, Henry
and Paulding Counties.
The Savings Bank faces significant competition both in making loans
and in attracting deposits principally from national, regional and local
commercial banks, savings banks, savings and loan associations, credit
unions, broker-dealers, mortgage banking companies (including FNMA) and
insurance companies. Its most direct competition for deposits has
historically come from commercial banks, savings banks, savings and loan
associations and credit unions. The Savings Bank faces additional
competition for deposits from short-term money market funds, other
corporate and government securities funds and from other financial
institutions such as brokerage firms and insurance companies. In addition,
the Savings Bank may face additional competition from commercial banks
headquartered outside of the State of Georgia as a result of the enactment
of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,
which becomes fully effective on June 1, 1997. The "Georgia Interstate
Banking Act," which became effective July 1, 1995, provides that (i)
interstate acquisitions by institutions located in Georgia are permitted in
states which also allow national interstate acquisitions, and (ii)
interstate acquisitions of institutions located in Georgia are permitted by
institutions located in states which also allow national interstate
acquisitions; provided, however, that if the board of directors of a
Georgia savings and loan institution adopts a resolution to except such
thrift or holding company from being acquired pursuant to the provisions of
the Georgia Interstate Banking Act and properly files a certified copy of
such resolution with the Georgia Department, such savings and loan
institution or holding company may not be acquired by an institution
located outside of the State of Georgia.
-65-
<PAGE>
The Savings Bank experiences strong competition for real estate loans
principally from other savings associations, commercial banks, and mortgage
banking companies. The Savings Bank competes for loans principally through
the interest rates and loan fees it charges and the efficiency and quality
of services it provides borrowers. Competition may increase as a result of
the continuing reduction of restrictions on the interstate operations of
financial institutions.
REGULATION
Savings and loan holding companies and federal savings banks are
extensively regulated under both Federal and state law. The following is a
brief summary of certain statutes and rules and regulations that affect or
will affect the Company and the Bank. This summary is qualified in its
entirety by reference to the particular statute and regulatory provision
referred to below and is not intended to be an exhaustive description of
the statutes or regulations applicable to the business of the Company and
the Bank. Supervision, regulation and examination of the Company and the
Bank by the regulatory agencies are intended primarily for the protection
of depositors rather than shareholders of the Company. The terms savings
association, federal savings bank and thrift are used interchangeably in
this section.
Savings and Loan Holding Company Regulation
The Company will be a registered holding company under both the
Savings and Loan Holding Company Act (the "SLHCA") set forth in Section 10
of the Home Owners Loan Act ("HOLA") and the Financial Institutions Code of
Georgia ("FICG"). The Company will be regulated under such acts by the
Office of Thrift Supervision (the "OTS") and by the Department of Banking
and Finance (the "Georgia Department"), respectively. As a savings and
loan holding company, the Company will be required to file with the OTS an
annual report and such additional information as the OTS may require
pursuant to the SLHCA. The OTS will also conduct examinations of the
Company and each of its subsidiaries.
Savings and loan holding companies and their subsidiaries are
prohibited from engaging in any activity or rendering any services for or
on behalf of their savings institution subsidiaries for the purpose or with
the effect of evading any law or regulation applicable to the institution.
This restriction is designed to prevent the use of holding company
affiliates to evade requirements of the SLHCA that are designed to protect
the holding company's savings institution subsidiaries. A unitary holding
company, that is, a holding company that owns only one insured institution
whose subsidiary institution satisfies the qualified thrift lender test
(discussed below), is not restricted to any statutorily prescribed list of
permissible activities, and the SLHCA and the FICG imposes no limits on
direct or indirect non-savings institution subsidiary operations.
The SLHCA and the FICG makes it unlawful for any savings and loan
holding company, directly or indirectly, or through one or more
subsidiaries or one or more transactions, to acquire control of another
savings association or another savings and loan holding company without
prior approval from the OTS and the Georgia Department, respectively. An
acquisition by merger, consolidation or purchase of assets of such an
institution or holding company or of substantially all of the assets of
such an institution or holding company is also prohibited without prior OTS
or Georgia Department approval. When considering an application for such
an acquisition, the OTS and the Georgia Department take into consideration
the financial and managerial resources and future prospects of the
prospective acquiring company and the institution involved. This includes
consideration of the competence, experience and integrity of the officers,
directors and principal
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<PAGE>
shareholders of the acquiring company and savings institution. In
addition, the OTS and the Georgia Department consider the effect of the
acquisition on the institution, the insurance risk to the Savings
Association Insurance Fund ("SAIF") and the convenience and needs of the
community to be served.
The OTS may not approve an acquisition that would result in the
formation of certain types of interstate holding company networks. The OTS
is precluded from approving an acquisition that would result in the
formation of a multiple holding company controlling institutions in more
than one state unless the acquiring company or one of its savings
institution subsidiaries is authorized to acquire control of an institution
or to operate an office in the additional state pursuant to a supervisory
acquisition authorized under Section 13(k) of the Federal Deposit Insurance
Act or unless the statutes of the state in which the institution to be
acquired is located permits such an acquisition.
Savings and loan holding companies are allowed to acquire or to retain
as much as 5% of the voting shares of a savings institution or savings and
loan holding company without regulatory approval.
Bank Regulation
General. The Savings Bank is a federal savings bank organized under
the laws of the United States subject to examination by the OTS. The OTS
regulates all areas of the Savings Bank's banking operations including
reserves, loans, mergers, payment of dividends, interest rates,
establishment of branches, and other aspects of operations. OTS
regulations generally provide that federal savings banks must be examined
no less frequently than every 12 months, unless the federal savings bank
(i) has assets of less than $250 million; (ii) is well capitalized; (iii)
was found to be well managed and its composite condition was found to be
outstanding (or good, if the bank had total assets of not more than
$100,000) during its last examination; (iv) is not subject to a formal
enforcement proceeding or an order from the Federal Deposit Insurance
Corporation ("FDIC") or another banking agency; and (v) has not undergone a
change of control during the previous 12-month period. Federal savings
banks must be examined no less frequently than every 18 months. The
Savings Bank also is subject to assessments by the OTS to cover the costs
of such examinations.
The Savings Bank is also insured and regulated by the FDIC. The major
functions of the FDIC with respect to insured federal savings banks include
paying depositors to the extent provided by law in the event an insured
bank is closed without adequately providing for payment of the claims of
depositors and preventing the continuance or development of unsound and
unsafe banking practices.
Subsidiary institutions of a savings and loan holding company, such as
the Savings Bank, are subject to certain restrictions imposed by the
Federal Reserve Act on any extension of credit to the holding company or
any of its subsidiaries, on investment in the stock or other securities
thereof, and on the taking of such stock or securities as collateral for
loans to any borrower. In addition, a holding company and its subsidiaries
are prohibited from engaging in certain tying arrangements in connection
with any extension of credit or provision of any property or services.
Capital Requirements. OTS regulations require that federal savings
banks maintain (i) "tangible capital" in an amount of not less than 1.5% of
total assets, (ii) "core capital" in an amount not less than 3.0% of total
assets, and (iii) a level of risk-based capital equal to 8% of risk-
weighted assets. Under OTS regulations, the term "core capital" generally
includes common stockholders' equity, noncumulative perpetual preferred
stock and related surplus, and minority interests in the equity accounts of
consolidated subsidiaries less unidentifiable intangible assets (other
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<PAGE>
than certain amounts of supervisory goodwill) and certain investments in
certain subsidiaries plus 90% of the fair market value of readily
marketable purchased mortgage servicing rights ("PMSRs") and purchased
credit card relationships (subject to certain conditions). "Tangible
capital" generally is defined as core capital minus intangible assets and
investments in certain subsidiaries, except PMSRs.
In determining total risk-weighted assets for purposes of the risk-
based requirement, (i) each off-balance sheet asset must be converted to
its on-balance sheet credit equivalent amount by multiplying the face
amount of each such item by a credit conversion factor ranging from 0% to
100% (depending upon the nature of the asset), (ii) the credit equivalent
amount of each off-balance sheet asset and each on-balance sheet asset must
be multiplied by a risk factor ranging from 0% to 200% (again depending
upon the nature of the asset) and (iii) the resulting amounts are added
together and constitute total risk-weighted assets. "Total capital," for
purposes of the risk-based capital requirement equals the sum of core
capital plus supplementary capital (which, as defined, includes the sum of,
among other items, perpetual preferred stock not counted as core capital,
limited life preferred stock, subordinated debt, and general loan and lease
loss allowances up to 1.25% of risk-weighted assets) less certain
deductions. The amount of supplementary capital that may be counted
towards satisfaction of the total capital requirement may not exceed 100%
of core capital, and OTS regulations require the maintenance of a minimum
ratio of core capital to total risk-weighted assets of 4%.
OTS regulations have been amended to include an interest-rate risk
component to the risk-based capital requirement. Under this regulation, an
institution is considered to have excess interest rate-risk if, based upon
a 200-basis point change in market interest rates, the market value of an
institution's capital changes by more than 2%. This new requirement is not
expected to have any material effect on the ability of the Savings Bank to
meet the risk-based capital requirement. The OTS also revised its risk-
based capital standards to ensure that its standards provide adequately for
concentration of credit risk, risk from nontraditional activities and
actual performance and expected risk of loss on multi-family mortgages.
Capital requirements higher than the generally applicable minimum
requirement may be established for a particular savings association if the
OTS determines that the institution's capital was or may become inadequate
in view of its particular circumstances.
Additionally, the Georgia Department requires that savings and loan
holding companies, such as the Company, must maintain a 5% Tier 1 leverage
ratio on a consolidated basis.
Prompt Corrective Action. The Federal Deposit Insurance Corporation
Improvement Act of 1991 (the "FDIC Act") imposes a regulatory matrix which
requires the federal banking agencies, which include the OTS, the FDIC, the
Office of the Comptroller of Currency (the "OCC"), and the Federal Reserve
Board, to take prompt corrective action to deal with depository
institutions that fail to meet their minimum capital requirements or are
otherwise in a troubled condition. The prompt corrective action provisions
require undercapitalized institutions to become subject to an increasingly
stringent array of restrictions, requirements and prohibitions, as their
capital levels deteriorate and supervisory problems mount. Should these
corrective measures prove unsuccessful in recapitalizing the institution
and correcting its problems, the FDIC Act mandates that the institution be
placed in receivership.
Pursuant to regulations promulgated under the FDIC Act, the corrective
actions that the banking agencies either must or may take are tied
primarily to an institution's capital levels. In
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<PAGE>
accordance with the framework adopted by the FDIC Act, the banking agencies
have developed a classification system, pursuant to which all banks and
thrifts will be placed into one of five categories: well-capitalized
institutions, adequately capitalized institutions, undercapitalized
institutions, significantly undercapitalized institutions and critically
undercapitalized institutions. The capital thresholds established for each
of the categories are as follows:
<TABLE>
<CAPTION>
================================================================================
Tier 1
Tier 1 Risk-Based Risk-Based
Capital Category Capital Capital Capital Other
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Well-Capitalized 5% or more 10% or more 6% or more Not
subject
to a
capital
directive
- --------------------------------------------------------------------------------
Adequately Capitalized 4% or more 8% or more 4% or more ---
- --------------------------------------------------------------------------------
Undercapitalized less than less than 8% less than 4% ---
4%
- --------------------------------------------------------------------------------
Significantly less than less than 6% less than 3% ---
Undercapitalized 3%
- --------------------------------------------------------------------------------
Critically Undercapitalized 2% or --- --- ---
less
tangible
equity
================================================================================
</TABLE>
The undercapitalized, significantly undercapitalized and critically
undercapitalized categories overlap; therefore, a critically
undercapitalized institution would also be an undercapitalized institution
and a significantly undercapitalized institution. This overlap ensures
that the remedies and restrictions prescribed for undercapitalized
institutions will also apply to institutions in the lowest two categories.
The down-grading of an institution's category is automatic in two
situations: (i) whenever an otherwise well-capitalized institution is
subject to any written capital order or directive, and (ii) where an
undercapitalized institution fails to submit or implement a capital
restoration plan or has its plan disapproved. The federal banking agencies
may treat institutions in the well-capitalized, adequately capitalized and
undercapitalized categories as if they were in the next lower capital level
based on safety and soundness considerations relating to factors other than
capital levels.
The FDIC Act prohibits all insured institutions regardless of their
level of capitalization from paying any dividend or making any other kind
of capital distribution or paying any management fee to any controlling
person if following the payment or distribution the institution would be
undercapitalized. While the prompt corrective action provisions of the
FDIC Act contain no requirements or restrictions aimed specifically at
adequately capitalized institutions, other provisions of the FDIC Act and
the agencies' regulations relating to deposit insurance assessments,
brokered deposits and interbank liabilities treat adequately capitalized
institutions less favorably than those that are well-capitalized.
A depository institution that is not well capitalized is prohibited
from accepting deposits through a deposit broker. However, an adequately
capitalized institution can apply for a waiver to accept brokered deposits.
Institutions that receive a waiver are subject to limits on the rates of
interest they may pay on brokered deposits.
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<PAGE>
Capital Distributions. An OTS rule imposes limitations on all capital
---------------------
distributions by savings associations (including dividends, stock
repurchases and cash-out mergers). Under the current rule, a savings
association is classified based on its level of regulatory capital both
before and after giving effect to a proposed capital distribution. Under a
proposed rule, the OTS would conform its three classifications to the five
capital classifications set forth under the prompt corrective action
regulations. Under the proposal, institutions that are at least adequately
capitalized would still be required to provide prior notice. Well
capitalized institutions could make capital distributions without prior
regulatory approval in specified amounts in any calendar year.
An institution that both before and after a proposed capital
distribution has net capital equal to or in excess of its capital
requirements may, subject to any otherwise applicable statutory or
regulatory requirements or agreements entered into with the regulators,
make capital distributions in any calendar year up to 100% of its net
income to date during the calendar year plus the amount that would reduce
by one-half its "surplus capital ratio" (i.e., the percentage by which the
association's capital-to-assets ratio exceeds the ratio of its fully
phased-in capital requirement to its assets) at the beginning of the
calendar year. No regulatory approval of the capital distribution is
required, but prior notice must be given to the OTS.
An institution that either before or after a proposed capital
distribution fails to meet its then applicable minimum capital requirement
or that has been notified that it needs more than normal supervision may
not make any capital distributions without the prior written approval of
the OTS. In addition, the OTS may prohibit a proposed capital
distribution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
Liquidity. Under applicable federal regulations, savings associations
---------
are required to maintain an average daily balance of liquid assets
(including cash, certain time deposits, certain bankers' acceptances,
certain corporate debt securities and highly rated commercial paper,
securities of certain mutual funds and specified United States government,
state or federal agency obligations) equal to a monthly average of not less
than a specified percentage of the average daily balance of the savings
association's net withdrawable deposits plus short-term borrowings. Under
HOLA, this liquidity requirement may be changed from time to time by the
OTS to any amount within the range of 4% to 10% depending upon economic
conditions and the deposit flows of member institutions, and currently is
5%. Savings institutions also are required to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently
1%) of the total of the average daily balance of its net withdrawable
deposits and short-term borrowings.
Equity Investments. The OTS has revised its risk-based capital
regulation to modify the treatment of certain equity investments and to
clarify the treatment of other equity investments. Equity investments that
are permissible for both savings banks and national banks will no longer be
deducted from savings associations' calculations of total capital over a
five-year period. Instead, permissible equity investments will be placed
in the 100% risk-weight category, mirroring the capital treatment
prescribed for those investments when made by national banks under the
regulations of the OCC. Equity investments held by savings associations
that are not permissible for national banks must still be deducted from
assets and total capital.
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<PAGE>
Qualified Thrift Lender Requirement. A federal savings bank is deemed
to be a "qualified thrift lender" ("QTL") as long as its "qualified thrift
investments" equal or exceed 65% of its "portfolio assets" on a monthly
average basis in nine out of every 12 months. Qualified thrift investments
generally consist of (i) various housing related loans and investments
(such as residential construction and mortgage loans, home improvement
loans, mobile home loans, home equity loans and mortgage-backed
securities), (ii) certain obligations of the FDIC and (iii) shares of stock
issued by any FHLB, the FHLMC or the FNMA. In addition, the following
assets may be categorized as qualified thrift investments in an amount not
to exceed 20% in the aggregate of portfolio assets: (i) 50% of the dollar
amount of residential mortgage loans originated and sold within 90 days of
origination; (ii) investments in securities of a service corporation that
derives at least 80% of its income from residential housing finance; (iii)
200% of loans and investments made to acquire, develop or construct starter
homes or homes in credit needy areas (subject to certain conditions); (iv)
loans for the purchase or construction of churches, schools, nursing homes
and hospitals; and (v) consumer loans (in an amount up to 20% of portfolio
assets). For purposes of the QTL test, the term "portfolio assets" means
the savings institution's total assets minus goodwill and other intangible
assets, the value of property used by the savings institution to conduct
its business, and liquid assets held by the savings institution in an
amount up to 20% of its total assets.
OTS regulations provide that any savings association that fails to
meet the definition of a QTL must either convert to a national bank charter
or limit its future investments and activities (including branching and
payments of dividends) to those permitted for both savings associations and
national banks. Further, within one year of the loss of QTL status, a
holding company of a savings association that does not convert to a bank
charter must register as a bank holding company and will be subject to all
statutes applicable to bank holding companies. In order to exercise the
powers granted to federally chartered savings associations and maintain
full access to FHLB advances, the Savings Bank must meet the definition of
a QTL.
Loans to One Borrower Limitations. HOLA generally requires savings
associations to comply with the loans to one borrower limitations
applicable to national banks. National banks generally may make loans to a
single borrower in amounts up to 15% of their unimpaired capital and
surplus, plus an additional 10% of capital and surplus for loans secured by
readily marketable collateral. HOLA provides exceptions under which a
savings association may make loans to one borrower in excess of the
generally applicable national bank limits. A savings association may make
loans to one borrower in excess of such limits under one of the following
circumstances: (i) for any purpose, in any amount not to exceed $500,000;
or (ii) to develop domestic residential housing units, in an amount not to
exceed the lesser of $30 million or 30% of the savings association's
unimpaired capital and unimpaired surplus, provided other conditions are
satisfied. The Federal Institutions Reform, Recovery, and Enforcement Act
of 1989 provided that a savings association could make loans to one
borrower to finance the sale of real property acquired in satisfaction of
debts previously contracted in good faith in amounts up to 50% of the
savings association's unimpaired capital and unimpaired surplus. The OTS,
however, has modified this standard by limiting loans to one borrower to
finance the sale of real property acquired in satisfaction of debts to 15%
of unimpaired capital and surplus. That rule provides, however, that
purchase money mortgages received by a savings association to finance the
sale of such real property do not constitute "loans" (provided no new funds
are advanced and the savings association is not placed in a more
detrimental position holding the note than holding the real estate) and,
therefore, are not subject to the loans to one borrower limitations.
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Commercial Real Property Loans. HOLA limits the aggregate amount of
commercial real estate loans that a federal savings association may make to
an amount not in excess of 400% of the savings association's capital.
Community Reinvestment. Under the Community Reinvestment Act (the
"CRA") and the implementing OTS regulations, federal savings banks have a
continuing and affirmative obligation to help meet the credit needs of its
local community, including low and moderate-income neighborhoods,
consistent with the safe and sound operation of the institution. The CRA
requires the board of directors of financial institutions, such as the
Savings Bank, to adopt a CRA statement for each assessment area that, among
other things, describes its efforts to help meet community credit needs and
the specific types of credit that the institution is willing to extend.
The regulations promulgated pursuant to CRA contain three evaluation tests:
(i) a lending test which will compare the institution's market share of
loans in low- and moderate-income areas to its market share of loans in its
entire service area and the percentage of a bank's outstanding loans to
low- and moderate-income areas or individuals, (ii) a services test which
will evaluate the provision of services that promote the availability of
credit to low- and moderate-income areas, and (iii) an investment test,
which will evaluate an institution's record of investments in organizations
designed to foster community development, small- and minority-owned
businesses and affordable housing lending, including state and local
government housing or revenue bonds.
Fair Lending. Congress and various federal agencies (including, in
addition to the bank regulatory agencies, the Department of Housing and
Urban Development, the Federal Trade Commission and the Department of
Justice) (collectively the "Federal Agencies") responsible for implementing
the nation's fair lending laws have been increasingly concerned that
prospective home buyers and other borrowers are experiencing discrimination
in their efforts to obtain loans. In recent years, the Department of
Justice has filed suit against financial institutions that it determined
had discriminated, seeking fines and restitution for borrowers who
allegedly suffered from discriminatory practices. Most, if not all, of
these suits have been settled (some for substantial sums) without a full
adjudication on the merits.
On March 8, 1994, the Federal Agencies, in an effort to clarify what
constitutes lending discrimination and to specify the factors the agencies
will consider in determining if lending discrimination exists, announced a
joint policy statement detailing specific discriminatory practices
prohibited under the Equal Credit Opportunity Act and the Fair Housing Act.
In the policy statement, three methods of proving lending discrimination
were identified: (i) overt evidence of discrimination, when a lender
blatantly discriminates on a prohibited basis, (ii) evidence of disparate
treatment, when a lender treats applicants differently based on a
prohibited factor even where there is no showing that the treatment was
motivated by prejudice or a conscious intention to discriminate against a
person, and (iii) evidence of disparate impact, when a lender applies a
practice uniformly to all applicants, but the practice has a discriminatory
effect, even where such practices are neutral on their face and are applied
equally, unless the practice can be justified on the basis of business
necessity.
FDIC Insurance Assessments. Federal deposit insurance is required for
all federally chartered savings associations. Deposits at the Savings Bank
are insured to a maximum of $100,000 for each depositor by Savings
Association Insurance Fund (the "SAIF"). As a SAIF-insured institution,
the Bank is subject to regulation and supervision by the FDIC, to the
extent deemed necessary by the FDIC to ensure the safety and soundness of
the SAIF. The FDIC is entitled to have access to reports of examination of
the Bank made by the OTS and all reports of condition filed by the Bank
with the OTS. The FDIC also may require the Bank to file such additional
reports as
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it determines to be advisable for insurance purposes. Additionally, the
FDIC may determine by regulation or order that any specific activity poses
a serious threat to the SAIF and that no SAIF member may engage in the
activity directly.
Insurance premiums are paid in semiannual assessments. Under a risk-
based assessment system, the FDIC is required to calculate a savings
association's semiannual assessment based on (i) the probability that the
insurance fund will incur a loss with respect to the institution (taking
into account the institution's asset and liability concentration), (ii) the
potential magnitude of any such loss, and (iii) the revenue and reserve
needs of the insurance fund. The semiannual assessment imposed on the
Savings Bank may be higher depending on the SAIF revenue and expense
levels, and the risk classification applied to the Savings Bank.
The deposit insurance assessment rate charged to each institution
depends on the assessment risk classification assigned to each institution.
Under the risk-classification system, each SAIF member is assigned to one
of three capital groups: "well capitalized," "adequately capitalized," or
"less than adequately capitalized," as such terms are defined under the
OTS's prompt corrective action regulation (discussed above), except that
"less than adequately capitalized" includes any institution that is not
well capitalized or adequately capitalized. Within each capital group,
institutions are assigned to one of three supervisory subgroups--"healthy"
(institutions that are financially sound with only a few minor weaknesses),
"supervisory concern" (institutions with weaknesses which, if not corrected
could result in significant deterioration of the institution and increased
risk to the SAIF) or "substantial supervisory concern" (institutions that
pose a substantial probability of loss to the SAIF unless corrective action
is taken). The FDIC will place each institution into one of nine
assessment risk classifications based on the institution's capital group
and supervisory subgroup classification.
Until recently, SAIF premiums had been equivalent to deposit insurance
premiums paid by banks on deposits to the Bank Insurance Fund ("BIF").
Deposit insurance premiums were set to facilitate each fund achieving its
designated reserve ratios. As each fund achieves its designated reserve
ratio, however, the FDIC has the authority to lower the premium assessments
for that fund to a rate that would be sufficient to maintain the designated
reserve ratio. In August 1995, the FDIC determined that the BIF had
achieved its designated reserve ratio and approved lower BIF premium rates
for deposit insurance by the BIF for all but the riskiest institutions. On
November 14, 1995, the FDIC determined that BIF deposit insurance premiums
for well capitalized banks would be further reduced to the then-statutory
minimum of $2,000 per institution per year, effective January 1, 1996.
Because the SAIF remained significantly below its designated reserve ratio,
insurance premiums for assessable SAIF deposits were not reduced in either
FDIC action.
The current financial condition of the SAIF resulted in the adoption
of the Deposit Insurance Funds Act of 1996 ("DIFA"), which was enacted on
September 30, 1996 as part of the Omnibus Consolidated Appropriations Act.
Under DIFA, a special one-time assessment of 65.7 cents per $100 of
assessable SAIF deposits was collected on November 27, 1996 and applied
retroactively to SAIF deposits as of March 31, 1995. DIFA provides that
special assessments will be deductible under Section 162 of the Internal
Revenue Code in the year in which the assessment is paid. After collection
of the special assessment, it is expected that the SAIF would achieve its
designated reserve ratio and SAIF premium rates would then become the same
as BIF rates. DIFA further provides that BIF and SAIF are to be merged,
creating the "Deposit Insurance Fund," on January 1, 1999, provided that
bank and savings association charters are combined by that date. The
Treasury Department is preparing a report to be submitted to Congress by
March 31, 1997 on the development
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of a common charter for all insured depository institutions. See
"Supervision and Regulation -Elimination of Federal Savings Charter."
