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As filed with the Securities and Exchange Commission on November 12, 1997
Registration No. 333-_____
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
(INCLUDING EXHIBITS)
CAVALRY BANCORP, INC.
--------------------------------------------
(Exact name of registrant as specified in charter)
Tennessee 6035 Applied For
- ------------------------------- -------------------- ------------------
(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
114 WEST COLLEGE STREET
MURFREESBORO, TENNESSEE 37130
(615) 893-1234
--------------------------------------------
(Address and telephone number of principal executive offices)
John F. Breyer, Jr., Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA
Suite 470 East
1300 I Street, N.W.
Washington, D.C. 20005
--------------------------------------------
(Name and address of agent for service)
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 of 1933, 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 of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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Calculation of Registration Fee
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<S> <C> <C> <C> <C>
Title of Each Class of Securities Proposed Maximum Proposed Offering Proposed Maximum Amount of
Being Registered Amount Being Price(1) Aggregate Offering Registration Fee
Registered(1) Price(1)
- ---------------------------------------------------------------------------------------------------------------------
Common Stock, No Par Value 7,538,250 $10.00 $75,382,500 $22,844
Participation interests 50,000 -- -- --(2)
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee. As
described in the Prospectus, the actual number of shares to be issued and
sold is subject to adjustment based upon the estimated pro forma market
value of the registrant and market and financial conditions.
(2) The securities of Cavalry Bancorp, Inc., to be purchased by the Cavalry
Banking 401(k) Plan are included in the amount shown for Common Stock.
Accordingly, pursuant to Rule 457(h) of the Securities Act of 1933, as
amended, no separate fee is required for the participation interests.
Pursuant to such rule, the amount being registered has been calculated on
the basis of the number of shares of Common Stock that may be purchased
with the current assets of such Plan.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
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>
Cross Reference Sheet showing the location in the Prospectus
of the Items of Form S-1
1. Forepart of the Registration Forepart of the Registration
Statement and Outside Front Statement; Outside Front Cover Page
Cover of Prospectus
2. Inside Front and Outside Back Inside Front Cover Page; Outside Back
Cover Pages of Prospectus Cover Page
3. Summary Information, Risk Factors Prospectus Summary; Risk Factors
and Ratio of Earnings
to Fixed Charges
4. Use of Proceeds Use of Proceeds; Capitalization
5. Determination of Offering Price Market for Common Stock
6. Dilution *
7. Selling Security Holders *
8. Plan of Distribution The Conversion
9. Description of Securities to be Description of Capital Stock
Registered
10. Interests of Named Experts and Legal and Tax Opinions; Experts
Counsel
11. Information with Respect to the
Registrant
(a) Description of Business Business of the Holding Company;
Business of the Bank
(b) Description of Property Business of the Bank -- Properties
(c) Legal Proceedings Business of the Bank -- Legal
Proceedings
(d) Market Price of and Dividends Outside Front Cover Page; Market for
on the Registrant's Common Equity Common Stock; Dividend Policy
and Related Stockholder Matters
(e) Financial Statements Financial Statements; Pro Forma Data
(f) Selected Financial Data Selected Financial and Other Data
(g) Supplementary Financial *
Information
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(h) Management's Discussion and Management's Discussion and Analysis
of
Analysis of Financial Condition Financial Condition and Results of
Operations
and Results of Operations
(i) Changes in and Disagreements *
with Accountants on Accounting
and Financial Disclosure
(j) Directors and Executive Management of the Holding Company;
Officers Management of the Bank
(k) Executive Compensation Management of the Holding Company;
Management of the Bank -- Benefits
-- Executive Compensation
(l) Security Ownership of Certain *
Beneficial Owners and Management
(m) Certain Relationships and Management of the Bank --
Transactions with the Bank
Related Transactions
12. Disclosure of Commission Position Part II - Item 17
on Indemnification for Securities
Act Liabilities
__________________
*Item is omitted because answer is negative or item inapplicable.
<PAGE>
PROSPECTUS SUPPLEMENT
CAVALRY BANCORP, INC.
CAVALRY BANKING
401(K) SAVINGS PLAN
This Prospectus Supplement relates to the offer and sale to participants
("Participants") in the Cavalry Banking 401(k) Savings Plan ("Plan" or "401(k)
Plan") of participation interests and shares of Cavalry Bancorp, Inc. common
stock, par value $.01 per share ("Common Stock"), as set forth herein.
In connection with the proposed conversion of Cavalry Banking ("Bank" or
"Employer") from a federally chartered mutual savings bank to a federally
chartered stock savings bank and thereafter, to a Tennessee-chartered commercial
bank, a holding company, Cavalry Bancorp, Inc. ("Holding Company"), has been
formed. The simultaneous conversion of the Bank to stock form, the issuance of
the Bank's common stock to the Holding Company and the offer and sale of the
Holding Company's Common Stock to the public are herein referred to as the
"Conversion." Applicable provisions of the 401(k) Plan permit the investment of
the Plan assets in Common Stock of the Holding Company at the direction of a
Plan Participant. This Prospectus Supplement relates to the election of a
Participant to direct the purchase of Common Stock in connection with the
Conversion.
The Prospectus, dated _________, 1998, of the Holding Company
("Prospectus"), which is attached to this Prospectus Supplement, includes
detailed information with respect to the Conversion, the Common Stock and the
financial condition, results of operations and business of the Bank and the
Holding Company. This Prospectus Supplement, which provides detailed information
with respect to the Plan, should be read only in conjunction with the
Prospectus. Terms not otherwise defined in this Prospectus Supplement are
defined in the Plan or the Prospectus.
A PARTICIPANT'S ELIGIBILITY TO PURCHASE COMMON STOCK IN THE CONVERSION
THROUGH THE PLAN IS SUBJECT TO THE PARTICIPANT'S GENERAL ELIGIBILITY TO PURCHASE
SHARES OF COMMON STOCK IN THE CONVERSION AND THE MAXIMUM AND MINIMUM LIMITATIONS
SET FORTH IN THE PLAN OF CONVERSION. SEE "THE CONVERSION" AND "-- LIMITATIONS
ON PURCHASES OF SHARES" IN THE PROSPECTUS.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" IN THE PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OFFICE OF THRIFT SUPERVISION ("OTS"), THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY OTHER FEDERAL OR STATE
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR
ANY OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus Supplement is ____________, 1998.
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement in connection with the offering made hereby, and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Holding Company, the Bank or the Plan. This Prospectus
Supplement does not constitute an offer to sell or solicitation of an offer to
buy any securities in any jurisdiction to any person to whom it is unlawful to
make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall
under any circumstances create any implication that there has been no change in
the affairs of the Bank or the Plan since the date hereof, or that the
information herein contained or incorporated by reference is correct as of any
time subsequent to the date hereof. This Prospectus Supplement should be read
only in conjunction with the Prospectus that is attached herein and should be
retained for future reference.
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TABLE OF CONTENTS
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PAGE
<S> <C>
The Offering
Securities Offered...................................... S-1
Election to Purchase Common Stock in the Conversion..... S-1
Value of Participation Interests........................ S-1
Method of Directing Transfer............................ S-1
Time for Directing Transfer............................. S-2
Irrevocability of Transfer Direction.................... S-2
Direction Regarding Common Stock After the Conversion... S-2
Purchase Price of Common Stock.......................... S-2
Nature of a Participant's Interest in the Common Stock.. S-2
Voting and Tender Rights of Common Stock................ S-3
Description of the Plan
Introduction............................................ S-3
Eligibility and Participation........................... S-4
Contributions Under the Plan............................ S-4
Limitations on Contributions............................ S-5
Investment of Contributions............................. S-7
The Employer Stock Fund................................. S-7
Benefits Under the Plan................................. S-8
Withdrawals and Distributions from the Plan............. S-8
Administration of the Plan.............................. S-9
Reports to Plan Participants............................ S-9
Plan Administrator...................................... S-10
Amendment and Termination............................... S-10
Merger, Consolidation or Transfer....................... S-10
Federal Income Tax Consequences......................... S-10
Restrictions on Resale.................................. S-13
Legal Opinions............................................. S-14
Investment Form S-15
</TABLE>
i
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THE OFFERING
SECURITIES OFFERED
The securities offered hereby are participation interests in the Plan and
up to _______ shares, at the actual purchase price of $10.00 per share, of
Common Stock which may be acquired by the Plan for the accounts of employees
participating in the Plan. The Holding Company is the issuer of the Common
Stock. Only employees and former employees of the Bank and their beneficiaries
may participate in the Plan. Information with regard to the Plan is contained
in this Prospectus Supplement and information with regard to the Conversion and
the financial condition, results of operation and business of the Bank and the
Holding Company is contained in the attached Prospectus. The address of the
principal executive office of the Bank is 114 W. College, Murfreesboro,
Tennessee 37130. The Bank's telephone number is (615) 893-1234.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
In connection with the Bank's Conversion, each Participant in the 401(k)
Plan may direct the trustees of the Plan (collectively, the "Trustees") to
transfer up to 100% of a Participant's account balance to a newly created
Employer Stock Fund and to use such funds to purchase Common Stock issued in
connection with the Conversion. Amounts transferred may include salary deferral,
matching and profit sharing contributions. The Employer Stock Fund may consist
of investments in the Common Stock made on or after the effective date of the
Conversion. Funds not transferred to the Employer Stock Fund will continue to be
invested by the trustees of the Plan (the "Trustees"). See "DESCRIPTION OF THE
PLAN -- INVESTMENT OF CONTRIBUTIONS" below. A PARTICIPANT'S ABILITY TO TRANSFER
FUNDS TO THE EMPLOYER STOCK FUND IN THE CONVERSION IS SUBJECT TO THE
PARTICIPANT'S GENERAL ELIGIBILITY TO PURCHASE SHARES OF COMMON STOCK IN THE
CONVERSION. FOR GENERAL INFORMATION AS TO THE ABILITY OF THE PARTICIPANTS TO
PURCHASE SHARES IN THE CONVERSION, SEE "THE CONVERSION -- THE SUBSCRIPTION,
DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS" IN THE ATTACHED PROSPECTUS.
VALUE OF PARTICIPATION INTERESTS
The assets of the Plan are valued on an ongoing basis and each Participant
is informed of the value of his or her beneficial interest in the Plan on at
least an annual basis. This value represents the market value of past
contributions to the Plan by the Bank and by the Participants and earnings
thereon, less previous withdrawals, and transfers from other plans.
METHOD OF DIRECTING TRANSFER
The last page of this Prospectus Supplement is an investment form to direct
a transfer to the Employer Stock Fund ("Investment Form"). If a Participant
wishes to transfer funds to the Employer Stock Fund to purchase Common Stock
issued in connection with the Conversion, the
S-1
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Participant should indicate that decision in Part 2 of the Investment Form. If a
Participant does not wish to make such an election, he or she does not need to
take any action.
TIME FOR DIRECTING TRANSFER
THE DEADLINE FOR SUBMITTING A DIRECTION TO TRANSFER AMOUNTS TO THE EMPLOYER
STOCK FUND IN ORDER TO PURCHASE COMMON STOCK ISSUED IN CONNECTION WITH THE
CONVERSION IS ___________, 1998. The Investment Form should be returned to
_________ at the Bank no later than the close of business on such date.
IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion shall be
irrevocable. Participants, however, will be able to direct the sale of Common
Stock, as explained below.
DIRECTION REGARDING COMMON STOCK AFTER THE CONVERSION
It is currently anticipated that Participants may be permitted to transfer
additional funds from their existing account balances to the Employer Stock Fund
following the Conversion. In addition, it is anticipated that a Participant
will, on a periodic basis, direct the purchase of Common Stock with new
Participant and employer contributions or direct the sale of Common Stock. If
Common Stock is sold, the proceeds will be credited to the Participant's account
and may be reinvested in the other investment options available under the Plan.
In addition, cash dividends, if any, paid on the Common Stock may be invested in
the Plan's other investment options but may not be used to purchase additional
shares of Common Stock. Special restrictions may apply to purchases or sales
directed by those Participants who are executive officers, directors and
principal stockholders of the Holding Company who are subject to the provisions
of Section 16(b) of the Securities and Exchange Act of 1934, as amended
("Exchange Act"), or applicable OTS regulations.
PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustees to purchase
shares of Common Stock. The price paid for such shares of Common Stock will be
the same price as is paid by all other persons who purchase shares of Common
Stock in the Conversion.
NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The Common Stock purchased for an account of a Participant will be held in
the name of the Trustees of the Plan in the Employer Stock Fund. Any earnings,
losses or expenses with
S-2
<PAGE>
respect to the Common Stock, including dividends and appreciation or
depreciation in value, will be credited or debited to the account and will not
be credited to or borne by any other accounts.
VOTING AND TENDER RIGHTS OF COMMON STOCK
The Trustees generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust as directed by Participants with an
interest in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have the right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The percentage of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
or negative on each matter shall be the same percentage of the total number of
voting instruction rights that are exercised in either the affirmative or
negative, respectively.
DESCRIPTION OF THE PLAN
INTRODUCTION
The Bank adopted the Plan effective January 1, 1993 as an amendment and
restatement of the Bank's prior defined contribution retirement plan. The Plan
is a cash or deferred arrangement established in accordance with the
requirements under Section 401(a) and Section 401(k) of the Internal Revenue
Code of 1986, as amended ("Code").
The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Bank will
adopt any amendments to the Plan that may be necessary to ensure the qualified
status of the Plan under the Code and applicable Treasury Regulations. The Bank
has received a determination from the Internal Revenue Service ("IRS") that the
Plan is qualified under Section 401(a) of the Code and that it satisfies the
requirements for a qualified cash or deferred arrangement under Section 401(k)
of the Code.
EMPLOYEE RETIREMENT INCOME SECURITY ACT. The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). As
such, the Plan is subject to all of the provisions of Title I (Protection of
Employee Benefit Rights) and Title II (Amendments to the Internal Revenue Code
Relating to Retirement Plans) of ERISA, except the funding requirements
contained in Part 3 of Title I of ERISA, which by their terms do not apply to an
individual account plan (other than a money purchase pension plan). The Plan is
not subject to Title IV (Plan Termination Insurance) of ERISA. Neither the
funding requirements contained in Title IV of ERISA nor the plan termination
insurance provisions contained in Title IV will be extended to Participants or
beneficiaries under the Plan.
S-3
<PAGE>
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH
THE BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS
MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, UNLESS A PARTICIPANT
RETIRES AS PERMITTED UNDER THIS PLAN REGARDLESS OF WHETHER SUCH A WITHDRAWAL
OCCURS DURING HIS OR HER EMPLOYMENT WITH THE BANK OR AFTER TERMINATION OF
EMPLOYMENT.
REFERENCE TO FULL TEXT OF PLAN. THE FOLLOWING STATEMENTS ARE SUMMARIES OF
THE MATERIAL PROVISIONS OF THE PLAN. THEY ARE NOT COMPLETE AND ARE QUALIFIED IN
THEIR ENTIRETY BY THE FULL TEXT OF THE PLAN, WHICH IS FILED AS AN EXHIBIT TO THE
REGISTRATION STATEMENT FILED WITH THE SEC. COPIES OF THE PLAN ARE AVAILABLE TO
ALL EMPLOYEES BY FILING A REQUEST WITH THE PLAN ADMINISTRATOR. EACH EMPLOYEE IS
URGED TO READ CAREFULLY THE FULL TEXT OF THE PLAN.
ELIGIBILITY AND PARTICIPATION
Any employee of the Bank is eligible to participate and will become a
Participant in the Plan following completion of one year of service with the
Bank and the attainment of age 21. The Plan year is the calendar year ("Plan
Year"). Directors who are not employees of the Bank are not eligible to
participate in the Plan.
During 1996, approximately __ employees participated in the Plan.
CONTRIBUTIONS UNDER THE PLAN
PARTICIPANT CONTRIBUTIONS. Each Participant in the Plan is permitted to
elect to reduce such Participant's Compensation (as defined below) pursuant to a
salary reduction agreement in amounts ranging from 1% to 15% of Compensation and
have that amount contributed to the Plan on such Participant's behalf. Such
amounts are credited to the Participant's deferral contributions account. For
purposes of the Plan, "Compensation" means a Participant's total amount of
earnings reportable W-2 wages for federal income tax withholding purposes plus a
Participant's elective deferrals pursuant to a salary reduction agreement under
the Plan or any elective deferrals to a Section 125 plan. Due to recent
statutory changes, the annual Compensation of each Participant taken into
account under the Plan is limited to $160,000 (as adjusted under applicable Code
provisions). A Participant may elect to modify the amount contributed to the
Plan under the participant's salary reduction agreement during the Plan Year.
Deferral contributions are transferred by the Bank to the Trustees of the Plan
on a periodic basis as required by applicable law.
EMPLOYER CONTRIBUTIONS. For employees with one or more years of service,
the Bank currently matches employee deferral contributions dollar-for-dollar up
to 3% of Compensation.
S-4
<PAGE>
Additional contributions may also be made on a discretionary basis in proportion
to each Participant's Compensation.
LIMITATIONS ON CONTRIBUTIONS
LIMITATIONS ON ANNUAL ADDITIONS AND BENEFITS. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions allocated to
each Participant's Account during any Plan Year may not exceed the lesser of 25%
of the Participant's "Section 415 Compensation" for the Plan Year or $30,000 (as
adjusted under applicable Code provisions). A Participant's "Section 415
Compensation" is a Participant's Compensation, excluding any amount contributed
to the Plan under a salary reduction agreement or any employer contribution to
the Plan or to any other plan or deferred compensation or any distributions from
a plan of deferred compensation. In addition, annual additions are limited to
the extent necessary to prevent the limitations for the combined plans of the
Bank from being exceeded. To the extent that these limitations would be
exceeded by reason of excess annual additions to the Plan with respect to a
Participant, the excess must be reallocated to the remaining Participants who
are eligible for an allocation of Employer contributions for the Plan Year.
LIMITATION ON 401(K) PLAN CONTRIBUTIONS. The annual amount of deferred
compensation of a Participant (when aggregated with any elective deferrals of
the Participant under any other employer plan, a simplified employee pension
plan or a tax-deferred annuity) may not exceed $10,000 (as adjusted under
applicable Code provisions). Contributions in excess of this limitation
("excess deferrals") will be included in the Participant's gross federal income
tax purposes in the year they are made. In addition, any such excess deferral
will again be subject to federal income tax when distributed by the Plan to the
Participant, unless the excess deferral (together with any income allocable
thereto) is distributed to the Participant not later than the first April 15th
following the close of the taxable year in which the excess deferral is made.
Any income on the excess deferral that is distributed not later than such date
shall be treated, for federal income tax purposes, as earned and received by the
Participant in the taxable year in which the excess deferral is made.
LIMITATION ON PLAN CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES.
Sections 401(k) and 401(m) of the Code limit the amount of deferred compensation
contributed to the Plan in any Plan Year on behalf of Highly Compensated
Employees (defined below) in relation to the amount of deferred compensation
contributed by or on behalf of all other employees eligible to participate in
the Plan. Specifically, the actual deferral percentage for a Plan Year (i.e.,
----
the average of the ratios, calculated separately for each eligible employee in
each
S-5
<PAGE>
group, by dividing the amount of employer contributions credited to the Matching
contributions account of such eligible employee by each eligible employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (a) 125% of the actual contribution percentage of all
other eligible employees, or (b) the lesser of (i) 200% of the actual
contributions percentage of all other eligible employees, or (ii) the actual
contribution percentage of all other eligible employees plus two percentage
points.
In general, a Highly Compensated Employee includes any employee who, during
the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner (i.e.,
----
owns directly or indirectly more than 5% of the stock of the Employer, or stock
possessing more than 5% of the total combined voting power of all stock of the
Employer) or, (2) during the preceding Plan Year, received Section 415
Compensation in excess of $80,000 (as adjusted under applicable Code provisions)
and, if elected by the Bank, was in the top paid group of employees for such
Plan Year.
In order to prevent disqualification of the Plan, any amounts contributed
by Highly Compensated Employees that exceed the average deferral limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the Bank will be subject to a 10%
excise tax on any excess contributions unless such excess contributions,
together with any income allocable thereto, either are recharacterized or are
distributed before the close of the first 2 1/2 months following the Plan Year
to which such excess contributions relate. In addition, in order to avoid
disqualification of the Plan, any contributions by Highly Compensated Employees
that exceed the average contribution limitation in any Plan Year ("excess
aggregate contributions") together with any income allocable thereto, must be
distributed to such Highly Compensated Employees before the close of the
following Plan Year. However, the 10% excise tax will be imposed on the Bank
with respect to any excess aggregate contributions, unless such amounts, plus
any income allocable thereto, are distributed within 2 1/2 months following the
close of the Plan Year in which they arose.
TOP-HEAVY PLAN REQUIREMENTS. If, for any Plan Year, the Plan is a Top-
Heavy Plan (as defined below), then (i) the Bank may be required to make certain
minimum contributions to the Plan on behalf of non-key employees (as defined
below), and (ii) certain additional restrictions would apply with respect to the
combination of annual additions to the Plan and projected annual benefits under
any defined plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year, if as of the last day of the preceding Plan Year, the aggregate balance of
the accounts of all Participants who are key Employees exceeds 60% of the
aggregate balance of the Accounts of the Participants. "Key Employees"
generally include any employee, who at any time during the Plan Year or any
other the four preceding Plan Years, if (1) an officer of the Bank having annual
compensation in excess of $60,000 who is in an administrative or policy-making
capacity, (2) one of the ten employees having annual compensation in excess of
$30,000 and owing, directly or indirectly, the largest interest in the employer,
(3) a 5% owner of the employer (i.e., owns
----
S-6
<PAGE>
directly or indirectly more than 5% of the stock of the employer, or stock
possessing more than 5% of the total combined voting power of all stock of the
employer), or (4) a 1% owner of the employer having compensation in excess of
$150,000.
INVESTMENT OF CONTRIBUTIONS
All amounts credited to Participant's Accounts under the Plan are held in
the Trust which is administered by the Trustees who are appointed by the Bank's
Board of Directors. Currently, the investment of all Plan assets is directed by
the Trustees in their discretion in a manner consistent with the Plan's
investment policy.
In connection with the Conversion, a Participant may elect to have prior
contributions and additions to the Participant's Account invested either in the
Employer Stock Fund. Any amounts credited to a Participant's Accounts for which
investment directions are not given will continue to be invested on a
discretionary basis by the Trustees.
The net gain (or loss) in the Accounts from investments (including interest
payments, dividends, realized and unrealized gains and losses on securities, and
expenses paid from the Trust) are determined on a periodic basis. For purposes
of such allocation, all assets of the Trust are valued at their fair market
value.
THE EMPLOYER STOCK FUND
The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Conversion.
Following the Conversion, when Common Stock is sold, the cost or net
proceeds will be charged or credited to the Accounts of Participants affected by
the purchase or sale. A Participant's Account will also be adjusted to reflect
changes in the value of shares of Common Stock resulting from stock dividends,
stock splits and similar changes.
To the extent dividends are not paid on Common Stock held in the Employer
Stock Fund, the return on any investment in the Employer Stock Fund will consist
only of the market value appreciation of the Common Stock subsequent to its
purchase. Declarations and payments of any dividends (regular and special) by
the Board of Directors will depend upon a number of factors, including the
amount of the net proceeds retained by the Holding Company, capital
requirements, regulatory limitations, the Bank's and the Holding Company's
financial condition and results of operations, tax considerations and general
economic conditions.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock. Accordingly, there is no record of the historical performance
of the Employer Stock Fund.
S-7
<PAGE>
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN RISK FACTORS
ASSOCIATED WITH INVESTMENTS IN COMMON STOCK OF THE HOLDING COMPANY. FOR A
DISCUSSION OF THESE RISK FACTORS, SEE "RISK FACTORS" IN THE PROSPECTUS.
BENEFITS UNDER THE PLAN
VESTING. A Participant has, at all times, a fully vested, nonforfeitable
interest in all of his or her Participant and Employer contributions and the
earnings thereon under the Plan.
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2
UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER
SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE BANK.
DISTRIBUTION UPON RETIREMENT, DEATH, DISABILITY OR TERMINATION OF
EMPLOYMENT. The normal form of distribution under the 401(k) Plan to a married
Participant who retires, incurs a disability, or otherwise terminates employment
is an joint-and-50% annuity payable over the life of the Participant and his
surviving spouse. The normal form of distribution to an unmarried participant
is an annuity for the life of the Participant. Optional forms of distribution
include a lump-sum payment or installment periods over a specified period.
Distributions generally commence as soon as practicable following the
Participant's termination of employment. At the request of the Participant, the
distribution may include an in-kind distribution of Common Stock of the Holding
Company credited to the Participant's Account. Benefits payments ordinarily
must begin not later than 60 days following the end of the Plan Year in which
occurs later of the Participant's: (i) termination of employment; (ii)
attainment of age 65; or (iii) tenth anniversary of commencement of
participation in the Plan; but in no event later than April 1 following the
calendar year in which the Participant attains age 70 1/2 (if the Participant is
retired). However, if the vested portion of the Participant's Account balances
exceeds $5,000, no distribution will be made from the Plan prior to the
Participant's attaining age 65 unless the Participant consents to an earlier
distribution. Special rules may apply to the distribution of Common Stock of
the Holding Company to those Participants who are executive officers, directors
and principal shareholders of the Holding Company who are subject to the
provisions of Section 16(b) of the Exchange Act.
IN-SERVICE WITHDRAWALS AND LOANS. The Plan provides for distributions of
Participant deferral contributions prior to termination of employment in the
form of hardship withdrawals. Such withdrawals are permitted where the funds
are applied to (i) uninsured medical expenses, (ii) the purchase of a principal
residence, (iii) the payment of tuition and other education expenses or (iv)
payments necessary to prevent eviction from a principal residence or foreclosure
on a
S-8
<PAGE>
mortgage. In order to qualify for a hardship withdrawal, the Participant must
satisfy certain requirements relating to his or her financial resources and the
amount of the withdrawal may not exceed the Participant's immediate and heavy
financial need.
The Plan does not provide for other in-service withdrawals or loans.
NONALIENATION OF BENEFITS. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
ADMINISTRATION OF THE PLAN
TRUSTEES. The Trustees with respect to Plan assets are currently N. Gary
Brown, Frank Crosslin and W. Henry Huddleston, all directors of the Bank.
Pursuant to the terms of the Plan, the Trustees receive and hold
contributions to the Plan in trust and have exclusive authority and discretion
to manage and control the assets of the Plan pursuant to the terms of the Plan
and to manage, invest and reinvest the Trust and income therefrom. The Trustees
have the authority to invest and reinvest the Trust and may sell or otherwise
dispose of Trust investments at any time and may hold trust funds uninvested.
The Trustees have authority to invest the assets of the Trust in "any type of
property, investment or security" as defined under ERISA.
The Trustees have full power to vote any corporate securities in the Trust
in person or by proxy; provided, however, that the Participants will direct the
Trustees as to voting and tendering of all Common Stock held in the Employer
Stock Fund.
The Trustees receive no compensation for their services. The expenses of
the Trustees are paid out of the Trust except to the extent such expenses and
compensation are paid by the Bank.
The Trustees must render at least annual reports to the Bank and to the
Participants in such form and containing such information that the Trustees deem
necessary.
REPORTS TO PLAN PARTICIPANTS
The Plan Administrator furnishes to each Participant a statement at least
quarterly showing (i) the balance in the Participant's Account as of the end of
that period, (ii) the amount of contributions allocated to such Participant's
Account for that period, and (iii) the adjustments to such Participant's Account
to reflect earnings or losses (if any).
S-9
<PAGE>
PLAN ADMINISTRATOR
The Bank currently serves as the Plan Administrator. The Plan
Administrator is responsible for the administration of the Plan, interpretation
of the provisions of the Plan, prescribing procedures for filing applications
for benefits, preparation and distribution of information explaining the Plan,
maintenance of plan records, books of account and all other data necessary for
the proper administration of the Plan, and preparation and filing of all returns
and reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and the IRS, and for all disclosures required to be made to
Participants, beneficiaries and others under Sections 104 and 105 of ERISA.
AMENDMENT AND TERMINATION
The Bank may terminate the Plan at any time. If the Plan is terminated in
whole or in part, then regardless of other provisions in the Plan, each employee
who ceases to be a Participant shall have a fully vested interest in his or her
Account. The Bank reserves the right to make, from time to time, any amendment
or amendments to the Plan which do not cause any part of the Trust to be used
for, or diverted to, any purpose other than the exclusive benefit of the
Participants or their beneficiaries.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED
TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN. THE
SUMMARY IS NECESSARILY GENERAL IN NATURE AND DOES NOT PURPORT TO BE COMPLETE.
MOREOVER, STATUTORY PROVISIONS ARE SUBJECT TO CHANGE, AS ARE THEIR
INTERPRETATIONS, AND THEIR APPLICATION MAY VARY IN INDIVIDUAL CIRCUMSTANCES.
FINALLY, THE CONSEQUENCES UNDER APPLICABLE STATE AND LOCAL INCOME TAX LAWS MAY
NOT BE THE SAME AS UNDER THE FEDERAL INCOME TAX LAWS.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.
S-10
<PAGE>
The Plan has received a determination from the IRS that it is qualified
under Sections 401(a) and 401(k) of the Code, and that the related Trust is
exempt from tax under Section 501(a) of the Code. A plan that is "qualified"
under these sections of the Code is afforded special tax treatment which include
the following: (1) the sponsoring employer is allowed an immediate tax deduction
for the amount contributed to the Plan of each year; (2) Participants pay no
current income tax on amounts contributed by the employer on their behalf; and
(3) earnings of the Plan are tax-exempt thereby permitting the tax-free
accumulation of income and gains on investments. The Plan will be administered
to comply in operation with the requirements of the Code as of the applicable
effective date of any change in the law. The Bank expects to timely adopt any
amendments to the Plan that may be necessary to maintain the qualified status of
the Plan under the Code. Following such an amendment, the Plan will be
submitted to the IRS for a determination that the Plan, as amended, continues to
qualify under Sections 401(a) and 501(a) of the Code and that it continues to
satisfy the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:
(a) Amounts contributed to a Participant's 401(k) account and the
investment earnings are actually distributed or withdrawn from the Plan.
Special tax treatment may apply to the taxable portion of any distribution that
includes Common Stock or qualified as a "Lump Sum Distribution" (as described
below).
(b) Income earned on assets held by the Trust will not be taxable to the
Trust.
LUMP SUM DISTRIBUTION. A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it
is made: (i) within a single taxable year of the Participant or beneficiary;
(ii) on account of the Participant's death or separation from service, or after
the Participant attains age 59 1/2; and (iii) consists of the balance to the
credits of the Participant under the Plan and all other profit sharing plans, if
any, maintained by the Bank. The portion of any Lump Sum Distribution that is
required to be included in the Participant's or beneficiary's taxable income for
federal income tax purposes ("total taxable amount") consists of the entire
amount of such Lump Sum Distribution less the amount of after-tax contributions,
if any, made by the Participant to any other profit sharing plans maintained by
the Bank which is included in such distribution.
AVERAGING RULES. The portion of the total taxable amount of a Lump Sum
Distribution ("ordinary income portion") will be taxable generally as ordinary
income for federal income tax purposes. However, for distributions occurring
prior to January 1, 2000, a Participant who has completed at least five years of
participation in the Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's participation
in the Plan or any other profit sharing plan maintained by the Employer), may
elect to have the ordinary income portion of such Lump Sum Distribution taxed
according to a special averaging rule ("five-year
S-11
<PAGE>
averaging"). The election of the special averaging rules may apply only to one
Lump Sum Distribution received by the Participant or beneficiary, provided such
amount is received on or after the Participant turns 59 1/2 and the recipient
elects to have any other Lump Sum Distribution from a qualified plan received in
the same taxable year taxed under the special averaging rule. The special five-
year averaging rule has been repealed for distributions occurring after December
31, 1999. Under a special grandfather rule, individuals who turned 50 by 1986
may elect to have their Lump Sum Distribution taxed under either the five-year
averaging rule (if available) or the prior law ten-year averaging rule. Such
individuals also may elect to have that portion of the Lump Sum Distribution
attributable to the Participant's pre-1974 participation in the Plan taxed at a
flat 20% rate as gain from the sale of a capital asset.
COMMON STOCK INCLUDED IN LUMP SUM DISTRIBUTION. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
- ----
distribution over its cost to the Plan. The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations by the IRS.
DISTRIBUTIONS: ROLLOVERS AND DIRECT TRANSFERS TO ANOTHER QUALIFIED PLAN OR
TO AN IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an individual retirement account ("IRA") without regard to
whether the distribution is a Lump Sum Distribution or Partial Distribution.
Effective January 1, 1993, Participants have the right to elect to have the
Trustees transfer all or any portion of an "eligible rollover distribution"
directly to another plan qualified under Section 401(a) of the Code or to an
IRA. If the Participant does not elect to have an "eligible rollover
distribution" transferred directly to another qualified plan of to an IRA, the
distribution will be subject to a mandatory federal withholding tax equal to 20%
of the taxable distribution. An "eligible rollover distribution" means any
amount distributed from the Plan except: (1) a distribution that is (a) one of
a series of substantially equal periodic payments made (not less frequently than
annually) over the Participant's life of the joint life of the Participant and
the Participant's designated beneficiary, or (b) for a specified period of ten
years or more; (2) any amount that is required to be distributed under the
minimum distribution rules; and (3) any other distributions excepted under
applicable federal law. The tax law change described above did not modify the
special tax treatment of Lump Sum Distributions, that are not rolled
S-12
<PAGE>
over or transferred, i.e., forward averaging, capital gains tax treatment and
----
the nonrecognition of net unrealized appreciation, discussed earlier.
ADDITIONAL TAX ON EARLY DISTRIBUTIONS. A Participant who receives a
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of a Participant) on
or after the death of the Participant, (ii) attributable to the Participant's
being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lives (or joint life expectancies) of the Participant and his or her
beneficiary, (iv) made to the Participant after separation from service on
account of early retirement under the Plan after attainment of age 55, (v) made
to pay medical expenses to the extent deductible for federal income tax
purposes, (vi) pursuant to a qualified domestic relations order, or (vii) made
to effect the distribution of excess contributions or excess deferrals.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED
TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
RESTRICTIONS ON RESALE
Any person receiving shares of the Common Stock under the Plan who is an
"affiliate" of the Bank or the Holding Company as the term "affiliate" is used
in Rules 144 and 405 under the Securities Act of 1933, as amended ("Securities
Act") (e.g., directors, officers and substantial shareholders of the Bank) may
reoffer or resell such shares only pursuant to a registration statement filed
under the Securities Act (the Holding Company and the Bank having no obligation
to file such registration statement) or, assuming the availability thereof,
pursuant to Rule 144 or some other exemption from the registration requirements
of the Securities Act. Any person who may be an "affiliate" of the Bank or the
Holding Company may wish to consult with counsel before transferring any Common
Stock owned by him or her. In addition, Participants who are officers of the
Bank or the Holding Company are advised to consult with counsel as to the
applicability of the reporting and short-swing profit liability rules of Section
16 of the Exchange Act which may affect the purchase and sale of the Common
Stock where acquired or sold under the Plan or otherwise.
S-13
<PAGE>
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Breyer & Aguggia, Washington, D.C., which firm is acting as special counsel for
the Holding Company in connection with the Conversion.
S-14
<PAGE>
Investment Form
(Employer Stock Fund)
CAVALRY BANKING
401(K) SAVINGS PLAN
Name of Participant:_____________________________
Social Security Number:___________________________
1. Instructions. In connection with the proposed conversion of Cavalry
Banking ("Bank") to a stock savings bank and the simultaneous formation of a
holding company ("Conversion"), participants in the Cavalry Banking 401(k)
Savings Plan ("Plan") may elect to direct the investment of up to 100% of their
account balance into the Employer Stock Fund ("Employer Stock Fund"). Amounts
transferred at the direction of Participants into the Employer Stock Fund will
be used to purchase shares of the common stock of Cavalry Bancorp, Inc. ("Common
Stock"), the proposed holding company for the Bank. A PARTICIPANT'S ELIGIBILITY
TO PURCHASE SHARES OF COMMON STOCK IS SUBJECT TO THE PARTICIPANT'S GENERAL
ELIGIBILITY TO PURCHASE SHARES OF COMMON STOCK IN THE CONVERSION AND THE MAXIMUM
AND MINIMUM LIMITATIONS SET FORTH IN THE PLAN CONVERSION. SEE THE PROSPECTUS
FOR ADDITIONAL INFORMATION.
You may use this form to direct a transfer of funds credited to your
account to the Employer Stock Fund, to purchase Common Stock in the Conversion.
To direct such a transfer to the Employer Stock Fund, you should complete this
form and return it to _________ at the Bank, NO LATER THAN THE CLOSE OF BUSINESS
ON _______________, 1998. The Bank will keep a copy of this form and return a
copy to you. (If you need assistance in completing this form, please contact
_________).
2. Transfer Direction. I hereby direct the Plan Administrator to
transfer $__________ (in increments of $10) to the Employer Stock Fund to be
applied to the purchase of Common Stock in the Conversion. Please transfer this
amount from my Prudential Money Market Fund account.
3. Effectiveness of Direction. I understand that this Investment Form
shall be subject to all of the terms and conditions of the Plan and the terms
and conditions of the Conversion. I acknowledge that I have received a copy of
the Prospectus and the Prospectus Supplement.
________________________________ ________________________________
Signature Date
* * * * *
4. Acknowledgement of Receipt. This Investment Form was received by the
Plan Administrator and will become effective on the date noted below.
_________________________________ ________________________________
Plan Administrator Date
S-15
<PAGE>
PROSPECTUS CAVALRY BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR CAVALRY BANKING)
UP TO 6,555,000 SHARES OF COMMON STOCK
$10.00 PURCHASE PRICE PER SHARE
Cavalry Bancorp, Inc. ("Holding Company"), a Tennessee corporation, is
offering between 4,845,000 and 6,555,000 shares of its common stock, no par
value per share ("Common Stock"), in connection with the conversion of Cavalry
Banking ("Bank") from a federally chartered mutual savings bank to a federally
chartered capital stock savings bank and the simultaneous issuance of all of the
Bank's outstanding capital stock to the Holding Company pursuant to the Bank's
plan of conversion ("Plan of Conversion"). The conversion of the Bank to a
federally chartered capital stock savings bank and its acquisition by the
Holding Company are collectively referred to herein as the "Stock Conversion."
Following the completion of the Stock Conversion, the Bank may convert from a
federally chartered capital stock savings bank to a Tennessee-chartered
commercial bank as a subsidiary of the Holding Company ("Bank Conversion"). All
references to the "Bank" shall include its operation as a federally chartered
mutual savings bank, a federally chartered capital stock savings bank, or a
Tennessee-chartered commercial bank, as indicated by the context. The Stock
Conversion and the Bank Conversion are collectively referred to herein as the
"Conversion." As of the date of this Prospectus, neither the Holding Company
nor the Bank has filed any of the applicable regulatory applications necessary
to undertake the Bank Conversion. Under the Plan of Conversion, the decision
whether or not to undertake the Bank Conversion is in the sole discretion of the
Bank's Board of Directors. The Board of Directors does not expect to make this
decision until after the consummation of the Stock Conversion. No assurance can
be given that the Bank Conversion will be undertaken. The decision whether or
not to undertake the Bank Conversion will depend on the economic and regulatory
climate at that time, among other factors. See "PROSPECTUS SUMMARY -- The
Conversion -- Bank Conversion."
Pursuant to the Plan of Conversion, nontransferable rights to subscribe for
the Common Stock ("Subscription Rights") have been granted, in order of
priority, to (i) depositors with $50.00 or more on deposit at the Bank as of
June 30, 1996 ("Eligible Account Holders"), (ii) the Bank's employee stock
ownership plan ("ESOP"), a tax-qualified employee benefit plan, (iii) depositors
with $50.00 or more on deposit at the Bank as of December 31, 1997
("Supplemental Eligible Account Holders"), and (iv) depositors of the Bank as of
______________, 1998 ("Voting Record Date") and borrowers of the Bank with loans
outstanding as of January 24, 1991, which continue to be outstanding as of the
Voting Record Date ("Other Members"), subject to the priorities and purchase
limitations set forth in the Plan of Conversion ("Subscription Offering").
SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS SELLING OR OTHERWISE
TRANSFERRING THEIR RIGHTS TO SUBSCRIBE FOR COMMON STOCK IN THE SUBSCRIPTION
OFFERING OR SUBSCRIBING FOR COMMON STOCK ON BEHALF OF ANOTHER PERSON WILL BE
SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION ("OTS") OR ANOTHER AGENCY
OF THE U.S. GOVERNMENT. THE SUBSCRIPTION OFFERING WILL EXPIRE AT 12:00 NOON,
CENTRAL TIME, ON FEBRUARY __, 1998 ("EXPIRATION DATE"), UNLESS EXTENDED BY THE
BANK AND THE HOLDING COMPANY FOR UP TO __ DAYS TO ____________ __, 1998. SUCH
EXTENSION MAY BE GRANTED WITHOUT ADDITIONAL NOTICE TO SUBSCRIBERS. See "THE
CONVERSION -- The Subscription, Direct Community and Syndicated Community
Offerings" and "-- Limitations on Purchases of Shares."
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK,
CALL THE STOCK INFORMATION CENTER AT (615) ___-____.
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 1.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE SAVINGS
ASSOCIATION
INSURANCE FUND ("SAIF") OR ANY OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OTS, THE FDIC OR ANY OTHER FEDERAL AGENCY OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR ANY OTHER
AGENCY OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
(cover continued on following page)
TRIDENT SECURITIES, INC.
The date of this Prospectus is ____________ __, 1998.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Estimated Underwriting
Purchase Commissions and Estimated Net
Price(1) Other Fees and Expenses(2) Proceeds(3)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Price Per Share.................. $ 10.00 $ 0.21 $ 9.79
- ------------------------------------------------------------------------------------------------------------------
Midpoint Price Per Share................. $ 10.00 $ 0.20 $ 9.80
- ------------------------------------------------------------------------------------------------------------------
Maximum Price Per Share.................. $ 10.00 $ 0.19 $ 9.81
- ------------------------------------------------------------------------------------------------------------------
Maximum Price Per Share, as adjusted(4).. $ 10.00 $ 0.18 $ 9.82
- ------------------------------------------------------------------------------------------------------------------
Minimum Total(5)......................... $48,450,000 $1,002,000 $47,448,000
- ------------------------------------------------------------------------------------------------------------------
Midpoint Total(6)........................ $57,000,000 $1,120,000 $55,880,000
- ------------------------------------------------------------------------------------------------------------------
Maximum Total(7)......................... $65,550,000 $1,238,000 $64,312,000
- ------------------------------------------------------------------------------------------------------------------
Maximum Total, as adjusted(4)(8)......... $75,382,500 $1,373,000 $74,009,500
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by
Ferguson & Company ("Ferguson") as of November 7, 1997, which states
that the estimated aggregate pro forma market value of the Holding
Company and the Bank as converted ranged from $48,450,000 to
65,550,000, with a midpoint of $57,000,000 ("Estimated Valuation
Range"). See "THE CONVERSION -- Stock Pricing and Number of Shares to
be Issued."
(2) Includes estimated expenses to the Holding Company and the Bank
arising from the Conversion, including fees to be paid to Trident
Securities, Inc. ("Trident Securities") in connection with the
Offerings. Trident Securities' fees amount to $414,000, $532,000,
$650,000 and $785,000 at the minimum, midpoint, maximum and 15% above
the Estimated Valuation Range, respectively. Such fees may be deemed
to be underwriting fees and Trident Securities may be deemed to be an
underwriter. Expenses, other than fees to be paid to Trident
Securities, are estimated to total approximately $588,000 at each of
the minimum, midpoint, maximum and maximum, as adjusted, of the
Estimated Valuation Range. Actual expenses may be more or less than
estimated amounts. The Holding Company and the Bank have agreed to
indemnify Trident Securities against certain liabilities, including
liabilities that might arise under the Securities Act of 1933, as
amended ("Securities Act"). See "USE OF PROCEEDS" and
"THE CONVERSION --Plan of Distribution for the Subscription, Direct
Community and Syndicated Community Offerings."
(3) Actual net proceeds can vary substantially from the estimated amounts
depending upon actual expenses and the relative number of shares sold
in the Offerings. See "USE OF PROCEEDS" and "PRO FORMA DATA."
(4) Gives effect to an increase in the number of shares that could be sold
in the Offerings due to an increase in the pro forma market value of
the Holding Company and the Bank as converted up to 15% above the
maximum of the Estimated Valuation Range, without the resolicitation
of subscribers or any right of cancellation. The ESOP shall have a
first priority right to subscribe for such additional shares up to an
aggregate of 8% of the Common Stock issued in the Conversion; however,
the ESOP may purchase all or part of its shares in the open market
after the consummation of the Conversion. The issuance of such
additional shares will be conditioned on a determination by Ferguson
that such issuance is compatible with its determination of the
estimated pro forma market value of the Holding Company and the Bank
as converted. See "THE CONVERSION -- Stock Pricing and Number of
Shares to be Issued."
(5) Assumes the issuance of 4,845,000 shares at $10.00 per share.
(6) Assumes the issuance of 5,700,000 shares at $10.00 per share.
(7) Assumes the issuance of 6,555,000 shares at $10.00 per share.
(8) Assumes the issuance of 7,538,250 shares at $10.00 per share.
Any shares of Common Stock not subscribed for in the Subscription
Offering may be offered for sale to members of the general public through a
direct community offering ("Direct Community Offering") with preference being
given to natural persons and trusts of natural persons who are permanent
residents of Rutherford and Bedford Counties, Tennessee ("Local Community"),
subject to the right of the Holding Company to accept or reject orders in the
Direct Community Offering in whole or in part. The Direct Community Offering, if
one is held, is expected to begin immediately after the Expiration Date, but may
begin at any time during the Subscription Offering. The Direct Community
Offering may terminate on or after the Expiration Date, but not later than
____________ __, 1998 (or _________ __, 1998 if the Subscription Offering is
fully extended), unless further extended with the consent of the OTS. It is
anticipated that shares of Common Stock not subscribed for or purchased in the
Subscription Offering
<PAGE>
and the Direct Community Offering will be offered to eligible members of the
general public on a best efforts basis by a selling group of broker-dealers
managed by Trident Securities in a syndicated offering ("Syndicated Community
Offering"). The Subscription Offering, Direct Community Offering and Syndicated
Community Offering are referred to collectively as the "Offerings." If the
Conversion is not consummated within 45 days after the last day of the
Subscription Offering (which date will be no later than ________ __, 1998,
assuming a fully extended Subscription Offering) and the OTS consents to an
extension of time to complete the Conversion, subscribers will be given the
right to increase, decrease or rescind their orders. Such extensions may not go
beyond ___________ __, 1999.
With the exception of the ESOP, which is expected to subscribe for 8% of
the shares of Common Stock issued in the Stock Conversion, the Plan of
Conversion provides for the following purchase limitations: (i) No Eligible
Account Holder, Supplemental Eligible Account Holder or Other Member, including,
in each case, all persons on a joint account, may purchase shares of Common
Stock with an aggregate purchase price of more than $600,000, (ii) no person,
either alone or together with associates of or persons acting in concert with
such person, may purchase in the Direct Community Offering, if any, or in the
Syndicated Community Offering, if any, shares of Common Stock with an aggregate
purchase price of more than $600,000, and (iii) no person (including all persons
on a joint account), either alone or together with associates of or persons
acting in concert with such person, may purchase in the Stock Conversion shares
of Common Stock with an aggregate purchase price of more than $600,000. If
market conditions are such that an increase in the maximum purchase limitation
is necessary to sell a number of shares in excess of the minimum of the
Estimated Valuation Range, the maximum purchase limitation may be increased at
the sole discretion of the Bank and the Holding Company subject to any required
regulatory approval. See "THE CONVERSION -- The Subscription, Direct Community
and Syndicated Community Offerings," "--Limitations on Purchases of Shares" and
"-- Procedure for Purchasing Shares in the Subscription and Direct Community
Offerings" for other purchase and sale limitations. The minimum order is 25
shares.
The Holding Company must receive a properly completed and signed stock
order form and certification ("Order Form") along with full payment (or
appropriate instructions authorizing a withdrawal of the full payment from a
deposit account at the Bank) of $10.00 per share for all shares subscribed for
or ordered. Funds so received will be placed in segregated accounts created for
this purpose at the Bank and will earn interest at the Bank's passbook rate from
the date payment is received until the Stock Conversion is consummated or
terminated; these funds will be otherwise unavailable to the depositor until
such time. Payments authorized by withdrawals from deposit accounts will
continue to earn interest at the contractual rate until the Stock Conversion is
consummated or terminated, although such funds will be unavailable for
withdrawal until the Stock Conversion is consummated or terminated. ONCE
TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT THE CONSENT OF THE BANK
AND THE HOLDING COMPANY. The Holding Company is not obligated to accept orders
submitted on photocopied or telecopied Order Forms.
The Bank and the Holding Company have engaged Trident Securities as their
financial advisor and to assist the Holding Company in the sale of the Common
Stock in the Offerings. Trident Securities is a registered broker-dealer and a
member of the National Association of Securities Dealers, Inc. ("NASD").
Neither Trident Securities nor any other registered broker-dealer is obligated
to take or purchase any shares of Common Stock in the Offerings. The Holding
Company and the Bank reserve the right, in their absolute discretion, to accept
or reject, in whole or in part, any or all orders in the Direct Community or
Syndicated Community Offerings either at the time of receipt of an order or as
soon as practicable following the termination of the Offerings. See "THE
CONVERSION -- Plan of Distribution for the Subscription, Direct Community and
Syndicated Community Offerings."
Offering materials for the Subscription Offering initially will be
distributed to certain persons by mail, with copies also available by request or
at the Stock Information Center. The Bank has established the Stock Information
Center for purposes of coordinating the Offerings, including tabulating orders
and answering questions about the Offerings by telephone. See "THE CONVERSION -
- - Description of Sales Activities."
Prior to the Offerings, the Holding Company has not issued any capital
stock and accordingly there has been no market for the shares offered hereby.
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 Holding
Company has received conditional approval to list the Common Stock the Nasdaq
National Market under the symbol "_____." See "RISK FACTORS -- Absence of Prior
Market for the Common Stock" and "MARKET FOR COMMON STOCK."
<PAGE>
CAVALRY BANKING
MURFREESBORO, TENNESSEE
[Map depicting State of Tennessee and Rutherford, Bedford and Williamson
Counties]
THE STOCK CONVERSION IS CONTINGENT UPON APPROVAL OF THE BANK'S PLAN OF
CONVERSION BY AT LEAST A MAJORITY OF THE BANK'S ELIGIBLE VOTING MEMBERS, THE
SALE OF AT LEAST 4,845,000 SHARES OF COMMON STOCK PURSUANT TO THE PLAN OF
CONVERSION, AND RECEIPT OF ALL APPLICABLE REGULATORY APPROVALS.
<PAGE>
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THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED OR GUARANTEED BY THE FDIC, THE SAIF OR ANY OTHER GOVERNMENT AGENCY.
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PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with and is
qualified in its entirety by the more detailed information and Consolidated
Financial Statements (including the Notes thereto) presented elsewhere in this
Prospectus. The purchase of Common Stock is subject to certain risks. See
"RISK FACTORS."
CAVALRY BANCORP, INC.
The Holding Company was organized on November 5, 1997 under Tennessee law
at the direction of the Bank to acquire all of the capital stock that the Bank
will issue upon its conversion from the mutual to stock form of ownership. The
Holding Company has only engaged in organizational activities to date. The
Holding Company has received conditional OTS approval to become a savings and
loan holding company through the acquisition of 100% of the capital stock of the
Bank. Immediately following the Stock Conversion, the only significant assets
of the Holding Company will be the outstanding capital stock of the Bank, 50% of
the net proceeds of the Offerings as permitted by the OTS to be retained by it
and a note receivable from the ESOP evidencing a loan to enable the ESOP to
purchase 8% of the Common Stock issued in the Stock Conversion. Funds retained
by the Holding Company will be used for general business activities. See "USE
OF PROCEEDS." Upon consummation of the Stock Conversion, the Holding Company
will be classified as a unitary savings and loan holding company subject to OTS
regulation. See "REGULATION -- Savings and Loan Holding Company Regulations."
If the Bank Conversion is undertaken, the Holding Company's principal business
would become the business of the Bank as a Tennessee-chartered commercial bank
and it would register with the Board of Governors of the Federal Reserve System
("Federal Reserve") as a bank holding company under the Bank Holding Company
Act, as amended ("BHCA"). See "-- The Conversion -- Bank Conversion" and
"REGULATION -- Bank Holding Company Regulation." Management believes that the
holding company structure and retention of proceeds could facilitate possible
geographic expansion and diversification through future acquisitions of other
financial institutions and also enable the Holding Company to diversify, should
it decide to do so, into a variety of commercial banking-related activities.
There are no present plans, arrangements, agreements, or understandings, written
or oral, regarding any such acquisitions or activities. The holding company
structure will also facilitate the repurchase of shares in the open market,
subject to the discretion of the Holding Company's Board of Directors,
regulatory restrictions and market conditions. The main office of the Holding
Company is located at 114 West College Street, Murfreesboro, Tennessee 37130 and
its telephone number is (615) 893-1234.
CAVALRY BANKING
The Bank is a federally chartered mutual savings bank located in
Murfreesboro, Tennessee, which is approximately 30 miles southeast of Nashville,
Tennessee. Chartered in 1929 as a Tennessee-chartered mutual building and loan
association under the name "Murfreesboro Building and Loan Association," the
Bank converted to a federal charter and adopted the name "Murfreesboro Federal
Savings and Loan Association," in 1936. In 1984, the Bank adopted the name
"Cavalry Banking Federal Savings and Loan Association." In 1991, the Bank
adopted the name "Cavalry Banking, A Federal Savings Bank," and in 1996 the Bank
amended its mutual charter to adopt its current name. As a result of the
Conversion, the Bank will convert to a federal capital stock savings bank and
will become a wholly-owned subsidiary of the Holding Company. The Bank is
regulated by the OTS, its primary regulator, and by the FDIC, the insurer of its
deposits. The Bank's deposits have been federally-insured since 1936 and are
currently insured by the FDIC under the SAIF. The Bank has been a member of the
Federal Home Loan Bank ("FHLB") System since 1936. At September 30, 1997, the
Bank had total assets of $275.9 million, total deposits of $242.0 million and
total equity of $29.5 million on a consolidated basis.
(i)
<PAGE>
The Bank is a community-oriented financial institution whose primary
business is attracting deposits from the general public and using those funds to
originate a variety of loans to individuals residing within its primary market
area, and to businesses owned and operated by such individuals. The Bank
considers Rutherford, Bedford and Williamson Counties in Central Tennessee as
its primary market area.
The Bank believes that its operations more closely resemble those of a
traditional commercial bank than a traditional thrift institution. Unlike a
traditional thrift institution that primarily originates long-term residential
mortgage loans funded primarily with long term certificates of deposits, a
traditional commercial bank primarily originates commercial business, consumer
and other short term non-real estate loans funded primarily by non-interest
bearing demand deposit accounts and other short term liabilities. The Bank's
one- to- four family mortgage loan portfolio, as a percent of the total loan
portfolio, has decreased from 50.6% at December 31, 1992 to 32.7% at September
30, 1997. In addition, the Bank's certificates of deposit, as a percentage of
deposit accounts, have decreased from 60.7% at December 31, 1994 to 54.6% at
September 30, 1997. In addition to the change in its asset and liability mix,
the Bank is one of the few thrift institutions in its primary market area that
offers trust services. See "BUSINESS OF THE BANK -- Lending Activities," "--
Deposit Activities and Other Sources of Funds --Deposit Accounts" and "-- Trust
Department."
The Bank's lending activities are diverse. The Bank originates both
adjustable rate mortgage ("ARM") loans and fixed-rate mortgage loans.
Generally, ARM loans are retained in the Bank's portfolio and long-term fixed-
rate mortgage loans are originated for sale in the secondary market. In
addition, the Bank actively originates construction and acquisition and
development loans. At September 30, 1997, construction loans totalled $68.8
million, or 26.7% of total loans receivable, and acquisition and development
loans totalled $10.6 million, or 4.1% of total loans receivable. The Bank also
originates commercial real estate, commercial business, and consumer and other
non-real estate loans. At September 30, 1997, commercial real estate loans
totalled $37.1 million, or 14.4% of total loans receivable, commercial business
loans totalled $22.1 million, or 8.6% of total loans receivable, and consumer
and other non-real estate loans totalled $33.3 million, or 12.9% of total loans
receivable. See "BUSINESS OF THE BANK -- Lending Activities." The Bank invests
its excess liquidity in short-term U.S. Government and agency securities. See
"BUSINESS OF THE BANK -- Investment Activities."
The Bank conducts its operations from its main office and four branch
offices located in Murfreesboro, Tennessee, a branch office in Shelbyville,
Tennessee (Bedford County) and three offices in Smyrna, Tennessee (Rutherford
County). The Bank also operates a mortgage loan origination office in Franklin,
Tennessee (Williamson County). See "BUSINESS OF THE BANK -- Properties." The
main office is located at 114 West College Street, Murfreesboro, Tennessee 37130
and its telephone number is (615) 893-1234.
THE CONVERSION
STOCK CONVERSION. Pursuant to the Stock Conversion, the Bank is converting
from a federally chartered mutual savings bank to a federally chartered capital
stock savings bank as a wholly owned subsidiary of the Holding Company. Upon
consummation of the Stock Conversion, the Bank will issue all of its outstanding
capital stock to the Holding Company in exchange for 50% of the net proceeds
raised by the Holding Company in the Offerings. Simultaneously, the Holding
Company will sell its Common Stock in the Offerings. The Conversion has been
conditionally approved by the OTS, subject to approval by the Bank's members at
a special meeting to be held on ___________ __, 1998. AFTER CONSUMMATION OF THE
CONVERSION, DEPOSITORS AND BORROWERS OF THE BANK WILL HAVE NO VOTING RIGHTS IN
THE HOLDING COMPANY UNLESS THEY BECOME STOCKHOLDERS.
The Plan of Conversion requires that the aggregate purchase price of the
Common Stock to be issued in the Conversion be based upon an independent
appraisal of the estimated pro forma market value of the Holding Company and the
Bank, as converted. Ferguson has advised the Bank that in its opinion, at
November 7, 1997, the aggregate estimated pro forma market value of the Holding
Company and the Bank, as converted, ranged from $48,450,000 to $65,550,000 or
from 4,845,000 shares to 6,555,000 shares, assuming a $10.00 per share Purchase
Price. The appraisal of the pro forma market value of the Holding Company and
the Bank as converted is based on a number
(ii)
<PAGE>
of factors and should not be considered a recommendation to buy shares of the
Common Stock or any assurance that after the Conversion shares of Common Stock
will be able to be resold at or above the Purchase Price. The appraisal will be
updated or confirmed prior to consummation of the Conversion.
The Board of Directors and management believe that the Conversion is in the
best interests of the Bank, its members and the communities it serves. The
capital raised in the Conversion is intended to support the Bank's current
lending and investment activities and may also support possible future expansion
and diversification of operations, although there are no current specific plans,
arrangements or understandings, written or oral, regarding any such expansion or
diversification. The Conversion is also expected to afford the Bank's members
and others the opportunity to become stockholders of the Holding Company and
participate more directly in, and contribute to, any future growth of the
Holding Company and the Bank. The Conversion will also enable the Holding
Company and the Bank to raise additional capital in the public equity or debt
markets should the need arise, although there are no current specific plans,
arrangements or understandings, written or oral, regarding any such financing
activities. As a mutual institution, the Bank is unable to raise equity capital
or issue debt instruments (other than by accepting deposits). See "THE
CONVERSION -- Purposes of Conversion."
BANK CONVERSION. If the Bank Conversion is undertaken, the Bank would
operate as a Tennessee-chartered commercial bank and succeed to all of the
assets and liabilities of the Bank immediately prior to the Bank Conversion.
The Bank Conversion would have to be approved by the Commissioner of the
Department of Financial Institutions of the State of Tennessee ("Commissioner")
and the OTS. The Holding Company would also have to file an application with
the Federal Reserve to become the bank holding company for the Bank upon
consummation of the Bank Conversion. As of the date of this Prospectus, neither
the Holding Company nor the Bank has filed any of the required regulatory
applications to undertake the Bank Conversion.
Under the Plan of Conversion, the decision whether or not to undertake the
Bank Conversion is in the sole discretion of the Bank's Board of Directors. The
Board of Directors does not expect to make this decision until after the
consummation of the Stock Conversion, and no assurances can be given that the
Bank Conversion will be undertaken. In deciding whether or not to undertake the
Bank Conversion, the Board of Directors will consider, among other things, the
economic and regulatory climate at the time, particularly the status of proposed
federal legislation providing for a common "unified charter" for banks and
thrifts. Although no assurances can be given whether or not such legislation
will be passed; if passed, it would likely eliminate the banking and thrift
industries as separate industries. See "RISK FACTORS -- Recent Legislation and
the Future of the Thrift Industry." As a Tennessee-chartered commercial bank,
the Bank would have broader investment and lending authorities than it now has
as a federally chartered savings bank, particularly in the areas of commercial
real estate and commercial business lending. See "REGULATION -- Regulation of
the Bank as a Tennessee Chartered Commercial Bank."
Upon consummation of the Bank Conversion, the deposits of the Bank would
continue to be insured by the FDIC under the SAIF and the Bank would continue to
be regulated and supervised by the FDIC. The Commissioner, however, would
replace the OTS as the Bank's primary regulator. The Bank Conversion would not
result in any change in the Bank's management, directors, employees or office
locations.
THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS
The Holding Company is offering up to 6,555,000 shares of Common Stock at
$10.00 per share to holders of Subscription Rights in the following order of
priority: (i) Eligible Account Holders; (ii) the Bank's ESOP; (iii) Supplemental
Eligible Account Holders; and (iv) Other Members. In the event the number of
shares offered in the Stock Conversion is increased above the maximum of the
Estimated Valuation Range, the Bank's ESOP shall have a priority right to
purchase any such shares exceeding the maximum of the Estimated Valuation Range
up to an aggregate of 8% of the Common Stock. ONCE TENDERED, ORDERS ARE
IRREVOCABLE WITHOUT THE CONSENT OF THE BANK AND THE HOLDING COMPANY. Any shares
of Common Stock not subscribed for in the Subscription Offering may be offered
in the Direct Community Offering to the general public with preference being
given to natural persons and trusts of natural persons who are permanent
residents of the Local Community. The Bank has engaged
(iii)
<PAGE>
Trident Securities to consult with and advise the Holding Company and the Bank
in the Offerings, and Trident Securities has agreed to use its best efforts to
assist the Holding Company with the solicitation of subscriptions and purchase
orders for shares of Common Stock in the Offerings. Trident Securities is not
obligated to take or purchase any shares of Common Stock in the Offerings. If
all shares of Common Stock to be issued in the Stock Conversion are not sold
through the Subscription Offering and the Direct Community Offering, then the
Holding Company expects to offer the remaining shares in a Syndicated Community
Offering managed by Trident Securities, which would occur as soon as practicable
following the close of the Subscription and Direct Community Offerings. All
shares of Common Stock will be sold at the same price per share in the
Syndicated Community Offering as in the Subscription Offering and the Direct
Community Offering. See "USE OF PROCEEDS," "PRO FORMA DATA" and "THE CONVERSION
- -- Stock Pricing and Number of Shares to be Issued." The Subscription Offering
will expire at 12:00 Noon, Central Time, on the Expiration Date, unless extended
by the Bank and the Holding Company for up to __ days. The Direct Community
Offering and Syndicated Community Offering, if any, may terminate on the
Expiration Date or on any date thereafter; however, in no event later than
____________ __, 1998, unless further extended with the consent of the OTS.
BENEFITS OF THE CONVERSION TO MANAGEMENT
ESOP. In connection with the Stock Conversion, the Bank will adopt the
ESOP, a tax-qualified employee benefit plan for officers and employees of the
Holding Company and the Bank, which intends to purchase 8% of the shares of
Common Stock issued in the Offerings (524,400 shares of Common Stock, based on
the issuance of the maximum of the Estimated Valuation Range). In the event the
number of shares offered in the Stock Conversion is increased above the maximum
of the Estimated Valuation Range, the Bank's ESOP shall have a priority right to
purchase any such shares exceeding the maximum of the Estimated Valuation Range
up to an aggregate of 8% of the Common Stock. In the event that the ESOP's
subscription is not filled in its entirety, the ESOP may purchase additional
shares in the open market or may purchase authorized but unissued shares with
cash contributed to it by the Bank. See "MANAGEMENT OF THE BANK -- Benefits --
Employee Stock Ownership Plan." As a result of the adoption of the ESOP, the
Holding Company will recognize compensation expense in an amount equal to the
fair market value of the ESOP shares when such shares are committed to be
released to participants' accounts. See "RISK FACTORS -- New Expenses
Associated With ESOP and MRP" and "PRO FORMA DATA."
MRP. The Holding Company expects to seek stockholder approval of the
Cavalry Bancorp, Inc. 1998 Management Recognition Plan and Trust ("MRP"). The
MRP will reserve a number of shares equal to 4% of the number of shares issued
in the Stock Conversion. Under current OTS regulations, the approval of a
majority vote of the Holding Company's outstanding shares of Common Stock is
required prior to the implementation of the MRP within one year of the
consummation of the Stock Conversion. If stockholder approval of the MRP is
obtained, it is expected that awards of up to 262,200 shares of Common Stock
(based on the issuance of the maximum of the Estimated Valuation Range) will be
made to key employees and directors of the Holding Company and the Bank at no
cost to the recipient. Although no specific award determinations have been
made at this time, the Holding Company and the Bank anticipate that if
stockholder approval is obtained it would provide awards to its directors,
officers and employees to the extent permitted by applicable regulations. Under
current OTS regulations, if the MRP is implemented within one year of the
consummation of the Stock Conversion, (i) no officer or employee could receive
an award covering in excess of 25%, (ii) no nonemployee director may receive in
excess of 5% and (iii) nonemployee directors, as a group, could not receive in
excess of 30% of the number of shares reserved for issuance under the MRP. In
addition, all awards would be subject to vesting at a minimum rate of 20% per
year. The size of individual awards will be determined prior to submitting the
MRP for stockholder approval, and disclosure of anticipated awards will be
included in the proxy materials for such meeting. See "PRO FORMA DATA" and
"MANAGEMENT OF THE BANK -- Benefits -- Management Recognition Plan."
STOCK OPTION PLAN. The Holding Company expects to seek stockholder
approval of the Cavalry Bancorp, Inc. Stock Option Plan ("Stock Option Plan").
The Stock Option Plan will reserve a number of shares equal to 10% of the number
of shares issued in the Stock Conversion. Under current OTS regulations, the
approval of a majority vote of the Holding Company's outstanding shares of
Common Stock is required prior to the implementation of the
(iv)
<PAGE>
Stock Option Plan within one year of the consummation of the Stock Conversion.
If stockholder approval of the Stock Option Plan is obtained, it is expected
that options to acquire up to 655,500 shares of Common Stock of the Holding
Company will be awarded to key employees and directors of the Holding Company
and the Bank (based on the issuance of the maximum of the Estimated Valuation
Range). The exercise price of such options will be 100% of the fair market
value of the Common Stock on the date the option is granted. Although no
specific award determinations have been made at this time, the Holding Company
and the Bank anticipate that if stockholder approval is obtained it would
provide awards to its directors, officers and employees to the extent permitted
by applicable regulations. Under current OTS regulations, if the Stock Option
Plan is implemented within one year of the consummation of the Stock Conversion,
(i) no officer or employees could receive an award of options covering in excess
of 25%, (ii) no nonemployee director could receive in excess of 5% and (iii)
nonemployee directors, as a group, could not receive in excess of 30% of the
number of shares reserved for issuance under the Stock Option Plan. In
addition, all awards would be subject to vesting at a minimum rate of 20% per
year. The size of individual awards will be determined prior to submitting the
Stock Option Plan for stockholder approval, and disclosure of anticipated awards
will be included in the proxy materials for such meeting. Options are valuable
only to the extent that they are exercisable and the market price for the
underlying share of Common Stock is in excess of the exercise price. An option
effectively eliminates the market risk of holding the underlying securities
since no consideration is paid for the option until it is exercised. Therefore,
the recipient may, within the limits of the term of the option, wait to exercise
the option until the market price exceeds the exercise price. See "MANAGEMENT
OF THE BANK -- Benefits -- Stock Option Plan."
EMPLOYMENT AND SEVERANCE AGREEMENTS. The Holding Company and the Bank have
agreed to enter into employment agreements with two of the Bank's executive
officers, which provide certain benefits in the event of their termination
following a change in control of the Holding Company or the Bank. In the event
of a change in control of the Holding Company or the Bank, as defined in the
agreement, each executive officer will be entitled to a package of cash and/or
benefits with a maximum value equal to 2.99 times their average annual
compensation during the five-year period preceding the change in control.
Assuming a change of control occurred as of September 30, 1997 the aggregate
value of the severance benefits payable to these executive officers under the
employment agreements would have been approximately $1.1 million. See
"MANAGEMENT OF THE BANK -- Executive Compensation -- Employment Agreements."
The Holding Company and the Bank also have agreed to enter into severance
agreements with seven of the Bank's senior officers, none of whom will be
covered by an employment agreement. The severance agreements provide certain
benefits in the event of their termination following a change in control of the
Holding Company or the Bank. In the event of a change in control of the Holding
Company or the Bank, as defined in the agreement, each senior officer will be
entitled to a package of cash and/or benefits with a maximum value equal to 2.99
times their average annual compensation during the five-year period preceding
the change in control. Assuming a change of control occurred as of September
30, 1997, the aggregate value of the severance benefits payable to these senior
officers under the severance agreements would have been approximately $650,000.
See "MANAGEMENT OF THE BANK -- Executive Compensation -- Severance Agreements."
KEY EMPLOYEE SEVERANCE COMPENSATION PLAN. In connection with the Stock
Conversion, the Board of Directors of the Bank intends to adopt a key Employee
Severance Compensation Plan ("Severance Plan") to provide benefits to eligible
key employees in the event of a change in control of the Holding Company or the
Bank. Officers who enter into separate employment or severance agreements with
the Holding Company and the Bank will not be eligible to participate in the
Severance Plan. The Severance Plan provides that, in the event of a change in
control of the Holding Company or the Bank, eligible key employees who are
terminated or who terminate employment (but only upon the occurrence of events
specified in the Severance Plan) within 12 months of the effective date of a
change in control will be entitled to a payment based on years of service with
the Bank, subject to certain limits. Assuming that a change in control had
occurred at September 30, 1997 and the termination of all eligible employees,
the maximum aggregate payment due under the Severance Plan would be
approximately $116,000. See "MANAGEMENT OF THE BANK -- Executive Compensation -
- - Employee Severance Compensation Plan."
(v)
<PAGE>
For information concerning the possible voting control of officers,
directors and employees following the Stock Conversion, see "RISK FACTORS --
Anti-takeover Considerations -- Voting Control by Insiders."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING COMMON STOCK
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Expiration Date, in accordance with Rule 15c2-8 under the Securities
Exchange Act of 1934, as amended ("Exchange Act"), no Prospectus will be mailed
later than five days or hand delivered any later than two days prior to the
Expiration Date. Execution of the Order Form will confirm receipt or delivery
of a Prospectus in accordance with Rule 15c2-8. Order Forms will be distributed
only with a Prospectus. Neither the Holding Company, the Bank nor Trident
Securities is obligated to deliver a Prospectus and an Order Form by any means
other than the U.S. Postal Service.
To ensure that Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members are properly identified as to their stock purchase
priorities, such parties must list all deposit accounts, or in the case of Other
Members who are only borrowers, loans held at the Bank, on the Order Form giving
all names on each deposit account and/or loan and the account and/or loan
numbers at the applicable eligibility date.
Full payment by check, cash (except by mail), money order, bank draft or
withdrawal authorization (payment by wire transfer will not be accepted) must
accompany an original Order Form. THE HOLDING COMPANY IS NOT OBLIGATED TO
ACCEPT ORDERS SUBMITTED ON PHOTOCOPIED OR TELECOPIED ORDER FORMS. ORDERS CANNOT
AND WILL NOT BE ACCEPTED WITHOUT THE EXECUTION OF THE CERTIFICATION APPEARING ON
THE REVERSE SIDE OF THE ORDER FORM. See "THE CONVERSION -- Procedure for
Purchasing Shares in the Subscription and Direct Community Offering."
PURCHASE LIMITATIONS
With the exception of the ESOP, which is expected to subscribe for 8% of
the shares of Common Stock issued in the Stock Conversion, the Plan of
Conversion provides for the following purchase limitations: (i) No Eligible
Account Holder, Supplemental Eligible Account Holder or Other Member, including,
in each case, all persons on a joint account, may purchase shares of Common
Stock with an aggregate purchase price of more than $600,000, (ii) no person,
either alone or together with associates of or persons acting in concert with
such person, may purchase in the Direct Community Offering, if any, or in the
Syndicated Community Offering, if any, shares of Common Stock with an aggregate
purchase price of more than $600,000, and (iii) no person (including all persons
on a joint account), either alone or together with associates of or persons
acting in concert with such person, may purchase in the Stock Conversion shares
of Common Stock with an aggregate purchase price of more than $600,000. THIS
MAXIMUM PURCHASE LIMITATION MAY BE INCREASED CONSISTENT WITH OTS REGULATIONS IN
THE SOLE DISCRETION OF THE HOLDING COMPANY AND THE BANK SUBJECT TO ANY REQUIRED
REGULATORY APPROVAL. The minimum purchase is 25 shares.
The term "acting in concert" is defined in the Plan of Conversion to mean:
(i) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; or (ii) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. The Holding Company and the 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 Securities and Exchange Commission ("SEC") with respect to other companies.
The term "associate" of a person is defined in the Plan of Conversion to mean:
(i) any corporation or organization (other than the Bank or a majority-owned
subsidiary of the Bank) of which such person is an officer or partner or is,
directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity (excluding tax-qualified employee plans); and
(iii) any relative or spouse of such person, or any relative of such spouse, who
either has the same home as such person or who is a director or officer of the
Bank or any of its parents or subsidiaries. THE HOLDING COMPANY AND THE BANK
MAY PRESUME THAT CERTAIN PERSONS ARE ACTING IN
(vi)
<PAGE>
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.
Stock orders received either through the Direct Community Offering or the
Syndicated Community Offering, if held, may be accepted or rejected, in whole or
in part, at the discretion of the Holding Company and the Bank. See "THE
CONVERSION -- Limitations on Purchases of Shares." If an order is rejected in
part, the purchaser does not have the right to cancel the remainder of the
order. In the event of an oversubscription, shares will be allocated in
accordance with the Plan of Conversion. See "THE CONVERSION -- The
Subscription, Direct Community and Syndicated Community Offerings."
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE STOCK CONVERSION
The Purchase Price in the Subscription Offering is a uniform price
established by the Board of Directors for all subscribers, including members of
the Holding Company's and the Bank's Boards of Directors, their management and
tax-qualified employee plans. The number of shares to be offered at the
Purchase Price is based upon an independent appraisal of the aggregate pro forma
market value of the Holding Company and the Bank, as converted. The aggregate
pro forma market value was estimated by Ferguson to range from $48,450,000 to
$65,550,000 as of November 7, 1997, or from 4,845,000 to 6,555,000 shares based
on the Purchase Price. See "THE CONVERSION -- Stock Pricing and Number of
Shares to be Issued." The appraisal of the pro forma value of the Holding
Company and the Bank, as converted, will be updated or confirmed at the
completion of the Offerings. The maximum of the Estimated Valuation Range may
be increased by up to 15% and the number of shares of Common Stock to be issued
in the Stock Conversion may be increased to 7,538,250 shares due to material
changes in the financial condition or results of operations of the Bank or
changes in market conditions or general financial, economic or regulatory
conditions. No resolicitation of subscribers will be made and subscribers will
not be permitted to modify or cancel their subscriptions unless the gross
proceeds from the sale of the Common Stock are less than the minimum or more
than 15% above the maximum of the current Estimated Valuation Range. THE
APPRAISAL IS NOT INTENDED TO BE AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION
OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK IN THE OFFERINGS
NOR CAN ASSURANCE BE GIVEN THAT PURCHASERS OF THE COMMON STOCK IN THE OFFERINGS
WILL BE ABLE TO SELL SUCH SHARES AFTER CONSUMMATION OF THE CONVERSION AT A PRICE
THAT IS EQUAL TO OR ABOVE THE PURCHASE PRICE. Furthermore, the pro forma
stockholders' equity is not intended to represent the fair market value of the
Common Stock and may be greater than amounts that would be available for
distribution to stockholders in the event of liquidation.
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock are estimated to range
from $47.4 million to $64.3 million, or to $74.0 million if the Estimated
Valuation Range is increased by 15%, depending upon the number of shares sold
and the expenses of the Stock Conversion. The Holding Company has received
conditional OTS approval to purchase all of the capital stock of the Bank to be
issued in the Stock Conversion in exchange for 50% of the net proceeds of the
Offerings. This will result in the Holding Company retaining approximately
$23.7 million to $32.2 million of the net proceeds, or up to $37.0 million if
the Estimated Valuation Range is increased by 15%, from which the Holding
Company will fund a loan to the ESOP, and the Bank receiving an equal amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Bank's capital and will support the expansion of the Bank's
existing business activities. The Bank will use the funds contributed to it for
general corporate purposes, including, initially, lending and investment in
short-term U.S. Government and agency obligations.
A portion of the net proceeds retained by the Holding Company will be used
for a loan by the Holding Company to the ESOP to enable it to purchase 8% of the
shares of Common Stock issued in the Stock Conversion. Such loan would fund the
entire purchase price of the ESOP shares ($5,244,000 at the maximum of the
Estimated Valuation Range) and would be repaid principally from the Bank's
contributions to the ESOP and from dividends
(vii)
<PAGE>
payable on the Common Stock held by the ESOP. The remaining proceeds retained
by the Holding Company initially will be invested primarily in short-term U.S.
Government and agency obligations. Such proceeds will be available for
additional contributions to the Bank in the form of debt or equity, to support
future growth and diversification activities, as a source of dividends to the
stockholders of the Holding Company and for future repurchases of Common Stock
(including possible repurchases to fund the MRP or to provide shares to be
issued upon exercise of stock options) to the extent permitted under Tennessee
law and OTS regulations. The Holding Company will consider exploring
opportunities to use such funds to expand operations through acquiring or
establishing additional branch offices and the acquisition of other financial
institutions. Currently, there are no specific plans, arrangements, agreements
or understandings, written or oral, regarding any such activities.
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Holding
Company has received conditional approval to have the Common Stock listed on the
Nasdaq National Market System under the symbol "____." Trident Securities has
agreed to act as a market maker for the Holding Company's Common Stock following
consummation of the Stock Conversion. No assurance can be given that an active
and liquid trading market for the Common Stock will develop. Further, no
assurance can be given that purchasers will be able to sell their shares at or
above the Purchase Price after the Stock Conversion. See "RISK FACTORS --
Absence of Prior Market for the Common Stock" and "MARKET FOR COMMON STOCK."
DIVIDEND POLICY
The Holding Company's Board of Directors anticipates paying quarterly cash
dividends on the Common Stock at an annual rate of $0.20 per share, commencing
in the first full quarter following the consummation of the Conversion.
Declarations and payments of dividends by the Board of Directors will depend
upon a number of factors, including the amount of the net proceeds retained by
the Holding Company, capital requirements, regulatory limitations, the Bank's
and the Holding Company's financial condition and results of operations, tax
considerations and general economic conditions. In order to pay any cash
dividends, however, the Holding Company must have available cash either from the
net proceeds raised in the Offerings and retained by the Holding Company,
dividends received from the Bank or earnings on Holding Company assets. There
are certain limitations on the payment of dividends from the Bank to the Holding
Company. See "REGULATION." In addition, from time to time in an effort to
manage capital to a reasonable level, the Board of Directors may determine to
pay periodic special cash dividends in addition to, or in lieu of, regular cash
dividends. No assurances can be given that any dividends (regular or special)
will be declared or, if declared, what the amount of dividends will be or
whether such dividends, once declared, will continue. See "DIVIDEND POLICY."
OFFICERS' AND DIRECTORS' COMMON STOCK PURCHASES AND BENEFICIAL OWNERSHIP
Officers and directors of the Bank (30 persons) are expected to subscribe
for an aggregate of approximately 1,117,800 shares of Common Stock, or 22.5% and
16.8% of the shares based on the minimum and the maximum of the Estimated
Valuation Range, respectively. See "SHARES TO BE PURCHASED BY MANAGEMENT
PURSUANT TO SUBSCRIPTION RIGHTS." In addition, purchases by the ESOP,
allocations under the MRP, and the exercise of stock options issued under the
Stock Option Plan, will increase the number of shares beneficially owned by
directors, officers and employees. Assuming (i) implementation of the MRP and
the Stock Option Plan, (ii) the open market purchase of shares on behalf of the
MRP, (iii) the purchase by the ESOP of 8% of the Common Stock sold in the
Offerings, and (iv) the exercise of stock options equal to 10% of the number of
shares of Common Stock issued in the Conversion, directors, officers and
employees of the Holding Company and the Bank would have voting control, on a
fully diluted basis, of 39.5% and 34.3% of the Common Stock, based on the
issuance of the minimum and maximum of the Estimated Valuation Range,
respectively. See "RISK FACTORS -- Anti-takeover Considerations -- Voting
Control by Insiders." The MRP and Stock Option Plan are subject to approval by
the
(viii)
<PAGE>
stockholders of the Holding Company at a meeting to be held no earlier than six
months following consummation of the Stock Conversion.
RISK FACTORS
See "RISK FACTORS" beginning on page 1 for a discussion of certain risks
related to the Offerings that should be considered by all prospective investors.