DIFA further assesses premiums for Financing Corporation Bond debt
service ("FICO"). Beginning January 1, 1997, FICO premiums for BIF and
SAIF will be 1.3 and 6.4 basis points, respectively. Full pro rata sharing
of FICO will begin no later than January 1, 2000.
Effective January 1, 1997, SAIF members will have the same risk-based
assessment schedule as BIF members, which is 0 to 27 cents per $100 of
deposits. FICO assessments of 1.3 cents for BIF deposits and 6.4 cents per
$100 of deposits for SAIF deposits will be added to the BIF-assessable base
and SAIF assessable base, respectively, until December 31, 1999.
Thereafter, approximately 2.4 cents per $100 of deposits would be added to
each regular assessment for all insured depositors, thereby achieving full
pro rata FICO sharing.
The SAIF-assessable base previously was assessed at a rate of 23 to 31
basis points for the fourth quarter as part of the regular annual deposit
insurance assessment. Following the enaction of DIFA, the special
assessment was booked as an asset by the FDIC effective October 1, 1996,
fully capitalizing SAIF as of that date. Consequently, the proposed
regular assessment rate for SAIF-member savings associations has been
lowered retroactively to 18 to 27 basis points effective October 1, 1996,
which represents the amount necessary to cover FICO obligations.
Until January 1, 1997, under the FDIC's interpretation of existing
law, FICO payments can be met only from assessments on SAIF-member savings
associations. Overpayment of fourth quarter assessments from such
institutions, estimated at approximately 1.25 cents per $100 of deposits,
will be refunded or credited, with interest, using regular quarterly
payment procedures.
The federal banking agencies are required to take action to prevent
insured institutions from facilitating or encouraging the shifting of SAIF
deposits to BIF deposits for purposes of evading the assessments imposed on
SAIF-assessable deposits.
Insurance of deposits may be terminated by the FDIC after notice and
hearing, upon a finding by the FDIC that the savings association has
engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law, rule,
regulation, order or condition imposed by, or written agreement with, the
FDIC. Additionally, if insurance termination proceedings are initiated
against a savings association, the FDIC may temporarily suspend insurance
on new deposits received by an institution under certain circumstances.
Federal Home Loan Bank System. The FHLB System consists of 12
regional FHLBs, each subject to supervision and regulation by the Federal
Housing Finance Board (the "FHFB"). The FHLBs provide a central credit
facility for member savings associations. The maximum amount that the FHLB
of Atlanta will advance fluctuates from time to time in accordance with
changes in policies of the FHFB and the FHLB of Atlanta, and the maximum
amount generally is reduced by borrowings from any other source. In
addition, the amount of FHLB advances that a savings association may obtain
will be restricted in the event the institution fails to constitute a QTL.
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Federal Reserve System. The Federal Reserve Board has adopted
regulations that require savings associations to maintain nonearning
reserves against their transaction accounts (primarily NOW and regular
checking accounts). These reserves may be used to satisfy liquidity
requirements imposed by the OTS. Because required reserves must be
maintained in the form of cash or a non-interest-bearing account at a
Federal Reserve Bank, the effect of this reserve requirement is to reduce
the amount of the Savings Bank's interest-earning assets.
Savings institutions also have the authority to borrow from the
Federal Reserve "discount window." Federal Reserve Board regulations,
however, require savings associations to exhaust all FHLB sources before
borrowing from a Federal Reserve bank.
Transactions with Affiliates Restrictions. Transactions engaged in by
a savings association or one of its subsidiaries with affiliates of the
savings association generally are subject to the affiliate transaction
restrictions contained in Sections 23A and 23B of the Federal Reserve Act
in the same manner and to the same extent as such restrictions apply to
transactions engaged in by a member bank or one of its subsidiaries with
affiliates of the member bank. Section 23A of the Federal Reserve Act
imposes both quantitative and qualitative restrictions on transactions
engaged in by a member bank or one of its subsidiaries with an affiliate,
while Section 23B of the Federal Reserve Act requires, among other things
that all transactions with affiliates be on terms substantially the same,
and at least as favorable to the member bank or its subsidiary, as the
terms that would apply to, or would be offered in, a comparable transaction
with an unaffiliated party. Exemptions from, and waivers of, the
provisions of Sections 23A and 23B of the Federal Reserve Act may be
granted only by the Federal Reserve Board. The HOLA and OTS regulations
promulgated thereunder contain other restrictions on loans and extension of
credit to affiliates, and the OTS is authorized to impose additional
restrictions on transactions with affiliates if it determines such
restrictions are necessary to ensure the safety and soundness of any
savings association. Current OTS regulations are similar to Sections 23A
and 23B of the Federal Reserve Act.
Future Requirements. Statutes and regulations are regularly
introduced which contain wide-ranging proposals for altering the
structures, regulations and competitive relationships of financial
institutions. It cannot be predicted whether or what form any proposed
statute or regulation will be adopted or the extent to which the business
of the Company and the Savings Bank may be affected by such statute or
regulation.
Elimination of Federal Savings Association Charter
Legislation that would eliminate the federal savings association
charter is under discussion. If such legislation is enacted, the Bank
would be required to convert its federal savings bank charter to either a
national bank charter or to a state depository institution charter.
Pending legislation also may provide relief as to recapture of the bad debt
deduction for federal tax purposes that otherwise would be applicable if
the Savings Bank converted its charter, provided that the Savings Bank
meets a proposed residential loan origination requirement. Various
legislative proposals also may result in the restructuring of federal
regulatory oversight, including, for example, consolidation of the OTS into
another agency, or creation of a new Federal banking agency to replace the
various such agencies which presently exist. The Savings Bank is unable to
predict whether such legislation will be enacted or, if enacted, whether it
will contain relief as to bad debt deductions previously taken.
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TAXATION
Federal Taxation
General. The Company and the Savings Bank are subject to the
generally applicable corporate tax provisions of the Code, and the Savings
Bank is subject to certain additional provisions of the Code which apply to
thrift and other types of financial institutions. The following discussion
of federal taxation is intended only to summarize certain pertinent federal
income tax matters and is not a comprehensive discussion of the tax rules
applicable to the Company and the Savings Bank.
Tax Returns. The Savings Bank files a federal income tax return on
the basis of a fiscal year ending on December 31. Consolidated returns
have the effect of eliminating intercompany distributions, including
dividends, from the computation of consolidated taxable income for the
taxable year in which such distributions occur. However, based upon the
best interests of the Company, the Savings Bank and its stockholders, and
on other conditions, the Company may elect not to file consolidated
returns.
Bad Debt Reserves. Savings institutions such as the Savings Bank are
subject to the taxing provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), for corporations, as modified by certain provisions
specifically applicable to financial or thrift institutions. Income is
reported using the accrual method of accounting. The maximum corporate
federal income tax rate is 35%.
For fiscal years beginning prior to December 31, 1995, thrift
institutions that qualified under certain definitional tests and other
conditions of the Code were permitted certain favorable provisions
regarding their deductions from taxable income for annual additions to
their bad debt reserve. A reserve could be established for bad debts on
qualifying real property loans (generally loans secured by interests in
real property improved or to be improved) under (i) a method based on a
percentage of the institution's taxable income, as adjusted (the
"percentage of taxable income method") or (ii) a method based on actual
loss experience (the "experience method").
In 1996, the Code was amended to repeal the foregoing methods of
establishing a bad debt reserve. Effective January 1, 1996, the Savings
Bank now computes its bad debt reserves for tax purposes under the rules
promulgated pursuant to Code Section 585, which applies to commercial
banks. In the years prior to 1996, the Savings Bank obtained bad debt
deductions approximating $5.8 million in excess of its financial statement
allowance for loan losses for which no provision for federal income tax was
made. These amounts were then subject to federal income tax in future
years pursuant to the provisions of prior Code Section 593 if they were
used for purposes other than to absorb bad debt losses. As of January 1,
1996, approximately $1.0 million of the excess reserve was no longer
subject to recapture under any circumstances and approximately $4.8 million
of the excess reserve was subject to recapture only if the Savings Bank
ceased to operate as a bank pursuant to the provisions of Code Section 585.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of
20%. The alternative minimum tax generally applies to a base of regular
taxable income plus certain tax preferences ("alternative minimum taxable
income" or "AMTI") and is payable to the extent such AMTI is in excess of
an exemption amount. The Code provides that an item of tax preference is
the excess of the bad debt deduction allowable for a taxable year pursuant
to the percentage of taxable income method over the amount allowable under
the experience method. Other items of tax preference that constitute AMTI
include (a) tax-exempt interest on newly issued (generally, issued
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on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) 75% of the excess (if any) of (i) adjusted current
earnings as defined in the Code, over (ii) AMTI (determined without regard
to this preference and prior to reduction by net operating losses).
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses ("NOLs") to the preceding three taxable years and
forward to the succeeding 15 taxable years. This provision applies to
losses incurred in taxable years beginning after 1986. The Savings Bank
has no NOL carryforwards for federal income tax purposes.
Capital Gains and Corporate Dividends-Received Deduction. Corporate
net capital gains are taxed at a maximum rate of 35%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated
tax return, and corporations which own less than 20% of the stock of a
corporation distributing a dividend may deduct only 70% of dividends
received or accrued on their behalf. However, a corporation may deduct
100% of dividends from a member of the same affiliated group of
corporations.
Other Matters. Federal legislation is introduced from time to time
that would limit the ability of individuals to deduct interest paid on
mortgage loans. Individuals are currently not permitted to deduct interest
on consumer loans. Significant increases in tax rates or further
restrictions on the deductibility of mortgage interest could adversely
affect the Savings Bank.
The Savings Bank's federal income tax returns for the tax years ended
December 31, 1996, 1995 and 1994 are open under the statute of limitations
and are subject to review by the IRS.
Georgia Taxation. The Company and the Savings Bank are both subject
to Georgia corporate income tax and franchise tax to the extent they are
engaged in business in the State of Georgia or have income that is
generated in the State of Georgia. For Georgia income tax purposes,
savings institutions are presently taxed at a rate equal to 6.0% of income,
which is calculated based on federal taxable income, subject to certain
adjustments. The State of Georgia also imposes franchise and privilege
taxes on savings institutions, which in the case of the Savings Bank do not
constitute significant tax items.
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MANAGEMENT OF THE COMPANY
Directors and Executive Officers
The Board of Directors is divided into three classes, each of which
contains approximately one-third of the Board. The Bylaws of the Company
currently authorize nine directors. The directors shall be elected by the
stockholders of the Company for staggered three-year terms, or until their
successors are elected and qualified. One class of directors, consisting
of Gary M. Bullock, Jerry L. Clayton and Dean B. Talley will have a term
expiring at the Company's first annual meeting of stockholders; a second
class of directors, consisting of Thomas E. Reeve, Jr., Michael P. Steed
and Thomas S. Upchurch will have a term of office expiring at the second
annual meeting; and a third class of directors, consisting of T. Aubrey
Silvey, Gary D. Dorminey and Anna L. Berry, will have a term of office
expiring at the third annual meeting. Their names and biographical
information are set forth under "Management of the Savings Bank -
Directors."
The following individuals are executive officers of the Company and
hold the offices set forth below opposite their names. Their biographical
information is set forth under "Management of the Savings Bank - Directors"
and "- Executive Officers Who Are Not Directors."
Name Position(s) with the Company
---- ----------------------------
Gary D. Dorminey President and Chief Executive Officer
D. Lane Poston Executive Vice President and Chief Operating Officer
C. Lynn Gable Chief Financial Officer
Anyce C. Fox Senior Vice President
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, retirement, resignation or removal by the Board of Directors.
Since the formation of the Company, none of the executive officers,
directors or other personnel of the Company has received remuneration from
the Company. In the event that any employee of the Savings Bank provides
services to the Company, the Company has agreed to reimburse the Savings
Bank for any costs related to such services. Information concerning the
principal occupations and employment of the directors and officers of the
Company during the past five years is set forth under "Management of the
Savings Bank - Directors" and "- Executive Officers Who Are Not Directors."
Directors and executive officers of the Company initially will not be
compensated by the Company but will serve and be compensated by the Savings
Bank. The Company does not currently nor does it plan to obtain "key
person" insurance on any of its employees. See "Management of the Savings
Bank - Executive Compensation."
Board Meetings and Committees of the Board of Directors
Regular meetings of the Board of Directors of the Company will be held
on a quarterly basis, with special meetings being held from time to time as
needed. Upon consummation of the Offerings, the Company will have an
Executive Committee, Compensation Committee and Audit Committee. The
Executive Committee will have the power and authority to act on behalf of
the Board of Directors on important matters between scheduled director
meetings unless specific Board action is required or unless otherwise
restricted by the Company's Articles of Incorporation or Bylaws or by
action of its Board of Directors. The Compensation Committee will
establish and review executive
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compensation and administer executive compensation programs. The Audit
Committee will recommend to the Board of Directors the independent public
accountants to be selected to audit the Company's annual financial
statements and to approve any special assignments given to such
accountants. The Audit Committee will also review the planned scope of the
annual audit, any changes in accounting principles and the effectiveness
and efficiency of the Company's internal accounting staff. The
Compensation Committee and the Audit Committee will be composed solely of
non-employee directors.
Benefits
1997 Stock Option Plan. The Board of Directors of the Company intends
to adopt the Option Plan and to submit the Option Plan to stockholders at a
special or annual meeting of stockholders no earlier than six months after
the completion of the Conversion and Reorganization. No options will be
awarded under the Option Plan unless stockholder approval is obtained. The
Company intends to reserve for future issuance pursuant to the Option Plan
a number of authorized shares of Common Stock equal to 10% of the Common
Stock issued in the Offerings (or 209,875 shares at the maximum of the
Valuation Price Range). Shares issued pursuant to the Option Plan may be
authorized but unissued shares or treasury shares repurchased by the
Company, or both.
The Option Plan will be designed to attract and retain qualified
personnel in key positions, provide directors, officers and key employees
with a proprietary interest in the Company as an incentive to contribute to
the success of the Company and reward such persons for performance and the
attainment of targeted goals. The Option Plan will provide for the grant
of incentive stock options intended to comply with the requirements of
Section 422 of the Code ("incentive stock options") and non-incentive or
compensatory stock options (collectively "Awards"). Awards will be granted
to directors and key employees of the Savings Bank and/or the Company and
any subsidiaries, except that non-employee directors will not be eligible
to receive incentive stock options. If shareholder approval is obtained,
it is expected that options to acquire shares of Common Stock will be
awarded to key employees of the Company or its subsidiaries and directors
of the Company or the Savings Bank with an exercise price equal to the fair
market value of the Common Stock on the date of the grant. If the Option
Plan is submitted for shareholder approval within one year after the
consummation of the Conversion and Reorganization, under current OTS
regulations, unless the Regional Director of the OTS permits otherwise, no
individual member of management may receive more than 25% of the options
that may be issued and directors who are not employees may not receive more
than 5% of such options individually and more than 30% of such options in
the aggregate. No decision has yet been made as to anticipated grants to
individuals under the Option Plan.
The Option Plan will be administered and interpreted by a committee
(the "Committee") of disinterested directors satisfying standards under
both Rule 16b-3 under the Exchange Act and Section 162(m) of the Code. The
Option Plan will have an indefinite term except that incentive stock
options may not be granted more than ten years from its adoption by the
Board of Directors. Under the Option Plan, the Committee will determine
which directors, officers and key employees will be granted options,
whether such options will be incentive or compensatory options, the number
of shares subject to each option, the exercise price of each compensatory
option, the forms of payment of the exercise price and when such options
become exercisable. The per share exercise price of an incentive stock
option shall at least equal the fair market value of a share of Common
Stock on the date the option is granted. In the event of a merger,
consolidation, extraordinary cash or stock dividend, reorganization or
other change in corporate structure or tender offer, the number of shares
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of Common Stock under the Option Plan, the number of shares to which any Award
relates and the exercise price per share under any option shall be adjusted to
reflect such event.
Stock options shall become vested and exercisable in the manner
specified by the Committee. However, current OTS regulations require that stock
options granted pursuant to a plan approved by shareholders within one year of
consummation of a mutual-to-stock conversion not vest at a rate in excess of 20%
per year. Stock options are non-transferable except by will or the laws of
descent and distribution.
Pursuant to the Option Plan, compensatory stock options for 30% of the
shares of Common Stock to be reserved for issuance pursuant to the Option Plan
will be available for grants to non-employee directors of the Company and the
Savings Bank upon approval of the Option Plan by shareholders. The exercise
price for such options will be the fair market value of the Common Stock at the
date of grant. Each stock option or portion thereof shall be exercisable at any
time on or after it vests and is exercisable until ten years after its date of
grant or three months after the date on which the optionee's employment
terminates. An option will fully vest in the event of the optionee's death or
disability. An option granted to directors will be exercisable until ten years
after its date of grant. However, if an optionee dies while serving as a non-
employee director or within three years following the termination of the
optionee's service as a non-employee director as a result of retirement or
resignation without having fully exercised his or her options, the optionee's
executors, administrators, legatees or distributees of his or her estate shall
have the right to exercise such options during the twelve-month period following
such death, provided no option will be exercisable within six months after the
date of grant or more than ten years from the date it was granted.
Pursuant to the Option Plan, stock options for 70% of the shares of
Common Stock to be reserved for issuance pursuant to the Option Plan will be
available for grant to personnel of the Company and its subsidiaries other than
outside directors of the Company and the Savings Bank. Upon receipt of
shareholder approval of the Option Plan, the Company plans to grant compensatory
stock options for shares of Common Stock to executive officers and other key
personnel of the Company and its subsidiaries. The exercise price for such
options will be the fair market value of the Common Stock at the date of grant.
Grants will be made by the Committee primarily based on performance, although
the Committee will be able to consider other factors determined to be relevant
in its sole discretion. Under the terms of the Option Plan, no employee of the
Company may be granted options for more than 100,000 shares of Common Stock in a
given fiscal year. Each stock option or portion thereof shall be exercisable at
any time on or after it vests and is exercisable until ten years after its date
of grant or three months after the date on which the optionee's employment
terminates. An option will fully vest in the event of the optionee's death or
disability.
Under current provisions of the Code, the federal income tax treatment
of incentive stock options and compensatory stock options is different. As to
incentive stock options, an optionee who meets certain holding period
requirements will not recognize income at the time the option is granted or at
the time the option is exercised (although a tax preference item subject to the
alternative minimum tax may result upon exercise), and a federal income tax
deduction generally will not be available to the Company at any time as a result
of such grant or exercise. With respect to compensatory stock options, the
difference between the fair market value on the date of exercise and the option
exercise price generally will be treated as ordinary income upon exercise, and
the Company will be entitled to a deduction in the amount of income so
recognized by the optionee.
Management Recognition Plan. The Board of Directors of the Company
intends to adopt the Recognition Plan for directors and selected officers and
employees and to submit such plan to
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stockholders at a special or annual meeting of stockholders no earlier than six
months after the completion of the Conversion and Reorganization. The objective
of the Recognition Plan will be to enable the Company to provide directors,
officers and employees of the Company and the Savings Bank with a proprietary
interest in the Company as an incentive to contribute to its success.
The Recognition Plan will be administered by the same committee that
administers the Option Plan. A number of shares equal to 4.0% of the Common
Stock (73,000 shares, based on the sale of 1,825,000 shares will be reserved
under the Recognition Plan). Shares of Common Stock granted pursuant to the
Recognition Plan generally will be in the form of restricted stock that vests
over a period specified by the Committee and will be issued at no cost to the
recipient. For accounting purposes, compensation expense in the amount of the
fair market value of the Common Stock at the date of the grant to the recipient
will be recognized pro rata over the number of years during which the shares
vest. The shares, while restricted, may not be sold, pledged or otherwise
disposed of. If a recipient terminates employment for reasons other than death
or disability, the recipient will forfeit all rights to the shares under
restriction. If the recipient's termination is caused by death or disability,
all restrictions will expire and all allocated shares will become unrestricted.
Common Stock required for distribution pursuant to the Recognition Plan will be
issued from authorized but unissued shares or from treasury shares repurchased
by the Company, or both. The Board of Directors of the Company may terminate the
Recognition Plan at any time.
Under current OTS regulations, if the Recognition Plan is submitted for
shareholder approval within one year after the consummation of the Conversion
and Reorganization, unless the Regional Director of the OTS permits otherwise,
no individual member of management may receive more than 25% of the shares which
may be issued pursuant to a stock plan and directors who are not employees may
not receive more than 5% of such shares individually and more than 30% of such
shares in the aggregate. If the Recognition Plan is submitted for shareholder
approval within one year after the consummation of the Conversion and
Reorganization, shares granted pursuant to the Recognition Plan will vest at the
rate of 20% per year over the five years following the date of grant. Recipients
of grants under the Recognition Plan will not be required to make any payment at
the time of grant or when the underlying shares of Common Stock become vested.
Upon receipt of stockholder approval of the Recognition Plan, the
Company anticipates granting stock awards for shares of Common Stock to
directors, executive officers and other key personnel. A total of 70% of the
Common Stock to be issued pursuant to the Recognition Plan will be available for
the award of shares of Common Stock to executive officers and key employees of
the Savings Bank. It is currently anticipated that stock awards will be made to
officers and key personnel by the committee primarily based on performance,
although the committee will be able to consider other factors determined to be
relevant in its sole discretion. In addition, pursuant to the Recognition Plan,
30% of the shares of Common Stock authorized to be awarded by the Recognition
Plan will be available to be awarded to outside directors of the Company. It is
currently anticipated that stock awards will be granted to each of the non-
employee directors. All of the stock awards will be granted at no cost to the
recipients. No decision has yet been made as to anticipated grants to
individuals under the Recognition Plan. See "Risk Factors - Possible Dilutive
Effect of Issuance of Additional Shares" and "Management of the Company -
Benefits."
81
<PAGE>
Employee Stock Ownership Plan
The Company will establish an Employee Stock Ownership Plan for
employees age 21 or older who have at least one year of credited service with
the Savings Bank or any affiliate (including years of service with the mutual
predecessor of the Savings Bank). The ESOP will be funded by the Company, the
Savings Bank and any other adopting affiliate with contributions made in cash
(which primarily will be invested in Common Stock) or Common Stock. Benefits may
be paid either in shares of Common Stock or in cash.
It is anticipated that the ESOP will borrow funds which are sufficient
to purchase 8% of the Common Stock issued in the Offerings or 167,900 shares,
based on the issuance of the maximum 2,098,750 shares in the Offerings. The ESOP
plans to obtain a loan from the Company which will permit the ESOP to purchase
such shares. The initial interest rate on the loan is expected to equal the
prime rate, which is currently 8.25%. The Savings Bank will make scheduled
discretionary cash contributions to the ESOP sufficient to amortize the
principal and interest on the loan, which is anticipated to have a maturity of
five years. The Savings Bank may, in any plan year, make additional
discretionary contributions for the benefit of plan participants in either cash
or shares of Common Stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders, upon the
original issuance of additional shares by the Company or upon the sale of
Treasury shares by the Company. Such purchases, if made, would be funded through
additional borrowings by the ESOP or additional contributions. The timing,
amount and manner of future contributions to the ESOP will be affected by
various factors, including prevailing regulatory policies, the requirements of
applicable laws and regulations and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held
in a loan suspense account and released on a pro rata basis as debt service
payments are made. Discretionary contributions to the ESOP and shares released
from the suspense account will be allocated among participants on the basis of
compensation. A participant becomes vested in his or her ESOP account upon
completing five years of service with the Savings Bank or any affiliate.
Forfeitures will be reallocated among remaining participating employees.
Benefits may be payable upon retirement or separation from service. The Savings
Bank's contributions to the ESOP are not fixed, so benefits payable under the
ESOP cannot be estimated.
The Savings Bank will administer the ESOP and Lisa Lawson, Thomas E.
Reeve, Jr. Steve McCord and Anna L. Berry will act as trustees of the related
trust. Under the ESOP, the trustees must vote all allocated shares held in the
ESOP in accordance with the instructions of the participating employees, and
allocated shares for which employees do not give instructions will be voted
generally by the ESOP trustees on any matter as to those shares for which
instructions are given. Unallocated shares held in the ESOP will be voted
generally by the ESOP trustees.
The ESOP will be subject to the requirements of the Employee Retirement
Income Security Act of 1974, as amended, the Code and the regulations of the IRS
and the Department of Labor promulgated thereunder.
82
<PAGE>
MANAGEMENT OF THE SAVINGS BANK
Directors
The direction and control of the Savings Bank is vested in its Board of
Directors. Pursuant to the Bylaws of the Savings Bank, its Board of Directors
shall be divided into three classes which are as equal in size as is possible,
and one of such classes shall be elected annually by the stockholders of the
Savings Bank for three-year terms.
The following table sets forth certain information with respect to the persons
who currently serve as directors of the Savings Bank. There are no arrangements
or understandings between the Savings Bank and any such person pursuant to which
such person may be elected a director of the Savings Bank, and no such director
is related to any other director or executive officer by blood, marriage or
adoption.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Age as of
Name and Position(s) December Principal Employment Director Term
with the Savings Bank 31, 1996 for the Past Five Years Since Expires
- --------------------------------------------------------------------------------
T. Aubrey Silvey 59 Chairman and Chief 1982 1997
Chairman of the Board Executive Officer of
Aubrey Silvey
Enterprises, an
electrical
substation contractor
Gary D. Dorminey 50 Chief Executive 1990 1997
Chief Executive Officer, Officer, President
President and Director and Director of the
Savings Bank
Anna L. Berry 47 Treasurer of 1996 1997
Director Southwire Company, a
major manufacturer
of wire products
Gary M. Bullock 54 President and Chief 1988 1998
Vice Chairman of the Board Executive Officer of
Carroll Electric
Membership Corp.
Jerry L. Clayton 54 Owner of Clayton 1992 1998
Director Pharmacy
Thomas E. Reeve, Jr. 76 Retired Physician 1990 1999
Director
Michael P. Steed 52 President and Owner 1990 1999
Director of the Steed Company,
a manufacturer of
fabric labels
Dean B. Talley 54 Physician 1986 1998
Director
Thomas S. Upchurch 57 President of Georgia 1991 1999
Director Partnership for
Excellence in
Education
</TABLE>
83
<PAGE>
Executive Officers Who Are Not Directors
The following table sets forth certain information with respect to the
persons who currently serve as executive officers of the Savings Bank and who
initially will serve as executive officers of the Company and who are not, and
will not be, directors. There are no arrangements or understandings between the
Savings Bank and/or the Company and any such person pursuant to which such
person was or will be elected an executive officer of the Savings Bank or the
Company and no such officer is related to any director or other officer of the
Savings Bank or the Company by blood, marriage or adoption.
<TABLE>
<CAPTION>
Name and Position(s) with Age as of Principal Employment
the Savings Bank December 31, 1996 for the Past Five Years
- --------------------------------------------------------------------------------
<S> <C> <C>
D. Lane Poston 47 Executive Vice President and
Executive Vice President Chief Operating Officer of the
and Chief Operating Savings Bank
Officer
C. Lynn Gable 44 Chief Financial Officer of the
Chief Financial Officer Savings Bank since February
1997; prior thereto, President
of Gable Financial Group, Inc.
Anyce C. Fox 50 Senior Vice President of the
Senior Vice President Savings Bank since 1990.
</TABLE>
Board Meetings and Committees of the Board of Directors
Regular meetings of the Board of Directors of the Savings Bank are held
on at least a monthly basis and special meetings of the Board of Directors of
the Savings Bank are held from time to time as needed. There were 13 meetings of
the Board of Directors of the Savings Bank held during the fiscal year ended on
December 31, 1996. No director attended fewer than 75% of the total number of
meetings of the Board of Directors of the Savings Bank held during fiscal 1996
and the total number of meetings held by all committees of the Board on which
the director served during such year.
The Board of Directors of the Savings Bank has established various
committees, including an Executive Committee, a Compensation Committee and an
Audit Committee.
The Executive Committee generally has the power and authority to act on
behalf of the Board of Directors on important matters between scheduled director
meetings unless specific Board of Directors action is required or unless
otherwise restricted by the Savings Bank's charter or bylaws or its Board of
Directors. The Executive Committee currently is chaired by T. Aubrey Silvey,
with Gary M. Bullock, Gary D. Dorminey and Michael P. Steed as members. The
Executive Committee met 40 times during fiscal 1996.
The Compensation Committee establishes and reviews executive
compensation and administers executive compensation programs. Gary M. Bullock
serves as Chairman of the Compensation Committee and Michael P. Steed and Thomas
S. Upchurch serve as members. The Compensation Committee met four times during
fiscal 1996.
84
<PAGE>
The Audit Committee recommends to the Board of Directors the independent
public accountants to be selected to audit the Savings Bank's annual financial
statements and to approve any special assignments given to such accountants. The
Audit Committee also reviews the planned scope of the annual audit, any changes
in accounting principles and the effectiveness and efficiency of the Savings
Bank's internal accounting staff. Thomas S. Upchurch serves as Chairman of the
Audit Committee and Dean B. Talley, Thomas E. Reeve and Anna L. Berry serve as
members. The Audit Committee met four times during fiscal 1996.
Other Committees
In addition to committees of the Board of Directors, the Savings Bank
has also established an Asset/Liability Committee, Asset Review Committee,
Marketing/Public Relations Committee, Loan Committee, C.R.A. Committee, 401(k)
Administrative and Investment Committee and Commercial Loan Committee. These
Committees are composed of directors, officers and key personnel of the Savings
Bank.
Executive Compensation
The following table sets forth the compensation paid by the Savings Bank
for services rendered in all capacities during the fiscal year ended December
31, 1996 to the Savings Bank's chief executive officer and all other executive
officers whose total salary and bonus during such year exceeded $100,000. None
of the named executive officers received or held any stock options in 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Other All
Name and Principal Annual Long-Term Other
Position Year Salary Bonus Compensation(1) Compensation Compensation
<S> <C> <C> <C> <C> <C> <C>
Gary D. Dorminey 1996 $139,000 $31,650 0 0 0
President and Chief 1995 129,250 42,342 0 0 0
Executive Officer 1994 117,500 24,675 0 0 0
D. Lane Poston 1996 105,000 24,182 0 0 0
Executive Vice 1995 99,500 24,875 0 0 0
President and Chief 1994 95,520 19,830 0 0 0
Operating Officer
</TABLE>
(1) Does not include amounts attributable to miscellaneous benefits received by
executive officers, including automobiles owned by the Savings Bank. The costs
to the Savings Bank of providing such benefits to any individual executive
officer during any of the years reported did not exceed the lesser of $50,000 or
10% of the total annual salary and bonus reported for the individual.
Board Fees
Following the Conversion and Reorganization, the directors of the
Company will not receive compensation solely for their services as directors of
the Company. Each member of the Board of Directors of the Savings Bank is paid a
fee of $575 per Board meeting attended, $750 per month for Executive Committee
members other than the Chairman ($1,000 per month in the case of the Chairman of
the committee) and $200 per meeting for all other committees.
85
<PAGE>
Directors' Retirement Plan
In December 1995, the Savings Bank initiated a defined contribution
post-retirement benefit plan to provide retirement benefits to its directors and
to provide death benefits for the designated beneficiary. In connection with the
plan's establishment, the Savings Bank purchased a whole life insurance contract
on the life of each director and entered into a split dollar arrangement with
each director. The increase in cash surrender value of the contract, less the
Bank's cost of funds, determines each director's annual benefit. In the event
the insurance contract fails to produce positive returns, the Savings Bank has
no separate obligation to contribute to the Plan. At December 31, 1996, the cash
surrender value of the insurance contract was approximately $969,000. See Note
(9) of Notes to Consolidated Financial Statements.
Employment Agreements
Mr. Dorminey currently has an employment agreement with the Savings
Bank that provides him with (a) an annual salary that has been increased
annually by the Board of Directors in accordance with the terms of the agreement
to the salary shown in "--Executive Compensation--Summary Compensation Table;"
(b) an incentive bonus determined each year by the Compensation Committee of the
Board of Directors; (c) participation in employee benefit programs maintained
for employees of the Savings Bank; (d) reimbursement of the dues and cost of
club membership; and (e) use of an automobile. The agreement further provides
that in the event of termination following a change in control of the Savings
Bank, Mr. Dorminey shall be entitled to a payment equal to the greater of (i)
the payments due under the remaining term of the agreement, or (ii) 2.99 times
his average annual compensation over the five years preceding such termination.
The Savings Bank and the Company (collectively, the "Employer") and
Mr. Dorminey have agreed to terminate Mr. Dorminey's current employment
agreement as of June 1, 1997 and to replace it with a new agreement with regard
to Mr. Dorminey's continued service as President and Chief Executive Officer of
the Company and the Savings Bank. During the term of this agreement, Mr.
Dorminey will receive (a) an annual salary of $165,000, which is subject to
discretionary annual increases by the Savings Bank's Board of Directors; (b) an
incentive bonus determined each year by the Compensation Committee of the
Savings Bank's Board of Directors based upon the achievement of certain
performance criteria to be determined annually by the Board of Directors; (c)
benefits under such other programs as are maintained for employees of the
Savings Bank or the Company generally; (d) reimbursement for reasonable business
expenses, club dues and business-related costs of club memberships; (e) use of
an automobile; and (f) such other medical, dental and other healthcare benefits
as are extended to other management personnel. The agreement has an initial term
of three years and will automatically renew on each day after its effective date
so that the term remains a three-year term. Automatic renewal may be terminated
by either Mr. Dorminey or the Employer by giving written notice to the other
party of such termination, in which event the term will end on the third
anniversary of the thirtieth day following the date the written notice is
received. If the agreement is terminated by the Employer for cause (as defined
in the agreement) or by Mr. Dorminey without good reason (as defined in the
agreement), Mr. Dorminey will receive only such salary and bonus amounts as are
due and owed to him on the effective date of the termination. If he is
terminated without cause or upon permanent disability, or if he terminates his
employment with good reason, 60 days' prior written notice of intent to
terminate is required and Mr. Dorminey will receive a termination payment equal
to his Average Monthly Compensation (as defined below) for the remaining term of
the agreement. Average Monthly Compensation means the quotient determined by
dividing (a) the greater of (1) Mr. Dorminey's then current base salary, or (2)
the average of his base salary and incentive bonus for the most recent three
consecutive 12-month periods during which he was employed by the Employer
immediately prior to the effective date of the termination that produced the
highest average by (b) twelve (12). This payment may be reduced if necessary to
comply with certain provisions of the Internal Revenue Code. In addition, Mr.
Dorminey has agreed not to engage in the community banking business within a 20-
mile radius of any office or facility of the Employer for a period of 36 months
following his termination by the Employer for cause or by Mr. Dorminey for good
reason or following a change in control of the Employer as defined in the
agreement, and not to solicit the Employer's customers or employees within the
same geographic area for the same period of time.
Messrs. Poston and Gable and Ms. Fox have also entered into employment
agreements with the Employer that contain essentially identical terms and
conditions, except that the base salaries set forth in such agreements are
$115,000, $90,000 and $65,600, respectively. Their employment agreements will
become effective as of June 1, 1997.
Retirement Plan
The Savings Bank has a defined benefit pension plan ("Retirement Plan" )
for all employees who have attained the age of 21 years and have completed one
year of service with the Savings Bank In general, the Retirement Plan provides
for annual benefits payable monthly upon retirement at age 65 in an amount equal
to approximately one percent of the "Average Compensation" of the employee
(which is equal to the average of the compensation paid to him or her during the
five successive calendar years within the final ten calendar years of service
affording the highest average, excluding bonuses, overtime pay and other special
compensation) for each year of service, not in excess of 40 years. Under the
Retirement Plan, an employee's benefits are fully vested after five years of
qualifying service. A year of service is any year in which an employee works a
minimum of 1,000 hours. The Retirement Plan provides for an early retirement
option with reduced benefits for participants who are 55.
86
<PAGE>
The following table illustrates annual pension benefits for retirement
at age 65 under various levels of compensation and years of service. The
figures in the table assume that the Retirement Plan continues in its
present form and that the participants elect a straight life annuity form
of benefit.
<TABLE>
<CAPTION>
Five Year
Average 10 Years of 15 Years of 20 Years of 25 Years of 30 Years of 35 Years of
Compensation Service Service Service Service Service Service
- ------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$ 40,000 $ 4,000 $ 6,000 $ 8,000 $10,000 $12,000 $14,000
50,000 5,000 7,500 10,000 12,500 15,000 17,500
60,000 6,000 9,000 12,000 15,000 18,000 21,000
70,000 7,000 10,500 14,000 17,500 21,000 24,500
80,000 8,000 12,000 16,000 20,000 24,000 28,000
90,000 9,000 13,500 18,000 22,500 27,000 31,500
100,000 10,000 15,000 20,000 25,000 30,000 35,000
110,000 11,000 16,500 22,000 27,500 33,000 38,500
120,000 12,000 18,000 24,000 30,000 36,000 42,000
130,000 13,000 19,500 26,000 32,500 39,000 45,500
140,000 14,000 21,000 28,000 35,000 42,000 49,000
150,000 15,000 22,500 30,000 37,500 45,000 52,500
160,000 16,000 24,000 32,000 40,000 48,000 56,000
</TABLE>
The Savings Bank did not contribute to the Retirement Plan for fiscal
1996. At December 31, 1996, Mr. Dorminey had 8.67 years of credited
service under the Retirement Plan and total accrued funds in the Retirement
Plan of $6,721, and Mr. Poston had 5.58 years of credited service under the
Retirement Plan and total accrued funds in the Retirement Plan of $5,289.
The Savings Bank will continue to maintain the Retirement Plan
following the Conversion and Reorganization.
401(k) Plan
The Savings Bank maintains a 401(k) retirement savings plan (the
"401(k) Plan") for employees who satisfy minimum age and service
requirements and makes matching contributions to this plan equal to 50% of
an eligible employee's salary deferrals (not in excess of 10% of his or her
compensation). Under the 401(k) Plan, each employee may elect to reduce
his or her current gross salary by up to 15% of his or her compensation,
not to exceed certain limits specified in the Code, and have the amount of
the reduction contributed to the 401(k) Plan. Upon termination of
employment, a participant may elect to receive a lump sum distribution.
Indebtedness of Management
As a result of FIRREA's application of Section 22(h) of the Federal
Reserve Act to savings institutions, any credit extended by a savings
association, such as the Savings Bank to its executive officers, directors
and, to the extent otherwise permitted, principal stockholder(s), or any
related interest of the foregoing, must be (i) on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions by the savings association with non-
affiliated parties and (ii) not involve more than the normal risk of
repayment or present other unfavorable features. In the normal course of
business, the Savings Bank makes loans to directors,
-87-
<PAGE>
officers and employees on substantially the same terms, including interest
rates and collateral, as those prevailing for comparable transactions with
others.
-88-
<PAGE>
THE CONVERSION AND REORGANIZATION
The Boards of Directors of the Mutual Holding Company, the Savings
Bank and the Company have approved the Plan of Conversion, as has the OTS,
subject to approval by the Members of the Mutual Holding Company entitled
to vote on the matter and the Mutual Holding Company, as the sole
shareholder of the Savings Bank, and the satisfaction of certain other
conditions. Such OTS approval, however, does not constitute a
recommendation or endorsement of the Plan by such agency.
General
The Boards of Directors of the Mutual Holding Company and the Savings
Bank unanimously adopted the Plan on February 11, 1997. The Plan has been
approved by the OTS, subject to, among other things, approval of the Plan
by the Members and by the Mutual Holding Company, as the sole stockholder
of the Savings Bank. The Members Meeting and the Stockholders Meeting have
been called for this purpose on _____________, 1997.
The following is a brief summary of pertinent aspects of the Plan and
the Conversion and Reorganization. The summary is qualified in its
entirety by reference to the provisions of the Plan, which is available for
inspection at the office of the Savings Bank and at the offices of the OTS.
The Plan also is filed as an exhibit to the Registration Statement of which
this Prospectus is a part, copies of which may be obtained from the SEC.
See "Additional Information."
Purposes of the Conversion and Reorganization
The Mutual Holding Company, as a federally chartered mutual holding
company, does not have stockholders and has no authority to issue capital
stock. As a result of the Conversion and Reorganization, the Company will
be structured in the form used by holding companies of commercial banks,
most business entities and a growing number of savings institutions. The
stock holding company form of organization will provide the Company with
the ability to diversify the Company's and the Savings Bank's business
activities through acquisition of or mergers with both stock savings
institutions and commercial banks, as well as other companies. Although
there are no current arrangements, understandings or agreements regarding
any such opportunities, the Company will be in a position after the
Conversion and Reorganization, subject to regulatory limitations and the
Company's financial position, to take advantage of any such opportunities
that may arise. Management believes it will be in the best interests of
the Company, the Savings Bank and the Company's stockholders for the
Company to remain an independent company.
In their decision to pursue the Conversion and Reorganization, the
Mutual Holding Company and the Savings Bank considered various regulatory
uncertainties associated with the mutual holding company structure,
including the ability to waive dividends in the future as well as the
general uncertainty regarding a possible elimination of the federal savings
bank charter.
The Conversion and Reorganization also will be important to the future
growth and performance of the holding company organization by providing a
larger capital base to support the operations of the Savings Bank and
Company and by enhancing their future access to capital markets, ability to
diversify into other financial services related activities, and ability to
provide additional services to the public. Although the Savings Bank
currently has the ability to raise additional capital through the sale of
additional shares of Savings Bank Common Stock, that ability is limited by
the
-89-
<PAGE>
mutual holding company structure which, among other things, requires that
the Mutual Holding Company hold a majority of the outstanding shares of
Savings Bank Common Stock. Therefore, only a minority could be sold to
depositors and other members of the public.
As a result, the Conversion and Reorganization also will likely result
in a larger number of stockholders following the Conversion and
Reorganization as compared to the number of outstanding stockholders of
Savings Bank Common Stock that would be outstanding if the Savings Bank had
determined to pursue a public offering of Savings Bank Common Stock within
the mutual holding company structure. The larger number of stockholders
will increase the likelihood of the development of an active and liquid
trading market for the Common Stock. See "Market for Common Stock."
In light of the foregoing, the Boards of Directors of the Savings Bank
and the Mutual Holding Company believe that the Conversion and
Reorganization is in the best interests of such companies and their
respective stockholders and Members.
Description of the Conversion and Reorganization
On February 11, 1997, the Boards of Directors of the Savings Bank and
the Mutual Holding Company adopted the Plan and in March 1997 the Savings
Bank incorporated the Company under Georgia law as a first-tier wholly
owned subsidiary of the Savings Bank. Pursuant to the Plan, (i) the Mutual
Holding Company will convert to Interim Mutual and simultaneously will
merge with and into the Savings Bank, pursuant to which the Mutual Holding
Company will cease to exist and the shares of Savings Bank Common Stock
held by the Mutual Holding Company will be cancelled, and (ii) Interim CFB
will then merge with and into the Savings Bank. As a result of the merger
of Interim CFB with and into the Savings Bank, the Savings Bank will become
a wholly owned subsidiary of the Company operating under the name
"Carrollton Federal Bank."
-90-
<PAGE>
The following diagram outlines the current organizational structure
and the parties ownership interests:
------------------------------------
CF Mutual
Holdings
------------------------------------
|
| 100%
|
------------------------------------
Carrollton Federal Bank
------------------------------------
|
| 100%
|
------------------------------------
Community First Banking
Company
------------------------------------
|
| 100%
|
------------------------------------
Interim CFB
Savings Bank
------------------------------------
-91-
<PAGE>
The following diagram reflects the Conversion and Reorganization,
including (i) the merger of the mutual Holding Company (following its
conversion to Interim Mutual) with and into the Savings Bank, (ii) the
merger of Interim CFB with and into the Savings Bank, and (iii) the
offering of Common Stock.
------------------------------------
Purchasers of Common Stock
------------------------------------
|
| 100%
|
------------------------------------
Community First
Banking Company
------------------------------------
|
| 100%
|
------------------------------------
Carrollton Federal Bank
------------------------------------
Pursuant to OTS regulations, consummation of the Conversion and
Reorganization (including the offering of Common Stock in the Offerings, as
described below) is conditioned upon the approval of the Plan by (1) the
OTS, (2) at least a majority of the total number of votes eligible to be
cast by members of the Mutual Holding Company at the Members' Meeting, and
(3) holders of at least two-thirds of the shares of the outstanding Savings
Bank Common Stock at the Stockholders' Meeting. The OTS has conditionally
approved the Plan. One hundred percent of the Savings Bank's Common Stock
is owned by the Mutual Holding Company and the Mutual Holding Company
intends to vote its shares of Savings Bank Common Stock in favor of the
Plan at the Stockholders' Meeting.
Effects of the Conversion and Reorganization
General. Prior to the Conversion and Reorganization, each depositor
in the Savings Bank has both a deposit account in the institution and a pro
rata ownership interest in the net worth of the Mutual Holding Company
based upon the balance in his account, which interest may only be realized
in the event of a liquidation of the Mutual Holding Company. However, this
ownership interest is tied to the depositor's account and has no tangible
market value separate from such deposit account. A depositor who reduces
or closes his or her account receives a portion or all of the balance in
the account but nothing for his or her ownership interest in the net worth
of the Mutual Holding Company, which is lost to the extent that the balance
in the account is reduced.
Consequently, the depositors of the Savings Bank normally have no way
to realize the value of their ownership interest in the Mutual Holding
Company, which has realizable value only in the unlikely event that the
Mutual Holding Company is liquidated. In such event, the depositors of
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<PAGE>
record at that time, as owners, would share pro rata in any residual
surplus and reserves of the Mutual Holding Company after other claims are
paid.
Upon consummation of the Conversion and Reorganization, permanent
nonwithdrawable capital stock will be created to represent the ownership of
the net worth of the Company. The Common Stock of the Company is separate
and apart from deposit accounts and cannot be and is not insured by the
FDIC or any other governmental agency. Certificates are issued to evidence
ownership of the permanent stock. The stock certificates are transferable,
and therefore the stock may be sold or traded if a purchaser is available
with no effect on any account the seller may hold in the Savings Bank.
Continuity. While the Conversion and Reorganization is being
accomplished, the normal business of the Savings Bank of accepting deposits
and making loans will continue without interruption. The Savings Bank will
continue to be subject to regulation by the OTS and the FDIC. After the
Conversion and Reorganization, the Savings Bank will continue to provide
services for depositors and borrowers under current policies by its present
management and staff.
The directors and officers of the Savings Bank at the time of the
Conversion and Reorganization will continue to serve as directors and
officers of the Savings Bank after the Conversion and Reorganization. The
directors and officers of the Company consist of individuals currently
serving as directors and officers of the Mutual Holding Company and the
Savings Bank, and they generally will retain their positions in the Company
after the Conversion and Reorganization.
Effect on Deposit Accounts. Under the Plan, each depositor in the
Savings Bank at the time of the Conversion and Reorganization will
automatically continue as a depositor after the Conversion and
Reorganization, and each such deposit account will remain the same with
respect to deposit balance, interest rate and other terms, except to the
extent that funds in the account are withdrawn to purchase Common Stock to
be issued in the Offerings. Each such account will be insured by the FDIC
to the same extent as before the Conversion and Reorganization. Depositors
will continue to hold their existing certificates, passbooks and other
evidences of their accounts.
Effect on Loans. No loan outstanding from the Savings Bank will be
affected by the Conversion and Reorganization, and the amount, interest
rate, maturity and security for each loan will remain as they were
contractually fixed prior to the Conversion and Reorganization.
Effect on Voting Rights of Members. At present, all depositors of the
Savings Bank and certain borrowers (those having borrowings as of July 19,
1990 that are still in existence) are members of, and have voting rights
in, the Mutual Holding Company as to all matters requiring membership
action. Upon completion of the Conversion and Reorganization, depositors
and such borrowers will cease to be members and will no longer be entitled
to vote at meetings of the Mutual Holding Company. Upon completion of the
Conversion and Reorganization, all voting rights in the Savings Bank will
be vested in the Company as the sole stockholder of the Savings Bank.
Exclusive voting rights with respect to the Company will be vested in the
holders of Common Stock. Depositors of the Savings Bank will not have
voting rights in the Company after the Conversion and Reorganization,
except to the extent that they become stockholders of the Company.
Tax Effects. Consummation of the Conversion and Reorganization is
conditioned on prior receipt by the Primary Parties of rulings or opinions
with regard to federal and Georgia income taxation which indicate that the
adoption and implementation of the Plan of Conversion set forth
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herein will not be taxable for federal or Georgia income tax purposes to
the Primary Parties or the Savings Bank's Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members, except as discussed
below. See "- Tax Aspects" below.
Effect on Liquidation Rights. Were the Mutual Holding Company to
liquidate, all claims of the Mutual Holding Company's creditors would be
paid first. Thereafter, if there were any assets remaining, members of the
Mutual Holding Company would receive such remaining assets, pro rata, based
upon the deposit balances in their deposit accounts at the Savings Bank
immediately prior to liquidation. In the unlikely event that the Savings
Bank were to liquidate after the Conversion and Reorganization, all claims
of creditors (including those of depositors, to the extent of their deposit
balances) also would be paid first, followed by distribution of the
"liquidation account" to certain depositors (see "-Liquidation Rights"
below), with any assets remaining thereafter distributed to the Company as
the holder of the Savings Bank's capital stock. Pursuant to the rules and
regulations of the OTS, a merger, consolidation, sale of bulk assets or
similar combination or transaction with another insured savings institution
would not be considered a liquidation for this purpose and, in such a
transaction, the liquidation account would be required to be assumed by the
surviving institution.
The Offerings
Subscription Offering. In accordance with the Plan of Conversion,
rights to subscribe for the purchase of Common Stock have been granted
under the Plan of Conversion to the following persons in the following
order of descending priority: (1) Eligible Account Holders; (2) the ESOP;
(3) Supplemental Eligible Account Holders; and (4) Other Members. All
subscriptions received will be subject to the availability of Common Stock
after satisfaction of all subscriptions of all persons having prior rights
in the Subscription Offering and to the maximum and minimum purchase
limitations set forth in the Plan of Conversion and as described below
under "- Limitations on Common Stock Purchase." Pursuant to the Plan and
OTS policy and regulations, subscription rights will be allocated based on
a subscriber's account relationship with the Savings Bank. No person
holding subscription rights may exceed any otherwise applicable purchase
limitation by submitting multiple orders for Common Stock in the Offerings.
Multiple orders are subject to adjustment on a pro rata basis and deposit
balances will be divided equally among such orders in allocating shares in
the event of an oversubscription. The beneficial owners of individual
retirement accounts, Keogh savings accounts and similar retirement accounts
shall receive the subscription rights with respect to those deposit
accounts.