(ix)
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Bank and its
subsidiaries at the dates and for the periods indicated. Information at
September 30, 1997 and for the nine months ended September 30, 1997 and 1996 are
unaudited, but, in the opinion of management, reflect all adjustments (none of
which are other than normal recurring entries) necessary for a fair
presentation. The results of operations for the nine months ended September 30,
1997 are not necessarily indicative of the results of operations that may be
expected for the entire fiscal year. This information is qualified in its
entirety by reference to the detailed information contained in the Consolidated
Financial Statements and Notes thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At September 30, At December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993 1992
----------------- -------- ----------- ---------- -------- --------
(Unaudited) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets.............................. $275,925 $244,964 $223,882 $208,844 $206,078 $198,600
Loans receivable, net..................... 216,410 200,600 159,943 165,481 154,139 162,537
Loans held-for-sale....................... 4,149 5,253 3,689 1,452 4,804 7,378
Investment securities held-to-maturity.... 3,700 7,705 35,550 19,898 13,535 7,522
Investment securities available-for sale.. 10,107 -- -- -- -- --
Mortgage-backed securities held-
to-maturity............................. 1,333 1,419 1,541 1,665 2,108 2,446
Cash, federal funds sold and overnight
interest-bearing deposits............... 26,691 19,519 13,935 11,978 22,660 9,954
Deposit accounts.......................... 241,950 214,533 196,734 180,283 185,174 180,294
Borrowings................................ -- -- -- 5,000 -- --
Total equity, substantially restricted.... 29,501 27,250 24,436 21,236 18,778 16,155
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, Year Ended December 31,
---------------- ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ------
(Unaudited) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income........................... $ 16,160 $ 14,380 $ 19,584 $ 17,222 $ 15,394 $ 14,963 $15,849
Interest expense.......................... 6,815 6,117 8,268 7,696 6,299 6,317 8,116
-------- -------- -------- -------- -------- -------- -------
Net interest income....................... 9,345 8,263 11,316 9,526 9,095 8,646 7,733
Provision for loan losses................. 700 90 120 80 113 690 366
-------- -------- -------- -------- -------- -------- -------
Net interest income
after provision for loan losses.......... 8,645 8,173 11,196 9,446 8,982 7,956 7,367
Gains from sale of loans.................. 674 733 890 882 530 1,552 945
Gains from sale of securities............. -- -- -- -- -- -- 46
Other income.............................. 1,840 1,580 2,268 2,082 1,485 1,618 1,418
Other expenses............................ 7,354 7,517 9,786 7,498 7,001 7,000 6,263
-------- -------- -------- -------- -------- -------- -------
Earnings before income taxes
and extraordinary item.................. 3,805 2,969 4,568 4,912 3,996 4,126 3,513
Provision for income taxes................ 1,547 1,129 1,754 1,711 1,538 1,913 1,272
-------- -------- -------- -------- -------- -------- -------
Earnings before extraordinary item........ 2,258 1,840 2,814 3,201 2,458 2,213 2,241
Cumulative effect of change in
accounting principle..................... -- -- -- -- -- 409 --
-------- -------- -------- -------- -------- -------- -------
Net earnings $ 2,258 $ 1,840 $ 2,814 $ 3,201 $ 2,458 $ 2,622 $ 2,241
======== ======== ======== ======== ======== ======== =======
</TABLE>
(x)
<PAGE>
<TABLE>
<CAPTION>
At September 30, At December 31,
------------------------------------------
1997 1996 1995 1994 1993 1992
-------------- -------- -------- ------- ------- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Number of:
Real estate loans outstanding..... 4,816 4,693 4,559 4,690 5,912 5,469
Deposit accounts.................. 22,772 20,687 18,891 17,812 17,610 16,960
Full-service offices.............. 9 7 7 6 6 6
</TABLE>
<TABLE>
<CAPTION>
At or For
Nine Months
Ended
September 30, Year Ended December 31,
------------- -----------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
KEY FINANCIAL RATIOS(1):
Performance Ratios:
Return on average assets(2)....... 1.16% 1.05% 1.20% 1.48% 1.18% 1.30% 1.15%
Return on average equity(3)....... 10.61 9.68 10.89 14.02 12.29 15.01 14.91
Interest rate spread(5)........... 4.84 4.50 4.50 4.11 4.28 4.17 3.85
Net interest margin(6)............ 4.75 4.83 4.83 4.44 4.54 4.38 4.07
Average interest-earning assets
as a percentage of average
interest-bearing liabilities..... 108.45 109.04 109.31 109.11 108.20 106.52 105.29
Noninterest expense as a
percent of average total assets.. 2.82 3.22 4.17 3.47 3.37 3.46 3.23
Efficiency ratio(7)............... 62.01 71.08 67.61 60.03 63.02 59.24 61.75
Asset Quality Ratios:
Nonaccrual and 90 days or more
past due loans as a percent
of total loans, net.............. 0.03 0.02 0.02 0.07 0.22 0.49 0.84
Nonperforming assets as a
percent of total assets.......... 0.02 0.01 0.02 0.05 0.22 0.72 1.23
Allowance for losses as a
percent of gross
loans receivable................. 1.09 1.04 0.87 1.00 0.93 0.92 0.81
Allowance for losses as a
percent of nonperforming loans... 4747.46 6953.33 4160.78 1866.36 476.14 217.18 106.37
Net charge-offs to average
outstanding loans................ (0.01) -- -- 0.89 (0.01) (0.31) (0.13)
Capital Ratios:
Total equity-to-assets ratio(4)... 10.69 10.83 11.12 10.91 10.17 9.11 8.13
Average equity to average assets.. 10.90 10.98 11.02 10.55 9.64 8.63 7.74
</TABLE>
________________
(1) Annualized, where appropriate, for the nine months ended September 30, 1997
and 1996.
(2) Net earnings divided by average total assets.
(3) Net earnings divided by average equity.
(4) Average total equity divided by average total assets.
(5) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
(7) Other expenses divided by the sum of net interest income and other income.
(xi)
<PAGE>
RISK FACTORS
Before investing in shares of the Common Stock offered hereby, prospective
investors should carefully consider the matters presented below, in addition to
matters discussed elsewhere in this Prospectus.
CERTAIN LENDING RISKS
CONSTRUCTION AND LAND LENDING RISKS. The Bank is an active originator of
construction loans and acquisition and development ("land A&D") loans. At
September 30, 1997, the Bank had $79.4 million of such loans, representing 30.8%
of its total loan portfolio. Of the $79.4 million of such loans, $7.3 million
were commercial A&D loans, $10.6 million were residential A&D loans, and $61.5
million were residential construction loans, of which $28.8 million were
speculative construction loans, meaning that at the time the loan was originated
there was no commitment for permanent financing for the finished property. Land
A&D loans are loans to real estate developers for the acquisition and
infrastructure development (i.e., installing roads, sewers and other utilities,
----
etc.) of raw or unimproved land so that individual improved lots are available
on which to construct a single family home.
At September 30, 1997, the Bank's portfolio of construction and land A&D loans
was concentrated among approximately 25 builders and at that time the Bank had
14 borrowers whose aggregate speculative construction and land A&D loans
outstanding in such projects exceeded $500,000.
Construction and land A&D lending involves greater credit risk than one- to-
four family mortgage lending. Construction and land A&D loans generally have
higher loan balances than one- to- four family mortgage loans. In addition, the
potential for cost overruns because of the inherent difficulties in estimating
construction costs and, therefore, collateral values and the difficulties and
costs associated with monitoring construction progress, among other things, are
major contributing factors to this greater credit risk. Speculative
construction loans have the added risk that there is not an identified buyer for
the completed home when the loan is originated, with the risk that the builder
will have to service the construction loan debt and finance other carrying costs
of the completed property for an extended time period until a buyer is
identified. Furthermore, the demand for construction loans and the ability of
construction loan borrowers to service their debt depends highly on the state of
the general economy, including market interest rate levels, and the state of the
economy of the Bank's primary market area. A material downturn in economic
conditions would be expected to have a material adverse effect on the credit
quality of the construction and land A&D loan portfolio, and may require
management to reassess the adequacy of the Bank's allowance for loan losses and
to establish additional provisions for loan losses, which would have a material
adverse effect on net income. See "BUSINESS OF THE BANK -- Lending Activities -
- - Construction Lending" and "--Allowance for Loan Losses."
COMMERCIAL REAL ESTATE LENDING. At September 30, 1997, the Bank's commercial
real estate loan portfolio amounted to $37.1 million, or 14.4% of total net
loans receivable. Commercial real estate lending generally involves greater
credit risk than one- to- four family mortgage lending. Because payments on
loans secured by commercial properties often depend upon the successful
operation and management of the properties, repayment of such loans may be
affected by adverse conditions in the real estate market or the economy, among
other things. See "BUSINESS OF THE BANK -- Lending Activities -- Commercial
Real Estate Lending."
COMMERCIAL BUSINESS LENDING. At September 30, 1997, the Bank's commercial
business loan portfolio amounted to $22.1 million, or 8.6% of total net loans
receivable. Subject to market conditions and other factors, the Bank intends to
expand its commercial business lending activities within its primary market
area. Commercial business lending generally involves greater credit risk than
one- to- four family mortgage lending. Although commercial business loans are
often collateralized by equipment, inventory, accounts receivable or other
business assets, the liquidation value of these assets in the event of a
borrower default is often an insufficient source of repayment because accounts
receivable may be uncollectible and inventories and equipment may be obsolete or
of limited use. See "BUSINESS OF THE BANK -- Lending Activities -- Commercial
Business Lending."
1
<PAGE>
CONSUMER LENDING RISKS. At September 30, 1997, the Bank's consumer loan
portfolio amounted to $33.2 million, or 15.4% of loans receivable, net.
Consumer lending is also generally viewed to involve greater credit risk than
one- to- four family mortgage lending. Collateral such as automobiles, boats
and other personal property depreciate rapidly and are often an inadequate
repayment source if a borrower defaults. In addition, consumer loan repayments
depend on the borrower's continuing financial stability and are more likely to
be adversely affected by job loss, divorce, illness, personal bankruptcy and
other financial hardship. See "BUSINESS OF THE BANK --Lending Activities --
Consumer Lending."
CONCENTRATION OF CREDIT RISK. The Bank has no significant concentration of
credit risk other than that a substantial portion of its loan portfolio is
secured by real estate, either as primary or secondary collateral, located in
its primary market area. This concentration of credit risk could have a
material adverse effect on the Bank's financial condition and results of
operations to the extent there is a material deterioration in that area's
economy and real estate values. See "BUSINESS OF THE BANK -- Lending
Activities."
INTEREST RATE RISK
GENERAL. Like all financial institutions, the Bank's financial condition and
operations are influenced significantly by general economic conditions, the
related monetary and fiscal policies of the federal government and government
regulations. Deposit flows and the cost of funds are influenced by interest
rates of competing investments and general market interest rates. Lending
activities are affected by the demand for mortgage financing and for consumer
and other types of loans, which in turn is affected by the interest rates at
which such financing may be offered and by other factors affecting the supply of
housing and the availability of funds. The Bank's profitability, like that of
most financial institutions, depends largely on its net interest income, which
is the difference between the interest income received from its interest-earning
assets and the interest expense incurred in connection with its interest-bearing
liabilities. To better control the impact of changes in interest rates, the
Bank has sought to improve the match between asset and liability maturities or
repricing periods and rates by emphasizing the origination of adjustable-rate
mortgage ("ARM") loans and shorter term construction, commercial real estate,
and consumer loans.
POTENTIAL ADVERSE IMPACT ON RESULTS OF OPERATIONS. The Bank's results of
operations would be adversely affected by a material prolonged increase in
market interest rates. At June 30, 1997, assuming, for example, an
instantaneous 200 basis point increase in market interest rates, the Bank's net
portfolio value ("NPV") (the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts) would decrease by approximately
$3.1 million. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Asset and Liability Management."
POTENTIAL ADVERSE IMPACT ON FINANCIAL CONDITION. Changes in the level of
interest rates also affect the volume of loans originated or purchased by the
Bank and, thus, the amount of loan and commitment fees, as well as the market
value of the Bank's investment securities and other interest-earning assets.
Changes in interest rates also can affect the average life of loans. Decreases
in interest rates may result in increased prepayments of loans, as borrowers
refinance to reduce borrowing costs. Under these circumstances, the 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. Moreover, volatility in interest rates also can result in
disintermediation, or the flow of funds away from savings institutions into
direct investments, such as U.S. Government and corporate securities and other
investment vehicles which, because of the absence of federal insurance premiums
and reserve requirements, generally pay higher rates of return than savings
institutions.
At September 30, 1997, out of total gross loans of $257.3 million in the
Bank's portfolio, $74.8 million were ARM loans, the majority of which reprice
every year. Furthermore, the Bank's ARM loans contain periodic and lifetime
interest rate adjustment limits which, in a rising interest rate environment,
may prevent such loans from repricing to market interest rates. While
management anticipates that ARM loans will better offset the adverse effects of
an increase in interest rates as compared to fixed-rate mortgages, the increased
mortgage payments required
2
<PAGE>
of ARM borrowers in a rising interest rate environment could potentially cause
an increase in delinquencies and defaults. The Bank has not historically had an
increase in such delinquencies and defaults on ARM loans, but no assurance can
be given that such delinquencies or defaults would not occur in the future. The
marketability of the underlying property also may be adversely affected in a
high interest rate environment. Moreover, the Bank's ability to originate or
purchase ARM loans may be affected by changes in the level of interest rates and
by market acceptance of the terms of such loans. In a relatively low interest
rate environment, as currently exists, borrowers generally tend to favor fixed-
rate loans over ARM loans to hedge against future increases in interest rates.
NEW EXPENSES ASSOCIATED WITH ESOP AND MRP
The Bank will recognize additional material employee compensation and benefit
expenses assuming the ESOP and the MRP are implemented. The actual aggregate
amount of these new expenses cannot be currently predicted because applicable
accounting practices require that they be based on the fair market value of the
shares of Common Stock when the expenses are recognized, which would occur when
shares are committed to be released in the case of the ESOP and over the vesting
period of awards made to recipients in the case of the MRP. These expenses have
been reflected in the pro forma financial information under "PRO FORMA DATA"
assuming the Purchase Price ($10.00 per share) as fair market value. Actual
expenses, however, will be based on the fair market value of the Common Stock at
the time of recognition, which may be higher or lower than the Purchase Price.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Impact of Accounting Pronouncements and Regulatory Policies --
Accounting for Employee Stock Ownership Plans," "-- Accounting for Stock-Based
Compensation," "MANAGEMENT OF THE BANK -- Benefits -- Employee Stock Ownership
Plan" and "-- Benefits -- Management Recognition Plan."
POSSIBLE DILUTIVE EFFECT OF BENEFIT PROGRAMS
The MRP intends to acquire an amount of Common Stock of the Holding Company
equal to 4% of the shares issued in the Stock Conversion. Such shares of Common
Stock of the Holding Company may be acquired by the Holding Company in the open
market or from authorized but unissued shares of Common Stock of the Holding
Company. In the event that the MRP acquires authorized but unissued shares of
Common Stock from the Holding Company, the voting interests of existing
stockholders will be diluted and net income per share and stockholders' equity
per share will be decreased. See "PRO FORMA DATA" and "MANAGEMENT OF THE BANK -
- - Benefits -- Management Recognition Plan." The MRP is subject to approval by
the Holding Company's stockholders.
The Stock Option Plan will provide for options for up to a number of shares of
Common Stock of the Holding Company equal to 10% of the shares issued in the
Stock Conversion. Such shares may be authorized but unissued shares of Common
Stock of the Holding Company and, upon exercise of the options, will result in
the dilution of the voting interests of existing stockholders and may decrease
net income per share and stockholders' equity per share. See "MANAGEMENT OF THE
BANK -- Benefits -- Stock Option Plan." The Stock Option Plan is subject to
approval ny the Holding Company's stockholders.
If the ESOP is not able to purchase 8% of the shares of Common Stock issued in
the Offerings, the ESOP may purchase newly issued shares from the Holding
Company. In such event, the voting interests of existing stockholders will be
diluted and net income per share and stockholders' equity per share will be
decreased. See "MANAGEMENT OF THE BANK -- Benefits -- Employee Stock Ownership
Plan."
ANTI-TAKEOVER CONSIDERATIONS
PROVISIONS IN THE HOLDING COMPANY'S GOVERNING INSTRUMENTS AND TENNESSEE LAW.
Certain provisions included in the Holding Company's Charter and in the
Tennessee Business Corporation Act, as amended ("TBCA") might discourage
potential proxy contests and other potential takeover attempts, particularly
those that have not been negotiated with the Board of Directors. As a result,
these provisions might preclude takeover attempts that certain
3
<PAGE>
stockholders may deem to be in their best interest and might tend to perpetuate
existing management. These provisions include, among other things, a provision
limiting voting rights of beneficial owners of more than 10% of the Common
Stock, supermajority voting requirements for certain business combinations,
staggered terms for directors, non-cumulative voting for directors, the removal
of directors without cause only upon the vote of holders of 80% of the
outstanding voting shares, limitations on the calling of special meetings, and
specific notice requirements for stockholder nominations and proposals. Certain
provisions of the Holding Company's Charter cannot be amended by stockholders
unless an 80% stockholder vote is obtained. The existence of these anti-
takeover provisions could result in the Holding Company being less attractive to
a potential acquiror and in stockholders receiving less for their shares than
otherwise might be available in the event of a takeover attempt. Furthermore,
federal regulations prohibit for three years after consummation of the
Conversion the ownership of more than 10% of the Bank or the Holding Company
without prior OTS approval. Federal law also requires OTS approval prior to the
acquisition of "control" (as defined in OTS regulations) of an insured
institution. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY."
VOTING CONTROL BY INSIDERS. Directors and officers of the Bank and the
Holding Company (and their associates) expect to purchase 1,117,800 shares of
Common Stock, or 22.5% and 16.8% of the shares issued in the Offerings at the
minimum and the maximum of the Estimated Valuation Range, respectively.
Directors and officers are also expected to control indirectly the voting of
approximately 8% of the shares of Common Stock issued in the Stock Conversion
through the ESOP (assuming shares have been allocated under the ESOP). Under
the terms of the ESOP, the unallocated shares will be voted by the ESOP trustees
in the same proportion as the votes cast by participants with respect to the
allocated shares. Three, current, non-employee directors of the Holding Company
and the Bank will serve as the ESOP trustees.
At a meeting of stockholders to be held no earlier than six months following
the consummation of the Stock Conversion, the Holding Company expects to seek
approval of the Holding Company's MRP, which is a non-tax-qualified restricted
stock plan for the benefit of key employees and directors of the Holding Company
and the Bank. The Holding Company expects to acquire common stock of the
Holding Company on behalf of the MRP in an amount equal to 4% of the Common
Stock issued in the Stock Conversion, or 193,800 and 262,200 shares at the
minimum and the maximum of the Estimated Valuation Range, respectively. These
shares will be acquired either through open market purchases through a trust
established in conjunction with the MRP or from authorized but unissued shares
of Common Stock. A committee of the Board of Directors of the Holding Company
will administer the MRP, the members of which would also serve as trustees of
the MRP trust, if formed. Under the terms of the MRP, the MRP committee or the
MRP trustees, will have the power to vote unallocated and unvested shares. In
addition, the Holding Company intends to reserve for future issuance pursuant to
the Stock Option Plan a number of authorized shares of Common Stock equal to 10%
of the Common Stock issued in the Stock Conversion (484,500 and 655,500 shares
at the minimum and the maximum of the Estimated Valuation Range, respectively).
The Holding Company also intends to seek approval of the Stock Option Plan at a
meeting of stockholders to be held no earlier than six months following the
consummation of the Stock Conversion.
Assuming (i) the implementation of the MRP and the Stock Option Plan, (ii) the
open market purchase of shares on behalf of the MRP, (iii) the purchase by the
ESOP of 8% of the Common Stock sold in the Offerings, and (iv) the exercise of
stock options equal to 10% of the number of shares of Common Stock issued in the
Stock Conversion, directors, officers and employees of the Holding Company and
the Bank would have voting control, on a fully diluted basis, of an additional
39.5% and 34.3% of the Common Stock, based on the issuance of the minimum and
maximum of the Estimated Valuation Range, respectively. Management's potential
voting control alone, as well as together with additional stockholder support,
might preclude or make more difficult takeover attempts that certain
stockholders deem to be in their best interest and might tend to perpetuate
existing management.
PROVISIONS OF EMPLOYMENT AND SEVERANCE AGREEMENTS AND SEVERANCE PLAN. The
proposed employment and severance agreements with certain senior officers of the
Holding Company and the Bank provide for cash severance payments and/or the
continuation of health, life and disability benefits in the event of their
termination of employment following a change in control of the Holding Company
or the Bank. Assuming a change of control
4
<PAGE>
occurred as of September 30, 1997, the aggregate value of the severance benefits
available to these executive officers under the agreements would have been
approximately $1.8 million. In addition, assuming that a change in control had
occurred at September 30, 1997 and the termination of all eligible key
employees, the maximum aggregate payment due under the Severance Plan would be
approximately $116,000. These agreements and plan may have the effect of
increasing the costs of acquiring the Holding Company, thereby discouraging
future attempts to take over the Holding Company or the Bank.
See "MANAGEMENT OF THE BANK -- Benefits," "RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY" and "DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY."
RETURN ON EQUITY AFTER CONVERSION
Return on equity (net income for a given period divided by average equity
during that period) is a ratio used by many investors to compare the performance
of a particular financial institution to its peers. The Bank's return on equity
for the nine months ended September 30, 1997 and the year ended December 31,
1996 was, and the Holding Company's post-Conversion return on equity will be,
less than the average return on equity for publicly traded thrift institutions
and their holding companies. See "SELECTED CONSOLIDATED FINANCIAL INFORMATION"
for numerical information regarding the Bank's historical return on equity and
"CAPITALIZATION" for a discussion of the Holding Company's estimated pro forma
consolidated capitalization as a result of the Conversion. In order for the
Holding Company to achieve a return on equity comparable to the historical
levels of the Bank, the Holding Company either would have to increase net income
or reduce stockholders' equity, or both, commensurate with the increase in
equity resulting from the Conversion. Reductions in equity could be achieved
by, among other things, the payment of regular or special cash dividends
(although no assurances can be given as to their payment or, if paid, their
amount and frequency), the repurchase of shares of Common Stock subject to
applicable regulatory restrictions, or the acquisition of branch offices, other
financial institutions or related businesses (neither the Holding Company nor
the Bank has any present plans, arrangements, or understandings, written or
oral, regarding any repurchase or acquisitions). See "DIVIDEND POLICY" and "USE
OF PROCEEDS." Achievement of increased net income levels will depend on several
important factors outside management's control, such as general economic
conditions, including the level of market interest rates, competition and
related factors, among others. In addition, the expenses associated with the
ESOP and the MRP (see "-- New Expenses Associated with ESOP and MRP"), along
with other post-Conversion expenses, as well as operating expenses associated
with the new branch offices, are expected to contribute initially to reduced
earnings levels. Subject to market conditions, initially the Bank intends to
deploy the net proceeds of the Offerings to support its core lending activities
to increase earnings per share and book value per share, without assuming undue
risk, with the goal of achieving a return on equity comparable to the average
for publicly traded thrift institutions and their holding companies. This goal
will likely take a number of years to achieve and no assurances can be given
that this goal can be attained. Consequently, for the foreseeable future,
investors should not expect a return on equity which will meet or exceed the
average return on equity for publicly traded thrift institutions, many of which
are not newly converted institutions and have had time to deploy their
conversion capital.
COMPETITION
The Bank has faced, and will continue to face, intense competition both in
making loans and attracting deposits. The Bank's primary market area of
Rutherford and Bedford Counties has a high density of financial institutions,
many of which are branches of large Southeastern bank holding companies which
have greater financial resources than the Bank and all of which compete with the
Bank in varying degrees. Competition for loans principally comes from
commercial banks, thrift institutions, credit unions, mortgage banking companies
and insurance companies. Historically, commercial banks, thrift institutions
and credit unions have been the Bank's most direct competition for deposits.
The Bank also competes with short-term money market funds and with other
financial institutions, such as brokerage firms and insurance companies, for
deposits. In competing for loans, the Bank may be forced to offer lower loan
interest rates periodically. Conversely, in competing for deposits, the Bank
5
<PAGE>
may be forced to offer higher deposit interest rates periodically. Either case
or both cases could adversely affect net interest income. See "BUSINESS OF THE
BANK -- Competition."
ABSENCE OF PRIOR MARKET FOR THE COMMON STOCK
The Holding Company has never issued capital stock and, consequently, there is
no existing market for the Common Stock. Although the Holding Company has
received conditional approval to list the Common Stock on the Nasdaq National
Market under the symbol "____," there can be no assurance that an active and
liquid trading market for the Common Stock will develop, or once developed, will
continue. Furthermore, there can be no assurance that purchasers will be able
to sell their shares at or above the Purchase Price. See "MARKET FOR COMMON
STOCK."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The Estimated Valuation Range may be increased up to 15% to reflect material
changes in the financial condition or results of operations of the Bank or
changes in market conditions or general financial, economic or regulatory
conditions following the commencement of the Offerings. If the Estimated
Valuation Range is increased, it is expected that the Holding Company would
increase the Estimated Price Range so that up to 7,538,250 shares of Common
Stock at the Purchase Price would be issued for an aggregate price of up to
$75,382,500. This increase in the number of shares would decrease a
subscriber's pro forma net earnings per share and stockholders' equity per
share, increase the Holding Company's pro forma consolidated stockholders'
equity and net earnings, and increase the Purchase Price as a percentage of pro
forma stockholders' equity per share and net earnings per share. See "PRO FORMA
DATA."
POTENTIAL DELAY IN CONSUMMATING THE STOCK CONVERSION
Once tendered, subscription orders cannot be revoked during the Offerings
without the consent of the Holding Company and the Bank, unless the Stock
Conversion is terminated or there is a resolicitation offering. If the Stock
Conversion is not completed by ______ __, 1998 as a result of changes that lead
to a material revision in the Estimated Valuation Range and the OTS consents to
an extension of time to complete the Stock Conversion, there would be a
resolicitation offering. OTS regulations permit the OTS to grant one or more
time extensions, none of which shall exceed 90 days. In the resolicitation
offering, all subscribers would be mailed a supplement to this Prospectus and
given the opportunity to confirm, modify or cancel their subscriptions. Failure
to confirm affirmatively or modify would be deemed a cancellation and all
subscription funds, together with accrued interest, would be returned to the
subscriber, or if the subscriber authorized payment by withdrawal of funds on
deposit at the Bank, that authorization would terminate. If a subscriber
affirmatively confirms his subscription order during the resolicitation
offering, the Holding Company and the Bank would continue to hold all
subscription orders and all subscription funds until the expiration of the
resolicitation offering. All subscriptions held by the Holding Company and the
Bank when the resolicitation offering expires would be irrevocable without the
consent of the Holding Company and the Bank until the completion or termination
of the Stock Conversion.
RECENT LEGISLATION AND THE FUTURE OF THE THRIFT INDUSTRY
The Bank is, and the Holding Company upon consummation of the Conversion will
be, subject to extensive government regulation designed primarily to protect the
federal deposit insurance fund and depositors. Such regulation often has a
material impact on the Bank's financial condition and results of operations.
For example, recent legislation required the Bank to pay a one-time assessment
of $1.2 million, pre-tax, to the FDIC to recapitalize the SAIF. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Comparison of Operating Results for the Nine Months Ended
September 30, 1997 and 1996."
6
<PAGE>
The U.S. Congress is considering several versions of proposed legislation
designed to modernize the financial institutions industry. Currently, these
various legislative measures are in the committee stage and there is no
definitive timetable for considering any of them on the floor of either the
House or Senate. Principal among the various measures is the House measure
(H.R. 10), which, among other things, includes in its current form provisions
calling for the elimination of the thrift charter and the elimination of the
absence of restrictions on non-banking activities applicable to unitary thrift
holding companies. If the thrift charter is eliminated, alternatives under
consideration are requiring thrifts to convert to a bank charter or adopt a
common financial institutions charter. The Bank cannot predict whether such
legislation will be passed or, if passed, what the attributes of any common
charter would be. However, it is possible that the common charter may not offer
all the advantages that the Bank now enjoys (e.g., unrestricted nationwide
----
branching) or that the Holding Company, as a unitary savings and loan holding
company, will enjoy upon consummation of the Conversion (e.g., the absence of
----
restrictions on non-banking activities). See "REGULATION."
In deciding whether or not to undertake the Bank Conversion after the
consummation of the Stock Conversion, the Bank will consider the economic and
regulatory climate at that time, among other factors. The status of
Congressional legislation regarding the common "unified charter" is expected to
be a significant factor in its decision making.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
If the Subscription Rights granted to Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members of the Bank are deemed to have an
ascertainable value, receipt of such rights may be a taxable event (either as
capital gain or ordinary income), to those Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members who receive and/or
exercise the Subscription Rights in an amount equal to such value.
Additionally, the Bank could be required to recognize a gain for tax purposes on
such distribution. Whether Subscription Rights are considered to have
ascertainable value is an inherently factual determination. The Bank has been
advised by Ferguson that such rights have no value; however, Ferguson's
conclusion is not binding on the Internal Revenue Service ("IRS"). See "THE
CONVERSION -- Effects of Conversion to Stock Form on Depositors and Borrowers of
the Bank -- Tax Effects."
CAVALRY BANCORP, INC.
The Holding Company was incorporated on November 5, 1997 under Tennessee law
at the direction of the Bank to acquire all of the capital stock that the Bank
will issue upon its conversion from the mutual to stock form of ownership. The
Holding Company has received conditional OTS approval to become a savings and
loan holding company through the acquisition of 100% of the capital stock of the
Bank. Prior to the Conversion, the Holding Company will not engage in any
material operations. After the Conversion, the Holding Company will be
classified as a unitary savings and loan holding company subject to regulation
by the OTS, and its principal business will be the ownership of the Bank.
Immediately following the Conversion, the only significant assets of the Holding
Company will be the capital stock of the Bank, 50% of the net proceeds of the
Offerings as permitted by the OTS to be retained by it and a note receivable
from the ESOP evidencing a loan to enable the ESOP to purchase 8% of the Common
Stock issued in the Conversion. See "BUSINESS OF THE HOLDING COMPANY."
The holding company structure will permit the Holding Company to expand the
financial services currently offered through the Bank. Management believes that
the holding company structure and retention of a portion of the proceeds of the
Offerings will, should it decide to do so, facilitate the expansion and
diversification of its operations. The holding company structure will also
enable the Holding Company to repurchase its stock without adverse tax
consequences, subject to applicable regulatory restrictions, including waiting
periods. There are no present plans, arrangements, agreements, or
understandings, written or oral, regarding any such activities or repurchases.
See "REGULATION -- Savings and Loan Holding Company Regulations."
7
<PAGE>
CAVALRY BANKING
The Bank is a federally chartered mutual savings bank located in Murfreesboro,
Tennessee, which is approximately 30 miles southeast of Nashville, Tennessee.
Chartered in 1929 as a Tennessee-chartered mutual building and loan association
under the name "Murfreesboro Building and Loan Association," the Bank converted
to a federal charter and adopted the name "Murfreesboro Federal Savings and Loan
Association," in 1936. In 1984, the Bank adopted the name "Cavalry Banking
Federal Savings and Loan Association." In 1991, the Bank adopted the name
"Cavalry Banking, A Federal Savings Bank," and in 1996 the Bank amended its
mutual charter to adopt its current name. As a result of the Conversion, the
Bank will convert to a federal capital stock savings bank and will become a
wholly-owned subsidiary of the Holding Company. The Bank is regulated by the
OTS, its primary regulator, and by the FDIC, the insurer of its deposits. The
Bank's deposits have been federally-insured since 1936 and are currently insured
by the FDIC under the SAIF. The Bank has been a member of the FHLB System since
1936. At September 30, 1997, the Bank had total assets of $275.9 million, total
deposits of $242.0 million and total equity of $29.5 million on a consolidated
basis.
The Bank is a community-oriented financial institution whose primary business
is attracting deposits from the general public and using those funds to
originate a variety of loans to individuals residing within its primary market
area, and to businesses owned and operated by such individuals. The Bank
considers Rutherford, Bedford and Williamson Counties in Central Tennessee as
its primary market area.
The Bank believes that its operations more closely resemble those of a
traditional commercial bank than a traditional thrift institution. Unlike a
traditional thrift institution that primarily originates long-term residential
mortgage loans funded primarily with long term certificates of deposits, a
traditional commercial bank primarily originates commercial business, consumer
and other short term non-real estate loans funded primarily by non-interest
bearing demand deposit accounts and other short term liabilities. The Bank's
one- to- four family mortgage loan portfolio, as a percent of the total loan
portfolio, has decreased from 50.6% at December 31, 1992 to 32.7% at September
30, 1997. In addition, the Bank's certificates of deposit, as a percentage of
deposit accounts, have decreased from 60.7% at December 31, 1994 to 54.6% at
September 30, 1997. In addition to its shifting asset and liability mix, the
Bank is one of the few thrift institutions in its primary market area that
offers trust services. See "BUSINESS OF THE BANK -- Lending Activities," "--
Deposit Activities and Other Sources of Funds -- Deposit Accounts" and "-- Trust
Department."
The Bank's lending activities are diverse. The Bank originates both ARM loans
and fixed-rate mortgage loans. Generally, ARM loans are retained in the Bank's
portfolio and long-term fixed-rate mortgage loans are originated for sale in the
secondary market. In addition, the Bank actively originates construction and
acquisition and development loans. At September 30, 1997, construction loans
totalled $68.8 million, or 26.7% of total loans receivable, and acquisition and
development loans totalled $10.6 million, or 4.1% of total loans receivable.
The Bank also originates commercial real estate, commercial business, and
consumer and other non-real estate loans. At September 30, 1997, commercial
real estate loans totalled $37.1 million, or 14.4% of total loans receivable,
commercial business loans totalled $22.1 million, or 8.6% of total loans
receivable, and consumer and other non-real estate loans totalled $33.3 million,
or 12.9% of total loans receivable. See "BUSINESS OF THE BANK -- Lending
Activities." The Bank invests its excess liquidity in short-term U.S.
Government and agency securities. See "BUSINESS OF THE BANK -- Investment
Activities."
If the Bank Conversion is undertaken, the Bank, as a Tennessee-chartered
commercial bank, would succeed to all of the assets and liabilities of the Bank
(which, pursuant to the Stock Conversion will have succeeded to all of the
assets and liabilities of the Bank), and would initially continue to conduct
business in substantially the same manner as the Bank prior to the Bank
Conversion. Over time, however, management anticipates an increase in the
percentage of commercial loans in the Bank's loan portfolio. It is anticipated
that the Bank will continue to diversify its loan and deposit mix and add other
services in connection with the Bank Conversion.
8
<PAGE>
The deposits of the Bank would continue to be insured by the FDIC under the
SAIF upon consummation of the Bank Conversion. Accordingly, FDIC regulation and
supervision would continue. However, the Commissioner would replace the OTS as
the Bank's primary regulator upon consummation of the Bank Conversion.
The Bank conducts its operations from its main office and four branch offices
located in Murfreesboro, Tennessee, a branch office in Shelbyville, Tennessee
(Bedford County) and three offices in Smyrna, Tennessee (Rutherford County).
The Bank also operates a mortgage loan origination office in Franklin, Tennessee
(Williamson County). See "BUSINESS OF THE BANK -- Properties."
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $47.4 million to $64.3 million, or up to $74.0 million
if the Estimated Valuation Range is increased by 15%. See "PRO FORMA DATA" for
the assumptions used to arrive at such amounts. The Holding Company has
received conditional OTS approval to purchase all of the capital stock of the
Bank to be issued in the Stock Conversion in exchange for 50% of the net
proceeds of the Offerings. This will result in the Holding Company retaining
approximately $23.7 million to $32.2 million of net proceeds, or up to $37.0
million if the Estimated Valuation Range is increased by 15%, from which it will
fund a loan to the ESOP, and the Bank receiving an equal amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Bank's capital and will support the expansion of the Bank's
existing business activities. The Bank will use the funds contributed to it for
general corporate purposes, including, initially, lending and investment in
short-term U.S. Government and agency obligations.
In connection with the Conversion and the establishment of the ESOP, the
Holding Company intends to loan the ESOP the amount necessary to purchase 8% of
the shares of Common Stock sold in the Stock Conversion. The Holding Company's
loan to fund the ESOP may range from $3,876,000 to $5,244,000 based on the sale
of 387,600 shares to the ESOP (at the minimum of the Estimated Valuation Range)
and 524,400 shares (at the maximum of the Estimated Valuation Range),
respectively, at $10.00 per share. If 15% above the maximum of the Estimated
Valuation Range, or 7,538,250 shares, are sold in the Stock Conversion, the
Holding Company's loan to the ESOP would be approximately $6,030,600 (based on
the sale of 603,060 shares to the ESOP). It is anticipated that the ESOP loan
will have a 12-year term with interest payable at the prime rate as published in
The Wall Street Journal on the closing date of the Stock Conversion. The loan
will be repaid principally from the Bank's contributions to the ESOP and from
any dividends paid on shares of Common Stock held by the ESOP.
The remaining net proceeds retained by the Holding Company initially will be
invested primarily in short-term U.S. Government and agency obligations. Such
proceeds will be available for additional contributions to the Bank in the form
of debt or equity, to support future diversification or acquisition activities,
as a source of dividends to the stockholders of the Holding Company and for
future repurchases of Common Stock to the extent permitted under Tennessee law
and federal regulations. The Holding Company will consider exploring
opportunities to use such funds to expand operations through acquiring or
establishing additional branch offices or acquiring other financial
institutions. Currently, there are no specific plans, arrangements, agreements
or understandings, written or oral, regarding any diversification activities.
Following consummation of the Stock Conversion, the Board of Directors will
have the authority to adopt plans for repurchases of Common Stock, subject to
statutory and regulatory requirements. Since the Holding Company has not yet
issued stock, there currently is insufficient information upon which an
intention to repurchase stock could be based. The facts and circumstances upon
which the Board of Directors may determine to repurchase stock in the future
would 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
9
<PAGE>
share of the remaining outstanding shares, and the ability to improve the
Holding 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 Holding
Company and its stockholders. Any stock repurchases will be subject to a
determination by the Board of Directors that both the Holding Company and the
Bank will be capitalized in excess of all applicable regulatory requirements
after any such repurchases and that capital will be adequate, taking into
account, among other things, the level of nonperforming and classified assets,
the Holding Company's and the Bank's current and projected results of operations
and asset/liability structure, the economic environment and tax and other
regulatory considerations. For a discussion of the regulatory limitations
applicable to stock repurchases and current OTS policy with respect thereto, see
"THE CONVERSION -- Restrictions on Repurchase of Stock."
DIVIDEND POLICY
GENERAL
The Holding Company's Board of Directors anticipates paying quarterly cash
dividends on the Common Stock at an annual rate of $0.20 per share, commencing
in the first full quarter following the consummation of the Conversion.
Declarations or payments of dividends will be subject to determination by the
Holding Company's Board of Directors, which will take into account the amount of
the net proceeds retained by the Holding Company, the Holding Company's
financial condition, results of operations, tax considerations, capital
requirements, industry standards, economic conditions and other factors,
including the regulatory restrictions that affect the payment of dividends by
the Bank to the Holding Company discussed below. In addition, from time to time
in an effort to manage capital to a reasonable level, the Board of Directors may
determine to pay periodic special cash dividends in addition to, or in lieu of,
regular cash dividends. No assurances can be given that any dividends, either
regular or special, will be declared or, if declared, what the amount of
dividends will be or whether such dividends, once declared, will continue. In
order to pay any cash dividends (regular and special), however, the Holding
Company must have available cash either from the net proceeds raised in the
Offerings and retained by the Holding Company, dividends received from the Bank
or earnings on Holding Company assets.
CURRENT RESTRICTIONS
Dividends from the Holding Company may depend, in part, upon receipt of
dividends from the Bank because the Holding Company initially will have no
source of income other than dividends from the Bank and earnings from the
investment of the net proceeds from the Offerings retained by the Holding
Company. OTS regulations require the Bank to give the OTS 30 days' advance
notice of any proposed declaration of dividends to the Holding Company, and the
OTS has the authority under its supervisory powers to prohibit the payment of
dividends to the Holding Company. The OTS imposes certain limitations on the
payment of dividends from the Bank to the Holding Company which utilize a three-
tiered approach that permits various levels of distributions based primarily
upon a savings association's capital level. The Bank currently meets the
criteria to be designated a Tier 1 association, as hereinafter defined, and
consequently could at its option (after prior notice to and no objection made by
the OTS) distribute up to 100% of its net income during the calendar year plus
50% of its surplus capital ratio at the beginning of the calendar year less any
distributions previously paid during the year. In addition, the Bank may not
declare or pay a cash dividend on its capital stock if the effect thereof would
be to reduce the regulatory capital of the Bank below the amount required for
the liquidation account to be established pursuant to the Bank's Plan of
Conversion. See "REGULATION -- Federal Regulation of Savings Associations --
Limitations on Capital Distributions, " "THE CONVERSION -- Effects of Conversion
to Stock Form on Depositors and Borrowers of the Bank -- Liquidation Account"
and Note 14 of Notes to the Consolidated Financial Statements included elsewhere
herein.
Subsequent to the Bank Conversion, dividends from the Holding Company would
continue to depend primarily upon the receipt of dividends from the Bank and the
payment of such dividends would be subject to the
10
<PAGE>
restrictions under Tennessee law, which generally limit dividend declarations to
not more than once each calendar quarter from undivided profits, less any
required transfers to surplus. See "REGULATION."
Dividend payments by the Holding Company will be governed by Tennessee law,
which prohibits dividend payments that would either render the Holding Company
unable to pay its debts as they came due in the normal course of business or
cause the Holding Company's total liabilities to exceed its total assets. If the
Bank Conversion is undertaken, the Holding Company would also be subject to
Federal Reserve policy governing dividend payments by bank holding companies.
See "REGULATION -- Bank Holding Company Regulation -- Dividends."
The Holding Company has committed to the OTS not to make any tax-free
distributions to stockholders in the form of a return of capital, or take any
action in contemplation of any such distributions, within the first year
following the consummation of the Stock Conversion.
TAX CONSIDERATIONS
In addition to the foregoing, retained earnings of the Bank appropriated to
bad debt reserves and deducted for federal income tax purposes cannot be used by
the Bank to pay cash dividends to the Holding Company without the payment of
federal income taxes by the Bank at the then current income tax rate on the
amount deemed distributed, which would include the amount of any federal income
taxes attributable to the distribution. See "TAXATION -- Federal Taxation" and
Note 11 of Notes to the Consolidated Financial Statements included elsewhere
herein. The Holding Company does not contemplate any distribution by the Bank
that would result in a recapture of the Bank's bad debt reserve or create the
above-mentioned federal tax liabilities.
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock and, consequently, there
is no existing market for the Common Stock. Although the Holding Company has
received conditional approval to list the Common Stock on the Nasdaq National
Market System under the symbol "_______," there can be no assurance that the
Holding Company will meet Nasdaq National Market System listing requirements,
which include a minimum market capitalization, at least two market makers and a
minimum number of record holders. Trident Securities has agreed to make a market
for the Common Stock following consummation of the Stock Conversion and will
assist the Holding Company in seeking to encourage at least two additional
market makers to establish and maintain a market in the Common Stock. Making a
market involves maintaining bid and ask quotations and being able, as principal,
to effect transactions in reasonable quantities at those quoted prices, subject
to various securities laws and other regulatory requirements. The Holding
Company anticipates that prior to the completion of the Stock Conversion it will
be able to obtain the commitment from at least two additional broker-dealers to
act as market maker for the Common Stock. Additionally, the development of a
liquid public market depends on the existence of willing buyers and sellers, the
presence of which is not within the control of the Holding Company, the Bank or
any market maker. 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. The number of active buyers and sellers of the Common Stock at any
particular time may be limited. Under such circumstances, investors in the
Common Stock could have difficulty disposing of their shares on short notice and
should not view the Common Stock as a short-term investment. Furthermore, there
can be no assurance that purchasers will be able to sell their shares at or
above the Purchase Price or that quotations will be available on the Nasdaq
National Market System as contemplated.
11
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank
at September 30, 1997, and the pro forma consolidated capitalization of the
Holding Company after giving effect to the assumptions set forth under "PRO
FORMA DATA," based on the sale of the number of shares of Common Stock at
the minimum, midpoint, maximum and maximum, as adjusted, of the Estimated
Valuation Range. The shares that would be issued at the maximum, as
adjusted, of the Estimated Valuation Range would be subject to receipt of
OTS approval of an updated appraisal confirming such valuation. A CHANGE IN
THE NUMBER OF SHARES TO BE ISSUED IN THE STOCK CONVERSION MAY MATERIALLY
AFFECT PRO FORMA CONSOLIDATED CAPITALIZATION.
<TABLE>
<CAPTION>
Holding Company
Pro Forma Consolidated Capitalization
Based Upon the Sale of
---------------------------------------------------------------
4,845,000 5,700,000 6,555,000 7,538,250
Capitalization Shares at Shares at Shares at Shares at
as of $10.00 $10.00 $10.00 $10.00
September 30, 1997 Per Share(1) Per Share(1) Per Share(1) Per Share(2)
------------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits(3)........................ $241,950 $241,950 $241,950 $241,950 $241,950
FHLB advances...................... -- -- -- -- --
-------- -------- -------- -------- --------
Total deposits and
borrowed funds.................... $241,950 $241,950 $241,950 $241,950 $241,950
======== ======== ======== ======== ========
Stockholders' equity:
Preferred stock:
250,000 shares, no
par value per share,
authorized; none issued
or outstanding............... $ -- $ -- $ -- $ -- $ --
Common Stock:
49,750,000 shares, no par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding(4)............... -- 47,448 55,880 64,312 74,010
Additional paid-in capital.... -- -- -- -- --
Retained earnings(5).......... 29,508 29,508 29,508 29,508 29,508
Less:
Common Stock acquired
by ESOP(6).................. -- (3,876) (4,560) (5,244) (6,031)
Common Stock to be acquired
by MRP(7)................... -- (1,938) (2,280) (2,622) (3,015)
Net unrealized losses on
available for sale securities (7) (7) (7) (7) (7)
----- --------- --------- --------- --------
Total stockholders' equity...... $29,501 $ 71,135 $ 78,541 $ 85,947 $ 94,465
======= ========= ========= ========= ========
</TABLE>
(footnotes on following page)
12
<PAGE>
_______________
(1) Does not reflect the possible increase in the Estimated Valuation Range to
reflect material changes in the financial condition or results of operations
of the Bank or changes in market conditions or general financial, economic
and regulatory conditions, or the issuance of additional shares under the
Stock Option Plan.
(2) This column represents the pro forma capitalization of the Holding Company
in the event the aggregate number of shares of Common Stock issued in the
Stock Conversion is 15% above the maximum of the Estimated Valuation Range.
See "PRO FORMA DATA" and Footnote 1 thereto.
(3) Withdrawals from deposit accounts for the purchase of Common Stock are not
reflected. Such withdrawals will reduce pro forma deposits by the amounts
thereof.
(4) The Bank's authorized capital will consist solely of 1,000 shares of common
stock, par value $1.00 per share, 1,000 shares of which will be issued to
the Holding Company, and 9,000 shares of preferred stock, no par value per
share, none of which will be issued in connection with the Stock
Conversion.
(5) Retained earnings are substantially restricted by applicable regulatory
capital requirements. Additionally, the Bank will be prohibited from paying
any dividend that would reduce its regulatory capital below the amount in
the liquidation account, which will be established for the benefit of the
Bank's Eligible Account Holders and Supplemental Eligible Account Holders
at the time of the Stock Conversion and adjusted downward thereafter as
such account holders reduce their balances or cease to be depositors. See
"THE CONVERSION -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Bank -- Liquidation Account."
(6) Assumes that 8% of the Common Stock sold in the Stock Conversion will be
acquired by the ESOP in the Stock Conversion with funds borrowed from the
Holding Company. Under generally accepted accounting principles ("GAAP"),
the amount of Common Stock to be purchased by the ESOP represents unearned
compensation and is, accordingly, reflected as a reduction of capital. As
shares are released to ESOP participants' accounts, a corresponding
reduction in the charge against capital will occur. Since the funds are
borrowed from the Holding Company, the borrowing will be eliminated in
consolidation and no liability will be reflected in the consolidated
financial statements of the Holding Company. See "MANAGEMENT OF THE BANK --
Benefits -- Employee Stock Ownership Plan."
(7) Assumes the purchase in the open market at the Purchase Price, pursuant to
the proposed MRP, of a number of shares equal to 4% of the shares of Common
Stock issued in the Stock Conversion at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range. The issuance of an
additional 4% of the shares of Common Stock for the MRP from authorized but
unissued shares of Holding Company Common Stock would dilute the ownership
interest of stockholders by 3.85%. The shares are reflected as a reduction
of stockholders' equity. See "RISK FACTORS -- Possible Dilutive Effect of
Benefit Programs," "PRO FORMA DATA" and "MANAGEMENT OF THE BANK --
Benefits -- Management Recognition Plan." The MRP is subject to stockholder
approval, which is expected to be sought at a meeting to be held no earlier
than six months following consummation of the Stock Conversion.
13
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following tables set forth as of September 30, 1997, in order of
presentation, (i) the Bank's historical and pro forma capital compliance under
OTS regulatory capital requirements, (ii) the Bank's historical and pro forma
capital compliance under FDIC regulatory capital requirements that would
apply upon consummation of the Bank Conversion, and (iii) the Holding
Company's pro forma capital compliance under Federal Reserve regulatory capital
requirements that would apply upon consummation of the Bank Conversion. For
purposes of the following tables, (i) the amount of capital infused into the
Bank is 50% of the proceeds of the Offerings and (ii) the amount expected to be
borrowed by the ESOP and the cost of the shares of Common Stock expected to be
acquired by the MRP are deducted from pro forma regulatory capital. For
additional information regarding the financial condition of the Bank and the
assumptions underlying the pro forma capital calculations set forth below, see
"USE OF PROCEEDS, "CAPITALIZATION" AND "PRO FORMA DATA" and the Consolidated
Financial Statements and related Notes appearing elsewhere herein.
OTS REGULATORY CAPITAL COMPLIANCE
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1997
----------------------------------------------------
Minimum of Estimated Midpoint of Estimated
Valuation Range Valuation Range
----------------------- -------------------------
4,845,000 Shares 5,700,000 Shares
September 30, 1997 at $10.00 Per Share at $10.00 Per Share
--------------------------- ----------------------- -------------------------
Percent of Percent of Percent of
Adjusted Adjusted Adjusted
Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1)
------ ------------ ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital(2)............... $29,501 10.7% $47,411 15.9% $50,601 16.8%
======= ==== ======= ==== ======= ====
Tangible capital(2)........... $29,508 10.8% $47,418 16.1% $50,608 17.0%
Tangible capital requirement.. 4,089 1.5 4,416 1.5 4,474 1.5
------- ---- ------- ---- ------- ----
Excess........................ $25,419 9.3% $43,002 14.6% $46,134 15.5%
======= ==== ======= ==== ======= ====
Core capital(2)............... $29,508 10.8% $47,418 16.1% $50,608 17.0%
Core capital requirement(3)... 8,178 3.0 8,832 3.0 8,948 3.0
------- ---- ------- ---- ------- ----
Excess........................ $21,330 7.8% $38,586 13.1% $41,660 14.0%
======= ==== ======= ==== ======= ====
Total capital(4).............. $32,309 13.1% $50,219 20.0% $53,409 21.2%
Risk-based
capital requirement.......... 19,746 8.0 20,095 8.0 20,157 8.0
------- ---- ------- ---- ------- ----
Excess........................ $12,563 5.1% $30,124 12.0% $33,252 13.2%
======= ==== ======= ==== ======= ====
<CAPTION>
15% above
Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range
------------------------ -----------------------
6,555,000 Shares 7,538,250 Shares
at $10.00 Per Share at $10.00 Per Share
------------------------ -----------------------
Percent of Percent of
Adjusted Adjusted
Total Total
Amount Assets (1) Amount Assets (1)
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
GAAP capital(2)............... $53,791 17.6% $57,460 18.5%
======= ==== ======= ====
Tangible capital(2)........... $53,798 17.8% $57,467 18.7%
Tangible capital requirement.. 4,532 1.5 4,599 1.5
------- ---- ------- ----
Excess........................ $49,266 16.3% $52,868 17.2%
======= ==== ======= ====
Core capital(2)............... $53,798 17.8% $57,467 18.7%
Core capital requirement(3)... 9,064 3.0 9,198 3.0
------- ---- ------- ----
Excess........................ $44,734 14.8% $48,269 15.7%
======= ==== ======= ====
Total capital(4).............. $56,599 22.4% $60,268 23.8%
Risk-based
capital requirement.......... 20,219 8.0 20,290 8.0
------- ---- ------- ----
Excess........................ $36,380 14.4% $39,978 15.8%
======= ==== ======= ====
</TABLE>
14
<PAGE>
FDIC REGULATORY CAPITAL COMPLIANCE
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1997
----------------------------------------------------------------------
Minimum of Estimated Midpoint of Estimated Maximum of Estimated
Valuation Range Valuation Range Valuation Range
------------------- ---------------------- -----------------------
Historical 4,845,000 Shares 5,700,000 Shares 6,555,000 Shares
At September 30, 1997 at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
--------------------- ------------------- ---------------------- -----------------------
Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted
Total Total Total Total
Amount Assets Amount Assets Amount Assets Amount Assets
------ ------- ------ ------ ------ ------ ------- ------
(Dollars in thousand)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital.............. $29,501 10.7% $47,411 15.9% $50,610 16.8% $53,791 17.6%
======= ==== ======= ==== ======= ==== ======= ====
Tier 1 capital............ $29,508 10.8% $47,418 16.1% $50,608 17.0% $53,798 17.8%
Minimum Tier 1 (leverage)
requirement.............. 10,904 4.0 11,776 4.0 11,931 4.0 12,086 4.0
------- ---- ------- ---- ------- ---- ------- -----
Excess.................. $18,604 6.8% $35,642 12.1% $38,677 13.0% $41,712 13.8%
======= ==== ======= ==== ======= ==== ======= ====
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1997
----------------------------------------------------------------------
15% above
Maximum of Estimated
Valuation Range
------------------------
7,538,250 Shares
at $10.00 Per Share
------------------------
Percent of
Adjusted
Total
Amount Assets
------- ------
<S> <C> <C>
GAAP capital.............. $57,460 18.5%
======= ====
Tier 1 capital............ $57,467 18.7%
Minimum Tier 1 (leverage)
requirement.............. $12,264 4.0
------- ----
Excess.................. $45,203 14.7%
======= ====
</TABLE>
FEDERAL RESERVE REGULATORY CAPITAL COMPLIANCE
<TABLE>
<CAPTION>
Historical
At September 30, 1997 PRO FORMA AT SEPTEMBER 30, 1997
--------------------- ------------------------------------------------------------------------
Percent of Percent of Percent of Percent of
Risk-weighted Risk-weighted Risk-weighted Risk-weighted
Amount Assets Amount Assets Amount Assets Amount Assets
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 capital............ $29,508 12.0% $71,142 27.8% $78,548 30.5% $85,954 33.2%
Tier 1 (risk weighted)
requirement.............. 9,873 4.0 10,237 4.0 10,302 4.0 10,367 4.0
------- ---- ------- ---- ------- ---- ------- ----
Excess.................... $19,635 8.0% $60,905 23.8% $68,246 26.5% $75,587 29.2%
======= ==== ======= ==== ======= ==== ======= ====
Total capital............. $32,309 13.1% $73,943 28.9% $81,349 31.6% $88,755 34.2%
Total (risk weighted)
requirement.............. 19,746 8.0 20,475 8.0 20,604 8.0 20,733 8.0
------- ---- ------- ---- ------- ---- ------- ----
Excess.................... $12,563 5.1% $53,468 20.9% $60,745 23.6% $68,022 26.2%
======= ==== ======= ==== ======= ==== ======= ====
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1997
----------------------------------------------------------------------
Percent of
Risk-weighted
Amount Assets
------ --------
<S> <C> <C>
Tier 1 capital............ $94,472 36.2%
Tier 1 (risk weighted)
requirement.............. 10,441 4.0
------- ----
Excess.................... $84,031 32.2%
======= =====
Total capital............. $97,273 37.3%
Total (risk weighted)
requirement.............. 20,882 8.0
------- ----
Excess.................... $76,391 29.3%
======= =====
</TABLE>
______________
(1) Based upon adjusted total assets of $272.6 million for purposes of the
tangible capital and core capital requirements, and risk-weighted assets of
$246.8 million for purposes of the risk-based capital requirement.
(2) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a core capital ratio of 4% to 5% for all other thrifts.
(3) Percentage represents total core and supplementary capital divided by total
risk-weighted assets. Assumes net proceeds are invested in assets that
carry a 20% risk-weighting.
15
<PAGE>
PRO FORMA DATA
Under the Plan of Conversion, the Common Stock must be sold at a price
equal to the estimated pro forma market value of the Holding Company and the
Bank as converted, based upon an independent valuation. The Estimated Valuation
Range as of November 7, 1997 is from a minimum of $48,450,000 to a maximum of
$65,550,000 with a midpoint of $57,000,000 or, at a price per share of $10.00, a
minimum number of shares of 4,845,000, a maximum number of shares of 6,555,000
and a midpoint number of shares of 5,700,000. The actual net proceeds from the
sale of the Common Stock cannot be determined until the Conversion is completed.
However, net proceeds set forth on the following table are based upon the
following assumptions: (i) Trident Securities will receive fees of $414,000,
$532,000, $650,000 and $785,000 at the minimum, midpoint, maximum and 15% above
the Estimated Valuation Range, respectively (see "THE CONVERSION -- Plan of
Distribution for the Subscription, Direct Community and Syndicated Community
Offerings); (ii) all of the Common Stock will be sold in the Subscription and
Direct Community Offerings; and (iii) Conversion expenses, excluding the fees
paid to Trident Securities, will total approximately $588,000 at each of the
minimum, midpoint, maximum and 15% above the Estimated Valuation Range. Actual
expenses may vary from this estimate, and the fees paid will depend upon the
percentages and total number of shares sold in the Subscription, Direct
Community and Syndicated Community Offerings and other factors.
The pro forma consolidated net income of the Bank for the nine months ended
September 30, 1997 and the year ended December 31, 1996 have been calculated as
if the Conversion had been consummated at the beginning of the respective
periods and the estimated net proceeds received by the Holding Company and the
Bank had been invested at 5.45% and 5.50% at the beginning of the respective
periods, which represent the yield on one year Treasury Bill as of September 30,
1997 and December 31, 1996, respectively. As discussed under "USE OF PROCEEDS,"
the Holding Company expects to retain 50% of the net proceeds of the Offerings
from which it will fund the ESOP loan. A pro forma after-tax return of 3.38% and
3.41% are used for both the Holding Company and the Bank for the periods, after
giving effect to an incremental combined federal and state income tax rate of
38% for both periods. Historical and pro forma per share amounts have been
calculated by dividing historical and pro forma amounts by the number of shares
of Common Stock indicated in the footnotes to the table. Per share amounts have
been computed as if the Common Stock had been outstanding at the beginning of
the respective periods or at September 30, 1997 or December 31, 1996, but
without any adjustment of per share historical or pro forma stockholders' equity
to reflect the earnings on the estimated net proceeds.
The following tables summarize the historical net income and retained
earnings of the Bank and the pro forma consolidated net income and stockholders'
equity of the Holding Company for the periods and at the dates indicated, based
on the minimum, midpoint and maximum of the Estimated Valuation Range and based
on a 15% increase in the maximum of the Estimated Valuation Range. No effect has
been given to: (i) the shares to be reserved for issuance under the Holding
Company's Stock Option Plan, which is expected to be voted upon by stockholders
at a meeting to be held no earlier than six months following consummation of the
Stock Conversion; (ii) withdrawals from deposit accounts for the purpose of
purchasing Common Stock in the Stock Conversion; (iii) the issuance of shares
from authorized but unissued shares to the MRP, which is expected to be voted
upon by stockholders at a meeting to be held no earlier than six months
following consummation of the Stock Conversion; or (iv) the establishment of a
liquidation account for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. See "MANAGEMENT OF THE BANK -- Benefits -- Stock
Option Plan" and "THE CONVERSION -- Stock Pricing and Number of Shares Issued."
Shares of Common Stock may be purchased with funds on deposit at the Bank, which
will reduce deposits by the amounts of such purchases. Accordingly, the net
amount of funds available for investment will be reduced by the amount of
deposit withdrawals used to fund stock purchases.
THE FOLLOWING PRO FORMA INFORMATION MAY NOT BE REPRESENTATIVE OF THE
FINANCIAL EFFECTS OF THE CONVERSION AT THE DATE ON WHICH THE CONVERSION ACTUALLY
OCCURS AND SHOULD NOT BE TAKEN AS INDICATIVE OF FUTURE RESULTS OF OPERATIONS.
STOCKHOLDERS' EQUITY REPRESENTS THE DIFFERENCE BETWEEN THE STATED AMOUNTS OF
CONSOLIDATED ASSETS AND LIABILITIES OF THE HOLDING COMPANY COMPUTED IN
ACCORDANCE WITH GAAP. STOCKHOLDERS' EQUITY HAS NOT BEEN INCREASED OR DECREASED
TO REFLECT THE DIFFERENCE BETWEEN THE CARRYING VALUE OF LOANS AND OTHER ASSETS
AND MARKET VALUE. STOCKHOLDERS' EQUITY IS NOT INTENDED TO REPRESENT FAIR MARKET
VALUE NOR DOES IT REPRESENT AMOUNTS THAT WOULD BE AVAILABLE FOR DISTRIBUTION TO
STOCKHOLDERS IN THE EVENT OF LIQUIDATION.
16
<PAGE>
<TABLE>
<CAPTION>
At or For the Nine Months Ended September 30, 1997
-----------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
--------- --------- --------- ---------------
4,845,000 5,700,000 6,555,000 7,538,250(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross Proceeds....................................... $48,450 $57,000 $65,550 $75,383
Less; estimated expenses............................. (1,002) (1,120) (1,238) (1,373)
------- ------- ------- -------
Estimated net proceeds............................... 47,448 55,880 64,312 74,010
Less: Common Stock acquired by ESOP.................. (3,876) (4,560) (5,244) (6,031)
Less: Common Stock to be acquired by MRP............. (1,938) (2,280) (2,622) (3,015)
------- ------- ------- -------
Net investable proceeds......................... $41,634 $49,040 $56,446 $64,964
======= ======= ======= =======
Consolidated net earnings:
Historical.......................................... $ 2,258 $ 2,258 $ 2,258 $ 2,258
Pro forma income on net proceeds(2)................. 1,055 1,243 1,430 1,646
Pro forma ESOP adjustments(3)....................... (150) (177) (203) (234)
Pro forma MRP adjustments(4)........................ (180) (212) (244) (280)
------- ------- ------- -------
Pro forma net earnings.......................... $ 2,983 $ 3,112 $ 3,241 $ 3,390
======= ======= ======= =======
Consolidated net earnings per share(5)(6):
Historical.......................................... $ 0.50 $ 0.43 $ 0.37 $ 0.32
Pro forma income on net proceeds.................... 0.24 0.24 0.24 0.24
Pro forma ESOP adjustments(3)....................... (0.03) (0.03) (0.03) (0.03)
Pro forma MRP adjustments(4)........................ (0.04) (0.04) (0.04) (0.04)
------- ------- ------- -------
Pro forma net earnings per share................ $ 0.67 $ 0.60 $ 0.54 $ 0.49
======= ======= ======= =======
Consolidated stockholders' equity (book value):
Historical.......................................... $29,501 $29,501 $29,501 $29,501
Estimated net proceeds.............................. 47,448 55,880 64,312 74,010
Less: Common Stock acquired by ESOP................. (3,876) (4,560) (5,244) (6,031)
Less: Common Stock to be acquired by MRP(4)......... (1,938) (2,280) (2,622) (3,015)
------- ------- ------- -------
Pro forma stockholders' equity(7)............... $71,135 $78,541 $85,947 $94,465
======= ======= ======= =======
Consolidated stockholders' equity per share(6)(8):
Historical(6)....................................... $ 6.09 $ 5.18 $ 4.50 $ 3.91
Estimated net proceeds.............................. 9.79 9.80 9.81 9.82
Less: Common Stock acquired by ESOP................. (0.80) (0.80) (0.80) (0.80)
Less: Common Stock to be acquired by MRP(4)......... (0.40) (0.40) (0.40) (0.40)
------- ------- ------- -------
Pro forma stockholders' equity per share(9)..... $ 14.68 $ 13.78 $ 13.11 $ 12.53
======= ======= ======= =======
Purchase Price as a percentage of pro forma
stockholders' equity per share...................... 68.1% 72.6% 76.3% 79.8%
==== ==== ==== ====
Purchase Price as a multiple of pro forma
net earnings per share.............................. 11.4% 12.7% 14.2% 15.3%
==== ==== ==== ====
</TABLE>
(footnotes on second following page)
17
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1996
----------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
---------- ----------- ----------- ---------------
4,845,000 5,700,000 6,555,000 7,538,250(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
---------- ----------- ----------- ---------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds........................................... $48,450 $57,000 $65,550 $75,383
Less: estimated expenses................................. (1,002) (1,120) (1,238) (1,373)
-------- -------- -------- --------
Estimated net proceeds................................... 47,448 55,880 64,312 74,010
Less: Common Stock acquired by ESOP...................... (3,876) (4,560) (5,244) (6,031)
Less: Common Stock to be acquired by MRP................. (1,938) (2,280) (2,622) (3,015)
-------- -------- -------- --------
Net investable proceeds............................... $41,634 $49,040 $56,446 $64,964
======== ======== ======== ========
Consolidated net earnings:
Historical.............................................. $ 2,814 $ 2,814 $ 2,814 $ 2,814
Pro forma income on net proceeds(2)..................... 1,420 1,672 1,925 2,215
Pro forma ESOP adjustments(3)........................... (200) (236) (271) (312)
Pro forma MRP adjustments(4)............................ (240) (283) (325) (374)
-------- -------- -------- --------
Pro forma net earnings................................. $ 3,794 $ 3,967 $ 4,143 $ 4,343
======== ======== ======== ========
Consolidated net earnings per share (5)(6):
Historical.............................................. $ 0.63 $ 0.53 $ 0.46 $ 0.40
Pro forma income on net proceeds........................ 0.32 0.32 0.32 0.32
Pro forma ESOP adjustments(3)........................... (0.05) (0.05) (0.05) (0.05)
Pro forma MRP adjustments(4)............................ (0.05) (0.05) (0.05) (0.05)
-------- -------- -------- --------
Pro forma net earnings per share....................... $ 0.85 $ 0.75 $ 0.68 $ 0.62
======== ======== ======== ========
Consolidated stockholders' equity (book value):
Historical.............................................. $27,250 $27,250 $27,250 $27,250
Estimated net proceeds.................................. 47,448 55,880 64,312 74,010
Less: Common Stock acquired by ESOP..................... (3,876) (4,560) (5,244) (6,031)
Less: Common Stock to be acquired by MRP(4)............. (1,938) (2,280) (2,622) (3,015)
-------- -------- -------- --------
Pro forma stockholders' equity(7)...................... $68,884 $76,290 $83,696 $92,214
======== ======== ======== ========
Consolidated stockholders' equity per share(6)(8):
Historical(6)........................................... $ 5.62 $ 4.78 $ 4.16 $ 3.61
Estimated net proceeds.................................. 9.79 9.80 9.81 9.82
Less: Common Stock acquired by ESOP..................... (0.80) (0.80) (0.80) (0.80)
Less: Common Stock to be acquired by MRP(4)............. (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity per share(9)............ $ 14.21 $ 13.38 $ 12.77 $ 12.23
======== ======== ======== ========
Purchase Price as a percentage of pro forma
stockholders' equity per share.......................... 70.3% 74.7% 78.3% 81.7%
==== ==== ==== ====
Purchase Price as a multiple of pro forma
net earnings per share.................................. 11.9% 13.3% 14.7% 16.1%
==== ==== ==== ====
</TABLE>
(footnotes on following page)
18
<PAGE>
__________________
(1) Gives effect to the sale of an additional 983,250 shares in the Stock
Conversion, which may be issued to cover an increase in the pro forma
market value of the Holding Company and the Bank as converted, without the
resolicitation of subscribers or any right of cancellation. The issuance of
such additional shares will be conditioned on a determination by Ferguson
that such issuance is compatible with its determination of the estimated
pro forma market value of the Holding Company and the Bank as converted.
See "THE CONVERSION -- Stock Pricing and Number of Shares to be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Stock Conversion. Since funds on
deposit at the Bank may be withdrawn to purchase shares of Common Stock
(which will reduce deposits by the amount of such purchases), the net
amount of funds available to the Bank for investment following receipt of
the net proceeds of the Offerings will be reduced by the amount of such
withdrawals.
(3) It is assumed that 8% of the shares of Common Stock offered in the Stock
Conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP (at an interest rate equal to the prime
rate as published in The Wall Street Journal on the closing date of the
Stock Conversion, which rate is currently 8.5%) from the net proceeds from
the Offerings retained by the Holding Company. The amount of this borrowing
has been reflected as a reduction from gross proceeds to determine
estimated net investable proceeds. The Bank intends to make contributions
to the ESOP in amounts at least equal to the principal and interest
requirement of the debt. As the debt is paid down, stockholders' equity
will be increased. The Bank's payment of the ESOP debt is based upon equal
installments of principal over a 12-year period, assuming a combined
federal and state income tax rate of 38%. Interest income earned by the
Holding Company on the ESOP debt offsets the interest paid by the Bank on
the ESOP loan. No reinvestment is assumed on proceeds contributed to fund
the ESOP. The ESOP expense reflects adoption of Statement of Position
("SOP") 93-6, which will require recognition of expense based upon shares
committed to be released and the exclusion of unallocated shares from
earnings per share computations. The valuation of shares committed to be
released would be based upon the average market value of the shares during
the year, which, for purposes of this calculation, was assumed to be equal
to the $10.00 per share Purchase Price. See "MANAGEMENT OF THE BANK --
Benefits -- Employee Stock Ownership Plan."
(4) In calculating the pro forma effect of the MRP, it is assumed that the
required stockholder approval has been received, that the shares were
acquired by the MRP at the beginning of the period presented in open market
purchases at the Purchase Price, that 20% of the amount contributed was an
amortized expense during such period, and that the combined federal and
state income tax rate is 38%. The issuance of authorized but unissued
shares of the Common Stock instead of open market purchases would dilute
the voting interests of existing stockholders by approximately 3.85% and
pro forma net income per share would be $0.65, $0.58, $0.52 and $0.48 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range for the nine months ended September 30, 1997, respectively,
and $0.82, $0.73, $0.67 and $0.61 at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range for the year ended
December 31, 1996, respectively, and pro forma stockholders' equity per
share would be $14.50, $13.63, $12.99 and $12.43 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range at
September 30, 1997, respectively, and $14.06, $13.25, $12.66 and $12.15 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range at December 31, 1996 respectively. Shares issued under the
MRP vest 20% per year and, for purposes of this table, compensation expense
is recognized on a straight-line basis over each vesting period. In the
event the fair market value per share is greater than $10.00 per share on
the date shares are awarded under the MRP, total MRP expense would
increase. The total estimated MRP expense was multiplied by 20% (the total
percent of shares for which expense is recognized in the first year)
resulting in after-tax MRP expense of $180,234, $212,040, $243,841 and
$280,423 at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range for the nine months ended September 30, 1997,
respectively, and $240,312, $282,720, $325,128 and $373,897 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range for the year ended December 31, 1996, respectively. No effect has
been given to the shares reserved for issuance under the proposed Stock
Option Plan. If stockholders approve the Stock Option Plan following the
19
<PAGE>
Stock Conversion, the Holding Company will have reserved for issuance under
the Stock Option Plan authorized but unissued shares of Common Stock
representing an amount of shares equal to 10% of the shares sold in the
Stock Conversion. If all of the options were to be exercised utilizing
these authorized but unissued shares rather than treasury shares which
could be acquired, the voting and ownership interests of existing
stockholders would be diluted by approximately 9.1%. Assuming stockholder
approval of the Stock Option Plan and that all options were exercised at
the end of the nine months ended September 30, 1997 and the year ended
December 31, 1996, respectively, at an exercise price of $10.00 per share,
pro forma net earnings per share would be $0.65, $0.56, $0.51, and $0.46,
respectively, for the nine months ended September 30, 1997, and $0.80,
$0.71, $0.65 and $0.59, respectively, for the year ended December 31, 1996,
and pro forma stockholders' equity per share would be $14.26, $13.44,
$12.83 and $12.30, respectively, for the nine months ended September 30,
1997, and $13.83, $13.08, $12.52 and $12.03, respectively for the year
ended December 31, 1996 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range. See "MANAGEMENT OF THE BANK --
Benefits -- Stock Option Plan" and "-- Benefits -- Management Recognition
Plan" and "RISK FACTORS -- Possible Dilutive Effect of Benefit Programs."
(5) Per share amounts are based upon shares outstanding of 4,489,700,
5,282,000, 6,074,300 and 6,985,445 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range for the nine months
ended September 30, 1997, and the year ended December 31, 1996,
respectively, which includes the shares of Common Stock sold in the Stock
Conversion less the number of shares assumed to be held by the ESOP not
committed to be released within the first year following the Stock
Conversion.
(6) Historical per share amounts have been computed as if the shares of Common
Stock expected to be issued in the Stock Conversion had been outstanding at
the beginning of the period or on the date shown, but without any
adjustment of historical net income or historical retained earnings to
reflect the investment of the estimated net proceeds of the sale of shares
in the Stock Conversion, the additional ESOP expense or the proposed MRP
expense, as described above.
(7) "Book value" represents the difference between the stated amounts of the
Bank's assets and liabilities. The amounts shown do not reflect the
liquidation account which will be established for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in the Stock
Conversion, or the federal income tax consequences of the restoration to
income of the Bank's special bad debt reserves for income tax purposes
which would be required in the unlikely event of liquidation. See "THE
CONVERSION -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Bank" and "TAXATION." The amounts shown for book value do
not represent fair market values or amounts distributable to stockholders
in the unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 4,845,000,
5,700,000, 6,555,000 and 7,538,250 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively.
(9) Does not represent possible future price appreciation or depreciation of
the Common Stock.
20
<PAGE>
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth certain information as to the approximate
purchases of Common Stock by each director and executive officer of the Bank,
including their associates, as defined by applicable regulations. No individual
has entered into a binding agreement with respect to such intended purchases,
and, therefore, actual purchases could be more or less than indicated below.
Directors and officers of the Bank and their associates may not purchase in
excess of 30% of the shares sold in the Stock Conversion. For purposes of the
following table, it has been assumed that sufficient shares will be available to
satisfy subscriptions in all categories. Directors, officers and employees will
pay the same price for the shares for which they subscribe as the price that
will be paid by all other subscribers.
<TABLE>
<CAPTION>
Percent of Percent of
Anticipated Anticipated Shares at Shares at
Number of Dollar Minimum of Maximum of
Name and Shares Amount Estimated Estimated
Position Purchased (1) Purchased Valuation Range Valuation Range
-------- ------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
William H. Huddleston, III
Chairman of the Board 60,000 $ 600,000 1.2% 0.9%
Ed C. Loughry, Jr.
President, Chief Executive Officer
and Director 60,000 600,000 1.2 0.9
Ronald F. Knight
Executive Vice President, Chief
Operating Officer and Director 60,000 600,000 1.2 0.9
Gary Brown
Vice Chairman of the Board 60,000 600,000 1.2 0.9
Frank E. Crosslin, Jr.
Director 60,000 600,000 1.2 0.9
Tim J. Durham
Director 60,000 600,000 1.2 0.9
Ed Elam
Director 60,000 600,000 1.2 0.9
James C. Cope
Director 60,000 600,000 1.2 0.9
Terry G. Haynes
Director 60,000 600,000 1.2 0.9
Hillard C. "Bud" Gardner
Senior Vice President and Chief
Financial Officer 60,000 600,000 1.2 0.9
</TABLE>
(table continued on following page)
21
<PAGE>
<TABLE>
<CAPTION>
Percent of Percent of
Anticipated Anticipated Shares at Shares at
Number of Dollar Minimum of Maximum of
Name and Shares Amount Estimated Estimated
Position Purchased (1) Purchased Valuation Range Valuation Range
- -------- ------------- --------- --------------- ---------------
<S> <C> <C> <C> <C>
William S. Jones
Senior Vice President and Trust
Officer/Investor Relations 60,000 600,000 1.2 0.9
David W. Hopper
Senior Vice President and Trust Officer 60,000 600,000 1.2 0.9
R. Dale Floyd
Senior Vice President 60,000 600,000 1.2 0.9
Ira B. Lewis, Jr.
Vice President/CRA Compliance Officer
and Secretary 60,000 600,000 1.2 0.9
M. Glenn Layne
Vice President 60,000 600,000 1.2 0.9
Joy B. Jobe
Vice President 60,000 600,000 1.2 0.9
Other officers (14 persons) 157,800 1,578,000 3.3 2.4
------- --------- --- ---
Total 1,117,800 $11,178,000 22.5% 16.8%
========= =========== ==== ====
</TABLE>
_________________
(1) Excludes any shares awarded pursuant to the ESOP and MRP and options to
acquire shares pursuant to the Stock Option Plan. For a description of the
number of shares to be purchased by the ESOP and intended awards under the
MRP and Stock Option Plan, see "MANAGEMENT OF THE BANK -- Benefits --
Employee Stock Ownership Plan," "-- Benefits -- Stock Option Plan" and "--
Benefits -- Management Recognition Plan."
22
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
The following Consolidated Statements of earnings of Cavalry Banking and
Subsidiaries for the fiscal years ended December 31, 1996, 1995 and 1994 have
been audited by Rayburn, Betts & Bates, P.C., Nashville, Tennessee, independent
auditors, whose report thereon appears elsewhere in this Prospectus. The
Consolidated Statements of Earnings for the nine months ended September 30, 1997
and 1996 were not audited by Rayburn, Betts & Bates, P.C., but, in the opinion
of management, reflect all adjustments (none of which are other than normal
recurring entries) necessary for a fair presentation. The results of operations
for the nine months ended September 30, 1997 are not necessarily of the results
of operations that may be expected for the entire fiscal year. These statements
should be read in conjunction with the Consolidated Financial Statements and
related Notes included elsewhere herein.
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Years Ended December 31,
------------------- ---------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
(In Thousands)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
First mortgage loans ........................................... $ 9,312 $ 8,446 $11,516 $9,996 $9,378
Other loans .................................................... 5,750 4,410 6,165 4,904 4,503
Investment securities ......................................... 399 1,114 1,338 1,601 1,088
Deposits with other financial institutions ..................... 629 332 464 612 339
Mortgage-backed securities ..................................... 70 78 101 109 86
------- ------- ------- ------ ------
Total interest income ......................................... 16,160 14,380 19,584 17,222 15,394
------- ------- ------- ------ ------
Interest expense - deposits ..................................... 6,815 6,117 8,259 7,696 6,180
Interest expense - Advances from Federal
Home Loan Bank ................................................. -- -- 9 -- 119
------- ------- ------- ------ ------
Total interest expense ........................................ 6,815 6,117 8,268 7,696 6,229
------- ------- ------- ------ ------
Net interest income ........................................... 9,345 8,263 11,316 9,256 9,095
Provision for loan losses (note 5) .............................. 700 90 120 80 113
------- ------- ------- ------ ------
Net interest income after provision for loan losses ........... 8,645 8,173 11,196 9,446 8,982
------- ------- ------- ------ ------
Noninterest income:
Loans fees and servicing income ................................ 398 411 548 658 375
Gain on sale of real estate acquired in
settlement of loans, net ...................................... -- 7 11 23 18
Gain on sale of loans, net ..................................... 674 733 890 882 530
Gain on sale of office properties and equipment ................ -- -- 40 -- --
Deposit servicing fees and charges ............................. 854 702 973 796 643
Trust services fees ............................................ 435 349 483 375 302
Other operating income ......................................... 153 111 213 230 147
------- ------- ------- ------ ------
Total noninterest income ...................................... 2,514 2,313 3,158 2,964 2,015
------- ------- ------- ------ ------
Noninterest expenses:
Compensation payroll taxes and fringe benefits (note 12) ....... 4,081 3,454 4,661 3,889 3,774
Occupancy expense .............................................. 404 355 493 459 417
Supplies, communications and other office expenses ............. 468 413 567 615 460
Federal insurance premiums (note 18) ........................... 76 1,537 1,654 418 423
Advertising expense ............................................ 145 142 201 166 122
Equipment and service bureau expense ........................... 1,452 1,082 1,466 1,241 1,073
State and other taxes .......................................... 261 149 200 180 170
Other operating expenses ....................................... 467 385 544 530 562
------- ------- ------- ------ ------
Total noninterest expenses .................................... 7,354 7,517 9,786 7,498 7,001
------- ------- ------- ------ ------
Earnings before income tax expense .............................. 3,805 2,969 4,568 4,912 3,996
Income tax expense (note 11) .................................... 1,547 1,129 1,754 1,711 1,538
------- ------- ------- ------ ------
Net earnings .................................................. $2,258 $1,840 $2,814 $3,201 $2,458
======= ======= ======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Bank. The information contained in this section
should be read in conjunction with the Consolidated Financial Statements and
accompanying Notes thereto and the other sections contained in this Prospectus.
OPERATING STRATEGY
The Bank is a community-oriented financial institution whose primary
business is attracting deposits from the general public and using those funds to
originate a variety of loans to individuals residing within its primary market
area, and to businesses owned and operated by such individuals. The Bank
believes that its operations more closely resemble those of a traditional
commercial bank than a traditional thrift institution. The Bank originates, in
order of magnitude, one-to-four family mortgage loans, construction loans,
commercial real estate loans, consumer loans, commercial business loans, and
land A&D loans. In addition, the Bank invests in U.S. Government and federal
agency obligations. The Bank intends to continue to fund its assets primarily
with retail deposits, although FHLB-Cincinnati advances may be used as a
supplemental source of funds. The Bank also offers trust services. See "CAVALRY
BANKING."
The Bank's profitability depends primarily on its net interest income,
which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits. Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets equal or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The Bank profitability is also
affected by the level of other income and expenses. Other income, net, includes
income associated with the origination and sale of mortgage loans, loan
servicing fees, other deposit related fees and trust fees. Other expenses
include compensation and benefits, occupancy and equipment expenses, deposit
insurance premiums, data servicing expenses and other operating costs. The
Bank's results of operations are also significantly affected by general economic
and competitive conditions, particularly changes in market interest rates,
government legislation and regulation and monetary and fiscal policies.
The Bank's business strategy is to operate as a well-capitalized,
profitable and independent financial institution dedicated to a community-
oriented approach that emphasizes management involvement with customers and the
community at large, local decision-making and quality customer service.
Management believes that it can best serve an important segment of the
marketplace and enhance the long-term value of the Holding Company by operating
independently and continuing with and expanding its community-oriented approach,
especially in light of recent consolidations of thrift institutions with large
regional commercial banks in the Bank's market area.
The Bank believes that it has successfully implemented its business
strategy by: (i) maintaining a strong capital base (see "HISTORICAL AND PRO
FORMA REGULATORY CAPITAL COMPLIANCE"); (ii) seeking to reduce its exposure to
fluctuations in market interest rates (see "-- Asset and Liability Management");
(iii) promoting local loan originations (see "BUSINESS OF THE BANK -- Lending
Activities -- General"); (iv) supplementing its traditional menu of mortgage
loan products with a variety of consumer and commercial loan products (see
"BUSINESS OF THE BANK -- Lending Activities -- Commercial Real Estate Lending,"
"--Commercial Business Lending," and "-- Consumer Lending"); (v) providing check
imaging services and offering commercial deposit accounts to complement its
commercial real estate and commercial business lending activities (see BUSINESS
OF THE BANK -- Deposit Activities and Other Sources of Funds); (vi) expanding
its branch office network (see BUSINESS OF THE BANK -- Properties"); (vii)
seeking to increase its portfolio of loans serviced for others (see "BUSINESS OF
THE BANK -- Lending Activities -- Loan Fees"); and (viii) seeking to increase
its trust
24
<PAGE>
assets under management (see "BUSINESS OF THE BANK -- Trust Powers"). The Bank
believes that the capital raised in the Offerings will enhance its ability to
continue implementing its business strategy.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997, DECEMBER 31, 1996 AND
DECEMBER 31, 1995
Total assets were $275.9 million, $245.0 million and $223.9 million at
September 30, 1997, December 31, 1996 and December 31, 1995, respectively. This
increase resulted primarily from growth in the loan portfolio, which was funded
primarily by deposit growth.
Loans receivable, net, amounted to $216.4 million, $200.6 million and
$159.9 million at September 30, 1997, December 31, 1996 and December 31, 1995,
respectively. A substantial portion of the Bank's loan portfolio is secured by
real estate, either as primary or secondary collateral, located in its primary
market area. There are certain risks associated with this credit concentration.
See "RISK FACTORS -- Concentration of Credit Risk." In addition, the period
between December 31, 1995 and September 30, 1997 saw a continuing trend in the
growth of the construction commercial and consumer loan portfolios as the Bank
emphasized the origination of loans with shorter maturities for asset and
liability management purposes. See "-- Asset and Liability Management."
Construction, commercial real estate, commercial business and consumer loans are
inherently riskier than one- to-four family mortgage loans. See "RISK FACTORS --
Certain Lending Risks" and "BUSINESS OF THE BANK -- Lending Activities."
Loans held-for-sale were $4.1 million, $5.3 million and $3.7 million at
September 30, 1997, December 31, 1996 and December 31, 1995, respectively. The
variances resulted primarily from timing differences in the funding of loans.
Cash and cash equivalents amounted to $26.7 million, $19.5 million and
$13.9 million at September 30, 1997, December 31, 1996 and December 31, 1995,
respectively. The increase between December 31, 1995 and September 30, 1997
reflects proceeds from the maturity of investment securities, and, to a lesser
extent, deposit growth. See "-- Liquidity and Capital Resources."
Investment securities held-to-maturity were $3.7 million, $7.7 million and
$35.6 million at September 30, 1997, December 31, 1996 and December 31, 1995,
respectively. The decrease between December 31, 1995 and September 30, 1997
resulted from maturities, with the proceeds used to fund loan growth.