Priority 1: Eligible Account Holders. Each Eligible Account Holder
will receive, without payment therefor, first priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of (i) $482,700 of Common Stock, (ii) one-tenth of one percent
(.10%) of the total offering of shares of Common Stock in the Subscription
Offering or (iii) 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Common Stock
offered in the Subscription Offering by a fraction, of which the numerator
is the amount of the Eligible Account Holder's qualifying deposit and the
denominator of which is the total amount of qualifying deposits of all
Eligible Account Holders, in each case as of the close of business on
December 31, 1995 (the "Eligibility Record Date"), subject to the overall
purchase limitations. See "- Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions in this category, shares will first be allocated so as to
permit each subscribing Eligible Account Holder to purchase a number of
shares sufficient to make his or her total allocation equal to the lesser
of the number of shares subscribed for or 100 shares. Thereafter,
unallocated shares will be allocated to subscribing Eligible
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Account Holders whose subscriptions remain unfilled in the proportion that
the amounts of their respective eligible deposits bear to the total amount
of eligible deposits of all subscribing Eligible Account Holders whose
subscriptions remain unfilled, provided that no fractional shares shall be
issued. If the amount so allocated exceeds the amount subscribed for by
any one or more Eligible Account Holders, the excess shall be reallocated
(one or more times as necessary) among those Eligible Account Holders whose
subscriptions are not fully satisfied on the same principle described above
until all available shares have been allocated or subscriptions satisfied.
The subscription rights of Eligible Account Holders who are also directors
or executive officers of the Mutual Holding Company or the Savings Bank and
their associates will be subordinated to the subscription rights of other
Eligible Account Holders to the extent attributable to increased deposits
in the year preceding December 31, 1995.
Priority 2: ESOP. The ESOP will receive, without payment therefor,
second priority, nontransferable subscription rights to purchase, in the
aggregate, up to 10% of the Common Stock, including any increase in the
number of shares of Common Stock after the date hereof as a result of an
increase of up to 15% in the maximum of the Valuation Price Range. The
ESOP intends to purchase 8.0% of the shares of Common Stock, or 167,900
shares based on the maximum of the Valuation Price Range. Subscriptions by
the ESOP will not be aggregated with shares of Common Stock purchased
directly by or which are otherwise attributable to any other participants
in the Subscription and Community Offerings, including subscriptions of any
of the Savings Bank's directors, officers, employees or associates thereof.
See "Management of the Company - Benefits - Employee Stock Ownership Plan."
In the event that the number of shares of Common Stock issued in the
Conversion and Reorganization exceeds the number of shares that would be
issued at the maximum of the Valuation Price Range (the "Maximum Shares"),
the ESOP will have the first priority right to purchase any shares of
Common Stock issued in excess of the Maximum Shares (up to an aggregate of
10% of the Common Stock issued in the Conversion, including any shares of
Common Stock to be issued in the Conversion and Reorganization as a result
of an increase in the Valuation Price Range after commencement of the
Subscription Offering and prior to completion of the Conversion and
Reorganization). In the event that there is an oversubscription for shares
of Common Stock, and as a result, the ESOP is unable to purchase in the
Conversion and Reorganization the amounts subscribed for (up to the 10%
limitation described above), then, upon receipt of all necessary regulatory
approvals, the Boards of Directors of the Company and the Savings Bank
shall be authorized to (i) issue additional shares of Common Stock directly
to the ESOP at the Purchase Price or (ii) approve the purchase by the ESOP
in the open market after the Conversion and Reorganization, of such shares
as are necessary for the ESOP to purchase the amounts subscribed for. In
making such purchases, the ESOP would use funds contributed by the Company
or the Savings Bank and/or borrowed from the Company or an independent
financial institution. Purchases of additional shares of Common Stock from
the Company would dilute the interest of other stockholders. See "-
Limitations on Common Stock Purchases" and "Risk Factors - Possible
Dilutive Effect of Issuance of Additional Shares."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third
priority, nontransferable subscription rights to subscribe for the
Subscription Offering up to the greater of (i) $482,700 of Common Stock,
(ii) one-tenth of one percent (.10%) of the total offering of shares of
Common Stock in the Subscription Offering and (iii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the total
number of shares of Common stock offered in the Subscription Offering by a
fraction, of which the numerator is the amount of the Supplemental Eligible
Account
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Holder's qualifying deposit and the denominator of which is the total
amount of qualifying deposits of all Supplemental Eligible Account Holders,
in each case as of the close of business on [March 31], 1997 (the
"Supplemental Eligibility Record Date"), subject to the overall purchase
limitations. See "- Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions in this category, shares first will be allocated so as to
permit each subscribing Supplemental Eligible Account Holder to purchase a
number of shares sufficient to make his or her total allocation equal to
the lesser of the number of shares subscribed for or 100 shares.
Thereafter, unallocated shares will be allocated to subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled
in the proportion that the amounts of their respective eligible deposits
bear to the total amount of eligible deposits of all such subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled,
provided that no fractional shares shall be issued. If the amount so
allocated exceeds the amount subscribed for by any one or more Supplemental
Eligible Account Holders, the excess shall be reallocated (one or more
times as necessary) among those Supplemental Eligible Account Holders whose
subscriptions are not fully satisfied until all available shares have been
allocated or subscriptions satisfied.
Priority 4: Other Members. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, the ESOP and Supplemental Eligible Account Holders, each Other
Member will receive, without payment therefor, fourth priority,
nontransferable subscription rights to subscribe for Common Stock in the
Subscription Offering up to the greater of (i) $482,700 of Common Stock, or
(ii) one-tenth of one percent (.10%) of the total offering of shares of
Common Stock in the Subscription Offering, subject to the overall purchase
limitations. See "- Limitations on Common Stock Purchases."
In the event the Other Members subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders, the
ESOP and Supplemental Eligible Account Holders, is in excess of the total
number of shares of Common Stock offered in the Subscription Offering,
shares first will be allocated so as to permit each subscribing Other
Member to purchase a number of shares sufficient to make his or her total
allocation equal to the lesser of the number of shares subscribed for or
100 shares. Thereafter, any remaining shares will be allocated among
subscribing Other Members on a pro rata basis in the same proportion as
each Other Member's subscription bears to the total subscriptions of all
subscribing Other Members, provided that no fractional shares shall be
issued.
Expiration Date for the Subscription Offering. The Subscription
Offering will expire at 12:00 noon, Eastern Time, on [June 17], 1997,
unless extended by the Primary Parties for up to 45 days or, with the
approval of the OTS, for additional periods by the Primary Parties. Such
extension may not be beyond [June 16,] 1999. Subscription rights which
have not been exercised prior to the Expiration Date will become void.
The Primary Parties will not execute orders until at least the minimum
number of shares of Common Stock (25 shares) have been subscribed for or
otherwise sold. If all shares have not been subscribed for or sold within
45 days after the Expiration Date, unless such period is extended with the
consent of the OTS, all funds delivered to the Savings Bank pursuant to the
Subscription Offering will be returned promptly to the subscribers with
interest and all withdrawal authorizations will be cancelled. If an
extension beyond the 45-day period following the Expiration Date is
granted, the Primary Parties will notify subscribers of the extension of
time and of any rights of subscribers to modify or rescind their
subscriptions.
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Community Offering. To the extent that shares remain available for
purchase after satisfaction of all subscriptions of Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders and Other Members,
the Primary Parties have determined to offer shares pursuant to the Plan to
certain members of the general public, with preference given to natural
persons residing in the Local Community (such natural persons referred to
as "Preferred Subscribers"). Such persons, together with associates of and
persons acting in concert with such persons, may purchase up to $482,700 of
Common Stock in the Community Offering. See "- Limitations on Common Stock
Purchases." This amount may be increased at the sole discretion of the
Primary Parties up to 5% of the total offering of shares in the
Subscription Offering. The opportunity to subscribe for shares of Common
Stock in the Community Offering category is subject to the right of the
Primary Parties, in their sole discretion, to accept or reject any such
orders in whole or in part either at the time of receipt of an order or as
soon as practicable following the completion of the Community Offering.
If there are not sufficient shares available to fill the orders of
Preferred Subscribers after completion of the Subscription and Community
Offerings, such stock will be allocated first to each Preferred Subscriber
whose order is accepted by the Primary Parties, in an amount equal to the
lesser of 100 shares or the number of shares subscribed for by each such
Preferred Subscriber, if possible. Thereafter, unallocated shares will be
allocated among the Preferred Subscribers whose orders remain unsatisfied
in the same proportion that the unfilled subscription of each (up to 2.0%
of the total offering) bears to the total unfilled subscriptions of all
Preferred Subscribers whose subscription remains unsatisfied. If there are
any shares remaining, shares will be allocated to other members of the
general public who subscribe in the Community Offering applying the same
allocation described above for Preferred Subscribers.
The Primary Parties may commence the Community Offering concurrently
with, at any time during, or as soon as practicable after the end of the
Subscription Offering. The Community Offering may terminate at any time
after it is commenced, but must be completed within 45 days after the
completion of the Subscription Offering, unless extended by the Primary
Parties with the consent of the OTS.
Syndicated Community Offering. The Plan provides that, if feasible,
all shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, may be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-
dealers to be formed or through an underwritten public offering. No person
will be permitted to subscribe in the Syndicated Community Offering for
more than $482,700 of Common Stock. The maximum amount of Common Stock
that may be purchased in the aggregate in the Syndicated Community Offering
by any person or entity, together with associates of and persons acting in
concert with such person or entity, shall not exceed an aggregate purchase
price of $482,700 of Common Stock. This amount may be increased to up to
5% of the total offering of shares in the Subscription Offering, provided
that orders for Common Stock in the Syndicated Community Offering will
first be filled to a maximum of $482,700 of the total number of shares of
Common Stock sold in the Conversion. Thereafter, any remaining shares will
be allocated on an equal number of shares basis per order until all orders
have been filled. The Primary Parties have the right to reject orders in
whole or part in their sole discretion in the Syndicated Community
Offering. Neither Trident nor any registered broker-dealer shall have any
obligation to take or purchase any shares of Common Stock in the Syndicated
Community Offering; however, Trident has agreed to use its best efforts in
the sale of shares in the Syndicated Community Offering.
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In addition to the foregoing, if a syndicate of broker-dealers
("selected dealers") is formed to assist in the Syndicated Community
Offering, during the Syndicated Community Offering, selected dealers may
only solicit indications of interest from their customers to place orders
with the Savings Bank as of a certain date (the "Order Date") for the
purchase of shares of Common Stock. When and if Trident and the Savings
Bank believe that enough indications and orders have been received in the
Offerings to consummate the Conversion and Reorganization, Trident will
request, as of the Order Date, selected dealers to submit orders to
purchase shares for which they have received indications of interest from
their 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 a date which will be
three business days from the Order Date ("Debit Date"). Customers who
authorize selected dealers to debit their brokerage accounts are required
to have the funds for payment in their account on but not before the Debit
Date. On the next business day following the Debit Date, selected dealers
will remit funds to the account that the Savings Bank established for each
selected dealer. After payment has been received by the Savings Bank from
selected dealers, funds will earn interest at the Savings Bank's passbook
savings rate until the consummation of the Conversion and Reorganization.
In the event the Conversion and Reorganization are not consummated as
described above, funds with interest will be returned promptly to the
selected dealers, who, in turn, will promptly credit their customers'
brokerage accounts.
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration date, unless extended by the Primary Parties with
the approval of the OTS. See "- Stock Pricing and Number of Shares to be
Issued" below for a discussion of rights of subscribers, if any, in the
event an extension is granted.
Stock Pricing and Number of Shares to be Issued
The Plan of Conversion requires that the purchase price of the Common
Stock must be based on the appraised pro forma market value of the Company
and the Savings Bank, as determined on the basis of an independent
valuation. The Primary Parties have retained Ferguson to make such
valuation. For its services in making such appraisal and for the
preparation of a business plan, Ferguson will receive a maximum fee of
$27,500 plus out of pocket expenses not to exceed $5,000. The Primary
Parties have agreed to indemnify Ferguson and its employees and affiliates
against certain losses (including any losses in connection with claims
under the federal securities laws) arising out of its services as
appraiser, except where Ferguson's liability results from its negligence or
a failure to exercise due diligence or in circumstances in which it had
knowledge of certain material facts.
The Appraisal has been prepared by Ferguson in reliance upon the
information contained in this Prospectus, including the Consolidated
Financial Statements. Ferguson also considered the following factors,
among others: the present and projected operating results and financial
condition of the Primary Parties and the economic and demographic
conditions in the Savings Bank's existing market area; certain historical,
financial and other information relating to the Savings Bank; a comparative
evaluation of the operating and financial statistics of the Savings Bank; a
comparative evaluation of the operating and financial statistics of the
Savings Bank with those of other similarly situated publicly traded
companies located in Georgia and other regions of the United States; the
aggregate size of the offering of the Common Stock; the impact of the
Conversion and Reorganization on the Savings Bank's net worth and earnings
potential; the proposed dividend policy of the Company and the Savings
Bank; and the trading market for the securities of comparable companies and
general conditions in the market for such securities.
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On the basis of the foregoing, Ferguson has advised the Primary
Parties that in its opinion, the estimated pro forma market value of the
Savings Bank and the Company on a combined basis was $36,500,000 as of
February 27, 1997. As a result, the Valuation Price Range, from 15% below
such value to 15% above such value, is from a minimum of $31,025,000 to a
maximum of $41,975,000. The Boards of Directors of the Primary Parties
determined that the Common Stock would be sold at $20.00 per share,
resulting in a range of 1,551,250 to 2,098,750 shares of Common Stock being
offered. The Boards of Directors of the Primary Parties reviewed
Ferguson's appraisal report, including the methodology and the assumptions
used by Ferguson, and determined that the Valuation Price Range was
reasonable and adequate. The Valuation Price Range may be amended with the
approval of the OTS, if required, or if necessitated by subsequent
developments in the financial condition of any of the Primary Parties or
market conditions generally. In the event the Appraisal is updated and
changed below $31,025,000 or above $48,271,250 (the maximum of the
Valuation Price Range, as increased by 15%), such Appraisal will be filed
with the SEC by post-effective amendment.
Based upon current market and financial conditions and recent
practices and policies of the OTS, in the event the Company receives orders
for Common Stock in excess of $41,975,000 (the maximum of the Valuation
Price Range), the Company may be required by the OTS to accept all such
orders up to $48,271,250 (15% above the maximum of the Valuation Price
Range). No assurances, however, can be made that the Company will receive
orders for Common Stock in any amount or that, if such orders are received,
all such orders will be accepted because the Company's final valuation and
number of shares to be issued are subject to the receipt of an updated
Appraisal from Ferguson and the approval of such updated Appraisal by the
OTS. There is no obligation or understanding on the part of management to
take and/or pay for any shares of Common Stock in order to complete the
Offerings.
Ferguson's valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of
Common Stock. Ferguson did not independently verify the Consolidated
Financial Statements and other information provided by the Savings Bank,
the Company and the Mutual Holding Company, nor did Ferguson value
independently the assets or liabilities of the Savings Bank, the Company or
the Mutual Holding Company. The valuation considers the Savings Bank and
the Mutual Holding Company as going concerns and should not be considered
as an indication of the liquidation value of the Savings Bank and the
Company. 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 Stock in the Conversion and Reorganization will
thereafter be able to sell such shares at prices at or above the Purchase
Price or in the range of the foregoing valuation of the pro forma market
value thereof.
No sale of shares of Common Stock may be consummated unless prior to
such consummation Ferguson confirms that nothing of a material nature has
occurred which, taking into account all relevant factors, would cause it to
conclude that the Purchase Price is materially incompatible with the
estimate of the pro forma market value of the Savings Bank and the Company
upon consummation of the Conversion and Reorganization. If such is not the
case, a new Valuation Price Range may be set and a new Subscription and
Community Offering and/or Syndicated Community Offering may be held or such
other action may be taken as the Primary Parties shall determine and the
OTS may permit or require.
Prior to the completion of the Conversion and Reorganization, the
total number of shares of Common Stock to be issued in the Offerings may be
increased or decreased to reflect changes in
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market or financial conditions or to fill the order of the ESOP without a
resolicitation of subscribers, provided that the product of the total
number of shares times the Purchase Price is not below the minimum or more
than 15% above the maximum of the Valuation Price Range (exclusive of a
number of shares equal to up to an additional 8.0% of the Common Stock
which may be issued to the ESOP out of authorized but unissued shares of
Common Stock to the extent such shares are not purchased in the Offerings
due to an oversubscription). In the event market or financial conditions
change so as to cause the aggregate Purchase Price of the shares to be
below the minimum of the Valuation Price Range or more than 15% above the
maximum of such range (exclusive of additional shares that may be issued to
the ESOP), purchasers will be resolicited (i.e., permitted to continue,
modify or rescind their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly
refunded with interest at the Savings Bank's passbook rate of interest).
Any change in the Valuation Price Range must be approved by the OTS.
An increase in the number of shares of Common Stock, either as a
result of an increase in the appraisal of the estimated pro forma market
value or due to the purchase by the ESOP of authorized but unissued shares
(see "- the Offerings - Subscription Offering" and " - Priority 2: ESOP"),
would decrease both a subscriber's ownership interest and the Company's pro
forma net income and equity on a per share basis while increasing pro forma
net income and equity on an aggregate basis. A decrease in the number of
shares of Common Stock would increase both a subscriber's ownership
interest and the Company's pro forma net income and equity on a per share
basis while decreasing pro forma net income and equity on an aggregate
basis. See "Risk Factors - Possible Dilutive Effect of Issuance of
Additional Shares" and "Pro Forma Data."
The appraisal report of Ferguson has been filed as an exhibit to the
Registration Statement and Application for Conversion of which this
Prospectus is a part and is available for inspection in the manner set
forth under "Additional Information."
Persons in Nonqualified States or Foreign Countries
The Primary Parties will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons
entitled to subscribe for stock pursuant to the Plan reside. However, the
Primary Parties are not required to offer stock in the Subscription
Offering to any person who resides in a foreign country or resides in a
state of the United States with respect to which all of the following
apply: (a) the number of persons otherwise eligible to subscribe for
shares under the Plan who reside in such jurisdiction is small; (b) the
granting of subscription rights or the offer or sale of shares of Common
Stock to such persons would require any of the Primary Parties or their
officers, directors or employees, under the laws of such jurisdiction, to
register as a broker, dealer, salesman or selling agent or to register or
otherwise qualify its securities for sale in such jurisdiction or to
qualify as a foreign corporation or file a consent to service of process in
such jurisdiction; and (c) such registration, qualification or filing in
the judgment of the Primary Parties would be impracticable or unduly
burdensome for reasons of costs or otherwise. Where the number of persons
eligible to subscribe for shares in one state is small, the Primary Parties
will base their decision as to whether or not to offer the Common Stock in
such state on a number of factors, including but not limited to the size of
accounts held by account holders in the state, the cost of registering or
qualifying the shares or the need to register the Company, its officers,
directors or employees as brokers, dealers or salesmen.
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Limitations on Common Stock Purchases
The Plan incudes the following limitations on the number of shares of
Common Stock which may be purchased:
(1) No less than 25 shares of Common Stock may be purchased, to
the extent such shares are available;
(2) The ESOP may purchase in the aggregate up to 10% of the shares
of Common Stock to be issued in the Offerings, including any
additional shares issued in the event of an increase in the Valuation
Price Range, although at this time the ESOP intends to purchase only
8.0% of such shares;
(3) The maximum amount of Common Stock subscribed for in all
categories by any person or entity, together with associates of and
persons acting in concert with such person or entity, shall not exceed
$482,700. In addition, where more than one person or entity is an
owner of a particular deposit account or an obligor of a particular
loan account, the orders of such persons pursuant to subscription
rights related to such joint accounts collectively may not exceed the
maximum purchase limitation; and
(4) No more than 28.5% of the total number of shares sold in the
Offerings may be purchased by directors and certain specified officers
of the Mutual Holding Company and the Savings Bank and their
associates in the aggregate, excluding purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the
Members or the Mutual Holding Company, as the sole stockholder of the
Savings Bank, the overall purchase limitation may be increased up to a
maximum of 5% of the total shares of Common Stock to be issued in the
Conversion and Reorganization or decreased to not less than 1% of the total
shares of Common Stock to be issued at the maximum of the Valuation Price
Range, at the discretion of the Primary Parties. If the individual amount
is decreased, subscribers' orders for the maximum amount will be adjusted
without a resolicitation of such subscribers.
In the event of an increase in the total number of shares of Common
Stock offered in the Conversion due to an increase in the Valuation Price
Range of up to 15% (the "Adjusted Maximum"), the additional shares will be
allocated in the following order of priority in accordance with the Plan:
(i) to fill the ESOP's subscription of 8.0% of the Adjusted Maximum number
of shares; (ii) in the event that there is an oversubscription by Eligible
Account Holders, to fill unfulfilled subscriptions of Eligible Account
Holders, up to the Adjusted Maximum; (iii) in the event that there is an
oversubscription by Supplemental Eligible Account Holders, to fill
unfulfilled subscriptions of Supplemental Eligible Account Holders, up to
the Adjusted Maximum; (iv) in the event that there is an oversubscription
by Other Members, to fill unfulfilled subscriptions of Other Members, up to
the Adjusted Maximum; (v) to fill unfulfilled subscriptions by Preferred
Subscribers in the Community Offering to the extent possible, up to the
Adjusted Maximum; and (vi) to fill unfulfilled subscriptions in the
Community Offering other than from Preferred Subscribers, up to the
Adjusted Maximum.
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The term "associate" of a person is defined to mean (i) any
corporation or other organization (other than the Primary Parties or a
majority-owned subsidiary of the Company or the Savings Bank) of which such
person is a director, officer or partner or is directly or indirectly the
beneficial owner of 10% or more of any class of equity securities; (ii) any
trust or other estate in which such person has a substantial beneficial
interest or as to which such person serves as trustee or in a similar
fiduciary capacity, provided, however, that such term shall not include any
tax-qualified employee stock benefit plan of the Primary Parties in which
such person has a substantial beneficial interest or serves as a trustee or
in a similar fiduciary capacity; and (iii) any relative or spouse of such
person, or any relative of such spouse, who either has the same home as
such person or who is a director or officer of one of the Primary Parties
or any of their subsidiaries.
The term "resident" as used herein means any person who, on the date
designated for that category of subscriber in the Plan, maintained a bona
fide residence within the Local Community. To the extent the person is a
corporation or other business entity, the principal place of business or
headquarters must be within the Local Community. To the extent the person
is a personal benefit plan, the circumstances of the beneficiary shall
apply with respect to this definition. In the case of all other benefit
plans, circumstances of the trustee shall be examined for purposes of this
definition. The Savings Bank may utilize deposit or loan records or such
other evidence provided to it to make a determination as to whether a
person is a bona fide resident of the Local Community. Subscribers in the
Community Offering who are natural persons also will have a purchase
preference if they were residents of the Local Community. In all cases,
however, such determination shall be in the sole discretion of the Savings
Bank.
The term "acting in concert" means (i) knowing participation in a
joint activity or interdependent conscious parallel action towards a common
goal, whether or not pursuant to an express agreement, with respect to the
purchase, ownership, voting or sale of Common Stock; (ii) a combination or
pooling of voting or other interests in the securities of the Company for a
common purpose pursuant to any contract, understanding, relationship,
agreement or other arrangement, whether written or otherwise. The Company
and the Savings Bank may presume that certain persons are acting in concert
based upon, among other things, joint account relationships and the fact
that such persons have filed joint Schedules 13D with the SEC with respect
to other companies.
Marketing Arrangements
The Primary Parties have engaged Trident as a financial advisor and
marketing agent in connection with the offering of the Common Stock, and
Trident has agreed to use its best efforts to solicit subscriptions and
purchase orders for shares of Common Stock in the Offerings. Trident is a
member of the National Association of Securities Dealers, Inc. (the "NASD")
and a broker-dealer which is registered with the SEC. Trident is
headquartered in Raleigh, North Carolina, and its telephone number is (919)
781-8900. Trident will provide various services, including but not limited
to (i) training and educating the Savings Bank's directors, officers and
employees regarding the mechanics and regulatory requirements of the stock
sales process: (2) providing its employees to staff the Stock Information
Center to assist the Savings Bank's customers and internal stock purchasers
and to keep records of orders for shares of Common Stock: (3) targeting the
Company's sales efforts, including preparation of marketing materials: and
(4) assisting in the solicitation of proxies of members for use at the
Members' Meeting. Based upon negotiations between the Company and the
Savings Bank and Trident concerning fee structure, Trident will receive a
management fee of $40,000 and a fee equal to 1.65% of the aggregate dollar
amount of capital stock sold by Trident in the Subscription and Community
Offerings (excluding the amounts sold to the ESOP, to directors and
executive officers of the Savings Bank and to associates of such directors
and executive officers). In the event that a selected dealers agreement is
entered into in connection with a Syndicated Community Offering, the
Savings Bank will pay a fee
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in an amount to be agreed upon jointly between Trident and the Savings Bank
based on the aggregate Purchase Price of Common Stock sold by an NASD
member firm pursuant to a selected dealers agreement. Fees to Trident and
to any other broker dealer may be deemed to be underwriting fees, and
Trident and such broker/dealers may be deemed to be underwriters. Trident
will also be reimbursed for its reasonable out-of-pocket expenses including
legal fees of which Trident has already received $10,000. No fees will be
paid to Trident on subscriptions by any director or executive officer or
associates of directors and executive officers or by the ESOP. The Primary
Parties have agreed to indemnify Trident for reasonable costs and expenses
in connection with certain claims or liabilities, including certain
liabilities under the Securities Act for misrepresentations or certain
untrue or alleged untrue statements of material fact or the omission or
alleged omission of a material facts required to be stated or necessary to
make not misleading certain statements contained in this Prospectus.
Directors and executive officers of the Primary Parties may
participate in the solicitation of offers to purchase Common Stock. Other
employees of the Savings Bank may participate in the Offerings in
ministerial capacities or providing clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit
offers to purchase Common Stock or provide advice regarding the purchase of
Common Stock. Questions of prospective purchasers will be directed to
executive officers or registered representatives. The Company will rely on
Rule 3a4-1 under the Exchange Act, and sales of Common Stock will be
conducted within the requirements of Rule 3a4-1, so as to permit officers,
directors and employees to participate in the sale of Common Stock. No
officer, director or employee of the Primary Parties will be compensated in
connection with his or her solicitations or other participation in the
Offerings by the payment of commissions or other remuneration based either
directly or indirectly on transactions in the Common Stock.
Procedure for Purchasing Shares in the Offerings
To ensure that each purchaser receives a Prospectus at least 48 hours
before the date the Offerings terminate in accordance with Rule 15c2-8 of
the Exchange Act, no Prospectus will be mailed any later than five days
prior to such date or hand delivered any later than two days prior to such
date. Execution of the order form will confirm receipt or delivery of the
Prospectus in accordance with Rule 15c2-8. Order forms will only be
distributed with a Prospectus.
To purchase shares in the Subscription Offering, an executed order
form with the required payment for each share subscribed for, or with
appropriate authorization for withdrawal from a deposit account at the
Savings Bank (which may be given by completing the appropriate blanks in
the order form), must be received by the Savings Bank at any of its offices
by 12:00 noon, Eastern Time, on the Expiration Date, unless such date is
extended. To purchase shares in the Community Offering, an executed order
form with the required payment, or appropriate withdrawal authorization,
must be received by the Savings Bank at any of its offices prior to the
time the Community Offering terminates, which may be at any time after it
begins. In addition, the Primary Parties will require a prospective
purchaser to execute a certification in connection with any sale of Common
Stock and will not accept order forms unless such a certification is
executed. Order forms which (i) are not received by such time, (ii) are
improperly completed or executed, (iii) are received without full payment
(or appropriate withdrawal instructions), or (iv) are submitted by a person
whose representations the Primary Parties believe to be false or who they
otherwise believe, either alone, or acting in concert with others, is
violating, evading or circumventing, or intends to violate, evade or
circumvent, the terms and conditions of the Plan, are not required to be
accepted. In addition, the Savings Bank will not accept photocopied or
facsimiled order forms or order forms unaccompanied by an executed
certification form. The Primary Parties have the right to waive or permit
the correction of incomplete or improperly executed forms, but do not
represent that they will do so. Once received, an executed order form may
not be modified, amended or rescinded without the consent of the Primary
Parties, unless the
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Offerings have not been completed within 45 days after the end of the
Subscription Offering unless such period has been extended with the consent
of the OTS.
In order to ensure that Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are properly identified as to
their stock purchase priority, depositors as of the close of business on
the Eligibility Record Date (December 31, 1995) or the Supplemental
Eligibility Record Date (_______________) and depositors and borrowers as
of the close of business on the Voting Record Date (______________, 19___)
must list on the order form all accounts in which they have an interest,
giving all names in each account and the account numbers.
Payment for subscriptions may be made (i) in cash if delivered in
person at any office of the Savings Bank, (ii) by check or money order or
(iii) by authorization of withdrawal from deposit accounts maintained with
the Savings Bank. The Primary Parties will not accept payment for shares
of Common Stock by wired funds. Funds will be deposited in a segregated
account at the Savings Bank and interest will be paid on funds made by
cash, check or money order at the Savings Bank's passbook rate of interest
from the date payment is received until completion or termination of the
Conversion and Reorganization. If payment is made by authorization of
withdrawal from deposit accounts, the funds authorized to be withdrawn from
a deposit account will continue to accrue interest at the contractual rates
until completion or termination of the Conversion and Reorganization, but a
hold will be placed on such funds, thereby making them unavailable to the
depositor until completion or termination of the Conversion and
Reorganization.
If a subscriber authorizes the Savings Bank to withdraw the aggregate
amount of the purchase price from a deposit account, the Savings Bank will
do so as of the effective date of the Conversion and Reorganization. The
Savings Bank will waive any applicable penalties for early withdrawal from
certificate accounts. If the remaining balance in a certificate account is
reduced below the applicable minimum balance requirement at the time that
the funds actually are transferred under the authorization, the certificate
will be cancelled at the time of the withdrawal without penalty and the
remaining balance will earn interest at the passbook rate.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but rather may pay for such shares of Common Stock
subscribed for by it at the Purchase Price upon consummation of the
Offerings, provided that there is in force from the time of its
subscription until such time, a loan commitment from an unrelated financial
institution or the Company to lend to the ESOP, at such time, the aggregate
Purchase Price of the shares for which it subscribed.
Owners of self-directed Individual Retirement Accounts ("IRAs") may
use the assets of such IRAs to purchase shares of Common Stock in the
Offerings, provided that such IRAs are not maintained at the Savings Bank.
Persons with IRAs maintained at the Savings Bank must have their accounts
transferred to a broker to purchase shares of Common Stock in the
Subscription and Community Offerings. In addition, ERISA provisions and IRS
regulations require that officers, directors and 10% stockholders who use
self-directed IRA funds to purchase shares of Common Stock in the
Subscription and Community Offerings make such purchases for the exclusive
benefit of the IRAs. Any parties wishing to use IRA funds for stock
purchases must visit the Stock Information Center on or before
_______________, 1997 so that the necessary forms may be forwarded for
execution and returned prior to the Expiration Date.
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Restrictions on Transfer of Subscription Rights and Shares
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or
understanding to transfer the legal or beneficial ownership of the
subscription rights issued under the Plan or the shares of Common Stock to
be issued upon their exercise. Such rights may be exercised only by the
person to whom they are granted and only for his or her account. Each
person exercising such subscription rights will be required to certify that
he or she is purchasing shares solely for his or her own account and that
he or she has no agreement or understanding regarding the sale or transfer
of such shares. Federal regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to
purchase such subscription rights or shares of Common Stock prior to the
completion of the Conversion.
The Primary Parties will pursue any and all legal and equitable
remedies in the event they become aware of the transfer of subscription
rights and will not honor orders known by them to involve the transfer of
such rights.
Liquidation Rights
In the unlikely event of a complete liquidation of the Mutual Holding
Company in its present mutual form, each depositor of the Savings Bank
would receive his or her pro rata share of any assets of the Mutual Holding
Company remaining after payment of claims of all creditors. Each
depositor's pro rata share of such remaining assets would be in the same
proportion as the value of his or her deposit account was to the total
value of all deposit accounts in the Savings Bank at the time of
liquidation. After the Conversion and Reorganization, each depositor, in
the event of a complete liquidation of the Savings Bank, would have a claim
as a creditor of the same general priority as the claims of all other
general creditors of the Savings Bank. However, except as described below,
his or her claim would be solely in the amount of the balance in his or her
deposit account plus accrued interest. He or she would not have an
interest in the value or assets of the Savings Bank or the Company above
that amount.
The Plan provides for the establishment, upon the completion of the
Conversion and Reorganization, of a special "liquidation account" for the
benefit of Eligible Account Holders and Supplemental Eligible Account
Holders in an amount equal to the Savings Bank's net worth as reflected in
its latest balance sheet contained in the final Prospectus utilized in the
Offerings. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he or she were to continue to maintain his or her deposit
account at the Savings Bank, would be entitled, upon a complete liquidation
of the Savings Bank after the Conversion and Reorganization, to an interest
in the liquidation account prior to any payment to the Company as the sole
stockholder of the Savings Bank. Each Eligible Account Holder and
Supplemental Eligible Account Holder would have an initial interest in such
liquidation account for each deposit account, including passbook accounts,
transaction accounts such as checking accounts, money market deposit
accounts and certificates of deposit, held in the Savings Bank at the close
of business on December 31, 1995 or _______________, as the case may be.
Each Eligible Account Holder and Supplemental Eligible Account Holder will
have a pro rata interest in the total liquidation account for each of his
or her deposit accounts based on the proportion that the balance of each
such deposit account on the December 31, 1995 Eligibility Record Date (or
the _______________ Supplemental Eligibility Record Date, as the case may
be) bore to the balance of all deposit accounts in the Savings Bank on such
date.
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If, however, on any annual closing date thereafter, the amount in any
deposit account is less than the amount in such deposit account on December
31, 1995 or _______________, as the case may be, or any other annual
closing date, then the interest in the liquidation account relating to such
deposit account would be reduced by the proportion of any such reduction,
and such interest will cease to exist if such deposit account is closed.
In addition, no interest in the liquidation account would ever be increased
despite any subsequent increase in the related deposit account. Any assets
remaining after the above liquidation rights of Eligible Account Holders
and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Savings Bank.
Tax Aspects
Consummation of the Conversion and Reorganization is expressly
conditioned upon prior receipt of either a ruling from the IRS or an
opinion of counsel with respect to applicable federal tax laws, and either
a ruling from the State of Georgia or an opinion of counsel with respect to
Georgia tax laws, concerning certain federal and State of Georgia income
tax consequences.
Prior to consummation of the Conversion and Reorganization, Powell,
Goldstein, Frazer & Murphy LLP will issue an opinion to the Company, the
Mutual Holding Company and the Savings Bank to the effect that, for federal
and State of Georgia income tax purposes:
1. The merger of the Mutual Holding Company with and into the Savings
Bank will qualify as a reorganization pursuant to Section
368(a)(1)(A) of the Code;
2. No gain or loss will be recognized by the Mutual Holding Company or
the Savings Bank as a consequence of the merger (except for
deferred gain or loss recognized pursuant to Section 1502 of the
Code in the event that the Mutual Holding Company consolidated
group is not considered to survive as a result of the Conversion
and Reorganization and the resulting Company group does not elect
to file a consolidated return for federal income tax purposes);
3. The merger of Interim CFB with and into the Savings Bank will be
disregarded for federal income tax purposes and will be treated as
the transfer of an amount of proceeds received in the Offerings by
the Company to the Savings Bank in exchange for Savings Bank Common
Stock;
4. No gain or loss will be recognized by the Savings Bank upon receipt
of the contributed offering proceeds in exchange for Savings Bank
Common Stock; and
5. No gain or loss will be recognized by the Company upon receipt of
the offering proceeds in exchange for Company Common Stock.
In the opinion of Ferguson, which opinion is not binding on the IRS,
the subscription rights do not have any ascertainable value, based on the
fact that such rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right
only to purchase the Common Stock at a price equal to its estimated fair
market value. which will be the same price as the Purchase Price for the
unsubscribed shares of Common Stock. If the subscription rights granted to
eligible subscribers are deemed to have an ascertainable value, receipt of
such rights likely would be taxable only to those eligible subscribers who
exercise the subscription rights (either as a capital gain or ordinary
income) in an amount equal to such value, and the Primary Parties could
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recognize gain on such distribution. Eligible subscribers are encouraged
to consult with their own tax advisor as to the tax consequences in the
event that such subscription rights are deemed to have an ascertainable
value.
Unlike private rulings, an opinion is not binding on the IRS and the
IRS could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
Delivery of Certificates
Certificates representing Common Stock issued in connection with the
Offerings will be mailed by the Company's transfer agent to the persons
entitled thereto at the addresses of such persons appearing on the stock
order form for Common Stock as soon as practicable following consummation
of the Conversion and Reorganization. Any certificates returned as
undeliverable will be held by the Company until claimed by persons legally
entitled thereto or otherwise disposed of in accordance with applicable
law. Until certificates for Common Stock are available and delivered to
subscribers, subscribers may not be able to sell the shares of Common Stock
for which they have subscribed, even though trading of Common Stock may be
commenced.
Required Approvals
Various approvals of the OTS are required in order to consummate the
Conversion and Reorganization. The OTS has approved the Plan of
Conversion, subject to approval by the Mutual Holding Company's Members and
the Mutual Holding Company as the Savings Bank's sole stockholder. In
addition, consummation of the Conversion and Reorganization is subject to
OTS approval of the Company's application to acquire all of the to-be-
outstanding Savings Bank Common Stock and the applications with respect to
the merger of the Mutual Holding Company (following its conversion to
Interim Mutual) into the Savings Bank and the merger of Interim CFB into
the Savings Bank, with the Savings Bank being the surviving entity in both
mergers. Applications for these approvals have been filed and are
currently pending. There can be no assurances that the requisite OTS
approvals will be received in a timely manner, in which event the
consummation of the Conversion and Reorganization may be delayed beyond the
expiration of the Offerings.
Pursuant to OTS regulations, the Plan of Conversion also must be
approved by (1) at least a majority of the total number of votes eligible
to be cast by Members of the Mutual Holding Company at the Members'
Meeting, and (2) holders of at least two-thirds of the outstanding Savings
Bank Common Stock at the Stockholders' Meeting. As of the date of this
Prospectus, the Mutual Holding Company holds 100% of all outstanding stock
of the Savings Bank Common Stock and intends to vote those shares at the
Stockholders' Meeting to approve the Plan of Conversion.
Certain Restrictions on Purchase or Transfer of Shares after the Conversion
and Reorganization
All shares of Common Stock purchased in connection with the Conversion
and Reorganization by a director or certain specified officers of the
Primary Parties identified in the Plan of Conversion will be subject to a
restriction that the shares not be sold for a period of one year following
the Conversion and Reorganization, except in the event of the death of such
director or executive officer or pursuant to a merger or similar
transaction approved by the OTS. Each certificate for restricted shares
will bear a legend giving notice of this restriction on transfer, and
appropriate stop-transfer instructions will be issued to the Company's
transfer agent. Any shares of Common Stock issued
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within this one-year period as a stock dividend, stock split or otherwise
with respect to such restricted stock will be subject to the same
restrictions. The directors and certain specified officers of the Company
will also be subject to the insider trading rules promulgated pursuant to
the Exchange Act.
Purchases of Common Stock of the Company by directors, certain
officers specified in the Plan of Conversion and their associates during
the three-year period following completion of the Conversion and
Reorganization may be made only through a broker or dealer registered with
the SEC, except with the prior written approval of the OTS. This
restriction does not apply, however, to negotiated transactions involving
more than 1.0% of the Company's outstanding Common Stock or to the purchase
of stock pursuant to any tax-qualified employee stock benefit plan, such as
the ESOP, or by any non-tax-qualified employee stock benefit plan.
Pursuant to OTS regulations, the Company will generally be prohibited
from repurchasing any shares of Common Stock within one year following
consummation of the Conversion and Reorganization. During the second and
third years following consummation of the Conversion and Reorganization,
the Company may not repurchase any shares of its Common Stock other than
pursuant to (i) an offer to all stockholders on a pro rata basis which is
approved by the OTS; (ii) the repurchase of qualifying shares of a
director, if any; (iii) purchases in the open market by a tax-qualified or
non-tax-qualified employee stock benefit plan in an amount reasonable and
appropriate to fund the plan; or (iv) purchases that are part of an open-
market program not involving more than 5% of its outstanding capital stock
during a 12-month period, if the repurchases do not cause the Savings Bank
to become undercapitalized and the Savings Bank provides to the Regional
Director of the OTS no later than ten days prior to the commencement of a
repurchase program written notice containing a full description of the
program to be undertaken and such program is not disapproved by the
Regional Director. However, the Regional Director has authority to permit
repurchases during the first year following consummation of the Conversion
and Reorganization and to permit repurchases in excess of 5% during the
second and third years upon the establishment of exceptional circumstances
(i.e., where such repurchases would be in the best interests of the
institution and its stockholders).
Amendment or Termination of the Plan
If deemed necessary or desirable by the Board of Directors of the
Primary Parties, the Plan may be amended at any time prior to the
solicitation of proxies from members and stockholders to vote on the Plan
and at any time thereafter with the concurrence of the OTS. Unless the OTS
requires otherwise, any amendment to the Plan made after approval by the
members and stockholders with OTS concurrence will not necessitate further
approval by the members or stockholders. The Plan will terminate if the
sale of all of the shares of Common Stock in the Offerings is not completed
within 24 months after the date of shareholder approval of the Plan.
Before the Plan is approved by the Mutual Holding Company or its members,
whichever is earlier, the Plan may be terminated by the Boards of Directors
of the Primary Parties without OTS approval. Thereafter, the respective
Boards of Directors may terminate the Plan only with OTS approval.
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY
Certain provisions of the Company's Articles of Incorporation and
Bylaws which deal with matters of corporate governance and rights of
shareholders might be deemed to have a potential anti-takeover effect.
These provisions provide, among other things, (i) that the Board of
Directors
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of the Company shall be divided into three classes as nearly equal in
number as possible and that the members of each class shall be elected for
a term of three years, with one class being elected annually; (ii) the
authority to issue shares of authorized but unissued Common Stock and
Preferred Stock and to establish the terms of any one or more series of
Preferred Stock, including voting rights; and (iii) that certain mergers,
acquisitions and similar transactions involving the Company must be
approved by 80% of the shareholder votes entitled to be cast unless two-
thirds of the members of the Board of Directors approves the transaction;
(iv) that 80% of the shareholder votes entitled to be cast will be required
to remove a director without cause; (v) that 80% of the shareholder votes
entitled to be cast will be required to change the number of directors
unless two-thirds of the members of the Board of Directors approve the
change; (vi) that the Board of Directors may consider factors other than
price when evaluating an offer from another party to acquire the Company;
and (vii) that 80% of the shareholder votes entitled to be cast will be
required to amend the foregoing provisions of the Articles of Incorporation
unless two-thirds of the members of the Board of Directors approve the
amendment. In addition to the foregoing, and described below the Georgia
Business Corporation Act (the "GBCA") generally restricts "business
combinations" between the Company or a subsidiary and an "interested
shareholder" within the five-year period after the person or entity becomes
an interested shareholder. These provisions are described in more detail
below.
The foregoing provisions of the Articles of Incorporation and Bylaws
of the Company and Georgia law could have the effect of discouraging an
acquisition of the Company or stock purchases in furtherance of an
acquisition, and could accordingly, under certain circumstances, discourage
transactions which might otherwise have a favorable effect on the price of
the Common Stock.
In addition, the employment agreements between the Company and its
executive officers provide for certain termination payments in the event of
a change in control of the Company. See "Management of the Savings Bank-
Consulting Arrangements and Employment Agreements." The foregoing provision
may make it more costly for companies or persons to acquire control of the
Company.
The Board of Directors believes that the provisions described above
are prudent and will reduce vulnerability to takeover attempts and certain
other transactions that are not negotiated with and approved by the Board
of Directors of the Company. The Board of Directors believes that these
provisions are in the best interests of the Company and its future
shareholders. In the Board of Directors' judgment, the Board of Directors
is in the best position to determine the true value of the Company and to
negotiate more effectively for what may be in the best interests of its
shareholders. Accordingly, the Board of Directors believes that it is in
the best interests of the Company and its future shareholders to encourage
potential acquirors to negotiate directly with the Board of Directors and
that these provisions will encourage such negotiations and discourage
hostile takeover attempts. It is also the Board of Directors' view that
these provisions should not discourage persons from proposing a merger or
other transaction at prices reflective of the true value of the Company and
where the transaction is in the best interests of all shareholders.
Board of Directors
The Articles of Incorporation and Bylaws of the Company require that
the Board of Directors be divided into three classes as nearly equal in
number as possible and that the members of each class shall be elected for
a term of three years and until their successors are elected and qualified,
with one class being elected annually. The vote of the holders of at least
80% of the shares entitled
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to vote is required to change the size of the Board of Directors unless
two-thirds of the directors agree to the change. Under the Company's
Bylaws, any vacancy occurring in the Board of Directors, including any
vacancy created by reason of an increase in the number of directors, may be
filled by the remaining directors, and any director so chosen shall hold
office for the remainder of the term to which the director has been elected
and until his or her successor is elected and qualified. In addition, the
Company's Bylaws provide that any director may be removed for cause by the
holders of a majority of the outstanding voting shares of the Company, but
may only be removed without cause by the holders of 80% of the outstanding
voting shares of the Company. All of these provisions make it more
difficult to force an immediate change in the composition of the Board and
would therefore render more difficult an attempt to gain control of the
Company.
Limitations on Liability
Section 14-2-202 of the GBCA currently provide that directors (but not
officers) of corporations that have adopted a provision in their Articles
of Incorporation eliminating their personal liability to the Corporation or
its shareholders for monetary damages for breach of duty as a director will
not be so liable, except (i) for any breach of the director's duty of
loyalty to the corporation or its shareholders, (ii) for acts or omissions
not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) for the payment of certain unlawful dividends and
the making of certain stock purchases or redemptions or (iv) for any
transaction from which the director derived an improper personal benefit.
This provision would absolve directors of personal liability for negligence
in the performance of their duties, including gross negligence. It would
not permit a director to be exculpated, however, for liability for actions
involving conflicts of interest or breaches of the traditional "duty of
loyalty" to the Company and its shareholders, and it would not affect the
availability of injunctive or other equitable relief as a remedy.
The Company's Articles of Incorporation eliminate the personal
liability of the directors of the Company to the extent permitted by the
GBCA, except that the Articles of Incorporation provide that liability of
the Directors will be eliminated for the breach of any duty and have
modified subsection (iv) of the GBCA provision described in the preceding
paragraph to retain liability only for an improper "material tangible"
personal benefit. Should any portion of the Articles of Incorporation be
deemed to be unenforceable, the Articles of Incorporation provide that
nothing shall limit the enforceability of any other portion of the Articles
of Incorporation.
Currently the scope of the provision in the Company's Articles of
Incorporation limiting the personal liability of directors is uncertain
because of the absence of judicial precedent interpreting similar
provisions. In addition, the SEC takes the position that similar
provisions added to other corporations' charters would not protect those
corporations' directors from liability for violations of the federal
securities laws. Federal banking regulators also may take the same
position with respect to violations of federal banking laws and
regulations.
The provision limiting the personal liability of the Company's
directors does not eliminate or alter the duty of the Company's directors:
it merely limits personal liability for monetary damages to the maximum
extent now or hereafter permitted by the GBCA. Moreover, it currently
applies only to claims against a director arising out of his or her role as
a director; it currently does not apply to claims arising out of his or her
role as an officer (if he or she is also an officer) or arising out of any
other capacity in which he or she serves because Section 14-2-202 of the
GBCA does not authorize such a limitation of liability.
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The provision in the Company's Articles of Incorporation which limits
the personal liability of directors is designed to ensure that the ability
of the Company's directors to exercise their best business judgment in
managing the Company's affairs is not unreasonably impeded by exposure to
the potentially high personal costs or other uncertainties of litigation.
The nature of the tasks and responsibilities undertaken by directors of
publicly-held corporations often require such persons to make difficult
judgments of great importance which can expose such persons to personal
liability, but from which they will acquire no personal benefit. In recent
years, litigation against publicly held corporations and their directors
and officers challenging good faith business judgments and involving no
allegations of personal wrongdoing has become common. Such litigation
regularly involves damage claims in huge amounts which bear no relationship
to the amount of compensation received by the directors or officers,
particularly in the case of directors who are not employees of the
corporation. The expense of such litigation, whether it is well founded or
not, can be enormous. The provision of the Articles of Incorporation
relating to director liability is intended to reduce in appropriate cases,
the risk incident to serving as a director and to enable the Company to
elect and retain the persons most qualified to serve as directors.
Mergers, Consolidations and Sales of Assets
The Company's Articles of Incorporation require the approval of the
holders of 80% of the outstanding stock of the Company entitled to vote
thereon for mergers or consolidations, and for sales, leases or exchanges
of all or substantially all of the Company's assets unless the transaction
is approved by two-thirds of the members of the Boards of Directors. This
provision could tend to make the acquisition of the Company more difficult
to accomplish without the cooperation or favorable recommendation of the
Company's Board of Directors.
As holder of all of the outstanding Savings Bank Common Stock after
consummation of the Conversion and Reorganization, the Company generally
will be able to authorize a merger, consolidation or other business
combination involving the Savings Bank without the approval of the
shareholders of the Company.
Business Combinations with Interested Shareholders
Section 14-2-1132 of the GBCA imposes certain restrictions on business
combinations between the Company and large shareholders. Specifically, the
GBCA generally prohibits a "business combination" (as defined in the GBCA,
generally including mergers, sales and leases of assets, issuances of
securities and similar transactions) between the Company or a subsidiary
and an "interested shareholder" (as defined in Section 14-2-1110 of the
GBCA, generally the beneficial owner of 10% or more of the Common Stock)
within five years after the person or entity becomes an interested
shareholder, unless (i) prior to the person or entity becoming an
interested shareholder, the business combination or the transaction
pursuant to which such person or entity became an interested shareholder
shall have been approved by the Company's Board of Directors, (ii) upon
consummation of the transaction in which the interested shareholder became
such, the interested shareholder holds at least 90% of the Common Stock
(excluding "insider") shares held by persons who are both officers and
directors and shares held by certain employee benefit plans), or (iii)
after the shareholder becomes an interested shareholder, he or she acquires
additional shares resulting in ownership of at least 90% of the outstanding
Common Stock and obtains the approval of the holders of a majority of the
remaining shares, excluding "insider" shares as described above.
One of the effects of the Act may be to prevent highly leveraged
takeovers, which depend upon obtaining access to the acquired corporation's
assets to support or repay acquisition
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<PAGE>
indebtedness and certain coercive acquisition tactics. The Act may prevent
any interested shareholder from taking advantage of its position as a
substantial, if not controlling, shareholder and engaging in transactions
with the Company that may not be fair to the Company's other shareholders
or that may otherwise not be in the best interests of the Company, its
shareholders and other constituencies.