Investment securities available-for-sale were $10.1 million at September
30, 1997. There were no investment securities available-for-sale at December 31,
1996 and December 31, 1995. The increase between December 31, 1996 and September
30, 1997 reflected the investment of excess liquidity. Such securities may be
sold for lending or other operating purposes.
Office properties and equipment, net, were $7.9 million, $6.2 million and
$5.3 million at September 30, 1997, December 31, 1996 and December 31, 1995,
respectively. The increase between December 31, 1996 and 1995 resulted primarily
from the acquisition of land for the construction of the Cason Lane and SE Broad
branch offices, expansion of the Memorial Boulevard office, and the purchase of
the building and property for the Hazelwood branch. During 1996, the Bank also
upgraded its computer hardware and software. The increase from December 31, 1996
to September 30, 1997 resulted from the continuation of the computer hardware
and software upgrade project, the construction and opening of the Cason Lane
office, the purchase of two parcels of land for possible branch locations and
starting construction on the SE Broad office. See "BUSINESS OF THE BANK --
Properties."
Deposit accounts totaled $242.0 million, $214.5 million and $196.7 million
at September 30, 1997, December 31, 1996 and December 31, 1995, respectively.
The increases between September 30, 1997, December 31, 1996 and December 31,
1995 were the result of aggressive marketing and promotion of transaction
accounts. See "BUSINESS OF THE BANK -- Deposit Activities and Other Sources of
Funds."
25
<PAGE>
Total equity was $29.5 million, $27.3 million and $24.4 million at
September 30, 1997, December 31, 1996 and December 31, 1995, respectively. These
increases were primarily the result of retained earnings.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1996
NET EARNINGS. Net earnings were $2.3 million for the nine months ended
September 30, 1997 compared to $1.8 million for the nine months ended September
30, 1996, a 22.7% increase, attributed primarily to an increase in interest
income, offset by increases in interest expense and an increase in the provision
for loan losses.
NET INTEREST INCOME. Net interest income increased 13.1% from $8.3 million
for the nine months ended September 30, 1996 to $9.3 million for the nine months
ended September 30, 1997. Total interest income increased 12.4% from $14.4
million for the nine months ended September 30, 1996 to $16.2 million for the
nine months ended September 30, 1997 primarily as a result of an increase in the
average balance of interest-earning assets from $216.2 million to $237.6 million
resulting primarily from normal asset growth, combined with an increase in
average yield from 8.87% at September 30, 1996 to 9.07% at September 30, 1997
resulting primarily from an increase in market interest rates. Interest expense
increased 11.4% from $6.1 million for the nine months ended September 30, 1996
to $6.8 million for the nine months ended September 30, 1997 as a result of an
increase in the average balance of deposits from $183.6 million to $203.4
million primarily as a result of normal growth. The average cost of these funds
was 4.45% for the period ending September 30, 1996 compared with 4.46% for the
period ended September 30, 1997. Interest rate spread increased from 4.42% to
4.61% as a result of the increase in yield on interest-earning assets between
the nine months ended September 30, 1996 and the nine months ended September 30,
1997 resulting primarily from increases in loans outstanding and decreases in
investments outstanding.
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for estimated loan losses based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions. In determining the
adequacy of the allowance for loan losses, the Bank reviews all loans monthly
for any delinquencies and all loans over $500,000 at least annually. These
reviews are presented monthly to the Bank's Asset Classification Committee that
determines specific provisions for loan losses. In addition, each loan category
(residential, consumer, construction, and commercial) and each category of
assets classified under OTS regulations (doubtful, substandard, loss, and
special mention) are assigned specific risk weights. The Bank gives greater
weight to the level of classified assets than to the level of nonperforming
assets (nonaccrual loans, accruing loans contractually past due 90 days or more,
and real estate acquired in settlement of loans) because classified assets
include not only nonperforming assets but also performing assets that otherwise
exhibit, in management's judgment, potential credit weaknesses. See "BUSINESS OF
THE BANK -- Lending Activities -- Nonperforming Assets and Delinquencies" and
"--Lending Activities -- Asset Classification." The required level of the
allowance for loan losses is then calculated based upon the outstanding balances
in each loan category and the risk weight assigned to each loan category.
The provision for loan losses was $700,000 for the nine months ended
September 30, 1997 compared to $90,000 for the same period in 1996. Management
deemed the increase in the provision for loan losses necessary in light of the
increase in the relative level of estimated losses inherent in the higher levels
of higher risk loans (construction, commercial real estate, land, commercial
business and consumer loans), as well as the increase in the level of classified
assets at September 30, 1997. See "RISK FACTORS -- Certain Lending Risks" and
"BUSINESS OF THE BANK -- Lending Activities -- Asset Classification." Management
deemed the allowance for loan losses adequate at September 30, 1997.
NONINTEREST INCOME. Noninterest income increased from $2.3 million for the
nine months ended September 30, 1996 to $2.5 million for the nine months ended
September 30, 1997, primarily as a result of the increase in service charges and
trust fees offset by a decrease in other income. Service charges and fees
increased from $702,000 for the nine months ended September 30, 1996 to $854,000
for the same period in 1997 primarily as a result of increased income deposit
account fees, particularly on the increased number of transaction accounts.
Trust
26
<PAGE>
fees increased from $349,000 for 1996 to $435,000 for 1997 as a result of an
increase in trust assets under management. These increases were partially
offset by a decline in net gain on sale of loans from $733,000 for 1996 to
$674,000 for 1997 primarily because of a decrease in volume of loan sales.
NONINTEREST EXPENSES. Noninterest expenses were $7.4 million for the nine
months ended September 30, 1997 compared to $7.5 million for the same period in
1996. This decrease resulted primarily from the FDIC special assessment on all
SAIF-insured institutions to recapitalize the SAIF. The Bank's assessment
amounted to $1.2 million and was accrued during the quarter ended September 30,
1996. Prior to the SAIF recapitalization, the Bank's total annual deposit
insurance premiums amounted to 0.23% of assessable deposits. Effective January
1, 1997, the rate decreased to 0.065% of assessable deposits. See "REGULATION --
Federal Regulation of Savings Associations -- Federal Deposit Insurance
Corporation" and Note 17 of Notes to the Consolidated Financial Statements.
Compensation, payroll taxes and fringe benefits expenses increased from $3.5
million for 1996 to $4.1 million for 1997 as a result of an increase in
personnel to staff the new branch offices and service the increased number of
loan and deposit accounts. Occupancy expense increased from $355,000 in 1996 to
$404,000 in 1997 as a result of new branch openings and increased maintenance
costs on the main office. Equipment and service bureau expenses increased from
$1.1 million in 1996 to $1.5 million in 1997 as a result of increased
maintenance agreements for the new computer software and hardware and an
increase in related depreciation expense. Other operating expenses will increase
in subsequent periods following the consummation of the Conversion as a result
of increased costs associated with operating as a public company and increased
compensation expense as a result of the adoption of the ESOP and, if approved by
the Holding Company's stockholders, the MRP. See "RISK FACTORS --Return on
Equity After Conversion," "-- New Expenses Associated With ESOP and MRP" and
"BUSINESS OF THE BANK -- Properties."
INCOME TAX EXPENSE. Income tax expense was $1.5 million for the nine months
ended September 30, 1997 compared to $1.1 million for the nine months ended
September 30, 1996 as a result of higher income before taxes.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NET EARNINGS. Net earnings were $2.8 million for the year ended December
31, 1996 compared to $3.2 million a year earlier, a 12.1% decline, primarily as
a result of increases in noninterest expenses, primarily associated with the
one-time FDIC special SAIF assessment, and an increase in the provision for loan
losses.
NET INTEREST INCOME. Net interest income was $11.3 million for the year
ended December 31, 1996 compared to $9.5 million for the year ended December 31,
1995, a 18.8% increase. A 13.7% increase in total interest income, from $17.2
million in 1995 to $19.6 million in 1996, was offset by a 7.4% increase in
interest expense, from $7.7 million in 1995 to $8.3 million in 1996. The
increase in total interest income resulted primarily from an increase in the
average balance of interest-earning assets from $199.3 million in 1995 to $220.0
million in 1996 and an increase in the average yield on interest-earning assets
from 8.64% in 1995 to 8.92% in 1996 as a result of a combination of higher
market interest rates and an increase in the average balance of higher yielding
consumer and other loans. The increase in interest expense was primarily the
result of an increase in average deposits from $169.8 million at December 31,
1995 to $185.5 million at December 31, 1996 primarily as a result of market and
promotions. The increase was offset by a decrease in the average cost of
deposits from 4.50% for 1995 to 4.44% for 1996 as a result of declining market
interest rates. Interest rate spread increased from 4.14% in 1995 to 4.48% in
1996.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $120,000 for
the year ended December 31, 1996 compared to $80,000 for the year ended December
31, 1995. Management deemed the increase in the provision for loan losses
necessary in light of the increase in the relative level of estimated losses
inherent in the higher levels of higher risk loans (construction, commercial
real estate, land, commercial business and consumer loans). See "BUSINESS OF THE
BANK -- Lending Activities -- Construction Lending" and "--Lending Activities --
Nonperforming Assets and Delinquencies."
27
<PAGE>
NONINTEREST INCOME. Noninterest income was $3.2 million for the year ended
December 31, 1996 compared to $3.0 million for the year ended December 31, 1995.
Loan fees and servicing income declined from $658,000 in 1995 to $548,000 in
1996 as a result of a decrease in the servicing portfolio from $134.4 million at
December 31, 1995 to $121.1 million at December 31, 1996. This decrease was
offset by an increase in deposit fees from $796,000 in 1995 to $973,000 in 1996,
which was a result of an increase in transaction accounts. Trust fees also
increased from $375,000 in 1995 to $483,000 in 1996 as a result of increased
assets under management.
NONINTEREST EXPENSES. Noninterest expenses were $9.8 million for the year
ended December 31, 1996 compared to $7.5 million for the year ended December 31,
1995, an increase of 30.5%, primarily as a result of the FDIC special assessment
on all SAIF-insured institutions. This assessment amounted to $1.2 million in
1996. As the Bank continued to grow and expand during this period, compensation
and related employee expenses increased from $3.9 million for the year ended
December 31, 1995 to $4.7 million for the same period in 1996, which represents
a 19.9% increase. Equipment and service bureau expenses increased from $1.2
million in 1995 to $1.5 million in 1996, an 18.1% increase, as a result of
business expansion.
INCOME TAX EXPENSE. Income tax expense was $1.8 million for the year ended
December 31, 1996 compared to $1.7 million for the year ended December 31, 1995.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
NET EARNINGS. Net earnings were $2.5 million for the year ended December
31, 1994 compared to $3.2 million for the year ended December 31, 1995, a 30.2%
increase, primarily as a result of an increase in net interest income and an
increase in other operating income, offset by an increase in other expense.
NET INTEREST INCOME. Net interest income increased from $9.1 million for
the year ended December 31, 1994 to $9.5 million for the year ended December 31,
1995. Interest rate spread increased to 4.14% in 1995 from 4.11% in 1994
primarily as a result of increases in market interest rates. Average interest-
earning assets increased from $198.0 million to $199.0 million during 1995, with
a corresponding increase in yield from 7.78% to 8.64% as a result of an increase
in market interest rates. These increases were partially offset by an increase
in cost of funds and borrowings from 3.68% for 1994 compared to 4.5% for 1995
primarily as a result of increases in market interest rates. Total average
interest-bearing liabilities were $171.2 million for 1994 compared with $170.8
million for 1995.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $80,000 for
the year ended December 31, 1995 compared to $113,000 for the year ended
December 31, 1994. The reduced provision for loan losses was warranted in 1995
as a result of net recoveries of $141,000 during the year. See "BUSINESS OF THE
BANK --Lending Activities -- Allowance for Loan Losses."
NONINTEREST INCOME. Noninterest income was $3.0 million for the year ended
December 31, 1995 compared to $2.0 million for the year ended December 31, 1994.
Servicing income increased from $375,000 in 1994 to $658,000 in 1995 as a result
of the completion of the write-off of the remainder of an excess servicing asset
in 1994. There was also an increase in net gain on disposition of loans
available for sale from $530,000 in 1994 to $882,000 in 1995, resulting from
increased loan sale activity. Transaction account and deposit servicing fees and
charges increased from $643,000 in 1994 to $796,000 in 1995 as a result of
increased transaction account activity resulting primarily from an increased
number of accounts. Trust fees increased from $302,000 in 1994 to $375,000 in
1995 as a result of the growth in assets under management.
NONINTEREST EXPENSES. Noninterest expenses were $7.5 million in 1995
compared to $7.0 million in 1994, an increase of 7.1%, primarily as a result of
general increases in all expense categories, which reflected the increased
activity of the Bank during the year.
28
<PAGE>
INCOME TAX EXPENSE. Income tax expense was $1.7 million for the year ended
December 31, 1995 compared to $1.5 million for the year ended December 31, 1994
as a result of higher income before taxes.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs. Such yields and costs for the periods indicated are derived by dividing
income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. Average balances are derived from daily
balances for the nine months ended September 30, 1997 and 1996 and for the years
ended December 31, 1996 and 1995. Average balances for the year ended December
31, 1994 were derived from month-end balances. Management does not believe that
the use of month-end balances instead of daily balances has caused any material
inconsistencies in the information presented.
29
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------------- ----------------------------
1997 1996 1996
----------------------------- ------------------------------ ----------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost(3) Balance Dividends Cost(3) Balance Dividends Cost
-------- --------- --------- -------- --------- --------- -------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)........ $212,161 $15,062 9.47% $180,579 $12,856 9.49% $186,393 $17,681 9.49%
Mortgage-backed securities....... 1,387 70 6.73 1,509 78 6.89 1,497 101 6.75
Investment securities............ 6,857 316 6.14 24,754 1,038 5.59 21,933 1,236 5.64
FHLB stock....................... 1,544 83 7.17 1,442 76 7.03 1,454 102 7.02
Federal funds sold and overnight
interest-bearing deposits....... 15,658 629 5.36 7,948 332 5.57 8,293 464 5.60
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning assets.. 237,607 16,160 9.07 216,232 14,380 8.87 219,570 19,584 8.92
Non-interest-earning assets....... 17,823 14,766 15,028
-------- -------- --------
Total assets................... $255,430 $230,998 $234,598
======== ======== ========
Interest-bearing liabilities:
Deposits:
Passbook accounts............... 15,354 227 1.97 16,821 272 2.16 16,581 350 2.11
Money market accounts........... 33,243 1,040 4.17 25,286 795 4.20 25,851 1,090 4.22
NOW accounts.................... 27,892 356 1.70 25,849 386 1.99 26,257 505 1.92
Certificates of deposit......... 126,987 5,192 5.45 115,675 4,664 5.39 116,828 6,287 5.38
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total deposits................ 203,476 6,815 4.46 183,631 6,117 4.45 185,517 8,232 4.44
-------- ------- ------ -------- ------- ------ -------- ------- ------
Advances from FHLB................ -- -- -- -- -- -- 628 36 5.73
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities................... 203,476 6,815 4.46 183,631 6,117 4.45 186,145 8,268 4.44
Non-interest-bearing
liabilities(2)................... 23,625 21,890 22,726
-------- -------- --------
Total liabilities.............. 227,101 205,521 208,871
Retained earnings................. 28,329 25,477 25,727
-------- -------- --------
Total liabilities and
retained earnings............. $255,430 $230,998 $234,598
======== ======== ========
Net interest income............... 9,345 8,263 11,316
Interest rate spread.............. 4.61% 4.42% 4.48%
==== ==== ====
Net interest margin............... 5.24% 5.10% 5.15%
==== ==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities.............. 116.77% 117.75% 117.96%
====== ====== ======
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1995 1994
-------------------------- ----------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
-------- --------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)........ $158,043 $14,900 9.43% $163,370 $13,881 8.50%
Mortgage-backed securities....... 1,626 109 6.70 1,882 86 4.57
Investment securities............ 29,090 1,550 5.33 22,873 1,014 4.43
FHLB stock....................... 1,357 93 6.85 1,299 74 5.70
Federal funds sold and overnight
interest-bearing deposits 9,160 570 6.22 8,540 339 3.97
-------- ------- ------ -------- ------- ------
Total interest-earning
assets........................ 199,276 17,222 8.64 197,964 15,394 7.78
Non-interest-earning assets....... 13,648 11,577
-------- --------
Total assets................... $212,924 $209,541
======== ========
Interest-bearing liabilities:
Deposits:
Passbook accounts............... 17,943 399 2.22 21,202 445 2.10
Money market accounts........... 16,352 681 4.16 12,258 396 3.23
NOW accounts.................... 22,052 464 2.10 21,535 431 2.00
Certificates of deposit......... 113,498 6,096 5.37 114,438 4,908 4.29
-------- ------- ------ -------- ------- ------
Total deposits................ 169,845 7,640 4.50 169,433 6,180 3.65
-------- ------- ------ -------- ------- ------
Advances from FHLB................ 1,000 56 5.60 2,245 119 5.30
-------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities................... 170,845 7,696 4.50 171,678 6,299 3.67
Non-interest-bearing
liabilities(2)................... 19,556 16,553
-------- --------
Total liabilities.............. 190,401 188,231
Retained earnings................. 22,523 21,310
-------- --------
Total liabilities and
retained earnings............. $212,924 $209,541
======== ========
Net interest income............... 9,526 9,095
Interest rate spread.............. 4.14% 4.11%
==== ====
Net interest margin............... 4.78% 4.59%
==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities.............. 116.64% 115.31%
====== ======
</TABLE>
________________
(1) Excludes interest on loans 90 days or more past due. Includes loans
originated for sale.
(2) Includes non-interest bearing demand deposits of $19.4 million and $17.3
million for the nine months ended September 30, 1997 and 1996,
respectively, and $18.0 million, $15.1 million and $13.6 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
(3) Annualized.
30
<PAGE>
YIELDS EARNED AND RATES PAID
The following table sets forth for the periods and at the dates indicated
the weighted average yields earned on the Bank's assets and the weighted average
interest rates paid on the Bank's liabilities, together with the net yield on
interest-earning assets.
<TABLE>
<CAPTION>
Nine Months
At Ended
September 30, September 30, Year Ended December 31,
------------- ----------------------
1997 1997 1996 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted average yield on:
Loans receivable........................ 8.87% 9.47% 9.49% 9.49% 9.43% 8.50%
Mortgage-backed securities.............. 7.19 6.73 6.89 6.75 6.70 4.57
Investment securities................... 5.64 6.14 5.59 5.64 5.33 4.43
FHLB stock.............................. 7.25 7.17 7.03 7.02 6.85 5.70
Federal funds sold and overnight
interest-bearing deposits............ 6.00 5.36 5.57 5.60 6.22 3.97
All interest-earning assets............. 8.49 9.07 8.87 8.92 8.64 7.78
Weighted average rate paid on:
Passbook savings accounts............... 2.00 1.97 2.16 2.11 2.22 2.10
NOW accounts............................ 1.50 1.70 1.99 1.92 2.10 2.00
Money market accounts................... 4.18 4.17 4.20 4.22 4.16 3.23
Certificate accounts.................... 5.58 5.45 5.39 5.38 5.37 4.29
FHLB advances........................... -- -- -- 5.73 5.60 5.30
All interest-bearing liabilities........ 4.49 4.46 4.45 4.44 4.50 3.67
Interest rate spread (spread between
weighted average rate on all interest-
earning assets and all interest-
bearing liabilities).................... 4.00 4.61 4.42 4.48 4.14 4.11
Net interest margin (net interest income
(expense) as a percentage of average
interest-earning assets)................ N/A 5.24 5.10 5.15 4.78 4.59
</TABLE>
31
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on
net interest income of the Bank. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); and (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume). The net change
attributable to the combined impact of volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31, Year Ended December 31,
1997 Compared to Nine Months 1996 Compared to Year 1995 Compared to Year
Ended September 30, 1996 Ended December 31, 1995 Ended December 31, 1994
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
------------------------- ------------------------- -----------------------
Rate Volume Total Rate Volume Total Rate Volume Total
---- ------ ----- ---- ------ ----- ---- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1).............. $ 165 $ 2,041 $ 2,206 $(1,200) $ 3,981 $2,781 $ 738 $ 281 $1,019
Mortgage-backed securities -- (8) (8) -- (8) (8) 29 (6) 23
Investment securities............. (517) (205) (722) 1,212 (1,484) (272) (553) 1,048 495
FHLB stock........................ -- 7 7 2 7 9 12 6 18
Federal funds sold and overnight
interest-bearing deposits........ (92) 389 297 (366) 218 (148) 116 157 273
------ ------- ------- ------- ------- ------ ------ ------ ------
Total net change in income
on interest-earning assets........ (444) 2,224 1,780 (352) 2,714 2,362 342 1,486 1,828
Interest-bearing liabilities:
Passbook accounts................. (24) (21) (45) (15) (32) (47) 102 (57) 45
NOW accounts...................... (82) 52 (30) 113 (72) 41 21 37 58
Money market accounts............. (314) 559 245 74 335 409 (44) 212 168
Certificate accounts.............. (138) 666 528 (229) 418 189 954 235 1,189
FHLB advances..................... -- -- -- (20) -- (20) 202 (265) (63)
------ ------- ------- ------- ------- ------ ------ ------ ------
Total net change in expense
on interest-bearing liabilities... (557) 1,255 698 (78) 650 572 1,236 161 1,397
------ ------- ------- ------- ------- ------ ------ ------ ------
Net change in net interest income.. $ 113 $ 969 $ 1,082 $ (274) $ 2,064 $1,790 $ (894) $1,325 $ 431
====== ======= ======= ======= ======= ====== ====== ====== ======
</TABLE>
________________
(1) Excludes interest on loans 90 days or more past due. Includes loans held-
for-sale.
32
<PAGE>
ASSET AND LIABILITY MANAGEMENT
The Bank's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating market interest rates.
The Bank has sought to reduce the exposure of its earnings to changes in market
interest rates by attempting to manage the mismatch between asset and liability
maturities and interest rates. The principal element in achieving this objective
is to increase the interest-rate sensitivity of the Bank's interest-earning
assets by retaining for its portfolio loans with interest rates subject to
periodic adjustment to market conditions and the selling of fixed-rate one-to-
four family mortgage loans. In addition, the Bank maintains an investment
portfolio of U.S. Government and agency securities with contractual maturities
of between zero and two years. The Bank relies on retail deposits as its primary
source of funds. Management believes retail deposits, compared to brokered
deposits, reduce the effects of interest rate fluctuations because they
generally represent a more stable source of funds. As part of its interest rate
risk management strategy, the Bank promotes transaction accounts and
certificates of deposit with terms up to four years.
In order to encourage institutions to reduce their interest rate risk, the
OTS adopted a rule incorporating an interest rate risk component into the risk-
based capital rules. Using data compiled by the OTS, the Bank receives a report
which measures interest rate risk by modeling the change in NPV over a variety
of interest rate scenarios. This procedure for measuring interest rate risk was
developed by the OTS to replace the "gap" analysis (the difference between
interest-earning assets and interest-bearing liabilities that mature or reprice
within a specific time period). NPV is the present value of expected cash flows
from assets, liabilities and off-balance sheet contracts. The calculation is
intended to illustrate the change in NPV that will occur in the event of an
immediate change in interest rates of at least 200 basis points with no effect
given to any steps that management might take to counter the effect of that
interest rate movement. Under proposed OTS regulations, an institution with a
greater than "normal" level of interest rate risk will be subject to a deduction
from total capital for purposes of calculating its risk-based capital. An
institution with a "normal" level of interest rate risk is defined as one whose
"measured interest rate risk" is less than 2.0%. Institutions with assets of
less than $300 million and a risk-based capital ratio of more than 12.0%, like
the Bank, are exempt. However, the Bank will likely not be exempt after the
consummation of the Conversion because its asset size will increase as a result
of the proceeds of the Offerings. Based on the Bank's regulatory capital levels
at September 30, 1997, and assuming the conversion was consummated at that date,
the Bank believes that, if the proposed regulation was implemented at that date,
the regulation would not have had a material adverse effect on the Bank's
regulatory capital compliance.
The following table is provided by the OTS and sets forth the change in the
Bank's NPV at June 30, 1997, based on OTS assumptions, that would occur in the
event of an immediate change in interest rates, with no effect given to any
steps that management might take to counteract that change.
<TABLE>
<CAPTION>
Basis Point Estimated Change in Board Approved
Change in Rates Net Portfolio Value Limit
--------------- ------------------- --------------
(Dollars in thousands)
Amount Percent Percent
------ ------- -------
<S> <C> <C> <C>
400 $(7,654) (19)% (50)%
300 (5,302) (13) (30)
200 (3,120) (8) (20)
100 (1,297) (3) (20)
-- -- -- --
(100) 632 2 (10)
(200) 709 2 (20)
(300) 842 2 (30)
(400) 1,738 4 (50)
</TABLE>
33
<PAGE>
The above table illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at June 30, 1997 would reduce the Bank's
NPV by approximately $3.1 million, or 8%.
Certain assumptions utilized by the OTS in assessing the interest rate risk
of savings associations within its region were utilized in preparing the
preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
34
<PAGE>
The following table presents the Bank's interest sensitivity gap analysis
at September 30, 1997.
<TABLE>
<CAPTION>
After After
Within One to Three Over
Six Six Months Three to Five Ten
Months to One Year Years Years Years Total
-------- ----------- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net.......................... $46,632 $ 38,484 $ 31,846 $ 26,981 $76,616 $220,559
Mortgage-backed securities.................... 15 15 67 77 1,159 1,333
Other loans................................... 160 160 641 641 -- 1,602
Investment securities......................... 3,698 5,038 5,072 -- -- 13,808
Federal funds sold and overnight
interest-bearing deposits.................... $17,000 -- -- -- -- 17,000
------- -------- -------- -------- ------- --------
Total rate sensitive assets................. 67,505 43,697 37,626 27,699 77,775 254,302
Interest-bearing liabilities:
Deposits:
NOW accounts................................. 2,999 2,999 11,996 11,996 -- 29,990
Passbook savings accounts.................... 1,520 1,520 6,081 6,081 -- 15,202
Money market deposit accounts................ 3,990 3,990 15,961 15,961 -- 39,902
Certificates of deposit...................... 66,916 45,334 17,412 2,446 -- 132,108
------- -------- -------- -------- ------- --------
Total rate sensitive liabilities............ 75,425 53,843 51,450 36,484 -- 217,202
------- -------- -------- -------- ------- --------
Excess (deficiency) of interest sensitivity
assets over interest sensitivity liabilities.. (7,920) (10,146) (13,824) (8,785) 77,775 37,100
Cumulative excess (deficiency) of
interest sensitivity assets................... (7,920) (18,066) (31,890) (40,675) 37,100 37,099
Cumulative ratio of interest-earning assets
to interest-bearing liabilities............... 89.50% 86.02% 82.35% 81.27% 117.08% 117.08%
Interest sensitivity gap to total assets....... (3.11)% (3.99)% (5.44)% (3.45)% 30.58% 14.59%
Ratio of interest-earning assets to
interest-bearing liabilities................. 89.50% 81.16% 73.13% 75.92% 117.08%
Ratio of cumulative gap to total assets (3.11)% (7.10)% (12.54)% (15.99)% 14.59% 14.59%
</TABLE>
35
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are customer deposits, proceeds from
principal and interest payments on and the sale of loans, maturing securities
and FHLB advances. While maturities and scheduled amortization of loans are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Bank generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At September 30,
1997, cash and cash equivalents totalled $26.7 million, or 9.7% of total assets.
The Bank did not have any investment securities classified as available-for-sale
with maturities of one year or less at September 30, 1997. At September 30,
1997, the Bank also maintained an available line of credit of $12.1 million with
the FHLB-Cincinnati that may be used as an additional source of liquidity.
At September 30, 1997, the Bank's commitments to extend funds consisted of
unused lines of credit of $22.7 million, outstanding letters of credit of $8.1
million issued primarily to municipalities as performance bonds, and commitments
to originate or purchase loans of $3.8 million. The commitments to originate or
purchase loans at September 30, 1997 consisted of commitments to originate or
purchase variable rate loans of $800,000, and commitments to originate or
purchase fixed rate loans of $3.0 million at interest rates ranging from 5.75%
to 9.50%.
OTS regulations require savings institutions to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 5.0%
of the average daily balance of its net withdrawable deposits and short-term
borrowings. In addition, short-term liquid assets currently must constitute
1.0% of the sum of net withdrawable deposit accounts plus short-term borrowings.
The Bank's actual short- and long-term liquidity ratios at September 30, 1997
were 13.9% and 17.3%, respectively.
The Bank's primary lending activity is the origination of one- to- four
family mortgage loans. During the nine months ended September 30, 1997 and the
years ended December 31, 1996, 1995 and 1994, the Bank originated $54.6 million,
$73.1 million, $63.2 million and $57.1 million of such loans, respectively. At
September 30, 1997, the Bank had loan commitments totalling $3.8 million and
undisbursed loans in process totalling $33.2 million. The Bank anticipates that
it will have sufficient funds available to meet current loan commitments.
Certificates of deposit that are scheduled to mature in less than one year from
September 30, 1997 totalled $112.3 million. Historically, the Bank has been able
to retain a significant amount of its deposits as they mature.
OTS regulations require the Bank to maintain specific amounts of regulatory
capital. As of September 30, 1997, the Bank complied with all regulatory
capital requirements as of that date with tangible, core and risk-based capital
ratios of 10.8%, 10.8% and 13.1%, respectively. For a detailed discussion of
regulatory capital requirements, see "REGULATION -- Federal Regulation of
Savings Associations -- Capital Requirements." See also "HISTORICAL AND PRO
FORMA REGULATORY CAPITAL COMPLIANCE."
IMPACT OF ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. See Note 1 of Notes to
the Consolidated Financial Statements for a discussion of Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures." The Bank adopted SFAS No. 114 and SFAS No.
118 effective January 1, 1995, and their adoption did not have a material effect
on the Bank's financial condition or results of operations.
ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. In November 1993 the
American Institute of Certified Public Accountants issued SOP 93-6, which
requires an employer to record compensation expense in an amount equal to the
fair value of shares committed to be released to employees from an employee
stock ownership plan and to
36
<PAGE>
exclude unallocated shares from earnings per share computations. The effect of
SOP 93-6 on net income and book value per share in future periods cannot be
predicted due to the uncertainty of the fair value of the shares at the time
they will be committed to be released. See "PRO FORMA DATA."
DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES. In December 1994
the Accounting Standards Executive Committee issued SOP 94-6, "Disclosure of
Certain Significant Risks and Uncertainties." This SOP applies to financial
statements prepared in conformity with GAAP by all nongovernmental entities. The
disclosure requirements in SOP 94-6 focus primarily on risks and uncertainties
that could significantly affect the amounts reported in the financial statements
in the near-term functioning of the reporting entity. The risks and
uncertainties discussed in SOP 94-6 stem from the nature of the entity's
operations, from the necessary use of estimates in the preparation of the
entity's financial statements and from significant concentrations in certain
aspects of the entity's operations. SOP 94-6 is effective for financial
statements issued for fiscal years ending after December 15, 1995 and did not
have a material impact on the financial condition or results of operations of
the Bank.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. See Note 1 of Notes to the
Consolidated Financial Statements for a discussion of SFAS No. 122, "Accounting
for Mortgage Servicing Rights." The Bank implemented SFAS No. 122,
prospectively, effective January 1, 1996 and its implementation did not have a
material impact on the Bank's financial condition or results of operations.
Effective January 1, 1997, SFAS No. 122 was superseded by SFAS No. 125 discussed
below.
ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 123, "Accounting for
Stock-Based Compensation," establishes financial accounting and reporting
standards for stock-based employee compensation plans. This statement encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting method are required to disclose in a footnote to the financial
statements pro forma net income and, if presented, earnings per share, as if
this statement had been adopted. The accounting requirements of this statement
are effective for transactions entered into in fiscal years that begin after
December 15, 1995; however, companies are required to disclose information for
awards granted in their first fiscal year beginning after December 15, 1994.
Management of the Bank has not completed an analysis of the potential effects of
SFAS No. 123 on its financial condition or results of operations, but expects to
use the intrinsic value method upon consummation of the Conversion.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES. See Note 1 of Notes to the Consolidated Financial
Statements for a discussion of SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," and of SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125." SFAS No. 127 defers the effective date of the application of certain
portions of SFAS No. 125 until January 1, 1998. The adoption of the provisions
of SFAS No. 125 and SFAS No. 127 did not have a material impact on the Bank's
financial condition or results of operations.
EARNINGS PER SHARE. SFAS No. 128, "Earnings Per Share," issued in February
1997, establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly-held common stock or potential
common stock. It replaces the presentation of primary EPS with a presentation of
basic EPS and requires the dual presentation of basic and diluted EPS on the
face of the income statement. This statement is effective for financial
statements issued for periods ending after December 15, 1997 including interim
periods; earlier applications not permitted. This statement requires restatement
of all prior period EPS data presented.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. SFAS No. 129,
"Disclosure of Information About Capital Structure," establishes standards for
disclosing information about an entity's capital structure and applies to all
entities. SFAS No. 129 continues the previous requirements to disclose certain
information about an entity's capital structure found in Accounting Principles
Board ("APB") Opinions No. 10, "Omnibus Opinion - 1966," and
37
<PAGE>
No. 15, "Earnings Per Share," and SFAS No. 47, "Disclosure of Long-Term
Obligations," for entities that were subject to those standards. SFAS No. 129
is effective for financial statements for periods ending after December 15,
1997. SFAS No. 129 contains no change in disclosure requirements for entities
that were previously subject to the requirements of APB Opinions Nos. 10 and 15
and SFAS No. 47. The adoption of the provisions of SFAS No. 129 is not expected
to have a material impact on the Bank.
COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income,"
issued in July 1997, establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements. SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial condition.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comprehensive purposes is required.
DISCLOSURE ABOUT SEGMENTS. SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," issued in June 1997, establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise." SFAS No. 131 becomes effective for the
Bank's fiscal year ending December 31, 1998, and requires that comparative
information from earlier years be restated to conform to its requirements. The
adoption of the provisions of SFAS No. 131 is not expected to have a material
impact on the Bank.
YEAR 2000 CONSIDERATIONS
Many existing computer programs use only two digits to identify a year in
the date datum field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If uncorrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. The Year 2000 issue affects virtually all companies and
organizations.
The Bank uses the services of an outside service bureau for its significant
data processing applications. Based on discussions with its service bureau, the
Bank does not expect that the cost of addressing any Year 2000 issue will be a
material event or uncertainty that would cause its reported financial
information not to be necessarily indicative of future operating results or
future financial condition, or that the costs or consequences of incomplete or
untimely resolution of any Year 2000 issue represent a known material event or
uncertainty that is reasonably likely to affect the its future financial
results, or cause its reported financial information not to be necessarily
indicative of future operating results or future financial condition.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with GAAP, which require the measurement
of financial position and operating results in terms of historical dollars
without considering the change in the relative purchasing power of money over
time due to inflation. The primary impact of inflation is reflected in the
increased cost of the Bank's operations. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are monetary
in nature. As a result, interest rates generally have a more significant impact
on a financial institution's performance than do general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
38
<PAGE>
BUSINESS OF THE HOLDING COMPANY
GENERAL
The Holding Company was organized as a Tennessee business corporation at
the direction of the Bank on November 5, 1997 for the purpose of becoming a
holding company for the Bank upon completion of the Conversion. As a result of
the Conversion, the Bank will be a wholly-owned subsidiary of the Holding
Company and all of the issued and outstanding capital stock of the Bank will be
owned by the Holding Company.
BUSINESS
Prior to the Conversion, the Holding Company has not and will not engage in
any significant activities other than of an organizational nature. Upon
completion of the Conversion, the Holding Company's sole business activity will
be the ownership of the outstanding capital stock of the Bank. In the future,
the Holding Company may acquire or organize other operating subsidiaries,
although there are no current plans, arrangements, agreements or understandings,
written or oral, to do so.
Initially, the Holding Company will neither own nor lease any property but
will instead use the premises, equipment and furniture of the Bank with the
payment of appropriate rental fees, as required by applicable law and
regulations.
Since the Holding Company will only hold the outstanding capital stock of
the Bank upon consummation of the Conversion, the competitive conditions
applicable to the Holding Company will be the same as those confronting the
Bank. See "BUSINESS OF THE BANK -- Competition."
BUSINESS OF THE BANK
GENERAL
The Bank operates, and intends to continue to operate, as a community
oriented financial institution and is devoted to serving the personal and
business needs of individuals residing in its primary market area. The Bank's
business consists primarily of attracting retail deposits from the general
public and using those funds to originate loans secured by real estate.The Bank
believes that its operations more closely resemble those of a traditional
commercial bank than a traditional thrift institution. In addition to
originating one- to- four family mortgage loans, the Bank originates commercial
business loans, consumer loans and other short-term non-real estate loans funded
increasingly by transaction accounts rather than long-term certificates. See "--
Lending Activities" and "-- Deposit Activities and Other Sources of Funds." In
addition, the Bank offers trust services. See"-- Trust Powers."
MARKET AREA
The Bank considers Rutherford, Bedford and Williamson Counties in Central
Tennessee to be its primary market area. A large number of the Bank's depositors
reside, and a substantial portion of its loan portfolio is secured by properties
located, in Rutherford and Bedford Counties. See "RISK FACTORS -- Concentration
of Credit Risk."
Rutherford and Bedford Counties had a 1990 population of approximately
118,570 and 30,411, respectively, according to the Rutherford and Bedford Areas
Chambers of Commerce. The economy of Rutherford and Bedford Counties are diverse
and generally stable. According to the U.S. Bureau of Labor Statistics, the
Rutherford and Bedford Counties unemployment rates were 3.4% and 5.1%,
respectively, for December 1996. According to the Rutherford and Bedford Area
Chambers of Commerce, major employers include Nissan Motor Manufacturing Corp.
USA, Rutherford County Government, Whirlpool Corp., Bridgestone/Firestone Inc.,
Middle Tennessee State University, Alvin C. York Veterans Administration Medical
Center and Ingram Book Co., among others.
39
<PAGE>
The Bank faces intense competition from many financial institutions for
deposits and loan originations. See "-- Competition" and "RISK FACTORS --
Competition."
LENDING ACTIVITIES
GENERAL. At September 30, 1997, the Bank's total loans receivable portfolio
amounted to $220.6 million, or 79.9% of total assets at that date. The Bank has
traditionally concentrated its lending activities on conventional first mortgage
loans secured by one- to- four family properties, with such loans amounting to
$84.0 million, or 32.7% of the total loans receivable portfolio at September 30,
1997. In addition, the Bank originates construction loans, commercial real
estate loans, land loans, consumer loans and commercial business loans. A
substantial portion of the Bank's loan portfolio is secured by real estate,
either as primary or secondary collateral, located in its primary market area.
See "RISK FACTORS -- Concentration of Credit Risk."
40
<PAGE>
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition of
the Bank's loan portfolio by type of loan as of the dates indicated.
<TABLE>
<CAPTION>
At At December 31,
------------------------------------------------------------------------------
September 30, 1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One- to four-family(1)........ $ 84,036 32.7% $ 81,279 33.1% $ 72,302 36.4% $ 82,793 43.5% $ 76,687 42.2%
Multi-family.................. 1,385 0.5 2,847 1.2 1,705 0.9 2,285 1.2 8,546 4.7
Commercial.................... 37,104 14.4 30,099 12.3 22,140 11.1 16,808 8.8 17,617 9.7
Construction.................. 68,794 26.7 61,032 24.9 47,416 23.9 40,261 21.1 35,969 19.8
Acquisition and
development.................. 10,634 4.1 18,799 7.7 13,816 6.9 9,962 5.2 7,500 4.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total mortgage loans......... 201,953 78.5 194,056 79.1 157,379 79.2 152,109 79.9 146,319 80.4
-------- -------- -------- -------- --------
Consumer Loans:
Home equity lines of
credit....................... 2,829 1.1 1,964 0.8 941 0.5 228 0.1 3 --
Automobile.................... 4,808 1.9 3,716 1.5 2,735 1.4 2,144 1.1 2,131 1.2
Unsecured..................... 1,855 0.7 1,779 0.7 1,996 1.0 2,129 1.1 2,051 1.1
Other secured................. 23,742 9.2 23,037 9.4 20,982 10.6 22,406 11.8 22,574 12.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer loans........ 33,324 12.9 30,496 12.4 26,654 13,5 26,907 14.1 26,759 14.7
Commercial business loans...... 22,136 8.6 20,698 8.4 14,771 7.4 11,451 6.0 8,834 4.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans................. 257,323 100.0% 245,250 100.0% 198,805 100.0% 190,467 100.0% 181,912 100.0%
===== ===== ===== ===== =====
Less:
Undisbursed portion of
loans in process............. 33,201 36,573 32,615 21,228 20,699
Net deferred loan fees........ 762 701 560 533 589
Allowance for loan losses..... 2,801 2,123 1,997 1,776 1,681
-------- -------- -------- -------- --------
Total loans receivable, net.. $220,559 $205,853 $163,632 $166,930 $158,943
======== ======== ======== ======== ========
<CAPTION>
------------------
1992
------------------
Amount Percent
-------- --------
<S> <C> <C>
Mortgage Loans:
One- to four-family(1)........ $ 94,549 50.6%
Multi-family.................. 8,188 4.4
Commercial.................... 7,159 3.8
Construction.................. 27,389 14.6
Acquisition and
development.................. 8,582 4.6
-------- -------
Total mortgage loans......... 145,867 78.0
--------
Consumer Loans:
Home equity lines of
credit....................... 24 --
Automobile.................... 872 0.5
Unsecured..................... 127 0.1
Other secured................. 21,515 11.5
-------- -------
Total consumer loans........ 22,538 12.1
Commercial business loans...... 18,675 10.0
-------- -------
Total loans................. 187,080 100.0%
=======
Less:
Undisbursed portion of
loans in process............. 14,744
Net deferred loan fees........ 902
Allowance for loan losses..... 1,520
--------
Total loans receivable, net.. $169,914
========
</TABLE>
___________
(1) Includes loans held-for-sale.
41
<PAGE>
ONE- TO- FOUR FAMILY REAL ESTATE LENDING. Historically, the Bank has
concentrated its lending activities on the origination of loans secured by first
mortgage loans on existing one- to- four family residences located in its
primary market area. At September 30, 1997, $84.0 million, or 32.7% of the
Bank's total loan portfolio, consisted of such loans. The Bank originated $54.6
million, $73.1 million, $63.2 million and $57.1 million of one- to- four family
residential mortgage loans during the nine months ended September 30, 1997 and
the years ended December 31, 1996, 1995 and 1994, respectively.
Generally, the Bank's fixed-rate one- to- four family mortgage loans have
maturities ranging from 15 to 30 years and are fully amortizing with monthly
payments sufficient to repay the total amount of the loan with interest by the
end of the loan term. Generally, they are originated under terms, conditions and
documentation which permit them to be sold to U.S. Government sponsored agencies
such as Federal Home Loan Mortgage Corporation ("FHLMC"). The Bank's fixed-rate
loans customarily include "due on sale" clauses, which give the Bank the right
to declare a loan immediately due and payable in the event the borrower sells or
otherwise disposes of the real property subject to the mortgage and the loan is
not paid.
The Bank also originates ARM loans at rates and terms competitive with
market conditions. At September 30, 1997, $72.6 million, or 28.1% of the Bank's
gross loan portfolio, were subject to periodic interest rate adjustments. The
Bank originates for its portfolio ARM loans which provide for an interest rate
which adjusts every year or which is fixed for one, three or five years and then
adjusts every year after the initial period. Most of the Bank's one-year, three-
year and five-year ARMs adjust every year after the initial fixed rate period
based on the one year Treasury constant maturity index. The Bank's ARMs are
typically based on a 30-year amortization schedule. The Bank qualifies the
borrowers on its nonconforming ARM loans (i.e. loans not originated in
----
conformity with standards that would permit the loans to be sold in the
secondary market) based on the initial rate. The Bank qualifies the borrowers on
its conforming ARM loans based on the maximum note interest rate during the
second year of the loan. A one-year ARM loan that is originated according to
FHLMC secondary market standards may be converted to a fixed-rate loan within
five years of the origination date. ARM loans that are not saleable to the FHLMC
are not permitted to be converted to fixed rate loans. The Bank does not offer
deep discount or "teaser" rates. The Bank's current ARM loans do not provide for
negative amortization. The Bank's ARM loans generally provide for annual and
lifetime interest rate adjustment limits of 2% and 5% to 6%, respectively.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The retention of ARM loans in the Bank's loan portfolio helps reduce the
Bank's exposure to changes in interest rates. There are, however, unquantifiable
credit risks resulting from the potential of increased costs due to changed
rates to be paid by the customer. It is possible that during periods of rising
interest rates the risk of default on ARM loans may increase as a result of
repricing and the increased payments required by the borrower. See "RISK
FACTORS -- Interest Rate Risk." In addition, although ARM loans allow the Bank
to increase the sensitivity of its asset base to changes in the interest rates,
the extent of this interest sensitivity is limited by the annual and lifetime
interest rate adjustment limits. Because of these considerations, the Bank has
no assurance that yields on ARM loans will be sufficient to offset increases in
the Bank's cost of funds. The Bank believes these risks, which have not had a
material adverse effect on the Bank to date, generally are less than the risks
associated with holding fixed-rate loans in portfolio during a rising interest
rate environment.
The Bank also originates one-to four-family mortgage loans under Federal
Housing Administration ("FHA") and Veterans Administration ("VA") programs and
the Tennessee Housing and Development Agency ("THDA"), an affordable housing
program. FHA and VA loans are generally sold to private investors, servicing
released (i.e., the right to collect principal and interest payments and
forward---- it to the purchaser of the loan, maintain escrow accounts for
payment of taxes and insurance and perform other loan administration functions
is sold with the loan). THDA loans are sold with servicing rights retained. See
"-- Loan Originations, Sales and Purchases."
42
<PAGE>
The Bank generally requires title insurance insuring the status of its lien
or an acceptable attorney's opinion on all loans where real estate is the
primary source of security. The Bank also requires that fire and casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least equal to the outstanding loan balance.
The Bank's one- to- four family residential mortgage loans typically do not
exceed 80% of the appraised value of the security property. Pursuant to
underwriting guidelines adopted by the Bank's Board of Directors, the Bank can
lend up to 95% of the appraised value of the property securing a one- to- four
family residential loan; however, the Bank generally obtains private mortgage
insurance on the portion of the principal amount that exceeds 80% to 95% of the
appraised value of the security property.
CONSTRUCTION LENDING. The Bank actively originates three types of
residential construction loans: (i) speculative construction loans, (ii) pre-
sold construction loans and (iii) construction/permanent loans. The construction
loan portfolio increased from $27.4 million, or 14.6% of total loans receivable
at December 31, 1992 to $68.8 million, or 26.7% of total loans receivable, at
September 30, 1997. See "RISK FACTORS -- Certain Lending Risks." To a
substantially lesser extent, the Bank also originates construction loans for the
development of multi-family and commercial properties.
At September 30, 1997, the composition of the Bank's residential
construction loan portfolio was as follows:
<TABLE>
<CAPTION>
Outstanding Percent of
Balance(1) Total
---------- -----
(In thousands)
<S> <C> <C>
Residential:
Speculative construction.... $28,805 41.9%
Pre-sold construction....... 21,471 31.2
Construction/permanent...... 11,227 16.3
Commercial and multi-family.. 7,291 10.6
------- -----
Total....................... $68,794 100.0%
======= =====
</TABLE>
____________________
(1) Includes loans in process.
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either the Bank or another lender for the finished
home. The home buyer may be identified either during or after the construction
period, with the risk that the builder will have to debt service the speculative
construction loan and finance real estate taxes and other carrying costs of the
completed home for a significant time after the completion of construction until
the home buyer is identified. The Bank lends to approximately 110 local
builders, many of whom may have only one or two speculative loans outstanding
from the Bank. The Bank considers approximately 25 builders as core borrowers
with several speculative loans outstanding at any one time. Rather than
originating lines of credit to home builders to construct several homes at once,
the Bank originates and underwrites a separate loan for each home. Speculative
construction loans are originated for a term of 12 months, with interest rates
ranging from 0.5% to 2.0% above the prime lending rate, and with a loan-to-value
ratio of no more than 80% of the appraised estimated value of the completed
property. At September 30, 1997, the Bank had 14 borrowers each with aggregate
outstanding speculative loan balances of more than $500,000, all of which were
performing according to their respective terms and the largest of which amounted
to $1.4 million.
Unlike speculative construction loans, pre-sold construction loans are made
to home builders who, at the time of construction, have a signed contract with a
home buyer who has a commitment for permanent financing for the finished home
with the Bank or another lender. Pre-sold construction loans are generally
originated for a term of 12 months, with adjustable interest rates ranging from
0.5% to 1.0% above the prime lending rate, and with loan-to-value ratios of 80%
of the appraised estimated value of the completed property or cost, whichever is
less. At
43
<PAGE>
September 30, 1997, the largest outstanding pre-sold construction loan had an
outstanding balance of $404,000 and was performing according to its terms.
Construction/permanent loans are originated to the home owner rather than
the home builder. The construction phase of a construction/permanent loan
generally lasts 12 months and the interest rate charged is generally 8.5% to
9.5%, fixed, and with loan-to-value ratios of 80% (or up to 95% with private
mortgage insurance) of the appraised estimated value of the completed property
or cost, whichever is less. At the completion of construction, the Bank may
either originate a fixed-rate mortgage loan or an ARM loan for retention in its
portfolio or use its mortgage brokerage capabilities to obtain permanent
financing for the customer with another lender. See "-- Lending Activities --
Loan Originations, Sales and Purchases" and "-- Lending Activities -- Mortgage
Loan Servicing." At September 30, 1997, the largest outstanding
construction/permanent loan had an outstanding balance of $350,000 and was
performing according to its terms.
To a lesser extent, the Bank also provides construction financing for non-
residential properties (i.e., multi-family and commercial properties). At
----
September 30, 1997, such construction loans amounted to $7.3 million, $4.4
million of which was repaid subsequent to September 30, 1997.
Construction loans up to $500,000 may be approved by any two members of the
Bank's seven member Loan Committee. All construction loans over $500,000 must be
approved by the Board of Directors. See "-- Lending Activities -- Loan Solic
itation and Processing." Prior to preliminary approval of any construction loan
application, an appraiser approved by the Board of Directors inspects the site
and the Bank reviews the existing or proposed improvements, identifies the
market for the proposed project, analyzes the pro forma data and assumptions on
the project. In the case of a speculative or pre-sold construction loan, the
Bank reviews the experience and expertise of the builder. After preliminary
approval has been given, the application is processed, which includes obtaining
credit reports, financial statements and tax returns on the borrowers and
guarantors, an independent appraisal of the project, and any other expert
reports necessary to evaluate the proposed project. In the event of cost
overruns, the Bank requires that the borrower use its own funds to maintain the
original loan-to-value ratio.
The construction loan documents require that construction loan proceeds be
disbursed in increments as construction progresses. Disbursements are based on
periodic on-site inspections by an appraiser and/or Bank personnel approved by
the Board of Directors. The Bank regularly monitors the construction loan
portfolio and the economic conditions and housing inventory. Property
inspections are performed by the Bank's property inspector. The Bank believes
that the internal monitoring system helps reduce many of the risks inherent in
its construction lending.
Construction lending affords the Bank the opportunity to achieve higher
interest rates and fees with shorter terms to maturity than does its single-
family permanent mortgage lending. Construction lending, however, is generally
considered to involve a higher degree of risk than single-family permanent
mortgage lending because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion proves to be inaccurate, the Bank may be confronted with a
project whose value is insufficient to assure full repayment. Projects may also
be jeopardized by disagreements between borrowers and builders and by the
failure of builders to pay subcontractors. Loans to builders to construct homes
for which no purchaser has been identified carry more risk because the payoff
for the loan depends on the builder's ability to sell the property prior to the
time that the construction loan is due. The Bank has sought to address these
risks by adhering to strict underwriting policies, disbursement procedures, and
monitoring practices. In addition, because the Bank's construction lending is in
its primary market area, changes in the local economy and real estate market
could adversely affect the Bank's construction loan portfolio.
44
<PAGE>
ACQUISITION AND DEVELOPMENT LENDING. The Bank originates acquisition and
development loans for the purpose of developing the land (i.e., installing
----
roads, sewers, water and other utilities) for sale for residential housing
construction. At September 30, 1997, the Bank had land A&D loans with aggregate
approved commitments of $26.1 million, of which an aggregate of $8.9 million was
outstanding. At September 30, 1997, the largest land A&D loan had an outstanding
balance of $495,000 and was performing according to its terms. All of the land
A&D loans are secured by properties located in the Bank's primary market area.
See "RISK FACTORS -- Concentration of Credit Risk."
Land A&D loans are usually repaid through the sale of the developed land.
However, the Bank believes that its land A&D loans are made to individuals with,
or to corporations the principals of which possess, sufficient personal
financial resources out of which the loans could be repaid, if necessary.
Land A&D loans are secured by a lien on the property, made for a two year
term, and with an interest rate that adjusts with the prime rate. The Bank
requires monthly interest payments during the term of the land A&D loan. After
the expiration of the two year term, the loan is reevaluated, adjusted and/or
extended as a fixed or adjustable rate loan. In addition, the Bank obtains
personal guarantees from the principals of its corporate borrowers. At September
30, 1997, the Bank did not have any nonaccruing land A&D loans.
Loans secured by undeveloped land or improved lots involve greater risks
than one- to four-family residential mortgage loans because such loans are more
difficult to monitor and foreclose as the Bank may be confronted with a property
the value of which is insufficient to assure full repayment. Furthermore, if the
borrower defaults the Bank may have to expend its own funds to complete
development and also incur costs associated with marketing and holding the
building lots pending sale. Land A&D loans are generally considered to involve a
higher degree of risk than single-family permanent mortgage loans because of the
concentration of principal among relatively few borrowers and development
projects, the increased difficulty at the time the loan is originated of
estimating the development building costs, the increased difficulty and costs of
monitoring the loan, the higher degree of sensitivity to increases in market
rates of interest, and the increased difficulty of working out problem loans. A
concentration of loans secured by properties in any single area presents the
risk that any adverse change in regional economic or employment conditions may
result in increased delinquencies and loan losses. The Bank attempts to minimize
this risk by limiting the maximum loan-to-value ratio on acquisition and
development loans to 75%, although the Board of Directors has the authority to
approve acquisition and development loans with loan-to-value ratios of up to
80%.
COMMERCIAL REAL ESTATE LENDING. The Bank originates mortgage loans for the
acquisition and refinancing of commercial real estate properties. At September
30, 1997, $37.1 million, or 14.4% of the Bank's total loan portfolio, consisted
of loans secured by existing commercial real estate properties. The majority of
the Bank's commercial real estate properties are secured by small businesses,
retail properties and churches located in the Bank's primary market area.
The Bank requires an evaluation of all properties securing commercial real
estate loans which are $250,000 and less. Evaluations are performed by the
Bank's commercial loan officers or in-house appraiser, an outside fee appraiser,
or an employee of the Bank designated by the Board of Directors. Appraisals are
required for all properties securing commercial real estate loans in excess of
$250,000. Appraisals are performed by an independent appraiser designated by the
Bank and are reviewed by management. The Bank considers the quality and location
of the real estate, the credit of the borrower, the cash flow of the project and
the quality of management involved with the property.
The average size of a commercial real estate loan in the Bank's portfolio
is approximately $100,000 to $200,000. Commercial real estate loans are
generally structured with fixed rates of interest and terms of three to five
years based on amortization schedules of fifteen to twenty years. At September
30, 1997, the largest commercial real estate loan had an outstanding balance of
$4.4 million. This loan was repaid subsequent to September 30, 1997.
45
<PAGE>
Loan to value ratios on the Bank's commercial real estate loans are
generally limited to 80%. As part of the criteria for underwriting commercial
real estate loans, the Bank generally imposes a debt coverage ratio (the ratio
of net cash from operations before payment of debt service to debt service) of
not less than 1.2 times. It is also the Bank's policy to obtain personal
guarantees from the principals of its corporate borrowers on its commercial real
estate loans.
Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one- to- four
family residential lending. However, loans secured by such properties usually
are greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to- four family residential mortgage
loans. Because payments on loans secured by multi-family and commercial
properties are often dependent on the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy. The Bank seeks to minimize these risks by
limiting the maximum loan-to-value ratio to 80% and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan. The Bank also obtains loan
guarantees from financially capable parties based on a review of personal
financial statements.
COMMERCIAL BUSINESS LENDING. The Bank's commercial business lending
activities focuses primarily on small to medium size businesses owned by
individuals well known to the Bank and who reside in the Bank's primary market
area. At September 30, 1997, commercial business loans amounted to $22.1
million, or 8.6% of total loans.
Commercial business loans may be unsecured loans, but generally are secured
by various types of business collateral other than real estate (i.e., inventory,
----
equipment, etc.). In many instances, however, such loans are often also secured
by junior liens on real estate. Commercial business loans are generally made in
amounts between $50,000 to $75,000 and may be either lines of credit or term
loans. Lines of credit are generally renewable and made for a one-year term.
Lines of credit are generally variable rate loans indexed to the prime rate.
Term loans are generally originated with three to five year maturities, with a
maximum of seven years, on a fully amortizing basis. As with commercial real
estate loans, the Bank generally requires annual financial statements from its
commercial business borrowers and, if the borrower is a corporation, personal
guarantees from the principals.
At September 30, 1997, the largest commercial business loan to an
unaffiliated borrower was a $2.0 line of credit secured by marketable investment
securities, with no outstanding balance at that date. At September 30, 1997, the
largest commercial business loan with an outstanding balance had a balance of
$324,000 and was secured by inventory and equipment. Such loan was performing
according to its terms at September 30, 1997.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential, commercial and multi-family real estate lending.
Real estate lending is generally considered to be collateral based lending with
loan amounts based on predetermined loan to collateral values and liquidation of
the underlying real estate collateral is viewed as the primary source of
repayment in the event of borrower default. Although commercial business loans
are often collateralized by equipment, inventory, accounts receivable or other
business assets, the liquidation of collateral in the event of a borrower
default is often not a sufficient source of repayment because accounts
receivable may be uncollectible and inventories and equipment may be obsolete or
of limited use, among other things. Accordingly, the repayment of a commercial
business loan depends primarily on the creditworthiness of the borrower (and any
guarantors), while liquidation of collateral is a secondary and often
insufficient source of repayment.
As part of its commercial business lending activities, the Bank issues
standby letters of credit or performance bonds as an accommodation to its
borrowers. See "-- Loan Commitments and Letters of Credit."
CONSUMER LENDING. The Bank originates a variety of consumer loans that
generally have shorter terms to maturity and higher interest rates than
residential mortgage loans. At September 30, 1997, the Bank's consumer loans
totaled approximately $33.2 million, or 15.4%, of the Bank's loans receivable,
net. The Bank's consumer loans consist primarily of home equity lines of credit,
automobile loans, and a variety of other secured loans, a substantial
46
<PAGE>
portion of which are secured by junior mortgages on real estate. To a
substantially lesser extent, the Bank also originates unsecured consumer loans.
The Bank anticipates that it will continue to be an active originator of
consumer loans. Factors that may affect the ability of the Bank to increase its
originations in this area include the demand for such loans, interest rates and
the state of the local and national economy. Consumer loans accounted for 12.3%
of the Bank's total loan originations in the nine months ended September 30,
1997, and 9.5% and 8.9% in fiscal 1996 and 1995, respectively.
The Bank offers open-ended home equity lines of credit secured by a second
mortgage on the borrower's primary residence. These lines of credit have an
interest rate that is one to two percentage points above the prime lending rate,
as published in The Wall Street Journal, which adjusts monthly. The majority of
the approved lines of credit at September 30, 1997 were less than $50,000. At
September 30, 1997, approved lines of credit totaled $5.2 million, of which $2.8
million was outstanding.
At September 30, 1997, the Bank's automobile loan portfolio amounted to
$4.8 million, or 1.9%, of total loans at such date, a substantial portion of
which were secured by used automobiles. The maximum term for the Bank's
automobile loans is 60 months. The Bank generally lends up to 80% to 90% of the
purchase price of the automobile. The Bank requires all borrowers to maintain
automobile insurance, including collision, fire and theft, with a maximum
allowable deductible and with the Bank listed as loss payee. The Bank does not
engage in indirect automobile lending.
The Bank's consumer loan portfolio also includes other consumer loans
secured by a variety of collateral, such as recreational vehicles, boats,
motorcycles, deposit accounts and, in many instances, junior mortgages on real
estate. Such other secured consumer loans were $23.7 million, or 9.2% of total
loans, at September 30, 1997.
At September 30, 1997, unsecured consumer loans amounted to $1.9 million,
or 0.7% of total loans. Unsecured loans are made for a term up to 24 months with
fixed rates of interest and are offered primarily to existing customers of the
Bank. Included in the unsecured consumer loan portfolio are credit card loans
with an aggregate outstanding balance of $199,000 at September 30, 1997.
Approved credit card lines totaled $942,000 at September 30, 1997. The Bank is a
VISA and MASTERCARD card issuer. The Bank does not actively solicit credit card
business beyond its customer base and market area and has not engaged in mailing
of pre-approved credit cards. The rate currently charged by the Bank on its
credit card loans is the prime rate, as published in The Wall Street Journal,
plus 6.9%, and the Bank is permitted to change the interest rate quarterly.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles and other vehicles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
that can be recovered on such loans. At September 30, 1997, the Bank had $59,000
of consumer loans accounted for on a nonaccrual basis.
MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at September 30, 1997 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, but does
not include scheduled payments or potential prepayments. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Loan balances do not include
undisbursed loan proceeds, unearned discounts, unearned income and allowance for
loan losses.
47
<PAGE>
<TABLE>
<CAPTION>
After After
One Year 3 Years 5 Years
Within Through Through Through After
One Year 3 Years 5 Years 10 Years 10 Years Total
-------- -------- ------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential................ $ 6,801 $10,488 $11,972 $14,802 $56,831 $100,894
Construction............... 44,144 3,672 -- -- -- 47,816
Commercial................. 14,212 6,272 9,117 4,046 289 33,936
Consumer and other loans... 9,462 6,956 4,608 203 165 21,394
Commercial business loans.. 10,858 5,177 2,004 387 1,656 20,082
------- ------- ------- ------- ------- --------
Total.................... $85,477 $32,565 $27,701 $19,438 $58,941 $224,122
======= ======= ======= ======= ======= ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1998, which have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Floating or
Rates Adjustable Rates
------- ----------------
(In thousands)
<S> <C> <C>
Mortgage loans:
Residential................ $21,508 $72,586
Construction............... -- 3,673
Commercial................. 18,886 838
Consumer and other loans... 8,358 3,574
Commercial business loans.. 9,171 52
------- -------
Total.................... $57,923 $80,723
======= =======
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of mortgage loans tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates. Furthermore, management believes
that a significant number of the Bank's residential mortgage loans are
outstanding for a period less than their contractual terms because of the
transitory nature of many of the borrowers who reside in its primary market
area.
LOAN SOLICITATION AND PROCESSING. The Bank's lending activities are subject
to the written, non-discriminatory, underwriting standards and loan origination
procedures established by the Bank's Board of Directors and management. Loan
originations come from a number of sources. The customary sources of loan
originations are realtors, walk-in customers, referrals and existing customers.
A business development program has been implemented where loan officers and
sales personnel make sales calls on building contractors and realtors. The Bank
also advertises its loan products.
In marketing its products and services, the Bank emphasizes its community
ties, customized personal service and an efficient underwriting and approval
process. The Bank uses professional fee appraisers for most residential real
estate loans and construction loans and all commercial real estate and land
loans. The Bank requires hazard, title and, to the extent applicable, flood
insurance on all security property.
Loan approval authority varies based on loan type. Construction loans and
acquisition and development loans up to $500,000 may be approved by any two
members of the Bank's seven member Loan Committee, while loans over $500,000
must be approved by the Board of Directors. One- to- four family residential
mortgage loans up to $500,000 originated to be held in portfolio may be approved
by any two members of the Loan Committee,
48
<PAGE>
while loans over $500,000 must be approved by the Board of Directors. One- to-
four family residential mortgage loans that are originated for sale to investors
and that are underwritten to the investor's specifications may be approved by
any member of the Loan Committee up to FHLMC loan limits. Consumer and
commercial business loans may be approved by loan officers individually or in
combination with other loan officers within dollar limits specified by the Loan
Committee. These dollar limits range from $2,500 to $25,000 for unsecured loans
and from $25,000 to $500,000 for secured loans. The maximum approval authority
for an individual loan officer is $125,000 for unsecured loans and $250,000 for
secured loans. All unsecured consumer and commercial business loans over
$250,000, and all secured consumer and commercial business loans over $500,000,
must be approved by the Board of Directors. Each approved loan, regardless of
type, is reviewed by the Bank's quality control personnel to insure that proper
approval was received.
LOAN ORIGINATIONS, SALES AND PURCHASES. While the Bank originates both
adjustable-rate and fixed-rate loans, its ability to generate each type of loan
depends upon relative customer demand for loans in its primary market area.
The Bank sells all loans originated under FHA and VA programs, including
related servicing rights, except for those originated for the THDA. The Bank
periodically sells conventional one- to- four family loans (i.e., non-FHA/VA
----
loans) with servicing retained and without recourse. These sales generally
involve fixed-rate loans which help to reduce the Bank's exposure to interest
rate risk, and the proceeds of sale are used to fund continuing operations
However, the Bank occasionally may sell ARM loans to satisfy liquidity needs.
Sellers of loans are exposed to various degrees of "pipeline risk," which
is the risk that the value of the loan will decline during the period between
the time the loan is originated and the time of sale because of changes in
market interest rates. The Bank is exposed to a relatively low degree of
pipeline risk because it generally does not fix the loan interest rate until
shortly before or on the closing date and loans are generally closed against a
mandatory purchase commitment by the FHLMC or other purchaser.
When conventional loans are sold, the Bank retains the responsibility for
servicing the loans, including collection and remitting mortgage loans payments,
accounting for principal and interest and holding and disbursing escrow or
impound funds for real estate taxes and insurance premiums. The Bank receives a
servicing fee for performing these services for others. The Bank's servicing
portfolio amounted to $117.1 million at September 30, 1997. The Bank is
generally paid a fee equal to 0.25% of the outstanding principal balance for
servicing sold loans. Loan servicing income totalled $305,000, $447,000,
$561,000 and $285,000 for the nine months ended September 30, 1997 and the years
ended December 31, 1996, 1995 and 1994, respectively. The Bank earns late
charges collected from delinquent customers whose loans are serviced by the
Bank. The Bank is allowed to invest escrow impounds (funds collected from
mortgage customers for the payment of property taxes and insurance premiums on
mortgaged real estate) until they are disbursed on behalf of mortgage customers,
but is not required to pay interest on these funds. At September 30, 1997,
borrowers' escrow funds amounted to $1.1 million.
Historically, the Bank has not been an active purchaser of loans or
participation interests in loans.
49
<PAGE>
The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
-------------------- -------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans originated:
Mortgage loans:
One- to four-family..................... $ 54,597 $ 57,501 $ 73,075 $ 63,175 $ 57,145
Multi-family............................ -- -- -- -- 730
Commercial.............................. 4,200 7,100 9,700 7,200 4,700
Construction............................ 59,137 63,335 78,901 66,798 63,196
Land.................................... 3,091 6,649 10,341 10,114 7,633
Consumer................................. 21,326 16,641 22,625 15,842 15,653
Commercial business loans................ 30,599 30,601 41,222 14,875 16,142
-------- -------- -------- -------- --------
Total loans originated.................. 172,950 181,827 235,864 178,004 165,199
Loans purchased:
One- to four-family..................... -- 3,947 3,947 -- --
-------- -------- -------- -------- --------
Total loans originated and purchased.. 172,950 185,774 239,811 178,004 165,199
Loans sold:
One- to four-family..................... 48,684 52,278 71,235 145,932 48,939
-------- -------- -------- -------- --------
Total loans sold..................... 48,684 52,278 71,235 145,932 48,939
Loan principal repayments................. 64,499 52,670 81,711 72,743 46,981
Increase (decrease) in other items, net... (45,061) (45,404) (44,644) 37,370 (61,289)
-------- -------- -------- -------- --------
Net increase (decrease) in
loans receivable, net.................... $ 14,706 $ 35,422 $ 42,221 $ (3,301) $ 7,990
======== ======== ======== ======== ========
</TABLE>
LOAN COMMITMENTS AND LETTERS OF CREDIT. The Bank issues commitments for
mortgage loans conditioned upon the occurrence of certain events. Such
commitments are made in writing on specified terms and conditions and are
honored for up to 45 days from approval, depending on the type of transaction.
At September 30, 1997, the Bank had loan commitments (excluding undisbursed
portions of interim construction loans of $33.2 million) of $3.8 million and
unused lines of credit of $22.7 million. See Note 15 of Notes to the
Consolidated Financial Statements.
As an accommodation to its commercial business borrowers, the Bank issues
standby letters of credit or performance bonds in favor of entities, usually
municipalities, for whom the Bank's borrowers are performing work or other
services. At September 30, 1997, the Bank had an outstanding standby letter of
credit of $8.1 million that was issued primarily to municipalities as
performance bonds. See Note 15 of Notes to the Consolidated Financial
Statements.
LOAN FEES. In addition to interest earned on loans, the Bank receives
income from fees in connection with loan originations, loan modification, late
payments and for miscellaneous service related to its loan. Income from these
activities varies from period to period depending upon the volume and type of
loans made and competitive conditions.
The Bank charges loan origination fees which are calculated as a percentage
of the amount borrowed. In accordance with applicable accounting procedures,
loan origination fees and discount points in excess of loan origination costs
are deferred and recognized over the contractual remaining lives of the related
loans on a level yield basis. Discounts and premiums on loans purchased are
accreted and amortized in the same manner. The Bank
50
<PAGE>
recognized $820,000, $1.2 million, $918,000 and $1.2 million of deferred loan
fees during the nine months ended September 30, 1997 and the years ended
December 31, 1996, 1995 and 1994, respectively, in connection with loan
refinancings, payoffs, sales and ongoing amortization of outstanding loans.
The Bank also earns fee income on loans serviced for others. Loan servicing
fees for the nine months ended September 30, 1997 and the year ended December
31, 1996 amounted to $305,000 and $447,000, respectively. At September 30, 1997,
the Bank serviced loans for others totalling $120.5 million. See Note 1 of Notes
to Consolidated Financial Statements.
NONPERFORMING ASSETS AND DELINQUENCIES. When a borrowers fails to make a
required payment on a loan, the Bank attempts to cure the deficiency by
contacting the borrower and seeking the payment. Contacts are generally made ten
days after a payment is due. In most cases, deficiencies are cured promptly. If
a delinquency continues, additional contact is made either through a notice or
other means and the Bank will attempt to work out a payment schedule. While the
Bank generally prefers to work with borrowers to resolve such problems, the Bank
will institute foreclosure or other proceedings, as necessary, to minimize any
potential loss.
Loans are placed on nonaccrual status generally if, in the opinion of
management, principal or interest payments are not likely in accordance with the
terms of the loan agreement, or when principal or interest is past due 90 days
or more. Interest accrued but not collected at the date the loan is placed on
nonaccrual status is reversed against income in the current period. Loans may be
reinstated to accrual status when payments are under 90 days past due and, in
the opinion of management, collection of the remaining past due balances can be
reasonably expected.
The Bank's Board of Directors is informed monthly of the status of all
loans delinquent more than 60 days, all loans in foreclosure and all foreclosed
and repossessed property owned by the Bank.
51
<PAGE>
The following table sets forth information with respect to the Bank's non-
performing assets at the dates indicated.
<TABLE>
<CAPTION>
At September 30, At December 31,
-----------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to four-family................................. $ -- $ 9 $ 37 $ 204 $ 657 $ 968
Commercial.......................................... -- -- -- 61 4 187
Consumer loans....................................... 59 42 70 108 113 274
----- ----- ----- ----- ------ ------
Total........................................... $ 59 $ 51 $ 107 $ 373 $ 774 $1,429
Accruing loans which are contractually
past due 90 days or more............................. -- -- -- -- -- --
Total of nonaccrual and 90 days past due loans........ 59 51 107 373 774 1,429
Real estate owned..................................... -- -- -- 95 711 1,015
----- ----- ----- ----- ------ ------
Total nonperforming assets....................... $ 59 $ 51 $ 107 $ 468 $1,485 $2,444
===== ===== ===== ===== ====== ======
Restructured loans.................................... $ -- $ -- $ -- $ 95 $ 711 $1,015
===== ===== ===== ===== ====== ======
Nonaccrual and 90 days or more past due loans
as a percentage of loans receivable, net............. 0.03% 0.02% 0.07% 0.22% 0.49% 0.84%
Nonaccrual and 90 days or more past due
loans as a percentage of total assets................ 0.02% 0.02% 0.05% 0.18% 0.38% 0.72%
Nonperforming assets as a percentage of total assets.. 0.02% 0.02% 0.05% 0.22% 0.72% 1.23%
</TABLE>
Interest income that would have been recorded for the nine months
ended September 30, 1997 and the year ended December 31, 1996 had
nonaccruing loans been current in accordance with their original terms
amounted to $8,700 and $10,300, respectively. No interest was included in
interest income on such loans for such periods.
REAL ESTATE OWNED. See Note 1 of Notes to Consolidated Financial
Statements for a discussion of the accounting treatment of real estate
owned. At September 30, 1997, the Bank had no real estate acquired in
settlement of loans.
RESTRUCTURED LOANS. Under GAAP, the Bank is required to account for
certain loan modifications or restructuring as a "troubled debt
restructuring." In general, the modification or restructuring of a debt
constitutes a troubled debt restructuring if the Bank for economic or legal
reasons related to the borrower's financial difficulties grants a
concession to the borrowers that the Bank would not otherwise consider.
Debt restructurings or loan modifications for a borrower do not necessarily
always constitute troubled debt restructurings, however, and troubled debt
restructurings do not necessarily result in nonaccrual loans. The Bank had
no restructured loans.
ASSET CLASSIFICATION. The OTS has adopted various regulations
regarding problem assets of savings institutions. The regulations require
that each insured institution review and classify its assets on a regular
basis. In addition, in connection with examinations of insured
institutions, OTS examiners have authority to identify problem assets and,
if appropriate, require them to be classified. 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.
52
<PAGE>
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. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. If an asset or portion thereof is classified as
loss, the insured institution establishes specific allowances for loan losses
for the full amount of the portion of the asset classified as loss. All or a
portion of general loan loss allowances established to cover possible losses
related to assets classified substandard or doubtful can be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
Assets that do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are designated "special mention" and monitored by the Bank.
The aggregate amounts of the Bank's classified and special mention assets,
and of the Bank's general and specific loss allowances at the dates indicated,
were as follows:
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loss...................... $ -- $ -- $ --
Doubtful.................. -- -- --
Substandard assets........ 863 735 748
Special mention........... 1,398 245 252
General loss allowances... 2,801 2,123 1,997
Specific loss allowances.. -- -- --
</TABLE>
At September 30, 1997, substandard assets consisted of seven one- to- four
family mortgage loans totalling $482,000 and 33 consumer loans totalling
$381,000.
At September 30, 1997, special mention assets consisted of four commercial
real estate loans, one of which was a $1.1 million loan secured by a golf course
property that was repaid subsequent to September 30, 1997.
ALLOWANCE FOR LOAN LOSSES. The Bank has established a systematic
methodology for the determination of provisions for loan losses. The methodology
is set forth in a formal policy and takes into consideration the need for an
overall general valuation allowance as well as specific allowances that are tied
to individual loans.
In originating loans, the Bank recognizes that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. The Bank increases its allowance for loan losses by
charging provisions for loan losses against the Bank's income.
The general valuation allowance is maintained to cover losses inherent in
the loan portfolio. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and current
economic conditions. Specific valuation allowances are established to absorb
losses on loans for which full collectibility cannot be reasonably assured. The
amount of the allowance is based on the estimated value of the collateral
securing the loan and other analyses pertinent to each situation. Generally, a
provision for losses is charged against income quarterly to maintain the
allowances.
At September 30, 1997, the Bank had an allowance for loan losses of $2.8
million. Management believes that the amount maintained in the allowances at
September 30, 1997 will be adequate to absorb losses inherent in the portfolio.
Although management believes that it uses the best information available to make
such determinations,
53
<PAGE>
future adjustments to the allowance for loan losses may be necessary and results
of operations could be significantly and adversely affected if circumstances
differ substantially from the assumptions used in making the determinations.
Furthermore, while the Bank believes it has established its existing allowance
for loan losses in accordance with GAAP, there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request the Bank to
increase significantly its allowance for loan losses. In addition, because
future events affecting borrowers and collateral cannot be predicted with
certainty, there can be no assurance that the existing allowance for loan losses
is adequate or that substantial increases will not be necessary should the
quality of any loans deteriorate as a result of the factors discussed above. Any
material increase in the allowance for loan losses may adversely affect the
Bank's financial condition and results of operations.
54
<PAGE>
The following table sets forth an analysis of the Bank's gross allowance
for possible loan losses for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, Year Ended December 31,
-------------------- ---------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance at beginning of period....... $ 2,123 $ 1,997 $ 1,997 $ 1,776 $ 1,681 $ 1,520 $ 1,353
Provision for loan losses.............. 700 90 120 80 113 690 366
Recoveries:
Mortgage loans:
One- to four-family.................. -- 2 14 8 8 6 --
Multi-family......................... -- -- -- 68 26 -- --
Commercial........................... -- -- 1 101 7 -- --
Construction......................... -- -- -- 3 -- -- --
Consumer loans:
Unsecured............................ 14 194 191 -- -- -- --
Other................................ -- 15 12 12 17 12 9
Commercial business loans............. -- -- -- -- 1 --
-------- -------- -------- -------- ------- ------- -------
Total recoveries.................... $ 14 $ 211 $ 218 $ 192 $ 59 $ 18 $ 9
Charge-offs:
Mortgage loans:
One- to four-family.................. -- -- 10 -- 54 -- --
Construction......................... -- -- -- 6 -- -- --
Consumer loans:
Home equity lines of credit.......... 10 -- -- -- -- -- --
Automobile........................... 25 -- -- 4 -- -- --
Credit card.......................... 1 -- -- -- -- -- --
Unsecured............................ -- 196 196 -- -- -- --
Other................................ -- 16 6 34 23 547 208
Commercial business loans............. -- -- -- 7 -- -- --
-------- -------- -------- -------- ------- ------- -------
Total charge-offs................... 36 212 212 51 77 547 208
-------- -------- -------- -------- ------- ------- -------
Net recoveries (charge-offs)........ (22) (1) 6 141 (18) (529) (199)
-------- -------- -------- -------- ------- ------- -------
Balance at end of period........... $ 2,801 $ 2,086 $ 2,123 $ 1,997 $ 1,776 $ 1,681 $ 1,520
======== ======== ======== ======== ======= ======= =======
Allowance for loan losses as a
percentage of total loans
outstanding at the end of the period.. 1.27% 1.05% 1.03% 1.22% 1.06% 1.06% 0.89%
Net charge-offs as a percentage
of average loans outstanding
during the period..................... (0.01)% --% --% 0.09% (0.01)% (0.31)% (0.13)%
Allowance for loan losses as
a percentage of nonperforming
loans at end of period................ 4747.46% 6953.33% 4160.76% 1866.36% 476.14% 217.18% 106.37%
</TABLE>
55
<PAGE>
For additional discussion regarding the provisions for loan losses in
recent periods, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Results of Operations -- Comparison of Operating
Results for the Nine months Ended September 30, 1997 and 1995 --Provision for
Loan Losses," "-- Results of Operations -- Comparison of Operating Results for
the Years Ended December 31, 1996 and 1995 -- Provision for Loan Losses," and
"-- Results of Operations -- Comparison of Operating Results for the Years Ended
December 31, 1995 and 1994 -- Provision for Loan Losses."
56
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
At
September 30, At December 31,
------------------------------------------------------------------
1997 1996 1995 1994
----------------- ------------------ ---------------------- --------------------
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
in Category in Category in Category in Category
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family............... $ 420 32.7% $ 121.9 33.0% $ 108 36.4% $ 124 43.6%
Multi-family...................... 21 0.5 4.3 1.2 3 0.9 3 1.2
Commercial........................ 557 14.4 301.0 12.3 221 11.1 168 8.8
Construction...................... 534 26.7 244.6 24.9 148 23.9 190 21.1
Land.............................. 160 4.0 188.0 7.7 138 6.9 100 5.2
Consumer loans:
Home equity lines of
credit........................... 42 1.1 24.6 0.8 9 0.5 2 0.1
Automobile........................ 61 1.9 46.5 1.5 27 1.4 21 1.1
Credit cards...................... 3 0.1 -- -- -- -- -- --
Loans secured by deposit
accounts......................... -- -- 0.4 -- 1 -- 1 0.2
Unsecured......................... 25 0.6 22.2 0.7 20 1.0 20 1.1
Other secured..................... 356 9.2 287.6 9.4 209 10.5 209 11.6
Commercial business loans.......... 332 8.6 258.7 8.4 148 7.4 148 6.0
Unallocated........................ 290 N/A 623.0 N/A 964 N/A 789 N/A
------ ----- ------ ----- ------ ----- ------ -----
Total allowance
for loan losses................ $2,801 100.0% $ 2,123 100.0% $1,997 100.0% $1,776 100.0%
====== ===== ======= ===== ====== ===== ====== =====
<CAPTION>
---------------------------------------------
1993 1992
--------------------- ----------------------
Percent Percent
of Loans of Loans
in Category in Category
to Total to total
Amount Loans Amount Loans
------ ----- ------ -----
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family................ $ 115 42.1% $ 142 50.5%
Multi-family....................... 13 4.7 12 4.4
Commercial......................... 176 9.7 72 3.8
Construction....................... 153 19.8 126 14.6
Land............................... 75 4.1 86 4.6
Consumer loans:
Home equity lines of
credit............................ -- -- -- --
Automobile......................... 21 1.2 9 0.5
Credit cards....................... -- -- -- --
Loans secured by deposit
accounts.......................... 6 0.3 7 0.4
Unsecured.......................... 21 1.1 1 0.1
Other secured...................... 220 12.1 208 11.1
Commercial business loans........... 88 4.9 187 10.0
Unallocated......................... 793 N/A 670 N/A
------ ----- ------ -----
Total allowance
for loan losses................. $1,681 100.0% $1,520 100.0%
====== ===== ====== =====
</TABLE>
57
<PAGE>
INVESTMENT ACTIVITIES
The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the FHLB-
Cincinnati, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Bank may also invest a portion of its assets in commercial paper and corporate
debt securities. Savings institutions like the Bank are also required to
maintain an investment in FHLB stock. The Bank is required under federal
regulations to maintain a minimum amount of liquid assets. See "REGULATION" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."
The Bank purchases investment securities with excess liquidity arising when
investable funds exceed loan demand. The Bank's investment securities purchases
generally have been limited to U.S. Government and agency securities with
contractual maturities of between one and five years. The Bank does not expect
a material change in these activities upon consummation of the Conversion.
The Bank's investment policies generally limit investments to U.S.
Government and agency securities, municipal bonds, certificates of deposits,
marketable corporate debt obligations, mortgage-backed securities. The Bank's
investment policy does not permit hedging activities or the purchase of high
risk mortgage derivative products or non-investment grade corporate bonds.
Investments are made based on certain considerations, which include the interest
rate, yield, settlement date and maturity of the investment, the Bank's
liquidity position, and anticipated cash needs and sources (which in turn
include outstanding commitments, upcoming maturities, estimated deposits and
anticipated loan amortization and repayments). The effect that the proposed
investment would have on the Bank's credit and interest rate risk and risk-based
capital is also considered.
58
<PAGE>
The following table sets forth the amortized cost and fair value of the
Bank's debt and mortgage-based and related securities, by accounting
classification and by type of security, at the dates indicated.