For similar reasons, however, these provisions may make more difficult
or discourage an acquisition of the Company, or the acquisition of control
of the Company by a principal shareholder, and thus the removal of
incumbent management. In addition, to the extent that the Act discourages
takeovers that would result in the change of the Company's management, such
a change may be less likely to occur.
Neither the Savings Bank's Charter and Bylaws nor federal laws and
regulations contain a provision which restricts business combinations
between the Savings Bank and interested shareholders in the manner set
forth in the Act.
Fair Price Provisions
Under Sections 14-2-1111 and -1112 of the GBCA, business combinations
with "interested shareholders" (as defined in Section 14-2-1110 of the GBCA
and described in the preceding section of this Prospectus) must meet one of
three criteria designed to protect minority shareholders: (i) the
transaction must be unanimously approved by the "continuing directors" of
the Company (generally directors who serve prior to the time the interested
shareholder acquired 10% beneficial ownership of the Company and who are
unaffiliated with the interested shareholder); (ii) the transaction must be
approved by two-thirds of the continuing directors and a majority of shares
held by shareholders other than the interested shareholder; or (iii) the
terms of the transaction must meet specified fair pricing criteria and
certain other tests that are intended to ensure that all shareholders
receive a fair price and equivalent consideration for their shares
regardless of when they sell their shares to an acquiring party. This
provision is designed to protect shareholders against the inequities of
certain tactics that have been used in hostile takeover attempts. For
example, in "two-tier" transactions, the acquiring party usually tenders in
cash at a substantial premium for a major stock interest in the target
corporation. After acquiring this initial interest in the corporation, the
acquiring party may acquire total ownership of the corporation by effecting
a "freeze-out" merger that forces minority shareholders to receive cash or
other consideration for their shares of the acquired corporation. As a
result, minority shareholders who do not participate in the initial tender
may receive a lower price or less desirable form of consideration than was
received by shareholders that tendered. The "fair price" provisions of the
GBCA are designed to discourage transactions of this kind and to encourage
negotiated acquisitions in which all shareholders will be more likely to
receive equal treatment.
Dissenters' Rights of Appraisal
After the Conversion and Reorganization, the rights of appraisal of
dissenting shareholders of the Company will be governed by the GBCA.
Pursuant thereto, a shareholder of a Georgia corporation generally, has the
right to dissent from any merger or consolidation involving the corporation
or the sale of all or substantially all of the corporation's assets,
subject to specified procedural requirements. However, no such appraisal
rights are available for the shares of any class or series of a
corporation's capital stock if (i) as of the record date fixed to determine
the shareholders entitled to receive notice of and to vote at the meeting
of shareholders to act upon the agreement of merger or consolidation, such
shares were either listed on a national securities exchange or designated
as a national market system security on an interdealer quotation system by
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the NASD or held of record by more than 2,000 shareholders, or (ii) the
corporation is the surviving corporation of a merger and the merger did not
require the approval of the corporation's shareholders, unless in either
case, the holders of such stock are required by an agreement of merger or
consolidation to accept for that stock something other than: (a) shares of
stock of the corporation surviving or resulting from the merger or
consolidation; (b) shares of stock of any other corporation that, at the
effective date of the merger, will be listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the NASD or held of record by more than
2,000 shareholders; (c) cash in lieu of fractional shares of a corporation
described in clause (a) or (b) above; or (d) any combination of the shares
of stock and cash in lieu of fractional shares described in clauses (a)
through (c) above.
Amendment of Governing Instruments
The Articles of Incorporation of the Company provide that any
amendment of the provisions of the Articles of Incorporation or Bylaws:
(i) requiring a classified board of directors; (ii) requiring a
supermajority vote of the shareholders to change the number of directors of
the Company, remove a director without cause or approve a merger or sale of
the Company; (iii) eliminating the personal liability of directors; or (iv)
allowing the Board to consider factors in addition to price when evaluating
acquisition offers requires the affirmative vote of the holders of at least
80% of the issued and outstanding shares of Common Stock unless two-thirds
of the Board of Directors approves the amendment.
Regulatory Restrictions
The Change in Bank Control Act provides that no person, acting
directly or indirectly or through or in concert with one or more other
persons, may acquire control of a savings institution unless the OTS has
been given 60 days' prior written notice. The HOLA provides that no
company may acquire "control" of a savings institution without the prior
approval of the OTS. Any company that acquires such control becomes a
savings institution holding company subject to registration, examination
and regulation by the OTS. Pursuant to federal regulations, control of a
savings institution is conclusively deemed to have been acquired by, among
other things, the acquisition of more than 25% of any class of voting stock
of the institution or the ability to control the election of a majority of
the directors of an institution. Moreover, control is presumed to have
been acquired, subject to rebuttal, upon the acquisition of more than 10%
of any class of voting stock, or of more than 25% of any class of stock, of
a savings institution where certain enumerated "control factors" are also
present in the acquisition. The OTS may prohibit an acquisition if (i) it
would result in a monopoly or substantially lessen competition, (ii) the
financial condition of the acquiring person might jeopardize the financial
stability of the institution, or (iii) the competence, experience or
integrity of the acquiring person indicates that it would not be in the
interest of the depositors or of the public to permit the acquisition of
control by such person. The foregoing restrictions do not apply to the
acquisition of a savings institution's capital stock by one or more tax-
qualified employee stock benefit plans of the Company or the Savings Bank,
provided that the plan or plans do not have beneficial ownership in the
aggregate of more than 25% of any class of equity security of the savings
institution.
For three years following the Conversion and Reorganization, OTS
regulations prohibit any person from acquiring, either directly or
indirectly, or making an offer to acquire more than 10% of the stock of any
converted savings institution, without the prior written approval of the
OTS, except for (i) any offer with a view toward public resale made
exclusively to the institution or to underwriters or a selling group acting
on its behalf, (ii) offers that if consummated would not result
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<PAGE>
in the acquisition by such person during the preceding 12-month period of
more than one percent of such stock, (iii) offers in the aggregate for up
to 24.9% by the ESOP or other tax-qualified plans of the Company or the
Savings Bank, and (iv) an offer to acquire or acquisition of beneficial
ownership of more than 10% of the common stock of the savings institution
by a corporation whose ownership is or will be substantially the same as
the ownership of the savings institution, provided that the offer or
acquisition is made more than one year following the date of completion of
the conversion. Such prohibition also is applicable to the acquisition of
the Common Stock. In the event that any person, directly or indirectly,
violates this regulation, the securities beneficially owned by such person
in excess of 10% shall not be counted as shares entitled to vote and shall
not be voted by any person or counted as voting shares in connection with
any matters submitted to a vote of shareholders. The definition of
beneficial ownership for this regulation extends to persons holding
revocable or irrevocable proxies for an institution's stock under
circumstances that give rise to a conclusive or rebuttable determination of
control under OTS regulations.
In addition to the foregoing, the Plan prohibits any person, prior to
the completion of the Conversion and Reorganization, from offering, or
making an announcement of an intent to make an offer, to purchase
subscription rights or Common Stock. See "The Conversion and
Reorganization - Restrictions on Transfer of Subscription Rights and
Shares."
Issuance of Capital Stock
Pursuant to applicable laws and regulations, the Mutual Holding
Company is required to own not less than a majority of the outstanding
Savings Bank Common Stock. There will be no such restriction applicable to
the Company following consummation of the Conversion and Reorganization.
Neither the Charter of the Savings Bank nor the Articles of
Incorporation of the Company contain a restriction on the issuance of
shares of capital stock to directors, officers or controlling persons of
the Company and the Savings Bank, respectively. Thus, stock-related
compensation plans such as stock option plans could be adopted by the
Company and the Savings Bank without shareholder approval and shares of
Company capital stock and Savings Bank capital stock could be issued
directly to directors, officers or controlling persons without shareholder
approval. The Bylaws of the NASD, however, generally require corporations
with securities which are quoted on the Nasdaq National Market to obtain
shareholder approval of most stock compensation plans for directors,
officers and key employees of the corporation. Moreover, although
generally not required, shareholder approval of stock-related compensation
plans may be sought in certain instances in order to qualify such plans for
favorable federal income tax and securities law treatment under current
laws and regulations.
Neither the Articles of Incorporation nor Bylaws of the Company
provide for pre-emptive rights to shareholders in connection with the
issuance of capital stock.
Voting Rights
The Articles of Incorporation and Bylaws of the Company do not
authorize cumulative voting in elections of directors. Elimination of
cumulative voting will help to ensure continuity and stability of the
Company's Board of Directors and the policies adopted by it by making it
more difficult for the holders of a relatively small amount of the Savings
Bank Common Stock to elect their nominees to the Board of Directors and
possibly by delaying, deterring or discouraging proxy contests. The
Articles of Incorporation of the Company do not specify or limit the
circumstances under which separate class voting rights may be provided to a
particular class or series of Preferred Stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
General
The Company is authorized to issue 10,000,000 shares of Common Stock
having a par value of $.01 per share and 10,000,000 shares of preferred stock
with no par value (the "Preferred Stock"). The Company currently expects to
issue up to a maximum of 2,098,750 shares of Common Stock and no shares of
Preferred Stock in the Conversion and Reorganization. Each share of the
Company's Common Stock will have the same relative rights as and will be
identical in all respects with each other share of Common Stock. Upon payment of
the Purchase Price for the Common Stock in accordance with the Plan of
Conversion, all such stock will be duly authorized, fully paid and
nonassessable.
The Common Stock of the Company will represent nonwithdrawable
capital, will not be an account of an insurable type, and will not be insured by
the FDIC.
Common Stock
Dividends. The Company can pay dividends if, as and when declared by
its Board of Directors, subject to compliance with limitations which are imposed
by law. See "Dividend Policy." The holders of Common Stock of the Company will
be entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Company out of funds legally available therefor.
If the Company issues Preferred Stock, the holders thereof may have a priority
over the holders of the Common Stock with respect to dividends.
Voting Rights. Upon completion of the Conversion and Reorganization,
the holders of Common Stock of the Company will possess exclusive voting rights
in the Company. They will elect the Company's Board of Directors and act on such
other matters as are required to be presented to them under Georgia law or the
Company's Articles of Incorporation or as are otherwise presented to them by the
Board of Directors. Except as discussed in "Restrictions on Acquisition of the
Company," each holder of Common Stock will be entitled to one vote per share and
will not have any right to cumulate votes in the election of directors. If the
Company issues Preferred Stock, holders of the Preferred Stock may also possess
voting rights.
Liquidation. In the event of any liquidation, dissolution or winding
up of the Company, the holders of its Common Stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of the Company available for distribution. If Preferred Stock is
issued, the holders thereof may have a priority over the holders of the Common
Stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not
be entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion and Reorganization. Such stock may be issued with such
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without
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stockholder approval, issue preferred stock with voting, dividend, liquidation
and conversion rights which could dilute the voting strength of the holders of
the Common Stock and may assist management in impeding an unfriendly takeover or
attempted change in control.
EXPERTS
The audited consolidated financial statements of the Mutual Holding
Company at December 31, 1996 and 1995, and for each of the years in the three-
year period ended December 31, 1996 included in this Prospectus and elsewhere in
the registration statement on Form S-1 filed with the SEC and the Application
for Conversion filed with the OTS, have been audited by Porter Keadle Moore LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included in reliance upon the authority of said firm as experts
in giving said reports.
Ferguson has consented to the publication herein of the summary of its
report to the Company and the Savings Bank setting forth its opinion as to the
estimated pro forma market value of the Company and the Savings Bank to be
outstanding upon completion of the Conversion and Reorganization and its opinion
with respect to subscription rights.
LEGAL MATTERS
The legality of the Common Stock and the federal and Georgia income
tax consequences of the Conversion and Reorganization will be passed upon for
the Company, Mutual Holding Company and Carrollton by Powell, Goldstein, Frazer
& Murphy LLP, Atlanta, Georgia. Certain legal matters will be passed upon for
Trident by Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., Greensboro,
North Carolina.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the Registration Statement. Such information can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material can
be obtained from the SEC at prescribed rates. In addition, the SEC maintains a
World Wide Web site that contains reports, proxy statements, information
statements and other information regarding registrants that file electronically
with the SEC, including the Company. The address is (http://www.sec.gov.). The
statements contained in this Prospectus as to the contents of any contract or
other document filed as an exhibit to the Registration Statement are, of
necessity, brief descriptions thereof and are not necessarily complete; each
such statement is qualified by reference to such contract or document.
The Mutual Holding Company has filed an Application for Conversion
with the OTS with respect to the Conversion and Reorganization. This Prospectus
omits certain information contained in that application. The application may be
examined at the principal office of the OTS, 1700 G Street, N.W., Washington,
D.C. 20552, and at the Southeast Regional Office of the OTS located at 1475
Peachtree Street, N.E., Atlanta, Georgia 30309.
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<PAGE>
In Connection with the Conversion and Reorganization, the Company will
register its Common Stock with the SEC under Section 12(g) of the Exchange Act,
and upon such registration, the Company and the holders of its stock will become
subject to the proxy solicitation rules, reporting requirements and restrictions
on stock purchases and sales by directors, officers and greater than 10%
stockholders, the annual and periodic reporting requirements and certain other
requirements of the Exchange Act. Under the Plan, the Company has undertaken
that it will not terminate such registration for a period of at least three
years following the Conversion and Reorganization.
A copy of the Articles of Incorporation and the Bylaws of the Company
are available without charge from the Company.
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<PAGE>
GLOSSARY
Appraisal Independent appraisal prepared by Ferguson &
Company dated February 27, 1997
BIF Bank Insurance Fund of the FDIC
Code Internal Revenue Code of 1986, as amended
Common Stock The common stock, $0.01 par value per share, of
Community First Banking Company
Community Offering Offering for sale to certain members of the
general public of any shares of Common Stock not
subscribed for in the Subscription Offering,
including the possible offering of Common Stock in
a Syndicated Community Offering
Company Community First Banking Company, a Georgia
corporation
Conversion and The conversion of CF Mutual Holdings to stock
Reorganization form, the issuance of Carrollton Federal Bank,
FSB's outstanding common stock to Community First
Banking Company and Community First Banking
Company's offer and sale of Common Stock in the
Offerings
Eligible Account Holders Deposit account holders of Carrollton Federal
Bank, FSB with account balances of at least $50 as
of the close of business on December 31, 1995
ESOP The Company's Employee Stock Ownership Plan
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Date 12:00 noon, Eastern Time, on [JUNE 17,] 1997,
unless extended
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
Ferguson Ferguson & Company
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
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<PAGE>
FNMA Federal National Mortgage Association
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
Local Community Carroll, Coweta, Douglas, Fayette, Haralson,
Heard, Henry and Paulding counties within the
State of Georgia
Members Members of CF Mutual Holdings
Members' Meeting Special meeting of members of CF Mutual Holdings
called for the purpose of approving the Plan
MRP, or Recognition Plan Plan pursuant to which a number of shares up to
4.0% of the Common Stock to be sold in the
Offerings will be distributed to directors and
selected employees
Mutual Holding Company CF Mutual Holdings, a federally chartered mutual
holding company
NASD National Association of Securities Dealers, Inc.
Nasdaq Nasdaq National Market System
NII Net interest income
NOW account Negotiable order of withdrawal account
NPV Net portfolio value
Offerings Subscription, Community and Syndicated Community
Offerings, collectively
Option Plan Stock option plan pursuant to which options to
purchase a number of shares of Common Stock up to
10% of the shares to be sold in the Offerings will
be issued to directors and selected employees
Other Members Depositors of the Savings Bank as of the close of
business on ___________, 19___ and borrowers of
the Savings Bank as of July 19, 1990 whose
borrowings were still in existence as of the close
of business on ___________, 1997. Does not
include Eligible Account Holders or Supplemental
Account Holders.
OTS Office of Thrift Supervision
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<PAGE>
Plan, or Plan of Plan between CF Mutual Holdings and Carrollton
Conversion Federal Bank, FSB dated as of February 11, 1997,
as amended, pursuant to which (i) CF Mutual
Holdings will convert to an interim federal stock
savings bank and simultaneously merge with and
into the Savings Bank, (ii) a second interim
savings bank formed by the Company solely for such
purpose will then merge into the Savings Bank,
(iii) the Savings Bank will issue all of its
outstanding capital stock to the Company and
become the wholly-owned subsidiary of the Company
and (iv) the Company will offer shares of its
Common Stock in the Offerings.
Primary Parties Community First Banking Company, CF Mutual
Holdings and Carrollton Federal Bank, FSB
Prospectus This Prospectus and Proxy Statement
Purchase Price The $20.00 per share purchase price of the Common
Stock
QTI Qualified thrift investment
QTL Qualified thrift lender
Retirement Plan Retirement Plan of Carrollton Federal Bank, FSB
SAIF Savings Association Insurance Fund of the FDIC
Savings Bank Carrollton Federal Bank, FSB
Savings Bank Common Stock The common stock, $0.01 par value per share, of
Carrollton Federal Bank, FSB
SEC Securities and Exchange Commission
Securities Act Securities Act of 1933, as amended
SFAS Statement of Financial Accounting Standards
adopted by FASB
Subscription Offering Offering of non-transferable rights to subscribe
for the Common Stock, in order of priority, to
Eligible Account Holders, the ESOP, Supplemental
Eligible Account Holders and Other Members
Supplemental Eligible Depositors, who are not Eligible Account Holders,
Account Holders of Carrollton Federal Bank, FSB with account
balances of at least $50 on [MARCH 31,] 1997
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<PAGE>
Syndicated Community Offering of shares of Common Stock remaining after
Offering the Subscription Offering and undertaken prior to
the end and as part of the Community Offering, and
which may, at our discretion be made to the
general public on a best efforts basis by a
selling group of broker-dealers
Trident Trident Securities, Inc.
Valuation Price Range Estimated pro forma market value of the Company
and the Savings Bank ranging from $31,025,000 to
$41,975,000, as it may be amended pursuant to the
Plan
Voting Record Date The close of business on _____________________,
1997, the date for determining members entitled to
vote at the Members' Meeting
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<PAGE>
CF MUTUAL HOLDINGS
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report...................................... F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995...... F-3
Consolidated Statements of Earnings for the Years Ended
December 31, 1996, 1995 and 1994................................ F-4
Consolidated Statements of Capital for the Years Ended
December 31, 1996, 1995 and 1994................................ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994................................ F-6
Notes to Consolidated Financial Statements........................ F-8
Financial statement schedules are omitted because they are not required or are
not applicable, or the required information is shown in the financial statement
or notes thereto.
Financial statements of Community First Banking Company have not been provided
because Community First Banking Company has not conducted any operations to
date.
<PAGE>
[LOGO APPEARS HERE]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
CF Mutual Holdings
We have audited the accompanying consolidated balance sheets of CF Mutual
Holdings and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of earnings, capital, and cash flows for each of the
three years in the period ended December 31, 1996. The consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CF Mutual Holdings
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
PORTER KEADLE MOORE, LLP
/s/ Peter Keadle Moore, LLP
Successor to the practice of
Evans, Porter, Bryan & Co.
Atlanta, Georgia
February 4, 1997, except for note 15,
as to which the date is February 11, 1997
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Assets
------
1996 1995
----------- -----------
<S> <C> <C>
Cash and due from banks, including reserve requirements
of $1,658,000 and $1,050,000 $ 11,061,383 6,947,747
Interest-bearing deposits in financial institutions 3,355,586 9,494,437
Federal funds sold 8,680,000 17,615,000
----------- -----------
Cash and cash equivalents 23,096,969 34,057,184
Securities available for sale 33,927,243 -
Securities held to maturity 7,764,058 10,377,578
Other investments 2,599,741 3,247,341
Mortgage loans held for sale 282,488 3,091,269
Loans, net 269,834,098 270,880,011
Premises and equipment, net 9,288,592 7,365,297
Accrued interest receivable 2,687,472 2,397,423
Other assets 3,050,849 3,061,143
----------- -----------
$ 352,531,510 334,477,246
=========== ===========
Liabilities and Capital
-----------------------
Deposits:
Noninterest-bearing demand $ 15,903,005 12,055,514
Interest-bearing demand 47,288,356 46,625,670
Savings 34,076,732 31,736,434
Time 163,257,956 155,228,432
Time, over $100,000 47,230,149 43,641,462
----------- -----------
Total deposits 307,756,198 289,287,512
Federal Home Loan Bank advances 16,295,186 15,595,341
Subordinated debentures 2,000,000 2,000,000
Accrued interest payable and other liabilities 1,222,603 2,564,148
----------- -----------
Total liabilities 327,273,987 309,447,001
Commitments
Capital:
Retained earnings 25,278,036 25,030,245
Net unrealized loss on securities available for sale, net of tax (20,513) -
----------- -----------
Total capital 25,257,523 25,030,245
----------- -----------
$ 352,531,510 334,477,246
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 24,874,119 24,587,915 23,000,495
Interest-bearing deposits and federal funds sold 822,139 473,124 406,144
Interest and dividends on investment securities:
U.S. Treasury 43,805 56,716 60,930
U.S. Government agencies and mortgage-backed 2,132,908 2,326,932 2,155,765
State, county and municipals 83,541 - -
Other 233,927 268,434 196,558
---------- ---------- ----------
Total interest income 28,190,439 27,713,121 25,819,892
---------- ---------- ----------
Interest expense:
Interest on deposits:
Demand 1,385,726 1,365,946 1,183,901
Savings 889,267 828,348 1,094,354
Time 11,337,831 10,443,910 8,651,930
---------- ---------- ----------
13,612,824 12,638,204 10,930,185
Interest on FHLB advances and subordinated debentures 1,168,634 1,857,531 1,666,171
---------- ---------- ----------
Total interest expense 14,781,458 14,495,735 12,596,356
---------- ---------- ----------
Net interest income 13,408,981 13,217,386 13,223,536
Provision for loan losses 1,142,987 250,000 99,400
---------- ---------- ----------
Net interest income after provision for loan losses 12,265,994 12,967,386 13,124,136
---------- ---------- ----------
Other income:
Service charges on deposits 2,349,522 2,005,839 1,443,041
Gains on sales of securities available for sale 178,487 366,903 -
Miscellaneous 716,379 745,755 693,621
---------- ---------- ----------
Total other income 3,244,388 3,118,497 2,136,662
---------- ---------- ----------
Other expenses:
Salaries and employee benefits 6,453,278 5,346,917 6,255,624
Occupancy and equipment 1,607,963 1,493,728 1,313,795
Deposit insurance premiums 2,339,616 635,932 682,110
Other operating 4,875,135 4,287,652 4,072,090
---------- ---------- ----------
Total other expenses 15,275,992 11,764,229 12,323,619
---------- ---------- ----------
Earnings before income tax (benefit) expense 234,390 4,321,654 2,937,179
Income tax (benefit) expense (13,401) 1,374,627 553,488
---------- ---------- ----------
Net earnings $ 247,791 2,947,027 2,383,691
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Net Unrealized
Loss on Securities
Retained Available for Sale,
Earnings Net of Tax Total
-------- ------------------- -----------
<S> <C> <C> <C>
Balance, December 31, 1993 $ 19,699,527 - 19,699,527
Net earnings 2,383,691 - 2,383,691
---------- ---------- ----------
Balance, December 31, 1994 22,083,218 - 22,083,218
Net earnings 2,947,027 - 2,947,027
---------- ---------- ----------
Balance, December 31, 1995 25,030,245 - 25,030,245
Net earnings 247,791 - 247,791
Change in unrealized loss on
securities available
for sale, net of tax - (20,513) (20,513)
---------- ---------- ----------
Balance, December 31, 1996 $ 25,278,036 (20,513) 25,257,523
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 247,791 2,947,027 2,383,691
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation, amortization and accretion 1,117,487 1,019,631 713,689
Provision for loan losses 1,142,987 250,000 99,400
FHLB stock dividend - - (39,700)
Deferred income tax benefit (946,505) (244,431) (110,918)
Gains on sales of securities available for sale (178,487) (366,903) -
Gains on sales of premises and equipment, net (66,641) (403,674) (73,181)
Change in:
Mortgage loans held for sale 2,808,781 (3,091,269) 2,890,726
Accrued interest receivable (290,050) 74,144 (816,556)
Other assets (87,809) (635,687) 62,808
Accrued interest payable (241,316) 214,526 244,020
Accrued expenses and other liabilities (143,158) 424,857 (770,982)
----------- ----------- -----------
Net cash provided by operating activities 3,363,080 188,221 4,582,997
----------- ----------- -----------
Cash flows from investing activities:
Net maturities of interest-bearing deposits - - 23,000
Proceeds from sales of securities available for sale 4,917,934 19,418,935 -
Proceeds from sales of other investments 759,600 - -
Proceeds from maturities of securities available
for sale 239,984 - -
Proceeds from maturities of securities held to maturity 2,664,499 15,969,894 3,234,583
Proceeds from maturities of other investments - 10,000,053 -
Purchases of other investments (112,000) (10,056,194) -
Purchases of securities available for sale (38,902,740) - -
Purchases of securities held to maturity - (115,000) (37,602,333)
Net change in loans (79,190) 10,181,757 (20,654,713)
Proceeds from sales of real estate 80,220 461,746 119,132
Proceeds from sales of premises and equipment 301,607 1,328,519 103,894
Purchases of premises and equipment (3,361,740) (1,130,516) (1,982,085)
Organization costs - - (212,319)
Cash received in branch acquisition - - 18,949,593
----------- ----------- -----------
Net cash provided (used) by investing
activities (33,491,826) 46,059,194 (38,021,248)
----------- ----------- -----------
Cash flows from financing activities:
Net change in demand and savings deposits 6,850,475 (10,175,766) 2,079,617
Net change in time deposits 11,618,211 10,135,548 (3,503,991)
Proceeds from FHLB advances 10,000,000 5,000,000 26,500,000
Payments of FHLB advances (9,300,155) (27,175,156) (8,675,155)
Proceeds from subordinated debentures - - 2,000,000
----------- ----------- -----------
Net cash provided (used) by financing 19,168,531 (22,215,374) 18,400,471
activities ----------- -----------
Net change in cash and cash equivalents (10,960,215) 24,032,041 (15,037,780)
Cash and cash equivalents at beginning of year 34,057,184 10,025,143 25,062,923
----------- ----------- -----------
Cash and cash equivalents at end of year $ 23,096,969 34,057,184 10,025,143
=========== =========== ===========
</TABLE>
-5-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 15,022,774 14,281,209 12,336,651
Income taxes $ 935,000 1,175,000 822,500
Supplemental schedule of noncash investing and financing activities:
Real estate acquired through foreclosure $ 401,866 428,182 665,532
Loans to facilitate sales of real estate $ 419,750 608,769 429,792
Transfer of securities held to maturity to available for sale $ - 19,052,032 -
</TABLE>
In connection with the 1994 branch acquisition, assets were acquired and
liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $(1,124,185)
Liabilities assumed 21,186,730
Premium paid for core deposit intangible (1,112,952)
-----------
Cash received in connection with branch acquisition $18,949,593
===========
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
Prior to August 1, 1994, CF Mutual Holdings (the "Company") conducted its
activities pursuant to a federal mutual savings bank charter ("Mutual
Bank") and Carroll Services and Development Corporation ("Service")
operated as its wholly owned subsidiary. Effective August 1, 1994, the
operations of the Mutual Bank were transferred to a federally chartered
stock savings bank, Carrollton Federal Bank, FSB ("Bank").