<TABLE>
<CAPTION>
At September 30, At December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994
------------------------ ------------------------ ------------------------ ------------------------
Amortized Percent of Amortized Percent of Amortized Percent of Amortized Percent of
Cost(1) Total Cost(1) Total Cost(1) Total Cost(1) Total
------------ ---------- ------------ ---------- ------------ ---------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity:
Debt Securities:
U.S. Treasury obligations. $ 3,000 17.91% $ 7,005 65.82% $12,062 31.32% $ 8,109 35.46%
U.S. Government agency
obligations.............. 700 4.18 700 6.58 23,488 60.99 11,789 51.55
Mortgage-backed securities. 1,333 7.96 1,419 13.33 1,541 4.00 1,665 7.28
FHLB stock................. 1,602 9.56 1,519 14.27 1,418 3.68 1,304 5.70
------- ------ ------- ------ ------- ------ ------- ------
Total held to maturity
securities................ 6,635 39.60 10,643 100.00 38,509 100.00 22,867 100.00
------- ------ ------- ------ ------- ------ ------- ------
Available for Sale:
Debt Securities:
U.S. Treasury obligations. 3,052 18.22 -- -- -- -- -- --
U.S. Government agency
obligations.............. 7,066 42.18 -- -- -- -- -- --
------- ------ ------- ------ ------- ------ ------- ------
Total available for sale
securities.............. 10,118 60.40 -- -- -- -- -- --
------- ------ ------- ------ ------- ------ ------- ------
Total portfolio............ $16,753 100.00% $10,643 100.00% $38,509 100.00% $22,867 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
__________________
(1) The market value of the Bank's investment portfolio amount to $16.8
million, $10.6 million, $38.6 million and $22.0 million at September 30,
1997 and December 31, 1996, 1995 and 1994, respectively. At September 30,
1997, the market value of the principal components of the Bank's investment
securities portfolio was as follows: U.S. Government securities, $13.9
million; mortgage-backed securities, $1.3 million; and FHLB, $1.6 million.
59
<PAGE>
The following table sets forth the maturities and weighted average yields
of the debt and mortgage-backed securities in the Bank's investment securities
portfolio at September 30, 1997.
<TABLE>
<CAPTION>
Less Than One to Over Five to Over Ten
One Year Five Years Ten Years Years
-------------- -------------- -------------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ------ ------ ------ ------------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity:
Debt Securities:
U.S. Government agency obligations.... $3,000 5.83% $ 700 5.53% $ -- --% $ -- --%
Mortgage backed securities............. -- -- -- -- -- 1,333 7.19
FHLB stock............................. 1,602 7.25 -- -- -- --
------ ------ ------------ ------
Total held to maturity securities...... 4,602 6.33 700 5.53 -- -- 1,333 7.19
Available for Sale:
Debt Securities:
U.S. Government agency obligations.... 5,040 5.50 5,078 5.67 -- -- -- --
Mortgage backed securities............. -- -- -- -- -- -- -- --
Other.................................. -- -- -- -- -- -- -- --
------ ------ ------------ ------
Total available for sale securities.. 5,040 5.50 5,078 5.67 -- -- -- --
------ ------ ------------ ------
Total portfolio........................ $9,642 5.89% $5,778 5.65% $ -- --% $1,333 7.19
====== ====== ============ ======
</TABLE>
60
<PAGE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the major external source of funds for the
Bank's lending and other investment activities. In addition, the Bank also
generates funds internally from loan principal repayments and prepayments and
maturing investment securities. Scheduled loan repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by general interest rates and money market
conditions. Borrowings from the FHLB-Cincinnati may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. Presently, the Bank has no other borrowing arrangements.
DEPOSIT ACCOUNTS. Most of the Bank's depositors reside in Tennessee.
The Bank's deposit products include a broad selection of deposit instruments,
including NOW accounts, demand deposit accounts, money market accounts, regular
passbook savings, statement savings accounts and term certificate accounts.
Deposit account terms vary with the principal difference being the minimum
balance deposit, early withdrawal penalties and the interest rate. The Bank
reviews its deposit mix and pricing weekly. The Bank does not utilize brokered
deposits, nor has it aggressively sought jumbo certificates of deposit.
The Bank believes it is competitive in the type of accounts and
interest rates it offers on its deposit products. The Bank does not seek to pay
the highest deposit rates but a competitive rate. The Bank determines the rates
paid based on a number of conditions, including rates paid by competitors, rates
on U.S. Treasury securities, rates offered on various FHLB-Cincinnati lending
programs, and the deposit growth rate the Bank is seeking to achieve.
In the unlikely event the Bank is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to the Holding Company as the sole stockholder of the Bank.
61
<PAGE>
The following table sets forth information concerning the Bank's time
deposits and other interest-bearing deposits at September 30, 1997.
<TABLE>
<CAPTION>
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- ---- ---- -------- ------ ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
1.50% -- NOW Accounts $ 1,000 $29,981 13.80%
2.00 -- Savings Accounts 100 15,202 7.00
4.34 -- Money Market Accounts 5,000 39,902 18.37
Certificates of Deposit
-----------------------
3.55 32 to 89 Days Fixed-term, Fixed Rate 1,000 37 0.02
4.69 90 to 181 Days Fixed-term, Fixed Rate 1,000 1,120 0.52
5.22 182 - 364 Days Fixed-term, Fixed Rate 1,000 27,103 12.48
5.66 12 Months Fixed-term, Fixed Rate 1,000 1,818 0.84
6.00 12 Months Fixed-term, Adjustable Rate 1,000 2,025 0.93
8.00 15 Months Fixed-term, Fixed Rate 1,000 12 0.01
4.95 18 Months Floating Rate IRA 250 390 0.18
5.52 12 to 18 Month Fixed-term, Fixed Rate 1,000 35,983 16.57
5.23 18 to 23 Month Fixed-term, Fixed Rate 1,000 757 0.35
5.65 18 to 59 Month Fixed-term, Fixed Rate 1,000 155 0.07
5.04 18 Months Fixed Rate IRA 250 8,068 3.71
7.50 21 Months Fixed-term, Fixed Rate 1,000 4 --
5.45 24 Months Fixed-term, Fixed Rate 1,000 1,775 0.82
5.50 2 Years Fixed-term, Adjustable Rate 1,000 10 --
5.60 24 to 35 Month Fixed-term, Fixed Rate 1,000 12,475 5.74
5.51 36 to 47 Month Fixed-term, Fixed Rate 1,000 1,813 0.83
5.85 60+ Months Fixed-term, Fixed Rate 1,000 12,540 5.77
7.75 4 Years Fixed-term, Fixed Rate 1,000 10 --
5.82 3 to 60 Months Fixed-term, Fixed Rate 100,000 26,013 11.98
------- -------
$217,193 100.00%
======== =======
</TABLE>
The following table indicates the amount of the Bank's jumbo
certificates of deposit by time remaining until maturity as of September 30,
1997. Jumbo certificates of deposit have principal balances of $100,000 or more
and the rates paid on such accounts are generally negotiable.
<TABLE>
<CAPTION>
Maturity Period Amount
- --------------- ------
(In thousands)
<S> <C>
Three months or less............ $ 4,390
Over three through six months... 6,770
Over six through twelve months.. 11,395
Over twelve months.............. 3,458
-------
Total....................... $26,013
=======
</TABLE>
62
<PAGE>
DEPOSIT FLOW
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Bank at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------
1997 1996
------------------------------ -----------------------------
Percent Percent
of Increase of Increase
Amount Total (Decrease) Amount Total Decrease
-------- -------- ---------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing....... $ 24,757 10.23% $ 4,913 $ 19,844 9.25% $ (31)
NOW checking............... 29,981 12.39 2,245 27,736 12.93 3,410
Passbook savings accounts.. 15,202 6.28 (604) 15,806 7.37 (1,422)
Money market deposit....... 39,902 16.49 11,403 28,499 13.28 8,054
Fixed-rate certificates
which mature in the year
ending:
Within 1 year............ 112,254 46.40 20,150 92,104 42.93 4,453
After 1 year, but within
2 years................. 14,155 5.85 (8,331) 22,486 10.48 8,654
After 2 years, but
within 5 years.......... 5,699 2.36 (1,355) 8,054 3.75 (5,290)
Thereafter............... -- -- (4) 4 -- (29)
-------- ------ ------- -------- ------ -------
Total................. $241,950 100.00% $27,417 $214,533 100.00% $17,799
======== ====== ======= ======== ====== =======
<CAPTION>
At December 31,
--------------------------------------------------------------
1995 1994
------------------------------ ------------------------------
Percent Percent
of Increase of Increase
Amount Total (Decrease) Amount Total (Decrease)
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing....... $ 19,875 10.10% $ 5,141 $ 14,734 8.17% $ 384
NOW checking............... 24,326 12.36 1,838 22,488 12.47 3,078
Passbook savings accounts.. 17,228 8.76 (2,552) 19,780 10.97 (1,497)
Money market deposit....... 20,445 10.39 6,553 13,892 7.71 2,655
Fixed-rate certificates
which
mature in the year ending:
Within 1 year............ 87,651 44.55 11,434 76,217 42.28 (7,006)
After 1 year, but within
2 years................. 13,832 7.03 (3,365) 17,197 9.54 (7,692)
After 2 years, but
within 5 years.......... 13,344 6.78 (2,540) 15,884 8.81 5,097
Thereafter............... 33 0.02 (58) 91 0.05 91
-------- ------ ------- ------- ------ -------
Total................. $196,734 100.00% $16,451 180,283 100.00% $(4,890)
======== ====== ======= ======= ====== =======
</TABLE>
63
<PAGE>
TIME DEPOSITS BY RATES. The following table sets forth the amount of
time deposits in the Bank categorized by rates at the dates indicated.
<TABLE>
<CAPTION>
At
September 30, At December 31,
----------------------------
1997 1996 1995 1994
------------- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
0.00 - 1.99%.... $ 269 $ 673 $ 377 $ 276
2.00 - 3.99%.... -- 93 277 23,092
4.00 - 4.99%.... 3,812 28,995 10,925 42,874
5.00 - 5.99%.... 79,328 59,373 74,193 26,621
6.00 - 6.99%.... 48,344 32,937 26,738 13,637
7.00% and over.. 355 578 2,349 2,890
-------- -------- -------- --------
Total........... $132,108 $122,649 $114,859 $109,390
======== ======== ======== ========
</TABLE>
TIME DEPOSITS BY MATURITIES. The following table sets forth the amount
of time deposits in the Bank categorized by maturities at September 30, 1997.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------------------------
After After
One to Two to Three
Less Than Two Three to Four After
One Year Years Years Years 4 Years Total
-------- ----- ----- ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
0.00 - 1.99%.................................................... $ 269 $ -- $ -- $ -- $ -- $ 269
2.00 - 3.99%.................................................... -- -- -- -- -- --
4.00 - 4.99%.................................................... 3,576 236 -- -- -- 3,812
5.00 - 5.99%.................................................... 64,143 10,603 2,137 996 1,449 79,328
6.00 - 6.99%.................................................... 44,126 3,294 924 -- -- 48,344
7.00% and over.................................................. 140 22 193 -- -- 355
-------- -------- -------- -------- -------- --------
Total........................................................... $112,254 $ 14,155 $ 3,254 $ 996 $ 1,449 $132,108
======== ======== ======== ======== ======== ========
</TABLE>
DEPOSIT ACTIVITY. The following table set forth the savings activity
of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, Year Ended December 31,
-------------------- -----------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance............................................... $214,533 $196,734 $196,734 $180,283 $185,174
Net deposits (withdrawals)
before interest credited...................................... 25,338 10,611 15,025 14,018 (6,895)
Interest credited............................................... 2,079 2,046 2,774 2,433 2,004
Net increase (decrease)
in deposits.................................................... 27,417 12,557 1,779 16,451 (4,891)
-------- -------- -------- -------- --------
Ending balance.................................................. $241,950 $209,291 $214,533 $196,734 $180,283
======== ======== ======== ======== ========
</TABLE>
BORROWINGS. Savings deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business purposes.
The Bank has the ability to use advances from the FHLB-Cincinnati to supplement
its supply of lendable funds and to meet deposit withdrawal requirements. The
FHLB-Cincinnati
64
<PAGE>
functions as a central reserve bank providing credit for savings associations
and certain other member financial institutions. As a member of the FHLB-
Cincinnati, the Bank is required to own capital stock in the FHLB-Cincinnati and
is authorized to apply for advances on the security of such stock and certain of
its mortgage loans and other assets (principally securities that are obligations
of, or guaranteed by, the U.S. Government) provided certain creditworthiness
standards have been met. Advances are made pursuant to several different credit
programs. Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based on the
financial condition of the member institution and the adequacy of collateral
pledged to secure the credit. At September 30, 1997, the Bank had no advances
outstanding from the FHLB-Cincinnati.
The following table sets forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated:
<TABLE>
<CAPTION>
At or For the
Nine Months
Ended At or For the
September 30, Year Ended December 31,
-------------- ------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Maximum amount of FHLB advance
outstanding at any month end.......... $ -- $ -- $5,000 5,000 $5,000
Approximate average FHLB advance
outstanding........................... -- -- 5,000 5,000 5,000
Approximate weighted average rate paid
on FHLB advances....................... --% --% 5.67% 5.55% 5.34%
</TABLE>
COMPETITION
The Bank faces intense competition in its primary market area for the
attraction of savings deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for savings deposits has
historically come from commercial banks, credit unions, other thrifts operating
in its market area, and other financial institutions such as brokerage firms and
insurance companies. As of September 30, 1997, there were 12 commercial banks
and no other thrifts operating in Rutherford and Bedford Counties, Tennessee.
Particularly in times of high interest rates, the Bank has faced additional
significant competition for investors' funds from short-term money market
securities and other corporate and government securities. The Bank's
competition for loans comes from commercial banks, thrift institutions, credit
unions and mortgage bankers. Such competition for deposits and the origination
of loans may limit the Bank's growth in the future. See "RISK FACTORS --
Competition."
SUBSIDIARY ACTIVITIES
Federal savings associations generally may invest up to 3% of their
assets in service corporations, provided that at least one-half of any amount in
excess of 1% is used primarily for community, inner-city and community
development projects.
The Bank had three service corporation subsidiaries in dissolution as
of September 30, 1997. The subsidiaries were either inactive or engaged in an
insignificant level of activities that the Bank is legally permitted to engage
in directly.
65
<PAGE>
TRUST DEPARTMENT
The OTS granted trust powers to the Bank on December 13, 1991. The
Bank is one of the few banks in the Bank's primary market area providing a broad
range of trust services. These services include acting as trustee under a living
trust, a Standby Trust or Testamentary Trust; acting as personal representative;
agency services, including custody accounts, agent for the trustee, and agent
for the personal representative; and trustee and agent services for accounts
subject to the provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). In addition to providing fiduciary and investment
advisory services, the Bank provides employee benefit services, such as Self-
Directed Individual Retirement Accounts ("IRAs"). At September 30, 1997, trust
assets under management totalled approximately $185.9 million.
PROPERTIES
The following table sets forth certain information regarding the
Bank's offices at September 30, 1997, all of which are owned except as noted.
<TABLE>
<CAPTION>
Approximate
Location Year Opened Square Footage Deposits
- -------- ----------- -------------- --------
(In thousands)
<S> <C> <C> <C>
Main Office:
114 W. College Street 1974 32,385 $174,076
Murfreesboro, Tennessee 37130
Branch Offices:
804 S. Tennessee Boulevard (1) 1983 578 2,477
Murfreesboro, Tennessee 37130
1745 Memorial Boulevard 1984 1,500 8,868
Murfreesboro, Tennessee 37129
1645 N.W. Broad Street 1995 1,500 5,525
Murfreesboro, Tennessee 37130
123 Cason Lane (2) 1997 1,967 10,810
Murfreesboro, Tennessee 37130
604 N. Main Street 1958 1,500 17,647
Shelbyville, Tennessee 37160
269 S. Lowry Street 1972 3,898 22,202
Smyrna, Tennessee 37167
Hazelwood Drive and Nashville Highway 1997 1,100 $253
Smyrna, Tennessee 37167
</TABLE>
(table continued on following page)
66
<PAGE>
<TABLE>
<CAPTION>
Approximate
Location Year Opened Square Footage Deposits
- -------- ----------- -------------- --------
(In thousands)
<S> <C> <C> <C>
Almaville Road and Interstate 24 East (3) 1997 935 112
Smyrna, Tennessee 37167
Loan Production Office:
236 Public Square (4)
Franklin, Tennessee 37604 1985 1,200 N/A
_______________
</TABLE>
(1) The Bank has received approval from the OTS to relocate this office to
Southeast Broad and Rutherford Boulevard.
(2) The Bank relocated this office from 110 John R. Rice Boulevard,
Murfreesboro, Tennessee, effective June 16, 1997.
(3) Lease expires in April 2001 with a 5-year option to renew.
(4) Leased month-to-month.
The Bank owns two commercial building lots for future branch office
development. The lots are located on U.S. Highway 231 South, Murfreesboro,
Tennessee, and State Highway 96 N.E., Murfreesboro, Tennessee. To date, the
Bank has not contracted with an architect or builder and has not filed the
required regulatory notices to establish branch offices at either of these
locations.
The Bank uses the services of an outside service bureau for its significant
data processing applications. At September 30, 1997, the Bank had 15
proprietary automated teller machines. At September 30, 1997, the net book
value of the Bank's office properties and the Bank's fixtures, furniture and
equipment was $7.9 million.
PERSONNEL
As of September 30, 1997, the Bank had 132 full-time and 35 part-time
employees, none of whom is represented by a collective bargaining unit. The
Bank believes its relationship with its employees is good.
LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties in
which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. The Bank is not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial condition or
operations of the Bank.
MANAGEMENT OF THE HOLDING COMPANY
Directors shall be elected by the stockholders of the Holding Company for
staggered three-year terms, or until their successors are elected and qualified.
The Holding Company's Board of Directors consists of nine persons divided into
three classes, each of which contains approximately one third of the Board. One
class, consisting of Messrs. Brown, Huddleston and Haynes, has a term of office
expiring at the first annual meeting of stockholders; a second class, consisting
of Messrs. Crosslin, Loughry and Cope, has a term of office expiring at the
second annual meeting of stockholders; and a third class, consisting of Messrs.
Durham, Elam and Knight, has a term of office expiring at the third annual
meeting of stockholders.
67
<PAGE>
The executive officers of the Holding Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Holding Company are:
Name Position
---- --------
William H. Huddleston, III Chairman of the Board
Gary Brown Vice Chairman of the Board
Ed C. Loughry, Jr. President and Chief Executive Officer
Ronald F. Knight Executive Vice President and Chief Operating
Officer
Hillard C. "Bud" Gardner Senior Vice President and Chief Financial
Officer
William S. Jones Senior Vice President
Ira B. Lewis, Jr. Vice President and Secretary
Since the formation of the Holding Company, none of the executive officers,
directors or other personnel has received remuneration from the Holding Company.
For information concerning the principal occupations, employment and
compensation of the directors and executive officers of the Holding Company
during the past five years, see "MANAGEMENT OF THE BANK -- Biographical
Information."
MANAGEMENT OF THE BANK
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Bank is presently composed of nine members
who are elected for terms of three years, approximately one third of whom are
elected annually in accordance with the Bylaws of the Bank. The executive
officers of the Bank are elected annually by the Board of Directors and serve at
the Board's discretion. The following table sets forth information with respect
to the Directors and executive officers of the Bank.
DIRECTORS
<TABLE>
<CAPTION>
Current
Director Term
Name Age (1) Position with Bank Since Expires
- ---- ------- ------------------ -------- -------
<S> <C> <C> <C> <C>
William H. Huddleston, III 68 Chairman of the Board 1967 1997
Gary Brown 55 Vice Chairman of the Board 1984 1997
Ed C. Loughry, Jr. 55 Director, President and Chief 1982 1998
Executive Officer
Ronald F. Knight 47 Director, Executive Vice President 1990 1999
and Chief Operating Officer
Frank E. Crosslin, Jr. 61 Director 1985 1998
Tim J. Durham 44 Director 1986 1999
Ed Elam 57 Director 1977 1999
James C. Cope 48 Director 1992 1998
Terry G. Haynes 40 Director 1997 1997
</TABLE>
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<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
<TABLE>
<CAPTION>
Name Age (1) Position with Bank
- ---- ------- ------------------
<S> <C> <C>
Hillard C. "Bud" Gardner 49 Senior Vice President and Chief Financial Officer
David W. Hopper 54 Senior Vice President and Trust Officer
William S. Jones 37 Senior Vice President and Trust Officer/Investor Relations
Ira B. Lewis, Jr. 51 Vice President/CRA Compliance Officer and Secretary
R. Dale Floyd 47 Senior Vice President
M. Glenn Layne 43 Vice President
Joy B. Jobe 53 Vice President
</TABLE>
____________
(1) As of September 30, 1997.
BIOGRAPHICAL INFORMATION
Set forth below is certain information regarding the Directors and
executive officers of the Bank. Unless otherwise stated, each Director and
executive officer has held his current occupation for the last five years. There
are no family relationships among or between the Directors or executive
officers.
William H. Huddleston, III is a Civil Engineer and has been a part-time
employee of Huddleston-Steele Engineering, Inc., an engineering company,
Murfreesboro, Tennessee, since 1994. Prior to that time, Mr. Huddleston was
President and Chief Executive Officer of Huddleston Engineering, Inc. from 1955
to until 1993. Mr. Huddleston is Chairman of the Public Building Authority of
Rutherford County and is a director of the Christy/Houston Foundation.
Ed C. Loughry, Jr. joined the Bank in 1968 and has served as President and
Chief Executive Officer of the Bank since 1982. Mr. Loughry has served on the
Boards of Directors of the Rutherford County Chamber of Commerce, United Way and
Heart Fund, and currently serves as a director of the FHLB of Cincinnati,
Tennessee Bankers Association, Rutherford County 20/20 and the Conference
Center. He was selected Business Person of the Year in 1993 by the Chamber of
Commerce.
Ronald F. Knight joined the Bank in 1972 and has served as Executive Vice
President and Chief Operating Officer since 1982. Mr. Knight serves on the Board
of Directors of the Rutherford County Chamber of Commerce, the Tennessee Housing
Development Agency, and is a committee member of the United Way and is co-
founder of a local charity, "Christmas For The Children." Mr. Knight has also
served as a director of the Tennessee Bankers Association.
Gary Brown is the owner and manager of Roscoe Brown, Inc., a heating and
air conditioning company, Murfreesboro, Tennessee. Mr. Brown is a member of the
Murfreesboro Water Sewer Department Board, the Electrical Examining Board and
the Middle Tennessee State University Foundation Board.
Frank E. Crosslin, Jr. is President and Chairman of the Board of Crosslin
Supply Company, Inc., a building supply company, Smyrna, Tennessee. Mr. Crosslin
is a member of the Rutherford County Industrial Bond Board, the Rutherford
County Public Building Authority Board and the Smyrna Economic Development
Board. Mr. Crosslin is also a past director of the Tennessee Housing Development
Agency.
Tim J. Durham is the owner of Durham Realty & Auction, Inc., a real estate
and auction service company, Murfreesboro, Tennessee. Mr. Durham is also a
partner in D&H Development Co., commercial and residential developers. He is a
member of the Murfreesboro Water and Sewer Board. He served on the Murfreesboro
Planning
69
<PAGE>
Commission for eight years and is a former member of the Board of Zoning
Appeals. Mr. Durham is past President and Director of the Rutherford County
Board of Realtors.
Ed Elam is the Rutherford County Clerk, Murfreesboro, Tennessee, a position
he has held since 1973. Mr. Elam is a member of the Christy/Houston Foundation
Board and the Evergreen Cemetery Board.
James C. Cope is a partner in the law firm, Murfree, Cope, Hudson &
Scarlett, Murfreesboro, Tennessee. Mr. Cope serves as attorney for Rutherford
County, Tennessee, Middle Tennessee Electric Membership Corporation, the
Murfreesboro Housing Authority, the Smyrna/Rutherford County Airport Authority
and otherwise engages in a general civil practice of law. He was past President
of the Middle Tennessee State University Foundation and the Murfreesboro Rotary
Club.
Terry G. Haynes is the Chief Executive Officer, General Manager and Chief
Operating Officer of Haynes Bros. Lumber Co., a retail building supply dealer
located in Murfreesboro, Tennessee. Mr. Haynes is the Chairman of the Rutherford
County Chamber of Commerce.
Hillard C. "Bud" Gardner joined the Bank in 1981 and has been Senior Vice
President and Chief Financial Officer since 1982. Mr. Gardner is a member of the
Tennessee Society of Certified Public Accountants, the Security for Public
Deposit Task Force, the American Institute of Certified Public Accountants and
the Optimist International.
David W. Hopper joined the Bank in 1992 and has been Senior Vice President
and Trust Officer since that time. Mr. Hopper is a member of the Murfreesboro
Rotary Club, the Hospice of Murfreesboro, and the Murfreesboro School Board.
William S. Jones joined the Bank in 1992 and has been Senior Vice President
since January 1997. Prior to that time, Mr. Jones was Vice President/Senior
Vice President and Trust Officer of the Bank. Mr. Jones is an executive officer
and a member of the Board of Trustees of the Middle Tennessee State University
Foundation and a member of the Board of Trustees of the Middle Tennessee Medical
Center Foundation.
Ira B. Lewis, Jr. joined the Bank in 1993 and has been Vice President/CRA
Compliance Officer and Secretary since January 1996. Before joining the Bank,
Mr. Lewis was a Field Examiner and Field Manager of the OTS's Nashville Area
Office, an affiliate office of the OTS Central Regional Office, Chicago,
Illinois.
R. Dale Floyd joined the Bank in September 1987 and has been Senior Vice
President since October 1988. As Senior Vice President, he supervises the Bank's
mortgage lending activities, including originations, construction and land
development lending and mortgage loan servicing. Mr. Floyd's civic activities
include participation in Leadership Rutherford, Habitat for Humanity, Stones
River Ducks Unlimited and Kids Castle Volunteers. Mr. Floyd is also a member of
the Affordable Housing Advisory Council of the City of Murfreesboro.
M. Glenn Layne joined the Bank in August 1994 with over 17 years of banking
experience and has served as Vice President and Manager of Commercial and
Consumer Lending since that time. Mr Layne is an active member of the
Murfreesboro Downtown Lions Club and the Belle Aire Baptist Church.
Joy B. Jobe joined the Bank in May 1995 with over 24 years of banking
experience and serves as Vice President of Retail Banking and Business
Development. Ms. Jobe is a member of the Rotary Club and the American Red Cross.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business of the Bank is conducted through meetings and activities of
the Board of Directors and its committees. During the fiscal year ended December
31, 1996, the Board of Directors held 12 regular meetings and
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<PAGE>
no special meetings. No director attended fewer than 75% of the total meetings
of the Board of Directors and of committees on which such director served.
The Executive Committee, consisting of Directors Huddleston (Chairman),
Elam, Brown, Loughry and Knight, has the authority to act on behalf of the Board
of Directors in the event of an emergency. The Executive Committee did not met
during the year ended December 31, 1996.
The full Board of Directors functions as a personnel committee responsible
for all personnel issues, including recommending compensation levels for all
employees and senior management to the Board of Directors. The Board of
Directors, functioning as a personnel committee, met 12 times during the year
ended December 31, 1996.
The Audit Committee, consisting of Directors Durham (Chairman), Elam,
Crosslin and Haynes, receives and reviews all reports prepared by the Bank's
external and internal auditor. The Committee meets semi-annually in April and
October to review the reports issued by the internal auditor and the external
auditor. The Audit Committee met twice during the year ended December 31, 1996.
The Chairman of the Board annually appoints three directors to serve as the
Nominating Committee for the annual selection of management's nominees for
election as directors. The Nominating Committee met once during the year ended
December 31, 1996.
The Bank also maintains standing Loan, Investment, Asset Classification,
Asset/Liability Management, Trust and Compliance Committees.
DIRECTORS' COMPENSATION
All directors, other than the Chairman of the Board and the Vice-Chairman
of the Board, receive a monthly fee of $1,000. The Chairman of the Board
receives a monthly fee of $1,200 and the Vice-Chairman of the Board receives a
monthly fee of $1,050. Outside directors receive an additional fee of $100 per
Executive Committee, Audit Committee and Trust Committee meeting attended.
Directors' fees totalled $72,000 for the year ended December 31, 1996. Following
consummation of the Conversion, directors' fees will continue to be paid by the
Bank and, initially, no separate fees are expected to be paid for service on the
Holdings Company's Board of Directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following information is furnished for
Messrs. Loughry and Knight for the year ended December 31, 1996.
<TABLE>
<CAPTION>
Annual Compensation(1)
----------------------------------------
Name and Other Annual All Other
Position Year Salary Bonus Compensation(2) Compensation(3)
- -------- ---- -------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Ed C. Loughry, Jr. 1996 $140,000 $43,120 -- $18,432
President and Chief
Executive Officer
Ronald F. Knight 1996 120,000 36,960 -- 16,332
Executive Vice
President and Chief
Operating Officer
</TABLE>
71
<PAGE>
____________
(1) Compensation information for the years ended December 31, 1995 and 1994 has
been omitted as the Bank was not a public company nor a subsidiary thereof
at such time.
(2) The aggregate amount of perquisites and other personal benefits was less
than 10% of the total annual salary and bonus reported.
(3) Includes employer paid medical, dental, group term life and disability
insurance premiums and employer 401(k) and pension plan contributions.
EMPLOYMENT AGREEMENTS. In connection with the Conversion, the Holding
Company and the Bank (collectively, the "Employers") will enter into three-year
employment agreements ("Employment Agreements") with Messrs. Loughry and Knight
(individually, the "Executive"). Under the Employment Agreements, the initial
salary levels for Messrs. Loughry and Knight will be $162,000 and $135,000,
respectively, which amounts will be paid by the Bank and may be increased at the
discretion of the Board of Directors or an authorized committee of the Board. On
each anniversary of the commencement date of the Employment Agreements, the term
of each agreement may be extended for an additional year at the discretion of
the Board. The agreement is terminable by the Employers at any time, by the
Executive if the Executive is assigned duties inconsistent with his initial
position, duties, responsibilities and status, or upon the occurrence of certain
events specified by federal regulations. In the event that an Executive's
employment is terminated without cause or upon the Executive's voluntary
termination following the occurrence of an event described in the preceding
sentence, the Bank would be required to honor the terms of the agreement through
the expiration of the current term, including payment of current cash
compensation and continuation of employee benefits.
The Employment Agreements also provide for severance payments and other
benefits in the event of involuntary termination of employment in connection
with any change in control of the Employers. Severance payments also will be
provided on a similar basis in connection with a voluntary termination of
employment where, subsequent to a change in control, an Executive is assigned
duties inconsistent with his position, duties, responsibilities and status
immediately prior to such change in control. The term "change in control" is
defined in the agreement as having occurred when, among other things, (a) a
person other than the Holding Company purchases shares of Common Stock pursuant
to a tender or exchange offer for such shares, (b) any person (as such term is
used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the
beneficial owner, directly or indirectly, of securities of the Holding Company
representing 25% or more of the combined voting power of the Holding Company's
then outstanding securities, (c) the membership of the Board of Directors
changes as the result of a contested election, or (d) shareholders of the
Holding Company approve a merger, consolidation, sale or disposition of all or
substantially all of the Holding Company's assets, or a plan of partial or
complete liquidation.
The maximum value of the severance benefits under the Employment Agreements
is 2.99 times the Executive's average annual compensation during the five-year
period preceding the effective date of the change in control (the "base
amount"). The Employment Agreements provide that the value of the maximum
benefit may be distributed, at the Executive's election, (i) in the form of a
lump sum cash payment equal to 2.99 times the Executive's base amount or (ii) a
combination of a cash payment and continued coverage under the Employers'
health, life and disability programs for a 36-month period following the change
in control, the total value of which does not exceed 2.99 times the Executive's
base amount. Assuming that a change in control had occurred at September 30,
1997 and that each Executive elected to receive a lump sum cash payment, Messrs.
Loughry and Knight would be entitled to payments of approximately $566,000 and
$491,000, respectively. Section 280G of the Internal Revenue Code of 1986, as
amended ("Code"), provides that severance payments that equal or exceed three
times the individual's base amount are deemed to be "excess parachute payments"
if they are contingent upon a change in control. Individuals receiving excess
parachute payments are subject to a 20% excise tax on the amount of such excess
payments, and the Employers would not be entitled to deduct the amount of such
excess payments.
The Employment Agreements restrict each Executive's right to compete
against the Employers for a period of one year from the date of termination of
the agreement if an Executive voluntarily terminates employment, except in the
event of a change in control.
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<PAGE>
SEVERANCE AGREEMENTS. In connection with the Conversion, the Holding
Company and the Bank will enter into severance agreements with senior officers
of the Bank. On each anniversary of the commencement date of the severance
agreements, the term of each agreement may be extended for an additional year at
the discretion of the Board. It is anticipated that the severance agreements
will have initial terms of two years.
The severance agreements will provide for severance payments and
continuation of insured employee welfare benefits in the event of involuntary
termination of employment in connection with any change in control of the
Employers in the same manner as provided for in the employment agreements.
Severance payments and benefits also will be provided on a similar basis in
connection with a voluntary termination of employment where, subsequent to a
change in control, an officer is assigned duties inconsistent with his position,
duties, responsibilities and status immediately prior to such change in control.
The term "change in control" is defined in the agreement as having occurred
when, among other things, (a) a person other than the Holding Company purchases
shares of Common Stock pursuant to a tender or exchange offer for such shares,
(b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Exchange Act) is or becomes the beneficial owner, directly or indirectly, of
securities of the Holding Company representing 25% or more of the combined
voting power of the Holding Company's then outstanding securities, (c) the
membership of the Board of Directors changes as the result of a contested
election, or (d) shareholders of the Holding Company approve a merger,
consolidation, sale or disposition of all or substantially all of the Holding
Company's assets, or a plan of partial or complete liquidation.
Assuming that a change in control had occurred at September 30, 1997, and
excluding any other benefits due under the severance agreements, the aggregate
value of the severance benefits payable to the seven officers would be
approximately $650,000.
KEY PERSONNEL SEVERANCE COMPENSATION PLAN. In connection with the
Conversion, the Board of Directors of the Bank intends to adopt the Severance
Plan to provide benefits to eligible employees in the event of a change in
control of the Holding Company or the Bank. In general, all officers (except for
officers who enter into separate employment or severance agreements with the
Holding Company and the Bank) will be eligible to participate in the Severance
Plan. Under the Severance Plan, in the event of a change in control of the
Holding Company or the Bank, eligible officers, who are terminated or who
terminate employment (but only upon the occurrence of events specified in the
Severance Plan) within 12 months of the effective date of a change in control
will be entitled to a payment based on years of service with the Bank. However,
the maximum payment for any eligible employee would be equal to three months of
their then current compensation.. Assuming that a change in control had occurred
at September 30, 1997 and the termination of all eligible employees, the maximum
aggregate payment due under the Severance Plan would be approximately $116,000.
BENEFITS
GENERAL. The Bank currently pays 100% of the premiums for medical, life
and disability insurance benefits for full-time employees, subject to certain
deductibles.
DEFINED BENEFIT PLAN. The Bank formerly maintained a non-contributory
defined benefit pension plan for the benefit of eligible employees. The plan was
terminated by resolution of the Board of Directors effective December 31, 1997.
The plan covered all employees who completed one year of service and attained
the age of 21 years. The normal retirement benefit, payable at age 65, was a
monthly amount equal to 1.2% times the participant's years of service up to 25
years. Optional forms of benefit included, at the participant's election, a lump
sum distribution or various annuity forms of distribution. The plan also
provided for payment of benefits reduced on an actuarial basis if the
participant elected early retirement at age 60 with 10 years of service and
unreduced benefits if the participant elected early retirement at age 55 with 30
years of service. Benefits under the plan were not subject to offset for social
security benefits. Pension expense for the fiscal year ended December 31, 1996
was $170,000. As of September 30, 1997, Messrs. Loughry and Knight had 30 and 26
years, respectively, of credited service under the plan.
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<PAGE>
The following table illustrates annual pension benefits payable at normal
retirement age, based on various levels of compensation and years of service.
<TABLE>
<CAPTION>
Highest Five-Year
Average Annual Years of Service
------------------------------------------
Compensation 5 10 15 25 35
- ------------------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 10,000........... $ 600 $ 1,200 $ 1,800 $ 3,000 $ 3,000
20,000........... 1,200 2,400 3,600 6,000 6,000
30,000........... 1,800 3,600 5,400 9,000 9,000
40,000........... 2,400 4,800 7,200 12,000 12,000
60,000........... 3,600 7,200 10,800 18,000 18,000
80,000........... 4,800 9,600 14,400 24,000 24,000
100,000........... 6,000 12,000 18,000 30,000 30,000
120,000........... 7,200 14,400 21,600 36,000 36,000
</TABLE>
401(K) SAVINGS PLAN. The Bank maintains the Cavalry Banking 401(k) Savings
Plan ("401(k) Plan") for the benefit of eligible employees of the Bank. The
401(k) Plan is intended to be a tax-qualified plan under Sections 401(a) and
401(k) of the Code. Employees of the Bank who have completed 1,000 hours of
service during 12 consecutive months and who have attained age 21 are eligible
to participate in the 401(k) Plan. Participants may contribute from 1%-15% of
their annual compensation to the 401(k) Plan through a salary reduction
election. The Bank matches participant contributions on a discretionary basis
to a maximum of 3% of compensation contributed by the participant. In addition
to employer matching contributions, the Bank may contribute a discretionary
amount to the 401(k) Plan in any plan year which is allocated to individual
participants in the proportion that their annual compensation bears to the total
compensation of all participants during the plan year. To be eligible to
receive a discretionary employer contribution, the participant must complete
1,000 hours of service during the plan year and remain employed by the Bank on
the last day of the plan year. Participants are at all times 100% vested in all
contributions. For the year ended December 31, 1996, the Bank incurred total
contribution-related expenses of $143,000 in connection with the 401(k) Plan.
Generally, the investment of 401(k) Plan assets is managed by the Bank's
Trust Department which serves as the 401(k) Plan trustee. In connection with
the Conversion, the investment options available to participants will be
expanded to include the opportunity to direct the investment of their 401(k)
Plan account balance to purchase shares of the Common Stock. A participant in
the 401(k) Plan who elects to purchase Common Stock in the Conversion through
the 401(k) Plan will receive the same subscription priority and be subject to
the same individual purchase limitations as if the participant had elected to
make such purchase using other funds. See "THE CONVERSION -- Limitations on
Purchases of Shares."
EMPLOYEE STOCK OWNERSHIP PLAN. The Board of Directors has authorized the
adoption by the Bank of an ESOP for employees of the Bank to become effective
upon the completion of the Conversion. The ESOP is intended to satisfy the
requirements for an employee stock ownership plan under the Code and the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Full-
time employees of the Holding Company and the Bank who have been credited with
at least 1,000 hours of service during a 12-month period and who have attained
age 21 will be eligible to participate in the ESOP.
In order to fund the purchase of up to 8% of the Common Stock to be issued
in the Conversion, it is anticipated that the ESOP will borrow funds from the
Holding Company. Such loan will equal 100% of the aggregate purchase price of
the Common Stock. The loan to the ESOP will be repaid principally from the
Bank's contributions to the ESOP and dividends payable on Common Stock held by
the ESOP over the anticipated 12-year term of the loan. The interest rate for
the ESOP loan is expected to be the prime rate as published in The Wall Street
Journal on the closing date of the Conversion. See "PRO FORMA DATA." To the
extent that the ESOP
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<PAGE>
is unable to acquire 8% of the Common Stock issued in the Conversion, such
additional shares will be acquired following the Conversion through open market
purchases.
In any plan year, the Bank may make additional discretionary contributions
to the ESOP 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 or which constitute authorized but
unissued shares or shares held in treasury by the Holding Company. The timing,
amount, and manner of such discretionary contributions will be affected by
several factors, including applicable 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 suspense account and released on a pro rata basis as the loan is repaid.
Discretionary contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of each participant's
proportional share of total compensation. Forfeitures will be reallocated among
the remaining plan participants.
Participants will vest in their accrued benefits under the ESOP at the rate
of 20% per year, beginning upon the completion of one year of participation. A
participant is fully vested at retirement, in the event of disability or upon
termination of the ESOP. Benefits are distributable upon a participant's
retirement, early retirement, death, disability, or termination of employment.
The Bank's contributions to the ESOP are not fixed, so benefits payable under
the ESOP cannot be estimated.
It is anticipated that members of the Board of Directors or officers of the
Bank will be appointed by the Board of Directors to serve as trustees of the
ESOP. Under the ESOP, the trustees must vote all allocated shares held in the
ESOP in accordance with the instructions of plan participants and unallocated
shares and allocated shares for which no instructions are received must be voted
in the same ratio on any matter as those shares for which instructions are
given.
Pursuant to SOP 93-6, compensation expense for a leveraged ESOP is recorded
at the fair market value of the ESOP shares when committed to be released to
participants' accounts. See "PRO FORMA DATA" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Results of
Operations -- Comparison of Operating Results for the Nine Months Ended
September 30, 1997 and 1996."
If the ESOP purchases newly issued shares from the Holding Company, total
stockholders' equity would neither increase nor decrease. However, on a per
share basis, stockholders' equity and per share net earnings would decrease
because of the increase in the number of outstanding shares.
The ESOP will be subject to the requirements of ERISA and the regulations
of the IRS and the Department of Labor issued thereunder. The Bank intends to
request a determination letter from the IRS regarding the tax-qualified status
of the ESOP. Although no assurance can be given that a favorable determination
letter will be issued, the Bank expects that a favorable determination letter
will be received by the ESOP.
STOCK OPTION PLAN. The Board of Directors of the Holding Company intends
to adopt the Stock Option Plan and to submit the Stock Option Plan to the
stockholders for approval at a meeting held no earlier than six months following
consummation of the Conversion. Under current OTS regulations, the approval of
a majority vote of the Holding Company's outstanding shares is required prior to
the implementation of the Stock Option Plan within one year of the consummation
of the Conversion. The Stock Option Plan will comply with all applicable
regulatory requirements. However, the Stock Option Plan will not be approved or
endorsed by the OTS.
The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, key
employees and nonemployee directors with a proprietary interest in the Holding
Company as an incentive to contribute to the success of the Holding Company and
the Bank, and to
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<PAGE>
reward officers and key employees for outstanding performance. The Stock Option
Plan will provide for the grant of incentive stock options ("ISOs") intended to
comply with the requirements of Section 422 of the Code and for nonqualified
stock options ("NQOs"). Upon receipt of stockholder approval of the Stock
Option Plan, stock options may be granted to key employees of the Holding
Company and its subsidiaries, including the Bank. Unless sooner terminated, the
Stock Option Plan will continue in effect for a period of ten years from the
date the Stock Option Plan is approved by stockholders.
A number of authorized shares of Common Stock equal to 10% of the number of
shares of Common Stock issued in connection with the Conversion will be reserved
for future issuance under the Stock Option Plan (655,500 shares based on the
issuance of 6,555,000 shares at the maximum of the Estimated Valuation Range).
Shares acquired upon exercise of options will be authorized but unissued shares
or treasury shares. In the event of a stock split, reverse stock split, stock
dividend, or similar event, the number of shares of Common Stock under the Stock
Option Plan, the number of shares to which any award relates and the exercise
price per share under any option may be adjusted by the Committee (as defined
below) to reflect the increase or decrease in the total number of shares of
Common Stock outstanding.
The Stock Option Plan will be administered and interpreted by a committee
of the Board of Directors ("Committee"). Subject to applicable OTS regulations,
the Committee will determine which nonemployee directors, officers and key
employees will be granted options, whether, in the case of officers and
employees, such options will be ISOs or NQOs, the number of shares subject to
each option, and the exercisability of such options. All options granted to
nonemployee directors will be NQOs. The per share exercise price of all options
will equal at least 100% of the fair market value of a share of Common Stock on
the date the option is granted.
Under current OTS regulations, if the Stock Option Plan is implemented
within one year of the consummation of the Conversion, (i) no officer or
employees could receive an award of options covering in excess of 25%, (ii) no
nonemployee director could receive in excess of 5% and (iii) nonemployee
directors, as a group, could not receive in excess of 30% of the number of
shares reserved for issuance under the Stock Option Plan.
It is anticipated that all options granted under the Stock Option Plan will
be granted subject to a vesting schedule whereby the options become exercisable
over a specified period following the date of grant. Under OTS regulations, if
the Stock Option plan is implemented within the first year following
consummation of the Conversion the minimum vesting period will be five years.
All unvested options will be immediately exercisable in the event of the
recipient's death or disability. Unvested options also will be exercisable
following a change in control (as defined in the Stock Option Plan) of the
Holding Company or the Bank to the extent authorized or not prohibited by
applicable law or regulations. OTS regulations currently provide that if the
Stock Option Plan is implemented prior to the first anniversary of the
Conversion, vesting may not be accelerated upon a change in control of the
Holding Company or the Bank.
Each stock option that is awarded to an officer or key employee will remain
exercisable at any time on or after the date it vests through the earlier to
occur of the tenth anniversary of the date of grant or three months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended by the Committee. Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
nonemployee director's service on the Board. All stock options are
nontransferable except by will or the laws of descent or distribution.
Under current provisions of the Code, the federal tax treatment of ISOs and
NQOs is different. With respect to ISOs, an optionee who satisfies certain
holding period requirements will not recognize income at the time the option is
granted or at the time the option is exercised. If the holding period
requirements are satisfied, the optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of Common Stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference
76
<PAGE>
between the fair market value of the Common Stock on the date of grant and the
option exercise price, if any, will be taxable to the optionee at ordinary
income tax rates. A federal income tax deduction generally will not be
available to the Holding Company as a result of the grant or exercise of an ISO,
unless the optionee fails to satisfy the holding period requirements. With
respect to NQOs, the grant of an NQO generally is not a taxable event for the
optionee and no tax deduction will be available to the Holding Company.
However, upon the exercise of an NQO, the difference between the fair market
value of the Common Stock on the date of exercise and the option exercise price
generally will be treated as compensation to the optionee upon exercise, and the
Holding Company will be entitled to a compensation expense deduction in the
amount of income realized by the optionee.
Although no specific award determinations have been made at this time, the
Holding Company and the Bank anticipate that if stockholder approval is obtained
it would provide awards to its directors, officers and employees to the extent
and under terms and conditions permitted by applicable regulations. The size of
individual awards will be determined prior to submitting the Stock Option Plan
for stockholder approval, and disclosure of anticipated awards will be included
in the proxy materials for such meeting.
MANAGEMENT RECOGNITION PLAN. Following the Conversion, the Board of
Directors of the Holding Company intends to adopt an MRP for officers,
employees, and nonemployee directors of the Holding Company and the Bank,
subject to shareholder approval. The MRP will enable the Holding Company and
the Bank to provide participants with a proprietary interest in the Holding
Company as an incentive to contribute to the success of the Holding Company and
the Bank. The MRP will comply with all applicable regulatory requirements.
However, the MRP will not be approved or endorsed by the OTS. Under current OTS
regulations, the approval of a majority vote of the Holding Company's
outstanding shares is required prior to the implementation of the MRP within one
year of the consummation of the Conversion.
The MRP expects to acquire a number of shares of Common Stock equal to 4%
of the Common Stock issued in connection with the Conversion (262,200 shares
based on the issuance of 6,555,000 shares in the Conversion at the maximum of
the Estimated Valuation Range). Such shares will be acquired on the open
market, if available, with funds contributed by the Holding Company or the Bank
to a trust which the Holding Company may establish in conjunction with the MRP
("MRP Trust") or from authorized but unissued shares or treasury shares of the
Holding Company.
A committee of the Board of Directors of the Holding Company will
administer the MRP, the members of which will also serve as trustees of the MRP
Trust, if formed. The trustees will be responsible for the investment of all
funds contributed by the Holding Company or the Bank to the MRP Trust. The
Board of Directors of the Holding Company may terminate the MRP at any time and,
upon termination, all unallocated shares of Common Stock will revert to the
Holding Company.
Shares of Common Stock granted pursuant to the MRP will be in the form of
restricted stock payable ratably over a specified vesting period following the
date of grant. During the period of restriction, all shares will be held in
escrow by the Holding Company or by the MRP Trust. Under OTS regulations, if
the MRP is implemented within the first year following consummation of the
Conversion, the minimum vesting period will be five years. All unvested MRP
awards will vest in the event of the recipient's death or disability. Unvested
MRP awards will also vest following a change in control (as defined in the MRP)
of the Holding Company or the Bank to the extent authorized or not prohibited by
applicable law or regulations. OTS regulations currently provide that, if the
MRP is implemented prior to the first anniversary of the Conversion, vesting may
not be accelerated upon a change in control of the Holding Company or the Bank.
A recipient of an MRP award in the form of restricted stock generally will
not recognize income upon an award of shares of Common Stock, and the Holding
Company will not be entitled to a federal income tax deduction, until the
termination of the restrictions. Upon such termination, the recipient will
recognize ordinary income in an amount equal to the fair market value of the
Common Stock at the time and the Holding Company will be entitled to a deduction
in the same amount after satisfying federal income tax withholding requirements.
However, the
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recipient may elect to recognize ordinary income in the year the restricted
stock is granted in an amount equal to the fair market value of the shares at
that time, determined without regard to the restrictions. In that event, the
Holding Company will be entitled to a deduction in such year and in the same
amount. Any gain or loss recognized by the recipient upon subsequent
disposition of the stock will be either a capital gain or capital loss.
Although no specific award determinations have been made at this time, the
Holding Company and the Bank anticipate that if stockholder approval is obtained
it would provide awards to its directors, officers and employees to the extent
and under terms and conditions permitted by applicable regulations. Under
current OTS regulations, if the MRP is implemented within one year of the
consummation of the Conversion, (i) no officer or employees could receive an
award covering in excess of 25%, (ii) no nonemployee director could receive in
excess of 5% and (iii) nonemployee directors, as a group, could not receive in
excess of 30% of the number of shares reserved for issuance under the MRP. The
size of individual awards will be determined prior to submitting the MRP for
stockholder approval, and disclosure of anticipated awards will be included in
the proxy materials for such meeting.
TRANSACTIONS WITH THE BANK
Federal regulations require that all loans or extensions of credit to
executive officers and directors must generally be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons (unless the loan or
extension of credit is made under a benefit program generally available to all
other employees and does not give preference to any insider over any other
employee) and must not involve more than the normal risk of repayment or present
other unfavorable features. The Bank's policy is not to make any new loans or
extensions of credit to the Bank's executive officers and directors at different
rates or terms than those offered to the general public. In addition, loans
made to a director or executive officer in an amount that, when aggregated with
the amount of all other loans to such person and his related interests, are in
excess of the greater of $25,000 or 5% of the Bank's capital and surplus (up to
a maximum of $500,000) must be approved in advance by a majority of the
disinterested members of the Board of Directors. See "REGULATION -- Federal
Regulation of Savings Associations -- Transactions with Affiliates." The
aggregate amount of loans by the Bank to its executive officers and directors
was approximately $609,000 at September 30, 1997, or approximately 0.71% of pro
forma stockholders' equity (based on the issuance of the maximum of the
Estimated Valuation Range).
President and Chief Executive Officer Ed C. Loughry, Jr.'s wife is a
principal partner in an insurance agency from which the Bank purchases some of
its insurance coverage. Mr. Loughry has no ownership interest in the insurance
agency and does not participate in its business affairs. Mrs. Loughry is not
paid any direct commissions on sales to the Bank. Premiums paid to the
insurance agency by the Bank amounted to approximately $88,000 and $68,000 for
the year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively.
Director Cope's law firm provides periodic routine legal services to the
Bank. The Bank paid legal fees to the firm of approximately $25,000 and $11,000
for the year ended December 31, 1996 and the nine months ended September 30,
1997, respectively. Neither of these amounts represented more than 5% of the
law firm's gross revenues for the law firm's last full fiscal year.
Periodically, the Bank has used the services of Director Brown's heating
and air conditioning company for maintenance and repair work to the Bank's
office facilities. The Bank paid to Mr. Brown's company approximately $8,000
and $6,000 during the year ended December 31, 1996 and the nine months ended
September 30, 1997 for work performed.
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REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
the OTS as its chartering agency, and the FDIC, as the insurer of its deposits.
The activities of federal savings institutions are governed by the Home Owners'
Loan Act, as amended ("HOLA") and, in certain respects, the Federal Deposit
Insurance Act ("FDIA") and the regulations issued by the OTS and the FDIC to
implement these statutes. These laws and regulations delineate the nature and
extent of the activities in which federal savings associations may engage.
Lending activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, the Bank's relationship with its
depositors and borrowers is also regulated to a great extent, especially in such
matters as the ownership of deposit accounts and the form and content of the
Bank's mortgage documents. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. There are periodic
examinations by the OTS and the FDIC to review the Bank's compliance with
various regulatory requirements. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such policies, whether by
the OTS, the FDIC or Congress, could have a material adverse impact on the
Holding Company, the Bank and their operations. The Holding Company, as a
savings and loan holding company, will also be required to file certain reports
with, and otherwise comply with the rules and regulations of, the OTS and the
Securities and Exchange Commission ("SEC").
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
OFFICE OF THRIFT SUPERVISION. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner. The Bank, as a member
of the FHLB-Cincinnati, is required to acquire and hold shares of capital stock
in the FHLB-Cincinnati in an amount equal to the greater of (i) 1.0% of the
aggregate outstanding principal amount of residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or
(ii) 1/20 of its advances (borrowings) from the FHLB-Cincinnati. The Bank is in
compliance with this requirement with an investment in FHLB-Cincinnati stock of
$1.6 million at September 30, 1997. Among other benefits, the FHLB-Cincinnati
provides a central credit facility primarily for member institutions. It is
funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLB System. It makes advances to members in accordance with policies
and procedures established by the FHFB and the Board of Directors of the FHLB-
Cincinnati.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent federal
agency established originally to insure the deposits, up to prescribed statutory
limits, of federally insured banks and to preserve the safety and soundness of
the banking industry. The FDIC maintains two separate insurance funds: the BIF
and the SAIF. As insurer of the Bank's deposits, the FDIC has examination,
supervisory and enforcement authority over all savings associations.
The Bank's deposit accounts are insured by the FDIC under the SAIF to the
maximum extent permitted by law. The Bank pays deposit insurance premiums to
the FDIC based on a risk-based assessment system established
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by the FDIC for all SAIF-member institutions. Under applicable regulations,
institutions are assigned to one of three capital groups that are based solely
on the level of an institution's capital ("well capitalized," "adequately
capitalized" or "undercapitalized"), which are defined in the same manner as the
regulations establishing the prompt corrective action system under the FDIA as
discussed below. The matrix so created results in nine assessment risk
classifications, with rates that until September 30, 1996 ranged from 0.23% for
well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk of loss to the SAIF unless effective corrective action is taken. The
Bank's assessments expensed for the year ended December 31, 1996 equaled $1.2
million.
Pursuant to the DIF Act, which was enacted on September 30, 1996, the FDIC
imposed a special assessment on each depository institution with SAIF-assessable
deposits which resulted in the SAIF achieving its designated reserve ratio. In
connection therewith, the FDIC reduced the assessment schedule for SAIF members,
effective January 1, 1997, to a range of 0% to 0.27%, with most institutions,
including the Bank, paying 0%. This assessment schedule is the same as that for
the BIF, which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of 0.065% of SAIF-
assessable deposits for the purpose of paying interest on the obligations issued
by the Financing Corporation ("FICO") in the 1980's to help fund the thrift
industry cleanup. BIF-assessable deposits will be charged an assessment to help
pay interest on the FICO bonds at a rate of approximately .013% until the
earlier of December 31, 1999 or the date upon which the last savings association
ceases to exist, after which time the assessment will be the same for all
insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Bank.
LIQUIDITY REQUIREMENTS. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
5.0%) of its net withdrawable accounts plus short-term borrowings. OTS
regulations also require each savings institution to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently 1.0%)
of the total of its net withdrawable savings accounts and borrowings payable in
one year or less. Monetary penalties may be imposed for failure to meet
liquidity requirements. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions that it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of prompt
corrective action. Under the regulations, an institution shall be deemed to be
(i) "well capitalized" if it has a total risk-based capital ratio of 10.0% or
more, has a Tier I risk-based capital ratio of 6.0% or more, has a leverage
ratio of 5.0% or more and is not subject to specified requirements to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if
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it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a leverage ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized;"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a
leverage ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At September 30, 1997, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDIA requires the federal banking
regulatory agencies to prescribe, by regulation, standards for all insured
depository institutions relating to: (i) internal controls, information systems
and internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees
and benefits. The federal banking agencies recently adopted final regulations
and Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines"). The Guidelines set forth the safety and soundness standards
that the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired. If the OTS
determines that the Bank fails to meet any standard prescribed by the
Guidelines, the agency may require the Bank to submit to the agency an
acceptable plan to achieve compliance with the standard. OTS regulations
establish deadlines for the submission and review of such safety and soundness
compliance plans.
QUALIFIED THRIFT LENDER TEST. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following restrictions
on its operations: (i) the association may not make any new investment or
engage in activities that would not be permissible for national banks; (ii) the
association may not establish any new branch office where a national bank
located in the savings institution's home state would not be able to establish a
branch office; (iii) the association shall be ineligible to obtain new advances
from any FHLB; and (iv) the payment of dividends by the association shall be
subject to the statutory and regulatory dividend restrictions applicable to
national banks. Also, beginning three years after the date on which the savings
institution ceases to be a QTL, the savings institution would be prohibited from
retaining any investment or engaging in any activity not permissible for a
national bank and would be required to repay any outstanding advances to any
FHLB. In addition, within one year of the date on which a savings association
controlled by a company ceases to be a QTL, the company must register as a bank
holding company and become subject to the rules applicable to such companies. A
savings institution may requalify as a QTL if it thereafter complies with the
QTL test.
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Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Code or that 65% of an
institution's "portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average basis in nine out of every 12
months. Assets that qualify without limit for inclusion as part of the 65%
requirement are loans made to purchase, refinance, construct, improve or repair
domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by Federal Home Loan Mortgage Corporation or
FNMA. Portfolio assets consist of total assets minus the sum of (i) goodwill
and other intangible assets, (ii) property used by the savings institution to
conduct its business, and (iii) liquid assets up to 20% of the institution's
total assets. At September 30, 1997, the qualified thrift investments of the
Bank were approximately 70.6% of its portfolio assets.
CAPITAL REQUIREMENTS. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Holding Company is not
subject to any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and nonincludable subsidiaries. An institution
that fails to meet the core capital requirement would be required to file with
the OTS a capital plan that details the steps they will take to reach
compliance. In addition, the OTS's prompt corrective action regulation provides
that a savings institution that has a leverage ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See "--
Federal Regulation of Savings Associations -- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations rated
a composite one (the highest rating) under the CAMEL rating system for savings
associations will be permitted to operate at or near the regulatory minimum
leverage ratio of 3%. All other savings associations will be required to
maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a case-by-case
basis to determine the applicable requirement. No assurance can be given as to
the final form of any such regulation, the date of its effectiveness or the
requirement applicable to the Bank.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Bank's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory
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convertible subordinated debt, subject to an amortization schedule, and (iii)
general valuation loan and lease loss allowances up to 1.25% of risk-weighted
assets.
The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans
are assigned a 100% risk weight, as are nonqualifying residential mortgage loans
and that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totalled to arrive at total risk-weighted assets. Off-
balance sheet items are included in risk-weighted assets by converting them to
an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
----
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's
total capital in calculating compliance with its risk-based capital requirement.
Under the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure. In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in lieu
of the OTS-calculated amount. The OTS has postponed the date that the component
will first be deducted from an institution's total capital.
See "HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE" for a table
that sets forth in terms of dollars and percentages the OTS tangible, core and
risk-based capital requirements, the Bank's historical amounts and percentages
at September 30, 1997 and pro forma amounts and percentages based upon the
assumptions stated therein.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Bank to give the OTS 30 days'
advance notice of any proposed declaration of dividends, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends.
The regulation utilizes a three-tiered approach which permits various levels of
distributions based primarily upon a savings association's capital level.
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A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
A Tier 1 savings association may make (without application but upon prior notice
to, and no objection made by, the OTS) capital distributions during a calendar
year up to 100% of its net income to date during the calendar year plus one-half
its surplus capital ratio (i.e., the amount of capital in excess of its fully
----
phased-in requirement) at the beginning of the calendar year or the amount
authorized for a Tier 2 association. Capital distributions in excess of such
amount require advance notice to the OTS. A Tier 2 savings association has
capital equal to or in excess of its minimum capital requirement but below its
fully phased-in capital requirement (both before and after the proposed capital
distribution). Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the previous
four quarters depending on how close the association is to meeting its fully
phased-in capital requirement. Capital distributions exceeding this amount
require prior OTS approval. A Tier 3 savings association has capital below the
minimum capital requirement (either before or after the proposed capital
distribution). A Tier 3 savings association may not make any capital
distributions without prior approval from the OTS.
The Bank currently meets the criteria to be designated a Tier 1 association
and, consequently, could at its option (after prior notice to, and no objection
made by, the OTS) distribute up to 100% of its net income during the calendar
year plus 50% of its surplus capital ratio at the beginning of the calendar year
less any distributions previously paid during the year.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial instruments
and bullion. The OTS by regulation has amended the loans to one borrower rule
to permit savings associations meeting certain requirements, including capital
requirements, to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units. At September 30, 1997, the Bank's limit on loans to one borrower
was $9.7 million. At September 30, 1997, the Bank's largest aggregate amount of
loans to one borrower was $6.1 million.
ACTIVITIES OF ASSOCIATIONS AND THEIR SUBSIDIARIES. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
TRANSACTIONS WITH AFFILIATES. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which
the insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a non-
affiliate. The term "covered transaction" includes the making of loans, the
purchase of assets, the issuance of a guarantee and similar types of
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transactions. Any loan or extension of credit by the Bank to an affiliate must
be secured by collateral in accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve Board, as is currently the case with respect to all
FDIC-insured banks. The Bank has not been significantly affected by the rules
regarding transactions with affiliates.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities controlled by such persons, is governed by
Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation O
thereunder. Among other things, these regulations generally require that such
loans be made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Generally, Regulation O also places individual and aggregate limits on the
amount of loans the Bank may make to such persons based, in part, on the Bank's
capital position, and requires certain board approval procedures to be followed.
The OTS regulations, with certain minor variances, apply Regulation O to savings
institutions.
COMMUNITY REINVESTMENT ACT. Under the federal CRA, all federally-insured
financial institutions have a continuing and affirmative obligation consistent
with safe and sound operations to help meet all the credit needs of its
delineated community. The CRA does not establish specific lending requirements
or programs nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to meet all the credit
needs of its delineated community. The CRA requires the federal banking
agencies, in connection with regulatory examinations, to assess an institution's
record of meeting the credit needs of its delineated community and to take such
record into account in evaluating regulatory applications to establish a new
branch office that will accept deposits, relocate an existing office, or merge
or consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution, among others. The CRA requires
public disclosure of an institution's CRA rating. The Bank received a
"satisfactory" rating as a result of its latest evaluation.
REGULATORY AND CRIMINAL ENFORCEMENT PROVISIONS. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers or directors,
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $27,500 per day, or
$1.1 million per day in especially egregious cases. Under the FDIA, the FDIC
has the authority to recommend to the Director of the OTS that enforcement
action be taken with respect to a particular savings institution. If action is
not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
HOLDING COMPANY ACQUISITIONS. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof. They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
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HOLDING COMPANY ACTIVITIES. As a unitary savings and loan holding company,
the Holding Company generally is not subject to activity restrictions under the
HOLA. If the Holding Company acquires control of another savings association as
a separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. The HOLA provides
that, among other things, no multiple savings and loan holding company or
subsidiary thereof which is not an insured association shall commence or
continue for more than two years after becoming a multiple savings and loan
association holding company or subsidiary thereof, any business activity other
than: (i) furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
insured institution, (iv) holding or managing properties used or occupied by a
subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by regulation as of March 5,
1987 to be engaged in by multiple holding companies or (vii) those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies, unless the OTS by regulation, prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
also must be approved by the OTS prior to being engaged in by a multiple savings
and loan holding company.
QUALIFIED THRIFT LENDER TEST. The HOLA provides that any savings and loan
holding company that controls a savings association that fails the QTL test, as
explained under "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
BANK HOLDING COMPANY REGULATION
GENERAL. Upon consummation of the Bank Conversion, the Holding Company
would become a bank holding company and would register as such with the Federal
Reserve. Bank holding companies are subject to comprehensive regulation by the
Federal Reserve under the BHCA and the regulations of the Federal Reserve. As a
bank holding company, the Holding Company will be required to file with the
Federal Reserve annual reports and such additional information as the Federal
Reserve may require and will be subject to regular examinations by the Federal
Reserve. The Federal Reserve also has extensive enforcement authority over bank
holding companies, including, among other things, the ability to asses civil
money penalties to issue cease and desist or removal orders and to require that
a holding company divest subsidiaries (including its bank subsidiaries). In
general, enforcement actions may be initiated for violations of law and
regulations and unsafe or unsound practices.
Under the BHCA, a bank holding company must obtain Federal Reserve approval
before: (1) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3)
merging or consolidating with another bank holding company.
Any direct or indirect acquisition by a bank holding company or its
subsidiaries of more than 5% of the voting shares of, or substantially all of
the assets of, any bank located outside of the state in which the operations of
the bank holding company's banking subsidiaries are principally conducted, may
not be approved by the Federal Reserve unless the laws of the state in which the
bank to be acquired is located specifically authorize such an acquisition. Most
states have authorized interstate bank acquisitions by out-of-state bank holding
companies on either a regional or a national basis, and most such statutes
require the home state of the acquiring bank holding company to have enacted a
reciprocal statute. Tennessee law permits on out-of-state bank holding company
to acquire banks or bank holding companies located in Tennessee subject to the
requirements that the laws of the state in which the acquiring bank holding
company is located permit bank holding companies located in Tennessee to acquire
banks or bank holding companies in the acquiror's state and that the Tennessee
bank sought to be acquired has been in existence for at least five years.
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The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the Federal Reserve
includes, among other things, operating a savings institutions, mortgage
company, finance company, credit card company or factoring company, performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The Holding Company has no present plans to
engage in any of these activities.
DIVIDENDS. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to the
extent that the company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earning retention that is consistent with
the company's capital needs, asset quality and overall financial condition. The
Federal Reserve also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the prompt corrective action regulations adopted by the
Federal Reserve pursuant to FDICIA, the Federal Reserve may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized." See "-- Federal Regulation of
the Bank -- Prompt Corrective Action."
Bank holding companies are required to give the Federal Reserve prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve may disapprove such a purchase or redemption of
it determines that the proposal would constitute an unsafe or unsound practice
or would violate any law, regulation, Federal Reserve order, or any condition
imposed by, or written agreement with, the Federal Reserve.
CAPITAL REQUIREMENTS. The Federal Reserve has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks under the Office of the Comptroller of the
Currency's regulations. The Federal Reserve regulations provide that capital
standards will generally be applied on a bank only (rather than on a
consolidated) basis in the case of a bank holding company with less than $150
million in total consolidated assets. SEE "HISTORICAL AND PRO FORMA CAPITAL
COMPLIANCE."
TAXATION
FEDERAL TAXATION
GENERAL. The Holding Company and the Bank will report their income on a
fiscal year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Holding Company.
BAD DEBT RESERVE. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on the
Bank's actual loss experience, or
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a percentage equal to 8% of the Bank's taxable income, computed with certain
modifications and reduced by the amount of any permitted additions to the non-
qualifying reserve. Due to the Bank's loss experience, the Bank generally
recognized a bad debt deduction equal to 8% of taxable income.
In August 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such
the new rules will have no effect on the net income or federal income tax
expense. For taxable years beginning after December 31, 1995, the Bank's bad
debt deduction will be determined under the experience method using a formula
based on actual bad debt experience over a period of years or, if the Bank is a
"large" association (assets in excess of $500 million) on the basis of net
charge-offs during the taxable year. The new rules allow an institution to
suspend bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institutions average mortgage lending activity for the six taxable years
preceding 1996 adjusted for inflation. For this purpose, only home purchase or
home improvement loans are included and the institution can elect to have the
tax years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve recapture,
it must begin its six year recapture no later than the 1998 tax year. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to provisions
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
DISTRIBUTIONS. To the extent that the Bank makes "nondividend
distributions" to the Holding Company, such distributions will be considered to
result in distributions from the balance of its bad debt reserve as of December
31, 1987 (or a lesser amount if the Bank's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserve. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a "nondividend distribution," then approximately one
and one-half times the Excess Distribution would be includable in gross income
for federal income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state and local taxes). See "REGULATION" and "DIVIDEND POLICY"
for limits on the payment of dividends by the Bank. The Bank does not intend to
pay dividends that would result in a recapture of any portion of its tax bad
debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. In addition, only 90%
of AMTI can be offset by net operating loss carryovers. AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). For taxable years beginning after December
31, 1986, and before January 1, 1996, an environmental tax of 0.12% of the
excess of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Bank, whether or not an Alternative Minimum Tax is
paid.
DIVIDENDS-RECEIVED DEDUCTION. The Holding Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Holding
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Company and the Bank will not file a consolidated tax return, except that if the
Holding Company or the Bank owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
AUDITS. The Bank's federal income tax returns have not been audited within
the past five years.
STATE TAXATION
TENNESSEE. Tennessee imposes franchise and excise taxes. The franchise
tax ($0.25 per $100) is applied either to the Bank's apportioned net worth or
the value of property owned and used in Tennessee, whichever is greater, as of
the close of the Bank's fiscal year. The excise tax (6%) is applied to net
earnings derived from business done in Tennessee. Under Tennessee regulations,
bad debt deductions are deductible from the excise tax. There have not been any
audits of the Bank's state tax returns during the past five years.
THE CONVERSION
THE OTS HAS APPROVED THE PLAN OF CONVERSION SUBJECT TO ITS APPROVAL BY THE
MEMBERS OF THE BANK ENTITLED TO VOTE THEREON AND TO THE SATISFACTION OF CERTAIN
OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. OTS APPROVAL DOES NOT
CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION.
GENERAL
On August 7, 1997, the Board of Directors of the Bank unanimously adopted
the Plan of Conversion, pursuant to which the Bank will be converted from a
federally chartered mutual savings bank to a federally chartered stock savings
bank and, in the discretion of the Board of Directors, subsequently convert to a
Tennessee-chartered commercial bank held by the Holding Company, a newly formed
Tennessee corporation. THE FOLLOWING DISCUSSION OF THE PLAN OF CONVERSION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN OF CONVERSION, WHICH IS
ATTACHED AS EXHIBIT A TO THE BANK'S PROXY STATEMENT AND IS AVAILABLE TO MEMBERS
OF THE BANK UPON REQUEST. The Plan of Conversion is also filed as an exhibit to
the Registration Statement. See "ADDITIONAL INFORMATION." The OTS has approved
the Plan of Conversion subject to its approval by the members of the Bank
entitled to vote on the matter at a Special Meeting called for that purpose to
be held on ___________ __, 1998, and subject to the satisfaction of certain
other conditions imposed by the OTS in its approval.
If the Board of Directors of the Bank decides for any reason, such as
possible delays resulting from overlapping regulatory processing or policies or
conditions that could adversely affect the Bank's or the Holding Company's
ability to consummate the Stock Conversion and transact its business as
contemplated herein and in accordance with the Bank's operating policies, at any
time prior to the issuance of the Common Stock, not to use the holding company
form of organization in implementing the Stock Conversion, the Plan of
Conversion will be amended to not use the holding company form of organization
in the Stock Conversion. In the event that such a decision is made, the Bank
will promptly refund all subscriptions or orders received together with accrued
interest, will withdraw the Holding Company's registration statement from the
SEC and will take all steps necessary to complete the Stock Conversion and
proceed with a new offering without the Holding Company, including filing any
necessary documents with the OTS. In such event, and provided there is no
regulatory action, directive or other consideration upon which basis the Bank
determines not to complete the Conversion, the Bank will issue and sell the
common stock of the Bank. There can be no assurance that the OTS would approve
the Stock Conversion if the Bank decided to proceed without the Holding Company.
The following description of the Plan of Conversion assumes that a holding
company form of organization will be utilized in the Stock Conversion. In the
event that a holding company form of organization is not utilized, all other
pertinent terms of the Plan of Conversion as described below will apply to the
conversion of the Bank from mutual to stock form of organization and the sale of
the Bank's common stock.
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The Stock Conversion will be accomplished through adoption of a Federal
Stock Charter and Bylaws to authorize the issuance of capital stock by the Bank,
the issuance of all the Bank's capital stock to be outstanding upon consummation
of the Stock Conversion to the Holding Company, the offer and sale of the Common
Stock of the Holding Company and, if undertaken, the Bank Conversion. Upon
issuance of the Bank's shares of capital stock to the Holding Company, the Bank
will be a wholly owned subsidiary of the Holding Company. If undertaken, the
Bank Conversion, whereby the Bank would convert to a Tennessee-chartered
commercial bank, would be undertaken after the Stock Conversion. Pursuant to
the Plan of Conversion, 4,845,000 to 6,555,000 shares of Common Stock are being
offered for sale by the Holding Company at the Purchase Price of $10.00 per
share. As part of the Stock Conversion, the Bank will issue all of its newly
issued common stock (1,000 shares) to the Holding Company in exchange for 50% of
the net proceeds from the sale of Common Stock by the Holding Company.
The Plan of Conversion provides generally that: (i) the Bank will convert
from a federally chartered mutual savings bank to a federally chartered stock
savings bank; (ii) the Common Stock will be offered by the Holding Company in
the Subscription Offering to persons having Subscription Rights; (iii) if
necessary, shares of Common Stock not subscribed for in the Subscription
Offering will be offered in a Direct Community Offering to certain members of
the general public, with preference given to natural persons and trusts of
natural persons residing in the Local Community, and then to certain members of
the general public in a Syndicated Community Offering through a syndicate of
registered broker-dealers pursuant to selected dealers agreements; (iv) the
Holding Company will purchase all of the capital stock of the Bank to be issued
in connection with the Conversion; and (v) subject to the discretion of the
Board of Directors, the Bank would convert to a Tennessee-chartered commercial
bank. The Stock Conversion will be effected only upon completion of the sale of
at least $48,450,000 of Common Stock to be issued pursuant to the Plan of
Conversion.
As part of the Stock Conversion, the Holding Company is making a
Subscription Offering of its Common Stock to holders of Subscription Rights in
the following order of priority: (i) Eligible Account Holders (depositors with
$50.00 or more on deposit as of June 30, 1996); (ii) the Bank's ESOP; (iii)
Supplemental Eligible Account Holders (depositors with $50.00 or more on deposit
as of December 31, 1997); and (iv) Other Members (depositors of the Bank as of
____________ __, 1997 and borrowers of the Bank with loans outstanding as of
January 24, 1991, which continue to be outstanding as of ___________ __, 1997).
Shares of Common Stock not subscribed for in the Subscription Offering may
be offered for sale in the Direct Community Offering to members of the general
public, with priority being given to natural persons and trusts of natural
persons residing in the Local Community. The Direct Community Offering, if one
is held, is expected to begin immediately after the Expiration Date, but may
begin at any time during the Subscription Offering. Shares of Common Stock not
sold in the Subscription and Direct Community Offerings may be offered in the
Syndicated Community Offering. Regulations require that the Direct Community
and Syndicated Community Offerings be completed within 45 days after completion
of the fully extended Subscription Offering unless extended by the Bank or the
Holding Company with the approval of the regulatory authorities. If the
Syndicated Community Offering is determined not to be feasible, the Board of
Directors of the Bank will consult with the regulatory authorities to determine
an appropriate alternative method for selling the unsubscribed shares of Common
Stock. The Plan of Conversion provides that the Stock Conversion must be
completed within 24 months after the date of the approval of the Plan of
Conversion by the members of the Bank.
No sales of Common Stock may be completed, either in the Subscription
Offering, Direct Community Offering or Syndicated Community Offerings unless the
Plan of Conversion is approved by the members of the Bank.
The completion of the Offerings, however, is subject to market conditions
and other factors beyond the Bank's control. No assurance can be given as to
the length of time after approval of the Plan of Conversion at the Special
Meeting that will be required to complete the Direct Community or Syndicated
Community Offerings or other sale of the Common Stock. If delays are
experienced, significant changes may occur in the estimated pro forma market
value of the Holding Company and the Bank as converted, together with
corresponding changes in the net proceeds realized by the Holding Company from
the sale of the Common Stock. In the event the Stock
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Conversion is terminated, the Bank would be required to charge all Stock
Conversion expenses against current income.
Orders for shares of Common Stock will not be filled until at least
4,845,000 shares of Common Stock have been subscribed for or sold and the OTS
approves the final valuation and the Stock Conversion closes. If the Stock
Conversion is not completed within 45 days after the last day of the fully
extended Subscription Offering and the OTS consents to an extension of time to
complete the Stock Conversion, subscribers will be given the right to increase,
decrease or rescind their subscriptions. Unless an affirmative indication is
received from subscribers that they wish to continue to subscribe for shares,
the funds will be returned promptly, together with accrued interest at the
Bank's passbook rate from the date payment is received until the funds are
returned to the subscriber. If such period is not extended, or, in any event,
if the Stock Conversion is not completed, all withdrawal authorizations will be
terminated and all funds held will be promptly returned together with accrued
interest at the Bank's passbook rate from the date payment is received until the
Stock Conversion is terminated.
PURPOSES OF CONVERSION
The Board of Directors and management believe that the Conversion is in the
best interests of the Bank, its members and the communities it serves. The
Bank's Board of Directors has formed the Holding Company to serve as a holding
company, with the Bank as its subsidiary, upon the consummation of the
Conversion. By converting to the stock form of organization, the Holding
Company and the Bank will be structured in the form used by holding companies of
commercial banks and by a growing number of savings institutions. Management of
the Bank believes that the Conversion offers a number of advantages which will
be important to the future growth and performance of the Bank. The capital
raised in the Conversion is intended to support the Bank's current lending and
investment activities and may also support possible future expansion and
diversification of operations, although there are no current specific plans,
arrangements or understandings, written or oral, regarding any such expansion or
diversification. The Conversion is also expected to afford the Bank's members
and others the opportunity to become stockholders of the Holding Company and
participate more directly in, and contribute to, any future growth of the
Holding Company and the Bank. The Conversion will also enable the Holding
Company and the Bank to raise additional capital in the public equity or debt
markets should the need arise, although there are no current specific plans,
arrangements or understandings, written or oral, regarding any such financing
activities. The Bank, as a mutual savings bank, does not have the authority to
issue capital stock or debt instruments, other than by accepting deposits.
EFFECTS OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK
VOTING RIGHTS. Savings members and borrowers will have no voting rights in
the converted Bank or the Holding Company and therefore will not be able to
elect directors of the Bank or the Holding Company or to control their affairs.
Currently, these rights are accorded to savings members of the Bank. Subsequent
to the Stock Conversion, voting rights will be vested exclusively in the Holding
Company with respect to the Bank and the holders of the Common Stock as to
matters pertaining to the Holding Company. Each holder of Common Stock shall be
entitled to vote on any matter to be considered by the stockholders of the
Holding Company. A stockholder will be entitled to one vote for each share of
Common Stock owned.
After the Bank Conversion, if undertaken, holders of savings accounts in
and obligors on loans of the Bank will not have voting rights in the Bank.
Exclusive voting rights with respect to the Holding Company shall be vested in
the holders of the Common Stock, account holders and borrowers of the Bank will
not have any voting rights in the Holding Company except and to the extent that
such persons become stockholders of the Holding Company, and the Holding Company
will have exclusive voting rights with respect to the Bank's capital stock.
SAVINGS ACCOUNTS AND LOANS. The Bank's savings accounts, account balances
and existing FDIC insurance coverage of savings accounts will not be affected by
the Conversion. Furthermore, the Conversion will not affect
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the loan accounts, loan balances or obligations of borrowers under their
individual contractual arrangements with the Bank.
TAX EFFECTS. The Bank has received an opinion from Breyer & Aguggia,
Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that: (i) no gain or loss will be recognized to the Bank in its
mutual or stock form by reason of the Stock Conversion; (ii) no gain or loss
will be recognized to its account holders upon the issuance to them of accounts
in the Bank immediately after the Stock Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Bank in its mutual
form plus interest in the liquidation account; (iii) the tax basis of account
holders' accounts in the Bank immediately after the Stock Conversion will be the
same as the tax basis of their accounts immediately prior to Stock Conversion;
(iv) the tax basis of each account holder's interest in the liquidation account
will be zero; (v) the tax basis of the Common Stock purchased in the Stock
Conversion will be the amount paid and the holding period for such stock will
commence at the date of purchase; (vi) no gain or loss will be recognized to
account holders upon the receipt or exercise of Subscription Rights in the
Conversion, except to the extent Subscription Rights are deemed to have value as
discussed below; and (vii) if the Bank Conversion is undertaken, the Bank (as a
Tennessee-chartered commercial bank), will be required to restate its tax
reserve for bad debt to a level generally based on its bad debt experience and
the excess of the restated amount is required to be included in its taxable
income ratably over a six year period. Unlike a private letter ruling issued by
the IRS, an opinion of counsel is not binding on the IRS and the IRS could
disagree with the conclusions reached therein. In the event of such
disagreement, no assurance can be given that the conclusions reached in an
opinion of counsel would be sustained by a court if contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that the
receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan of Conversion will be
taxable to the extent, if any, that the Subscription Rights are deemed to have a
fair market value. Ferguson, a financial consulting firm retained by the Bank,
whose findings are not binding on the IRS, has issued a letter indicating that
the Subscription Rights do not have any value, based on the fact that such
rights are acquired by the recipients without cost, are nontransferable and of
short duration and afford the recipients the right only to purchase shares of
the Common Stock at a price equal to its estimated fair market value, which will
be the same price paid by purchasers in the Direct Community Offering for
unsubscribed shares of Common Stock. If the Subscription Rights are deemed to
have a fair market value, the receipt of such rights may only be taxable to
those Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members who exercise their Subscription Rights. The Bank could also recognize a
gain on the distribution of such Subscription Rights. Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members are encouraged to
consult with their own tax advisors as to the tax consequences in the event the
Subscription Rights are deemed to have a fair market value.
The Bank has also received an opinion from Bass, Berry & Sims PLC,
Nashville, Tennessee, that, assuming the Conversion does not result in any
federal income tax liability to the Bank, its account holders, or the Holding
Company, implementation of the Plan of Conversion will not result in any
Tennessee income tax liability to such entities or persons.
The opinions of Breyer & Aguggia and Bass, Berry & Sims PLC and the letter
from Ferguson are filed as exhibits to the Registration Statement. See
"ADDITIONAL INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, each depositor in the Bank would receive a
pro rata share of any assets of the Bank remaining after payment of claims of
all creditors (including the claims of all depositors up to the withdrawal value
of their accounts). Each depositor's pro rata share of such remaining assets
would be in the same proportion as the value of his deposit account to the total
value of all deposit accounts in the Bank at the time of liquidation.
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After the Stock Conversion, holders of withdrawable deposit(s) in the Bank,
including certificates of deposit ("Savings Account(s)"), shall not be entitled
to share in any residual assets in the event of liquidation of the Bank.
However, pursuant to OTS regulations, the Bank shall, at the time of the Stock
Conversion, establish a liquidation account in an amount equal to its total
equity as of the date of the latest statement of financial condition contained
herein.
The liquidation account shall be maintained by the Bank subsequent to the
Stock Conversion for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who retain their Savings Accounts in the Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder shall, with
respect to each Savings Account held, have a related inchoate interest in a
portion of the liquidation account balance ("subaccount").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or a Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's "qualifying deposit" in the
Savings Account and the denominator is the total amount of the "qualifying
deposits" of all such holders. Such initial subaccount balance shall not be
increased, and it shall be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing day of the Bank subsequent to June 30, 1996 or December 31, 1997 is less
than the lesser of (i) the deposit balance in such Savings Account at the close
of business on any other annual closing date subsequent to June 30, 1996 or
December 31, 1997 or (ii) the amount of the "qualifying deposit" in such Savings
Account on June 30, 1996 or December, 31, 1997, then the subaccount balance for
such Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of
a downward adjustment, such subaccount balance shall not be subsequently
increased, notwithstanding any increase in the deposit balance of the related
Savings Account. If any such Savings Account is closed, the related subaccount
balance shall be reduced to zero.
In the event of a complete liquidation of the Bank (and only in such event)
each Eligible Account Holder and Supplemental Eligible Account Holder shall be
entitled to receive a liquidation distribution from the liquidation account in
the amount of the then current adjusted subaccount balance(s) for Savings
Account(s) then held by such holder before any liquidation distribution may be
made to stockholders. No merger, consolidation, bulk purchase of assets with
assumptions of Savings Accounts and other liabilities or similar transactions
with another federally insured institution in which the Bank is not the
surviving institution shall be considered to be a complete liquidation. In any
such transaction the liquidation account shall be assumed by the surviving
institution.
If undertaken, the Bank Conversion shall not be deemed to be a complete
liquidation of the Bank for purposes of the distribution of the liquidation
account. The liquidation account, and all rights and obligations of the Bank in
connection therewith, would be assumed by the Bank as a Tennessee-chartered
commercial bank.
THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS
SUBSCRIPTION OFFERING. In accordance with the Plan of Conversion,
nontransferable Subscription Rights to purchase the Common Stock have been
issued to persons and entities entitled to purchase the Common Stock in the
Subscription Offering. The amount of the Common Stock which these parties may
purchase will be subject to the availability of the Common Stock for purchase
under the categories set forth in the Plan of Conversion. Subscription
priorities have been established for the allocation of stock to the extent that
the Common Stock is available. These priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or more
on deposit at the Bank as of June 30, 1996 will receive nontransferable
Subscription Rights to subscribe for up to the greater of $600,000 of Common
Stock, one-tenth of one percent of the total offering of Common Stock or 15
times the product (rounded
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down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is the
amount of qualifying deposit of the Eligible Account Holder and the denominator
is the total amount of qualifying deposits of all Eligible Account Holders. If
the exercise of Subscription Rights in this category results in an
oversubscription, shares of Common Stock will be allocated among subscribing
Eligible Account Holders so as to permit each Eligible Account Holder, to the
extent possible, to purchase a number of shares sufficient to make such person's
total allocation equal 100 shares or the number of shares actually subscribed
for, whichever is less. Thereafter, unallocated shares will be allocated among
subscribing Eligible Account Holders proportionately, based on the amount of
their respective qualifying deposits as compared to total qualifying deposits of
all Eligible Account Holders. Subscription Rights received by officers and
directors in this category based on their increased deposits in the Bank in the
one year period preceding June 30, 1996 are subordinated to the Subscription
Rights of other Eligible Account Holders.
Category 2: ESOP. The Plan of Conversion provides that the ESOP shall
receive nontransferable Subscription Rights to purchase up to 10% of the shares
of Common Stock issued in the Stock Conversion. The ESOP intends to purchase 8%
of the shares of Common Stock issued in the Stock Conversion. In the event the
number of shares offered in the Stock Conversion is increased above the maximum
of the Estimated Valuation Range, the ESOP shall have a priority right to
purchase any such shares exceeding the maximum of the Estimated Valuation Range
up to an aggregate of 8% of the Common Stock. However, the ESOP may purchase
all or part of its shares in the open market after the consummation of the
Conversion.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit as of December 31, 1997 will receive nontransferable
Subscription Rights to subscribe for up to the greater of $600,000 of Common
Stock, one-tenth of one percent of the total offering of Common Stock or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of qualifying deposits of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. If the
exercise of Subscription Rights in this category results in an oversubscription,
shares of Common Stock will be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each Supplemental Eligible Account Holder, to
the extent possible, to purchase a number of shares sufficient to make his total
allocation equal 100 shares or the number of shares actually subscribed for,
whichever is less. Thereafter, unallocated shares will be allocated among
subscribing Supplemental Eligible Account Holders proportionately, based on the
amount of their respective qualifying deposits as compared to total qualifying
deposits of all Supplemental Eligible Account Holders.
Category 4: Other Members. Each depositor of the Bank as of the Voting
Record Date (_________ __, 1997) and each borrower with a loan outstanding on
January 24, 1991, which continues to be outstanding as of the Voting Record Date
will receive nontransferable Subscription Rights to purchase up to $600,000 of
Common Stock in the Stock Conversion to the extent shares are available
following subscriptions by Eligible Account Holders, the Bank's ESOP and
Supplemental Eligible Account Holders. In the event of an oversubscription in
this category, the available shares will be allocated proportionately based on
the amount of the respective subscriptions.
SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS SELLING OR OTHERWISE
TRANSFERRING THEIR RIGHTS TO SUBSCRIBE FOR COMMON STOCK IN THE SUBSCRIPTION
OFFERING OR SUBSCRIBING FOR COMMON STOCK ON BEHALF OF ANOTHER PERSON WILL BE
SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OTS OR ANOTHER AGENCY OF THE U.S. GOVERNMENT. EACH
PERSON EXERCISING SUBSCRIPTION RIGHTS WILL BE REQUIRED TO CERTIFY THAT HE OR SHE
IS PURCHASING SUCH SHARES SOLELY FOR HIS OR HER OWN ACCOUNT AND THAT HE OR SHE
HAS NO AGREEMENT OR UNDERSTANDING WITH ANY OTHER PERSON FOR THE SALE OR TRANSFER
OF SUCH SHARES. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT
THE CONSENT OF THE BANK AND THE HOLDING COMPANY.
The Holding Company and the Bank will make reasonable attempts to provide a
Prospectus and related offering materials to holders of Subscription Rights.
However, the Subscription Offering and all Subscription Rights
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under the Plan of Conversion will expire at 12:00 Noon, Central Time, on the
Expiration Date, whether or not the Bank has been able to locate each person
entitled to such Subscription Rights. ORDERS FOR COMMON STOCK IN THE
SUBSCRIPTION OFFERING RECEIVED IN HAND BY THE BANK AFTER THE EXPIRATION DATE
WILL NOT BE ACCEPTED. The Subscription Offering may be extended by the Holding
Company and the Bank up to __________ __, 1998 without the OTS's approval. OTS
regulations require that the Holding Company complete the sale of Common Stock
within 45 days after the close of the Subscription Offering. If the Direct
Community Offering and the Syndicated Community Offerings are not completed by
___________ __, 1998 (or ___________ __, 1998, if the Subscription Offering is
fully extended), all funds received will be promptly returned with interest at
the Bank's passbook rate and all withdrawal authorizations will be canceled or,
if regulatory approval of an extension of the time period has been granted, all
subscribers and purchasers will be given the right to increase, decrease or
rescind their orders. If an extension of time is obtained, all subscribers will
be notified of such extension and of the duration of any extension that has been
granted, and will be given the right to increase, decrease or rescind their
orders. If an affirmative response to any resolicitation is not received by the
Holding Company from a subscriber, the subscriber's order will be rescinded and
all funds received will be promptly returned with interest (or withdrawal
authorizations will be canceled). No single extension can exceed 90 days.
DIRECT COMMUNITY OFFERING. Any shares of Common Stock which remain
unsubscribed for in the Subscription Offering will be offered by the Holding
Company to certain members of the general public in a Direct Community Offering,
with preference given to natural persons and trusts of natural persons residing
in the Local Community. Purchasers in the Direct Community Offering are
eligible to purchase up to $600,000 of Common Stock in the Stock Conversion. In
the event an insufficient number of shares are available to fill orders in the
Direct Community Offering, the available shares will be allocated on a pro rata
basis determined by the amount of the respective orders. The Direct Community
Offering, if held, is expected to commence immediately subsequent to the
Expiration Date, but may begin at anytime during the Subscription Offering. The
Direct Community Offering may terminate on or at any time subsequent to the
Expiration Date, but no later than 45 days after the close of the Subscription
Offering, unless extended by the Holding Company and the Bank, with approval of
the OTS. Any extensions beyond 45 days after the close of the fully extended
Subscription Offering would require a resolicitation of orders, wherein
subscribers for the maximum numbers of shares of Common Stock would be, and
certain other large Subscribers in the discretion of the Holding Company and the
Bank may be, given the opportunity to continue their orders, in which case they
will need to reconfirm affirmatively their subscriptions prior to the expiration
of the resolicitation offering or their subscription funds will be promptly
refunded with interest at the Bank's passbook rate, or be permitted to modify or
cancel their orders. THE RIGHT OF ANY PERSON TO PURCHASE SHARES IN THE DIRECT
COMMUNITY OFFERING IS SUBJECT TO THE ABSOLUTE RIGHT OF THE HOLDING COMPANY AND
THE BANK TO ACCEPT OR REJECT SUCH PURCHASES IN WHOLE OR IN PART. IF AN ORDER IS
REJECTED IN PART, THE PURCHASER DOES NOT HAVE THE RIGHT TO CANCEL THE REMAINDER
OF THE ORDER. THE HOLDING COMPANY PRESENTLY INTENDS TO TERMINATE THE DIRECT
COMMUNITY OFFERING AS SOON AS IT HAS RECEIVED ORDERS FOR ALL SHARES AVAILABLE
FOR PURCHASE IN THE STOCK CONVERSION.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Direct
Community Offering.
SYNDICATED COMMUNITY OFFERING. The Plan of Conversion provides that, if
necessary, all shares of Common Stock not purchased in the Subscription Offering
and Direct Community Offering, if any, may be offered for sale to certain
members of the general public in a Syndicated Community Offering through a
syndicate of registered broker-dealers to be managed by Trident Securities
acting as agent of the Holding Company. THE HOLDING COMPANY AND THE BANK HAVE
THE RIGHT TO REJECT ORDERS, IN WHOLE OR PART, IN THEIR SOLE DISCRETION IN THE
SYNDICATED COMMUNITY OFFERING. Neither Trident Securities nor any registered
broker-dealer shall have any obligation to take or purchase any shares of the
Common Stock in the Syndicated Community Offering; however, Trident Securities
has agreed to use its best efforts in the sale of shares in the Syndicated
Community Offering.
Stock sold in the Syndicated Community Offering also will be sold at the
$10.00 Purchase Price. See "--Stock Pricing and Number of Shares to be Issued."
No person will be permitted to subscribe in the Syndicated
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Community Offering for shares of Common Stock with an aggregate purchase price
of more than $600,000. See "-- Plan of Distribution for the Subscription,
Direct Community and Syndicated Community Offerings" for a description of the
commission to be paid to the selected dealers and to Trident Securities.
Trident Securities may enter into agreements with selected dealers to
assist in the sale of shares 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 Holding Company as of a
certain date ("Order Date") for the purchase of shares of Conversion Stock.
When and if Trident Securities and the Holding Company believe that enough
indications of interest and orders have been received in the Subscription
Offering, the Direct Community Offering and the Syndicated Community Offering to
consummate the Stock Conversion, Trident Securities 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 to such customers on the next business day after the
Order Date. Selected dealers may debit the accounts of their customers on a
date which will be three business days from the Order Date ("Settlement 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
Settlement Date. On the Settlement Date, selected dealers will remit funds to
the account that the Holding Company established for each selected dealer. Each
customer's funds so forwarded to the Holding Company, along with all other
accounts held in the same title, will be insured by the FDIC up to the
applicable $100,000 legal limit. After payment has been received by the Holding
Company from selected dealers, funds will earn interest at the Bank's passbook
rate until the completion of the Offerings. At the completion of the Stock
Conversion, the funds received in the Offerings will be used to purchase the
shares of Common Stock ordered. The shares issued in the Stock Conversion
cannot and will not be insured by the FDIC or any other government agency. In
the event the Stock Conversion is 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 may terminate on or at any time
subsequent to the Expiration Date, but no later than 45 days after the close of
the Subscription Offering, unless extended by the Holding Company and the Bank,
with approval of the OTS.
In the event the Bank is unable to find purchasers from the general public
for all unsubscribed shares, other purchase arrangements will be made by the
Board of Directors of the Bank, if feasible. Such other arrangements will be
subject to the approval of the OTS. The OTS may grant one or more extensions of
the offering period, provided that (i) no single extension exceeds 90 days, (ii)
subscribers are given the right to increase, decrease or rescind their
subscriptions during the extension period, and (iii) the extensions do not go
more than two years beyond the date on which the members approved the Plan of
Conversion. If the Stock Conversion is not completed within 45 days after the
close of the Subscription Offering, either all funds received will be returned
with interest (and withdrawal authorizations canceled) or, if the OTS has
granted an extension of time, all subscribers will be given the right to
increase, decrease or rescind their subscriptions at any time prior to 20 days
before the end of the extension period. If an extension of time is obtained,
all subscribers will be notified of such extension and of their rights to modify
their orders. If an affirmative response to any resolicitation is not received
by the Holding Company from a subscriber, the subscriber's order will be
rescinded and all funds received will be promptly returned with interest (or
withdrawal authorizations will be canceled).
PERSONS IN NON-QUALIFIED STATES. The Holding Company and the Bank 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 of Conversion reside. However, the Holding Company and the Bank 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 (i) a small number of persons otherwise eligible to subscribe for shares
of Common Stock reside in such state or (ii) the Holding Company or the Bank
determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including but not limited to a
request or requirement that the Holding Company and the Bank or their officers,
directors or trustees register as a broker, dealer, salesman or selling agent,
under the securities laws of such state, or a request or requirement to register
or
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otherwise qualify the Subscription Rights or Common Stock for sale or submit any
filing with respect thereto in such state. Where the number of persons eligible
to subscribe for shares in one state is small, the Holding Company and the Bank
will base their decision as to whether or not to offer the Common Stock in such
state on a number of factors, including the size of accounts held by account
holders in the state, the cost of reviewing the registration and qualification
requirements of the state (and of actually registering or qualifying the shares)
or the need to register the Holding Company, its officers, directors or
employees as brokers, dealers or salesmen.
PLAN OF DISTRIBUTION FOR THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED
COMMUNITY OFFERINGS
The Bank and the Holding Company have retained Trident Securities to
consult with and advise the Bank and to assist the Bank and the Holding Company,
on a best efforts basis, in the distribution of shares in the Offerings.
Trident Securities is a broker-dealer registered with the SEC and a member of
the NASD. Trident Securities will assist the Bank in the Stock Conversion as
follows: (i) it will act as marketing advisor with respect to the Subscription
Offering and will represent the Bank as placement agent on a best efforts basis
in the sale of the Common Stock in the Direct Community Offering if one is held;
(ii) it will conduct training sessions with directors, officers and employees of
the Bank regarding the Stock Conversion process; and (iii) it will assist in the
establishment and supervision of the Stock Information Center and, with
management's input, will train the Bank's staff to record properly and tabulate
orders for the purchase of Common Stock and to respond appropriately to customer
inquiries.
Based upon negotiations between Trident Securities on the one hand and the
Holding Company and the Bank on the other hand concerning fee structure, Trident
Securities will receive a commission equal to 1.5% of the aggregate amount of
Common Stock sold in the Subscription and Community Offerings to persons other
than the Bank's directors, executive officers and, in each case, their
associates and to the ESOP. Trident Securities and selected dealers
participating in the Syndicated Community Offering may receive a commission in
the Syndicated Community Offering in an amount to be agreed upon by the Holding
Company and the Bank. Fees and commissions paid to Trident Securities and to
any selected dealers may be deemed to be underwriting fees, and Trident
Securities and such selected dealers may be deemed to be underwriters. Trident
Securities will also be reimbursed for its reasonable out-of-pocket expenses not
to exceed $10,000 and its legal fees not to exceed $30,000. Trident Securities
has received an advance of $10,000 towards its reimbursable expenses. For
additional information, see "-- Stock Pricing and Number of Shares to be Issued"
and "USE OF PROCEEDS."
Subject to certain limitations, the Holding Company and the Bank have also
agreed to indemnify Trident Securities against liabilities and expenses
(including legal fees) incurred in connection with certain claims or litigation
arising out of or based upon untrue statements or omissions contained in the
offering material for the Common Stock or with regard to allocations of shares
(in the event of oversubscription) or determinations of eligibility to purchase
shares.
DESCRIPTION OF SALES ACTIVITIES
The Common Stock will be offered in the Subscription Offering and Direct
Community Offering principally by the distribution of this Prospectus and
through activities conducted at the Bank's Stock Information Center at its main
office facility. The Stock Information Center is expected to operate during
normal business hours throughout the Subscription Offering and Direct Community
Offering. It is expected that at any particular time one or more Trident
Securities employees will be working at the Stock Information Center. Such
employees of Trident Securities will be responsible for mailing materials
relating to the Offerings, responding to questions regarding the Conversion and
the Offerings and processing stock orders.
Sales of Common Stock will be made by registered representatives affiliated
with Trident Securities or by the selected dealers managed by Trident
Securities. The management and employees of the Bank may participate in the
Offerings in clerical capacities, providing administrative support in effecting
sales transactions or, when permitted by state securities laws, answering
questions of a mechanical nature relating to the proper execution of the
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Order Form. Management of the Bank may answer questions regarding the business
of the Bank when permitted by state securities laws. Other questions of
prospective purchasers, including questions as to the advisability or nature of
the investment, will be directed to registered representatives. The management
and employees of the Holding Company and the Bank have been instructed not to
solicit offers to purchase Common Stock or provide advice regarding the purchase
of Common Stock.
No officer, director or employee of the Bank or the Holding Company will be
compensated, directly or indirectly, for any activities in connection with the
offer or sale of securities issued in the Stock Conversion.
None of the Bank's personnel participating in the Offerings is registered
or licensed as a broker or dealer or an agent of a broker or dealer. The Bank's
personnel will assist in the above-described sales activities pursuant to an
exemption from registration as a broker or dealer provided by Rule 3a4-1 ("Rule
3a4-1") promulgated under the Exchange Act. Rule 3a4-1 generally provides that
an "associated person of an issuer" of securities shall not be deemed a broker
solely by reason of participation in the sale of securities of such issuer if
the associated person meets certain conditions. Such conditions include, but
are not limited to, that the associated person participating in the sale of an
issuer's securities not be compensated in connection therewith at the time of
participation, that such person not be associated with a broker or dealer and
that such person observe certain limitations on his participation in the sale of
securities. For purposes of this exemption, "associated person of an issuer" is
defined to include any person who is a director, officer or employee of the
issuer or a company that controls, is controlled by or is under common control
with the issuer.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION AND DIRECT COMMUNITY
OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 under 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 in accordance with Rule 15c2-8. Order
Forms will only be distributed with a Prospectus. The Bank will accept for
processing only orders submitted on original Order Forms. The Bank is not
obligated to accept orders submitted on photocopied or telecopied Order Forms.
ORDERS CANNOT AND WILL NOT BE ACCEPTED WITHOUT THE EXECUTION OF THE
CERTIFICATION APPEARING ON THE REVERSE SIDE OF THE ORDER FORM.
To purchase shares in the Subscription Offering, an executed Order Form
with the required full payment for each share subscribed for, or with
appropriate authorization for withdrawal of full payment from the subscriber's
deposit account with the Bank (which may be given by completing the appropriate
blanks in the Order Form), must be received by the Bank by 12:00 Noon, Central
Time, on the Expiration Date. Order Forms which are not received by such time
or are executed defectively or are received without full payment (or without
appropriate withdrawal instructions) are not required to be accepted. The
Holding Company and the Bank have the right to waive or permit the correction of
incomplete or improperly executed Order Forms, but do not represent that they
will do so. Pursuant to the Plan of Conversion, the interpretation by the
Holding Company and the Bank of the terms and conditions of the Plan of
Conversion and of the Order Form will be final. In order to purchase shares in
the Direct Community Offering, the Order Form, accompanied by the required
payment for each share subscribed for, must be received by the Bank prior to the
time the Direct Community Offering terminates, which may be on or at any time
subsequent to the Expiration Date. Once received, an executed Order Form may
not be modified, amended or rescinded without the consent of the Bank unless the
Stock Conversion has not been completed within 45 days after the end of the
Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (June 30,
1996) and/or the Supplemental Eligibility Record Date (December 31, 1997) and/or
the Voting Record Date (_________ __, 1998) must list all accounts on the Order
Form giving all names in each account, the account number and the approximate
account balance as of such date.
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Full payment for subscriptions may be made (i) in cash if delivered in
person at the Stock Information Center, (ii) by check, bank draft, or money
order, or (iii) by authorization of withdrawal from deposit accounts maintained
with the Bank. Appropriate means by which such withdrawals may be authorized
are provided on the Order Form. No wire transfers will be accepted. Interest
will be paid on payments made by cash, check, bank draft or money order at the
Bank's passbook rate from the date payment is received until the completion or
termination of the Stock Conversion. 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 Stock Conversion (unless the certificate
matures after the date of receipt of the Order Form but prior to closing, in
which case funds will earn interest at the passbook rate from the date of
maturity until consummation of the Stock Conversion), but a hold will be placed
on such funds, thereby making them unavailable to the depositor until completion
or termination of the Stock Conversion. At the completion of the Stock
Conversion, the funds received in the Offerings will be used to purchase the
shares of Common Stock ordered. THE SHARES OF COMMON STOCK ISSUED IN THE STOCK
CONVERSION CANNOT AND WILL NOT BE INSURED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY. In the event that the Stock Conversion is not consummated for any
reason, all funds submitted will be promptly refunded with interest as described
above.
If a subscriber authorizes the Bank to withdraw the amount of the aggregate
Purchase Price from his deposit account, the Bank will do so as of the effective
date of the Stock Conversion, though the account must contain the full amount
necessary for payment at the time the subscription order is received. The 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 canceled at the
time of the withdrawal, without penalty, and the remaining balance will earn
interest at the Bank's 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 at the Purchase Price upon consummation of the Stock Conversion,
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 Holding
Company to lend to the ESOP, at such time, the aggregate Purchase Price of the
shares for which it subscribed.
IRAs maintained in the Bank do not permit investment in the Common Stock.
A depositor interested in using his IRA funds to purchase Common Stock must do
so through a self-directed IRA. Since the Bank does not offer such accounts, it
will allow such a depositor to make a trustee-to-trustee transfer of the IRA
funds to a trustee offering a self-directed IRA program with the agreement that
such funds will be used to purchase the Holding Company's Common Stock in the
Offerings. There will be no early withdrawal or IRS interest penalties for such
transfers. The new trustee would hold the Common Stock in a self-directed
account in the same manner as the Bank now holds the depositor's IRA funds. An
annual administrative fee may be payable to the new trustee. Depositors
interested in using funds in a Bank IRA to purchase Common Stock should contact
the Stock Information Center so that the necessary forms may be forwarded for
execution and returned prior to the Expiration Date. In addition, the
provisions of ERISA and IRS regulations require that officers, directors and 10%
shareholders who use self-directed IRA funds to purchase shares of Common Stock
in the Subscription Offering, make such purchases for the exclusive benefit of
IRAs.
Certificates representing shares of Common Stock purchased, and any refund
due, will be mailed to purchasers at such address as may be specified in
properly completed Order Forms or to the last address of such persons appearing
on the records of the Bank as soon as practicable following consummation of the
sale of all shares of Common Stock. Any certificates returned as undeliverable
will be disposed of in accordance with applicable law. PURCHASERS MAY NOT BE
ABLE TO SELL THE SHARES OF COMMON STOCK WHICH THEY PURCHASED UNTIL CERTIFICATES
FOR THE COMMON STOCK ARE AVAILABLE AND DELIVERED TO THEM, EVEN THOUGH TRADING OF
THE COMMON STOCK MAY HAVE COMMENCED.
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STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
Federal regulations require that the aggregate purchase price of the
securities sold in connection with the Stock Conversion be based upon an
estimated pro forma value of the Holding Company and the Bank as converted
(i.e., taking into account the expected receipt of proceeds from the sale of
----
securities in the Stock Conversion), as determined by an independent appraisal.
The Bank and the Holding Company have retained Ferguson to prepare an appraisal
of the pro forma market value of the Holding Company and the Bank as converted,
as well as a business plan. Ferguson will receive a fee expected to total
approximately $25,000 for its appraisal services and assistance in the
preparation of a business plan, plus reasonable out-of-pocket expenses incurred
in connection with the appraisal. The Bank has agreed to indemnify Ferguson
under certain circumstances against liabilities and expenses (including legal
fees) arising out of, related to, or based upon the Conversion.
Ferguson has prepared an appraisal of the estimated pro forma market value
of the Holding Company and the Bank as converted taking into account the
formation of the Holding Company as the holding company for the Bank. For its
analysis, Ferguson undertook substantial investigations to learn about the
Bank's business and operations. Management supplied financial information,
including annual financial statements, information on the composition of assets
and liabilities, and other financial schedules. In addition to this
information, Ferguson reviewed the Bank's Form AC Application for Approval of
Conversion and the Holding Company's Form S-1 Registration Statement.
Furthermore, Ferguson visited the Bank's facilities and had discussions with the
Bank's management and its special conversion legal counsel, Breyer & Aguggia.
No detailed individual analysis of the separate components of the Holding
Company's or the Bank's assets and liabilities was performed in connection with
the evaluation.
In estimating the pro forma market value of the Holding Company and the
Bank as converted, as required by applicable regulatory guidelines, Ferguson's
analysis utilized three selected valuation procedures, the Price/Book ("P/B")
method, the Price/Earnings ("P/E") method, and Price/Assets ("P/A") method, all
of which are described in its report. Ferguson placed the greatest emphasis on
the P/E and P/B methods in estimating pro forma market value. In applying these
procedures, Ferguson reviewed, among other factors, the economic make-up of the
Bank's primary market area, the Bank's financial performance and condition in
relation to publicly-traded institutions that Ferguson deemed comparable to the
Bank, the specific terms of the offering of the Holding Company's Common Stock,
the pro forma impact of the additional capital raised in the Stock Conversion,
conditions of securities markets in general, and the market for thrift
institution common stock in particular. Ferguson's analysis provides an
approximation of the pro forma market value of the Holding Company and the Bank
as converted based on the valuation methods applied and the assumptions outlined
in its report. Included in its report were certain assumptions as to the pro
forma earnings of the Holding Company after the Stock Conversion that were
utilized in determining the appraised value. These assumptions included
expenses of $1,120,000 at the midpoint of the Estimated Valuation Range, an
assumed after-tax rate of return on the net Stock Conversion proceeds of 3.41%,
purchases by the ESOP of 8% of the Common Stock sold in the Stock Conversion and
purchases in the open market by the MRP of a number of shares equal to 4% of the
Common Stock sold in the Stock Conversion at the Purchase Price. See "PRO FORMA
DATA" for additional information concerning these assumptions. The use of
different assumptions may yield different results.
On the basis of the foregoing, Ferguson has advised the Holding Company and
the Bank that, in its opinion, as of November 7, 1997, the aggregate estimated
pro forma market value of the Holding Company and the Bank as converted and,
therefore, the Common Stock was within the valuation range of $48,450,000 to
$65,550,000 with a midpoint of $57,000,000. After reviewing the methodology and
the assumptions used by Ferguson in the preparation of the appraisal, the Board
of Directors established the Estimated Valuation Range which is equal to the
valuation range of $48,450,000 to $65,550,000 with a midpoint of $57,000,000.
Assuming that the shares are sold at $10.00 per share in the Stock Conversion,
the estimated number of shares would be between 4,845,000 and 6,555,000 with a
midpoint of 5,700,000. The Purchase Price of $10.00 was determined by
discussion among the Boards of Directors of the Bank and the Holding Company and
Trident Securities, taking into account, among other factors (i) the
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requirement under OTS regulations that the Common Stock be offered in a manner
that will achieve the widest distribution of the stock, (ii) desired liquidity
in the Common Stock subsequent to the Conversion, and (iii) the expense of
issuing shares for purposes of Tennessee franchise taxes. Since the outcome of
the Offerings relate in large measure to market conditions at the time of sale,
it is not possible to determine the exact number of shares that will be issued
by the Holding Company at this time. The Estimated Valuation Range may be
amended, with the approval of the OTS, if necessitated by developments following
the date of such appraisal in, among other things, market conditions, the
financial condition or operating results of the Bank, regulatory guidelines or
national or local economic conditions.
Ferguson's appraisal report is filed as an exhibit to the Registration
Statement. See "ADDITIONAL INFORMATION."
If, upon completion of the Subscription Offering, at least the minimum
number of shares are subscribed for, Ferguson, after taking into account factors
similar to those involved in its prior appraisal, will determine its estimate of
the pro forma market value of the Holding Company and the Bank as converted, as
of the close of the Subscription Offering.
No sale of the shares will take place unless prior thereto Ferguson
confirms to the OTS that, to the best of Ferguson's knowledge and judgment,
nothing of a material nature has occurred that would cause it to conclude that
the actual total purchase price on an aggregate basis was incompatible with its
estimate of the total pro forma market value of the Holding Company and the Bank
as converted at the time of the sale. If, however, the facts do not justify
such a statement, the Offerings or other sale may be canceled, a new Estimated
Valuation Range and price per share set and new Subscription, Direct Community
and Syndicated Community Offerings held. Under such circumstances, subscribers
would have the right to modify or rescind their subscriptions and to have their
subscription funds returned promptly with interest and holds on funds authorized
for withdrawal from deposit accounts would be released or reduced.
Depending upon market and financial conditions, the number of shares issued
may be more or less than the range in number of shares discussed herein. In the
event the total amount of shares issued is less than 4,845,000 or more than
7,538,250 (15% above the maximum of the Estimated Valuation Range), for
aggregate gross proceeds of less than $48,450,000 or more than $75,382,500,
subscription funds will be returned promptly with interest to each subscriber
unless he indicates otherwise. In the event a new valuation range is
established by Ferguson, such new range will be subject to approval by the OTS.
If purchasers cannot be found for an insignificant residue of unsubscribed
shares from the general public, other purchase arrangements will be made by the
Boards of Directors of the Bank and the Holding Company, if possible. Such
other purchase arrangements will be subject to the approval of the OTS and may
provide for purchases for investment purposes by directors, officers, their
associates and other persons in excess of the limitations provided in the Plan
of Conversion and in excess of the proposed director purchases set forth herein,
although no such purchases are currently intended. If such other purchase
arrangements cannot be made, the Plan of Conversion will terminate.
In formulating its appraisal, Ferguson relied upon the truthfulness,
accuracy and completeness of all documents the Bank furnished to it. Ferguson
also considered financial and other information from regulatory agencies, other
financial institutions, and other public sources, as appropriate. While
Ferguson believes this information to be reliable, Ferguson does not guarantee
the accuracy or completeness of such information and did not independently
verify the financial statements and other data provided by the Bank and the
Holding Company or independently value the assets or liabilities of the Holding
Company and the Bank. THE APPRAISAL BY FERGUSON IS NOT INTENDED TO BE, AND MUST
NOT BE INTERPRETED AS, A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF
VOTING TO APPROVE THE PLAN OF CONVERSION OR OF PURCHASING SHARES OF COMMON
STOCK. MOREOVER, BECAUSE THE APPRAISAL IS NECESSARILY BASED ON MANY FACTORS
WHICH CHANGE FROM TIME TO TIME, THERE IS NO ASSURANCE THAT
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PERSONS WHO PURCHASE SUCH SHARES IN THE STOCK CONVERSION WILL LATER BE ABLE TO
SELL SHARES THEREAFTER AT PRICES AT OR ABOVE THE PURCHASE PRICE.
LIMITATIONS ON PURCHASES OF SHARES
The Plan of Conversion provides for certain limitations to be placed upon
the purchase of Common Stock by eligible subscribers and others in the
Conversion. Each subscriber must subscribe for a minimum of 25 shares. With
the exception of the ESOP, which is expected to subscribe for 8% of the shares
of Common Stock issued in the Stock Conversion, the Plan of Conversion provides
for the following purchase limitations: (i) No Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member, including, in each case,
all persons on a joint account, may purchase shares of Common Stock with an
aggregate purchase price of more than $600,000, (ii) no person, either alone or
together with associates of or persons acting in concert with such person, may
purchase in the Direct Community Offering, if any, or in the Syndicated
Community Offering, if any, shares of Common Stock with an aggregate purchase
price of more than $600,000, and (iii) no person (including all persons on a
joint account), either alone or together with associates of or persons acting in
concert with such person, may purchase in the Stock Conversion shares of Common
Stock with an aggregate purchase price of more than $600,000. For purposes of
the Plan of Conversion, the directors are not deemed to be acting in concert
solely by reason of their Board membership. Pro rata reductions within each
Subscription Rights category will be made in allocating shares to the extent
that the maximum purchase limitations are exceeded.
The Bank's and the Holding Company's Boards of Directors may, in their sole
discretion, increase the maximum purchase limitation set forth above up to 9.99%
of the shares of Common Stock sold in the Stock Conversion, provided that orders
for shares which exceed 5% of the shares of Common Stock sold in the Stock
Conversion may not exceed, in the aggregate, 10% of the shares sold in the Stock
Conversion. The Bank and the Holding Company do not intend to increase the
maximum purchase limitation unless market conditions are such that an increase
in the maximum purchase limitation is necessary to sell a number of shares in
excess of the minimum of the Estimated Valuation Range. If the Boards of
Directors decide to increase the purchase limitation above, persons who
subscribed for the maximum number of shares of Common Stock will be, and other
large subscribers in the discretion of the Holding Company and the Bank may be,
given the opportunity to increase their subscriptions accordingly, subject to
the rights and preferences of any person who has priority Subscription Rights.
The term "acting in concert" is defined in the Plan of Conversion to mean
(i) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; or (ii) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. In general, a person who acts in concert with another party shall
also be deemed to be acting in concert with any person who is also acting in
concert with that other party.
The term "associate" of a person is defined in the Plan of Conversion to
mean (i) any corporation or organization (other than the Bank or a majority-
owned subsidiary of the Bank) of which such person is an officer or partner or
is, directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity (excluding tax-qualified employee plans); and
(iii) any relative or spouse of such person, or any relative of such spouse, who
either has the same home as such person or who is a director or officer of the
Bank or any of its parents or subsidiaries. For example, a corporation of which
a person serves as an officer would be an associate of such person and,
therefore, all shares purchased by such corporation would be included with the
number of shares which such person could purchase individually under the above
limitations.
The term "officer" is defined in the Plan of Conversion to mean an
executive officer of the Bank, including its Chairman of the Board, President,
Executive Vice Presidents, Senior Vice Presidents, Vice Presidents in charge of
principal business functions, Secretary and Treasurer.
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Common Stock purchased pursuant to the Stock Conversion will be freely
transferable, except for shares purchased by directors and officers of the Bank
and the Holding Company and by NASD members. See "--Restrictions on
Transferability by Directors and Officers and NASD Members."
RESTRICTIONS ON REPURCHASE OF STOCK
Pursuant to OTS regulations, OTS-regulated savings associations (and their
holding companies) may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock from
any person, except in the event of (i) an offer made to all of its stockholders
to repurchase the common stock on a pro rata basis, approved by the OTS; or (ii)
the repurchase of qualifying shares of a director; or (iii) a purchase 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. Furthermore,
repurchases of any common stock are prohibited if the effect thereof would cause
the association's regulatory capital to be reduced below (a) the amount required
for the liquidation account or (b) the regulatory capital requirements imposed
by the OTS. Repurchases are generally prohibited during the first year
following conversion. Upon ten days' written notice to the OTS, and if the OTS
does not object, an institution may make open market repurchases of its
outstanding common stock during years two and three following the conversion,
provided that certain regulatory conditions are met and that the repurchase
would not adversely affect the financial condition of the association. Any
repurchases of common stock by the Holding Company would be subject to these
regulatory restrictions unless the OTS would provide otherwise.
RESTRICTIONS ON TRANSFERABILITY BY DIRECTORS AND OFFICERS AND NASD MEMBERS
Shares of Common Stock purchased in the Offerings by directors and officers
of the Holding Company may not be sold for a period of one year following
consummation of the Stock Conversion, except in the event of the death of the
stockholder or in any exchange of the Common Stock in connection with a merger
or acquisition of the Holding Company. Shares of Common Stock received by
directors or officers through the ESOP or the MRP or upon exercise of options
issued pursuant to the Stock Option Plan or purchased subsequent to the Stock
Conversion are not subject to this restriction. Accordingly, shares of Common
Stock issued by the Holding Company to directors and officers shall bear a
legend giving appropriate notice of the restriction and, in addition, the
Holding Company will give appropriate instructions to the transfer agent for the
Holding Company's Common Stock with respect to the restriction on transfers.
Any shares issued to directors and officers as a stock dividend, stock split or
otherwise with respect to restricted Common Stock shall be subject to the same
restrictions.
Purchases of outstanding shares of Common Stock of the Holding Company by
directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following the Stock Conversion may be
made only through a broker or dealer registered with the SEC, except with the
prior written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Holding Company's
outstanding Common Stock or to the purchase of stock pursuant to the Stock
Option Plan.
The Holding Company has filed with the SEC a registration statement under
the Securities Act of 1933, as amended ("Securities Act") for the registration
of the Common Stock to be issued pursuant to the Stock Conversion. The
registration under the Securities Act of shares of the Common Stock to be issued
in the Stock Conversion does not cover the resale of such shares. Shares of
Common Stock purchased by persons who are not affiliates of the Holding Company
may be resold without registration. Shares purchased by an affiliate of the
Holding Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Holding Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the Holding
Company who complies with the other conditions of Rule 144 (including those that
require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Holding Company or (ii) the average weekly
volume of trading in such shares during the preceding four calendar weeks.
Provision may
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be made in the future by the Holding Company to permit affiliates to have their
shares registered for sale under the Securities Act under certain circumstances.
Under guidelines of the NASD, members of the NASD and their associates are
subject to certain restrictions on the transfer of securities purchased in
accordance with Subscription Rights and to certain reporting requirements upon
purchase of such securities.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of federal law
and regulations and Tennessee corporate law, as well as the Charter and Bylaws
of the Holding Company, relating to stock ownership and transfers, the Board of
Directors and business combinations, all of which may be deemed to have "anti-
takeover" effects. The description of these provisions is necessarily general
and reference should be made to the actual law and regulations and to the
Charter and Bylaws of the Holding Company contained in the Registration
Statement filed with the SEC. See "ADDITIONAL INFORMATION" as to how to obtain
a copy of these documents.
CONVERSION REGULATIONS
OTS regulations prohibit any person from making an offer, announcing an
intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, without the prior written approval of the OTS, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the converting institution (or its holding company) for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, that person would become
the beneficial owner of more than 10% of the outstanding stock of the
institution (or its holding company). The OTS has defined "person" to include
any individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association (or its holding company) or an underwriter or
member of a selling group acting on the converting institution's (or its holding
company's) behalf for resale to the general public are excepted. The regulation
also provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution (or its holding company) or who controls more than 10% of
the outstanding shares or voting rights of a converting or converted institution
(or its holding company).
CHANGE OF CONTROL REGULATIONS
Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings and loan association or its parent holding company
unless the OTS has been given 60 days' prior written notice and has not issued a
notice disapproving the proposed acquisition. In addition, OTS regulations
provide that no company may acquire control of a savings association without the
prior approval of the OTS. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation by the OTS.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations. Such control factors include
the acquiror being one of the two largest stockholders. The determination of
control may be rebutted by submission to the OTS, prior to the acquisition of
stock or the occurrence of any other circumstances giving rise to such
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determination, of a statement setting forth facts and circumstances which would
support a finding that no control relationship will exist and containing certain
undertakings. The regulations provide that persons or companies which acquire
beneficial ownership exceeding 10% or more of any class of a savings
association's stock must file with the OTS a certification form that the holder
is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable. There are also rebuttable presumptions in
the regulations concerning whether a group "acting in concert" exists, including
presumed action in concert among members of an "immediate family."
The OTS may prohibit an acquisition of control if it finds, among other
things, that (i) the acquisition 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 the public to permit the acquisition of
control by such person.
TENNESSEE ANTI-TAKEOVER STATUTES
The TBCA contains several provisions, described below, which may be
applicable to the Holding Company upon consummation of the Stock Conversion.
BUSINESS COMBINATION ACT. The TBCA generally prohibits a "business
combination" (generally defined to include mergers, share exchanges, sales and
leases of assets, issuances of securities and similar transactions) by a
"resident domestic corporation" (as defined below) or a subsidiary with an
"Interested Shareholder" (generally defined as any person or entity which
beneficially owns 10% or more of the voting power of any class or series of the
corporation's stock then outstanding) for a period of five years after the date
the person becomes an Interested Shareholder unless, prior to such date, the
board of directors approved either the business combination or the transaction
which resulted in the shareholder becoming an Interested Shareholder and the
business combination satisfies any other applicable requirements imposed by law
or by the corporation's charter or bylaws. The Business Combination Act also
limits the extent to which a "resident domestic corporation" which has a class
of voting stock traded on any national securities exchange or registered
pursuant to Section 12(g) of the Exchange Act or any of its officers or
directors could be held liable for resisting any business combination.
For purposes of the Business Combination Act, the term "resident domestic
corporation" is defined as an issuer of voting stock which, as of the share
acquisition date in question, is organized under the laws of Tennessee and meets
two or more of the following requirements: (i) the corporation has more than
10,000 stockholders or 10% of its stockholders resident in Tennessee or more
than 10% of its shares held by stockholders who are Tennessee residents; (ii)
the corporation has its principal office or place of business located in
Tennessee; (iii) the corporation has the principal office or place of business
of a significant subsidiary, representing not less than 25% of the corporation's
consolidated net sales located in Tennessee; (iv) the corporation employs more
than 250 individuals in Tennessee or has a combined annual payroll paid to
Tennessee residents which is in excess of $5.0 million; (v) the corporation
produces goods and services in Tennessee which result in annual gross receipts
in excess of $10.0 million; or (vi) the corporation has physical assets and/or
deposits, including those of any subsidiary located within Tennessee which
exceed $10.0 million in value.
CONTROL SHARE ACQUISITION ACT. The Tennessee Control Share Acquisition Act
generally provides that any person or group that acquires the power to vote more
than certain specified levels (one-fifth, one-third or a majority) of the shares
of certain Tennessee corporations will not have the right to vote such shares
unless granted voting rights by the holders of a majority of the votes entitled
to be cast, excluding "interested shares." Interested shares are those shares
held by the acquiring person, officers of the corporation and employees and
directors of the corporation. If approval of voting power for the shares is
obtained at one of the specified levels, additional stockholder approval is
required when a stockholder seeks to acquire the power to vote shares at the
next level. In the absence of such approval, the additional shares acquired by
the stockholder may not be voted until they are transferred to another
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person in a transaction other than a control share acquisition. The statutory
provisions will only apply to a Tennessee corporation if its charter or bylaws
so provides and which has: (i) 100 or more stockholders; (ii) its principal
place of business, its principal office or substantial assets within Tennessee;
and (iii) either (A) more than 10% of its stockholders resident in Tennessee,
(B) more than 10% of its shares owned by stockholders resident in Tennessee, or
(C) 10,000 or more stockholders resident in Tennessee. Neither the Holding
Company's Charter nor its Bylaws contains a provision declaring that the Holding
Company will be subject to the provisions of the Control Share Acquisition Act,
although the Holding Company could amend its Charter or Bylaws in the future to
include such a provision. At this time, the Holding Company has cannot
determine whether it would otherwise meet the requirements to be subject to its
provisions.
GREENMAIL ACT. The Tennessee Greenmail Act prohibits a Tennessee
corporation having a class of voting stock registered or traded on a national
securities exchange or registered pursuant to Section 12(g) of the Exchange Act
from purchasing, directly or indirectly, any of its shares at a price above the
market value of such shares from any person who holds more than 3% of the class
of securities to be purchased if such person has held such shares for less than
two years, unless: (i) such purchase has been approved by the affirmative vote
of a majority of the outstanding shares of each class of voting stock issued by
such corporation or (ii) the corporation makes an offer, at least equal value
per share, to al holders of shares of such class. Market value is defined as
the average of the highest and lowest closing market price of such shares during
the 30 trading days preceding the purchase or preceding the commencement or
announcement of a tender offer if the seller of such shares has commenced a
tender offer or announced an intention to seek control of the corporation.
The Common Stock will be registered pursuant to Section 12(g) of the
Exchange Act. As such, the Holding Company will be subject to the restrictions
of the Greenmail Act upon consummation of the Stock Conversion.
INVESTOR PROTECTION ACT. The Tennessee Investor Protection Act prohibits
any party owning, directly or indirectly, 5% or more of any class of equity
securities of an "offeree company" (as defined below), any of which were
purchased within one year before the proposed takeover offer, unless the
offeror: (i) before making such purchase, had made a public announcement of his
intention or change or influence the management or control of the "offeree
company;" (ii) has made a full, fair and effective disclosure of such intention
to the persons from whom he acquired such securities; and (iii) has filed with
the Tennessee Commissioner of Commerce and Insurance and with the "offeree
company" a statement signifying such intentions and containing such additional
information as the Commissioner may require. An "offeree company" is defined as
a corporation or other issuer of equity securities which is incorporated or
organized under the laws of Tennessee or has its principal office in Tennessee,
has substantial assets located in Tennessee and which is or may be involved in a
takeover offer relating to any class of its equity securities.
The Investor Protection Act also prohibits any offeror from making a
takeover offer which is not made to the holders of record or beneficial owners
of the equity securities of an offeree company who reside in Tennessee on
substantially the same terms as the offer is made to holders residing elsewhere.
ANTI-TAKEOVER PROVISIONS IN THE HOLDING COMPANY'S CHARTER AND BYLAWS AND
TENNESSEE LAW
Several provisions of the Holding Company's Charter and Bylaws deal with
matters of corporate governance and certain rights of stockholders. The
following discussion is a general summary of certain provisions of the Holding
Company's Charter and Bylaws and regulatory provisions relating to stock
ownership and transfers, the Board of Directors and business combinations, which
might be deemed to have a potential "anti-takeover" effect. These provisions
may have the effect of discouraging a future takeover attempt which is not
approved by the Board of Directors but which individual Holding Company
stockholders may deem to be in their best interests or in which stockholders may
receive a substantial premium for their shares over then current market prices.
As a result, stockholders who might desire to participate in such a transaction
may not have an opportunity to do so. Such provisions will also render the
removal of incumbent Board of Directors or management of the Holding Company
more difficult. The following description of certain of the provisions of the
Charter and Bylaws of the Holding
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Company is necessarily general, and reference should be made in each case to
such Charter and Bylaws, which are incorporated herein by reference. See
"ADDITIONAL INFORMATION" as to how to obtain a copy of these documents.
LIMITATION ON VOTING RIGHTS. Article XII of the Holding Company's Charter
provides that, if at any time following the consummation of the Conversion, any
person acquires beneficial ownership of more than 10% of any class of equity
security of the Holding Company without the prior approval of two-thirds of the
"Continuing Directors" (as defined below), then the record holders of the voting
stock of the Holding Company beneficially owned by such acquiring person shall
have only voting rights, with respect to each share in excess of 10%, equal to
one one-hundredth (1/100th) of a vote. The aggregate voting power of such record
holders will be allocated proportionately among such record holders by
multiplying the aggregate voting power, as so limited, of the outstanding shares
of voting stock of the Holding Company beneficially owned by such acquiring
person by a fraction whose numerator is the number of votes represented the
shares of voting stock of the Holding Company owned of record by such person
(and which are beneficially owned by such acquiring person) and whose
denominator is the total number of votes represented by the shares of voting
stock of the Holding Company that are beneficially owned by such acquiring
person. A person who is the record owner of shares of voting stock of the
Holding Company that are beneficially and simultaneously owned by more than one
person shall have, with respect to such shares, the right to cast the least
number of votes that such person would be entitled to cast under Article XII.
"Continuing Directors" are defined in the Holding Company's Charter to be those
members of the board of directors who are unaffiliated with any "Related Person"
(as defined below) and who were members of the board of directors prior to the
time that a "Related Person" (as defined below) became a "Related Person" and
any successor to such directors who are recommended to succeed a Continuing
Director by a majority of the Continuing Directors then on the Board of
Directors. The term "Related Person" is defined as any individual, corporation,
partnership or other person or entity which, together with its affiliates,
beneficially owns in the aggregate 10% or more of the outstanding shares of
Common Stock and any affiliate of such individual, corporation, partnership or
other person or entity.
BOARD OF DIRECTORS. The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the whole number of the members of the Board. The members of each class
shall be elected for a term of three years, with the terms of office of all
members of one class expiring each year so that approximately one-third of the
total number of directors are elected each year. The Holding Company's Charter
provides that the size of the Board shall be as set forth in the Bylaws. The
Bylaws currently set the number of directors at nine. The Charter provides that
any vacancy occurring in the Board, including a vacancy created by an increase
in the number of directors, shall be filled by a vote of two-thirds of the
directors then in office and any director so chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of the class to
which the director has been chosen expires. The classified Board is intended to
provide for continuity of the Board of Directors and to make it more difficult
and time consuming for a stockholder group to fully use its voting power to gain
control of the Board of Directors without the consent of the incumbent Board of
Directors of the Holding Company. The Charter of the Holding Company provides
that a director may be removed from the Board of Directors prior to the
expiration of his or her term only for cause and only upon the vote of at least
80% of the outstanding shares of voting stock. In the absence of this
provision, the vote of the holders of a majority of the shares could remove the
entire Board, but only with cause, and replace it with persons of such holders'
choice.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Charter does not provide for cumulative voting for any purpose. Moreover, the
Charter provides that special meetings of stockholders of the Holding Company
may be called only by the Board of Directors of the Holding Company and that
stockholders may take action only at a meeting and not by written consent.
AUTHORIZED SHARES. The Charter authorizes the issuance of 49,750,000
shares of Common Stock and 250,000 shares of preferred stock. The shares of
Common Stock and preferred stock were authorized in an amount greater than that
to be issued in the Conversion to provide the Holding Company's Board of
Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits,
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restricted stock grants and the exercise of stock options. However, these
additional authorized shares may also be used by the Board of Directors
consistent with its fiduciary duty to deter future attempts to gain control of
the Holding Company. The Board of Directors also has sole authority to
determine the terms of any one or more series of preferred stock, including
voting rights, conversion rates, and liquidation preferences. As a result of
the ability to fix voting rights for a series of preferred stock, the Board has
the power, to the extent consistent with its fiduciary duty, to issue a series
of preferred stock to persons friendly to management in order to attempt to
block a tender offer, merger or other transaction by which a third party seeks
control of the Holding Company, and thereby assist members of management to
retain their positions. The Holding Company's Board currently has no plans for
the issuance of additional shares, other than the issuance of shares of Common
Stock upon exercise of stock options and in connection with the MRP.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS. To approve
mergers and similar transactions, the TBCA generally requires the approval of
the Board of Directors of the corporation and of the holders of a majority of
all the votes entitled to be cast, unless the Charter or the Board of Directors
requires a greater vote. The TBCA permits a corporation to merge with another
corporation without obtaining the approval of its stockholders (unless the
Charter provides otherwise) if: (i) the corporation's separate corporate
existence will not cease as a result of the merger and, except for certain types
of amendments, its charter will not differ from its charter before the merger;
(ii) each stockholder of the corporation whose shares were outstanding
immediately before the effective date of the merger will hold the same number of
shares, with identical designations, preferences, limitations and relative
rights, immediately after the effective date of the merger; (iii) the voting
power of the shares outstanding immediately after the merger, plus the voting
power of the shares issuable as a result of the merger (either by the conversion
of securities issued pursuant to the merger or by the exercise of rights and
warrants issued pursuant to the merger) will not exceed by more than 20% the
voting power of the total shares of the corporation outstanding immediately
before the merger or exchange; and (iv) the number of participating shares
outstanding immediately after the merger, plus the number of participating
shares issuable as a result of the merger (either by the conversion of
securities issued pursuant to the merger or by the exercise of rights and
warrants issued pursuant to the merger) will not exceed more than 20% the total
number of participating shares outstanding immediately before the merger.
The TBCA also provides that any sale, lease, exchange, or other disposition
of all, or substantially all, of the property and assets not made in the usual
and regular course of business may be made in the following manner: (i) the
board of directors may adopt a resolution recommending that such a transaction
be approved by stockholders, unless the board of directors for any reason
determines that it should not make such a recommendation, in which case the
board may adopt a resolution directing that the transaction be submitted to
stockholders without a recommendation, (ii) the board of directors may submit
the proposed transaction for authorization by the company's stockholders at an
annual or special meeting of stockholders, (iii) written notice of such meeting
shall be given to stockholders of record, stating that the purpose, or one of
the purposes of the meeting is to propose the transaction, (iv) at such meeting
the stockholders may authorize the transaction, upon the affirmative vote of a
majority of all the votes entitled to be cast on the transaction, unless the
board of directors or the corporation's charter requires a greater vote or
voting by voting groups, (v) after such authorization by vote of the
stockholders, the board of directors may nevertheless abandon such transaction,
subject to the rights of third parties under any contract, without further
action or approval by the stockholders.
As holder of all the outstanding common stock of the Bank after
consummation of the Stock Conversion, the Holding Company generally will be able
to authorize a merger, consolidation or other business combination involving the
Bank without the approval of the stockholders of the Holding Company. In
addition to the provisions of Tennessee law, the Holding Company's Charter
requires the approval of the holders of at least 80% of the Holding Company's
outstanding shares of voting stock, and a majority of such shares not including
shares deemed beneficially owned by a Related Person, to approve certain
"Business Combinations," as defined therein. The Charter requires the approval
of the stockholders in accordance with the increased voting requirements in
connection with any such transactions except in cases where the proposed
transaction has been approved in advance by at least two-thirds of the Holding
Company's Continuing Directors. These provisions of the Charter apply to any
"Business Combination" which generally is defined to include: (i) any merger,
share exchange or consolidation of the Holding Company with
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or into a Related Person; (ii) any sale, lease, exchange, transfer or other
disposition of, including without limitation, the granting of any mortgage, or
any other security interest in, all or any substantial part of the assets of the
Holding Company (including, without limitation, any voting securities of a
subsidiary) or of a subsidiary to a Related Person or proposed by or on behalf
of a Related Person; (iii) any sale, lease, exchange, transfer or other
disposition, including without limitation, a mortgage, pledge or any other
security interest in, all or any substantial part of the assets of a Related
Person to the Holding Company or a subsidiary; (iv) the issuance or transfer of
any securities of the Holding Company or a subsidiary to a Related Person other
than pursuant to a dividend or distribution made pro rata to all stockholders of
the Holding Company; (v) the acquisition by the Holding Company or a subsidiary
of any securities of a Related Person or of any securities convertible into
securities of a Related Person; (vi) any transaction proposed by or on behalf of
a Related Person or pursuant to an agreement, arrangement or understanding with
a Related Person which has the effect, directly or indirectly, of increasing the
Related Person's proportionate ownership of voting securities of the Holding
Company or a subsidiary thereof or of securities that are convertible to,
exchangeable for or carry the right to acquire such voting securities; (vii) the
adoption of any plan or proposal of liquidation or dissolution of the Holding
Company any reincorporation of the Holding Company in another state or
jurisdiction, any reclassification of the Common Stock, or any recapitalization
involving the Common Stock proposed by or on behalf of a Related Person; (viii)
any loans, advances, guarantees, pledges, financial assistance, security
arrangements, restrictive covenants or any tax credits or other tax advantages
provided by, through or to the Holding Company or any subsidiary thereof as a
result of which a Related Person receives a benefit, directly or indirectly,
other than proportionately as a stockholder; and (ix) any agreement, contract or
other arrangement providing for any of the transactions described in (i) -
(viii) above.
AMENDMENT OF CHARTER AND BYLAWS. No amendment of the Holding Company's
Charter may be made unless it is first approved by the Board of Directors of the
Holding Company, recommended to the stockholders for approval and thereafter is
approved by the holders of a majority of the shares of the Holding Company
entitled to be cast. An 80% vote of the shares of the Holding Company is
required to amend, adopt, alter, change or repeal any provision inconsistent
with Article VI (setting quorum and voting requirements), Article VII (setting
the requirements for the Board of Directors, including classification of the
Board and vacancies), Article VIII (setting the procedures for nomination of
directors and stockholder proposals), Article IX (removal of directors), Article
X (elimination of director liability), Article XI (indemnification), Article XII
(restrictions on voting rights of certain holders), Article XIII (approval of
Business Combinations), Article XIV (evaluation of business combinations),
Article XVII (amendment of Bylaws) and Article XVIII (amendment of Charter).
STOCKHOLDER NOMINATIONS AND PROPOSALS. The Charter of the Holding Company
requires a stockholder who intends to nominate a candidate for election to the
Board of Directors or to raise new business at a stockholder meeting to give
advance written notice to the Secretary of the Holding Company 120 calendar days
in advance of the month and day of the Holding Company's proxy statement to
shareholders was mailed to shareholders the preceding year; provided, however,
that if notice of the meeting is effective fewer than 40 calendar days before
the meeting, such written notice shall be delivered to the Secretary of the
Holding Company not later than the close of the tenth calendar day following the
day on which notice of the meeting was mailed to shareholders. The notice
provision requires a stockholder who desires to raise new business to provide
certain information to the Holding Company concerning the nature of the new
business, the stockholder and the stockholder's interest in the business matter.
Similarly, a stockholder wishing to nominate any person for election as a
director must provide the Holding Company with certain information concerning
the nominee and the proposing stockholder.
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF THE HOLDING COMPANY'S CHARTER AND
BYLAWS. The Board of Directors of the Bank believes that the provisions
described above are prudent and will reduce the Holding Company's vulnerability
to takeover attempts and certain other transactions which have not been
negotiated with and approved by its Board of Directors. These provisions will
also assist in the orderly deployment of the Conversion proceeds into productive
assets during the initial period after the Conversion. The Board of Directors
believes these provisions are in the best interest of the Bank and the Holding
Company and its stockholders. In the judgment of the Board of Directors, the
Holding Company's Board will be in the best position to determine the true value
of the Holding Company and to negotiate more effectively for what may be in the
best interests of its stockholders.
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Accordingly, the Board of Directors believes that it is in the best interest of
the Holding Company and its stockholders to encourage potential acquirors to
negotiate directly with the Board of Directors of the Holding Company and that
these provisions will encourage such negotiations and discourage hostile
takeover attempts. It is also the view of the Board of Directors that these
provisions should not discourage persons from proposing a merger or other
transaction at a price reflective of the true value of the Holding Company and
which is in the best interest of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of the Holding
Company and its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objective may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners became less
than 300, thereby allowing for Exchange Act deregistration.
Despite the belief of the Bank and the Holding Company as to the benefits
to stockholders of these provisions of the Holding Company's Charter and Bylaws,
these provisions may also have the effect of discouraging a future takeover
attempt that would not be approved by the Holding Company's Board, but pursuant
to which stockholders may receive a substantial premium for their shares over
then current market prices. As a result, stockholders who might desire to
participate in such a transaction may not have any opportunity to do so. Such
provisions will also render the removal of the Holding Company's Board of
Directors and of management more difficult. The Board of Directors of the Bank
and the Holding Company, however, have concluded that the potential benefits
outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the acquisition of its equity securities that would
be permitted for a Tennessee business corporation. The Holding Company and the
Bank do not presently intend to propose the adoption of further restrictions on
the acquisition of the Holding Company's equity securities.
The cumulative effect of the restrictions on acquisition of the Holding
Company contained in the Charter and Bylaws and Holding Company, federal law and
Tennessee law may be to discourage potential takeover attempts and perpetuate
incumbent management, even though certain stockholders of the Holding Company
may deem a potential acquisition to be in their best interests, or deem existing
management not to be acting in their best interests.
DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
GENERAL
The Holding Company is authorized to issue 49,750,000 shares of Common
Stock having no par value per share and 250,000 shares of preferred stock
having no par value per share. The Holding Company currently expects to issue
up to 6,555,000 shares of Common Stock and no shares of preferred stock in the
Stock Conversion. Each share of the Holding Company's Common Stock will have
the same relative rights as, and will be identical in all
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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 HOLDING COMPANY WILL REPRESENT NONWITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF ANY TYPE, AND WILL NOT BE INSURED BY THE FDIC
OR ANY OTHER GOVERNMENT AGENCY.
COMMON STOCK
DIVIDENDS. The Holding Company can pay dividends out of statutory surplus
or from certain net profits if, as and when declared by its Board of Directors.
The payment of dividends by the Holding Company is subject to limitations which
are imposed by law and applicable regulation. See "DIVIDEND POLICY" and
"REGULATION." The holders of Common Stock of the Holding Company will be
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Holding Company out of funds legally available
therefor. If the Holding Company issues preferred stock, the holders thereof
may have a priority over the holders of the Common Stock with respect to
dividends.
STOCK REPURCHASES. The Plan of Conversion and OTS regulations place
certain limitations on the repurchase of the Holding Company's capital stock.
See "THE CONVERSION -- Restrictions on Repurchase of Stock" and "USE OF
PROCEEDS."
VOTING RIGHTS. Upon consummation of the Stock Conversion, the holders of
Common Stock of the Holding Company will possess exclusive voting rights in the
Holding Company. They will elect the Holding Company's Board of Directors and
act on such other matters as are required to be presented to them under
Tennessee law or as are otherwise presented to them by the Board of Directors.
Except as discussed in "RESTRICTIONS ON ACQUISITION OF THE HOLDING 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 Holding
Company issues preferred stock, holders of the Holding Company preferred stock
may also possess voting rights. Certain matters require a vote of 80% of the
outstanding shares entitled to vote thereon. See "RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY."
As a federal mutual savings bank, corporate powers and control of the Bank
are vested in its Board of Directors, who elect the officers of the Bank and who
fill any vacancies on the Board of Directors as it exists upon Conversion.
Subsequent to the Stock Conversion, voting rights will be vested exclusively in
the owners of the shares of capital stock of the Bank, all of which will be
owned by the Holding Company, and voted at the direction of the Holding
Company's Board of Directors. Consequently, the holders of the Common Stock
will not have direct control of the Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Bank, the Holding Company, as holder of the Bank's capital stock would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "THE CONVERSION"), all assets of the Bank available for distribution. In
the event of liquidation, dissolution or winding up of the Holding 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
Holding Company available for distribution. If Holding Company 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 Holding Company will
not be entitled to preemptive rights with respect to any shares that may be
issued. The Common Stock is not subject to redemption.
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PREFERRED STOCK
None of the shares of the authorized Holding Company preferred stock will
be issued in the Conversion and there are no plans to issue the preferred stock.
Such stock may be issued with such designations, powers, preferences and rights
as the Board of Directors may from time to time determine. The Board of
Directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
RESTRICTIONS ON ACQUISITION
Acquisitions of the Holding Company are restricted by provisions in its
Charter and Bylaws and by the rules and regulations of various regulatory
agencies. See "REGULATION" and "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
REGISTRATION REQUIREMENTS
The Holding Company will register the Common Stock with the SEC pursuant to
Section 12(g) of the Exchange Act upon the completion of the Stock Conversion
and will not deregister its Common Stock for a period of at least three years
following the completion of the Stock Conversion. Upon such registration, the
proxy and tender offer rules, insider trading reporting and restrictions, annual
and periodic reporting and other requirements of the Exchange Act will be
applicable.
LEGAL AND TAX OPINIONS
The legality of the Common Stock has been passed upon for the Holding
Company by Breyer & Aguggia, Washington, D.C. The federal tax consequences of
the Offerings have been opined upon by Breyer & Aguggia and the Tennessee tax
consequences of the Offerings have been opined upon by Bass, Berry & Sims PLC,
Nashville, Tennessee. Breyer & Aguggia and Bass, Berry & Sims PLC have
consented to the references herein to their opinions. Certain legal matters
will be passed upon for Trident Securities by Peabody & Brown, Washington, D.C.
EXPERTS
The consolidated financial statements of the Bank as of December 31, 1996
and 1995 and for the years ended December 31, 1996, 1995 and 1994 included in
this Prospectus have been audited by Rayburn, Betts & Bates, P.C., independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
Ferguson has consented to the publication herein of the summary of its
report to the Bank setting forth its opinion as to the estimated pro forma
market value of the Holding Company and the Bank as converted and its letter
with respect to subscription rights and to the use of its name and statements
with respect to it appearing herein.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on Form
S-1 (File No. 333-_____) under the Securities Act with respect to the Common
Stock offered in the Conversion. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Such
information may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at its
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies
may be obtained at prescribed rates from the Public Reference Section of the SEC
at 450
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Fifth Street, N.W., Washington, D.C. 20549. The Registration Statement also is
available through the SEC's World Wide Web site on the Internet
(http://www.sec.gov).
The Bank has filed with the OTS an Application for Approval of Conversion,
which includes proxy materials for the Bank's Special Meeting and certain other
information. This Prospectus omits certain information contained in such
Application. The Application, including the proxy materials, exhibits and
certain other information that are a part thereof, may be inspected, without
charge, at the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552
and at the office of the Regional Director of the OTS at the Regional Director
of the OTS at the Central Regional Office of the OTS, Madison Plaza, 200 West
Madison Street, Suite 1300, Chicago, Illinois 60606.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CAVALRY BANKING AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report........................................ F-1
Consolidated Balance Sheets as of September 30, 1997 (unaudited)
and December 31, 1996 and 1995..................................... F-2
Consolidated Statements of Earnings for the
Nine Months Ended September 30, 1997 and 1996 (unaudited)
and the Years Ended December 31, 1996, 1995 and 1994............... 23
Consolidated Statements of Equity for the Nine Months Ended
September 30, 1997 and 1996 (unaudited) and for the Years
Ended December 31, 1996, 1995 and 1994............................. F-3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 (unaudited)
and the Years Ended December 31, 1996, 1995 and 1994............... F-4
Notes to Consolidated Financial Statements.......................... F-6
</TABLE>
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements for the Holding Company have not been
included herein because the Holding Company, which has engaged in only
organizational activities to date, has no significant assets, liabilities
(contingent or otherwise), revenues or expenses.
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[LETTERHEAD OF RAYBURN, BETTS & BATES, P.C. APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Cavalry Banking and Subsidiaries
We have audited the consolidated balance sheets of Cavalry Banking and
Subsidiaries (the Bank) as of December 31, 1996 and 1995 and the related
consolidated statements of earnings, changes in equity and cash flows for each
of the years in the three year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free from
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 Cavalry Banking and
Subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three year period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Rayburn, Betts & Bates, P.C.
--------------------------------
RAYBURN, BETTS & BATES, P.C.
Nashville, Tennessee
September 25, 1997
F-1
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
SEPTEMBER 30, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30 December
------------ --------
Assets 1997 1996 1995
-------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C>
Cash (note 2) $ 9,691 9,497 7,420
Interest-bearing deposits with other financial institutions 17,000 10,022 6,515
-------- ------- -------
Cash and cash equivalents 26,691 19,519 13,935
Investment securities available for sale (note 3) 10,107 - -
Investment securities held to maturity (note 3) 3,700 7,705 35,550
Mortgage-backed securities, at amortized cost, fair value
of approximately $1,349 in 1997, $1,417 in 1996
and $1,534 in 1995 (note 4) 1,333 1,419 1,541
Loans held for sale, at estimated fair value (note 5) 4,149 5,253 3,689
Loans receivable, net (notes 5 and 10) 216,410 200,600 159,943
Accrued interest receivable:
Loans, net of allowance for delinquent interest of
$2, $5 and $9 in 1997, 1996
and 1995, respectively 1,485 1,280 1,092
Investment securities 374 155 509
Mortgage-backed securities 11 11 13
Office properties and equipment, net (note 6) 7,864 6,203 5,286
Required investment in stock of Federal Home Loan Bank,
at cost (note 7) 1,602 1,519 1,418
Deferred tax asset, net (note 11) 1,185 755 523
Other assets (note 12) 1,014 545 383
-------- ------- -------
$275,925 244,964 223,882
======== ======= =======
Liabilities and Retained Earnings
---------------------------------
Liabilities:
Deposits (note 9) $241,950 214,533 196,734
Accrued interest payable 353 264 271
Advance payments by borrowers for property
taxes and insurance 1,120 328 487
Income taxes payable (note 11) 1,211 1,089 620
Accrued expenses and other liabilities 1,790 1,500 1,334
-------- ------- -------
Total liabilities 246,424 217,714 199,446
-------- ------- -------
Equity: Retained earnings, substantially restricted
(notes 13 and 14) 29,508 27,250 24,436
Net unrealized loss on investment securities
available-for-sale, net (7) - -
-------- ------- -------
Total equity 29,501 27,250 24,436
-------- ------- -------
Total liabilities and equity $275,925 244,964 223,882
======== ======= =======
</TABLE>
Commitments and contingencies (notes 2, 12 and 16)
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Unrealized
Loss on
Investment
Securities
Retained Available-for
Earnings Sale Total
-------- ---- -----
<S> <C> <C> <C>
Balance at December 31, 1993 $18,777 - 18,777
Net earnings 2,458 - 2,458
------- ------------- ------
Balance at December 31, 1994 21,235 - 21,235
Net earnings 3,201 - 3,201
------- ------------- ------
Balance at December 31, 1995 24,436 - 24,436
Net earnings 2,814 - 2,814
------- ------------- ------
Balance at December 31, 1996 27,250 - 27,250
Net earnings (unaudited) 2,258 - 2,258
Change in valuation allowance for
securities available-for-sale, net of
income taxes of $4 (unaudited) - (7) (7)
------- ------------- ------
Balance at September 30, 1997 (unaudited) $29,508 (7) 29,501
======= ============= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
----------------- --------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net earnings $ 2,258 1,840 2,814 3,201 2,458
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Provision for loan losses 700 90 120 80 113
Gain on sales of real estate acquired
in settlement of loans, net - (7) (11) (23) (18)
Gain on sales of loans, net (674) (733) (890) (882) (530)
Gain on sale of office properties
and equipment - - (40) - -
Depreciation and amortization on
office properties and equipment 780 535 733 538 525
Net amortization (accretion) of
investment and mortgage-backed
securities premiums, net 10 95 102 (37) 189
Accretion of discount on loans
acquired through merger - - - - (60)
Amortization of deferred loan
origination fees (820) (836) (1,152) (918) (1,157)
Loan fees collected 867 978 1,294 946 1,160
Deferred income tax benefit (430) (253) (231) (40) (73)
Proceeds from sales of loans 48,684 52,278 71,235 145,932 48,939
Origination of loans held for sale (46,907) (50,660) (71,909) (147,287) (45,056)
Decrease (increase) in accrued
interest receivable (423) 5 167 (255) (263)
Decrease (increase) in other assets (464) (210) (162) (169) 493
Increase (decrease) in accrued
interest payable 88 (5) (7) 78 23
Stock dividends on Federal Home
Loan Bank stock (83) (50) (102) (114) (66)
Increase in accrued expenses
and other liabilities 290 1,382 170 301 162
Increase (decrease) in current
income taxes payable 123 (158) 469 151 36
-------- ------- ------- -------- --------
Net cash provided by
operating activities 3,999 4,291 2,600 1,502 6,875
-------- ------- ------- -------- --------
Investing activities:
Increase (decrease) in loans
receivable, net (16,557) (36,578) (40,962) 5,420 (11,585)
Principal payments on mortgage
backed securities 83 63 116 118 427
</TABLE>
See accompanying notes to conslidated statements.
F-4
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
------------------ -----------------------------------
1997 1996 1996 1995 1994
-------- ------- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Investing activities: (Continued)
Proceeds from the sales of branch and
office properties and equipment - - 153 3 -
Purchases of investment securities
available for sale (10,120) - - - -
Purchases of investment securities
held to maturity - (2,000) (2,002) (32,609) (16,036)
Proceeds from maturities of
investment securities 4,000 20,000 29,750 17,000 9,500
Purchases of office properties
and equipment (2,441) (807) (1,763) (913) (770)
Proceeds from sale of real estate
acquired through foreclosure - 51 51 129 820
-------- ------- ------- ------- -------
Net cash used in investing
activities (25,035) (19,271) (14,657) (10,852) (17,644)
------- -------
Financing activities:
Net increase in deposits 27,416 12,555 17,800 16,450 (4,891)
Advance from (repayment to)
Federal Home Loan Bank - - - (5,000) 5,000
Net increase (decrease) in advance
payments by borrowers for
property taxes and insurance 792 711 (159) (143) (22)
-------- ------- ------- ------- -------
Net cash provided by
financing activities 28,208 13,266 17,641 11,307 87
-------- ------- ------- ------- -------
Increase (decrease) in cash and
cash equivalents 7,172 (1,714) 5,584 1,957 (10,682)
Cash and cash equivalents,
beginning of year 19,519 13,935 13,935 11,978 22,660
-------- ------- ------- ------- -------
Cash and cash equivalents, end of year $ 26,691 12,221 19,519 13,935 11,978
======== ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Payments during the period for:
Interest $ 4,648 4,076 5,500 5,185 4,272
======== ======= ======= ======= =======
Income taxes $ 1,920 1,526 1,591 1,771 1,453
======== ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Foreclosures and in substance
foreclosures of loans during year $ - 44 44 22 232
======== ======= ======= ======= =======
Interest credited to deposits $ 2,079 2,046 2,775 2,433 2,004
======== ======= ======= ======= =======
Net unrealized losses on investment
securities available for sale $ 11 - - - -
======== ======= ======= ======= =======
Increase in deferred tax asset related
to unrealized loss on investments $ 4 - - - -
======== ======= ======= ======= =======
</TABLE>
See accompanying notes to conslidated statements.
F-5
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(1) Summary of Significant Accounting Policies:
------------------------------------------
Business
--------
Cavalry Banking and Subsidiaries and its wholly-owned subsidiaries' (the
Bank) primary business activities include attracting deposits from the
general public and originating residential property loans (one-to-four
family home mortgage, cooperative apartment and multi-family property
loans). The Bank also makes commercial real estate loans and consumer
loans. The Bank is subject to competition from other financial
institutions. Deposits at the Bank are insured up to applicable limits
by the Federal Deposit Insurance Corporation (FDIC). The Bank is a
federally chartered savings bank and is subject to comprehensive
regulation, examination and supervision by the OTS and the FDIC.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
of the date of the consolidated balance sheet and revenues and expenses
for the year. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for loan
losses and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowances for loan losses and foreclosed real
estate, management obtains independent appraisals for significant
properties.
A substantial portion of the Bank's loans are secured by real estate in the
Middle Tennessee market. In addition, foreclosed real estate, is located
in this same market. Accordingly, the ultimate collectibility of a
substantial portion of the Bank's loan portfolio and the recovery of a
substantial portion of the carrying amount of foreclosed real estate is
susceptible to changes in local market conditions.
Management believes that the allowance for possible loan losses is
adequate. While management uses available information to recognize losses
on loans and foreclosed real estate, future additions to the allowances
may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowances for losses on loans
and foreclosed real estate. Such agencies may require the Bank to
recognize additions to the allowances based on their judgments about
information available to them at the time of their examination.
As more fully discussed in note 19, the Bank plans to convert from a mutual
to capital stock form of ownership. As a stock institution and as a
result of the public offering of the stock of the holding company
intended to be formed by the Bank, the Bank will be subject to the
financial reporting requirements of the Securities Exchange Act of 1934,
as amended. Accordingly, in connection with the conversion, the Bank
performed a comprehensive review of its accounting policies and
practices, and made a determination that certain of such policies and
practices should be changed to adopt preferable accounting practices. The
accompanying consolidated financial statements
F-6
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(1) Summary of Significant Accounting Policies: (Continued)
------------------------------------------
Business (Continued)
--------
have been prepared to reflect such preferred accounting policies, which
are referred to in the paragraphs below and relate principally to the
timing of loan loss provisions.
Certain reclassifications have been made to prior periods amounts to
conform to the current period presentation.
Cash Equivalents
----------------
Cash equivalents include cash and demand and time deposits at other
financial institutions with remaining maturities of three months or less.
Investment Securities
---------------------
In accordance with Statement of Financial Accounting Standards No. (SFAS)
115, Accounting for Certain Investments in Debt and Equity Securities,
which the Bank adopted effective January 1, 1994, the Bank is required to
report debt, readily-marketable equity, mortgage-backed and mortgage
related securities in one of the following categories: (i) "held-to-
maturity" (management has a positive intent and ability to hold to
maturity) which are to be reported at amortized cost adjusted, in the
case of debt securities, for the amortization of premiums and accretion
of discounts; (ii) "trading" (held for current resale) which are to be
reported at fair value, with unrealized gains and losses included in
earnings; and (iii) "available for-sale" (all other debt, equity,
mortgage-backed and mortgage related securities) which are to be reported
at fair value, with unrealized gains and losses reported net of tax as a
separate component of retained earnings. The Bank classified all of its
holdings of debt, readily-marketable equity, mortgage-backed and mortgage
related securities at January 1, 1994 as either "held-to-maturity" or
"available-for-sale," thereafter, at the time of new securities
purchases, a determination is made as to the appropriate classification.
Realized and unrealized gains and losses on trading securities are
included in net income. Unrealized gains and losses on securities
available-for-sale are recognized as direct increases or decreases in
retained earnings, net of any tax effect. Cost of securities sold is
recognized using the specific identification method.
Mortgage-backed Securities
--------------------------
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried at the unpaid
principal balances, adjusted for unamortized premiums and unearned
discounts. Premiums and discounts are amortized using methods
approximating the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. Management
intends and has the ability to hold such securities to maturity. Should
any be sold, cost of securities sold is determined using the specific
identification method.
F-7
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(1) Summary of Significant Accounting Policies: (Continued)
------------------------------------------
Loans Receivable
----------------
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees and unearned discounts. Unearned
discounts on installment loans are recognized as income over the term of
the loans using the sum-of-the-months digits method that approximates the
interest method.
Loan origination and commitment fees, as well as certain origination costs,
are deferred and amortized as a yield adjustment over the lives of the
related loans adjusted for estimated prepayments based on the Bank's
historical prepayment experience, using the interest method. Loans are
placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Any unpaid interest previously accrued on these loans is reversed from
income and an allowance for accrued interest is recorded.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb potential losses inherent in
the loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances
for impaired loans are generally determined based on collateral values or
the present value of estimated cash flows. The allowance is increased by
a provision for loan losses, which is charged to expense, and reduced by
charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan losses.
In May 1993, SFAS 114, Accounting by Creditors for Impairment of a Loan was
issued. The statement is effective for financial statements for fiscal
years beginning after December 15, 1994. According to SFAS 114,
impairment is measured based upon the present value of expected future
cash flows or fair value of the loan's collateral, if collateral
dependent.
In October 1994, SFAS 118, Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures was issued. SFAS 118 is also
effective for fiscal years beginning after December 15, 1994 and amends
SFAS 114 to allow a creditor to use existing methods for recognizing
interest income on an impaired loan. This statement also amends the
disclosure requirements of SFAS 114 to require information about the
recorded investment in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans. The Bank
adopted SFAS 114 and SFAS 118 on January 1, 1995. The adoption of SFAS
114 and SFAS 118 did not have a significant effect on the Bank's
consolidated financial statements.
F-8
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(1) Summary of Significant Accounting Policies: (Continued)
------------------------------------------
Loans Held for Sale
-------------------
Mortgage loans originated and held for sale in the secondary market are
carried at the lower of cost or market value determined on an aggregate
basis. Net unrealized losses are recognized in a valuation allowance
through charges to income. Gains and losses on the sale of loans held for
sale are determined using the specific identification method.
Real Estate Acquired in Settlement of Loans
-------------------------------------------
Real estate acquired in settlement of loans includes property acquired
through foreclosure and deeds in lieu of foreclosure. Property acquired
by deed in lieu of foreclosure results when a borrower voluntarily
transfers title to the Bank in full settlement of the related debt in an
attempt to avoid foreclosure. Real estate acquired in settlement of loans
is valued at the date of acquisition and thereafter at the lower of fair
value less costs to sell or the Bank's net investment in the loan and
subsequent improvements to the property. Certain costs relating to
holding the properties, and gains or losses resulting from the
disposition of properties are recognized in the current period's
operations.
Office Properties and Equipment
-------------------------------
Depreciation and amortization are provided over the estimated useful lives
of the respective assets which range from 3 to 40 years. All office
properties and equipment are recorded at cost and are depreciated on the
straight-line method.
Income Taxes
------------
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. To the
extent that current available evidence about the future raises doubt
about the realization of a deferred tax asset, a valuation allowance must
be established. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
The Bank files a consolidated federal income and combined state franchise
and excise tax return. Each of the members of the consolidated group
accrues tax expense on a separate entity basis.
Pension and Savings Plans
-------------------------
The Bank has a noncontributory, defined benefit employee pension plan and a
401(k) savings plan covering substantially all employees upon attainment
of age 21 and completion of one year of service. The Bank contributes
actuarially determined amounts necessary to fund defined plan benefits of
at least the minimum amount required by the Employee Retirement Income
Security Act of 1974, as amended.
F-9
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(1) Summary of Significant Accounting Policies: (Continued)
------------------------------------------
Fair Values of Financial Instruments
------------------------------------
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
consolidated balance sheets for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instruments. Fair value estimates
are made at a point in time, based on relevant market information and
information about the financial instrument. Accordingly, such estimates
involve uncertainties and matters of judgment and therefore cannot be
determined with precision. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Bank.
The following are the more significant methods and assumptions used by the
Bank in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statement
of financial condition for cash and cash equivalents approximate those
assets' fair values, because they mature within 90 days or less and do
not present credit risk concerns.
Investment securities and mortgage-backed securities: Fair values for
investment securities and mortgage-backed securities are based on quoted
market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans receivable: The fair values for loans receivable are estimated using
discounted cash flow analysis which considers future repricing dates and
estimated repayment dates, and further using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. Loan fair value estimates include judgments regarding future
expected loss experience and risk characteristics.
Loans held for sale: Fair value is based on investor commitments, or in the
absence of such commitments, on current investor yield requirements.
Accrued interest receivable: Fair value is estimated to approximate the
carrying amount because such amounts are expected to be received within
90 days or less and any credit concerns have been previously considered
in the carrying value.
F-10
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(1) Summary of Significant Accounting Policies: (Continued)
------------------------------------------
Fair Values of Financial Instruments (Continued)
------------------------------------
Deposits: The fair values disclosed for deposits with no stated maturity
such as demand deposits, interest-bearing checking accounts and passbook
savings accounts are, by definition, equal to the amount payable on
demand at the reporting date (that is, their carrying amounts). The fair
values for certificates of deposit and other fixed maturity time deposits
are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on such type accounts to a
schedule of aggregated contractual maturities on such time deposits.
Advance from Federal Home Loan Bank: This advance matures within 90 days of
the balance sheet date; therefore, the carrying value will approximate
fair value.
Accrued interest payable: The carrying amount will approximate fair value
as the majority of such interest will be paid within 90 days or less.
Commitments to extend credit: Commitments to extend credit were evaluated
and fair value was estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates.
Sale and Servicing of Mortgage Loans
------------------------------------
The Bank sells mortgage loans for cash proceeds equal to the principal
amount of the loans sold but with yield rates which reflect the current
market rate. Gain or loss is recorded at the time of sale in an amount
reflecting the difference between the contractual interest rates of the
loans sold and the current market rate. Certain loans are sold with the
servicing retained by the Bank. Servicing income is recognized as
collected and is based on the normal agency servicing fee as defined by
GNMA, FNMA, or FHLMC. In May 1994, SFAS 122, Accounting for Mortgage
Servicing Rights was issued. SFAS 122 is effective for fiscal years
beginning after December 15, 1995, with earlier adoption permitted. The
statement amends SFAS 65, Accounting for Certain Mortgage Banking
Activities, to require that a mortgage banking enterprise recognize, as
separate assets, rights to service mortgage loans for others, however
acquired. For mortgage servicing rights that are created through the
origination of mortgage loans, and where the loans are subsequently sold
or securitized with servicing rights retained, the statement requires
that the total cost of the mortgage loans should be allocated to the
mortgage servicing rights and the loans based on their relative fair
values. The statement also requires the assessment of capitalized
mortgage servicing rights for impairment to be based on the current fair
value of those rights and recognized through a valuation allowance. The
Bank adopted SFAS 122 effective January 1, 1996, the impact of which was
not material to its financial statements.
Fees earned for servicing loans are reported as income when the related
mortgage loan payments are collected. Mortgage servicing rights (MSRs)
are amortized, as a reduction to loan service fee income, using the
interest method over the estimated remaining life of the underlying
mortgage loans. MSR assets are carried at fair value and impairment, if
any, is recognized through a valuation allowance. The Bank primarily
sells its mortgage loans on a non-recourse basis.
F-11
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(1) Summary of Significant Accounting Policies: (Continued)
------------------------------------------
Effect of New Accounting Pronouncements
---------------------------------------
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. The
statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities.
After a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished.