Contemporaneously, Mutual Bank amended its mutual savings bank charter and
by-laws to conform to the requirements applicable to a federally chartered
mutual holding company and changed its name to CF Mutual Holdings. The
August 1, 1994 reorganization transactions were accounted for in a manner
similar to a pooling of interests.
The Company has no capital stock. All holders of the savings, demand or
other authorized accounts of the Bank are members of the Company
("Members"). With respect to all questions requiring action by the Members,
each holder of an account at the Bank is permitted to cast one vote for
each $100, or fraction thereof, of the withdrawal value of the Member's
accounts. In addition, certain borrowers from the Mutual Bank as of July
19, 1990 are entitled to one vote during the period such borrowings are in
existence. No Member has the right to cast more than one thousand votes.
The Company may distribute its net earnings to account holders of the Bank
on such a basis and in accordance with such terms and conditions as may
from time to time be authorized by the Office of Thrift Supervision
("OTS"). All account holders are entitled to equal distribution of the
assets of the Company, pro rata to the value of their accounts in the Bank,
in the event of a voluntary or involuntary liquidation, dissolution or
winding up of the Company.
The Bank is primarily regulated by the OTS and the Federal Deposit
Insurance Corporation and undergoes periodic examinations by these
regulatory authorities. The Bank primarily provides a full range of
customary banking services throughout Carroll, Coweta, Douglas, Fayette,
Heard, Haralson, Paulding and Henry counties in Georgia. Service is
primarily involved in the sale of real estate previously developed for
sale.
Basis of Presentation and Reclassification
------------------------------------------
The consolidated financial statements include the accounts of the Company,
the Bank, Service, CFB Insurance, Inc. and CFB Securities, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform
to the current year presentation.
The accounting principles followed by the Company and its subsidiaries, and
the methods of applying these principles, conform with generally accepted
accounting principles ("GAAP") and with general practices within the thrift
industry. In preparing financial statements in conformity with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts in the financial statements. Actual results could differ
significantly from those estimates. Material estimates common to the thrift
industry that are particularly susceptible to significant change in the
near term include, but are not limited to, the determination of the
allowance for loan losses, the valuation of real estate acquired in
connection with or in lieu of foreclosure on loans, the valuation allowance
for mortgage servicing rights and valuation allowances associated with the
realization of deferred tax assets which are based on future taxable
income.
Cash and Cash Equivalents
-------------------------
Cash equivalents include amounts due from banks, interest-bearing deposits
in financial institutions and federal funds sold. Generally, federal funds
are sold for one-day periods.
-7-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Investment Securities
---------------------
The Company classifies its securities in one of three categories: trading,
available for sale, or held to maturity. There were no trading securities
at December 31, 1996 and 1995. Securities held to maturity are those
securities for which the Bank has the ability and intent to hold to
maturity. All other securities are classified as available for sale.
Available for sale securities consist of investment securities not
classified as trading securities or held to maturity securities and are
recorded at fair value. Held to maturity securities are recorded at cost,
adjusted for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses, net of the related tax effect, on
securities available for sale are excluded from earnings and are reported
as a separate component of stockholders' equity until realized. Transfers
of securities between categories are recorded at fair value at the date of
transfer. Unrealized holding gains or losses associated with transfers of
securities from held to maturity to available for sale are recorded as a
separate component of stockholders' equity.
A decline in the market value of any available for sale or held to maturity
investment below cost that is deemed other than temporary is charged to
earnings and establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to the yield. Realized gains and losses
are included in earnings and the cost of securities sold are derived using
the specific identification method.
Other Investments
-----------------
Other investments include Federal Home Loan Bank ("FHLB") stock and other
equity securities with no readily determinable fair value. An investment in
FHLB stock is required by law for a federally insured savings bank. These
investment securities are carried at cost and include stock dividends.
Interest Rate Cap Agreement
---------------------------
Interest rate cap agreements ("Caps"), which are principally used by the
Company in the management of interest rate exposure, are accounted for on
an accrual basis. Premiums paid for purchased Caps are being amortized to
interest expense over the terms of the Caps. Unamortized premiums are
included in other assets in the consolidated balance sheet. Amounts to be
received under the Caps are accounted for on an accrual basis, and are
recognized as a reduction of interest expense.
Mortgage Loans Held for Sale
----------------------------
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or market value. The amount by which
cost exceeds market value is accounted for as a valuation allowance.
Changes, if any, in the valuation allowance are included in the
determination of net earnings in the period in which the change occurs.
Gains and losses from the sale of loans are determined using the specific
identification method.
Loans, Loan Fees and Interest Income
------------------------------------
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity are reported at their outstanding
unpaid principal balances, net of the allowance for loan losses, deferred
fees or costs on originated loans and unamortized premiums or discounts on
purchased loans.
Loan fees and certain direct loan origination costs are deferred, and the
net fee or cost is recognized in interest income using the level-yield
method over the contractual lives of the loans, adjusted for estimated
prepayments based on the Bank's historical prepayment experience.
Commitment fees and costs relating to commitments whose likelihood of
exercise is remote are recognized over the commitment period on a straight-
line basis. If the commitment is subsequently exercised during the
commitment period, the remaining unamortized commitment fee at the time of
exercise is recognized over the life of the loan as an adjustment to the
yield. Premiums and discounts on purchased loans are amortized over the
remaining lives of the loans using the level-yield method. Fees arising
from servicing loans for others are recognized as earned.
-8-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Loans, Loan Fees and Interest Income, continued
-----------------------------------------------
The Bank accounts for impaired loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors
for Impairment of a Loan" amended for SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosure." A
loan is impaired when, based on current information and events, it is
probable that all amounts due according to the contractual terms of the
loan agreement will not be collected. Impaired loans are measured based on
the present value of expected future cash flows, discounted at the loan's
effective interest rate or at the loan's observable market price, or the
fair value of the collateral of the loan if the loan is collateral
dependent. Interest income from impaired loans is recognized using a cash
basis method of accounting during the time within that period in which the
loans were impaired.
Allowance for Loan Losses
-------------------------
The allowance for loan losses is established through provisions for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the collection of the principal is
unlikely. The allowance is an amount which, in management's judgment, will
be adequate to absorb losses on existing loans that may become
uncollectible. The allowance is established through consideration of such
factors as changes in the nature and volume of the portfolio, adequacy of
collateral, delinquency trends, loan concentrations, specific problem
loans, and economic conditions that may affect the borrower's ability to
pay.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to recognize additions to
the allowance based on their judgments about information available to them
at the time of their examination.
Real Estate
-----------
Real estate acquired through foreclosure is carried at the lower of cost
(defined as fair value at foreclosure) or fair value less estimated costs
to dispose. Generally accepted accounting principles define fair value as
the amount that is expected to be received in a current sale between a
willing buyer and seller other than in a forced or liquidation sale. Fair
values at foreclosure are based on appraisals. Losses arising from the
acquisition of foreclosed properties are charged against the allowance for
loan losses. Subsequent writedowns are provided by a charge to operations
through the allowance for losses on other real estate in the period in
which the need arises.
Real estate held for sale is carried at the lower of cost or fair value
less estimated selling costs. Interest and other carrying charges relating
to properties under development are capitalized as construction costs
during the construction period. Valuations are periodically performed by
management, and provisions for losses through an allowance are established
with a charge to operations if the carrying value of a property exceeds its
estimated net realizable value.
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Major additions and improvements are charged to the asset accounts while
maintenance and repairs that do not improve or extend the useful lives of
the assets are expensed currently. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from
the accounts, and any gain or loss is reflected in earnings for the period.
Depreciation expense is computed using the straight-line method over the
following estimated useful lives:
Land improvements 15-40 years
Buildings and improvements 15-40 years
Furniture and equipment 5-10 years
-9-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Mortgage Servicing Rights
-------------------------
Effective January 1, 1996, the Bank adopted the provisions of SFAS No. 122
"Accounting for Mortgage Servicing Rights." SFAS No. 122 amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities." SFAS No. 122
requires a mortgage banking enterprise to recognize as a separate asset,
the rights to service mortgage loans regardless of whether the servicing
rights are acquired through either purchase or origination. Prior to SFAS
No. 122, SFAS No. 65 prohibited the capitalization of mortgage servicing
rights except where the rights to service loans were acquired from another
organization. Additionally, the new standard requires an impairment
analysis of mortgage servicing rights regardless of whether purchased or
originated.
The Bank's mortgage servicing rights represent the unamortized cost of
purchased and originated contractual rights to service mortgages for others
in exchange for a servicing fee and ancillary loan administration income.
Mortgage servicing rights are amortized over the period of estimated net
servicing income and are periodically adjusted for actual and anticipated
prepayments of the underlying mortgage loans. An impairment analysis is
performed after stratifying the rights by interest rate. Impairment,
defined as the excess of the asset's carrying value over its current fair
value, is recognized through a valuation allowance. At December 31, 1996,
no valuation allowances were required for the mortgage servicing rights.
Core Deposit Intangible
-----------------------
During 1994, the Bank entered into a Purchase and Assumption agreement with
First Union National Bank of Georgia to acquire certain loans, deposits and
other liabilities of a branch in Bremen, Georgia ("branch acquisition") for
a net purchase price approximating $1,113,000. The purchased core deposit
intangible is amortized using the straight-line method over the estimated
average life of the deposit base acquired and is included as a component of
other assets. Amortization expense approximated $74,000, $74,000 and
$69,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Income Taxes
------------
Deferred tax assets and liabilities are recorded for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Future tax benefits, such as net operating loss carryforwards,
are recognized to the extent that realization of such benefits is more
likely than not. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
the assets and liabilities are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income tax expense in the period that includes the enactment
date.
In the event the future tax consequences of differences between the
financial reporting bases and the tax bases of the Company's assets and
liabilities results in deferred tax assets, the standard requires an
evaluation of the probability of being able to realize the future benefits
indicated by such assets. A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax asset will not
be realized. In assessing the realizability of the deferred tax assets,
management considers the scheduled reversals of deferred tax liabilities,
projected future taxable income, and tax planning strategies.
A deferred tax liability is not recognized for portions of the allowance
for loan losses for income tax purposes in excess of the financial
statement balance, as described in note 8. Such a deferred tax liability
will only be recognized when it becomes apparent that those temporary
differences will reverse in the foreseeable future.
-10-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) INVESTMENT SECURITIES
Investment securities at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
SECURITIES AVAILABLE FOR SALE Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government agencies $ 18,867,304 46,835 83,706 18,830,433
State, county and municipals 2,198,615 34,404 2,222 2,230,797
Mortgage-backed securities 12,892,403 24,853 51,243 12,866,013
---------- ------- ------- ----------
$ 33,958,322 106,092 137,171 33,927,243
========== ======= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
SECURITIES HELD TO MATURITY Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 499,819 25 - 499,844
U.S. Government agencies 6,216,029 34,795 90,755 6,160,069
State, county and municipals 115,000 1,206 - 116,206
Mortgage-backed securities 933,210 1,845 12,631 922,424
---------- ------- ------- ----------
$ 7,764,058 37,871 103,386 7,698,543
========== ======= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
SECURITIES HELD TO MATURITY Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,250,810 4,531 - 1,255,341
U.S. Government agencies 7,141,626 117,391 13,044 7,245,973
State, county and municipals 115,000 541 - 115,541
Mortgage-backed securities 1,870,142 5,277 16,093 1,859,326
---------- ------- ------- ----------
$ 10,377,578 127,740 29,137 10,476,181
========== ======= ======= ==========
</TABLE>
-11-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) INVESTMENT SECURITIES, CONTINUED
Mortgage-backed securities are summarized by issuer at December 31, 1996 as
follows:
<TABLE>
<CAPTION>
Securities Available Securities Held
for Sale to Maturity
--------------------------- ------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Federal National Mortgage Association $ 3,983,825 3,932,582 - -
Government National Mortgage - - 156,129 153,705
Association
Federal Home Loan Mortgage - - 778,081 768,719
Corporation
Privately-issued collateralized mortgage
obligations 8,908,578 8,933,431 - -
----------- ---------- --------- ---------
$12,892,403 12,866,013 933,210 922,424
=========== ========== ========= =========
</TABLE>
The amortized cost and estimated fair value of securities available for
sale and securities held to maturity at December 31, 1996, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Available Securities Held
for Sale to Maturity
--------------------------- ------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Within 1 year $ - - 499,819 499,844
========== ========== ========= =========
U.S. Government agencies:
Within 1 year $ - - 581,727 585,437
1 to 5 years 2,999,824 3,014,464 2,634,302 2,660,813
5 to 10 years 11,849,330 11,839,589 3,000,000 2,913,819
More than 10 years 4,018,150 3,976,380 - -
---------- ---------- --------- ---------
$ 18,867,304 18,830,433 6,216,029 6,160,069
========== ========== ========= =========
State, county and municipals:
1 to 5 years $ - - 115,000 116,206
More than 10 years 2,198,615 2,230,797 - -
---------- ---------- --------- ---------
$ 2,198,615 2,230,797 115,000 116,206
========== ========== ========= =========
Total securities other than mortgage-backed:
Within 1 year $ - - 1,081,546 1,085,281
1 to 5 years 2,999,824 3,014,464 2,749,302 2,777,019
5 to 10 years 11,849,330 11,839,589 3,000,000 2,913,819
More than 10 years 6,216,765 6,207,177 - -
Mortgage-backed securities 12,892,403 12,866,013 933,210 922,424
---------- ---------- --------- ---------
$ 33,958,322 33,927,243 7,764,058 7,698,543
========== ========== ========= =========
</TABLE>
On December 14, 1995 the Bank used the one-time reassessment provisions of
the "Special Report - A Guide to Implementation of SFAS No. 115 on
Accounting for Certain Investments in Debt and Equity Securities" to
transfer a portion of its held to maturity securities portfolio which had
an amortized cost of $19,052,032 and a net unrealized gain of $366,903 to
the available for sale category. The special report allowed the Company to
reassess the appropriateness of its classifications of all investment
securities prior to December 31, 1995 without calling into question the
Company's intent to hold investment securities to maturity in the future.
There were no sales of securities held to maturity during 1996, 1995 and
1994. Proceeds from sales of securities available for sale during 1996 and
1995 totalled $4,917,934 and $19,418,935. Gross gains of $178,487 and
$366,903 were realized on those sales.
Securities and interest-bearing deposits with a carrying value of
approximately $2,517,000 and $3,626,000 at December 31, 1996 and 1995,
respectively, were pledged to secure U.S. government and other public
deposits.
-12-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) LOANS
Major classifications of loans at December 31, 1996 and 1995 are summarized
as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Real estate mortgage loans
(1-4 family dwellings) $ 146,577,235 175,038,710
Real estate construction loans 33,681 2,348,532
Commercial loans 57,785,878 43,943,791
Consumer and other installment loans 68,038,424 51,839,952
----------- -----------
Total loans 272,435,218 273,170,985
Less: Allowance for loan losses 2,601,120 2,290,974
----------- -----------
Loans, net $ 269,834,098 270,880,011
=========== ===========
</TABLE>
The Bank concentrates its lending activities in the origination of
permanent residential mortgage loans, commercial mortgage loans, commercial
business loans, and consumer installment loans. The majority of the Bank's
real estate loans are secured by real property located in Carroll County,
Georgia and surrounding counties.
The Bank has recognized impaired loans of approximately $5,680,000 and
$1,918,000 at December 31, 1996 and 1995. The total allowance for loan
losses related to these loans was $243,000 and $381,000 at December 31,
1996 and 1995, respectively. Interest income on impaired loans of
approximately $68,000 and $100,000 was recognized for cash payments
received in 1996 and 1995, respectively.
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 2,290,974 2,391,920 2,686,508
Provisions charged to operations 1,142,987 250,000 99,400
Loans charged off (924,670) (448,484) (457,826)
Recoveries on loans previously
charged off 91,829 97,538 63,838
----------- --------- ---------
Balance at end of year $ 2,601,120 2,290,974 2,391,920
=========== ========= =========
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
consolidated financial statements. Unpaid principal balances of these loans
at December 31, 1996 and 1995 and 1994 approximate $53,061,000,
$48,036,000 and $45,085,000, respectively.
(4) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land and land improvements $ 1,131,003 1,136,802
Buildings and improvements 5,581,884 5,031,011
Furniture and equipment 7,935,857 6,368,621
Construction in progress 114,720 275,784
---------- ----------
14,763,464 12,812,218
Less: Accumulated depreciation 5,474,872 5,446,921
---------- ----------
$ 9,288,592 7,365,297
========== ==========
</TABLE>
Depreciation expense approximated $1,203,000, $1,038,000 and $889,000 at
December 31, 1996, 1995 and 1994, respectively.
-13-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) TIME DEPOSITS
At December 31, 1996, contractual maturities of time deposits are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1997 $ 133,863,983
1998 54,643,630
1999 11,684,852
2000 5,319,281
2001 and thereafter 4,976,359
--------------
$ 210,488,105
==============
</TABLE>
(6) FHLB ADVANCES
The interest rates for FHLB advances at December 31, 1996 and 1995 ranged
from 4.55% to 7.75%, respectively. FHLB advances are collateralized by FHLB
stock and first mortgage loans. Advances from FHLB outstanding at December
31, 1996 mature as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1997 $ 10,800,155
1998 2,550,155
1999 600,156
2000 600,156
2001 and Thereafter 1,744,564
-------------
$ 16,295,186
=============
</TABLE>
(7) SUBORDINATED DEBENTURES
During 1994, the Company issued Series A fixed rate subordinated debentures
to various executive officers and members of the Board of Directors in an
aggregate principal amount of $2,000,000. The subordinated debentures bear
interest at a simple interest rate per annum of 7.25%, which is payable
quarterly, and mature on September 30, 1999. The payment of the principal
and interest is subordinate and junior in right of payment to the claims of
creditors of the Company. The entire proceeds of the offering were used to
increase the capitalization of the Bank.
(8) INCOME TAXES
The following is an analysis of the components of income tax expense for
the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
Current $ 933,104 1,619,058 664,406
Deferred (946,505) (477,858) 81,555
Utilization of state operating loss
carryforwards - 233,427 79,970
Adjustment to valuation allowance - - (272,443)
----------- --------- --------
Income tax (benefit) expense $ (13,401) 1,374,627 553,488
=========== ========= ========
</TABLE>
-14-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(8) INCOME TAXES, CONTINUED
The differences between income tax (benefit)expense and the amount computed
by applying the statutory federal income tax rate of 34% to earnings
before taxes for the years ended December 31, 1996, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Pretax income at statutory rate $ 79,693 1,469,362 998,641
Add (deduct):
Tax-exempt interest income (91,076) (83,920) (61,445)
Adjustment to valuation allowance - - (272,443)
Other (2,018) (10,815) (111,265)
-------- --------- --------
Income tax (benefit) expense $(13,401) 1,374,627 553,488
======== ========= ========
Effective tax rate (6)% 32% 19%
======== ========= ========
</TABLE>
The following summarizes the net deferred tax asset (liability). The net
deferred tax asset (liability) is included as a component of other assets
and accrued interest payable and other liabilities at December 31, 1996 and
1995, respectively.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 515,105 310,999
Allowance for real estate held for 123,689 100,913
development and sale
Deferred compensation 76,968 57,158
Other 53,300 24,957
State tax credits 232,055 234,170
Unrealized loss on securities available
for sale 10,568 -
---------- ---------
Total gross deferred tax assets 1,011,685 728,197
Deferred tax liabilities:
Net deferred loan fees 363,706 727,411
FHLB stock 226,697 515,041
Premises and equipment 335,224 330,762
Other 2,110 28,108
--------- ---------
Total gross deferred tax liabilities 927,737 1,601,322
--------- ---------
Net deferred tax asset (liability) $ 83,948 (873,125)
========== =========
</TABLE>
The Internal Revenue Code ("IRC") was amended during 1996 and the IRC
section 593 reserve method for loan losses for thrift institutions was
repealed. Effective January 1, 1996, the Bank now computes its tax bad debt
reserves under the rules of IRC section 585, which apply to commercial
banks. In years prior to 1996, the Bank obtained tax bad debt deductions
approximating $5.8 million in excess of its financial statement allowance
for loan losses for which no provision for federal income tax was made.
These amounts were then subject to federal income tax in future years
pursuant to the prior IRC section 593 provisions if used for purposes other
than to absorb bad debt losses. Effective January 1, 1996, approximately
$1.0 million of the excess reserve is no longer subject to recapture under
any circumstances and approximately $4.8 million of the excess reserve is
subject to recapture only if the Bank ceases to qualify as a bank pursuant
to the provisions of IRC section 585.
-15-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) EMPLOYEE AND DIRECTOR BENEFIT PLANS
All qualifying employees of the Bank are included in a qualified
multiemployer noncontributory defined benefit pension plan sponsored by
the Financial Institutions Retirement Fund. The Bank's policy is to fund
pension costs accrued. No pension expense was incurred during 1996 or
1995. The Bank's pension expense for 1994 was approximately $104,000. At
June 30, 1996, the date of the latest actuarial valuation, the market
value of the plan's net assets exceeded the actuarially computed value of
accumulated plan benefits. Additional information regarding the Bank's
portion of plan benefits or net assets is not available.
Effective January 1, 1993, the Bank established a retirement plan
qualified pursuant to Internal Revenue Code section 401(k) ("Plan"). The
Plan allows eligible employees to defer a portion of their income by
making contributions into the Plan on a pretax basis. The Bank adopted a
matching formula which vests based on length of service. The Bank matches
50% of employee contributions up to 6% of the employees' compensation.
During the years ended December 31, 1996, 1995 and 1994, the Bank
recognized $94,000, $92,000 and $84,000 in expense related to its
obligations under the Plan.
During December 1995, the Bank initiated a defined contribution
postretirement benefit plan to provide retirement benefits to its Board of
Directors and to provide death benefits for their designated
beneficiaries. Under the plan, the Bank purchased split-dollar whole life
insurance contracts on the lives of each Director. The increase in cash
surrender value of the contracts, less the Bank's cost of funds,
constitutes the Bank's contribution to the plan each year. In the event
the insurance contracts fail to produce positive returns, the Bank has no
obligation to contribute to the Plan. At December 31, 1996 and 1995, the
cash surrender value of the insurance contracts was approximately $969,000
and $890,000 and is included as a component of other assets. Expenses
incurred for benefits were approximately $14,000 during 1996. No expenses
were incurred during 1995.
(10) REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier
I capital (as defined) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined) and of Tangible
capital to average assets. Management believes, as of December 31, 1996
and 1995, that the Bank meets all capital adequacy requirements to which
it is subject.
As of December 31, 1996 and 1995, the most recent notification from the
OTS categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-
based and Tier 1 leverage ratios as set forth in the following table.
There are no conditions or events since that notification that management
believes have changed the institution's category.
-16-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) REGULATORY MATTERS, CONTINUED
The Bank's actual capital amounts and ratios are presented below.