This Statement requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be
initially measured at fair value, if practicable. It also requires
that servicing assets and other retained interests in the transferred
assets be measured by allocating the previous carrying amount between
the assets sold, if any, and retained interests, if any, based on
their relative fair values at the date of the transfer. This Statement
requires that servicing assets and liabilities be subsequently
measured by (a) amortization in proportion to and over the period of
estimated net servicing income or loss and (b) assessment for asset
impairment or increased obligation based on their fair values. This
Statement requires that debtors reclassify financial assets pledged as
collateral and that secured parties recognize those assets and their
obligation to return them in certain circumstances in which the
secured party has taken control of those assets.
This Statement requires that a liability be derecognized if and only if
either (a) the debtor pays the creditor and is relieved of its
obligation for the liability or (b) the debtor is legally released
from being the primary obligor under the liability either judicially
or by the creditor. Therefore, a liability is not considered
extinguished by an in-substance defeasance.
This Statement is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after January 1, 1998 as
deferred by SFAS 127, and is to be applied prospectively. The impact
on the financial statements for implementation of the Statement is not
expected to be material.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. The
statement establishes standards for computing and presenting earnings
per share ("EPS") and applies to entities with publicly-held common
stock or potential common stock. It replaces the presentation of
primary EPS with a presentation of basic EPS and requires the dual
presentation of basic and diluted EPS on the face of the income
statement. This statement is effective for financial statements issued
for periods ending after December 15, 1997 including interim periods;
earlier applications not permitted. This statement requires
restatement of all prior period EPS data presented.
F-12
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(1) Summary of Significant Accounting Policies: (Continued)
------------------------------------------
Effect of New Accounting Pronouncements (Continued)
---------------------------------------
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. The statement establishes standards for
disclosing information about an entity's capital structure and applies
to all entities. This statement continues the previous requirements to
disclose certain information about an entity's capital structure found
in Accounting Principles Board ("APB") Opinions No. 10, Omnibus
Opinion - 1966, and No. 15, Earnings Per Share, and SFAS No. 47,
Disclosure of Long-Term Obligations, for entities that were subject to
those standards. This statement is effective for financial statements
for periods ending after December 15, 1997. This statement contains no
change in disclosure requirements for entities that were previously
subject to the requirements of APB Opinions Nos. 10 and 15 and SFAS
No. 47. The adoption of the provisions of this statement is not
expected to have a material impact on the Bank.
In July 1997, the FASB issued SFAS No. 130, Comprehensive Income. The
statement establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. It
requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported
in a financial statement that is presented with the same prominence as
other financial statements. This statement requires that companies (i)
classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial
condition. This statement is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comprehensive purposes is required.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. The statement establishes
standards for disclosure about operating segments in annual financial
statements and selected information in interim financial reports. It
also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This statement
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise. This statement becomes effective for the Bank's fiscal
year ending December 31, 1998, and requires that comparative
information from earlier years be restated to conform to its
requirements. The adoption of the provisions of this statement is not
expected to have a material impact on the Bank.
F-13
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(1) Summary of Significant Accounting Policies: (Continued)
------------------------------------------
Unaudited Financial Information
-------------------------------
Information as of September 30, 1997 and for the nine month periods ended
September 30, 1997 and 1996 is unaudited. The unaudited information
furnished reflects all adjustments, which consist solely of normal
recurring accruals, which are, in the opinion of management, necessary
for a fair presentation of the financial position at September 30,
1997 and the results of operations and cash flows for the nine-month
periods ended September 30, 1997 and 1996. The results of the nine-
month periods are not necessarily indicative of the results of the
Bank which may be expected for the entire year.
(2) Cash:
----
The Bank is required to maintain cash on hand or in the Federal Reserve
Bank account for various regulatory purposes. During 1997 and 1996,
such required cash averaged approximately $1,400,000 and $2,000,000,
respectively.
(3) Investment Securities Held to Maturity and Investment Securities Available
--------------------------------------------------------------------------
for Sale:
--------
The amortized cost and estimated fair values of investment securities held
to maturity and available for sale at September 30, 1997, December 31,
1996 and 1995, are as follows:
Investment securities held to maturity:
<TABLE>
<CAPTION>
September 30, 1997 (Unaudited)
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government agencies $3,700 5 2 3,703
============= ============= ============= =======
<CAPTION>
December 31, 1996
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government agencies $7,705 12 15 7,702
=========== ============ ============ ========
</TABLE>
F-14
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(3) Investment Securities Held to Maturity and Available-for-Sale: (Continued)
--------------------------------------------------------------------------
Investment securities held to maturity: (Continued)
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government agencies $35,550 104 31 35,623
============= ============== ============= ============
</TABLE>
Investment securities available for sale:
<TABLE>
<CAPTION>
September 30, 1997 (Unaudited)
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government agencies $10,118 - 11 10,107
============ ============= ============= =========
</TABLE>
The amortized cost and estimated market value of investment securities held to
maturity and available-for-sale at September 30, 1997, by contractual
maturity, are shown below.
Investment securities held to maturity:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government agencies:
Maturing within one year $3,000 3,005
Maturing from one to five years 700 698
------- -------
$3,700 3,703
======= =======
</TABLE>
F-15
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(3) Investment Securities Held to Maturity and Available-for-Sale: (Continued)
-------------------------------------------------------------
Investment securities available-for-sale:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
(Unaudited)
<S> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government agencies:
Maturing within one year $ 5,040 5,034
Maturing from one to five years 5,078 5,073
------- ---------
$10,118 10,107
======= =========
</TABLE>
The amortized cost and estimated market value of investment securities held to
maturity at December 31, 1996, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government agencies:
Maturing within one year $6,004 6,011
Maturing from one to five years 1,701 1,691
------ ---------
$7,705 7,702
====== =========
</TABLE>
The amortized cost and estimated market value of investment securities held to
maturity at December 31, 1995, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government agencies:
Maturing within one year $15,047 15,052
Maturing from one to five years 20,503 20,571
------- ------
$35,550 35,623
======= ======
</TABLE>
At September 30, 1997, December 31, 1996 and 1995, investment securities with
amortized cost values of $2,000,529, $2,000,000 and $9,032,217, respectively,
were pledged as collateral as permitted or required by law.
There were no sales of investment securities available-for-sale in the years
ended December 31, 1996, 1995, and 1994, or in the unaudited nine months ended
September 30, 1997 and 1996.
F-16
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(4) Mortgage-backed Securities:
--------------------------
The amortized cost and estimated fair values of mortgage-backed securities
at September 30, 1997, December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
September 30, 1997 (Unaudited)
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FHLMC $ 430 9 - 439
FNMA 903 12 5 910
------ ----- ----- ------
Total mortgage-backed securities $1,333 21 5 1,349
====== ===== ===== ======
<CAPTION>
December 31, 1996
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FHLMC $ 459 3 2 460
FNMA 960 4 7 957
------ ----- ----- -----
Total mortgage-backed securities $1,419 7 9 1,417
====== ===== ===== =====
<CAPTION>
December 31, 1995
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S>
Mortgage-backed securities:
FHLMC $ 520 1 2 519
FNMA 1,021 - 6 1,015
------ ----- ----- -----
Total mortgage-backed securities $1,541 1 8 1,534
====== ===== ===== =====
</TABLE>
There were no sales of mortgage-backed securities in the years ended December
31, 1996, 1995, and 1994 or in the unaudited nine months ended September 30,
1997 and 1996.
F-17
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(5) Loans Held-for-Sale, Net and Loans Receivable Held for Investment, Net:
----------------------------------------------------------------------
Loans held for sale, net are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1997 1996 1995
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
One-to-four family loans $4,149 5,253 3,689
------ ----- -----
Total loans held for sale, net $4,149 5,253 3,689
====== ===== =====
</TABLE>
The Bank originates most fixed rate loans for immediate sale to the Federal
National Mortgage Association (FNMA) or other investors. Generally, the
sale of such loans is arranged at the time the loan application is received
through commitments.
Loans receivable at September 30, 1997 and December 31, 1996 and 1995,
consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
-------------- ----------------
1997 1996 1995
-------------- ------- -------
(Unaudited)
<S> <C> <C> <C>
Loans secured by first mortgages on real estate:
One-to-four family $ 84,036 81,279 72,302
Multi-family 1,385 2,847 1,705
Land 10,634 18,799 13,816
Commercial real estate 37,104 30,099 22,140
Construction and development 68,794 61,032 47,416
-------- ------- -------
Total first mortgage loans 201,953 194,056 157,379
Second mortgage loans 2,829 1,964 941
Commercial loans 22,136 20,698 14,771
Consumer loans 30,405 28,533 25,713
-------- ------- -------
257,323 245,251 198,804
Less:
Loans in process 33,201 36,573 32,615
Allowance for loan losses 2,801 2,123 1,997
Deferred loan fees, net 762 702 560
Loans held for sale 4,149 5,253 3,689
-------- ------- -------
Loans receivable, net $216,410 200,600 159,943
======== ======= =======
</TABLE>
F-18
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(5) Loans Held-for-Sale, Net and Loans Receivable Held for Investment, Net:
----------------------------------------------------------------------
(Continued)
Loans are presented net of loans serviced for the benefit of others
totaling approximately $116.7 million, $120.5 million, $123.3 million,
$132.8 million and $139.2 million at September 30, 1997 and 1996 and
December 31, 1996, 1995 and 1994, respectively. Servicing loans for others
generally consists of collecting mortgage payments, maintaining escrow
amounts, disbursing payments to investors and foreclosure processing.
Impaired loans and related allowances for possible loan losses have been
identified and calculated in accordance with the provisions of SFAS 114.
The total allowance for possible loan losses has been determined in
accordance with the provisions of SFAS 5, Accounting for Contingencies. As
such, the Bank has provided amounts for anticipated losses that exceed the
immediately identified losses associated with loans that have been deemed
impaired. Provisions have been made and established accordingly, based
upon experience and expectations, for losses associated with the general
population of loans, specific industry and loan types, including
residential and consumer loans which are not subject to the provisions of
SFAS 114.
No loans were considered impaired at September 30, 1997 and December 31,
1996.
Activity in the allowance for loan losses, consisted of the following:
<TABLE>
<CAPTION>
Nine months ended Years ended
September 30, December 31,
---------------- -------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $2,123 1,997 1,997 1,776 1,681
Provision for loan losses 700 90 120 80 113
Recoveries 14 211 218 192 59
Charge-offs (36) (212) (212) (51) (77)
------ ----- ----- ----- -----
Balance at end of period 2,801 2,086 2,123 1,997 1,776
====== ===== ===== ===== =====
</TABLE>
Nonaccrual loans totaled approximately $59,000, $51,000 and $107,000 at
September 30, 1997, December 31, 1996 and 1995, respectively. Interest
income foregone on such loans was approximately $8,700, $7,725, $10,300,
$21,100 and $45,300 during the nine month periods ended September 30, 1997
and 1996 and the years ended December 31, 1996, 1995 and 1994,
respectively. The Bank is not committed to lend additional funds to
borrowers whose loans have been placed on a nonaccrual basis.
F-19
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(5) Loans Held-for-Sale, Net and Loans Receivable Held for Investment, Net:
----------------------------------------------------------------------
(Continued)
Loans in arrears three months or more were as follows:
<TABLE>
<CAPTION>
Amount % of loans
------ ----------
<S> <C> <C>
September 30, 1997 (unaudited) $108 0.05%
==== ====
December 31, 1996 $ 25 0.01%
==== ====
December 31, 1995 $ 97 0.06%
==== ====
</TABLE>
The Bank's policy is to make consumer and mortgage loans to directors,
officers, and employees pursuant to board of directors' approval.
The following summarizes the activity of these loans:
<TABLE>
<CAPTION>
September 30, December 31,
------------- ---------------
1997 1996 1995
----- ---- ----
(Unaudited)
<S> <C> <C> <C>
Balance at beginning of period $ 542 104 122
New loans 320 645 121
Principal repayments (253) (207) (139)
----- ---- ----
Balance at end of period $ 609 542 104
===== ==== ====
</TABLE>
In the opinion of management, such loans were made on substantially the
same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with other borrowers and did not
involve more than the normal risk of collectibility or present other
unfavorable features.
(6) Office Properties and Equipment, Net:
------------------------------------
Office properties and equipment, less accumulated depreciation and
amortization, consisted of the following at September 30, 1997 and
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 1995
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Land $ 2,525 2,088 1,543
Office buildings 3,759 3,363 3,125
Furniture, fixtures, and equipment 5,760 4,422 3,425
Leasehold improvements 150 150 150
Automobiles 102 96 106
Construction in process 144 8 165
------- ------ -----
12,440 10,127 8,514
Less accumulated depreciation and amortization 4,576 3,924 3,228
------- ------ -----
Office properties and equipment, net $ 7,864 6,203 5,286
======= ====== =====
</TABLE>
F-20
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(7) Required Investment in Stock of Federal Home Loan Bank:
------------------------------------------------------
The Bank is a member of the Federal Home Loan Bank (FHLB). As a member of
this system, the Bank is required to maintain an investment in capital
stock of the Federal Home Loan Bank of Cincinnati in an amount equal to
the greater of 1% of residential mortgage loans and mortgage-backed
securities, or .3% of total assets of the Bank. At December 31, 1996, no
additional investments are required. No ready market exists for the stock,
and it has no quoted market value, but may be redeemed for face value by
the FHLB if the Bank withdraws its membership. Accordingly, this
investment is carried at the Bank's historical cost.
(8) Mortgage Servicing Rights:
--------------------------
An analysis of the activity for originated mortgage servicing rights is as
follows:
<TABLE>
<S> <C>
Balance of adoption of Statement of
Financial Accounting Standards
No. 122 on January 1, 1996 $ -
Originations 29
Amortization (6)
----------
Balance, December 31, 1996 23
Originations (unaudited) 176
Amortization (unaudited) (34)
----------
Balance, September 30, 1997 (unaudited) $ 165
==========
</TABLE>
(9) Deposits:
--------
Savings, demand, and time deposit account balances are summarized as
follows:
<TABLE>
<CAPTION>
September 30, 1997
------------------------
(Unaudited)
Weighted
Type of Account Average Rate Amount
--------------- ------------- ------
<S> <C> <C>
Personal accounts - % $ 24,757
NOW accounts 1.70 29,981
Savings accounts 2.00 15,202
Certificates of deposit 5.52 132,108
Money market accounts 4.34 39,902
---------
$241,950
=========
</TABLE>
F-21
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(9) Deposits: (Continued)
---------------------
<TABLE>
<CAPTION> December 31, 1996
---------------------
Weighted
Type of Account Average Rate Amount
--------------- ------------ ------
<S> <C> <C>
Personal accounts - % $ 19,844
NOW accounts 1.69 27,735
Savings accounts 1.99 15,806
Certificates of deposit 5.38 122,649
Money market accounts 4.32 28,499
--------
$214,533
========
December 31, 1995
-----------------------
Weighted
Type of Account Average Rate Amount
--------------- ------------ ------
<S> <C> <C>
Personal accounts - % $ 19,877
NOW accounts 2.10% 24,325
Savings accounts 2.20% 17,228
Certificates of deposit 5.51% 114,859
Money market accounts 4.04% 20,445
--------
$196,734
========
</TABLE>
Scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
September 30, 1997
--------------------------
(Unaudited)
Weighted
Type of Account Average Rate Amount Percent
--------------- ------------ ------ -------
<S> <C> <C> <C>
1 year or less 5.51% $112,254 84.97%
Greater than 1 year through 2 years 5.51 14,155 10.72
Greater than 2 years through 3 years 6.32 3,254 2.46
Greater than 3 years through 4 years 5.59 996 0.75
Greater than 4 years through 5 years 5.66 1,449 1.10
Over 5 years - - -
-------- --------
$132,108 100.00%
======== ========
</TABLE>
F-22
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(9) Deposits: (Continued)
--------
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------
Weighted
Type of Account Average Rate Amount Percent
--------------- ------------ ------- -------
<S> <C> <C> <C>
1 year or less 3.77% $ 92,104 75.10%
Greater than 1 year through 2 years 5.58 22,487 18.33
Greater than 2 years through 3 years 5.82 4,902 4.00
Greater than 3 years through 4 years 6.06 3,153 2.57
Greater than 4 years through 5 years 6.24 3 -
Over 5 years - - -
------- --------
$122,649 100.00%
======= ========
<CAPTION>
December 31, 1995
---------------------------------------
Weighted
Type of Account Average Rate Amount Percent
--------------- ------------ ------ -------
<S> <C> <C> <C>
1 year or less 3.91% $ 87,650 76.31%
Greater than 1 year through 2 years 5.66% 13,832 12.04
Greater than 2 years through 3 years 5.74% 6,528 5.68
Greater than 3 years through 4 years 6.03% 6,816 5.93
Greater than 4 years through 5 years 5.59% 33 0.04
Over 5 years - % - -
-------- -------
$114,859 100.00%
======== =======
</TABLE>
Certificates of deposit in excess of $100,000 were approximately $25.9
million, $20.9 million and $18.8 million at September 30, 1997 (unaudited)
and at December 31, 1996 and 1995, respectively.
The FDIC insures deposits of account holders up to $100,000 per insured
depositor. To provide for this insurance, the Bank must pay a risk-based
annual assessment which considers the financial soundness of the
institution and capitalization level (note 17). At December 31, 1996, the
Bank was assessed at the FDIC's lowest assessment level, as a well
capitalized institution.
F-23
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(9) Deposits: (Continued)
--------
Interest expense on deposit balances is summarized as follows:
<TABLE>
<CAPTION>
Nine months Years ended
ended September 30, December 31,
------------------- ------------
(Unaudited)
1997 1996 1996 1995 1994
------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Savings accounts $ 227 272 351 398 353
Money market and NOW accounts 1,396 1,181 1,595 1,145 800
Certificates of deposit 5,192 4,664 6,322 6,153 5,027
------ ----- ----- ----- -----
$6,815 6,117 8,268 7,696 6,180
====== ===== ===== ===== =====
</TABLE>
(10) Advance from the Federal Home Loan Bank:
---------------------------------------
As of September 30, 1997, December 31, 1996 and 1995, no funds are owed to
the Federal Home Loan Bank of Cincinnati (FHLB). Available advances were
$10,000,000 at December 31, 1996 and $12,100,000 at September 30, 1997
(unaudited) and are secured by a blanket agreement to maintain residential
first mortgage loans with a principal value of 150% of the outstanding
advances and has a variable interest rate. At September 30, 1997 and
December 31, 1996, there were no draws outstanding against advance line.
By pledging additional residential first mortgage loans, the Bank can
increase its borrowings from the FHLB to $45,254,666 (unaudited) at
September 30, 1997.
(11) Income Taxes:
-------------
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Nine months Years ended
ended September 30, December 31,
---------------------- --------------------------
(Unaudited)
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current income tax expense:
Federal $1,640 1,238 1,775 1,541 1,428
State 337 144 210 210 183
------ ----- ----- ----- -----
Total current income tax expense 1,977 1,382 1,985 1,751 1,611
------ ----- ----- ----- -----
Deferred income tax expense (benefit):
Federal (385) (235) (215) (35) (64)
State (45) (18) (16) (5) (9)
------ ----- ----- ----- -----
Total deferred income tax benefit (430) (253) (231) (40) (73)
------ ----- ----- ----- -----
Income tax expense $1,547 1,129 1,754 1,711 1,538
====== ===== ===== ===== =====
</TABLE>
F-24
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(11) Income Taxes: (Continued)
------------
The following table presents a reconciliation of the provision for income
taxes as shown in the consolidated statements of earnings with that which
would be computed by applying the statutory federal income tax rate of 34%
to earnings before income taxes.
<TABLE>
<CAPTION>
Nine months Years ended
ended September 30, December 31,
--------------------------- -----------------------------------------
(Unaudited)
1997 1996 1996 1995 1994
-------------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tax expense at statutory rates $1,294 34.0% 1,009 34.0 1,553 34.0 1,670 34.0 1,359 34.0
Increases (decrease) in taxes
resulting from:
State income tax, net of
federal effect 193 5.0 83 2.8 128 2.8 136 2.8 115 2.9
Other, net 60 1.7 37 1.2 73 1.6 (95) (2.0) 64 1.6
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total income tax expense $1,547 40.7% 1,129 38.0 1,754 38.4 1,711 34.8 1,538 38.5
===== ===== ====== ===== ===== ==== ===== ==== ===== ====
</TABLE>
During 1996, legislation was passed which repealed the percentage of
taxable income reserve method of accounting for bad debts being utilized
by the Bank, effective for tax years beginning after 1995. The new law
required that, prospectively, the Bank account for bad debts utilizing the
experience reserve method beginning in tax year 1996.
The law also required that the Bank would be taxed on "applicable excess
reserves" which is determined by calculating the difference between the
balance of reserves as of the tax year ended 1995 and pre-1988 reserves.
These "applicable excess reserves" will be taxed over a six-taxable year
period beginning in 1996 unless a residential loan requirement is met. If
the residential loan requirement is met in 1996 and 1997, the payment of
the tax will commence in 1998. The Bank met the requirement in 1996.
The Bank's computed "applicable excess reserves" totaled $1,956,670 and,
based on an effective tax rate of 34%, would render additional tax of
$665,268. This computed tax is recorded as income taxes payable as of
December 31, 1996 and September 30, 1997 (unaudited).
The tax effects of temporary differences that give rise to the significant
portions of deferred tax asset and liabilities at September 30, 1997
(unaudited) and December 31, 1996 and 1995, are as follows:
F-25
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(11) Income Taxes: (Continued)
-------------
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 1995
----- ----- -----
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Loans receivable, allowance for loan losses $1,063 806 680
Deferred loan fees 289 266 192
Office properties and equipment 188 - -
Excess mortgage servicing asset 9 18 26
Other 2 2 4
----- ----- -----
Total deferred tax asset 1,551 1,092 902
----- ----- -----
Deferred tax liabilities:
FHLB stock 306 275 212
Office properties and equipment - 8 55
Tax bad debt reserve - - 60
Other 60 54 52
----- ----- -----
Total deferred tax liability 366 337 379
----- ----- -----
Net deferred tax asset $1,185 755 523
===== ===== =====
</TABLE>
SFAS No. 109, Accounting for Income Taxes, requires that the tax benefit of
deductible temporary differences be recorded as an asset to the extent
that management assesses the utilization of such temporary differences to
be "more likely than not." In accordance with SFAS No. 109, the
realization of tax benefits of deductible temporary differences depends on
whether the Bank has sufficient taxable income within the carryback and
carryforward period permitted by tax law to allow for utilization of the
deductible amounts. Taxable income in the carryback period and estimates
of taxable income in the carryforward period were expected to be
sufficient to utilize such differences. As such, no valuation allowance
was established at September 30, 1997 (unaudited), December 31, 1996 or
December 31, 1995.
(12) Pension Plan:
------------
The Bank sponsors a defined benefit pension plan and a 401(k) savings plan
to provide employees income at retirement. All employees of the Bank are
eligible to participate in both plans upon attainment of age 21 and
completion of one year of service. Both plans are administered by a
pension committee appointed by the Board of Directors of the Bank.
Under the defined benefit pension plan, the Bank contributes actuarially
determined amounts necessary to fund plan benefits of at least the minimum
amount required by the Employee Retirement Income Security Act of 1974, as
amended. No contributions are required or allowed by employees.
F-26
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(12) Pension Plan: (Continued)
------------
Net pension expense included the following components for the years ended
December 31, 1996 and 1995 (the latest valuation dates):
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995
------ ------
<S> <C> <C>
Service cost for benefits earned during the period $ 151 111
Interest cost on projected benefit obligation 104 86
Actual net return on plan assets (84) (169)
Net amortization and deferrals (1) 99
----- ----
Net periodic pension expense $ 170 127
===== ====
</TABLE>
The following table sets forth the defined benefit pension plan's funded status
and amounts recognized in the Bank's consolidated balance sheets for December
31, 1996 and 1995 (the latest valuation dates).
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
------- ------
<S> <C> <C>
Plan assets at fair value, primarily bonds $1,312 1,144
====== =====
Actuarial present value of benefit for service
rendered to date:
Accumulated benefit obligation, including vested
benefits of $714,198 and $660,838, respectively $ 812 739
Additional benefits based on projected future
compensation 832 844
------ -----
Projected benefit obligation 1,644 1,583
====== =====
Plan assets less than projected benefit obligation (332) (439)
Unrecognized prior service cost 39 43
Unrecognized net loss from past experience,
different from that assumed and effects of changes
in assumptions 521 631
Unrecognized net transition asset at January 1, 1989 (109) (120)
------ -----
Prepaid pension benefit $ 119 115
====== =====
</TABLE>
The weighted average discount rate used in determining the actuarial present
value was 7% for the years ended December 31, 1996 and 1995, respectively. The
rate of increase in future compensation levels used in determining the
actuarial present value was 5% for the years ended December 31, 1996 and 1995,
respectively. The expected long-term rate of return on plan assets was 8% in
1996 and 1995.
F-27
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(12) Pension Plan: (Continued)
------------
On January 1, 1993, management adopted the 401(k) savings plan (the Plan)
for employees of the Bank. Employees may enter the plan on January 1 or
July 1, whichever occurs first, after completion of eligibility
requirements. Management has contributed 2% of employees' earnings to the
Plan on the employees' behalf. Employees are allowed to contribute up to
15% of earnings and, in addition, management will match employee
contributions up to 3%. The expense incurred by the Plan for the years
ended December 31, 1996 and 1995 was $142,584 and $141,523, respectively.
(13) Retained Earnings:
-----------------
The Bank has been allowed a special bad debt deduction for Federal income
tax purposes, limited generally to 8% of otherwise taxable income and
subject to certain limitations based on aggregate loans and savings
account balances at the end of the year. The Bank could use each year for
Federal income tax purposes the greater of this percentage deduction or
actual charge-offs of loans. If the amounts that qualify as deductions
under the percentage method for Federal income tax purposes are later used
for purposes other than for bad debt losses, they would be subject to
Federal income tax at the then current corporate rate. During 1996,
legislation was passed prohibiting the utilization of percentage of
taxable income reserve method (see note 11). Retained earnings at December
31, 1996 and 1995, include approximately $2,800,000 and $4,800,000,
respectively, for which Federal income tax has not been provided.
(14) Regulatory Matters:
------------------
The amounts for retained earnings and net earnings reported to the Office
of Thrift Supervision (OTS) agree to the amounts per the accompanying
consolidated financial statements at December 31, 1996 and 1995, and for
the years then ended.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established a capital based supervisory system of Prompt Corrective Action
(PCA) for all insured depository institutions. The regulations adopted
pursuant to FDICIA and effective December 19, 1992, established capital
categories that determine the degree of supervisory PCA to which a
depository institution could be subjected. The categories consist of "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized". An institution is
deemed to be "well capitalized" if (a) its risk-based capital ratio is 10%
or greater, (b) its Tier 1 risk-based capital ratio is 6% or greater, and
(c) its leverage ratio is 5% or greater. At September 30, 1997
(unaudited), the Bank was "well-capitalized."
When an insured depository institution's capital ratios fall below the
"well-capitalized" level it becomes subject to a series of increasingly
restrictive supervisory actions, to the point where a conservator or
receiver must be designated for a "critically undercapitalized"
institution unless certain certifications are made by the appropriate
regulatory agencies. An institution is deemed to be "critically
undercapitalized" if its ratio of Tier 1 capital to total assets is 2% or
less.
F-28
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(14) Regulatory Matters: (Continued)
------------------
The following table presents the Bank's retained earnings (equity capital)
and regulatory capital ratios as of September 30, 1997 (unaudited) and
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
September 30, 1997 (unaudited and rounded)
-----------------------------------------------------------------------------------------------------
Tier 1 Total
Core 1 risk- risk-
Equity Tangible Tangible leverage based based
capital capital equity capital capital capital
---------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Equity capital $ 29,500 29,500 29,500 29,500 29,500 29,500
Nonincludable subsidiaries - - - - - -
Unrealized loss on
available for sale
securities - 7 7 7 7 7
General valuation
allowances - - - - - 2,801
-------- -------- -------- ------- ------- -------
Regulatory capital measure $ 29,500 29,507 29,507 29,507 29,507 32,308
======== ======== ======== ======= ======= =======
Total assets $275,925
========
Adjusted total assets $ 275,925 272,604 272,604
======= ======= =======
Risk-weighted assets $246,830 246,830
======== =======
Capital ratio 10.69% 10.69% 10.82% 10.82% 11.95% 13.09%
======== ======= ====== ======= ======= =======
<CAPTION>
December 31, 1996 (rounded)
--------------------------------------------------------------------------
Tier 1 Total
Core 1 risk- risk-
Equity Tangible Tangible leverage based based
capital capital equity capital capital capital
---------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Equity capital $ 27,250 27,250 27,250 27,250 27,250 27,250
Nonincludable
subsidiaries - (2) (2) (2) (2) (4)
General valuation
allowances - - - - - 2,123
-------- ------- ------ -------- -------- -------
Regulatory capital measure $ 27,250 27,248 27,248 27,248 27,248 29,369
======== ======== ======= ======== ======== =======
Total assets $ 244,964
========
Adjusted total assets $ 244,962 242,748 242,748
======== ======= =======
Risk-weighted assets $227,556 227,748
======== =======
Capital ratio 11.12% 11.12% 11.22% 11.22% 11.97% 12.91%
======= ======== ====== ======== ======== =======
</TABLE>
F-29
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(14) Regulatory Matters: (Continued)
------------------
<TABLE>
<CAPTION>
December 31, 1995 (rounded)
-------------------------------------------------------------------------
Tier 1 Total
Core 1 risk- risk-
Equity Tangible Tangible leverage based based
capital capital equity capital capital capital
------- ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Equity capital $ 24,436 24,436 24,436 24,436 24,436 24,436
Nonincludable
subsidiaries - (2) (2) (2) (2) (4)
General valuation
allowances - - - - - 1,997
-------- ------- ------- ------- ------- -------
Regulatory capital measure $ 24,436 24,434 24,434 24,434 24,434 26,429
======== ======= ======= ======= ======= =======
Total assets $223,882
========
Adjusted total assets $223,880 223,841 223,841
======== ======= =======
Risk-weighted assets $184,669 184,669
======== =======
Capital ratio 10.91% 10.91% 10.91% 10.91% 13.23% 14.31%
====== ====== ====== ====== ====== ======
</TABLE>
The Bank's management believes that at December 31, 1996, that the Bank
meets all capital requirements to which it is subject.
(15) Financial Instruments with Off-Balance-Sheet Risk:
-------------------------------------------------
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 reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend
credit, standby letters of credit, and financial guarantees. Those
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
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 and financial guarantees written
is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making these
commitments and conditional obligations as it does for on-balance-
sheet instruments.
F-30
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(15) Financial Instruments with Off-Balance-Sheet Risk: (Continued)
-------------------------------------------------
At December 31, 1996 and 1995, unused lines of credit were approximately
$16,770,000 and $10,992,000, respectively, with the majority having
terms of one year for commercial and two to five years for consumer;
outstanding letter of credit balances were approximately $8,804,000
and $5,648,000, respectively; and commitments to originate or purchase
loans were approximately $44,715,000 and $20,651,000, respectively.
The commitments to originate loans at December 31, 1996 were composed
of variable rate loans of approximately $36,850,000 and fixed rate
loans of approximately $7,865,000. The fixed rate loans had interest
rates ranging from 7.92% to 9.33%. The commitments to originate loans
at December 31, 1995 were composed of variable rate loans of
approximately $13,044,000 and fixed rate loans of approximately
$7,607,000. The fixed rate loans had interest rates ranging from 7.5%
to 9.0%.
At September 30, 1997 (unaudited), unused lines of credit totaled
approximately $22,692,000 with the majority having terms of one year
for commercial and two to five years for consumer; the outstanding
letter of credit balance was approximately $8,131,000 and commitments
to originate or purchase loans was approximately 3,789,190. The
commitments to originate loans at September 30, 1997 (unaudited) was
composed of variable rate loans of approximately $770,165 and fixed
rate loans of approximately $3,019,025. The fixed rate loans had
interest rates ranging from 5.75% to 9.50%.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The 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 counter-party. Collateral held
varies but may include property, plant, and equipment and income-
producing commercial properties.
Standby letters of credit and financial guarantees written are 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, including
commercial paper, bond financing, and similar transactions. Most
guarantees extend from one to two years. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers.
F-31
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(16) Fair Value of Financial Instruments:
-----------------------------------
Information about the fair value of the financial instruments in the
consolidated balance sheets, which should be read in conjunction with
note 1 and certain other notes to the consolidated financial
statements presented elsewhere herein, is set forth as follows:
<TABLE>
<CAPTION>
September 30, December 31, December 31,
1997 1996 1995
---------------------- --------------------- ---------------------
(Unaudited)
Estimated Estimated Estimated
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 26,691 26,691 19,519 19,519 13,935 13,935
Investment securities available
for sale 10,107 10,107 - - - -
Investment securities held to maturity 3,700 3,703 7,705 7,702 35,550 35,623
Mortgage-backed securities 1,333 1,349 1,419 1,417 1,541 1,534
Loans receivable, net 216,410 212,175 200,600 202,792 159,943 162,452
Loans available for sale 4,149 4,149 5,253 5,253 3,689 3,689
Accrued interest receivable 1,870 1,870 1,446 1,446 1,614 1,614
Required investment in stock of
the Federal Home Loan Bank 1,602 1,602 1,519 1,519 1,418 1,418
Financial liabilities:
Deposits with no stated maturity 109,842 109,842 91,884 91,884 81,875 81,875
Certificates of deposits 132,108 132,556 122,649 112,808 114,859 107,934
Off-balance sheet assets (liabilities):
Unused lines of credit - - -
Standby letters of credit - - -
Commitments to extend credit - - -
</TABLE>
(17) Federal Insurance Premiums:
--------------------------
During 1996, all Savings Association Insurance Fund (SAIF) members were
required to pay a one-time special assessment to the FDIC on SAIF-
assessable deposits to capitalize the SAIF at its target Designated
Reserve Ratio of 1.25% of insured deposits effective October 1, 1996.
The assessment was required to be applied against SAIF-assessable
deposits as of March 31, 1995 with an assessment rate of 67.5 basis
points. The expense incurred by the Bank was $1,653,727 and $417,731
during 1996 and 1995, respectively.
(18) Commitments and Contingencies:
-----------------------------
In the normal course of the Bank's business, there are outstanding various
commitments and contingent liabilities that have not been reflected in
the consolidated statements. In the opinion of management, the
financial position of the Bank will not be affected materially as a
result of such commitments and contingent liabilities.
F-32
<PAGE>
CAVALRY BANKING AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(TABLE AMOUNTS IN THOUSANDS)
(18) Commitments and Contingencies: (Continued)
-----------------------------
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, after consultation with
legal counsel, the financial position of the Bank will not be affected
materially by the outcome of such legal proceedings.
The Bank's profitability depends to a large extent on its net interest
income, which is the difference between interest income on loans and
investments and interest expense on deposits. Like most financial
institutions, the Bank's interest income and interest expense are
significantly affected by changes in market interest rates and other
economic factors beyond its control. The Bank's interest earning
assets consist primarily of mortgage loans and investments which
adjust more slowly to changes in interest rates than its interest-
bearing savings deposits. Accordingly, the Bank's earnings would be
adversely affected during periods of rising interest rates.
(19) Conversion to Capital Stock Form of Ownership:
---------------------------------------------
On August 7, 1997, the Board of Directors of the Bank adopted a Plan of
Conversion (Plan), to convert from a federally chartered mutual
savings bank to a federally chartered capital stock savings bank with
the concurrent formation of a holding company, Cavalry Bancorp, Inc.
(Company), subject to the approval by regulatory authorities and
depositors of the Bank. The conversion is expected to be accomplished
through amendment of the Bank's state charter and the sale of the
holding company's common stock in an amount equal to the consolidated
pro forma market value of the holding company and the Bank after
giving effect to the conversion. A subscription offering of the shares
of common stock will be offered initially to eligible account holders,
employee benefit plans of the Bank, supplemental eligible account
holders and other members of the Bank. Any shares of common stock not
sold in the offering are expected to be sold to the underwriters for
resale to the general public.
At the time of conversion, the Bank will establish a liquidation account
in an amount equal to its capital as of the date of the latest
consolidated statement of financial condition appearing in the final
prospectus. The liquidation account will be maintained for the benefit
of eligible account holders who continue to maintain their accounts at
the Bank after the conversion. The liquidation account will be reduced
annually to the extent that eligible account holders have reduced
their qualifying deposits as of each anniversary date. Subsequent
increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each
eligible account holder will be entitled to receive balances for
accounts then held.
Subsequent to the conversion, the Bank may not declare or pay cash
dividends on or repurchase any of its shares of common stock if the
effect thereof would cause stockholder's equity to be reduced below
applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory
requirements.
Conversion costs will be deferred and reduce the proceeds from the shares
sold in conversion. If the conversion is not completed, all costs will
be charged as expense. As of September 30, 1997, conversion costs of
$23,244 have been incurred.
F-33
<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 Cavalry Bancorp, Inc. or Cavalry Banking. 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 or 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 Cavalry
Bancorp, Inc. or Cavalry Banking since any of the dates as of which information
is furnished herein or since the date hereof.
<TABLE>
<CAPTION>
Table of Contents Page
----------------- ----
<S> <C>
Prospectus Summary......................................
Selected Consolidated Financial Information.............
Risk Factors............................................
Cavalry Bancorp, Inc....................................
Cavalry Banking.........................................
Use of Proceeds.........................................
Dividend Policy.........................................
Market for Common Stock.................................
Capitalization..........................................
Historical and Pro Forma Regulatory Capital Compliance..
Pro Forma Data..........................................
Shares to be Purchased by Management Pursuant
to Subscription Rights.................................
Cavalry Banking and Subsidiaries
Consolidated Statements of Earnings....................
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................
Business of the Holding Company.........................
Business of the Bank....................................
Management of the Holding Company.......................
Management of the Bank..................................
Regulation..............................................
Taxation................................................
The Conversion..........................................
Restrictions on Acquisition of the Holding Company......
Description of Capital Stock of the Holding Company.....
Registration Requirements...............................
Legal and Tax Opinions..................................
Experts.................................................
Additional Information..................................
Index to Consolidated Financial Statements..............
</TABLE>
UNTIL THE LATER OF ____________ __, 1998, OR 25 DAYS AFTER COMMENCEMENT OF THE
SYNDICATED COMMUNITY OFFERING OF COMMON STOCK, IF ANY, 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.
CAVALRY BANCORP, INC.
[Logo]
(Proposed Holding Company for
Cavalry Banking)
4,845,000 to 6,555,000 Shares of
Common Stock
_______________
PROSPECTUS
_______________
TRIDENT SECURITIES, INC.
_____________ __, 1998
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution(1)
<TABLE>
<CAPTION>
<S> <C>
Legal fees and expenses.................. $ 140,000
Securities marketing legal fees.......... 30,000
Printing, postage and mailing............ 130,000
Appraisal and business plan preparation.. 30,000
Accounting fees.......................... 60,000
Securities marketing fees and expenses... 531,600
Data processing fees..................... 15,000
SEC registration fee..................... 22,844
Blue Sky filing fees and expenses........ 15,000
OTS filing fees.......................... 8,400
Other expenses........................... 137,156
----------
Total................................ $1,120,000
==========
</TABLE>
________________
(1) Based on the midpoint of the Estimated Valuation Range, Trident
Securities, Inc. will receive a fee of 1.5% of the aggregate dollar amount of
stock sold (excluding shares purchased by officers and directors of the
Registrant and its affiliates, including the ESOP).
Item 14. Indemnification of Officers and Directors
Article XI of the Charter of Cavalry Bancorp, Inc. requires
indemnification of directors, officers and employees to the fullest
extent permitted by Tennessee law.
Section 48-18-502 through Section 48-18-508 of the Tennessee Business
Corporation Act sets forth circumstances under which directors,
officers, employees and agents may be insured or indemnified against
liability which they may incur in their capacities:
48-18-502 AUTHORITY TO INDEMNIFY. - (a) Except as provided in subsection
(d), a corporation may indemnify an individual made a party to a proceeding
because he is or was a director against liability incurred in the proceeding if:
(1) He conducted himself in good faith; and
(2) He reasonably believed:
(A) In the case of conduct in his official capacity with the corporation,
that his conduct was in its best interest; and
(B) In all other cases, that his conduct was at least not opposed to its
best interests; and
(3) In the case of any criminal proceeding, he had no reasonable cause to
believe his conduct was unlawful.
(b) A director's conduct with respect to an employee benefit plan for a
purpose he reasonably believed to be in the interests of the participants in and
beneficiaries of the plan is conduct that satisfies the requirement of
subdivision (a)(2)(B).
(c) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that the director did not meet the standard of conduct
described in this section.
(d) A corporation may not indemnify a director under this section:
(1) In connection with a proceeding by or in the right of the corporation
in which the director was adjudged liable to the corporation; or
(2) In connection with any other proceeding charging improper personal
benefit to him, whether or not involving action in his official capacity, in
which he was adjudged liable on the basis that personal benefit was improperly
received by him.
II-1
<PAGE>
48-18-503 MANDATORY INDEMNIFICATION. - Unless limited by its charter, a
corporation shall indemnify a director who was wholly successful, on the merits
or otherwise, in the defense of any proceeding to which he was a party because
he is or was a director of the corporation against reasonable expenses incurred
by him in connection with the proceeding.
48-18-504 ADVANCE FOR EXPENSES. - (a) A corporation may pay for or
reimburse the reasonable expenses incurred by a director who is a party to a
proceeding in advance of final disposition of the proceeding if:
(1) The director furnishes the corporation a written affirmation of his
good faith belief that he has met the standard of conduct described in (S)48-18-
502;
(2) The director furnishes the corporation a written undertaking, executed
personally or on his behalf, to repay the advance if it is ultimately determined
that he is not entitled to indemnification; and
(3) A determination is made that the facts then known to those making the
determination would not preclude indemnification under this part.
(b) The undertaking required by subsection (a)(2) must be an unlimited
general obligation of the director but need not be secured and may be accepted
without reference to financial ability to make repayment.
(c) Determinations and authorizations of payments under this section shall
be made in the manner specified in (S)48-18-506.
48-18-505 COURT ORDERED INDEMNIFICATION. - Unless a corporation's charter
provides otherwise, a director of the corporation who is a party to a proceeding
may apply for indemnification to the court conducting the proceeding or to
another court of competent jurisdiction. On receipt of an application, the
court, after giving any notice the court considers necessary, may order
indemnification if it determines:
(1) The director is entitled to mandatory indemnification under (S)48-18-
503, in which case the court shall also order the corporation to pay the
director's reasonable expenses incurred to obtain court-ordered indemnification;
or
(2) The director is fairly and reasonably entitled to indemnification in
view of all the relevant circumstances, whether or not he met the standard of
conduct set forth in (S)48-18-502 or was adjudged liable as described in (S)48-
18-502(d), but if he was adjudged so liable his indemnification is limited to
reasonable expenses incurred.
48-18-506 DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION. - (a) A
corporation may not indemnify a director under (S)48-18-502 unless authorized in
the specific case after a determination has been made that indemnification of
the director is permissible in the circumstances because he has met the standard
of conduct set forth in (S)48-18-502.
(b) The determination shall be made:
(1) By the board of directors by majority vote of a quorum consisting of
directors not at the time parties to the proceeding;
(2) If a quorum cannot be obtained under subdivision (1), by majority vote
of a committee duly designated by the board of directors (in which designation
directors who are parties may participate), consisting solely of two (2) or more
directors not at the time parties to the proceeding;
(3) By independent special legal counsel;
(A) Selected by the board of directors or its committee in the manner
prescribed in subdivision (1) or (2); or
(B) If a quorum of the board of directors cannot be obtained under
subdivision (1) and a committee cannot be designated under subdivision (2),
selected by majority vote of the full board of directors (in which selection
directors who are parties may participate); or
(4) By the shareholders, but shares owned by or voted under the control of
directors who are at the time parties to the proceeding may not be voted on the
determination.
(c) Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation to
reasonableness of expenses shall be made by those entitled under subdivision
(b)(3) to select counsel.
II-2
<PAGE>
48-18-507 INDEMNIFICATION OF OFFICERS, EMPLOYEES, AND AGENTS. - Unless a
corporation's charter provides otherwise:
(1) An officer of the corporation who is not a director is entitled to
mandatory indemnification under (S)48-18-503, and is entitled to apply for
court-ordered indemnification under (S)48-18-505, in each case to the same
extent as a director;
(2) The corporation may indemnify and advance expenses under this part to
an officer, employee, or agent of the corporation who is not a director to the
same extent as to a director; and
(3) A corporation may also indemnify and advance expenses to an officer,
employee, or agent who is not a director to the extent, consistent with public
policy, that may be provided by its charter, bylaws, general or specific action
of its board of directors, or contract.
48-18-508 INSURANCE. - A corporation may purchase and maintain insurance on
behalf of an individual who is or was a director, officer, employee, or agent of
the corporation, or who, while a director, officer, employee, or agent of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust employee benefit plan, or other
enterprise, against liability asserted against or incurred by him in that
capacity or arising from his status as a director, officer, employee, or agent,
whether or not the corporation would have the power to indemnify him against the
same liability under (S)48-18-502 or (S)48-18-503.
Item 15. Recent Sales of Unregistered Securities.
Not Applicable
Item 16. Exhibits and Financial Statement Schedules:
The financial statements and exhibits filed as part of this
Registration Statement are as follows:
(a) List of Exhibits
INDEX TO EXHIBITS
1.1 - Form of proposed Agency Agreement among Cavalry Bancorp, Inc.,
Cavalry Banking and Trident Securities, Inc. (a)
1.2 - Engagement Letter between Cavalry Banking and Trident Securities,
Inc.
2 - Plan of Conversion of Cavalry Banking (attached as an exhibit to the
Proxy Statement included herein as Exhibit 99.5)
3.1 - Charter of Cavalry Bancorp, Inc.
3.2 - Bylaws of Cavalry Bancorp, Inc.
4 - Form of Certificate for Common Stock
5 - Opinion of Breyer & Aguggia regarding legality of securities
registered
8.1 - Federal Tax Opinion of Breyer & Aguggia
8.2 - State Tax Opinion of Rayburn, Betts & Bates, P.C. (a)
8.3 - Opinion of Ferguson & Company as to the value of subscription rights
II-3
<PAGE>
10.1 - Proposed Form of Employment Agreement For Certain Executive Officers
10.2 - Proposed Form of Severance Agreement For Certain Senior Officers
10.3 - Proposed Form of Severance Compensation Plan For Employees
10.4 - Proposed Form of Employee Stock Ownership Plan
10.5 - Cavalry Banking 401(k) Plan (a)
21 - Subsidiaries of Cavalry Bancorp, Inc.
23.1 - Consent of Rayburn, Betts & Bates, P.C.
23.2 - Consent of Breyer & Aguggia (contained in opinion included as
Exhibit 5)
23.3 - Consent of Breyer & Aguggia as to its Federal Tax Opinion (contained
in opinion included as Exhibit 8.4)
23.4 - Consent of Bass, Berry & Sims PLC as to its State Tax Opinion
(contained in opinion included as Exhibit 8.2)
23.5 - Consent of Ferguson & Company
24 - Power of Attorney (contained in signature page to the Registration
Statement)
99.1 - Order and Acknowledgement Form
99.2 - Solicitation and Marketing Materials
99.3 - Agreement with Ferguson & Company
99.4 - Appraisal Report of Ferguson & Company (a)
99.5 - Proxy Statement for Special Meeting of Members of Cavalry Banking
_____________________
(a) To be filed by amendment.
Financial Statements and Schedules
II-4
<PAGE>
CAVALRY BANKING
Pages
Independent Auditors' Report...................................... F-1
Consolidated Balance Sheets as of September 30, 1997 (unaudited)
and December 31, 1996 and 1995................................... F-2
Consolidated Statements of Income for the
Nine Months Ended September 30, 1997 and 1996 (unaudited)
and the Years Ended December 31, 1996, 1995 and 1994............. 23
Consolidated Statements of Equity for the Nine Months Ended
September 30, 1997 and 1996 (unaudited) and for the Years
Ended December 31, 1996, 1995 and 1994........................... F-3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 (unaudited)
and the Years Ended December 31, 1996, 1995 and 1994............. F-4
Notes to Financial Statements..................................... F-6
All schedules are omitted because the required information is either not
applicable or is included in the financial statements or related notes.
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, as amended ("Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) 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, 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 the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-5
<PAGE>
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934, as amended ("Exchange Act") (and, where
applicable, each filing of any employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is therefore, unenforceable. In the event that a claim for
indemnification against 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 questions whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Murfreesboro, Tennessee
on the 12th day of November 1997.
CAVALRY BANCORP, INC.
By: /s/ Ed C. Loughry, Jr.
------------------------------
Ed C. Loughry, Jr.
President and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Cavalry Bancorp, Inc., do
hereby severally constitute and appoint Ed C. Loughry, Jr. or Ronald F. Knight,
our true and lawful attorneys and agents, to do any and all things and acts in
our names in the capacities indicated below and to execute all instruments for
us and in our names in the capacities indicated below which said Ed C. Loughry,
Jr. or Ronald F. Knight may deem necessary or advisable to enable Cavalry
Bancorp, Inc. to comply with the Securities Act of 1933, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the Registration Statement on Form S-1 relating to the
offering of Cavalry Bancorp, Inc. Common Stock, including specifically but not
limited to, power and authority to sign for us or any of us in our names in the
capacities indicated below the Registration Statement and any and all amendments
(including post-effective amendments) thereto; and we hereby ratify and confirm
all that Ed C. Loughry, Jr. or Ronald F. Knight shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Ed C. Loughry, Jr. President, Chief Executive Officer November 12, 1997
- ----------------------------
Ed C. Loughry, Jr. and Director (Principal Executive
Officer)
/s/ Ronald R. Knight Director, Chief Operating Officer November 12, 1997
- ----------------------------
Ronald F. Knight and Executive Vice President
/s/ Hillard C. "Bud" Gardner Senior Vice President and Chief Financial November 12, 1997
- -------------------------------
Hillard C. "Bud" Gardner Officer (Principal Financial and
Accounting Officer)
/s/ William H. Huddleston, III Chairman of the Board November 12, 1997
- -------------------------------
William H. Huddleston, III
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Gary Brown Vice Chairman of the Board November 12, 1997
- -----------------------------
Gary Brown
/s/ Frank E. Crosslin, Jr. Director November 12, 1997
- -----------------------------
Frank E. Crosslin, Jr.
/s/ Tim J. Durham Director November 12, 1997
- -----------------------------
Tim J. Durham
/s/ Ed Elam Director November 12, 1997
- -----------------------------
Ed Elam
/s/ James C. Cope Director November 12, 1997
- -----------------------------
James C. Cope
/s/ Terry G. Haynes Director November 12, 1997
- -----------------------------
Terry G. Haynes
</TABLE>
<PAGE>
As filed with the Securities and Exchange Commission on November 12, 1997
Registration No. 333-_____
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
CAVALRY BANCORP, INC.
----------------------------------------------------------
(Exact name of registrant as specified in charter)
Tennessee 6035 Applied For
- ------------------------------- ------------------ ------------------
(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
114 WEST COLLEGE STREET
MURFREESBORO, TENNESSEE 37130
(615) 893-1234
---------------------------------------------------------------------
(Address and telephone number of principal executive offices)
John F. Breyer, Jr., Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA
Suite 470 East
1300 I Street, N.W.
Washington, D.C. 20005
------------------------------
(Name and address of agent for service)
<PAGE>
INDEX TO EXHIBITS
1.1 - Form of proposed Agency Agreement among Cavalry Bancorp, Inc.,
Cavalry Banking and Trident Securities, Inc. (a)
1.2 - Engagement Letter between Cavalry Banking and Trident Securities,
Inc.
2 - Plan of Conversion of Cavalry Banking (attached as an exhibit to
the Proxy Statement included herein as Exhibit 99.5)
3.1 - Charter of Cavalry Bancorp, Inc.
3.2 - Bylaws of Cavalry Bancorp, Inc.
4 - Form of Certificate for Common Stock
5 - Opinion of Breyer & Aguggia regarding legality of securities
registered
8.1 - Federal Tax Opinion of Breyer & Aguggia
8.2 - State Tax Opinion of Rayburn, Betts & Bates, P.C. (a)
8.3 - Opinion of Ferguson & Company as to the value of subscription rights
10.1 - Proposed Form of Employment Agreement For Certain Executive Officers
10.2 - Proposed Form of Severance Agreement For Certain Senior Officers
10.3 - Proposed Form of Severance Compensation Plan For Employees
10.4 - Proposed Form of Employee Stock Ownership Plan
10.5 - Cavalry Banking 401(k) Plan (a)
21 - Subsidiaries of Cavalry Bancorp, Inc.
23.1 - Consent of Rayburn, Betts & Bates, P.C.
23.2 - Consent of Breyer & Aguggia (contained in opinion included as
Exhibit 5)
23.3 - Consent of Breyer & Aguggia as to its Federal Tax Opinion
(contained in opinion included as Exhibit 8.1)
23.4 - Consent of Bass, Berry & Sims PLC as to its State Tax Opinion
(contained in opinion included as Exhibit 8.2)
23.5 - Consent of Ferguson & Company
24 - Power of Attorney (contained in signature page to the Registration
Statement)
99.1 - Order and Acknowledgement Form
99.2 - Solicitation and Marketing Materials
<PAGE>
99.3 - Agreement with Ferguson & Company
99.4 - Appraisal Report of Ferguson & Company (a)
99.5 - Proxy Statement for Special Meeting of Members of Cavalry Banking
_____________________
(a) To be filed by amendment.
<PAGE>
[LETTER HEAD APPEARS HERE]
EXHIBIT 1.2
Board of Directors
Cavalry Banking
114 West College Street
Murfreesboro, Tennessee 37133
RE: Conversion Stock Marketing Services
Gentlemen:
This letter sets forth the terms of the proposed engagement between TRIDENT
SECURITIES, INC. ("TRIDENT") and Cavalry Banking (the "Cavalry") concerning our
investment banking services in connection with the conversion of Cavalry from a
mutual to a capital stock form of organization.
TRIDENT is prepared to assist Cavalry in connection with the offering of its
shares of common stock during the subscription offering and community offering
as such terms are defined in Cavalry's Plan of Conversion. The specific terms
of the services contemplated hereunder shall be set forth in a definitive sales
agency agreement (the "Agreement") between TRIDENT and Cavalry to be executed on
the date the offering circular/prospectus is declared effective by the
appropriate regulatory authorities. The price of the shares during the
subscription offering and community offering will be the price established by
Cavalry's Board of Directors, based upon an independent appraisal as approved by
the appropriate regulatory authorities, provided such price is mutually
acceptable to TRIDENT and Cavalry.
In connection with the subscription offering and community offering, TRIDENT
will act as financial advisor and exercise its best efforts to assist Cavalry in
the sale of its common stock during the subscription offering and community
offering. Additionally, TRIDENT may enter into agreements with other National
Association of Securities Dealers, Inc., ("NASD") member firms to act as
selected dealers, assisting in the sale of the common stock. TRIDENT and
Cavalry will determine the selected dealers to assist Cavalry during the
community offering. At the appropriate time, TRIDENT in conjunction with its
counsel, will conduct an examination of the relevant documents and records of
Cavalry as TRIDENT deems necessary and appropriate. Cavalry will make all
documents, records and other information deemed necessary by TRIDENT or its
counsel available to them upon request.
For its services hereunder, TRIDENT will receive the following compensation and
reimbursement from Cavalry:
1. A commission equal to one point five percent (1.5%) of the
aggregate dollar amount of capital stock sold in the subscription
and community offerings, excluding any shares of conversion stock
sold to Cavalry's directors, executive officers and all employee
benefit plans, including the ESOP. Additionally, commissions will
be excluded on those shares sold to "associates" of Cavalry's
directors and executive officers. The term "associates" as used
herein shall have the same meaning as that found in Cavalry's
Plan of Conversion.
<PAGE>
TRIDENT SECURITIES INC.
Board of Directors
July 23, 1997
Page 2
2. For stock sold by other NASD member firms under selected dealer's
agreements, the commission shall not exceed a fee to be agreed
upon jointly by TRIDENT and Cavalry to reflect market
requirements at the time of the stock allocation in a Syndicated
Community Offering.
3. The foregoing fees and commissions are to be payable to TRIDENT
at closing as defined in the Agreement to be entered into between
Cavalry and TRIDENT.
4. TRIDENT shall be reimbursed for allocable expenses incurred by
them, including legal fees, whether or not the Agreement is
consummated. TRIDENT's out-of-pocket expenses will not exceed
$10,000 and its legal fees will not exceed $30,000. Cavalry will
forward to TRIDENT a check in the amount of $10,000 as an advance
payment to defray the allocable expenses of TRIDENT.
It further is understood that Cavalry will pay all other expenses of the
conversion including but not limited to its attorneys' fees, NASD filing fees,
and filing and registration fees and fees of either TRIDENT's attorneys or the
attorneys relating to any required state securities law filings, telephone
charges, air freight, rental equipment, supplies, transfer agent charges, fees
relating to auditing and accounting and costs of printing all documents
necessary in connection with the foregoing.
For purposes of TRIDENT's obligation to file certain documents and to make
certain representations to the NASD in connection with the conversion, Cavalry
warrants that: (a) Cavalry has not privately placed any securities within the
last 18 months; (b) there have been no material dealings within the last 12
months between Cavalry and any NASD member or any person related to or
associated with any such member; (c) none of the officers or directors of
Cavalry has any affiliation with the NASD; (d) except as contemplated by this
engagement letter with TRIDENT, Cavalry has no financial or management
consulting contracts outstanding with any other person; (e) Cavalry has not
granted TRIDENT a right of first refusal with respect to the underwriting of any
future offering of Cavalry stock; and (f) there has been no intermediary between
TRIDENT and Cavalry in connection with the public offering of Cavalry's shares,
and no person is being compensated in any manner for providing such service.
Cavalry agrees to indemnify and hold harmless TRIDENT and each person, if any,
who controls the firm against all losses, claims, damages or liabilities, joint
or several and all legal or other expenses reasonably incurred by them in
connection with the investigation or defense thereof (collectively, "Losses"),
to which they may become subject under the securities laws or under the common
law, that arise out of or are based upon the conversion or the engagement
hereunder of TRIDENT. If the foregoing indemnification is unavailable for any
reason, Cavalry agrees to contribute to such Losses in the proportion that its
financial interest in the conversion bears to that of the indemnified parties.
If the Agreement is entered into with respect to the common stock to be issued
in the conversion, the Agreement will provide for indemnification, which will be
in addition to any rights that TRIDENT or any other indemnified party may have
at common law or otherwise. The indemnification provision of this paragraph
will be superseded by the indemnification provisions of the Agreement entered
into by Cavalry and TRIDENT.
<PAGE>
TRIDENT SECURITIES INC.
Board of Directors
July 23, 1997
Page 3
This letter is merely a statement of intent and is not a binding legal agreement
except as to paragraph (4) above with regard to the obligation to reimburse
TRIDENT for allocable expenses to be incurred prior to the execution of the
Agreement and the indemnity described in the preceding paragraph. While TRIDENT
and Cavalry agree in principle to the contents hereof and propose to proceed
promptly, and in good faith, to work out the arrangements with respect to the
proposed offering, any legal obligations between TRIDENT and Cavalry shall be
only as set forth in a duly executed Agreement. Such Agreement shall be in form
and content satisfactory to TRIDENT and Cavalry, as well as their counsel, and
TRIDENT's obligations thereunder shall be subject to, among other things, there
being in TRIDENT's opinion no material adverse change in the condition or
obligations of Cavalry or no market conditions which might render the sale of
the shares by Cavalry hereby contemplated inadvisable.
Please acknowledge your agreement to the foregoing by signing below and
returning to TRIDENT one copy of this letter along with the advance payment of
$10,000. This proposal is open for your acceptance for a period of thirty (30)
days from the date hereof.
Yours very truly,
TRIDENT SECURITIES, INC.
By: /s/ R Lee Burrows Jr
-----------------------
R. Lee Burrows, Jr.
Managing Director
Agreed and accepted to this 7 day
of August 1997
CAVALRY BANKING
By: /s/ Ed C Loughry Jr
-------------------
Ed C. Loughry, Jr.
President
RLB/cs
<PAGE>
EXHIBIT 3.1
CHARTER OF
CAVALRY BANCORP , INC.
ARTICLE I
CORPORATE NAME
The name of the corporation is Cavalry Bancorp, Inc. (the "Corporation").
ARTICLE II
REGISTERED OFFICE AND AGENT
The street address, including zip code, of the Corporation's registered
office is 114 W. College Street, Murfreesboro, Tennessee 37130. The
Corporation's registered office is located in Rutherford County. The name of the
Corporation's initial registered agent at its registered office is Ed C.
Loughry, Jr.
ARTICLE III
PRINCIPAL OFFICE
The street address, including zip code, of the Corporation's principal
office is 114 W. College Street, Murfreesboro, Tennessee 37130. The
Corporation's principal office is located in Rutherford County.
ARTICLE IV
PURPOSE AND POWERS
The purpose or purposes for which the Corporation is organized are to act
as a financial services holding company and to engage in any lawful business for
which corporations may be incorporated pursuant to the Tennessee Business
Corporation Act, as amended ("TBCA"). The Corporation shall have all the powers
of a corporation organized thereunder. The Corporation is for profit.
ARTICLE V
CAPITAL STOCK
The total number of shares of all classes of capital stock which the
Corporation has authority to issue is 50,000,000, of which 49,750,000 shares
shall be common stock, and of which 250,000 shares shall be serial preferred
stock. The shares may be issued from time to time as authorized by the board of
directors without the approval of the Corporation's shareholders except as
otherwise provided in this Article V. The consideration for the shares shall be
determined by the board of directors in accordance with the provisions of the
TBCA.
A description of the different classes and series (if any) of the
Corporation's capital stock and a statement of the relative powers,
designations, preferences and rights of the shares of each class of and series
(if any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:
(A) Except as provided in Article XII, each holder of shares of common
stock shall be entitled to one vote for each share held by such holder.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class having
preferences over the
<PAGE>
common stock in any such event, the full preferential amounts to which they are
respectively entitled, the holders of the common stock and of any class or
series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets shall be entitled, after payment or provision for payment
of all debts and liabilities of the Corporation, to receive the remaining assets
of the Corporation available for distribution, in cash or in kind.
Each share of common stock shall have the same relative powers, preferences
and rights as, and shall be identical in all respects with, all the other shares
of common stock of the Corporation.
(B) The board of directors of the Corporation is authorized to amend this
Charter, by adoption of articles of amendment effective without shareholder
approval, to provide for the issuance of serial preferred stock in series and to
fix the preferences, limitations and relative rights of each such series,
including, but not limited to, determination of any of the following:
(1) the distinctive designation for each series and the number of
shares constituting such series;
(2) the voting rights, full, conditional or limited, of shares of
such series;
(3) whether the shares of such series shall be redeemable and, if
so, the price or prices at which, and the terms and conditions
upon which, such shares may be redeemed;
(4) the dividend rate or the amount of dividends to be paid on
the shares of such series, whether dividends shall be cumulative
and, if so, from which date(s), the payment date(s) for
dividends, and the participating or other special rights, if any,
with respect to dividends;
(5) the amount(s) payable upon the shares of such series in the
even of voluntary or involuntary liquidation, dissolution or
winding up of the Corporation;
(6) whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the
purchase or redemption of such shares, and if so entitled, the
amount of such fund and the manner of its application, including
the price(s) at which such shares may be redeemed or purchased
through the application of such fund;
(7) whether the shares of such series shall be convertible into,
or exchangeable for, shares of any other class or classes or of
any other series of the same or any other class or classes of
stock of the Corporation and, if so convertible or exchangeable,
the conversion price(s) or the rate(s) of exchange, and the
adjustments thereof, if any, at which such conversion or exchange
may be made, and any other terms and conditions of such
conversion or exchange;
(8) the price or other consideration for which the shares of such
series shall be issued;
(9) whether the shares of such series that are redeemed or
converted shall have the status of authorized but unissued shares
of serial preferred stock and whether such shares may be reissued
as shares of the same or any other series of serial preferred
stock; and
(10) any other designations, preferences, limitations or rights
that are now or hereafter permitted by applicable law and are not
inconsistent with the provisions of this Charter.
Each share of each series of serial preferred stock shall have the same
preferences and relative rights as, and be identical in all respects with, all
other shares of the same series.
2
<PAGE>
ARTICLE VI
SHAREHOLDER MEETINGS; CUMULATIVE VOTING
(A) Special meetings of shareholders may be called at any time, but
only by the board of directors or a committee of the board of directors that has
been duly designated by the board of directors. The board of directors shall
call a meeting if holders of at least a majority of all of the outstanding
shares of the Corporation entitled to vote on any issue proposed to be
considered at the proposed special meeting sign, date and deliver to the
Corporation's secretary one or more written demands for the meeting describing
the purpose or purposes for which it is to be held. The record date for the
determination of shareholders entitled to make a meeting demand shall be
established by the Board of Directors within a reasonable time of receiving such
request.
(B) There shall be no cumulative voting by shareholders of any class
or series in the election of directors of the Corporation.
ARTICLE VII
DIRECTORS
The number of directors of the Corporation shall be such number, neither
fewer than five nor more than fifteen (exclusive of directors, if any, to be
elected by holders of preferred stock of the Corporation, voting separately as a
class), as shall be set forth from time to time in or in accordance with the
Bylaws, provided that no action shall be taken to decrease or increase the
number of directors unless at least two-thirds of the directors then in office
shall concur in said action. Vacancies in the board of directors of the
Corporation, however caused, and newly created directorships shall be filled
only by a vote of at least two-thirds of the directors then in office, whether
or not a quorum, and any director so chosen shall hold office for a term
expiring at the next meeting of shareholders at which directors are elected.
At the first meeting of shareholders of the Corporation, the board of
directors of the Corporation shall be divided into three classes as nearly equal
in number as the then total number of directors constituting the entire board of
directors shall permit, which classes shall be designated Class I, Class II and
Class III. At such meeting of shareholders, directors assigned to Class I shall
be elected to hold office for a term expiring at the first succeeding annual
meeting of shareholders thereafter, directors assigned to Class II shall be
elected to hold office for a term expiring at the second succeeding annual
meeting thereafter, and directors assigned to Class III shall be elected to hold
office for a term expiring at the third succeeding annual meeting thereafter.
Thereafter, at each annual meeting of shareholders of the Corporation, directors
of classes the terms of which expire at such annual meeting shall be elected for
terms of three years. Notwithstanding the foregoing, a director whose term shall
expire at any annual meeting shall continue to serve until such time as his
successor shall have been duly elected and shall have qualified unless his
position on the board of directors shall have been abolished by action taken to
reduce the size of the board of directors prior to said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as specified in the immediately
preceding paragraph. The board of directors shall designate, by the name of the
incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as specified in the
immediately preceding paragraph.
Whenever the holders of any one or more series of preferred stock of the
Corporation shall have the right, voting separately as a class, to elect one or
more directors of the Corporation, the board of directors shall consist of said
directors so elected in addition to the number of directors fixed as provided
above in this Article VI I. Notwithstanding the foregoing, and except as
otherwise may be required by law, whenever the holders of any one or more series
of
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preferred stock of the Corporation shall have the right, voting separately as a
class, to elect one or more directors of the Corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of shareholders.
ARTICLE VIII
NOTICE FOR NOMINATIONS AND PROPOSALS
(A) Nominations for the election of directors and proposals for any new
business to be taken up at any annual meeting of shareholders may be made by the
board of directors of the Corporation or, as provided in this Article, by any
shareholder of the Corporation entitled to vote generally in the election of
directors. Only business within the purpose or purposes described in the notice
of a special meeting may be conducted at the special meeting. In order for a
shareholder of the Corporation to make any such nominations and/or proposals, he
shall give notice thereof in writing, delivered or mailed by first class United
States mail, postage prepaid, to the secretary of the Corporation 120 calendar
days in advance of the month and day the Corporation's proxy statement to
shareholders was mailed to shareholders the preceding year, or, if the
Corporation's common stock is not registered under the Securities Exchange Act
of 1934 (the "1934 Act"), not fewer than 90 days nor more than 120 days prior to
any such meeting; provided, however, that if notice or public disclosure of the
meeting is effected fewer than 40 calendar days before the meeting, such written
notice shall be delivered or mailed, as prescribed, to the secretary of the
Corporation not later than the close of the 10th calendar day following the day
on which notice of the meeting was mailed to shareholders. Each such notice
given by a shareholder with respect to nominations for the election of directors
shall set forth (i) the name, age, business address and, if known, residence
address of each nominee proposed in such notice; (ii) the principal occupation
or employment of each such nominee; (iii) the number of shares of stock of the
Corporation which are beneficially owned by each such nominee; (iv) such other
information as would be required to be included in a proxy statement soliciting
proxies for the election of the proposed nominee pursuant to Regulation 14A of
the 1934 Act, including, without limitation, such person's written consent to
being named in the proxy statement as a nominee and to serving as a director, if
elected; and (v) as to the shareholder giving such notice, (a) his name and
address as they appear on the Corporation's books and (b) the class and number
of shares of the Corporation which are beneficially owned by such shareholder.
In addition, the shareholder making such nomination shall promptly provide any
other information reasonably requested by the Corporation.
(B) Each such notice given by a shareholder to the secretary with respect
to business proposals to bring before a meeting shall set forth in writing as to
each matter: (i) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting;
(ii) the name and address, as they appear on the Corporation's books, of the
shareholder proposing such business; (iii) the class and number of shares of the
Corporation which are beneficially owned by the shareholder; and (iv) any
material interest of the shareholder in such business. Notwithstanding anything
in this Charter to the contrary, no business shall be conducted at the meeting
except in accordance with the procedures set forth in this Article X.
(C) The chairman of the annual meeting of shareholders may, if the facts
warrant, determine and declare to such meeting that a nomination or proposal was
not made in accordance with the foregoing procedure, and, if he should so
determine, he shall so declare to the meeting and the defective nomination or
proposal shall be disregarded and laid over for action at the next succeeding or
annual meeting of the shareholders taking place thirty days or more thereafter.
This provision shall not require the holding of any adjourned or special meeting
of shareholders for the purpose of considering such defective nomination or
proposal.
ARTICLE IX
REMOVAL OF DIRECTORS
Notwithstanding any other provision of this Charter or the Bylaws of the
Corporation, no director of the Corporation may be removed at any time unless
for cause and upon the vote of the holders of at least majority of
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outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the shareholders called for that purpose, except as
otherwise required by law. For purposes of this Article, "cause" shall mean
final conviction of a felony, adjudication of bankruptcy, declaration of unsound
mind by court order, or conduct which would be grounds for removal by any
regulatory authority having jurisdiction over the Corporation.
ARTICLE X
ELIMINATION OF DIRECTORS' LIABILITY
Directors of the Corporation shall have no liability to the Corporation or
its shareholders for monetary damages for breach of fiduciary duty as a
director, provided that this Article X shall not eliminate liability of a
director for (i) any breach of the director's duty of loyalty to the Corporation
or its shareholders; (ii) acts or omissions that are not in good faith or that
involve intentional misconduct or a knowing violation of law; or (iii) unlawful
distributions under Section 48-18-304 of the TBCA.
If the TBCA is amended or other Tennessee law is enacted to permit further
elimination or limitation of the personal liability of directors, then the
liability of directors of the Corporation shall be eliminated or limited to the
fullest extent permitted by the TBCA, as so amended, or by such other Tennessee
law, as so enacted. Any repeal or modification of this Article XII or subsequent
amendment of the TBCA or enactment of other applicable Tennessee law shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal, modification, amendment or enactment.
ARTICLE XI
INDEMNIFICATION
(A) (1) Except as provided in Section (B) of this Article XI, the
Corporation shall indemnify any director who is made a party to
any threatened, pending, or completed action, suit or proceeding,
whether civil, criminal, administrative, or investigative
("proceeding"), because he is or was a director against liability
incurred in such proceeding if: (a) he conducted himself in good
faith; (b) he reasonably believed, (i) in the case of conduct in
his official capacity with the Corporation, that his conduct was
in the Corporation's best interests and (ii) in all other cases,
that his conduct was at least not opposed to its best interests;
and (c) in the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful.
(2) The Corporation shall further indemnify any director and any
officer who is not a director who was wholly successful, on the
merits or otherwise, in the defense of any proceedings to which
he was a party because he is or was a director or officer of the
Corporation against reasonable expenses incurred by him in
connection with the proceeding.
(B) The Corporation shall not indemnify a director in connection with a
proceeding by or in the right of the Corporation in which the director was
adjudged liable to the Corporation or in connection with any other proceeding
charging improper personal benefit to him, whether or not involving action in
his official capacity, in which he was adjudged liable on the basis that
personal benefit was improperly received by him.
(C) The Corporation may pay for or reimburse the reasonable expenses
incurred by a director who is a party to a proceeding in advance of final
disposition of the proceeding if: (i) the director furnishes the Corporation a
written affirmation of his good faith belief that he has met the standard of
conduct set forth in Subsection (A)(1) of this Article XI; (ii) he provides the
Corporation a written undertaking, executed personally or on his behalf, to
repay the
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advance if it is ultimately determined that he is not entitled to
indemnification; and (iii) a determination is made that the facts then known to
those making the determination would not preclude indemnification under this
Article XI.
(D) The Corporation may not indemnify a director under Subsection (A)(1)
of this Article XI unless authorized in the specific case after a determination
has been made that indemnification of the director is permissible in the
circumstances because he has met the standard set forth in Subsection (A)(1) of
this Article XI. The determination shall be made:
(1) By the board of directors by majority vote of a quorum
consisting of directors not at the time parties to the
proceeding;
(2) If a quorum cannot be obtained under Subsection (1) of this
Section (D), by majority vote of a committee duly designated by
the board of directors (in which designation directors who are
parties may participate), consisting solely of two or more
directors not at the time parties to the proceeding;
(3) By independent special legal counsel;
(a) Selected by the board of directors or its committee in the
manner prescribed in Subsections (1) or (2) of this Section
(D);
(b) If a quorum of the board of directors cannot be obtained
under Subsection (1) of this Section (D) and a committee
cannot be designated under Subsection (2) of this Section
(D), selected by majority vote of the full board of
directors (in which selection directors who are parties may
participate); or
(4) By the shareholders, but shares owned by or voted under the
control of directors who are at the time parties to the
proceeding may not be voted on the determination.
(E) Authorization of indemnification under Subsection (A)(1) of this
Article XI and evaluation that indemnification is permissible under Subsection
(A)(1) of this Article XI shall be made in the same manner as the determination
that indemnification is permissible, except that, if the determination is made
by special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under Subsection
(D)(3) of this Article XI to select counsel.
(F) The Corporation may indemnify and advance expenses to an officer,
employee or agent of the Corporation who is not a director to the same extent as
a director hereunder.
(G) The Corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee, or agent of the
Corporation, or who, while a director, officer, employee, or agent of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, employee benefit plan or other
enterprise, against liability asserted against or incurred by him in that
capacity or arising from his status as a director, officer, employee or agent,
whether or not the Corporation would have power to indemnify him against the
same liability hereunder.
(H) It is the intention of this Article XI to provide for indemnification
of directors and officers to the fullest extent permitted by the TBCA, and this
Article XI shall be interpreted accordingly. If this Article XI or any portion
hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the Corporation shall nevertheless indemnify each director,
officer, employee, and agent of the Corporation as to costs, charges, and
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement with respect to any proceeding, including an action by or in the
right of the Corporation, to the full extent permitted by any applicable portion
of this Article XI that shall not have been invalidated and to the full extent
permitted by applicable law. If the TBCA is amended or other
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Tennessee law is enacted to permit further or additional indemnification of a
director, officer, employee or agent of the Corporation beyond that provided in
this Article, then the Corporation shall be permitted to indemnify such
director, officer, employee or agent to the fullest extent permitted by the
TBCA, as so amended, or by such other Tennessee law.
(I) The indemnification and advance payment of expenses provided by this
Article XI shall not be exclusive of any other rights to which a person may be
entitled by law, bylaw, agreement, vote of shareholders or disinterested
directors, or otherwise.
(J) The indemnification provided by this Article XI shall be deemed to be
a contract between the Corporation and the persons entitled to indemnification
thereunder, and any repeal or modification of this Article XI shall not affect
any rights or obligations then existing with respect to any state of facts then
or theretofore existing or any action, suit or proceeding theretofore or
thereafter brought based in whole or in part upon any such state of facts. The
indemnification and advance payment provided by this Article XI shall continue
as to a person who has ceased to be a director or officer of the Corporation and
shall inure to his heirs, executors and administrators.
ARTICLE XII
RESTRICTIONS ON VOTING RIGHTS OF CERTAIN HOLDERS
(A) Restrictions on Voting Rights of Certain Holders. If, at any time
after the effective date of the completion of the conversion of Cavalry Banking,
AFSB from mutual to stock form, any person shall acquire the beneficial
ownership of more than 10% of any class of equity security of the Corporation
without the prior approval by a two-thirds vote of the Continuing Directors, as
defined in Article XIII of this Charter, then the record holders of voting stock
of the Corporation beneficially owned by such acquiring person shall have only
the voting rights set forth in this Section (A) on any matter requiring their
vote or consent. With respect to each vote in excess of 10% of the voting power
of the outstanding shares of voting stock of the Corporation which such record
holders would otherwise be entitled to cast without giving effect to this
Section (A), such record holders in the aggregate shall be entitled to cast only
one-hundredth (1/100th) of a vote, and the aggregate voting power of such record
holders, so limited for all shares of voting stock of the Corporation
beneficially owned by such acquiring person, shall be allocated proportionately
among such record holders. For each such record holder, this allocation shall be
accomplished by multiplying the aggregate voting power, as so limited, of the
outstanding shares of voting stock of the Corporation beneficially owned by such
acquiring person by a fraction whose numerator is the number of votes as so
limited represented by the shares of voting stock of the Corporation owned of
record by such record holder (and which are beneficially owned by such acquiring
person) and whose denominator is the total number of votes represented by the
shares of voting stock of the Corporation that are beneficially owned by such
acquiring person. A person who is a record owner of shares of voting stock of
the Corporation that are beneficially owned simultaneously by more than one
person shall have, with respect to such shares, the right to cast the least
number of votes that such person would be entitled to cast under this Section
(A) by virtue of such shares being so beneficially owned by any of such
acquiring persons.
(B) Definitions. The term "person" means an individual, a group acting in
concert, a corporation, a partnership, an association, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate or any
other group acting in concert formed for the purpose of acquiring, holding or
disposing of securities of the Corporation. The term "acquire" includes every
type of acquisition, whether effected by purchase, exchange, operation of law or
otherwise. The term "offer" includes every offer to buy or otherwise acquire,
solicitation of an offer to sell, tender offer for or request for invitation for
tenders of, a security or interest in a security for value. The term "acting in
concert" includes: (i) knowing participation in a joint activity or conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; and (ii) a combination or pooling of voting or other interests in the
Corporation's outstanding shares for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. The term "beneficial ownership" shall have the meaning defined in
Rule 13d-3 of the General Rules and Regulations under the 1934 Act.
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(C) Exclusion for Underwriters, Employee Benefit Plans and Certain
Proxies. The restrictions contained in this Article XII shall not apply to: (i)
any underwriter or member of an underwriting or selling group involving a public
sale or resale of securities of the Corporation or a subsidiary thereof;
provided, however, that upon completion of the sale or resale of such
securities, no such underwriter or member of such selling group is a beneficial
owner of more than 10% of any class of equity security of the Corporation; (ii)
any proxy granted to one or more Continuing Directors, as defined in Article
XIII of this Charter, by a shareholder of the Corporation; or (iii) any employee
benefit plans of the Corporation or a subsidiary thereof. In addition, the
Continuing Directors, as defined in Article XIII of this Charter, the officers
and employees of the Corporation and its subsidiaries, the directors of
subsidiaries of the Corporation, the employee benefit plans of the Corporation
and its subsidiaries, entities organized or established by the Corporation or
any subsidiary thereof pursuant to the terms of such plans and trustees and
fiduciaries with respect to such plans acting in such capacity shall not be
deemed to be a group with respect to their beneficial ownership of voting stock
of the Corporation solely by virtue of their being directors, officers or
employees of the Corporation or a subsidiary thereof or by virtue of the
Continuing Directors, as defined in Article XIII of this Charter, the officers
and employees of the Corporation and its subsidiaries and the directors of
subsidiaries of the Corporation being fiduciaries or beneficiaries of an
employee benefit plan of the Corporation or a subsidiary of the Corporation.
Notwithstanding the foregoing, no director, officer or employee of the
Corporation or any of its subsidiaries, or group of any of them, shall be exempt
from the provisions of this Article XII should any such person or group become a
beneficial owner of more than 10% of any class of equity security of the
Corporation.
(D) Determinations. A majority of the Continuing Directors, as defined in
Article XIII of this Charter, shall have the power to construe and apply the
provisions of this Article XII and to make all determinations necessary or
desirable to implement such provisions, including but not limited to matters
with respect to: (i) the number of shares beneficially owned by any person; (ii)
whether a person has an agreement, arrangement or understanding with another as
to the matters referred to in the definition of beneficial ownership; (iii) the
application of any other definition or operative provision of this Article XII
to the given facts; or (iv) any other matter relating to the applicability or
effect of this Article XII. Any constructions, applications or determinations
made by the Continuing Directors, as defined in Article XIII of this Charter,
pursuant to this Article XII in good faith and on the basis of such information
and assistance as was then reasonably available for such purpose shall be
conclusive and binding upon the Corporation and its shareholders.
ARTICLE XIII
APPROVAL OF BUSINESS COMBINATIONS
The shareholder vote required to approve a Business Combination (as
hereinafter defined) shall be as set forth in this Article XIII, in addition to
any other requirements under applicable law.
(A) (1) Except as otherwise expressly provided in this Article
XIII, the affirmative vote of the holders of (i) at least 80% of
the outstanding shares entitled to vote thereon (and, if any
class or series of shares is entitled to vote thereon separately,
the affirmative vote of the holders of at least two-thirds of the
outstanding shares of each such class or series) and (ii) a
majority of the outstanding shares entitled to vote thereon not
including shares deemed beneficially owned by a Related Person
(as hereinafter defined) shall be required in order to authorize
any of the following:
(a) any merger, share exchange or consolidation of the
Corporation or any subsidiary thereof with or into a Related
Person;
(b) any sale, lease, exchange, transfer or other disposition of
(including, without limitation the granting of any mortgage,
pledge or other security interest in) all or any Substantial
Part (as hereinafter defined) of the assets (in one
transaction or in a series of transactions) of the
Corporation (including, without limitation, any
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voting securities of a subsidiary) or of a subsidiary
thereof to a Related Person or proposed by or on behalf of a
Related Person;
(c) any sale, lease, exchange, transfer or other disposition of
including, without limitation, any granting of a mortgage,
pledge or any other security interest in, all or any
Substantial Part of the assets (in one transaction or in a
series of transactions) of a Related Person to the
Corporation or a subsidiary thereof;
(d) the issuance or transfer (in one transaction or in a series
of transactions) by the Corporation or any subsidiary
thereof of any securities of the Corporation or of a
subsidiary thereof to a Relative Person other than pursuant
to a dividend or distribution made pro rata to all
shareholders of the Corporation;
(e) the acquisition by the Corporation or a subsidiary thereof
of any securities of a Related Person or of any securities
convertible into securities of a Related Person;
(f) any transaction proposed by or on behalf of a Related Person
or pursuant to any agreement, arrangement or understanding
with a Related Person which has the effect, directly or
indirectly, of increasing the Related Person's proportionate
ownership of voting securities of the Corporation or of a
subsidiary thereof (or of securities that are convertible
to, exchangeable for or carry the right to acquire such
voting securities);
(g) the adoption of any plan or proposal of liquidation or
dissolution of the Corporation, any reincorporation of the
Corporation in another state or jurisdiction, any
reclassification of the common stock of the Corporation, or
any recapitalization involving the common stock of the
Corporation proposed by or on behalf of a Related Person;
(h) any loans, advances, guarantees, pledges, financial
assistance, security arrangements, restrictive covenants or
any tax credits or other tax advantages provided by, through
or to the Corporation or any subsidiary thereof as a result
of which a Related Person receives a benefit, directly or
indirectly, other than proportionately as a shareholder; and
(i) any agreement, contract or other arrangement providing for
any of the transactions described in this Section (A).