Consolidated amounts do not materially differ from Bank-only capital
amounts and ratios.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------ ----------------- ------ ----------------- -------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996:
Total Capital
(to Risk Weighted Assets) $ 25,612,075 10.9% 18,889,301 >8.0% 23,611,627 >10.0%
-
Tier 1 Capital
(to Risk Weighted Assets) $ 23,587,913 10.0% 9,444,651 >4.0% 14,166,976 > 6.0%
Tier 1 Capital - -
(to Adjusted Assets) $ 23,587,913 6.9% 13,972,080 >4.0% 17,465,100 > 5.0%
Tangible Capital
(to Tangible Assets) $ 23,587,913 6.9% 5,239,530 >1.5% N/A N/A
-
AS OF DECEMBER 31, 1995:
Total Capital
(to Risk Weighted Assets) $ 26,914,471 12.2% 17,588,987 >8.0% 21,986,233 >10.0%
- -
Tier 1 Capital
(to Risk Weighted Assets) $ 25,015,649 11.4% 8,794,493 >4.0% 13,191,740 > 6.0%
- -
Tier 1 Capital
(to Adjusted Assets) $ 25,015,649 7.5% 13,335,941 >4.0% 16,669,926 > 5.0%
- -
Tangible Capital
(to Tangible Assets) $ 25,015,649 7.5% 5,000,978 >1.5% N/A N/A
</TABLE>
The following is a reconciliation of equity capital under generally accepted
accounting principles to regulatory capital at December 31, 1996:
<TABLE>
<CAPTION>
Core/ Risk-
Tangible Leverage Based
Capital Capital Capital
--------- -------- -------
<S> <C> <C> <C>
Equity capital of the Bank $25,893,092 25,893,092 25,893,092
Nonincludable subsidiary--Service (312,371) (312,371) (312,371)
Nonqualifying assets (1,992,808) (1,992,808) (1,992,808)
General valuation allowances - - 2,024,162
----------- ---------- ----------
Regulatory capital $23,587,913 23,587,913 25,612,075
=========== ========== ==========
</TABLE>
Thrift regulations limit the amount of dividends the Bank can pay to the
Company without prior regulatory approval. These limitations are a
function of excess regulatory capital and net earnings in the year the
dividend is declared. In 1997, the Bank can pay dividends totalling
approximately $3,661,000 plus net earnings during 1997.
(11) COMMITMENTS
The Bank leases certain banking facilities under operating lease
arrangements expiring through 2012. Future minimum payments required for
all operating leases with remaining terms in excess of one year are
presented below:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1997 $ 243,839
1998 241,492
1999 223,172
2000 197,228
2001 147,729
Thereafter 773,855
---------
$ 1,827,315
=========
</TABLE>
Total rent expense was approximately $229,000, $127,000 and $101,000 for the
years ended December 31, 1996, 1995 and 1994.
-17-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) COMMITMENTS, CONTINUED
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers and to manage its cost of funds. These financial instruments
include commitments to extend credit, standby letters of credit and an
interest rate cap agreement. These instruments involve, to varying
degrees, elements of credit risk in excess of the amounts recognized in
the consolidated statements of financial condition. The contract amounts
of these instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
Commitments to originate first mortgage loans and to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the counterparty. The Bank's
loans are primarily collateralized by residential and other real
properties, automobiles, savings deposits, accounts receivable, inventory
and equipment located in Carroll County, Georgia and surrounding counties.
Standby letters of credit are written conditional commitments issued by
the Bank to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements. Most letters of credit extend for less than one
year. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. All standby letters of credit are secured at December 31,
1996 and 1995.
On July 20, 1995, the Company entered into a Cap to reduce the potential
impact of increases in interest rates on its interest-bearing liabilities.
The agreement entitles the Company to receive from a counterparty, on a
quarterly basis, the amounts, if any, by which the 3-month LIBOR rate
exceeds the Cap rate of 7% on a notional amount of $25,000,000. No amounts
have been received by the Company through December 31, 1996. The Cap
agreement expires on July 20, 1997.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to originate first mortgage loans $ 128,000 485,000
Commitments to extend credit $ 20,840,000 20,764,000
Standby letters of credit $ 108,000 71.000
Cap agreement $ 27,000 76,000
</TABLE>
(12) MISCELLANEOUS OPERATING EXPENSES
Components of other operating expenses in excess of 1% of interest and
other income for the years ended December 31, 1996, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Advertising $ 470,273 225,317 228,482
Data processing expense $ 648,853 506,908 455,108
Office supplies $ 329,246 213,787 235,714
</TABLE>
-18-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) CF MUTUAL HOLDINGS (PARENT COMPANY ONLY) FINANCIAL INFORMATION
Balance Sheets
December 31, 1996 and 1995
Assets
------
<TABLE>
<CAPTION>
1996 1995
---- ----
Cash and cash equivalents $ 1,327,334 752,189
Investment in subsidiaries 25,873,579 26,350,395
Other assets 222,850 152,662
---------- ----------
$ 27,423,763 27,255,246
========== ==========
Liabilities and Capital
-----------------------
Subordinated debentures $ 2,000,000 2,000,000
Accounts payable and accrued expenses 166,240 225,001
---------- ----------
Total liabilities 2,166,240 2,225,001
Capital 25,257,523 25,030,245
---------- ----------
$ 27,423,763 27,255,246
========== ==========
Statements of Earnings
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income:
Dividend income from the Bank $ 814,000 752,000 82,700
Interest income 30,290 - -
Other 2,240 - -
---------- ---------- ---------
Total income 846,530 752,000 82,700
---------- ---------- ---------
Operating expenses:
Interest expense 145,397 147,134 19,000
Other 54,801 50,791 17,765
---------- ---------- ---------
Total operating expenses 200,198 197,925 36,765
---------- ---------- ---------
Earnings before income tax benefit
and equity in
undistributed earnings of 646,332 554,075 45,935
subsidiaries
Income tax benefit 58,762 67,440 12,500
---------- ---------- ---------
Earnings before equity in
undistributed earnings of
subsidiaries or dividends
received in excess of earnings
of subsidiaries 705,094 621,515 58,435
Dividends received in excess of (457,303) - -
earnings of subsidiaries
Equity in undistributed earnings of - 2,325,512 2,325,256
subsidiaries ---------- ---------- ---------
Net earnings $ 247,791 2,947,027 2,383,691
========== ========== =========
</TABLE>
-19-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) CF MUTUAL HOLDINGS (PARENT COMPANY ONLY) FINANCIAL INFORMATION, CONTINUED
Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 247,791 2,947,027 2,383,691
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Amortization 42,464 42,464 17,765
Dividends received in excess of earnings of
subsidiaries 457,303 - -
Equity in undistributed earnings of subsidiaries - (2,325,512) (2,325,256)
Change in other assets and liabilities (172,413) (4,340) 228,769
---------- ---------- ----------
Net cash provided by operating activities 575,145 659,639 304,969
---------- ---------- ----------
Cash flows from investing activities:
Purchase of capital stock of Bank upon reorganization - - (100)
Contributions of capital to the Bank - - (2,000,000)
Organization costs - - (212,319)
---------- ---------- ---------
Net cash used in investing activities - - (2,212,419)
---------- ---------- ----------
Net cash provided by financing activities, consisting of - - 2,000,000
proceeds from subordinated debentures ---------- ---------- ----------
Net increase in cash 575,145 659,639 92,550
Cash at beginning of year 752,189 92,550 -
---------- ---------- ----------
Cash at end of year $1,327,334 752,189 92,550
========== ========== ==========
</TABLE>
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized on the face of the balance sheet, for which it is
practicable to estimate that value. The assumptions used in the estimation
of the fair value of the Company's financial instruments are detailed
below. Where quoted prices are not available, fair values are based on
estimates using discounted cash flows and other valuation techniques. The
use of discounted cash flows can be significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. The following disclosures should not be considered a surrogate of
the liquidation value of the Company or its subsidiaries, but rather a
good-faith estimate of the increase or decrease in value of financial
instruments held by the Company since purchase, origination or issuance.
-20-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Cash and Cash Equivalents
-------------------------
For cash, due from banks, federal funds sold and interest-bearing
deposits with other banks, the carrying amount is a reasonable estimate
of fair value.
Securities Held to Maturity and Securities Available for Sale
-------------------------------------------------------------
Fair values for securities held to maturity and securities available
for sale are based on quoted market prices.
Other investments
-----------------
The carrying value of other investments approximates fair value.
Loans and Mortgage Loans Held for Sale
--------------------------------------
The fair value of fixed rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings. For variable rate
loans, the carrying amount is a reasonable estimate of fair value.
Deposits
--------
The fair value of demand deposits, savings accounts, NOW accounts and
certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed maturity certificates of
deposit is estimated by discounting the future cash flows using the
rates currently offered for deposits of similar remaining
maturities.
FHLB Advances
-------------
The fair value of the FHLB fixed rate borrowings are estimated using
discounted cash flows, based on the current incremental borrowing rates
for similar types of borrowing arrangements.
Subordinated Debentures
-----------------------
Rates currently available to the Company for debt with similar terms
and remaining maturities are used to estimate fair value of existing
debt.
Commitments to Originate First Mortgage Loans, Commitments to Extend
--------------------------------------------------------------------
Credit and Standby Letters of Credit
------------------------------------
Because commitments to originate first mortgage loans, commitments to
extend credit and standby letters of credit are made using variable
rates, the contract value is a reasonable estimate of fair value.
Limitations
-----------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on many judgments. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include the
mortgage banking operation, deferred income taxes, premises and
equipment and purchased core deposit intangible. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
-21-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
The carrying amount and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 23,096,969 23,096,969 34,057,184 34,057,184
Securities available for sale 33,927,243 33,927,423 - -
Securities held to maturity 7,764,058 7,698,543 10,377,578 10,476,181
Other investments 2,599,741 2,599,741 3,247,341 3,247,341
Loans, net 269,834,098 270,434,962 270,880,011 272,897,692
Mortgage loans held for sale 282,488 282,488 3,091,269 3,091,269
Liabilities:
Deposits 307,756,198 308,234,690 289,287,512 288,616,298
FHLB advances 16,295,186 15,854,660 15,595,341 15,534,613
Subordinated debentures 2,000,000 1,947,000 2,000,000 1,910,000
Unrecognized financial instruments:
Commitments to originate first
mortgage loans 128,000 128,000 485,000 485,000
Commitments to extend credit 20,840,000 20,840,000 20,764,000 20,764,000
Standby letters of credit 108,000 108,000 71,000 71,000
</TABLE>
(15) SUBSEQUENT EVENT
On February 11, 1997, the Board of Directors of the Company adopted a Plan
of Conversion and Reorganization pursuant to which the Company would be
converted from a federally chartered mutual holding company to a federally
chartered stock savings bank holding company. The Plan of Conversion is
subject to approval of applicable regulatory authorities and by
affirmative vote of the majority of the Company's Members. The conversion
of the Company to a stock savings bank holding company will be accounted
for at historical cost in a manner similar to a pooling of interests.
The Company will form a new entity known as Community First Banking
Company ("Community First"), which will become the holding company for the
Bank upon consummation of the Conversion and Reorganization. Community
First will in turn form a new wholly owned subsidiary known as Interim CFB
Association ("Interim CFB"). The existing Company will convert to an
interim federal savings bank and will simultaneously merge with and into
the Bank, pursuant to which the Company will cease to exist and a
"liquidation account" will be established by the Bank for the benefit of
depositor members as of specified dates. Interim CFB will then merge with
and into the Bank, pursuant to which the Bank will become a wholly owned
subsidiary of Community First.
-22-
<PAGE>
CF MUTUAL HOLDINGS AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(15) SUBSEQUENT EVENT, CONTINUED
The Plan of Conversion provides for the establishment, upon the completion
of the conversion, of a special "liquidation account" for the benefit of
"Eligible Account Holders and Supplemental Eligible Account Holders"
("Holders") in an amount equal to the Company's retained earnings as of
the date of its latest statement of financial condition contained in the
final prospectus for the sale of the common stock. Each Holder, if he or
she continues to maintain a deposit account at the Bank, would be entitled
on a complete liquidation of the Company after conversion, to an interest
in the liquidation account prior to any payment to stockholders of
Community First. Each eligible account Holder would have an initial
interest in such liquidation account for each deposit account held in the
Company on the qualifying date, December 31, 1995. Each Supplemental
Eligible Account Holder would have a similar interest at a separate
qualifying date, which has not yet been determined. The interest as to
each deposit account would be in the same proportion of the total
liquidation account as the balance of the deposit account on the
qualifying dates was to the aggregate balance in all the deposit accounts
of Holders on such qualifying dates. However, if the amount in the deposit
account on any annual closing date of the Company is less than the amount
in such account on the respective qualifying dates, then the interest in
this special liquidation account would be reduced from time to time by an
amount proportionate to any such reduction, and the interest would cease
to exist if such deposit account were closed. The interest in the special
liquidation account will never be increased despite any increase in the
related deposit account after the respective qualifying dates.
Under the Plan of Conversion, up to 2,098,750 shares of the common stock
of the Company will be offered for sale by Community First, subject to
adjustment. As part of the Plan of Conversion, Community First will
conduct a subscription offering of the common stock for holders of
subscription rights in the following order of priority: (i) depositors of
the Company as of December 31, 1995 with deposits of at least $50
(Eligible Account Holders); (ii) tax-qualified employee benefit plans of
the Company (the Company currently plans to implement an ESOP); (iii)
other depositors of the Company as of December 31, 1995 with deposits of
at least $50 (Supplemental Eligible Account Holders); and (iv) depositors
who are neither Eligible Account Holders nor Supplemental Eligible Account
Holders and certain borrowers, subject to the provisions of the Plan.
The Company may offer shares of common stock in a community offering to
the general public in Georgia and other states with a preference to
natural persons residing in Carroll, Coweta, Douglas, Fayette, Haralson,
Heard, Paulding and Henry counties, Georgia, subject to the prior rights
of holders of subscription rights. The Company has the right, in its sole
discretion, to accept or reject, in whole or in part, any orders to
purchase shares of the common stock received in the community offering.
At December 31, 1996, no costs have been incurred related to the
aforementioned Plan of Conversion. Upon consummation of the Plan of
Conversion and related stock offering, any amounts incurred will be netted
against the proceeds from the stock offering and result in a reduction of
paid-in capital. Should the Plan of Conversion and stock offering not be
consummated, such costs will be charged to expense in 1997.
-23-
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by the Company, the Mutual Holding Company, the Savings Bank 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 or solicitation is not qualified to do
so, or to any person to whom it is unlawful to make such offer or solicitation
in such jurisdiction. Neither the delivery of this Prospectus nor any sale
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Company or the Savings Bank since any of
the dates as of which information is furnished herein or since the date hereof.
-----------------
TABLE OF CONTENTS
-----------------
Page
----
Summary.....................................................................
Selected Consolidated Financial and Other Data..............................
Recent Developments.........................................................
Management's Discussion and Analysis of Recent Developments.................
Risk Factors................................................................
Community First Banking Company.............................................
Carrollton Federal Bank.....................................................
CF Mutual Holdings..........................................................
Proposed Management Purchases...............................................
Use of Proceeds.............................................................
Dividend Policy.............................................................
Market for Common Stock.....................................................
Capitalization..............................................................
Regulatory Capital..........................................................
Pro Forma Data..............................................................
Management's Discussion and Analysis of Financial...........................
Condition and Results of Operations.........................................
Business....................................................................
Taxation....................................................................
Regulation..................................................................
Management of the Company...................................................
Management of the Savings Bank..............................................
The Conversion and Reorganization...........................................
Certain Restrictions on Acquisition
of the Company..............................................................
Description of Capital Stock................................................
Experts.....................................................................
Legal Matters...............................................................
Additional Information......................................................
Glossary....................................................................
Index to Consolidated Financial Statements..................................
Until ____________, 1997 or 25 days after commencement of the Syndicated
Community Offering, if any, whichever is later, all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,098,750 Shares
(Estimated Maximum)
COMMUNITY FIRST BANKING COMPANY
(Proposed Holding Company for
Carrollton Federal Bank, FSB)
COMMON STOCK
----------
PROSPECTUS
----------
TRIDENT SECURITIES, INC.
, 1997
-------- --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following are the estimated expenses, other than underwriting
discounts and commissions, to be borne by the Company in connection with the
issuance and distribution of the Common Stock being registered.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee $ 14,628
OTS filing fees 8,400
National Association of Securities Dealers, Inc. Filing Fee 5,328
Nasdaq Stock Market Listing Fee 17,068
Blue Sky Fees and Expenses 10,000
Legal Fees and Expenses 300,000
Accounting Fees and Expenses 60,000
Printing and Engraving Expenses 150,000
Marketing agent expenses 70,000
Appraiser's fees and expenses 32,500
Transfer Agent and Registrar Fee 3,000
Miscellaneous 28,076
-------
TOTAL $699,000
=======
</TABLE>
Item 14. Indemnification of Directors and Officers.
The Company's Bylaws contain certain indemnification provisions
providing that directors, officers, and employees or agents of the Company will
be indemnified against expenses actually and reasonably incurred by them if they
are successful on the merits of a claim or proceeding.
When a case or dispute is not ultimately determined on its merits (i.e.,
it is settled), the indemnification provisions provide that the Company will
indemnify directors when they meet the applicable standard of conduct. The
applicable standard of conduct is met if the director acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to an employee benefit plan, for a
purpose the director believed in good faith to be in the interests of the
participants and beneficiaries of the plan. The standard of conduct with respect
to any criminal action or proceeding is met if the director had no reasonable
cause to believe his or her conduct was unlawful. Whether the applicable
standard of conduct has been met is determined by the Board of Directors, the
shareholders or independent legal counsel in each specific case.
The Company can also provide for greater indemnification than that set
forth in the Bylaws if it chooses to do so, subject to approval by the Company's
shareholders. The Company may not, however, indemnify a director for liability
arising out of circumstances which constitute exceptions to limitation of a
director's liability for monetary damages. See "--Limitation of Liability".
II-1
<PAGE>
The Company may purchase and maintain insurance on behalf of any
director against any liability asserted against such person and incurred by
him or her in any such capacity, whether or not the Company would have had
the power to indemnify against such liability.
In addition, Article 11 of the Company's Articles of Incorporation,
subject to certain exceptions, eliminates the potential personal liability
of a director for monetary damages to the Company and to the shareholders
of the Company for breach of any duty as a director. There is no
elimination of liability for (a) a breach of duty involving appropriation
of a business opportunity of the Company, (b) an act or omission not in
good faith or involving intentional misconduct or a knowing violation of
law, (c) a transaction from which the director derives an improper material
tangible personal benefit, or (d) as to any payment of a dividend or
approval of a stock repurchase that is illegal under the Georgia Business
Corporation Code. The Articles of Incorporation do not eliminate or limit
the right of the Company or its shareholders to seek injunctive or other
equitable relief not involving monetary damages.
Item 15. Recent Sales of Unregistered Securities.
The only securities to be sold by the Registrant prior to effectiveness
of this registration statement will be of 10 shares of common stock to be
issued to its sole shareholder, Carrollton Federal Bank, FSB, for $20.00
per share, which shares will be cancelled upon consummation of the
Conversion and Reorganization. Because the shares will be sold to only one
entity and were sold only to facilitate the organization of the Registrant,
the sale will be exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
1.1 Form of Agency Agreement*
2.1 Plan of Conversion and Agreement and Plan of Reorganization, as
amended*
3.1 Articles of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
4.1 Specimen Stock Certificate of the Registrant*
4.2 See Exhibits 3.1 and 3.2 for provisions of the Registrant's
Articles of Incorporation and Bylaws governing the rights of
holders of securities of the Registrant*
5.1 Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding the
legality of the securities to be issued*
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
8.1 Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding income
tax consequences*
10.1 Form of 1997 Stock Option Plan, assuming the Plan is submitted to
the Company's shareholders for approval within 12 months after the
Conversion*
10.2 Form of Management Recognition Plan, assuming the Plan is
submitted to the Company's shareholders for approval within 12
months after the Conversion*
10.3 Form of Employee Stock Ownership Plan and Trust*
10.4 Form of Employee Stock Ownership Plan Trust Agreement*
10.5(a) Employment Agreement between Gary D. Dorminey and the Registrant
dated September 1, 1994, with the first and second amendments
thereto dated September 1, 1995 and September 1, 1996,
respectively*
10.5(b) Form of Employment Agreement between Gary D. Dorminey, the
Company and the Savings Bank dated as of June 1, 1997*
10.5(c) Form of Employment Agreement between D. Lane Poston, the
Company and the Savings Bank dated as of June 1, 1997*
10.5(d) Form of Employment Agreement between C. Lynn Gable, the
Company and the Savings Bank dated as of June 1, 1997*
10.5(e) Form of Employment Agreement between Anyce C. Fox, the
Company and the Savings Bank dated as of June 1, 1997*
10.6 Retirement Plan*
10.7 401(k) Retirement Plan*
23.1 Consent of Porter Keadle Moore LLP
23.2 Consent of Powell, Goldstein, Frazer & Murphy LLP (included in its
opinions filed as Exhibits 5.1 and 8.1)*
23.3 Consent of Ferguson & Co. L.L.P.*
24.1 Power of Attorney (appears on the signature page to this
Registration Statement)*
27.1 Financial Data Schedule (for SEC use only)*
99.1 Appraisal Report of Ferguson & Co. L.L.P.*
99.2 Stock Order Form (including form of proxy for solicitation of
members of CF Mutual Holdings)*
99.3 Marketing Materials*
</TABLE>
II-3
<PAGE>
(b) Financial Statement Schedules
The financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are either not required
under the related instructions or are inapplicable and have therefore been
omitted.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
---- ----
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offerings.
The undersigned Registrant hereby undertakes to furnish stock
certificates to or in accordance with the instructions of the respective
purchasers of the Common Stock, so as to make delivery to each purchaser
promptly following the closing under the Plan of Conversion.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia on May 8, 1997.
COMMUNITY FIRST BANKING COMPANY
By: /s/ Gary D. Dorminey
-----------------------------------------------
Gary D. Dorminey
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Position Date
---- -------- ----
<S> <C> <C>
* Chairman of the Board May 8, 1997
- ---------------------- ---------------
T. Aubrey Silvey
/s/ Gary D. Dorminey Chief Executive Officer, May 8, 1997
- ---------------------- President and Director ---------------
Gary D. Dorminey (principal executive officer)
</TABLE>
[Signatures continued on following page]
II-5
<PAGE>
[Signatures continued from previous page]
<TABLE>
<CAPTION>
Name Position Date
---- -------- ----
<S> <C> <C>
* Vice Chairman of the Board May 8, 1997
- ---------------------- -------------
Gary M. Bullock
* Director May 8, 1997
- ---------------------- -------------
Anna L. Berry
* Director May 8, 1997
- ---------------------- -------------
Jerry L. Clayton
* Director May 8, 1997
- ---------------------- -------------
Thomas E. Reeve, Jr.
* Director May 8, 1997
- ---------------------- -------------
Michael P. Steed
* Director May 8, 1997
- ---------------------- -------------
Dean B. Talley
* Director May 8, 1997
- ---------------------- -------------
Thomas S. Upchurch
* Chief Financial Officer May 8, 1997
- ----------------------- (principal financial and -------------
C. Lane Gable accounting officer)
</TABLE>
* By: /s/ Gary D. Dorminey
--------------------
Gary D. Dorminey
Attorney-in-Fact
II-6
<PAGE>
INDEX OF EXHIBITS
Exhibit Sequential
Number Description Page
------ ----------- ----
1.1 Form of Agency Agreement*
2.1 Plan of Conversion and Agreement and Plan of Reorganization,
as amended*
3.1 Articles of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
4.1 Specimen Stock Certificate of the Registrant*
4.2 See Exhibits 3.1 and 3.2 for provisions of the Registrant's
Articles of Incorporation and Bylaws governing the rights of
holders of securities of the Registrant*
5.1 Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding
the legality of the securities to be issued*
8.1 Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding
income tax consequences*
10.1 Form of 1997 Stock Option Plan, assuming the Plan is submitted
to the Company's shareholders for approval within 12 months
after the Conversion*
10.2 Form of Management Recognition Plan, assuming the Plan is
submitted to the Company's shareholders for approval within 12
months after the Conversion*
10.3 Form of Employee Stock Ownership Plan and Trust*
10.4 Form of Employee Stock Ownership Plan Trust Agreement*
10.5(a) Employment Agreement between Gary D. Dorminey and the
Registrant dated September 1, 1994, with the first and second
amendments thereto dated September 1, 1995 and September 1,
1996, respectively*
10.5(b) Form of Employment Agreement between Gary D. Dorminey,
the Company and the Savings Bank dated as of June 1, 1997*
10.5(c) Form of Employment Agreement between D. Lane Poston,
the Company and the Savings Bank dated as of June 1, 1997*
10.5(d) Form of Employment Agreement between C. Lynn Gable, the
Company and the Savings Bank dated as of June 1, 1997*
10.5(e) Form of Employment Agreement between Anyce C. Fox, the
Company and the Savings Bank dated as of June 1, 1997*
10.6 Retirement Plan*
10.7 401(k) Retirement Plan*
23.1 Consent of Porter Keadle Moore LLP
II-7
<PAGE>
23.2 Consent of Powell, Goldstein, Frazer & Murphy LLP (included
in its opinions filed as Exhibits 5.1 and 8.1)*
23.3 Consent of Ferguson & Co. L.L.P.*
24.1 Power of Attorney (appears on the signature page to this
Registration Statement)*
27.1 Financial Data Schedule (for SEC use only)*
99.1 Appraisal Report of Ferguson & Co. L.L.P.*
99.2 Stock Order Form (including form of proxy for solicitation of
members of CF Mutual Holdings)*
99.3 Marketing Materials*
II-8
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 4, 1997, except for note 15, as to
which the date is February 11, 1997, accompanying the financial statements
of CF Mutual Holdings and Subsidiaries contained in the Registration
Statement on Form S-1 and the Prospectus. We consent to the use of the
aforementioned report in the Registration Statement on Form S-1 and the
Prospectus, and to the use of our name as it appears under the caption
"Experts."
PORTER KEADLE MOORE LLP
Successor to the practice of
Evans, Porter, Bryan & Co.
Atlanta, Georgia
May 8, 1997