(2) Such affirmative vote shall be required notwithstanding any
other provision of this Charter, any provision of law, or any
agreement with any national securities exchange or automated
quotation system which might otherwise permit a lesser vote or no
vote.
(3) The term "Business Combination" as used in this Article XIII
shall mean any transaction referred to in any one or more of
Subsections (1)(a) through (1)(i) of this Section A.
(B) The provisions of Section (A) of this Article XIII shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only such affirmative vote as is required by any other provision
of this Charter, any provisions of law or any agreement with any federal
regulatory agency, national securities exchange or automated quotation system,
if either the Business Combination or the transaction in which the Related
Person became a Related Person shall have been approved in advance by at least
two-thirds of the Continuing Directors (as hereinafter defined); provided,
however, that such approval shall be effective only if obtained at a meeting at
which a Continuing Director Quorum (as hereinafter defined) is present.
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(C) For the purpose of this Article XIII the following definitions apply:
(1) The term "Related Person" shall mean: (i) any individual,
corporation, partnership or other person or entity which together
with its "affiliates" (as that term is defined in Rule 12b-2 of
the General Rules and Regulations under the 1934 Act)
"beneficially owns" (as that term is defined in Rule 13d-3 of the
General Rules and Regulations under the 1934 Act) in the
aggregate 10% or more of the outstanding shares of the common
stock of the Corporation; (ii) any "affiliate" (as that term is
defined in Rule 12b-2 of the General Rules and Regulations of the
1934 Act) of any such individual, corporation, partnership or
other person or entity; or (iii) any corporation which would be
an "affiliate" (as that term is defined in Rule 12b-2 of the
General Rules and Regulations under the 1934 Act) of any such
individual, corporation, partnership or other person or entity
following a Business Combination. Without limitation, any shares
of the common stock of the Corporation which any Related Person
has the right to acquire pursuant to any agreement, upon exercise
of conversion rights, warrants or options or otherwise shall be
deemed "beneficially owned" by such Related Person.
(2) The term "Substantial Part" shall mean more than 10% of the
total assets of the Corporation or the Related Person, as the
case may be, as of the end of its most recent fiscal year ending
prior to the time the determination is made.
(3) The term "Continuing Director" shall mean any member of the
board of directors of the Corporation who is unaffiliated with a
Related Person and was a member of the board of directors prior
to the time that the Related Person became a Related Person, and
any successor of a Continuing Director who is recommended to
succeed a Continuing Director by a majority of Continuing
Directors then on the board of directors.
(4) The term "Continuing Director Quorum" shall mean at least
two-thirds of the Continuing Directors capable of exercising the
powers conferred on them.
ARTICLE XIV
EVALUATION OF BUSINESS COMBINATIONS
In connection with the exercise of its judgment in determining what is in
the best interests of the Corporation and of the shareholders, when evaluating a
Business Combination (as defined in Article XIII of this Charter) or a tender or
exchange offer, the board of directors of the Corporation may, in addition to
considering the adequacy of the amount to be paid in connection with any such
transaction, consider all of the following factors and any other factors which
it deems relevant: (i) the social and economic effects of the transaction on the
Corporation, its subsidiaries, employees, depositors, loan and other customers
and creditors and the other elements of the communities in which the Corporation
and its subsidiaries operate or are located; (ii) the business and financial
condition and earnings prospects of the acquiring person or entity, including,
but not limited to, debt service and other existing financial obligations,
financial obligations to be incurred in connection with the acquisition and
other likely financial obligations of the acquiring person or entity, and the
possible effect of such conditions upon the Corporation and its subsidiaries and
the other elements of the communities in which the Corporation and its
subsidiaries operate or are located; and (iii) the competence, experience and
integrity of the acquiring person or entity and its or their management.
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ARTICLE XV
INCORPORATOR
The name and address, including zip code, of the Corporation's incorporator
are Jeffrey A. Oldham, 2700 First American Center, Nashville, Tennessee 37238.
ARTICLE XVI
INITIAL DIRECTORS
The individuals who are to serve as the initial directors of the
Corporation until the first annual meeting of shareholders are William H.
Huddleston, III, Ed C. Loughry, Jr., Ronald F. Knight, Gary Brown, Frank E.
Crosslin, Jr., Tim J. Durham, Ed Elam, James C. Cope and Terry G. Haynes. The
address of each initial director is 114 W. College Street, Murfreesboro,
Tennessee 37130.
ARTICLE XVII
AMENDMENT OF BYLAWS
To the extent permitted by the TBCA, the board of directors of the
Corporation is expressly authorized to repeal, alter, amend or rescind the
Bylaws of the Corporation by vote of a majority of the board of directors at a
legal meeting held in accordance with the Bylaws. Notwithstanding any other
provision of this Charter or the Bylaws of the Corporation (and notwithstanding
the fact that some lesser percentage may be specified by law), the Bylaws shall
be repealed, altered, amended or rescinded by the shareholders of the
Corporation only by vote of at least 80% of the outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) cast at a meeting of the shareholders
called for that purpose (provided that notice of such proposed repeal,
alteration, amendment or rescission is included in the notice of such meeting).
ARTICLE XVIII
AMENDMENT OF CHARTER
The Corporation reserves the right to repeal, alter, amend or rescind any
provision contained in this Charter in the manner now or hereafter prescribed by
law, and all rights conferred on shareholders herein are granted subject to this
reservation. Notwithstanding the foregoing, the provisions set forth in Articles
VI, VII, VIII, IX, X, XI, XII, XIII, XIV and XVII of this Charter and this
Article XVIII may not be repealed, altered, amended or rescinded in any respect
unless the same is approved by the affirmative vote of the holders at least 80%
of the outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as a single
class) cast at a meeting of the shareholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment or rescission is
included in the notice of such meeting); except that such repeal, alteration,
amendment or rescission may be made by the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose as a
single class) if the same is first approved by a majority of the Continuing
Directors, as defined in Article XIII of this Charter.
* * *
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THE UNDERSIGNED, being the incorporator herein before named, for the
purpose of forming a corporation pursuant to the Tennessee Business Corporation
Act, does make this Charter, hereby declaring and certifying that this is his
act and deed and the facts herein stated are true, and accordingly has hereunto
set his hand as of November 4, 1997.
/S/ JEFFREY A. OLDHAM
---------------------------
Jeffrey A. Oldham
Incorporator
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EXHIBIT 3.2
BYLAWS OF
CAVALRY BANCORP, INC.
ARTICLE I -HOME OFFICE
The home office of Cavalry Bancorp, Inc. ("Corporation") shall be at 114 W.
College Street, Murfreesboro, Tennessee 37130.
ARTICLE II -SHAREHOLDERS
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the Corporation or at such
other place as the board of directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually on the third Wednesday of
April, if not a legal holiday, and if a legal holiday, then on the next day
following which is not a legal holiday, at 2:00 p.m. Central Time, or at such
other date and time as determined by the board of directors.
Section 3. Special Meetings. Special meetings of the shareholders for any
purpose or purposes may be called in accordance with the provisions of the
Corporation's Charter.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with rules and procedures adopted by the board of
directors. The board of directors shall designate, when present, either the
chairman of the board or president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day and
hour of the meeting and the purpose(s) for which the meeting is called shall be
delivered not fewer than 10 days nor more than two (2) months before the date of
the meeting, either personally or by mail, by or at the direction of the
chairman of the board, the president, the secretary or the directors calling the
meeting, to each shareholder of record entitled to vote at such meeting;
provided, however, that with respect to meetings at which a plan of merger,
share exchange, sale of all or substantially all of the Corporation's assets or
dissolution of the Corporation is proposed to be considered, such notice shall
be provided to each shareholder of the Corporation whether or not entitled to
vote. If mailed, such notice shall be deemed to be delivered when deposited in
the mail, addressed to the shareholder at the address as it appears on the stock
transfer books or records of the Corporation as of the record date prescribed in
Section 6 of this Article II with postage prepaid. When any shareholders'
meeting, either annual or special, is adjourned for more than four months,
notice of the adjourned meeting shall be given as in the case of an original
meeting. It shall not be necessary to give any notice of the time and place of
any meeting adjourned for fewer than 30 days or of the business to be transacted
at the meeting, other than an announcement at the meeting at which such
adjournment is taken. If a meeting is adjourned to a date more than four (4)
months after the date fixed for the original meeting, a new record date for the
adjourned meeting must be fixed, and notice of the adjourned meeting must be
given to shareholders as of the new record date.
A shareholder may waive any notice required hereunder provided the waiver
is in writing, signed by him and delivered to the Corporation for inclusion in
the minutes or filing with the corporate records. A shareholder's attendance at
a meeting (i) waives objection to lack of notice or defective notice of the
meeting, unless the shareholder at the beginning of the meeting (or promptly
upon his arrival) objects to holding the meeting or transacting business at the
meeting, and (ii) waives objection to consideration of a particular matter at a
meeting that is not within the purpose or purposes described in the meeting
notice, unless the shareholder objects to considering the matter when it is
presented.
<PAGE>
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the board of directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more than
70 days prior to the date on which the particular action requiring such
determination of shareholders, is to be taken. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any adjournment,
except adjournment to a date more than four months after the date fixed for the
original meeting, in which case a new record date shall be set.
Section 7. Voting Lists. The officer or agent having charge of the stock
transfer books for shares of the Corporation shall make a complete list of the
shareholders entitled to notice of such meeting, or any adjournment, arranged in
alphabetical order, with the address and the number of shares held by each. Such
list of shareholders shall be kept on file at the home office of the Corporation
and shall be subject to inspection by any shareholder, upon written demand by
such shareholder, his agent or his attorney, beginning two business days after
notice of the meeting is given for which the list was prepared and continuing
through the meeting. If the right to vote at any meeting is challenged, the
person presiding thereat may rely on such list as evidence of the right of the
person challenged to vote at such meeting. A shareholder or his agent or
attorney is entitled on written demand to copy such list, during regular
business hours and at his expense, during the period it is available for
inspection, provided (i) his demand is made in good faith and for a proper
purpose, (ii) he describes with reasonable particularity his purpose and the
records he desires to inspect, and (iii) the records are directly connected with
his purpose.
Section 8. Quorum. A majority of the outstanding shares of the Corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If less than a majority of the outstanding shares
are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
Section 9. Proxies. At all meetings of shareholders, a shareholder may
appoint a proxy by executing a writing which authorizes another person or
persons to vote or otherwise act on the shareholder's behalf. Execution may be
accomplished by any reasonable means, including facsimile transmission, either
personally or by an attorney-in-fact in the case of an individual shareholder or
by an authorized officer, director, employee, agent or attorney-in-fact in the
case of another shareholder. Any copy, facsimile transmission or other reliable
reproduction of such writing or transmission may be substituted or used in lieu
of the original writing or transmission for any and all purposes for which the
original writing or transmission could be used; provided, that such copy,
facsimile transmission or other reproduction shall be a complete reproduction of
the entire original writing or transmission. Proxies solicited on behalf of the
management shall be voted as directed by the shareholder or, in the absence of
such direction, as determined by a majority of the board of directors. A proxy
shall be valid for 11 months from the date of its execution unless another
period is expressly provided in the appointment form.
Section 10. Voting. Except as otherwise provided in the Company's Charter,
at each election for directors every shareholder entitled to vote at such
election shall be entitled to one vote for each share of stock held by him.
Unless otherwise provided in the Corporation's Charter or by applicable law, a
majority of those votes cast by shareholders entitled to vote at a lawful
meeting shall be sufficient to pass on a transaction or matter, except in the
election of directors. Directors shall be elected by a plurality of the votes
cast by the shares entitled to vote at a meeting at which a quorum is present.
Where voting is by voting group, action on a matter (other than the election of
directors) by a voting group is approved if the votes cast within the voting
group favoring the action exceed the votes cast opposing the action, unless the
Corporation's Charter or applicable law requires a greater number of affirmative
votes.
Section 11. Voting of Shares in the Name of Two or More Persons. When
ownership stands in the name of two or more persons, in the absence of written
directions to the Corporation to the contrary, at any meeting of the
shareholders of the Corporation, any one or more of such shareholders may cast,
in person or by proxy, all votes to
<PAGE>
which such ownership is entitled. In the event an attempt is made to cast
conflicting votes, in person or by proxy, by the several persons in whose names
shares of stock stand, the vote or votes to which those persons are entitled
shall be cast as directed by a majority of those holding such shares and present
in person or by proxy at such meeting, but no votes shall be cast for such stock
if a majority cannot agree.
Section 12. Voting of Shares of Certain Holders. Shares standing in the
name of another corporation may be voted by an officer, agent or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, either in person or by
proxy, but no trustee shall be entitled to vote shares held by him without a
transfer of such shares into his name. Shares standing in the name of a receiver
may be voted by such receiver, and shares held by or under the control of a
receiver may be voted by such receiver without the transfer into his name if
authority to do so is contained in an appropriate order to the court or other
public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation nor shares
held by another corporation, if a majority of the shares entitled to vote for
the election of directors of such other corporation are held by the Corporation,
shall be voted at any meeting or counted in determining the total number of
outstanding shares at any given time for purposes of any meeting, unless such
shares are held in a fiduciary capacity.
Section 13. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any persons other than nominees
for office, as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may make such appointment
at the meeting. In case any person appointed as inspector fails to appear or
fails or refuses to act, the vacancy may be filled by appointment by the board
of directors in advance of the meeting or at the meeting by the chairman of the
board or the president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares and the voting power
of each share, the shares represented at the meeting, the existence of a quorum
and the authenticity, validity and effect of proxies; receiving votes, ballots
or consents; hearing and determining all challenges and questions in any way
arising in connection with the rights to vote; counting and tabulating all votes
or consents; determining the result; and performing such other acts as may be
proper to conduct the election or vote with fairness to all shareholders.
Section 14. Nominating Committee. The board of directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Provided such committee makes such nominations, no
nominations for directors except those made by the nominating committee shall be
voted upon at the annual meeting unless other nominations by shareholders are
made in writing and delivered to the secretary of the Corporation in accordance
with the provisions of the Corporation's Charter.
Section 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the
Corporation in accordance with the provisions of the Corporation's Charter. This
provision shall not prevent the consideration and approval or disapproval at the
annual meeting of reports of officers, directors and committees, but in
connection with such reports no new business shall be acted upon at such annual
meeting unless stated and filed as provided in the Corporation's Charter.
<PAGE>
Section 16. Informal Action by Shareholders. Any action required to be
taken at a meeting of the shareholders, or any other action which may be taken
at a meeting of shareholders, may be taken without a meeting. If all
shareholders entitled to vote on the action consent to taking such action
without a meeting, the affirmative vote of the number of shares that would be
necessary to authorize or take such action at a meeting is the act of the
shareholders. The action must be evidenced by one (1) or more written consents
describing the action taken, signed by each shareholder entitled to vote on the
action, in one (1) or more counterparts, indicating each signing shareholder's
vote or abstention on the action, and delivered to the Corporation for inclusion
in the minutes for filing with the corporate records.
A consent signed under this section has the effect of a meeting vote and
may be described as such in any document.
If the Tennessee Business Corporation Act, as amended, or the Charter
requires that notice of the proposed action be given to nonvoting shareholders
and the action is to be taken by consent of the voting shareholders, then the
Corporation must give its nonvoting shareholders written notice of the proposed
action at least ten (10) days before the action is taken. The notice must
contain or be accompanied by the same materials that would have been required by
law to be sent to nonvoting shareholders in a notice of meeting at which the
proposed action would have been submitted to the shareholders for action.
Section 17. Shareholder Meetings Through Special Communication.
Shareholders may not participate in any annual or special meeting and no annual
or special meeting of shareholders may be conducted by means of conference
telephone or similar communications equipment by which all persons participating
in the meeting can hear each other.
ARTICLE III -BOARD OF DIRECTORS
Section 1. General Powers. The business and affairs of the Corporation
shall be under the direction of its board of directors. The board of directors
shall annually elect a chairman of the board and a president from among its
members and shall designate, when present, either the chairman of the board or
the president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of nine
(9) members. In accordance with the provisions of the Corporation's Charter, at
the first meeting of shareholders of the Corporation, the board of directors
shall be divided into three classes as nearly equal in number as possible. At
succeeding annual meetings of shareholders, the members of each class shall be
elected for a term of three (3) years and until their successors are elected and
qualified. One (1) class shall be elected by ballot annually. The number of
directors may be increased or decreased upon the approval of at least two-thirds
of the directors then in office, but in no event shall such number be increased
or decreased beyond the range established in the Corporation's Charter.
Section 3. Regular Meetings. A regular meeting of the board of directors
shall be held without other notice than this bylaw immediately after, and at the
same place as, the annual meeting of shareholders or at such other time and
place as the board of directors shall determine. The board of directors may
provide, by resolution, the time and place for the holding of additional regular
meetings without other notice than such resolution.
Section 4. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board, the president,
or one-third of the directors. The persons authorized to call special meetings
of the board of directors may fix any place within Tennessee as the place for
holding any special meeting of the board of directors called by such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other. Such participation
shall constitute presence in person.
<PAGE>
Section 5. Notice of Special Meeting. Written notice of any special
meeting shall be given to each director at least two (2) days previous thereto
delivered personally, by telegram, by telecopy, or by mail at the address at
which the director is most likely to be reached. Such notice shall be deemed to
be delivered when deposited in the United States mail so addressed, with postage
thereon prepaid, or when delivered to the telegraph company if sent by telegram.
Any director may waive notice of any meeting by a writing filed with the
secretary. The attendance of a director at a meeting shall constitute a waiver
of notice of such meeting, except where a director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the board of directors need be
specified in the notice or waiver of notice of such meeting.
Section 6. Quorum. Except as otherwise provided by the Corporation's
Charter, a majority of the number of directors fixed by Section 2 of this
Article III shall constitute a quorum for the transaction of business at any
meeting of the board of directors; however, if less than such majority is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time. Notice of any adjourned meeting shall be given in the
same manner as prescribed by Section 5 of this Article III.
Section 7. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by these bylaws, the
Corporation's Charter or applicable law.
Section 8. Action Without a Meeting. Any action required or permitted to
be taken by the board of directors at a meeting may be taken without a meeting.
If all directors consent to taking such action without a meeting, the
affirmative vote of the number of directors that would be necessary to authorize
or take such action at a meeting is the act of the board. The action must be
evidenced by one (1) or more written consents describing the action taken,
signed by each director in one (1) or more counterparts, indicating each signing
director's vote or abstention on the action, and shall be included in the
minutes or filed with the corporate records reflecting the action taken. Action
taken under this section is effective when the last director signs the consent,
unless the consent specifies a different effective date.
A consent signed under this section has the effect of a meeting vote and
may be described as such in any document.
Section 9. Resignation. Any director may resign at any time by sending a
written notice of such resignation to the home office of the Corporation
addressed to the board of directors, the chairman of the board or the president.
Unless otherwise specified, such resignation shall take effect upon delivery.
More than three (3) consecutive absences from regular meetings of the board of
directors, unless excused by resolution of the board of directors, shall
automatically constitute a resignation, effective when such resignation is
accepted by the board of directors.
Section 10. Vacancies. Any vacancy occurring on the board of directors
shall be filled in accordance with the provisions of the Corporation's Charter.
Section 11. Compensation. Directors, as such, may receive a stated fee for
their services. By resolution of the board of directors, a reasonable fixed sum,
and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the board of directors. Members
of either standing or special committees may be allowed such compensation for
actual attendance at committee meetings as the board of directors may determine.
Section 12. Presumption of Assent. A director of the Corporation who is
present at a meeting of the board of directors at which action on any
Corporation matter is taken shall be presumed to have assented to the action
taken unless (i) he objects at the beginning of the meeting (or promptly upon
his arrival) to holding the meeting or transacting business at the meeting; (ii)
his dissent or abstention from the action taken is entered in the minutes of the
meeting; or (iii) he delivers written notice of his dissent or abstention to the
presiding officer of the meeting before
<PAGE>
its adjournment or to the Corporation immediately after adjournment of the
meeting. The right of dissent or abstention is not available to a director who
votes in favor of the action taken.
Section 13. Removal of Directors. Any director or the entire board of
directors may be removed only in accordance with the provisions of the
Corporation's Charter.
Section 14. Age Limitations. No person beyond seventy-four (74) years of
age shall be eligible for election, reelection, appointment, or reappointment to
the board of directors of the Corporation. No director shall serve as such
beyond the annual meeting of the Corporation immediately following the director
becoming seventy-five (75), except that a director serving on the date of
adoption of these Bylaws may complete the term as director. This age limitation
shall not apply to an advisory director.
ARTICLE IV --COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors may, by resolution passed by a majority of the whole
board, designate one (1) or more committees, as they may determine to be
necessary or appropriate for the conduct of the business of the Corporation, and
may prescribe the duties, constitution and procedures thereof. Each committee
shall consist of one (1) or more directors of the Corporation. The board may
designate one (1) or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the committee.
The board of directors shall have power, by the affirmative vote of two-
thirds of the authorized number of directors then in office, at any time to
change the members of, to fill vacancies in and to discharge any committee of
the board. Any member of any such committee may resign at any time by giving
notice to the Corporation; provided, however, that notice to the board, the
chairman of the board, the chief executive officer, the chairman of such
committee or the secretary shall be deemed to constitute notice to the
Corporation. Such resignation shall take effect upon receipt of such notice or
at any later time specified therein; and, unless otherwise specified therein,
acceptance of such resignation shall not be necessary to make it effective. Any
member of any such committee may be removed at any time, either with or without
cause, by the affirmative vote of a majority of the authorized number of
directors at any meeting of the board called for that purpose.
ARTICLE V --OFFICERS
Section 1. Positions. The officers of the Corporation shall be a
president, one (1) or more vice presidents, a secretary and a treasurer, each of
whom shall be elected by the board of directors. The board of directors may also
designate the chairman of the board as an officer. The president shall be the
chief executive officer unless the board of directors designates the chairman of
the board as chief executive officer. The president shall be a director of the
Corporation. The offices of the secretary and treasurer may be held by the same
person, and a vice president may also be either the secretary or treasurer. The
board of directors may designate one (1) or more vice presidents as executive
vice president or senior vice president. The board of directors may also elect
or authorize the appointment of such other officers as the business of the
Corporation may require. The officers shall have such authority and perform such
duties as the board of directors may from time to time authorize or determine.
In the absence of action by the board of directors, the officers shall have such
powers and duties as generally pertain to their respective offices. The
secretary of the Corporation shall be responsible for preparing minutes of the
directors' and shareholders' meetings and for authenticating records of the
Corporation.
Section 2. Election and Term of Office. The officers of the Corporation
shall be elected annually at the first meeting of the board of directors held
after each annual meeting of shareholders. If the election of officers is not
held at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until a successor has been duly elected
and qualified or until the officer's death, resignation or removal. Election or
appointment of an officer, employee or agent shall not of itself create
contractual rights. The board of directors may authorize the Corporation to
enter into an employment contract with any officer in accordance with applicable
law; however, no such contract shall impair the right of the board of directors
to remove any officer at any time in accordance with Section 3 of this Article
V.
<PAGE>
Section 3. Removal. Any officer may be removed by the board of directors
whenever in its judgment the best interests of the Corporation will be served
thereby, but such removal, other than for cause, shall be without prejudice to
any contractual rights of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise may be filled by the board
of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be fixed
from time to time by the board of directors by employment contracts or
otherwise.
Section 6. Age Limitations. No person beyond seventy-four (74) years of
age shall be eligible for election, reelection, appointment, or reappointment as
an officer of the Corporation. No officer shall serve beyond the annual meeting
of the Corporation immediately following the officer becoming seventy-five (75),
except that an officer serving on the date of adoption of these Bylaws may
complete the term as officer.
ARTICLE VI --CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. To the extent permitted by applicable law, and
except as otherwise prescribed by the Corporation's Charter or these bylaws with
respect to certificates for shares, the board of directors may authorize any
officer, employee or agent of the Corporation to enter into any contract or
execute and deliver any instrument in the name of and on behalf of the
Corporation. Such authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances. The Corporation shall not lend money to, or guarantee the
obligation of, any officer or director unless the board of directors determines
that the loan or guarantee benefits the Corporation and either approves the
specific loan or guarantee or a general plan authorizing loans and guarantees.
Section 3. Checks, Drafts, etc. All checks, drafts, other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by one (1) or more officers, employees or agents
of the Corporation in such manner as shall from time to time be determined by
the board of directors.
Section 4. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in any
duly authorized depositories as the board of directors may select.
ARTICLE VII --CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares. The shares of the Corporation shall be
represented by certificates signed by the chief executive officer or by any
other officer of the Corporation authorized by the board of directors, attested
by the secretary or an assistant secretary and sealed with the corporate seal or
a facsimile thereof. The signature of such officers upon a certificate may be
facsimiles if the certificate is manually signed on behalf of a transfer agent
or a registrar other than the Corporation itself or one (1) of its employees.
Each certificate for shares of capital stock shall be consecutively numbered or
otherwise identified. The name and address of the person to whom the shares are
issued, with the number of shares and date of issue, shall be entered on the
stock transfer books of the Corporation. All certificates surrendered to the
Corporation for transfer shall be canceled, and no new certificates shall be
issued until the form certificate for a like number of shares has been
surrendered and canceled, except that in the case of a lost or destroyed
certificate a new certificate may be issued upon such terms and indemnity to the
Corporation as the board of directors may prescribe.
Section 2. Form of Certificate. Each certificate representing shares
issued by the Corporation shall state on its face the name of the Corporation,
that the Corporation is organized under the laws of Tennessee, the name of the
person to whom it is issued, the number and class of shares and the designation
of the series, if any, the
<PAGE>
certificate represents. Each certificate shall set forth upon its face or back,
or shall state conspicuously, that the Corporation will furnish to any
shareholder upon request, and without charge, a full statement of the
designations, preferences, limitations and relative rights of each class
authorized to be issued, the variations in the relative rights and preferences
between the shares of each series so far as the same have been fixed and
determined and the authority of the board of directors to fix and determine the
relative rights and preferences of subsequent series. Other matters in regard to
the form of the certificates shall be determined by the board of directors.
Any restrictions imposed on the transfer or registration of transfer of
shares of the Corporation shall be noted conspicuously on the front or back of
each certificate representing such shares.
Section 3. Transfer of Shares. Transfer of shares of capital stock of the
Corporation shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record, by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney authorized by a duly executed power of attorney and filed with the
certificate for such shares. The person in whose name shares of capital stock
stand on the books of the Corporation shall be deemed by the Corporation to be
the owner for all purposes.
Section 4. Stock Ledger. The stock ledger of the Corporation shall be the
only evidence as to who are the shareholders entitled to examine the stock
ledger, the list required by Section 7 of Article II hereof or the books of the
Corporation or to vote in person or by proxy at any meeting of shareholders.
Section 5. Lost Certificates. The board of directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate, the
board of directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen, or destroyed
certificate, or his legal representative, to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 6. Record Owners. The Corporation shall be entitled to recognize
the exclusive right of a person registered on its books as the owner of shares
to receive dividends, and to vote as such owner, and shall not be bound to
recognize any equitable or other claim to or interest in such shares on the part
of any other person, whether or not the Corporation shall have express or other
notice thereof, except as otherwise provided by law.
ARTICLE VIII --FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Corporation shall end on the 31st day of December of
each year. The Corporation shall be subject to an annual audit as of the end of
its fiscal year by independent public accountants appointed by and responsible
to the board of directors.
ARTICLE IX --DIVIDENDS
Subject only to the terms of the Corporation's Charter and applicable law,
the board of directors may from time to time declare, and the Corporation may
pay, dividends on the outstanding classes of the Corporation's capital stock
which are eligible for dividends. Dividends may be paid in cash, in property or
in the Corporation's own stock.
ARTICLE X --CORPORATE SEAL
The corporate seal of the Corporation shall be in such form as the board of
directors may provide.
ARTICLE XI --AMENDMENTS
In accordance with the Corporation's Charter, these bylaws may be repealed,
altered, amended or rescinded by the shareholders of the Corporation only by the
affirmative vote of at least 80% of the outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors
(considered for this purpose as one (1)
<PAGE>
class) cast at a meeting of the shareholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment or rescission is
included in the notice of such meeting). In addition, these bylaws may be
repealed, altered, amended or rescinded by the board of directors by the
affirmative vote of a majority of the board of directors at a legal meeting held
in accordance with the provisions of these bylaws; provided, however, that an
amendment to the first sentence of this Article XI may be made only by the
shareholders of the Corporation.
<PAGE>
EXHIBIT 4
CAVALRY BANCORP, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF TENNESSEE
COMMON STOCK CUSIP
See Reverse For
Certain Definitions
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE,
OF
Cavalry Bancorp, Inc., a stock corporation incorporated under the laws of the
State of Tennessee. The shares represented by this Certificate are transferable
only on the stock transfer books of the Corporation by the holder of record
hereof or by his duly authorized attorney or legal representative upon the
surrender of this Certificate properly endorsed. Such shares are non-
withdrawable and not insurable. Such shares are not insured by the Federal
government. The Certificate and shares represented hereby are issued and shall
be held subject to all provisions of the Charter and Bylaws of the Corporation
and any amendments thereto (copies of which are on file with the Transfer
Agent), to all of which provisions the holder by acceptance hereof, assents.
IN WITNESS WHEREOF, Cavalry Bancorp, Inc. has caused this Certificate
to be executed by the facsimile signatures of its duly authorized officers and
has caused a facsimile of its corporate seal to be hereunto affixed.
CORPORATE SECRETARY PRESIDENT
TRANSFER AGENT
[SEAL]
<PAGE>
CAVALRY BANCORP, INC.
The shares represented by this Certificate are issued subject to all
the provisions of the Charter and Bylaws of Cavalry Bancorp, Inc.
("Corporation") as from time to time amended (copies of which are on file with
the Transfer Agent and at the principal executive offices of the Corporation).
The Charter includes a provision which prohibits any person (as
defined in the Charter) from directly or indirectly offering to acquire or
acquiring the beneficial ownership of more than ten percent (10%) of any class
of equity security of the Corporation, unless such offer or acquisition has been
approved in advance by a two-thirds vote of the Corporation's continuing
directors, as defined in the Charter. This provision does not apply to (i) any
underwriter or member of an underwriting or selling group involving a public
sale or resale of securities of the Corporation or a subsidiary thereof, (ii)
any proxy granted to one or more continuing directors, as defined, of the
Corporation by a shareholder, or (iii) any employee benefit plans of the
Corporation. Such provision contains certain other related restrictions,
including a limitation on the voting rights of securities acquired in violation
of the provision.
The Board of Directors of the Corporation is authorized by
resolution(s), from time to time adopted, to provide for the issuance of
preferred stock in series and to fix and state the powers, designations,
preferences and relative, participating, optional or other special rights of the
shares of each such series and the qualifications, limitations and restrictions
thereof. The Corporation will furnish to any shareholder upon request and
without charge a full description of each class of stock and any series thereof.
The shares represented by this Certificate may not be cumulatively
voted in the election of directors of the Corporation.
Pursuant to the Charter the affirmative vote of the holders of at
least 80% of the voting stock of the Corporation shall be required to approve
certain business combinations and other transactions (unless a lesser percentage
is permitted by the Charter), or to amend certain provisions of the Charter.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as through they were written out in full
according to applicable laws or regulations.
<TABLE>
<S> <C>
TEN COM -as tenants in common
TEN ENT -as tenants by the entireties
JT TEN -as joint tenants with right of survivorship and
not as tenants in common
UNIF GIFT MIN ACT -______Custodian_______ under Uniform Gifts to Minors Act _________
(Cust) (Minor) (State)
</TABLE>
Additional abbreviations may also be used though not in the above list
For value received, _________________________________________________
hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------
________________________________________________________________________________
________________________________________________________________________________
Please print or typewrite name and address, including postal zip code, of
assignee
________________________________________________________________________________
________________________________________________________________________________
_________________________________ shares of the Common Stock evidenced by this
Certificate, and do hereby irrevocably constitute and appoint __________________
_____________________________________________ Attorney, to transfer the said
shares on the books of the within named Corporation, with full power of
substitution.
Dated _________________
____________________________________
Signature
____________________________________
Signature
NOTICE: The signature to this assignment
must correspond with the name as written upon
the face of the Certificate in every
particular, without alteration or enlargement
or any change whatever.
<PAGE>
Breyer & Aguggia Letterhead
EXHIBIT 5
November 12, 1997
Board of Directors
Cavalry Bancorp, Inc.
114 West College Street
Murfreeboro, Tennessee 37130
RE: Cavalry Bancorp, Inc.
Registration Statement on Form S-1
To The Board of Directors:
You have requested your opinion as special counsel for Cavalry Bancorp,
Inc., a Tennessee corporation, in connection with the above-referenced
registration statement filed with the Securities and Exchange Commission under
the Securities Act of 1993, as amended.
In rendering this opinion, we understand the common stock of Cavalry
Bancorp, Inc. will be offered and sold in the manner described in the
Prospectus, which is part of the Registration statement. We have examined such
records and documents and made such examination as we have deemed relevant in
connection with this opinion.
Based upon the foregoing, it is our opinion that the shares of common stock
of Cavalry Bancorp, Inc. will upon issuance be legally issued, fully paid and
nonassessable.
This opinion is furnished for use as an exhibit to the Registration
Statement. We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "LEGAL AND
TAX OPINIONS."
Sincerely,
/s/ Breyer & Aggugia
BREYER & AGUGGIA
Washington, D.C.
<PAGE>
EXHIBIT 8.1
FORM OF FEDERAL TAX OPINION
___________, 1997
Boards of Directors
Cavalry Bancorp, Inc.
Cavalry Banking
114 W. College
Murfreesboro, Tennessee 37133
Re: Certain Federal Income Tax Consequences Relating to Proposed Holding
Company Conversion of Cavalry Banking and Subsequent Conversion to a
------------------------------------------------------------
Commercial Bank
----------------
Dear Members of the Board:
In accordance with your request, set forth herein is the opinion of this
firm relating to certain federal income tax consequences of (i) the proposed
conversion of Cavalry Banking (the "Cavalry Mutual") from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank (the "Cavalry
Stock") (the "Stock Conversion"); (ii) the concurrent acquisition of 100% of the
outstanding capital stock of the Cavalry Stock by a parent holding company
formed at the direction of the Board of Directors of Cavalry Mutual and to be
known as Cavalry Bancorp, Inc. (the "Holding Company"); and, thereafter, (iii)
the conversion of the Cavalry Stock to a Tennessee-chartered commercial bank
(the "Cavalry Bank") (the "Bank Conversion"). The Stock Conversion and the Bank
Conversion are referred to herein collectively as the "Conversion."
For purposes of this opinion, we have examined such documents and questions
of law as we have considered necessary or appropriate, including but not limited
to the Plan of Conversion as adopted by Cavalry Mutual's Board of Directors as
adopted on August 7, 1997 (the "Plan"); the federal mutual charter and bylaws of
Cavalry Mutual; the certificate of incorporation and bylaws of the Holding
Company; the Affidavit of Representations dated _________, 1997 provided to us
by Cavalry Mutual (the "Affidavit"), and the Prospectus (the "Prospectus")
included in the Registration Statement on Form S-1 filed with the Securities and
Exchange Commission ("SEC") on ___________, 1997 (the "Registration Statement").
In such examination, we have assumed, and have not independently verified, the
genuineness of all signatures on original documents where due execution and
delivery are requirements to the effectiveness thereof. Terms used but not
defined herein, whether capitalized or not, shall have the same meaning as
defined in the Plan.
<PAGE>
Boards of Directors
Cavalry Bancorp, Inc.
Cavalry Banking, FSB
________, 1997
Page 2
BACKGROUND
----------
Based solely upon our review of such documents, and upon such information
as Cavalry Mutual has provided to us (which we have not attempted to verify in
any respect), and in reliance upon such documents and information, we set forth
herein a general summary of the relevant facts and proposed transactions,
qualified in its entirety by reference to the documents cited above.
Cavalry Mutual is a federally-chartered mutual savings bank which is in the
process of converting to a federally-chartered stock savings bank and,
thereafter, to a Tennessee-chartered commercial bank. Cavalry Mutual was
initially organized in 1929. Cavalry Mutual is also a member of the Federal
Home Loan Bank System and its deposits are federally insured under the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation. Cavalry Mutual operates from its main office located at 114 W.
College, Murfreesboro, Tennessee 37133, four branch offices located in
Murfreesboro, Tennessee, a branch office in Shelbyville, Tennessee (Bedford
County) and three offices in Smyrna, Tennessee (Rutherford County). The Bank
also operates a mortgage loan origination office in Franklin, Tennessee
(Williamson County).
Cavalry Mutual is a community-oriented financial institution whose primary
business is attracting deposits from the general public and using those funds to
originate a variety of loans to individuals residing within its primary market
area, and to businesses owned and operated by such individuals. Cavalry Mutual
considers Rutherford, Bedford and Williamson Counties in Central Tennessee as
its primary market area. At September 30, 1997, Cavalry Mutual had total assets
of $275.9 million, deposits of $242.0 million, and total equity of $29.5
million.
As a federally-chartered mutual savings bank, Cavalry Mutual has no
authorized capital stock. Instead, Cavalry Mutual, in mutual form, has a unique
equity structure. A savings depositor of Cavalry Mutual is entitled to payment
of interest on his account balance as declared and paid by Cavalry Mutual, but
has no right to a distribution of any earnings of Cavalry Mutual except for
interest paid on his deposit. Rather, such earnings become retained earnings of
Cavalry Mutual.
However, a savings depositor does have a right to share pro rata, with
--- ----
respect to the withdrawal value of his respective savings account, in any
liquidation proceeds distributed if Cavalry Mutual is ever liquidated. Savings
depositors and certain borrowers are members of Cavalry Mutual and thereby have
voting rights in Cavalry Mutual. Each savings depositor is entitled to cast
votes based on the balances of their withdrawable deposit account of Cavalry
Mutual, and each borrower member (hereinafter "borrower") is entitled to one
vote in addition to the votes (if any) to which such person is entitled in such
borrower's capacity as a savings
<PAGE>
Boards of Directors
Cavalry Bancorp, Inc.
Cavalry Banking, FSB
________, 1997
Page 3
depositor of Cavalry Mutual. All of the interests held by a savings depositor
in Cavalry Mutual cease when such depositor closes his accounts with Cavalry
Mutual.
The Holding Company was incorporated in November 1997 under the laws of the
State of Tennessee as a general business corporation in order to act as a
savings institution holding company and a bank holding company. The Holding
Company has an authorized capital structure of 49,750,000 shares of common stock
and 250,000 shares of preferred stock.
PROPOSED TRANSACTION
--------------------
The Board of Directors of Cavalry Mutual has decided that in order to
increase Cavalry Mutual's net worth, support future growth, increase the amount
of funds available for lending and investment, provide greater resources for the
expansion of customer services, and facilitate future expansion through a
greater emphasis on commercial lending, it would be advantageous for Cavalry
Mutual to convert from a federally-chartered mutual savings bank to a federally-
chartered stock savings bank and, thereafter, to convert to a state-chartered
commercial bank. Further, the Board of Directors of Cavalry Mutual has
determined that in order to expand the financial services currently offered
through Cavalry Mutual and enhance flexibility of operations for diversification
of business opportunities, it would be advantageous to have the stock of the
Cavalry Stock (and, after the Bank Conversion, the stock of the Cavalry Bank)
held by a parent holding company.
Cavalry Mutual presently intends to consummate the Bank Conversion
following receipt of all necessary regulatory approvals. However, a period of
time may elapse between the consummation of the Stock Conversion and the
consummation of the Bank Conversion.
Accordingly, pursuant to the Plan, Cavalry Mutual will undergo the Stock
Conversion whereby it will be converted from a federally-chartered mutual
savings bank to a federally-chartered stock savings bank. As part of the Stock
Conversion, Cavalry Mutual will amend its existing mutual savings bank charter
and bylaws to read in the form of a Federal Stock Charter and Bylaws. The
Cavalry Stock will then issue to the Holding Company shares of the Cavalry
Stock's common stock, representing all of the shares of capital stock to be
issued by the Cavalry Stock in the Conversion, in exchange for payment by the
Holding Company of 50% of the net proceeds realized by the Holding Company from
such sale of its Common Stock, less amounts necessary to fund the Employee Stock
Ownership Plan of Cavalry Mutual, or such other percentage as the Office of
Thrift Supervision ("OTS") may authorize or require.
Also pursuant to the Plan, the Holding Company will offer its shares of
Common Stock for sale in a Subscription Offering and Direct Community Offering.
The aggregate purchase price at which all shares of Common Stock will be offered
and sold pursuant to the Plan and the
<PAGE>
Boards of Directors
Cavalry Bancorp, Inc.
Cavalry Banking, FSB
________, 1997
Page 4
total number of shares of Common Stock to be offered in the Conversion will be
determined by the Boards of Directors of Cavalry Mutual and the Holding Company
on the basis of the estimated pro forma market value of the Cavalry Bank as a
--- -----
subsidiary of the Holding Company. The estimated pro forma market value will be
--- -----
determined by an independent appraiser. Pursuant to the Plan, all such shares
will be issued and sold at a uniform price per share. The Stock Conversion,
including the sale of newly issued shares of the stock of the Cavalry Stock to
the Holding Company, will be deemed effective concurrently with the closing of
the sale of the Common Stock. The Bank Conversion will be consummated
immediately following the consummation of the Stock Conversion.
Under the Plan and in accordance with regulations of the OTS, the shares of
Common Stock will first be offered through the Subscription Offering pursuant to
non-transferable subscription rights on the basis of preference categories in
the following order of priority:
(1) Eligible Account Holders;
(2) Tax-Qualified Employee Stock Benefit Plans of Cavalry Mutual;
(3) Supplemental Eligible Account Holders; and
(4) Other Members.
Any shares of Common Stock not subscribed for in the Subscription Offering
will be offered in the Direct Community Offering in the following order of
priority:
(a) Natural persons residing in Rutherford and Bedford Counties,
Tennessee; and
(b) The general public.
Any shares of Common Stock not subscribed for in the Community Offering
will be offered to certain members of the general public on a best efforts basis
by a selling group of broker dealers in a Syndicated Community Offering.
The Plan also provides for the establishment of a Liquidation Account by
the Cavalry Stock for the benefit of all Eligible Account Holders and any
Supplemental Eligible Account Holders in an amount equal to the net worth of
Cavalry Mutual as of the date of the latest statement of financial condition
contained in the final prospectus issued in connection with the Conversion. The
establishment of the Liquidation Account will not operate to restrict the use or
application of any of the net worth accounts of the Cavalry Stock. The account
holders will have an inchoate interest in a proportionate amount of the
Liquidation Account with respect to each savings account held and will be paid
by the Cavalry Stock in event of liquidation prior to any
<PAGE>
Boards of Directors
Cavalry Bancorp, Inc.
Cavalry Banking, FSB
________, 1997
Page 5
liquidation distribution being made with respect to capital stock. Under the
Plan, the Bank Conversion shall not be deemed to be a liquidation of the Cavalry
Stock for purposes of distribution of the Liquidation Account. Upon
consummation of the Bank Conversion, the Liquidation Account, together with the
related rights and obligations of the Cavalry Stock, shall be assumed by the
Cavalry Bank.
Following the Stock Conversion, voting rights in the Cavalry Stock shall be
vested in the sole holder of stock in the Cavalry Stock, which will be the
Holding Company. Following the Bank Conversion, voting rights in the Cavalry
Bank will similarly be vested in the Holding Company. Voting rights in the
Holding Company, both after the Stock Conversion and after the Bank Conversion,
will be vested in the holders of the Common Stock.
The Stock Conversion will not interrupt the business of Cavalry Mutual.
The Cavalry Stock will continue to engage in the same business as Cavalry Mutual
immediately prior to the Stock Conversion, and the Cavalry Stock will continue
to have its savings accounts insured by the SAIF. Each depositor will retain a
withdrawable savings account or accounts equal in dollar amount to, and on the
same terms and conditions as, the withdrawable account or accounts at the time
of Stock Conversion except to the extent funds on deposit are used to pay for
Common Stock purchased in the Stock Conversion. All loans of Cavalry Mutual
will remain unchanged and retain their same characteristics in the Cavalry
Stock.
Similarly, the Bank Conversion is not expected to interrupt the business of
the Cavalry Stock. Management of Cavalry Mutual expects that, after the
Conversion, the Cavalry Bank will initially continue to conduct business in
substantially the same manner as Cavalry Mutual prior to the Conversion. Over
time, the Cavalry Bank will continue Cavalry Mutual's diversification of its
loan portfolio into commercial loans. Further, the Bank Conversion is expected
to allow Cavalry Mutual to enhance its ability to structure its banking services
to respond to prevailing market conditions. The Cavalry Bank will also continue
to have its savings accounts insured by the SAIF. Each depositor will retain a
withdrawable savings account or accounts equal in dollar amount to, and on the
same terms and conditions as, the withdrawable account or accounts at the time
of Bank Conversion. All loans of the Cavalry Stock will remain unchanged and
retain their same characteristics in the Cavalry Bank.
The Plan must be approved by the OTS and by an affirmative vote of at least
a majority of the total votes eligible to be cast at a meeting of Cavalry
Mutual's members called to vote on the Plan. The Bank Conversion is also
subject to approval of the Board of Governors of the Federal Reserve Board and
the Tennessee Department of Financial Institutions.
Immediately prior to the Conversion, Cavalry Mutual will have a positive
net worth determined in accordance with generally accepted accounting
principles.
<PAGE>
Boards of Directors
Cavalry Bancorp, Inc.
Cavalry Banking, FSB
________, 1997
Page 6
OPINION
-------
Based on the foregoing and in reliance thereon, and subject to the
conditions stated herein, it is our opinion that the following federal income
tax consequences will result from the proposed transaction.
1. The Stock Conversion will constitute a reorganization within the
meaning of Section 368(a)(1)(F) of the Internal Revenue Code of 1986,
as amended (the "Code"), and no gain or loss will be recognized to
either Cavalry Mutual or the Cavalry Stock as a result of the Stock
Conversion (see Rev. Rul. 80-105, 1980-1 C.B. 78).
---
2. The assets of Cavalry Mutual will have the same basis in the hands of
the Cavalry Stock as in the hands of Cavalry Mutual immediately prior
to the Stock Conversion (Section 362(b) of the Code).
3. The holding period of the assets of Cavalry Mutual to be received by
the Cavalry Stock will include the period during which the assets were
held by Cavalry Mutual prior to the Stock Conversion (Section 1223(2)
of the Code).
4. No gain or loss will be recognized by the Cavalry Stock on the receipt
of money from the Holding Company in exchange for shares of common
stock of the Cavalry Stock (Section 1032(a) of the Code). The
Holding Company will be transferring solely cash to the Cavalry Stock
in exchange for all the outstanding capital stock of the Cavalry Stock
and, therefore, will not recognize any gain or loss upon such
transfer. (Section 351(a) of the Code; see Rev. Rul. 69-357, 1969-1
---
C.B. 101).
5. No gain or loss will be recognized by the Holding Company upon receipt
of money from stockholders in exchange for shares of Common Stock
(Section 1032(a) of the Code).
6. No gain or loss will be recognized by the Eligible Account Holders and
Supplemental Eligible Account Holders of Cavalry Mutual upon the
issuance of them of deposit accounts in the Cavalry Stock in the same
dollar amount and on the same terms and conditions in exchange for
their deposit accounts in Cavalry Mutual held immediately prior to the
Stock Conversion (Section 1001(a) of the Code; Treas. Reg. (S)1.1001-
1(a)).
<PAGE>
Boards of Directors
Cavalry Bancorp, Inc.
Cavalry Banking, FSB
________, 1997
Page 7
7. The tax basis of the Eligible Account Holders' and Supplemental
Eligible Account Holders' savings accounts in the Cavalry Stock
received as part of the Stock Conversion will equal the tax basis of
such account holders' corresponding deposit accounts in Cavalry Mutual
surrendered in exchange therefor (Section 1012 of the Code).
8. Gain or loss, if any, will be realized by the deposit account holders
of Cavalry Mutual upon the constructive receipt of their interest in
the liquidation account of the Cavalry Stock and on the
nontransferable subscription rights to purchase stock of the Holding
Company in exchange for their proprietary rights in Cavalry Mutual.
Any such gain will be recognized by Cavalry Mutual deposit account
holders, but only in an amount non in excess of the fair market value
of the liquidation account and subscription rights received. (Section
1001 of the Code; Paulsen v. Commissioner, 469 U.S. 131 (1985); Rev.
-----------------------
Rul. 69-646, 1969-2 C.B. 54.)
9. The basis of each account holder's interest in the Liquidation Account
received in the Stock Conversion and to be established by the Cavalry
Stock pursuant to the Stock Conversion will be equal to the value, if
any, of that interest.
10. No gain or loss will be recognized upon the exercise of a subscription
right in the Stock Conversion. (Rev. Rul. 56-572, 1956-2 C.B. 182).
11. The basis of the Common Stock acquired in the Stock Conversion will be
equal to the purchase price of such stock, increased, in the case of
such stock acquired pursuant to the exercise of subscription rights,
by the fair market value, if any, of the subscription rights exercised
(Section 1012 of the Code).
12. The holding period of the Common Stock acquired in the Stock
Conversion pursuant to the exercise of subscription rights will
commence on the date on which the subscription rights are exercised
(Section 1223(6) of the Code). The holding period of the Common Stock
acquired in the Community Offering will commence on the date following
the date on which such stock is purchased (Rev. Rul. 70-598, 1970-2
C.B. 168; Rev. Rul. 66-97, 1966-1 C.B. 190).
13. The Bank Conversion will constitute a reorganization within the
meaning of Section 368(a)(1)(F) of the Code (see Rev. Rul. 80-105,
---
1980-1 C.B. 78).
<PAGE>
Boards of Directors
Cavalry Bancorp, Inc.
Cavalry Banking, FSB
________, 1997
Page 8
14. The assets of the Cavalry Stock will have the same basis in the hands
of the Cavalry Bank as in the hands of the Cavalry Stock immediately
prior to the Bank Conversion (Section 362(b) of the Code).
15. The holding period of the assets of the Cavalry Stock to be received
by the Cavalry Bank will include the period during which the assets
were held by the Cavalry Stock prior to the Bank Conversion (Section
1223(2) of the Code).
SCOPE OF OPINION
----------------
Our opinion is limited to the federal income tax matters described above
and does not address any other federal income tax considerations or any federal,
state, local, foreign or other tax considerations. If any of the information
upon which we have relied is incorrect, or if changes in the relevant facts
occur after the date hereof, our opinion could be affected thereby. Moreover,
our opinion is based on the case law, Code, Treasury Regulations thereunder and
Internal Revenue Service rulings as they now exist. These authorities are all
subject to change, and such change may be made with retroactive effect. We can
give no assurance that, after such change, our opinion would not be different.
We undertake no responsibility to update or supplement our opinion. This
opinion is not binding on the Internal Revenue Service and there can be no
assurance, and none is hereby given, that the Internal Revenue Service will not
take a position contrary to one or more of the positions reflected in the
foregoing opinion, or that our opinion will be upheld by the courts if
challenged by the Internal Revenue Service.
CONSENTS
--------
We hereby consent to the filing of this opinion with the OTS as an exhibit
to the Application H-(e)1-S filed by the Holding Company with the OTS in
connection with the Conversion and the reference to our firm in the Application
H-(e)1-S under Item 110.55 therein.
We also hereby consent to the filing of this opinion with the SEC and the
OTS as exhibits to the Registration Statement and the Bank's Application for
Conversion on Form AC ("Form AC"), respectively, and the reference on our firm
in the Prospectus, which is a part of both the Registration Statement and the
Form AC, under the headings "THE CONVERSION -- Effect of Conversion to Stock
Form on Depositors and Borrowers of Cavalry Mutual -- Tax Effects" and "LEGAL
OPINIONS."
Very truly yours,
BREYER & AGUGGIA
<PAGE>
[LETTER HEAD OF FERGUSON & COMPANY APPEARS HERE]
November 10, 1997
Board of Directors
Cavalry Banking
114 West College Street
Murfreesboro, Tennessee
Gentlemen:
All capitalized terms not otherwise defined in this letter have the
meanings given such terms in the Plan of Conversion adopted by the Board of
Directors of Cavalry Banking, Murfreesboro, Tennessee, ("Cavalry" or "Bank") on
August 7, 1997.
It is our understanding that, pursuant to Office of Thrift Supervision
regulations, subscription rights are non-transferable. Persons violating such
prohibition may lose their rights to purchase stock in the Conversion and be
subject to other possible sanctions.
Because the Subscription Rights to purchase shares of Common Stock in the
Bank to be issued to the Bank's employee stock benefit plans, depositors of the
Bank, and to other members of the Bank will be acquired by such recipients,
without cost, will be non-transferable and of short duration and will afford the
recipients the right only to purchase shares of Common Stock at the same price
as will paid by members of the general public in a Community Offering, we are of
the opinion that:
(1) the Subscription Rights will have no ascertainable fair market value
and,
<PAGE>
Board of Directors
November 10, 1997
Page 2
(2) the price at which the Subscription Rights are exercisable will not be
more or less than the fair market value of the shares on the date of
exercise.
Sincerely,
Ferguson & Company
/s/ Charles M. Hebert
Charles M. Hebert
Principal
<PAGE>
EXHIBIT 10.1
FORM OF SEVERANCE AGREEMENT FOR CERTAIN EXECUTIVE OFFICERS
This AGREEMENT is made effective as of ___________________, 1998 by and
between CAVALRY BANKING (the "BANK"); CAVALRY BANCORP, INC. ("COMPANY"), a
Tennessee corporation; and ________________ ("EXECUTIVE").
WHEREAS, the BANK recognizes the substantial contribution EXECUTIVE has
made to the BANK and wishes to protect his position therewith for the period
provided in this Agreement in the event of a Change in Control (as defined
herein); and
WHEREAS, EXECUTIVE serves in the position of ________________________, a
position of substantial responsibility;
NOW, THEREFORE, in consideration of the foregoing and upon the other terms
and conditions hereinafter provided, the parties hereto agree as follows:
1. TERM OF AGREEMENT
The term of this Agreement shall be deemed to have commenced as of the date
first above written and shall continue for a period of ____________________ (__)
full calendar months thereafter. Commencing on the first anniversary date of
this Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the BANK ("Board") may extend the Agreement for an additional year.
The Board will conduct a performance evaluation of EXECUTIVE for purposes of
determining whether to extend the Agreement, and the results thereof shall be
included in the minutes of the Board's meeting.
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control (as herein defined)
followed within twelve (12) months of the effective date of the Change in
Control by the voluntary or involuntary termination of EXECUTIVE's employment,
other than for Cause, as defined in Section 2(c) hereof, the provisions of
Section 3 shall apply. For purposes of this Agreement, "voluntary termination"
shall be limited to the circumstances in which EXECUTIVE elects to voluntarily
terminate his employment within twelve (12) months of the effective date of a
Change in Control following any demotion, loss of title, office or significant
authority, reduction in his annual compensation or benefits (other than a
reduction affecting the Bank's personnel generally), or relocation of his
principal place of employment by more than 25 miles from its location
immediately prior to the Change in Control.
(b) A "Change in Control" of the COMPANY or the BANK shall be deemed to
occur if and when (a) an offeror other than the COMPANY purchases shares of the
stock of the COMPANY or the BANK pursuant to a tender or exchange offer for such
shares, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of
the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of
securities of the COMPANY or the BANK representing twenty-five percent (25%) or
more of the combined voting power of the COMPANY's or the BANK's then
outstanding securities, (c) the membership of the board of directors of the
<PAGE>
COMPANY or the BANK changes as the result of a contested election, such that
individuals who were directors at the beginning of any twenty-four (24) month
period (whether commencing before or after the date of adoption of this
Agreement) do not constitute a majority of the Board at the end of such period,
or (d) shareholders of the COMPANY or the BANK approve a merger, consolidation,
sale or disposition of all or substantially all of the COMPANY's or the BANK's
assets, or a plan of partial or complete liquidation.
(c) EXECUTIVE shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of EXECUTIVE's intentional failure to
perform stated duties, personal dishonesty, incompetence, willful misconduct,
any breach of fiduciary duty involving personal profit, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease and desist order, or any material breach of any material provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards generally prevailing in the savings institution
industry. Notwithstanding the foregoing, EXECUTIVE shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
him a copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to EXECUTIVE and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, EXECUTIVE was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after Termination for Cause.
3. TERMINATION
(a) Upon the occurrence of a Change in Control, followed within twelve
(12) months of the effective date of a Change in Control by the voluntary or
involuntary termination of EXECUTIVE's employment other than Termination for
Cause, the BANK shall be obligated to pay EXECUTIVE, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay, a sum equal to the greater of (i) one-twelfth of
Executive's annual compensation times Executive's years of employment with the
Bank (including partial years rounded up to the nearest whole month) as of the
effective date of the Change in Control or (ii) Executive's annual compensation.
For purposes of this Agreement, "annual compensation" shall mean and include all
wages, salary, bonus, and other compensation, if any, paid (including accrued
amounts) by the Company or the Bank as consideration for the Participant's
service during the twelve (12) month period ending on the last day of the month
preceding the effective date of a Change in Control, which is or would be
includable in the gross income of the Participant receiving the same for federal
income tax purposes. Such amount shall be paid to EXECUTIVE in a lump sum no
later than thirty (30) days after the date of his termination.
(b) Upon the occurrence of a Change in Control of the BANK followed within
twelve (12) months of the effective date of a Change in Control by EXECUTIVE's
voluntary or
2
<PAGE>
involuntary termination of employment, other than Termination for Cause, the
BANK shall cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the BANK for EXECUTIVE
prior to his severance. Such coverage and payments shall cease upon expiration
of _______________________ (___) months from the date of EXECUTIVE's
termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that the aggregate payments or benefits to be made or afforded to
EXECUTIVE under this Section, together with any other payments or benefits
received or to be received by EXECUTIVE in connection with a Change in Control,
would be deemed to include an "excess parachute payment" under (S)280G of the
Code, then, at the election of EXECUTIVE, (i) such payments or benefits shall be
payable or provided to EXECUTIVE over the minimum period necessary to reduce the
present value of such payments or benefits to an amount which is one dollar
($1.00) less than three (3) times EXECUTIVE's "base amount" under (S)280G(b)(3)
of the Code or (ii) the payments or benefits to be provided under this Section 3
shall be reduced to the extent necessary to avoid treatment as an excess
parachute payment with the allocation of the reduction among such payments and
benefits to be determined by EXECUTIVE.
(d) Any payments made to EXECUTIVE pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and any regulations promulgated thereunder.
4. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the BANK and EXECUTIVE, except that
this Agreement shall not affect or operate to reduce any benefit or compensation
inuring to EXECUTIVE of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that EXECUTIVE is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
5. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
EXECUTIVE, the COMPANY, the BANK and their respective successors and assigns.
3
<PAGE>
6. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by an estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
7. REQUIRED PROVISIONS
(a) The BANK may terminate EXECUTIVE's employment at any time, but any
termination by the BANK, other than Termination for Cause, shall not prejudice
EXECUTIVE's right to compensation or other benefits under this Agreement.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 2(c) herein.
(b) If EXECUTIVE is suspended and/or temporarily prohibited from
participating in the conduct of the BANK's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the BANK's obligations under the Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the BANK may, in its
discretion, (i) pay EXECUTIVE all or part of the compensation withheld while its
contract obligations were suspended and (ii) reinstate (in whole or in part) any
of its obligations that were suspended.
(c) If EXECUTIVE is removed and/or permanently prohibited from
participating in the conduct of the BANK's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the BANK under the Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(d) If the BANK is in default (as defined in Section 3(x)(1) of the FDIA),
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement may be terminated: (i) by the
Director of the Office of Thrift Supervision (the "Director") or his or her
designee at the time the Federal Deposit Insurance Corporation enters into an
agreement to provide assistance to or on behalf of the BANK under the authority
contained in Section 13(c) of the FDIA and (ii) by the Director, or his or her
designee at the time the Director or such designee approves a supervisory merger
4
<PAGE>
to resolve problems related to operation of the BANK or when the BANK is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by such
action.
8. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
9. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
10. GOVERNING LAW
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Tennessee, unless
preempted by Federal law as now or hereafter in effect.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the BANK, in accordance with the rules of the
American Arbitration Association then in effect.
11. SOURCE OF PAYMENTS
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the BANK. The COMPANY, however, guarantees all
payments and the provision of all amounts and benefits due hereunder to
EXECUTIVE and, if such payments are not timely paid or provided by the BANK,
such amounts and benefits shall be paid or provided by the COMPANY.
12. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the BANK if EXECUTIVE is successful on the merits pursuant to a
legal judgment, arbitration or settlement.
5
<PAGE>
13. SUCCESSOR TO THE BANK OR THE COMPANY
The BANK and the COMPANY shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the BANK or the COMPANY, expressly
and unconditionally to assume and agree to perform the BANK's or the COMPANY's
obligations under this Agreement, in the same manner and to the same extent that
the BANK or the COMPANY would be required to perform if no such succession or
assignment had taken place.
14. SIGNATURES
IN WITNESS WHEREOF, the BANK and the COMPANY have caused this Agreement to
be executed and their seal to be affixed hereunto by a duly authorized officer,
and EXECUTIVE has signed this Agreement, all on the ____ day of _____________,
1998.
ATTEST: CAVALRY BANKING
_______________________________ BY:________________________________
[SEAL]
ATTEST: CAVALRY BANCORP, INC.
_______________________________ BY:________________________________
[SEAL]
WITNESS:
_______________________________ ___________________________________
EXECUTIVE
6
<PAGE>
EXHIBIT 10.2
CAVALRY BANKING
SEVERANCE COMPENSATION PLAN FOR KEY PERSONNEL
PLAN PURPOSE
The purpose of this Cavalry Banking Employee Severance Compensation Plan is
to assure the services of key personnel of the Bank in the event of a Change in
Control. The benefits contemplated by the Plan recognize the value to the Bank
of the services and contributions of such key personnel of the Bank and the
effect upon the Bank resulting from the uncertainties of continued employment,
reduced employee benefits, management changes and relocations that may arise in
the event of a Change in Control. The Board believes that the Plan will also
aid the Bank in attracting and retaining the highly qualified individuals who
are essential to its success and that the Plan's assurance of fair treatment of
the Bank's key personnel will reduce the distractions and other adverse effects
on their performance in the event of a Change in Control.
ARTICLE I
ESTABLISHMENT OF PLAN
1.1 Establishment of Plan
---------------------
As of the Effective Date of the Plan as defined herein, the Bank hereby
establishes a severance compensation plan to be known as the "Cavalry Banking
Severance Compensation Plan for Key Personnel." The purposes of the Plan are as
set forth above.
1.2 Application of Plan
-------------------
The benefits provided by this Plan shall be available to all officers of
the Bank, who, at or after the Effective Date, meet the eligibility requirements
of Article III, except for those officers of the Bank who have entered into, or
who enter into in the future, and continue to be subject to, an employment,
severance or change in control agreement with the Employer.
1.3 Contractual Right to Benefits
-----------------------------
This plan establishes and vests in each Participant a contractual right to
the benefits to which each Participant is entitled hereunder in the event of a
Change in Control, enforceable by the Participant against the Employer, the
Bank, or both. The Plan does not provide, and should not be construed as
providing, benefits of any kind to any officer, except in the event of a Change
in Control and, in the event of a Change in Control, only upon the involuntary
or voluntary termination of an officer in the manner contemplated herein.
1
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ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1 Definitions
-----------
Whenever used in the Plan, the following terms shall have the meanings set
forth below.
"Annual Compensation" of a Participant means and includes all wages,
salary, bonus, and cash compensation, if any, paid (including accrued amounts)
by an Employer as consideration for the Participant's service during the 12-
month period ending on the last day of the month preceding the date of a
Participant's termination pursuant to Section 4.2. For purposes of this Plan, a
Participant's "Monthly Compensation" shall equal one-twelfth of a Participant's
Annual Compensation as determined in accordance with this paragraph.
"Bank" means Cavalry Banking, Murfreesboro, Tennessee, or any successor as
provided in Aticle VII hereof.
"Board" means the Board of Directors of the Bank.
"Change in Control" shall mean an event deemed to occur if and when (a) an
offeror other than the Company purchases shares of the stock of the Company or
the Bank pursuant to a tender or exchange offer for such shares, (b) any person
(as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or
becomes the beneficial owner, directly or indirectly, of securities of the
Company or the Bank representing twenty-five percent (25%) or more of the
combined voting power of the Company's or the BANK's then outstanding
securities, (c) the membership of the board of directors of the Company or the
Bank changes as the result of a contested election, such that individuals who
were directors at the beginning of any twenty-four (24) month period (whether
commencing before or after the date of adoption of this Plan) do not constitute
a majority of the Board at the end of such period, or (d) shareholders of the
Company or the Bank approve a merger, consolidation, sale or disposition of all
or substantially all of the Company's or the BANK's assets, or a plan of partial
or complete liquidation.
"Company" means Cavalry Bancorp, Inc., a Tennessee corporation, the holding
company of the Bank.
"Disability" means the permanent and total inability by reason of mental or
physical infirmity, or both, of an employee to perform the work customarily
assigned to him. Additionally, a medical doctor selected or approved by the
Board must advise the Board that it is either not possible to determine if or
when such Disability will terminate or that it appears probable that such
Disability will be permanent during the remainder of said employee's lifetime.
"Effective Date" means the date the Plan is approved by the Board of the
Bank, or such other date as the Board shall designate in its resolution
approving the Plan.
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<PAGE>
"Employer" means (i) the Bank or (ii) a subsidiary of the Bank or a parent
company of the Bank which has adopted the plan pursuant to Article VI hereof.
"Expiration Date" means a date ten (10) years from the Effective Date
unless earlier terminated pursuant to Section 8.2 or extended pursuant to
Section 8.1.
"Just Cause" shall means termination because of Participant's personal
dishonesty, incompetence, willful misconduct, any breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic violations or other
similar offenses) or any final cease-and desist order.
"Payment" means the payment of severance compensation as provided in
Article IV hereof.
"Participant" means an officer of the Bank who meets the eligibility
requirements of Article III.
"Plan" means this Cavalry Banking Employee Severance Compensation Plan for
Key Employees.
2.2 Applicable Law
--------------
The laws of the State of Tennessee shall be controlling law in all matters
relating to the Plan to the extent not preempted by Federal law.
2.3 Severability
------------
If a provision of this Plan shall be held illegal or invalid, the
illegality or invalidity shall not affect the remaining parts of the Plan and
the Plan shall be construed and enforced as if the illegal or invalid provision
had not been included.
ARTICLE III
ELIGIBILITY
3.1 Participation
-------------
The term "Participant" shall be limited to any officer of an Employer who
has completed at least one (1) year of service with the Employer at the time of
any termination pursuant to Section 4.2 herein. Notwithstanding the foregoing,
officers who have entered into and continue to be covered by an individual
employment contract, severance agreement, or change in control agreement with an
Employer shall not be entitled to participate in this Plan.
3
<PAGE>
3.2 Duration of Participation
-------------------------
A Participant shall cease to be a Participant in the Plan when the
Participant ceases to be an employee of an Employer, unless such Participant is
entitled to a Payment as provided in the Plan. A Participant entitled to
receipt of a Payment shall remain a Participant in this Plan until the full
amount of such Payment has been paid to the Participant.
ARTICLE IV
PAYMENTS
4.1 Right to Payment
----------------
A Participant shall be entitled to receive from his or her Employer a
Payment in the amount provided in Section 4.3 if a Change in Control occurs and
if, within one (1) year thereafter, the Participant's employment by an Employer
shall terminate for any reason specified in Section 4.2. A Participant shall
not be entitled to a Payment if termination occurs by reason of death, voluntary
retirement, voluntary termination other than for the reasons specified in
Section 4.2, Disability or for Just Cause.
4.2 Reasons for Termination
-----------------------
Following a Change in Control, a Participant shall be entitled to a Payment
in accordance with Section 4.3 if employment by an Employer is terminated,
voluntary or involuntary, for any one or more of the following reasons:
(a) The Employer reduces the Participant's base salary or rate of
compensation as in effect immediately prior to the Change in Control, or as the
same may have been increased thereafter.
(b) The Employer materially changes the Participant's function,
duties or responsibilities which would cause the Participant's position to be
one of lesser responsibility, importance or scope with the Employer than
immediately prior to the Change in Control.
(c) The Employer requires the Participant to change the location of
the Participant's job or office, so that such Participant will be based at a
location more than twenty-five (25) miles from the location of the Participant's
job or office immediately prior to the Change in Control provided that such new
location is not closer to Participant's home.
(d) The Employer materially reduces the benefits and perquisites
available to the Participant immediately prior to the Change in Control;
provided, however, that a material reduction in benefits and perquisites
generally provided to all employees of the Bank on a nondiscriminatory basis
shall not trigger a Payment pursuant to this Plan.
4
<PAGE>
(e) A successor to the Employer fails or refuses to assume the
Employer's obligations under this Plan, as required by Article VII.
(f) The Employer, or any successor to the Employer, breaches any
other provisions of this Plan.
(g) The Employer terminates the employment of a Participant at or
after a Change in Control other than for Just Cause.
4.3 Amount of Payment
-----------------
Each Participant entitled to a Payment under this Plan shall receive
from the Employer a lump sum cash payment equal to the product of the
Participant's Monthly Compensation and the Participant's years of service
(including partial years rounded up to the nearest full month) from the
employee's date of hire through the date of termination. Notwithstanding
anything herein to the contrary, the maximum payment to a Participant under the
Plan shall not exceed three (3) times a Participant's Monthly Compensation.
The Participant shall not be required to mitigate damages on the amount of
the Payment by seeking other employment or otherwise, nor shall the amount of
such Payment be reduced by any compensation earned by the Participant as a
result of employment after termination of employment hereunder.
4.4 Time of Payment
---------------
The Payment to which a Participant is entitled shall be paid to the
Participant by the Employer or the successor to the Employer, in cash and in
full, not later than thirty (30) business days after the termination of the
Participant's employment. If any Participant should die after termination of the
employment but before all amounts have been paid, such unpaid amounts shall be
paid to the Participant's named beneficiary, if living, otherwise to the
personal representative of behalf of or for the benefit of the Participant's
estate.
4.5 Suspension of Payment
---------------------
Notwithstanding the foregoing, no payments or portions thereof shall be
made under this Plan, if such payment or portion would result in the Bank
failing to meet its minimum regulatory capital requirements as required by 12
C.F.R. (S)567.2. Any payments or portions thereof not paid shall be suspended
until such time as their payment would not result in a failure to meet the
Bank's minimum regulatory capital requirements. Any portion of benefit payments
which have not been suspended will be paid on an equitable basis, pro rata based
upon amounts due each Participant, among all eligible Participants.
5
<PAGE>
ARTICLE V
OTHER RIGHTS AND BENEFITS NOT AFFECTED
5.1 Other Benefits
--------------
Neither the provisions of this Plan nor the Payment provided for hereunder
shall reduce any amounts otherwise payable, or in any way diminish the
Participant's rights as an employee of an Employer, whether existing now or
hereafter, under any benefit, incentive, retirement, stock option, stock bonus,
stock ownership or any employment agreement or other plan or arrangement.
5.2 Employment Status
-----------------
This Plan does not constitute a contract of employment or impose on the
Participant's Employer any obligation to retain the Participant, to maintain the
status of the Participant's employment, or to change the Employer's policies
regarding termination of employment.
ARTICLE VI
PARTICIPATING EMPLOYERS
6.1 Upon approval by the Board of the Bank, this Plan may be adopted by
any subsidiary of the Bank or by the Company. Upon such adoption, the
subsidiary or the Company shall become an Employer hereunder and the provisions
of the Plan shall be fully applicable to the employees of that subsidiary or the
Company. The term "subsidiary" means any corporation in which the Bank,
directly or indirectly, holds a majority of the voting power of its outstanding
shares of capital stock.
ARTICLE VII
SUCCESSOR TO THE BANK
7.1 The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
plan, in the same manner and to the same extent that the Bank would be required
to perform if no such succession or assignment had taken place.
ARTICLE VIII
DURATION, AMENDMENT AND TERMINATION
8.1 Duration
--------
If a Change in Control has not occurred, this Plan shall expire as of the
Expiration Date, unless sooner terminated as provided in Section 8.2, or unless
extended for an additional period or periods by resolution adopted by the Board
of the Bank.
6
<PAGE>
Notwithstanding the foregoing, if a Change in Control occurs this Plan
shall continue in full force and effect, and shall not terminate or expire until
such date as all Participants who become entitled to Payments hereunder shall
have received such Payments in full.
8.2 Amendment and Termination
-------------------------
The Plan may be terminated or amended in any respect by resolution adopted
by a majority of the Board of the Bank, unless a Change in Control has
previously occurred. If a Change in Control occurs, the Plan no longer shall be
subject to amendment, change, substitution, deletion, revocation or termination
in any respect whatsoever.
8.3 Form of Amendment
-----------------
The form of any proper amendment or termination of the Plan shall be a
written instrument signed by a duly authorized officer or officers of the Bank,
certifying that the amendment or termination has been approved by the Board. A
proper termination of the Plan automatically shall effect a termination of all
Participants' rights and benefits hereunder.
8.4 No Attachment
-------------
(a) Except as required by law, no right to receive payments under this
Plan shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect such action shall be null, void,
and of no effect.
(b) This Plan shall be binding upon, and inure to the benefit of, each
employee, the Employer and their respective successors and assigns.
ARTICLE IX
LEGAL FEES AND EXPENSES
9.1 All reasonable legal fees and other expenses paid or incurred by a
party hereto pursuant to any dispute or question of interpretation relating to
this Plan shall be paid or reimbursed by the prevailing party in any legal
judgment, arbitration or settlement.
ARTICLE X
REQUIRED PROVISIONS
10.1 The Bank may terminate the employee's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
employee's right to compensation or other benefits under this Agreement if the
employee is otherwise entitled to a benefit. The employee shall not have the
right to receive compensation or other benefits for any period after termination
for Just Cause as defined in Section 2.1 hereinabove.
7
<PAGE>
10.2 If the employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(3) or (g)(1), the Bank's obligations under this Plan to such employee
shall be suspended as of the date of service, unless stated by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the employee all or part of the compensation withheld while
their contract obligations were suspended and (ii) reinstate (in whole or in
part) any of the obligation which were suspended.
10.3 If the employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(4) or (g)(1), all obligations of the Bank under this Plan to the
employee shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
10.4 If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. (S)1818(x)(1), all obligations of the
Bank under this Plan shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
10.5 All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution, (i) by the Director of the OTS
(or his designee) or (ii) the Federal Deposit Insurance Corporation ("FDIC") at
the time FDIC enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of the Federal Deposits
Insurance Act, 12 U.S.C. (S)1823(c); or (ii) by the Director of the OTS (or his
designee) at the time the Director (or his designee) approves a supervisory
merger to resolve problems related to the operations of the Bank or when the
Bank is determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by such action.
10.6 Any payments made to an employee pursuant to this Plan or otherwise
shall be conditioned upon compliance under 12 U.S.C. (S)1828(k) and any
regulations promulgated thereunder.
ARTICLE XI
ADMINISTRATION OF THE PLAN
11.1 The Plan shall be administered by the Board. Subject to the other
provisions of the Plan, the Board shall have authority to adopt, amend, alter
and repeal such administrative rules, guidelines and practices governing the
operation of the Plan as it shall from time to time consider advisable, to
interpret the provisions of the Plan and to decide all disputes arising in
connection with the Plan. The Board may correct any defect or supply any
omission or reconcile any inconsistency in the Plan in the manner and to the
extent it shall deem appropriate to carry the Plan into effect, in its sole and
absolute discretion. The Board's decision and interpretations
8
<PAGE>
shall be final and binding. Any action of the Board with respect to the
administration of the Plan shall be taken pursuant to a majority vote or by the
unanimous written consent of its members.
Having been adopted by its Board on ___________, 1998, this Plan is
executed by duly authorized officer of the Bank this ______ day of
__________________, 1998.
Attest
__________________________ _______________________________________
Secretary Ed C. Loughry, Jr.
President and Chief Executive Officer
9
<PAGE>
EXHIBIT 10.3
CAVALRY BANKING
SEVERANCE COMPENSATION PLAN FOR KEY PERSONNEL
PLAN PURPOSE
The purpose of this Cavalry Banking Employee Severance Compensation Plan is
to assure the services of key personnel of the Bank in the event of a Change in
Control. The benefits contemplated by the Plan recognize the value to the Bank
of the services and contributions of such key personnel of the Bank and the
effect upon the Bank resulting from the uncertainties of continued employment,
reduced employee benefits, management changes and relocations that may arise in
the event of a Change in Control. The Board believes that the Plan will also
aid the Bank in attracting and retaining the highly qualified individuals who
are essential to its success and that the Plan's assurance of fair treatment of
the Bank's key personnel will reduce the distractions and other adverse effects
on their performance in the event of a Change in Control.
ARTICLE I
ESTABLISHMENT OF PLAN
1.1 Establishment of Plan
---------------------
As of the Effective Date of the Plan as defined herein, the Bank hereby
establishes a severance compensation plan to be known as the "Cavalry Banking
Severance Compensation Plan for Key Personnel." The purposes of the Plan are as
set forth above.
1.2 Application of Plan
-------------------
The benefits provided by this Plan shall be available to all officers of
the Bank, who, at or after the Effective Date, meet the eligibility requirements
of Article III, except for those officers of the Bank who have entered into, or
who enter into in the future, and continue to be subject to, an employment,
severance or change in control agreement with the Employer.
1.3 Contractual Right to Benefits
-----------------------------
This plan establishes and vests in each Participant a contractual right to
the benefits to which each Participant is entitled hereunder in the event of a
Change in Control, enforceable by the Participant against the Employer, the
Bank, or both. The Plan does not provide, and should not be construed as
providing, benefits of any kind to any officer, except in the event of a Change
in Control and, in the event of a Change in Control, only upon the involuntary
or voluntary termination of an officer in the manner contemplated herein.
1
<PAGE>
ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1 Definitions
-----------
Whenever used in the Plan, the following terms shall have the meanings set
forth below.
"Annual Compensation" of a Participant means and includes all wages,
salary, bonus, and cash compensation, if any, paid (including accrued amounts)
by an Employer as consideration for the Participant's service during the 12-
month period ending on the last day of the month preceding the date of a
Participant's termination pursuant to Section 4.2. For purposes of this Plan, a
Participant's "Monthly Compensation" shall equal one-twelfth of a Participant's
Annual Compensation as determined in accordance with this paragraph.
"Bank" means Cavalry Banking, Murfreesboro, Tennessee, or any successor as
provided in Article VII hereof.
"Board" means the Board of Directors of the Bank.
"Change in Control" shall mean an event deemed to occur if and when (a) an
offeror other than the Company purchases shares of the stock of the Company or
the Bank pursuant to a tender or exchange offer for such shares, (b) any person
(as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or
becomes the beneficial owner, directly or indirectly, of securities of the
Company or the Bank representing twenty-five percent (25%) or more of the
combined voting power of the Company's or the BANK's then outstanding
securities, (c) the membership of the board of directors of the Company or the
Bank changes as the result of a contested election, such that individuals who
were directors at the beginning of any twenty-four (24) month period (whether
commencing before or after the date of adoption of this Plan) do not constitute
a majority of the Board at the end of such period, or (d) shareholders of the
Company or the Bank approve a merger, consolidation, sale or disposition of all
or substantially all of the Company's or the BANK's assets, or a plan of partial
or complete liquidation.
"Company" means Cavalry Bancorp, Inc., a Tennessee corporation, the holding
company of the Bank.
"Disability" means the permanent and total inability by reason of mental or
physical infirmity, or both, of an employee to perform the work customarily
assigned to him. Additionally, a medical doctor selected or approved by the
Board must advise the Board that it is either not possible to determine if or
when such Disability will terminate or that it appears probable that such
Disability will be permanent during the remainder of said employee's lifetime.
2
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"Effective Date" means the date the Plan is approved by the Board of the
Bank, or such other date as the Board shall designate in its resolution
approving the Plan.
"Employer" means (i) the Bank or (ii) a subsidiary of the Bank or a parent
company of the Bank which has adopted the plan pursuant to Article VI hereof.
"Expiration Date" means a date ten (10) years from the Effective Date
unless earlier terminated pursuant to Section 8.2 or extended pursuant to
Section 8.1.
"Just Cause" shall means termination because of Participant's personal
dishonesty, incompetence, willful misconduct, any breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic violations or other
similar offenses) or any final cease-and desist order.
"Payment" means the payment of severance compensation as provided in
Article IV hereof.
"Participant" means an officer of the Bank who meets the eligibility
requirements of Article III.
"Plan" means this Cavalry Banking Employee Severance Compensation Plan for
Key Employees.
2.2 Applicable Law
--------------
The laws of the State of Tennessee shall be controlling law in all matters
relating to the Plan to the extent not preempted by Federal law.
2.3 Severability
------------
If a provision of this Plan shall be held illegal or invalid, the
illegality or invalidity shall not affect the remaining parts of the Plan and
the Plan shall be construed and enforced as if the illegal or invalid provision
had not been included.
ARTICLE III
ELIGIBILITY
3.1 Participation
-------------
The term "Participant" shall be limited to any officer of an Employer who
has completed at least one (1) year of service with the Employer at the time of
any termination pursuant to Section 4.2 herein. Notwithstanding the foregoing,
officers who have entered into and continue
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to be covered by an individual employment contract, severance agreement, or
change in control agreement with an Employer shall not be entitled to
participate in this Plan.
3.2 Duration of Participation
-------------------------
A Participant shall cease to be a Participant in the Plan when the
Participant ceases to be an employee of an Employer, unless such Participant is
entitled to a Payment as provided in the Plan. A Participant entitled to
receipt of a Payment shall remain a Participant in this Plan until the full
amount of such Payment has been paid to the Participant.
ARTICLE IV
PAYMENTS
4.1 Right to Payment
----------------
A Participant shall be entitled to receive from his or her Employer a
Payment in the amount provided in Section 4.3 if a Change in Control occurs and
if, within one (1) year thereafter, the Participant's employment by an Employer
shall terminate for any reason specified in Section 4.2. A Participant shall
not be entitled to a Payment if termination occurs by reason of death, voluntary
retirement, voluntary termination other than for the reasons specified in
Section 4.2, Disability or for Just Cause.
4.2 Reasons for Termination
-----------------------
Following a Change in Control, a Participant shall be entitled to a Payment
in accordance with Section 4.3 if employment by an Employer is terminated,
voluntary or involuntary, for any one or more of the following reasons:
(a) The Employer reduces the Participant's base salary or rate of
compensation as in effect immediately prior to the Change in Control, or as the
same may have been increased thereafter.
(b) The Employer materially changes the Participant's function, duties
or responsibilities which would cause the Participant's position to be one of
lesser responsibility, importance or scope with the Employer than immediately
prior to the Change in Control.
(c) The Employer requires the Participant to change the location of
the Participant's job or office, so that such Participant will be based at a
location more than twenty-five (25) miles from the location of the Participant's
job or office immediately prior to the Change in Control provided that such new
location is not closer to Participant's home.
(d) The Employer materially reduces the benefits and perquisites
available to the Participant immediately prior to the Change in Control;
provided, however, that a material
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reduction in benefits and perquisites generally provided to all employees of the
Bank on a nondiscriminatory basis shall not trigger a Payment pursuant to this
Plan.
(e) A successor to the Employer fails or refuses to assume the
Employer's obligations under this Plan, as required by Article VII.
(f) The Employer, or any successor to the Employer, breaches any other
provisions of this Plan.
(g) The Employer terminates the employment of a Participant at or
after a Change in Control other than for Just Cause.
4.3 Amount of Payment
-----------------
Each Participant entitled to a Payment under this Plan shall receive
from the Employer a lump sum cash payment equal to the product of the
Participant's Monthly Compensation and the Participant's years of service
(including partial years rounded up to the nearest full month) from the
employee's date of hire through the date of termination. Notwithstanding
anything herein to the contrary, the maximum payment to a Participant under the
Plan shall not exceed three (3) times a Participant's Monthly Compensation.
The Participant shall not be required to mitigate damages on the amount of
the Payment by seeking other employment or otherwise, nor shall the amount of
such Payment be reduced by any compensation earned by the Participant as a
result of employment after termination of employment hereunder.
4.4 Time of Payment
---------------
The Payment to which a Participant is entitled shall be paid to the
Participant by the Employer or the successor to the Employer, in cash and in
full, not later than thirty (30) business days after the termination of the
Participant's employment. If any Participant should die after termination of
the employment but before all amounts have been paid, such unpaid amounts shall
be paid to the Participant's named beneficiary, if living, otherwise to the
personal representative of behalf of or for the benefit of the Participant's
estate.
4.5 Suspension of Payment
---------------------
Notwithstanding the foregoing, no payments or portions thereof shall be
made under this Plan, if such payment or portion would result in the Bank
failing to meet its minimum regulatory capital requirements as required by 12
C.F.R. (S)567.2. Any payments or portions thereof not paid shall be suspended
until such time as their payment would not result in a failure to meet the
Bank's minimum regulatory capital requirements. Any portion of benefit payments
which have not been suspended will be paid on an equitable basis, pro rata based
upon amounts due each Participant, among all eligible Participants.
5
<PAGE>
ARTICLE V
OTHER RIGHTS AND BENEFITS NOT AFFECTED
5.1 Other Benefits
--------------
Neither the provisions of this Plan nor the Payment provided for hereunder
shall reduce any amounts otherwise payable, or in any way diminish the
Participant's rights as an employee of an Employer, whether existing now or
hereafter, under any benefit, incentive, retirement, stock option, stock bonus,
stock ownership or any employment agreement or other plan or arrangement.
5.2 Employment Status
-----------------
This Plan does not constitute a contract of employment or impose on the
Participant's Employer any obligation to retain the Participant, to maintain the
status of the Participant's employment, or to change the Employer's policies
regarding termination of employment.
ARTICLE VI
PARTICIPATING EMPLOYERS
6.1 Upon approval by the Board of the Bank, this Plan may be adopted by
any subsidiary of the Bank or by the Company. Upon such adoption, the
subsidiary or the Company shall become an Employer hereunder and the provisions
of the Plan shall be fully applicable to the employees of that subsidiary or the
Company. The term "subsidiary" means any corporation in which the Bank,
directly or indirectly, holds a majority of the voting power of its outstanding
shares of capital stock.
ARTICLE VII
SUCCESSOR TO THE BANK
7.1 The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
plan, in the same manner and to the same extent that the Bank would be required
to perform if no such succession or assignment had taken place.
ARTICLE VIII
DURATION, AMENDMENT AND TERMINATION
8.1 Duration
--------
If a Change in Control has not occurred, this Plan shall expire as of the
Expiration Date, unless sooner terminated as provided in Section 8.2, or unless
extended for an additional period or periods by resolution adopted by the Board
of the Bank.
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Notwithstanding the foregoing, if a Change in Control occurs this Plan
shall continue in full force and effect, and shall not terminate or expire until
such date as all Participants who become entitled to Payments hereunder shall
have received such Payments in full.
8.2 Amendment and Termination
-------------------------
The Plan may be terminated or amended in any respect by resolution adopted
by a majority of the Board of the Bank, unless a Change in Control has
previously occurred. If a Change in Control occurs, the Plan no longer shall be
subject to amendment, change, substitution, deletion, revocation or termination
in any respect whatsoever.
8.3 Form of Amendment
-----------------
The form of any proper amendment or termination of the Plan shall be a
written instrument signed by a duly authorized officer or officers of the Bank,
certifying that the amendment or termination has been approved by the Board. A
proper termination of the Plan automatically shall effect a termination of all
Participants' rights and benefits hereunder.
8.4 No Attachment
-------------
(a) Except as required by law, no right to receive payments under this
Plan shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect such action shall be null, void,
and of no effect.
(b) This Plan shall be binding upon, and inure to the benefit of, each
employee, the Employer and their respective successors and assigns.
ARTICLE IX
LEGAL FEES AND EXPENSES
9.1 All reasonable legal fees and other expenses paid or incurred by a
party hereto pursuant to any dispute or question of interpretation relating to
this Plan shall be paid or reimbursed by the prevailing party in any legal
judgment, arbitration or settlement.
ARTICLE X
REQUIRED PROVISIONS
10.1 The Bank may terminate the employee's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
employee's right to compensation or other benefits under this Agreement if the
employee is otherwise entitled to a benefit. The employee shall not have the
right to receive compensation or other benefits for any period after termination
for Just Cause as defined in Section 2.1 hereinabove.
7
<PAGE>
10.2 If the employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(3) or (g)(1), the Bank's obligations under this Plan to such employee
shall be suspended as of the date of service, unless stated by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the employee all or part of the compensation withheld while
their contract obligations were suspended and (ii) reinstate (in whole or in
part) any of the obligation which were suspended.
10.3 If the employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(4) or (g)(1), all obligations of the Bank under this Plan to the
employee shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
10.4 If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. (S)1818(x)(1), all obligations of the
Bank under this Plan shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
10.5 All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution, (i) by the Director of the OTS
(or his designee) or (ii) the Federal Deposit Insurance Corporation ("FDIC") at
the time FDIC enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of the Federal Deposits
Insurance Act, 12 U.S.C. (S)1823(c); or (ii) by the Director of the OTS (or his
designee) at the time the Director (or his designee) approves a supervisory
merger to resolve problems related to the operations of the Bank or when the
Bank is determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by such action.
10.6 Any payments made to an employee pursuant to this Plan or otherwise
shall be conditioned upon compliance under 12 U.S.C. (S)1828(k) and any
regulations promulgated thereunder.
ARTICLE XI
ADMINISTRATION OF THE PLAN
11.1 The Plan shall be administered by the Board. Subject to the other
provisions of the Plan, the Board shall have authority to adopt, amend, alter
and repeal such administrative rules, guidelines and practices governing the
operation of the Plan as it shall from time to time consider advisable, to
interpret the provisions of the Plan and to decide all disputes arising in
connection with the Plan. The Board may correct any defect or supply any
omission or reconcile any inconsistency in the Plan in the manner and to the
extent it shall deem appropriate to carry the Plan into effect, in its sole and
absolute discretion. The Board's decision and interpretations
8
<PAGE>
shall be final and binding. Any action of the Board with respect to the
administration of the Plan shall be taken pursuant to a majority vote or by the
unanimous written consent of its members.
Having been adopted by its Board on ___________, 1998, this Plan is
executed by duly authorized officer of the Bank this ______ day of
__________________, 1998.
Attest
___________________________ ________________________________________
Secretary Ed C. Loughry, Jr.
President and Chief Executive Officer
9
<PAGE>
EXHIBIT 10.4
CAVALRY BANKING
EMPLOYEE STOCK OWNERSHIP PLAN
Effective as of January 1, 1998
<PAGE>
CAVALRY BANKING
EMPLOYEE STOCK OWNERSHIP PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION> Page
<S> <C>
PREAMBLE........................................................... 1
ARTICLE I
DEFINITION OF TERMS AND CONSTRUCTION
1.1 Definitions................................................... 2
1.2 Plurals and Gender............................................ 7
1.3 Incorporation of Trust Agreement.............................. 7
1.4 Headings...................................................... 7
1.5 Severability.................................................. 8
1.6 References to Governmental Regulations........................ 8
ARTICLE II
PARTICIPATION
2.1 Commencement of Participation................................. 9
2.2 Termination of Participation.................................. 9
2.3 Resumption of Participation................................... 9
2.4 Determination of Eligibility.................................. 10
ARTICLE III
CREDITED SERVICE
3.1 Service Counted for Eligibility Purposes...................... 11
3.2 Service Counted for Vesting Purposes.......................... 11
3.3 Credit for Pre-Break Service.................................. 11
3.4 Service Credit During Authorized Leaves....................... 11
3.5 Service Credit During Maternity or Paternity Leave............ 12
3.6 Ineligible Employees.......................................... 12
ARTICLE IV
CONTRIBUTIONS
4.1 Employee Stock Ownership Contributions........................ 13
4.2 Time and Manner of Employee Stock Ownership Contributions..... 13
</TABLE>
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<TABLE>
<S> <C>
4.3 Records of Contributions...................................... 14
4.4 Erroneous Contributions....................................... 14
ARTICLE V
ACCOUNTS, ALLOCATIONS AND INVESTMENTS
5.1 Establishment of Separate Participant Accounts................ 15
5.2 Establishment of Suspense Account............................. 15
5.3 Allocation of Earnings, Losses and Expenses................... 16
5.4 Allocation of Forfeitures..................................... 16
5.5 Allocation of Annual Employee Stock Ownership Contributions... 16
5.6 Limitation on Annual Additions................................ 17
5.7 Erroneous Allocations......................................... 20
5.8 Value of Participant's Interest in Fund....................... 21
5.9 Investment of Account Balances................................ 21
ARTICLE VI
RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY
6.1 Normal Retirement............................................. 22
6.2 Early Retirement.............................................. 22
6.3 Disability Retirement......................................... 22
6.4 Death Benefits................................................ 22
6.5 Designation of Death Beneficiary and Manner of Payment........ 23
ARTICLE VII
VESTING AND FORFEITURES
7.1 Vesting on Death, Disability, Retirement, Change in Control... 24
7.2 Vesting on Termination of Participation....................... 24
7.3 Disposition of Forfeitures.................................... 25
ARTICLE VIII
EMPLOYEE STOCK OWNERSHIP RULES
8.1 Right to Demand Employer Securities........................... 26
8.2 Voting Rights................................................. 26
8.3 Nondiscrimination in Employee Stock Ownership Contributions... 26
8.4 Dividends..................................................... 27
8.5 Exempt Loans.................................................. 27
8.6 Exempt Loan Payments.......................................... 28
8.7 Put Option.................................................... 29
8.8 Diversification Requirements.................................. 30
</TABLE>
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<TABLE>
<S> <C>
8.9 Independent Appraiser.......................................... 30
8.10 Limitation on Allocation ...................................... 30
ARTICLE IX
PAYMENTS AND DISTRIBUTIONS
9.1 Payments on Termination of Service -- In General............... 32
9.2 Commencement of Payments....................................... 32
9.3 Mandatory Commencement of Benefits............................. 32
9.4 Required Beginning Date........................................ 35
9.5 Form of Payment................................................ 35
9.6 Payments Upon Termination of Plan.............................. 35
9.7 Distribution Pursuant to Qualified Domestic Relations Orders... 36
9.8 Cash-Out Distributions......................................... 36
9.9 ESOP Distribution Rule......................................... 37
9.10 Withholding.................................................... 37
9.11 Waiver of 30-day Notice........................................ 38
ARTICLE X
PROVISIONS RELATING TO TOP-HEAVY PLANS
10.1 Top-Heavy Rules to Control..................................... 39
10.2 Top-Heavy Plan Definitions..................................... 39
10.3 Calculation of Accrued Benefits................................ 41
10.4 Determination of Top-Heavy Status.............................. 42
10.5 Determination of Super Top-Heavy Status........................ 43
10.6 Minimum Contribution........................................... 43
10.7 Maximum Benefit Limitation..................................... 44
ARTICLE XI
ADMINISTRATION
11.1 Appointment of Administrator................................... 45
11.2 Resignation or Removal of Administrator........................ 45
11.3 Appointment of Successors: Terms of Office, Etc................ 45
11.4 Powers and Duties of Administrator............................. 45
11.5 Action by Administrator........................................ 46
11.6 Participation by Administrators................................ 47
11.7 Agents......................................................... 47
11.8 Allocation of Duties........................................... 47
11.9 Delegation of Duties........................................... 47
11.10 Administrator's Action Conclusive.............................. 47
11.11 Compensation and Expenses of Administrator..................... 47
11.12 Records and Reports............................................ 48
</TABLE>
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<TABLE>
<S> <C>
11.13 Reports of Fund Open to Participants......................... 48
11.14 Named Fiduciary.............................................. 48
11.15 Information from Employer.................................... 48
11.16 Reservation of Rights by Employer............................ 48
11.17 Liability and Indemnification................................ 49
11.18 Service as Trustee and Administrator......................... 49
ARTICLE XII
CLAIMS PROCEDURE
12.1 Notice of Denial............................................. 50
12.2 Right to Reconsideration..................................... 50
12.3 Review of Documents.......................................... 50
12.4 Decision by Administrator.................................... 50
12.5 Notice by Administrator...................................... 50
ARTICLE XIII
AMENDMENTS, TERMINATION AND MERGER
13.1 Amendments................................................... 51
13.2 Consolidation, Merger or Other Transactions of Employer...... 51
13.3 Consolidation or Merger of Trust............................. 52
13.4 Bankruptcy or Insolvency of Employer......................... 52
13.5 Voluntary Termination........................................ 53
13.6 Partial Termination of Plan or Permanent Discontinuance of
Contributions............................................... 53
ARTICLE XIV
MISCELLANEOUS
14.1 No Diversion of Funds........................................ 54
14.2 Liability Limited............................................ 54
14.3 Incapacity................................................... 54
14.4 Spendthrift Clause........................................... 54
14.5 Benefits Limited to Fund..................................... 55
14.6 Cooperation of Parties....................................... 55
14.7 Payments Due Missing Persons................................. 55
14.8 Governing Law................................................ 55
14.9 Nonguarantee of Employment................................... 55
14.10 Counsel...................................................... 56
</TABLE>
iv
<PAGE>
CAVALRY BANKING
EMPLOYEE STOCK OWNERSHIP PLAN
PREAMBLE
Effective as of January 1, 1998, Cavalry Banking (the "Sponsor"), a
federally chartered stock savings bank (the "Sponsor"), has adopted the Cavalry
Banking Employee Stock Ownership Plan in order to enable Participants to share
in the growth and prosperity of the Sponsor, and to provide Participants with an
opportunity to accumulate capital for their future economic security by
accumulating funds to provide retirement, death and disability benefits. The
Plan is a stock bonus plan designed to meet the requirements of an employee
stock ownership plan as described at Section 4975(e)(7) of the Code and Section
407(d)(6) of ERISA. The primary purpose of the employee stock ownership plan is
to invest in employer securities. The Sponsor intends that the Plan will
qualify under Sections 401(a) and 501(a) of the Code and will comply with the
provisions of ERISA.
The terms of this Plan shall apply only with respect to Employees of the
Employer on and after January 1, 1998.
<PAGE>
ARTICLE I
DEFINITION OF TERMS AND CONSTRUCTION
1.1 Definitions.
Unless a different meaning is plainly implied by the context, the following
terms as used in this Plan shall have the following meanings:
(a) "Act" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, or any successor statute.
(b) "Administrator" shall mean the administrative committee provided for in
Article XI.
(c) "Annual Additions" shall mean, with respect to each Participant, the
sum of those amounts allocated to the Participant's accounts under this Plan and
under any other qualified defined contribution plan to which the Employer
contributes for any Limitation Year, consisting of the following:
(1) Employer contributions;
(2) Forfeitures; and
(3) Voluntary contributions (if any).
(d) "Authorized Leave of Absence" shall mean an absence from Service with
respect to which the Employee may or may not be entitled to Compensation and
which meets any one of the following requirements:
(1) Service in any of the armed forces of the United States for up to
36 months, provided that the Employee resumes Service within 90
days after discharge, or such longer period of time during which
such Employee's employment rights are protected by law; or
(2) Any other absence or leave expressly approved and granted by the
Employer which does not exceed 24 months, provided that the
Employee resumes Service at or before the end of such approved
leave period. In approving such leaves of absence, the Employer
shall treat all Employees on a uniform and nondiscriminatory
basis.
(e) "Beneficiary" shall mean such persons as may be designated by the
Participant to receive benefits after the death of the Participant, or such
persons designated by the Administrator to receive benefits after the death of
the Participant, all as provided in Section 6.5.
2
<PAGE>
(f) "Board of Directors" shall mean the Board of Directors of the Sponsor.
(g) "Break" shall mean a Plan Year during which an Employee fails to
complete more than 500 Hours of Service.
(h) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute.
(i) "Compensation" shall mean the amount of remuneration paid to an
Employee by the Employer, after the date on which the Employee becomes a
Participant, for services rendered to the Employer during a Plan Year, including
base salary, bonuses, overtime and commissions, and any amount of compensation
contributed pursuant to a salary reduction election under Code Section 401(k)
and any amount of compensation contributed to a cafeteria plan described at
Section 125 of the Code, but excluding amounts paid by the Employer or accrued
with respect to this Plan or any other qualified or non-qualified unfunded plan
of deferred compensation or other employee welfare plan to which the Employer
contributes, payments for group insurance, medical benefits, reimbursement for
expenses, and other forms of extraordinary pay, and excluding amounts accrued
for a prior year.
Notwithstanding the foregoing, for purposes of complying with Code Section
415, a Participant's contributions to a 401(k) Plan and cafeteria plan shall not
be included in the Participant's compensation. Notwithstanding anything herein
to the contrary, the annual Compensation of each Participant taken into account
under the Plan for any Plan Year shall not exceed $150,000, as adjusted from
time to time in accordance with Section 417 of the Code.
(j) "Date of Hire" shall mean the date on which a person shall perform his
first Hour of Service. Notwithstanding the foregoing, in the event a person
incurs one or more consecutive Breaks after his initial Date of Hire which
results in the forfeiture of his pre-Break Service pursuant to Section 3.3, his
"Date of Hire" shall thereafter be the date on which he completes his first Hour
of Service after such Break or Breaks.
(k) "Disability" shall mean a physical or mental impairment which
prohibits a Participant from engaging in any occupation for wages or profit and
which has caused the Social Security Administration to classify the individual
as "disabled" for purposes of Social Security.
(l) "Disability Retirement Date" shall mean the first day of the month
after which a Participant incurs a Disability.
(m) "Early Retirement Date" shall mean the first day of the month
coincident with or next following the date on which a Participant attains age 55
and completes ten Years of Service.
(n) "Effective Date" shall mean January 1, 1998.
3
<PAGE>
(o) "Eligibility Period" shall mean the period of 12 consecutive months
commencing on an Employee's Date of Hire. Succeeding eligibility computation
periods after the initial eligibility computation period shall be based on Plan
Years which include the first anniversary of an Employee's Date of Hire.
(p) "Employee" shall mean any person employed by the Employer, including
officers but excluding directors in their capacity as such; provided, however,
that the term "Employee" shall not include leased employees, employees regularly
employed outside the employer's own offices in connection with the operation and
maintenance of buildings or other properties acquired through foreclosure or
deed, and any employee included in a unit of employees covered by a collective-
bargaining agreement with the Employer that does not expressly provide for
participation of such employees in this Plan, where there has been good-faith
bargaining between the Employer and employees' representatives on the subject of
retirement benefits.
(q) "Employer" shall mean Cavalry Banking, a federally chartered stock
savings bank, or any successors to the aforesaid by merger, consolidation or
otherwise, which may agree to continue this Plan, or any affiliated or
subsidiary corporation or business organization of any Employer which, with the
consent of the Sponsor, shall agree to become a party to this Plan.
(r) "Employer Securities" shall mean the common stock issued by Cavalry
Bancorp, Inc., a Tennessee corporation, or any employer security within the
meaning of Section 4975(c)(8) of the Code and Section 407(d)(1) of ERISA.
(s) "Entry Date" shall mean each January 1 and July 1, so long as this
Plan shall remain in effect.
(t) "Exempt Loan" shall mean a loan described at Section 4975(d)(1) of the
Code to the Trustee to purchase Employer Securities for the Plan, made or
guaranteed by a disqualified person, as defined at Section 4975(e)(2) of the
Code, including, but not limited to, a direct loan of cash, a purchase money
transaction, an assumption of an obligation of the Trustee, an unsecured
guarantee or the use of assets of such disqualified person as collateral for
such a loan.
(u) "Former Participant" shall mean any previous Participant whose
participation has terminated but who has a vested interest in the Plan which has
not been distributed in full.
(v) "Fund" shall mean the Fund maintained by the Trustee pursuant to the
Trust Agreement in order to provide for the payment of the benefits specified in
the Plan.
(w) "Hour of Service" shall mean each hour for which an Employee is
directly or indirectly paid or entitled to payment by an Employer for the
performance of duties or for reasons other than the performance of duties (such
as vacation time, holidays, sickness, disability, paid lay-offs, jury duty and
similar periods of paid nonworking time). To the extent not otherwise included,
Hours of Service shall also include each hour for which back pay, irrespective
of mitigation of damages, is either awarded or agreed to by the Employer. Hours
of working
4
<PAGE>
time shall be credited on the basis of actual hours worked, even though
compensated at a premium rate for overtime or other reasons. In computing and
crediting Hours of Service for an Employee under this Plan, the rules set forth
in Sections 2530.200b-2(b) and (c) of the Department of Labor Regulations shall
apply, said Sections being herein incorporated by reference. Hours of Service
shall be credited to the Plan Year or other relevant period during which the
services were performed or the nonworking time occurred, regardless of the time
when Compensation therefor may be paid. Any Employee for whom no hourly
employment records are kept by the Employer shall be credited with 45 Hours of
Service for each calendar week in which he would have been credited with a least
one Hour or Service under the foregoing provisions, if hourly records were
available. Solely for purposes of determining whether a Break for participation
and vesting purposes has occurred in an Eligibility Period or Plan Year, an
individual who is absent from work for maternity or paternity reasons shall
receive credit for the Hours of Service which would otherwise have been credited
to such individual but for such absence, or in any case in which such hours
cannot be determined, eight Hours of Service per day of such absence. For
purposes of this Section 1.1(w), an absence from work for maternity or paternity
reasons means an absence (1) by reason of the pregnancy of the individual, (2)
by reason of a birth of a child of the individual, (3) by reason of the
placement of a child with the individual in connection with the adoption of such
child by such individual, or (4) for purposes of caring for such child for a
period beginning immediately following such birth or placement. The Hours of
Service credited under this provision shall be credited (1) in the computation
period in which the absence begins if the crediting is necessary to prevent a
Break in that period, or (2) in all other cases, in the following computation
period.
(x) "Investment Adjustments" shall mean the increases and/or decreases in
the value of a Participant's accounts attributable to earnings, gains, losses
and expenses of the Fund, as set forth in Section 5.3.
(y) "Limitation Year" shall mean the Plan Year.
(z) "Normal Retirement Date" shall mean the first day of the month
coincident with or during which a Participant attains age 65.
(aa) "Participant" shall mean an Employee who has met all of the
eligibility requirements of the Plan and who is currently included in the Plan
as provided in Article II hereof.
(bb) "Plan" shall mean the Cavalry Banking Employee Stock Ownership Plan,
as described herein or as hereafter amended from time to time.
(cc) "Plan Year" shall mean any 12 consecutive month period commencing on
January 1 and ending on December 31.
(dd) "Qualified Domestic Relations Order" shall mean any judgment, decree
or order (including approval of a property settlement agreement) that relates to
the provision of child support, alimony, marital property rights to a spouse,
former spouse, child or other dependent of
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the Participant (all such persons hereinafter termed "alternate payee") and is
made pursuant to a State domestic relations law (including community property
law) and, further, that creates or recognizes the existence of an alternate
payee's right to, or assigns to an alternate payee the right to receive all or a
portion of the benefits payable with respect to a Participant and that clearly
specifies the following:
(1) the name and last known mailing address (if available) of the
Participant and the name and mailing address of each alternate payee
to which the order relates;
(2) the amount or percentage of the Participant's benefits to be paid to
an alternate payee or the manner in which the amount is to be
determined; and
(3) the number of payments or period for which payments are required.
A domestic relations order is not a Qualified Domestic Relations Order if
it:
(1) requires the Plan to provide any type or form of benefit or any
option not otherwise provided under the Plan; or,
(2) requires the Plan to provide increased benefits; or
(3) requires payment of benefits to an alternate payee that is required
to be paid to another alternate payee under a previously existing
Qualified Domestic Relations Order.
(ee) "Retirement" shall mean termination of employment which qualifies
as early, normal or Disability retirement as described in Article VI.
(ff) "Service" shall mean employment with the Employer.
(gg) "Sponsor" shall mean Cavalry Banking, a federally chartered stock
savings bank.
(hh) "Trust Agreement" shall mean the agreement, the Sponsor and the
Trustee (or any successor Trustee governing the administration of the Trust as
it may be amended from time to time.
(ii) "Trustee" shall mean the Trustee or Trustees by whom the assets of
the Plan are held, as provided in the Trust Agreement, or his or their
successors.
(jj) "Valuation Date" shall mean the last day of each Plan Year. The
Trustee may make additional valuations, at the instruction of the Administrator,
but in no event may the Administrator request additional valuations by the
Trustee more frequently than quarterly.
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Whenever such date falls on a Saturday, Sunday or holiday, the preceding
business day shall be the Valuation Date.
(kk) "Year of Service" shall mean any Plan Year during which an Employee
has completed at least 1,000 Hours of Service. Except as otherwise specified in
Article III, in the determination of Years of Service for eligibility and
vesting purposes under this Plan, the term "Year of Service" shall also mean any
Plan Year during which an Employee has completed at least 1,000 Hours of Service
with an entity that is:
(1) a member of a controlled group including the Employer, while it is a
member of such controlled group (within the meaning of Section 414(b)
of the Code);
(2) in a group of trades or businesses under common control with the
Employer, while it is under common control (within the meaning of
Section 414(c) of the Code);
(3) a member of an affiliated service group including the Employer, while
it is a member of such affiliated service group (within the meaning
of Section 414(m) of the Code); or
(4) a leasing organization, under the circumstances described in Section
414(n) of the Code.
1.2 Plurals and Gender.
Where appearing in the Plan and the Trust Agreement, the masculine gender
shall include the feminine and neuter genders, and the singular shall include
the plural, and vice versa, unless the context clearly indicates a different
meaning.
1.3 Incorporation of Trust Agreement.
The Trust Agreement, as the same may be amended from time to time, is
intended to be and hereby is incorporated by reference into this Plan and for
all purposes shall be deemed a part of the Plan.
1.4 Headings.
The headings and sub-headings in this Plan are inserted for the convenience
of reference only and are to be ignored in any construction of the provisions
hereof.
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1.5 Severbility.
In case any provision of this Plan shall be held illegal or void, such
illegality or invalidity shall not affect the remaining provisions of this Plan,
but shall be fully severable, and the Plan shall be construed and enforced as if
said illegal or invalid provisions had never been inserted herein.
1.6 References to Governmental Regulations.
References in this Plan to regulations issued by the Internal Revenue
Service, the Department of Labor, or other governmental agencies shall include
all regulations, rulings, procedures, releases and other position statements
issued by any such agency.
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ARTICLE II
PARTICIPATION
2.1 Commencement of Participation.
(a) Any Employee who completes at least 1,000 Hours of Service during
his Eligibility Period or during any Plan Year beginning after his Date of Hire
shall initially become a Participant on the Entry Date coincident with or next
following the later of the following dates, provided he is employed by the
Employer on that Entry Date:
(1) The date which is 12 months after his Date of Hire; and
(2) The date on which he attains age 21.
(b) Any Employee who had satisfied the requirements set forth in Section
2.1(a) during the 12-month period prior to the Effective Date shall become a
Participant on the Effective Date, provided he is still employed by the Employer
on the Effective Date.
2.2 Termination of Participation.
After commencement or resumption of his participation, an Employee shall
remain a Participant during each consecutive Plan Year thereafter until the
earliest of the following dates:
(a) His actual Retirement date;
(b) His date of death; or
(c) The last day of a Plan Year during which he incurs a Break.
2.3 Resumption of Participation
(a) Any Participant whose employment terminates and who resumes Service
before he incurs a Break shall resume participation immediately on the date he
is reemployed.
(b) Except as otherwise provided in Section 2.3(c), any Participant who
incurs one or more Breaks and resumes Service shall resume participation
retroactively as of the first day of the first Plan Year in which he completes a
Year of Service after such Break(s).
(c) Any Participant who incurs one or more Breaks and resumes Service,
but whose pre-Break Service is not reinstated to his credit pursuant to Section
3.3, shall be treated as a new Employee and shall again be required to satisfy
the eligibility requirements contained in Section 2.1 before resuming
participation on the appropriate Entry Date, as specified in Section 2.1.
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2.4 Determination of Eligibility.
The Administrator shall determine the eligibility of Employees in
accordance with the provisions of this Article. For each Plan Year, the Employer
shall furnish the Administrator a list of all Employees, indicating the original
date of their reemployment with the Employer and any Breaks they may have
incurred.
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ARTICLE III
CREDITED SERVICE
3.1 Service Counted for Eligibility Purposes.
Except as provided in Section 3.3, all Years of Service completed by an
Employee shall be counted in determining his eligibility to become a Participant
on and after the Effective Date, whether such Service was completed before or
after the Effective Date.
3.2 Service Counted for Vesting Purposes.
All Years of Service completed by an Employee (including Years of Service
completed prior to the Effective Date) shall be counted in determining his
vested interest in this Plan, except the following:
(a) Service which is disregarded under the provisions of Section 3.3; and
(b) Service prior to the Effective Date of this Plan if such Service
would have been disregarded under the "break in service" rules (within the
meaning of Section 1.411(a)-5(b)(6) of the Treasury Regulations).
3.3 Credit for Pre-Break Service.
Upon his resumption of participation following one or a series of
consecutive Breaks, an Employee's pre-Break Service shall be reinstated to his
credit for all purposes of this Plan only if either:
(a) He was vested in any portion of his accrued benefit at the time the
Break(s) began; or
(b) The number of his consecutive Breaks does not equal or exceed the
greater of five or the number of his Years of Service credited to him before the
Breaks began.
Except as provided in the foregoing, none of an Employee's Service prior to
one or a series of consecutive Breaks shall be counted for any purpose in
connection with his participation in this Plan thereafter.
3.4 Service Credit During Authorized Leaves.
An Employee shall receive no Service credit under Section 3.1 or 3.2 during
any Authorized Leave of Absence. However, solely for the purpose of determining
whether he has incurred a Break during any Plan Year in which he is absent from
Service for one or more Authorized Leaves of Absence, he shall be credited with
45 Hours of Service for each week
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<PAGE>
during any such leave period. Notwithstanding the foregoing, if an Employee
fails to return to Service on or before the end of a leave period, he shall be
deemed to have terminated Service as of the first day of such leave period and
his credit for Hours of Service, determined under this Section 3.4, shall be
revoked. Notwithstanding anything contained herein to the contrary, an Employee
who is absent by reason of military service as set forth in Section 1.1(d)(1)
shall be given Service credit under this Plan for such military leave period to
the extent, and for all purposes, required by law.
3.5 Service Credit During Maternity or Paternity Leave.
For purposes of determining whether a Break has occurred for participation
and vesting purposes, an individual who is on maternity or paternity leave as
described in Section 1.1(w), shall be deemed to have completed Hours of Service
during such period of absence, all in accordance with Section 1.1(w).
Notwithstanding the foregoing, no credit shall be given for such Hours of
Service unless the individual furnishes to the Administrator such timely
information as the Administrator may reasonably require to determine:
(a) that the absence from Service was attributable to one of the maternity
or paternity reasons enumerated in Section 1.1(w); and
(b) the number of days for which such absence lasted.
In no event, however, shall any credit be given for such leave other than
for determining whether a Break has occurred.
3.6 Ineligible Employees.
Notwithstanding any provisions of this Plan to the contrary, any person who
is employed by the Employer, but who is ineligible to participate in this Plan,
either because of his failure:
(a) To meet the eligibility requirements contained in Article II; or
(b) To be an Employee, as defined in Section 1.1(p), shall, nevertheless,
earn Years of Service for eligibility and vesting purposes pursuant to the rules
contained in this Article III. However, such a person shall not be entitled to
receive any contributions hereunder unless and until he becomes a Participant in
this Plan, and then, only during his period of participation.
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ARTICLE IV
CONTRIBUTIONS
4.1 Employee Stock Ownership Contributions.
(a) Subject to all of the provisions of this Article IV, for each Plan
Year commencing on or after the Effective Date, the Employer shall make an
Employee Stock Ownership contribution to the Fund, in such amount as may be
determined by the Board of Directors in its discretion. Such contribution shall
be in the form of cash or Employer Securities. In determining the value of
Employer Securities transferred to the Fund as an Employee Stock Ownership
contribution, the Administrator may determine the average of closing prices of
such securities for a period of up to 90 consecutive days immediately preceding
the date on which the securities are contributed to the Fund. In the event that
the Employer Securities are not readily tradable on an established securities
market, the value of the Employer Securities transferred to the Fund shall be
determined by an independent appraiser in accordance with Section 8.9.
(b) In no event shall such contribution by the Employer exceed for any
Plan Year the maximum amount that may be deducted by the Employer under Section
404 of the Code, nor shall such contribution cause the Employer to violate its
regulatory capital requirements. Each Employee Stock Ownership contribution by
the Employer shall be deemed to be made on the express condition that the Plan,
as then in effect, shall be qualified under Sections 401 and 501 of the Code and
that the amount of such contribution shall be deductible from the Employer's
income under Section 404 of the Code.
4.2 Time and Manner of Employee Stock Ownership Contributions.
(a) The Employee Stock Ownership contribution (if any) for each Plan Year
shall be paid to the Trustee in one lump sum or installments at any time on or
before the expiration of the time prescribed by law (including any extensions)
for filing of the Employer's federal income tax return for its fiscal year
ending concurrent with or during such Plan Year. Any portion of the Employee
Stock Ownership contribution for each Plan Year that may be made prior to the
last day of the Plan Year shall be maintained by the Trustee in the Employee
Stock Ownership suspense account described in Section 5.2 until the last day of
such Plan Year.
(b) If an Employee Stock Ownership contribution for a Plan Year is paid
after the close of the Employer's fiscal year which ends concurrent with or
during such Plan Year but on or prior to the due date (including any extensions)
for filing of the Employer's federal income tax return for such fiscal year, it
shall be considered, for allocation purposes, as an Employee Stock Ownership
contribution to the Fund for the Plan Year for which it was computed and
accrued, unless such contribution is accompanied by a statement to the Trustee,
signed by a representative of the Employer, which specifies that the Employee
Stock Ownership contribution is made with respect to the Plan Year in which it
is received by the Trustee. Any Employee Stock Ownership contribution paid by
the Employer during any Plan Year but after the due date (including any
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<PAGE>
extensions) for filing of its federal income tax return for the fiscal year of
the Employer ending on or before the last day of the preceding Plan Year shall
be treated, for allocation purposes, as an Employee Stock Ownership contribution
to the Fund for the Plan Year in which the contribution is paid to the Trustee.
(c) Notwithstanding anything contained herein to the contrary, no Employee
Stock Ownership contribution shall be made for any year during which a
"limitations account" created pursuant to Section 5.6(c)(2) is in existence
until the balance of such limitations account has been reallocated in accordance
with Section 5.6(c)(2).
4.3 Records of Contributions.
The Employer shall deliver at least annually to the Trustee, with respect
to the contributions contemplated in Section 4.1, a certificate of the
Administrator, in such form as the Trustee shall approve, setting forth:
(a) The aggregate amount of contributions, if any, to the Fund for such
Plan Year;
(b) The names, Internal Revenue Service identifying numbers and current
residential addresses of all Participants in the Plan;
(c) The amount and category of contributions to be allocated to each such
Participant; and
(d) Any other information reasonably required for the proper operation of
the Plan.
4.4 Erroneous Contributions.
(a) Notwithstanding anything herein to the contrary, upon the Employer's
request, a contribution which was made by a mistake of fact, or conditioned upon
the initial qualification of the Plan, under Code Section 401, or upon the
deductibility of the contribution under Section 404 of the Code, shall be
returned to the Employer by the Trustee within one year after the payment of the
contribution, the denial of the qualification or the disallowance of the
deduction (to the extent disallowed), whichever is applicable; provided,
however, that in the case of denial of the initial qualification of the Plan, a
contribution shall not be returned unless an Application for Determination has
been timely filed with the Internal Revenue Service. Any portion of a
contribution returned pursuant to this Section 4.4 shall be adjusted to reflect
its proportionate share of the losses of the fund, but shall not be adjusted to
reflect any earnings or gains. Notwithstanding any provisions of this Plan to
the contrary, the right or claim of any Participant or Beneficiary to any asset
of the Fund or any benefit under this Plan shall be subject to and limited by
this Section 4.4.
(b) In no event shall voluntary Employee contributions be accepted. Any
such voluntary Employee contributions (and any earnings attributable thereto)
mistakenly received by the Trustee shall promptly be returned to the
Participant.
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ARTICLE V
ACCOUNTS, ALLOCATIONS AND INVESTMENTS
5.1 Establishment of Separate Participant Accounts.
The Administrator shall establish and maintain separate individual accounts
for Participants in the Plan and for each Former Participant in accordance with
the provisions of this Article V. Such separate accounts shall be for accounting
purposes only and shall not require a segregation of the Fund, and no
Participant, Former Participant or Beneficiary shall acquire any right to or
interest in any specific assets of the Fund as a result of the allocations
provided for under this Plan, except where segregation is expressly provided for
in this Plan.
(a) Employee Stock Ownership Accounts.
The Administrator shall establish a separate Employee Stock Ownership
Account in the Fund for each Participant. The account shall be credited as of
the last day of each Plan Year with the amounts allocated to the Participant
under Sections 5.4 and 5.5. The Administrator may establish subaccounts
hereunder, including an Employer Stock Account reflecting a Participant's
interest in Employer Securities held by the Trust and an Other Investments
Account reflecting the Participant's interest in his Employee Stock Ownership
Account other than Employer Securities.
(b) Distribution Accounts.
In any case where distribution of a terminated Participant's vested
interest in the Plan is to be deferred, the Administrator shall establish a
separate, nonforfeitable account in the Fund to which the balance in his
Employee Stock Ownership Account in the Plan shall be transferred after such
Participant incurs a Break. Unless the Former Participant's distribution
accounts are segregated for investment purposes pursuant to section 9.4, they
shall share in Investment Adjustments.
(c) Other Accounts.
The Administrator shall establish such other separate accounts for each
Participant as may be necessary or desirable for the convenient administration
of the Fund.
5.2 Establishment of Suspense Accounts.
The Administrator shall establish separate accounts to be known as
"suspense accounts." There shall be credited to such appropriate suspense
accounts any Employee Stock Ownership contributions that may be made prior to
the last day of the Plan Year, as provided in Section 4.2. The suspense accounts
shall share proportionately as to time and amount in any Investment Adjustments.
As of the last day of each Plan Year, the balance of the Employee Stock
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Ownership suspense account shall be added to the Employee Stock Ownership
contribution and allocated to the Employee Stock Ownership Accounts of
Participants as provided in Section 5.5, except as provided herein. In the event
that the Plan takes an Exempt Loan, the Employer Securities purchased thereby
shall be allocated to a separate Exempt Loan Suspense Account, from which
allocations shall be made in accordance with Section 8.5.
5.3 Allocation of Earnings, Losses and Expenses.
As of each Valuation Date, any increase or decrease in the net worth of the
aggregate Employee Stock Ownership Accounts held in the Fund attributable to
earnings, losses, expenses and unrealized appreciation or depreciation in each
such aggregate Account, as determined by the Trustee pursuant to the Trust
Agreement, shall be credited to or deducted from the appropriate suspense
accounts and all Participants' Employee Stock Ownership Accounts (except
segregated distribution accounts described in Section 5.1(b) and the
"limitations account" described in Section 5.6(c)(4)) in the proportion that the
value of each such Account (determined immediately prior to such allocation and
before crediting any Employee Stock Ownership contributions and forfeitures for
the current Plan Year but after adjustment for any transfer to or from such
Accounts and for the time such funds were in such Accounts) bears to the value
of all Employee Stock Ownership Accounts.
5.4 Allocation of Forfeitures.
As of the last day of each Plan Year, all forfeitures attributable to the
Employee Stock Ownership Accounts which are then available for reallocation
shall be, as appropriate, added to the Employee Stock Ownership contribution (if
any) for such year and allocated among the Participants' Employee Stock
Ownership Accounts, as appropriate, in the manner provided in Sections 5.5 and
5.6.
5.5 Allocation of Annual Employee Stock Ownership Contributions.
As of the last day of each Plan Year for which the Employer shall make an
Employee Stock Ownership contribution, the Administrator shall allocate the
Employee Stock Ownership contribution (including reallocable forfeitures) for
such Plan Year to the Employee Stock Ownership account of each Participant who
completed at least 1,000 Hours of Service during that Plan Year, provided that
he is still employed by the Employer on the last day of the Plan Year. Such
allocation shall be made in the same proportion that each such Participant's
Compensation for such Plan Year bears to the total Compensation of all such
Participants for such Plan Year, subject to Section 5.6; provided, however,
that, for purposes of this Section 5.5, a Participant's Compensation shall not
be considered for any part of a Plan Year prior to the date the Participant
commenced participation in the Plan. Notwithstanding the foregoing, if a
Participant attains his Normal or Early Retirement Date and terminates Service
prior to the last day of the Plan Year but after completing 1,000 Hours of
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Service, or terminates service by reason of death or Disability, he shall be
entitled to an allocation based on his Compensation earned prior to his
termination and during the Plan Year. Furthermore, if a Participant completes
1,000 Hours of Service and is on a Leave of Absence on the last day of the Plan
Year because of pregnancy or other medical reason, such a Participant shall be
entitled to an allocation based on his Compensation earned during such Plan
Year.
5.6 Limitation on Annual Additions.
(a) Notwithstanding any provisions of this Plan to the contrary, the total
Annual Additions credited to a Participant's accounts under this Plan (and under
any other defined contribution plan to which the Employer contributes) for any
Limitation Year shall not exceed the lesser of:
(1) 25% of the Participant's compensation for such Limitation Year; or
(2) $30,000 (or, if greater, one-fourth of the defined benefit dollar
limitation set forth in Section 415(b)(1)(A) of the Code). Whenever
otherwise allowed by law, the maximum amount of $30,000 shall be
automatically adjusted annually for cost-of-living increases in
accordance with Section 415(d) of the Code and the highest such
increase effective at any time during the Limitation Year shall be
effective for the entire Limitation Year, without any amendment to
this Plan.
(b) Solely for the purpose of this Section 5.6, the term "compensation" is
defined as wages, salaries, and fees for professional services and other amounts
received (without regard to whether or not an amount is paid in cash) for
personal services actually rendered in the course of employment with the
Employer maintaining the Plan to the extent that the amounts are includable in
gross income (including, but not limited to, commissions paid to salesmen,
compensation for services on the basis of a percentage of profits, commissions
on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or
other expense allowances under a nonaccountable plan (as described in Treas.
Regs. Section 1.62-2(c)), and excluding the following:
(1) Employer contributions to a plan of deferred compensation which are
not includable in the Employee's gross income for the taxable year in
which contributed, or Employer contributions under a simplified
employee pension plan to the extent such contributions are deductible
by the Employee, or any distributions from a plan of deferred
compensation;
(2) Amounts realized from the exercise of a non-qualified stock option, or
when restricted stock (or property) held by the employee either
becomes freely transferable or is no longer subject to a substantial
risk of forfeiture;
(3) Amounts realized from the sale, exchange or other disposition of stock
acquired under a qualified stock option; and
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(4) Other amounts which received special tax benefits, or contributions
made by the employer (whether or not under a salary reduction
agreement) towards the purchase of an annuity contract described in
section 403(b) of the Code (whether or not the contributions are
actually excludable from the gross income of the Employee).
(c) In the event that the limitations on Annual Additions described in
this Section 5.6(a) above are exceeded with respect to any Participant in any
Limitation Year, then the contributions allocable to the Participant for such
year shall be reduced to the minimum extent required by such limitations in the
following order of priority:
(1) If any further reductions in Annual Additions are necessary, then the
Employee Stock Ownership contributions and forfeitures allocated
during such Limitation Year to the Participant's Employee Stock
Ownership Account shall be reduced. The amount of any such reductions
in the Employee Stock Ownership contributions and forfeitures shall be
reallocated to all other Participants in the same manner as set forth
under Sections 5.4 and 5.5.
(2) Any amounts which cannot be reallocated to other Participants in a
current Limitation Year in accordance with Section 5.6(c)(1) above
because of the limitations contained in Sections 5.6(a) and (d) shall
be credited to an account designated as the "limitations account" and
carried forward to the next and subsequent Limitation Years until it
can be reallocated to all Participants as set forth in Sections 5.4,
and 5.5, as appropriate. No Investment Adjustments shall be allocated
to this limitations account. In the next and subsequent Limitation
Years, all amounts in the limitations account must be allocated in the
manner described in Sections 5.4 and 5.5, as appropriate, before any
Employee Stock Ownership contributions may be made to this Plan for
that Limitation Year.
(3) The Administrator shall determine to what extent the Annual Additions
to any Participant's Employee Stock Ownership Account must be reduced
in each Limitation Year. The Administrator shall reduce the Annual
Additions to all other tax-qualified retirement plans maintained by
the Employer in accordance with the terms contained therein for
required reductions or reallocations mandated by Section 415 of the
Code before reducing any Annual Additions in this Plan.
(4) In the event this Plan is voluntarily terminated by the Employer under
Section 13.5, any amounts credited to the limitations account
described in Section 5.6(c)(2) above which have not be reallocated as
set forth herein shall be distributed to the Participants who are
still employed by the
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Employer on the date of termination, in the proportion that each
Participant's Compensation bears to the Compensation of all
Participants.
(d) The Annual Additions credited to a Participant's accounts for each
Limitation Year are further limited so that in the case of an Employee who is a
Participant in both this Plan and any qualified defined benefit plan
(hereinafter referred to as a "pension plan") of the Employer, the sum of (1)
and (2) below will not exceed 1.0:
(1) (A) The projected annual normal retirement benefit of a Participant
under the pension plan, divided by
(B) The lesser of:
(i) The product of 1.25 multiplied by the dollar
limitation in effect under Section 415(b)(1)(A)
of the Code for such Limitation Year; or
(ii) The product of 1.4 multiplied by the amount of
compensation which may be taken into account
under Section 415(b)(1)(B) of the Code for the
Participant for such Limitation Year; plus
(2) (A) The sum of Annual Additions credited to the Participant under
this Plan for all Limitation Years, divided by:
(B) The sum of the lesser of the following amounts determined for
such Limitation Year and for each prior year of service with the
Employer:
(i) The product of 1.25 multiplied by the dollar
limitation in effect under Section 415(b)(1)(A)
of the Code for such Limitation Year, or
(ii) The product of 1.4 multiplied by the amount of
compensation which may be taken into account
under Section 415(b)(1)(B) of the Code for the
Participant for such Limitation Year. The
Administrator may, in calculating the defined
contribution plan fraction described in Section
5.6(d)(2), elect to use the transitional rule
pursuant to
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Section 415(e)(6) of the Code, if applicable.
If the sum of the fractions produced above will
exceed 1.0, even after the use of the "fresh
start" rule contained in Section 235 of the Tax
Equity and Fiscal Responsibility Act of 1982
("TEFRA"), if applicable, then the same provisions
as stated in Section 5.6(c) above shall apply.
If, even after the reductions provided for in
Section 5.6(c), the sum of the fractions still
exceed 1.0, then the benefits of the Participant
provided under the pension plan shall be reduced
to the extent necessary, in accordance with
Treasury Regulations issued under the Code.
Solely for the purposes of this Section 5.6(d),
the term "years of service" shall mean all years
of service defined by Treasury Regulations issued
under Section 415 of the Code.
(e) In the event that the Employer is a member of (1) a controlled group
of corporations or a group of trades or businesses under common control (as
described in Section 414(b) or (c) of the Code, as modified by Section 415(h)
thereof), or (2) an affiliated service group (as described in Section 414(m) of
the Code), the Annual Additions credited to any Participant's accounts in any
such Limitation Year shall be further limited by reason of the existence of all
other qualified retirement plans maintained by such affiliated corporations,
other entities under common control or other members of the affiliated service
group, to the extent such reduction is required by Section 415 of the Code and
the regulations promulgated thereunder. The Administrator shall determine if any
such reduction in the Annual Additions to a Participant's accounts is required
for this reason, and if so, the same provisions as stated in 5.6(c) and (d)
above shall apply.
(f) Annual Additions shall not include any Employer contributions which
are used by the Trust to pay interest on an Exempt Loan nor any forfeitures of
Employer Securities purchased with the proceeds of an Exempt Loan, provided that
not more than one-third of the Employer contributions are allocated to
Participants who are among the group of employees deemed "highly compensated
employees" within the meaning of Code Section 414(q).
5.7 Erroneous Allocations.
No Participant shall be entitled to any Annual Additions or other
allocations to his accounts in excess of those permitted under Sections 5.3,
5.4, 5.5, and 5.6. If it is determined at anytime that the Administrator and/or
Trustees have erred in accepting and allocating any contributions or forfeitures
under this Plan, or in allocating Investment Adjustments, or in excluding or
including any person as a Participant, then the Administrator, in a uniform and
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nondiscriminatory manner, shall determine the manner in which such error shall
be corrected and shall promptly advise the Trustee in writing of such error and
of the method for correcting such error. The accounts of any or all
Participants may be revised, if necessary, in order to correct such error.
5.8 Value of Participant's Interest in Fund
At any time, the value of a Participant's interest in the Fund shall
consist of the aggregate value of his Employee Stock Ownership Account and his
distribution account, if any, determined as of the next-preceding Valuation
Date. The Administrator shall maintain adequate records of the cost basis of
Employer Securities allocated to each Participant's Employer Stock Ownership
Account.
5.9 Investment of Account Balances.
The Employee Stock Ownership Accounts shall be invested primarily in
Employer Securities. All sales of Employer Securities by the Trustee
attributable to the Employee Stock Ownership Accounts of all Participants shall
be charged pro rata to the Employee Stock Ownership Accounts of all
Participants.
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ARTICLE VI
RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY
6.1 Normal Retirement.
A Participant who reaches his Normal Retirement Date and who shall
retire at that time shall thereupon be entitled to retirement benefits based on
the value of his interest in the Fund, payable pursuant to the provisions of
Section 9.1. A Participant who remains in Service after his Normal Retirement
Date shall not be entitled to any retirement benefits until his actual
termination of Service thereafter (except as provided in Section 9.3(g)) and he
shall meanwhile continue to participate in this Plan.
6.2 Early Retirement.
A Participant who reaches his Early Retirement Date may retire at such time
(or, at his election, as of the first day of any month thereafter prior to his
Normal Retirement Date) and shall thereupon be entitled to retirement benefits
based on the value of his interest in the Fund, payable pursuant to the
provisions of Section 9.1.
6.3 Disability Retirement.
In the event a Participant incurs a Disability, he may retire on his
Disability Retirement Date and shall thereupon be entitled to retirement
benefits based on the value of his interest in the Fund, payable pursuant to the
provisions of Section 9.1.
6.4 Death Benefits.
(a) Upon the death of a Participant before his Retirement or other
termination of Service, the value of his interest in the Fund shall be payable
pursuant to the provisions of Section 9.1. The Administrator shall direct the
Trustee to distribute his interest in the Fund to any surviving Beneficiary
designated by the Participant or, if none, to such persons designated by the
Administrator pursuant to Section 6.5.
(b) Upon the death of a Former Participant, the Administrator shall
direct the Trustee to distribute any undistributed balance of his interest in
the Fund to any surviving Beneficiary designated by him or, if none, to such
persons designated by the Administrator pursuant to Section 6.5.
(c) The Administrator may require such proper proof of death and such
evidence of the right of any person to receive the interest in the Fund of a
deceased Participant or Former Participant as the Administrator may deem
desirable. The Administrator's determination of death and of the right of any
person to receive payment shall be conclusive.
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6.5 Designation of Death Beneficiary and Manner of Payment.
(a) Each Participant shall have the right to designate a Beneficiary or
Beneficiaries to receive the sum or sums to which he may be entitled upon his
death. The Participant may also designate the manner in which any death benefits
under this Plan shall be payable to his Beneficiary, provided that such
designation is in accordance with Section 9.4. Such designation of Beneficiary
and manner of payment shall be in writing and delivered to the Administrator,
and shall be effective when received by the Administrator. The Participant shall
have the right to change such designation by notice in writing to the
Administrator. Such change of Beneficiary or the manner of payment shall become
effective upon its receipt by the Administrator. Any such change shall be deemed
to revoke all prior designations.
(b) If a Participant shall fail to designate validly a Beneficiary or if no
designated Beneficiary survives the Participant, his interest in the Fund shall
be paid to the person or persons in the first of the following classes of
successive preference Beneficiaries surviving at the death of the Participant:
the Participant's (1) widow or widower, (2) children, (3) parents, and (4)
estate. The Administrator shall decide what Beneficiaries, if any, shall have
been validly designated, and its decision shall be binding and conclusive on all
persons.
(c) Notwithstanding the foregoing, if a Participant has been married
throughout the 12 month period preceding the date of his death, the sum or sums
to which he may be entitled under this Plan upon his death shall be paid to his
spouse, unless the Participant's spouse shall have consented to the election of
another Beneficiary. Such a spousal consent shall be in writing and shall be
witnessed either by a representative of the Plan or a notary public. If it is
established to the satisfaction of the Administrator that such spousal consent
cannot be obtained because there is no spouse, because the spouse cannot be
located, or other reasons prescribed by governmental regulations, the consent of
the spouse may be waived, and the Participant may designate a Beneficiary or
Beneficiaries other than his spouse.
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ARTICLE VII
VESTING AND FORFEITURES
7.1 Vesting on Death, Disability, Retirement and Change in Control.
Unless his participation in this Plan shall have terminated prior thereto,
upon a Participant's death, Disability, Early Retirement, or upon his attainment
of Normal Retirement Date (whether or not he actually retires at that time)
while he is still employed by the Employer, the Participant's entire interest in
the Fund shall be fully vested and nonforfeitable. In addition, a Participant's
interest shall be fully vested and nonforfeitable upon a Change in Control. For
purposes of this Plan, a "Change in Control" shall mean an event deemed to occur
if and when (1) an offeror other than the Cavalry Bancorp, Inc. purchases shares
of the stock of Cavalry Bancorp, Inc. or the Sponsor pursuant to a tender or
exchange offer for such shares, (2) any person (as such term is used in Sections
13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner,
directly or indirectly, of securities of Cavalry Bancorp, Inc. or the Sponsor
representing 25% or more of the combined voting power of Cavalry Bancorp, Inc.'s
or the Sponsor's then outstanding securities, (3) the membership of the board of
directors of Cavalry Bancorp, Inc. or the Sponsor changes as the result of a
contested election, such that individuals who were directors at the beginning of
any 24 month period (whether commencing before or after the date of adoption of
this Plan) do not constitute a majority of the Board at the end of such period,
or (4) shareholders of Cavalry Bancorp, Inc. or the Sponsor approve a merger,
consolidation, sale or disposition of all or substantially all of Cavalry
Bancorp, Inc.'s or the Sponsor's assets, or a plan of partial or complete
liquidation.
7.2 Vesting on Termination of Participation.
Upon termination of his participation in this Plan for any reason
other than death, Disability, or Normal Retirement, a Participant shall be
vested in a percentage of his Employee Stock Ownership Account, such vested
percentages to be determined under the following table, based on the Years of
Service (including Years of Service prior to the Effective Date) credited to him
for vesting purposes at the time of his termination of participation:
Years of Service Completed Percentage Vested
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
Any portion of the Participant's Employee Stock Ownership Account
which is not vested at the time he incurs a Break shall thereupon be forfeited
and disposed of pursuant to Section 7.3.
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Distribution of the vested portion of a terminated Participant's interest in the
Plan may be authorized by the Administrator in any manner permitted under
Section 9.1.
7.3 Disposition of Forfeitures.
(a) In the event a Participant incurs a Break and subsequently resumes both
his Service and his participation in the Plan prior to incurring at least five
Breaks, the forfeitable portion of his Employee Stock Ownership Account shall be
reinstated to the credit of the Participant as of the date he resumes
participation.
(b) In the event a Participant terminates Service and subsequently incurs a
Break and receives a distribution, or in the event a Participant does not
terminate Service, but incurs at least five Breaks, or in the event that a
Participant terminates Service and incurs at least five Breaks but has not
received a distribution, then the forfeitable portion of his Employer Account,
including Investment Adjustments, shall be reallocated to other Participants,
pursuant to Section 5.4 as of the date the Participant incurs such Break or
Breaks, as the case may be.
(c) In the event a former Participant who had received a distribution from
the Plan is rehired, he shall repay the amount of his distribution before the
earlier of five years after the date of his rehire by the Employer, or the close
of the first period of five consecutive Breaks commencing after the
withdrawal in order for any forfeited amounts to be restored to him.
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ARTICLE VIII
EMPLOYEE STOCK OWNERSHIP PROVISIONS
8.1 Right to Demand Employer Securities.
A Participant entitled to a distribution from his Employee Stock Ownership
Account shall be entitled to demand that his interest in the Account be
distributed to him in the form of Employer Securities, all subject to Section
9.9. In the event that the Employer Securities are not readily tradable on an
established market, the Participant shall be entitled to require that the
Employer repurchase the Employer Securities under a fair valuation formula, as
provided by governmental regulations. The Participant or Beneficiary shall be
entitled to exercise the put option described in the preceding sentence for a
period of not more than 60 days following the date of distribution of Employer
Securities to him. If the put option is not exercised within such 60-day period,
the Participant or Beneficiary may exercise the put option during an additional
period of not more than 60 days after the beginning of the first day of the
first Plan Year following the Plan Year in which the first put option period
occurred, all as provided in regulations promulgated by the Secretary of
the Treasury.
8.2 Voting Rights.
Each Participant with an Employee Stock Ownership Account shall be
entitled to direct the Trustee as to the manner in which the Employer Securities
in such Account are to be voted. Employer Securities held in the Employee Stock
Ownership Suspense Account or the Exempt Loan Suspense Account shall be voted by
the Trustee on each issue with respect to which shareholders are entitled to
vote in the manner directed by the majority of the Participants who directed the
Trustee as to the manner of voting their shares in the Employee Stock Ownership
Accounts with respect to such issue. Prior to the initial allocation of shares,
the Trustee shall be entitled to vote the shares in the Suspense Account without
prior direction from the Participants or the Administrator. In the event that a
Participant fails to give timely voting instructions to the Trustee with respect
to the voting of his allocated Employer Securities, the Trustee shall be
entitled to vote such shares in its discretion.
8.3 Nondiscrimination in Employee Stock Ownership Contributions.
In the event that the amount of the Employee Stock Ownership contributions
that would be required in any Plan Year to make the scheduled payments on an
Exempt Loan would exceed the amount that would otherwise be deductible by the
Employer for such Plan Year under Code Section 404, then no more than one-third
of the Employee Stock Ownership contributions for the Plan Year, which is also
the Employer's taxable year, shall be allocated to the group of Employees who
during the Plan Year or the preceding Plan Year:
(a) During the Plan Year or the preceding Plan Year was at any time a 5%
owner of the Employer; or
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(b) During the preceding Plan Year, received compensation from the Employer
in excess of $80,000, as adjusted under Code Section 414(q) and, if elected by
the Employer, was in the top paid group of Employees for such Plan Year.
8.4 Dividends.
Any cash dividends or other cash contributions received by the Trustee of
Employer Securities allocated to the Employee Stock Account of Participants
shall be credited to the applicable Participants' Ownership Accounts unless the
Sponsor, in its sole discretion, elects to pay the cash dividends directly to
the applicable Participants or directs the Trustee to pay the cash dividends to
the Participants (or, if applicable, their Beneficiaries) within 90 calendar
days of the close of the Plan Year in which the cash dividend were paid to the
Fund. Notwithstanding anything contained in this Section to the contrary, the
Sponsor may direct cash dividends, including dividends on non-allocated shares,
be applied to repay an Exempt Loan, but only to the extent shares of Employer
Securities with an aggregate fair market value equal to the amount of dividends
so applied are allocated to the Employee Stock Ownership Account of the
applicable Participants and to the extent the cash dividends are deductible
under Section 404(k) of the Code. To the extent cash dividends on allocated
shares are applied to repay an Exempt Loan, shares released from encumbrance the
value equal to the amount of the dividends which, but for the repayment of the
Exempt Loan, would have been allocated to Participants' Employee Stock Ownership
Accounts shall be allocated to the Employee Stock Ownership Accounts of the
affected Participants, and the remaining shares to be allocated shall be
allocated among the Participants in accordance with Section 5.5. Dividends on
Employer Securities obtained pursuant to an Exempt Loan and not yet allocated
may be used to make payments on an Exempt Loan, as described in Section 8.5.
8.5 Exempt Loans.
(a) The Sponsor may direct the Trustee to obtain Exempt Loans. The Exempt
Loan may take the form of (i) a loan from a bank or other commercial lender to
purchase Employer Securities (ii) a loan from the Employer or affiliated
corporation, to the Plan; or (iii) an installment sale of Employer Securities to
the Plan. The proceeds of any such Exempt Loan shall be used, within a
reasonable time after the Exempt Loan is obtained, only to purchase Employer
Securities, repay the Exempt Loan, or repay any prior Exempt Loan. Any such
Exempt Loan shall provide for no more than a reasonable rate of interest and
shall be without recourse against the Plan. The number of years to maturity
under the Exempt Loan must be definitely ascertainable at all times. The only
assets of the Plan that may be given as collateral for an Exempt Loan are
Employer Securities acquired with the proceeds of the Exempt Loan and Employer
Securities that were used as collateral for a prior Exempt Loan repaid with the
proceeds of the current Exempt Loan. Such Employer Securities so pledged shall
be placed in an Exempt Loan Suspense Account. No person or institution entitled
to payment under an Exempt Loan shall have recourse against Trust assets other
than the aforesaid collateral, Employer Stock Ownership contributions (other
than contributions of Employer Securities) that are available under the Plan to
meet obligations under the Exempt Loan and earnings attributable to such
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collateral and the investment of such contributions. All Employee Stock
Ownership contributions paid during the Plan Year in which an Exempt Loan is
made (whether before or after the date the proceeds of the Exempt Loan are
received), all Employee Stock Ownership contributions paid thereafter until the
Exempt Loan has been repaid in full, and all earnings from investment of such
Employee Stock Ownership contributions, without regard to whether any such
Employee Stock Ownership contributions and earnings have been allocated to
Participants' Employee Stock Ownership Accounts, shall be available to meet
obligations under the Exempt Loan as such obligations accrue, or prior to the
time such obligations accrue, unless otherwise provided by the Employer at the
time any such contribution is made. Any pledge of Employer Securities shall
provide for the release of shares so pledged upon the payment of any portion of
the Exempt Loan.
(b) For each Plan Year during the duration of the Exempt Loan, the number
of shares of Employer Securities released from such pledge shall equal the
number of encumbered shares held immediately before release for the current Plan
Year multiplied by a fraction. The numerator of the fraction is the sum of
principal and interest paid in such Plan Year. The denominator of the fraction
is the sum of the numerator plus the principal and interest to be paid for all
future years. Such years will be determined without taking into account any
possible extension or renewal periods. If interest on any Exempt Loan is
variable, the interest to be paid in future years under the Exempt Loan shall be
computed by using the interest rate applicable as of the end of the Plan Year.
(c) Notwithstanding the foregoing, the Trustee may obtain an Exempt Loan
pursuant to the terms of which the number of Employer Securities to be released
from encumbrance may, at the election of the Sponsor or otherwise, be determined
solely with reference to principal payments. In the event that such an Exempt
Loan is obtained, annual payments of principal and interest shall be at a
cumulative rate that is not less rapid at any time than level payments of such
amounts for not more than 10 years. The amount of interest in any such annual
loan repayment shall be disregarded only to the extent that it would be
determined to be interest under standard loan amortization tables. The
requirement set forth in the preceding sentence shall not be applicable from the
time that, by reason of a renewal, extension, or refinancing, the sum of the
expired duration of the Exempt Loan, the renewal period, the extension period,
and the duration of a new Exempt Loan exceeds 10 years.
8.6 Exempt Loan Payments.
(a) Payments of principal and interest on any Exempt Loan during a Plan
Year shall be made by the Trustee (as directed by the Administrator) only from
(1) Employee Stock Ownership contributions to the Trust made to meet the Plan's
obligation under an Exempt Loan (other than contributions of Employer
Securities) and from any earnings attributable to Employer Securities held as
collateral for an Exempt Loan and investments of such contributions (both
received during or prior to the Plan Year); (2) the proceeds of a subsequent
Exempt Loan made to repay a prior Exempt Loan; and (3) the proceeds of the sale
of any Employer Securities held as collateral for
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an Exempt Loan. Such contribution and earnings shall be accounted for separately
by the Plan until the Exempt Loan is repaid.
(b) Employer Securities released by reason of the payment of principal or
interest on an Exempt Loan from amounts allocated to Participants' Employee
Stock Ownership Accounts shall be allocated as set forth in Section 5.5.
(c) The Employer shall contribute to the Trust sufficient amounts to enable
the Trust to pay principal and interest on any such Exempt Loans as they are
due, provided however that no such contribution shall exceed the limitations in
Section 5.6. In the event that such contributions by reason of the limitations
in Section 5.6 are insufficient to enable the Trust to pay principal and
interest on such Exempt Loan as it is due, then upon the Trustee's request the
Employer or an affiliated corporation shall:
(1) Make an Exempt Loan to the Trust in sufficient amounts to meet such
principal and interest payments. Such new Exempt Loan shall be
subordinated to the prior Exempt Loan. Securities released from the
pledge of the prior Exempt Loan shall be pledged as collateral to
secure the new Exempt Loan. Such Employer Securities will be released
from this new pledge and allocated to the Employee Stock Ownership
Accounts of the Participants in accordance with applicable provisions
of the Plan;
(2) Purchase any Employer Securities pledged as collateral in an amount
necessary to provide the Trustee with sufficient funds to meet the
principal and interest repayments. Any such sale by the Plan shall
meet the requirements of Section 408(e) of ERISA; or
(3) Any combination of the foregoing. However, the Employer shall not,
pursuant to the provisions of this subsection, do, fail to do or cause
to be done any act or thing which would result in a disqualification
of the Plan as an Employee Stock Ownership Plan under the Code.
(d) Except as provided in Section 8.1 above and notwithstanding any
amendment to or termination of the Plan which causes it to cease to qualify as
an Employee Stock Ownership plan within the meaning of Section 4975(e)(7) of the
Code, or any repayment of an Exempt Loan, no shares of Employer Securities
acquired with the proceeds of an Exempt Loan obtained by the Trust to purchase
Employer Securities may be subject to a put, call or other option, or buy-sell
or similar arrangement while such shares are held by the Plan or when such
Shares ar e distributed from the Plan.
8.7 Put Option.
If a Participant exercises a put option (as set forth in Section 8.1)
with respect to Employer Securities that were distributed as part of a total
distribution pursuant to which a
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Participant's Employee Stock Ownership Account is distributed to him in a single
taxable year, the Employer or the Plan may elect to pay the purchase price of
the Employer Securities over a period not to exceed five years. Such payments
shall be made in substantially equal installments not less frequently than
annually over a period beginning not later than 30 days after the exercise of
the put option. Reasonable interest shall be paid to the Participant with
respect to the unpaid balance of the purchase price and adequate security shall
be provided with respect thereto. In the event that a Participant exercises a
put option with respect to Employer Securities that are distributed as part of
an installment distribution, the amount to be paid for such securities shall be
paid not later than 30 days after the exercise of the put option.
8.8 Diversification Requirements
Each Participant who has completed at least 10 years of participation
in the Plan and has attained age 55 may elect within 90 days after the close of
each Plan Year during his "qualified election period" to direct the Plan as to
the investment of at least 25% of his Employee Stock Ownership Account (to the
extent such percentage exceeds the amount to which a prior election under this
Section 8.8 had been made). For purposes of this Section 8.8, the term
"qualified election period" shall mean the five-Plan Year period beginning with
the Plan Year after the Plan Year in which the Participant attains age 55 (or,
if later, beginning with the Plan Year after the first Plan Year in which the
Employee first completes at least 10 years of participation in the Plan). In
the case of the Employee who has attained age 60 and completed 10 years of
participation in the prior Plan Year and in the case of the election year in
which any other Participant who has met the minimum age and service requirements
for diversification can make his last election hereunder, he shall be entitled
to direct the Plan as to the investment of at least 50% of his Employee Stock
Ownership Account (to the extent such percentage exceeds the amount to which a
prior election under this Section 8.8 had been made). The Plan shall make
available at least three investment options (not inconsistent with regulations
prescribed by the Department of Treasury) to each Participant making an election
hereunder. The Plan shall be deemed to have met the requirements of this
Section if the portion of the Participant's Employee Stock Ownership Account
covered by the election hereunder is distributed to the Participant or his
designated Beneficiary within 90 days after the period during which the election
may be made. In the absence of such a distribution, the Trustee shall implement
the Participant's election within 90 days following the expiration of the
qualified election period.
8.9 Independent Appraiser.
An independent appraiser meeting the requirements of Code 170(a)(1) shall
value the Employer Securities in those Plan Years when such securities are not
readily tradable on an established securities market.
8.10 Limitation on Allocations.
In the event that the Trustee acquires shares of Employer Securities in a
transaction to which section 1042 of the Code applies, such Shares shall not be
allocated, directly or indirectly,
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to any Participant described in Section 409(n)(1) of the Code for the duration
of the "nonallocation period" (as defined in Section 409(n)(3)(C) of the Code).
Where any shares of Employer Securities are prevented from being allocated due
to the prohibition contained in this section the allocation of contributions
otherwise provided under Section 5.5 shall be adjusted to reflect such result.
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ARTICLE IX
PAYMENTS AND DISTRIBUTIONS
9.1 Payments on Termination of Service In General.
All benefits provided under this Plan shall be funded by the value of a
Participant's vested interest in the Fund. As soon as practicable after a
Participant's Retirement, death or termination of Service, the Administrator
shall ascertain the value of his vested interest in the Fund, as provided in
Article V, and the Administrator shall hold or dispose of the same in accordance
with the following provisions of this Article IX.
9.2 Commencement of Payments.
(a) Distributions upon Retirement or Death. Upon a Participant's
Retirement or Death, payment of benefits under this Plan shall, unless the
Participant otherwise elects (in accordance with Section 9.3), commence no later
than six months after the close of the Plan Year in which occurs the date of the
Participant's Retirement or death.
(b) Distribution following Termination of Service. Unless a Participant
elects otherwise, if a Participant terminates Service prior to Retirement or
death, he shall be accorded an opportunity to commence receipt of distributions
from his Accounts within six months after the Valuation Date next following the
date of his termination of service. A Participant who terminates Service with a
deferred vested benefit shall be entitled to receive from the Administrator a
statement of his benefits. In the event that a Participant elects not to
commence receipt of distributions from his Accounts in accordance with this
Section 9.2(b), after the Participant incurs a Break, the Administrator shall
transfer his deferred vested interest to a distribution account. If a
Participant's vested Employer Account does not exceed (or at the time of any
prior distribution did not exceed) $5,000, the Plan Administrator may distribute
the vested portion of his Employer Account as soon as administratively feasible
without the consent of the Participant or his spouse.
(c) Distribution of Accounts Greater Than $5,000. If the value of a
Participant's vested Account balance exceeds (or at the time of any prior
distribution exceeded) $5,000, and the Account balance is immediately
distributable, the Participant must consent to any distribution of such Account
balance. The Plan Administrator shall notify the Participant of the right to
defer any distribution until the Participant's Account balance is no longer
immediately distributable. The consent of the Participant shall not be required
to the extent that a distribution is required to satisfy Code Section 401(a)(9)
or Code Section 415.
9.3 Mandatory Commencement of Benefits.
(a) Unless a Participant elects otherwise, in writing, distribution of
benefits will begin no later than the 60th day after the latest of the close of
the Plan Year in which (i) the Participant
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attains age 65, (ii) occurs the tenth anniversary of the year in which the
Participant commenced participation in the Plan Year, or (iii) the Participant
terminates Service with the Employer.
(b) In the event that the Plan shall be subsequently amended to provide for
a form of distribution other than a lump sum, as of the first distribution
calendar year, distributions, if not made in a lump sum, may be made only over
one of the following periods (or a combination thereof):
(i) the life of the Participant,
(ii) the life of the Participant and the designated beneficiary,
(iii) a period certain not extending beyond the life expectancy of the
Participant, or
(iv) a period certain not extending beyond the joint and last survivor
expectancy of the Participant and a designated beneficiary.
(c) In the event that the Plan shall be subsequently amended to provide
for a form of distribution other than a lump sum, if the participant's interest
is to be distributed in other than a lump sum, the following minimum
distribution rules shall apply on or after the required beginning date:
(i) If a Participant's benefit is to be distributed over (1) a period
not extending beyond the life expectancy of the Participant or the
joint life and last survivor expectancy of the Participant and the
Participant's designated beneficiary or (2) a period not extending
beyond the life expectancy of the designated beneficiary, the amount
required to be distributed for each calendar year, beginning with
distributions for the first distribution calendar year, must at
least equal the quotient obtained by dividing the Participant's
benefit by the applicable life expectancy.
(ii) The amount to be distributed each year, beginning with distributions
for the first distribution calendar year shall not be less than the
quotient obtained by dividing the Participant's benefit by the
lesser of (1) the applicable life expectancy or (2) if the
Participant's spouse is not the designated beneficiary, the
applicable divisor determined from the table set forth in Q&A-4 of
section 1.401(a)(9)-2 of the Proposed Regulations. Distributions
after the death of the participant shall be distributed using the
applicable life expectancy in sub-section (iii) above as the
relevant divisor without regard to Proposed Regulations 1.401(a)(9)-
2.
(iii) The minimum distribution required for the Participant's first
distribution calendar year must be made on or before the
Participant's required
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beginning date. The minimum distribution for other calendar
years, including the minimum distribution for the distribution
calendar year in which the employee's required beginning date occurs,
must be made on or before December 31 of the distribution calendar
year.
(d) If a Participant dies after a distribution has commenced in
accordance with Section 8.3(b) but before his entire interest has been
distributed to him, the remaining portion of such interest shall be distributed
to his Beneficiary at least as rapidly as under the method of distribution in
effect as of the date of his death.
(e) If a Participant shall die before the distribution of his interest in
the Plan has begun, the entire interest of the Participant shall be distributed
by December 31 of the calendar year containing the fifth anniversary of the
death of the Participant, except in the following events:
(i) If any portion of the Participant's interest is payable to (or for the
benefit of) a designated beneficiary over a period not extending
beyond the life expectancy of such beneficiary and such distributions
begin not later than December 31 of the calendar year immediately
following the calendar year in which the Participant died.
(ii) If any portion of the Participant's interest is payable to (or for the
benefit of) the Participant's spouse over a period not extending
beyond the life expectancy of such spouse and such distributions begin
no later than December 31 of the calendar year in which the
Participant would have attained age 70-1/2.
If the Participant has not made a distribution election by the time of
his death, the Participant's designated beneficiary shall elect the
method of distribution no later than the earlier of (1) December 31 of
the calendar year in which distributions would be required to begin
under this Article or (2) December 31 of the calendar year which
contains the fifth anniversary of the date of death of the
Participant. If the Participant has no designated beneficiary, or if
the designated beneficiary does not elect a method of distribution,
distribution of the Participant's entire interest shall be completed
by December 31 of the calendar year containing the fifth anniversary
of the Participant's death.
(f) For purposes of this Article, the life expectancy of a Participant and
his spouse may be redetermined but not more frequently than annually. The life
expectancy (or joint and last survivor expectancy) shall be calculated using the
attained age of the Participant (or designated beneficiary) as of the
Participant's (or designated beneficiary's) birthday in the applicable calendar
year reduced by one for each calendar year which has elapsed since the date life
expectancy was first calculated. If life expectancy is being recalculated, the
applicable life expectancy shall be the life expectancy as so recalculated. The
applicable calendar year shall be
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the first distribution calendar year, and if life expectancy is being
recalculated, such succeeding calendar year. Unless otherwise elected by the
Participant (or his spouse, if applicable) by the time distributions are
required to begin, life expectancies shall be recalculated annually. Any such
election not to recalculate shall be irrevocable and shall apply to all
subsequent years. The life expectancy of a nonspouse beneficiary may not be
recalculated.
(g) For purposes of Section 9.3(b) and 9.3(e), any amount paid to a child
shall be treated as if it had been paid to a surviving spouse if such amount
will become payable to the surviving spouse upon such child reaching majority
(or other designated event permitted under regulations).
(h) For distributions beginning before the Participant's death, the first
distribution calendar year is the calendar year immediately preceding the
calendar year which contains the Participant's required beginning date. For
distributions beginning after the Participant's death, the first distribution
calendar year is the calendar year in which distributions are required to begin
pursuant to this Article.
9.4 Required Beginning Dates.
The required beginning date of a Participant is the first day of April of
the calendar year following the later of (1) calendar year in which the
participant attains age 70-1/2 or (2) the calendar year in which the Participant
terminated his employment, unless he is a 5% owner (as defined in Section 416)
with respect to the Plan Year ending in the calendar year in which he attains
age 70-1/2, in which case clause (2) shall not apply.
9.5 Form of Payment.
Each Participant's vested interest shall be distributed in a lump sum
payment. Notwithstanding the preceding sentence, but subject to Section 9.3, the
Administrator may not distribute a lump sum when the present value of a
Participant's total Account balances is in excess of $5,000 without the
Participant's consent. This form of payment shall be the normal form of
distribution provided, however, that in the event that the Administrator must
commence distributions with respect to an Employee who has attained age 70-1/2
and is still employed by the Employer, if the Employee does not elect a lump sum
distribution, payments shall be made in installments in such amounts as shall
satisfy the minimum distribution rules of Section 9.3.
9.6 Payments Upon Termination of Plan.
Upon termination of this Plan pursuant to Sections 13.2, 13.4, 13.5 or
13.6, the Administrator shall continue to perform its duties and the Trustee
shall make all payments upon the following terms, conditions and provisions: All
interests of Participants shall immediately become fully vested; the value of
the interests of all Participants shall be determined within 60 days after such
termination, and the Administrator shall have the same powers to direct the
Trustee in making payments as contained in Sections 9.1 and 13.5.
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9.7 Distributions Pursuant to Qualified Domestic Relations Orders.
Upon receipt of a domestic relations order, the Administrator shall notify
promptly the Participant and any alternate payee of receipt of the order and the
Plan's procedure for determining whether the order is a Qualified Domestic
Relations Order. While the issue of whether a domestic relations order is a
Qualified Domestic Relations Order is being determined, if the benefits would
otherwise be paid, the Administrator shall segregate in a separate account in
the Plan the amounts that would be payable to the alternate payee during such
period if the order were a Qualified Domestic Relations Order. If within 18
months the order is determined to be a Qualified Domestic Relations Order, the
amounts so segregated, along with the interest or investment earnings
attributable thereto shall be paid to the alternate payee. Alternatively, if
within 18 months, it is determined that the order is not a Qualified Domestic
Relations Order or if the issue is still unresolved, the amounts segregated
under this Section 9.6, with the earnings attributable thereto, shall be paid to
the Participant or Beneficiary who would have been entitled to such amounts if
there had been no order. The determination as to whether the order is qualified
shall be applied prospectively. Thus, if the Administrator determines that the
order is a Qualified Domestic Relations Order after the 18-month period, the
Plan shall not be liable for payments to the alternative payee for the period
before the order is determined to be a Qualified Domestic Relations Order.
9.8 Cash-Out Distributions
If a Participant receives a distribution of the entire present value of his
vested Account balances under this Plan because of the termination of his
participation in the Plan, the Plan shall disregard a Participant's Service with
respect to which such cash-out distribution shall have been made, in computing
his accrued benefit under the Plan in the event that a Former Participant shall
again become an Employee and become eligible to participate in the Plan. Such a
distribution shall be deemed to be made on termination of participation in the
Plan if it is made not later than the close of the second Plan Year following
the Plan Year in which such termination occurs. The forfeitable portion of a
Participant's accrued benefit shall be restored upon repayment to the Plan by
such former Participant of the full amount of the cash-out distribution,
provided that the former Participant again becomes an Employee. Such repayment
must be made by the Employee not later than the end of the five-year period
beginning with the date of the distribution. Forfeitures required to be restored
by virtue of such repayment shall be restored from the following sources in the
following order of preference: (i) current forfeitures; (ii) additional employee
stock ownership contributions, as appropriate and as subject to Section 5.6; and
(iii) investment earnings of the Fund. In the event that a Participant's
interest in the Plan is totally forfeitable, a Participant shall be deemed to
have received a distribution of zero upon his termination of Service. In the
event of a return to Service within five years of the date of his deemed
distribution, the Participant shall be deemed to have repaid his distribution in
accordance with the rules of this Section 9.8.
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9.9 ESOP Distribution Rules
Notwithstanding any provision of this Article IX to the contrary, the
distribution of a Participant's Employee Stock Ownership Account (unless the
Participant elects otherwise in writing), shall commence as soon as
administratively feasible as of the first Valuation Date coincident with or next
following his death, disability or termination of Service, but not later than
one year after the close of the Plan Year in which the Participant separates
from Service by reason of the attainment of his Normal Retirement Date,
disability, death or separation from Service. In addition, all distributions
hereunder shall, to the extent that the Participant's Account is invested in
Employer Securities, be made in the form of Employer Securities. Fractional
shares, however, may be distributed in the form of cash.
9.10 Withholding.
(a) Notwithstanding any provision of the Plan to the contrary that
would otherwise limit a distributee's election under this Article IX, a
distributee may elect, at the time and in the manner prescribed by the Plan
Administrator, to have any portion of an "eligible rollover distribution" paid
directly to an "eligible retirement plan" specified by the distributee in a
"direct rollover."
(b) For purposes of this Section 9.10, an "eligible rollover
distribution" is any distribution of all or any portion of the balance to the
credit of the distributee, except that an "eligible rollover distribution" does
not include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life expectancies)
of the distributee and the distributee's designated beneficiary, or for a
specified period of 10 years or more; any distribution to the extent such
distribution is required under section 401(a)(9) of the Code; and the portion of
any distribution that is not includable in gross income (determined without
regard to the exclusion for net unrealized appreciation with respect to Employer
Securities).
(c) For purposes of this Section 9.10, an "eligible retirement plan" is an
individual retirement account described in section 408(a) of the Code, an
individual retirement annuity described in section 408(b) of the Code, an
annuity plan described in section 403(a) of the Code, or a qualified trust
described in section 401(a) of the Code, that accepts the distributee's eligible
rollover distribution. However, in the case of an "eligible rollover
distribution" to the surviving spouse, an "eligible retirement plan" is an
individual retirement account or individual retirement annuity.
(d) For purposes of this Section 9.10, a distributee includes a Participant
or former Participant. In addition, the Participant's or former Participant's
surviving spouse and the Participant's or former Participant's spouse or former
spouse who is the alternate payee under a qualified domestic relations order, as
defined in section 414(p) of the Code, are "distributees" with regard to the
interest of the spouse or former spouse.
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(e) For purposes of this Section 9.10, a "direct rollover" is a payment by
the Plan to the "eligible retirement plan" specified by the distributee.
9.11 Waiver of 30-day Notice.
If a distribution is one to which sections 401(a)(11) and 417 of the Code
do not apply, such distribution may commence less than 30 days after the notice
required under Section 1.411(a)-11(c) of the Income Tax Regulations is given,
provided that: (1) the Plan Administrator clearly informs the Participant that
the Participant has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a distribution (and,
if applicable, a particular distribution option), and (2) the Participant, after
receiving the notice, affirmatively elects a distribution.
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ARTICLE X
PROVISIONS RELATING TO TOP-HEAVY PLANS
10.1 Top-Heavy Rules to Control.
Anything contained in this Plan to the contrary notwithstanding, if
for any Plan Year the Plan is a top-heavy plan, as determined pursuant to
Section 416 of the Code, then the Plan must meet the requirements of this
Article X for such Plan Year.
10.2 Top-Heavy Plan Definitions.
Unless a different meaning is plainly implied by the context, the
following terms as used in this Article X shall have the following meanings:
(a) "Accrued Benefit" shall mean the account balances or accrued
benefits of an Employee, calculated pursuant to Section 10.3.
(b) "Determination Date" shall mean, with respect to any particular
Plan Year of this Plan, the last day of the preceding Plan Year (or, in the case
of the first Plan Year of the Plan, the last day of the first Plan Year). In
addition, the term "Determination Date" shall mean, with respect to any
particular plan year of any plan (other than this Plan) in a Required
Aggregation Group or a Permissive Aggregation Group, the last day of the plan
year of such plan which falls within the same calendar year as the Determination
Date for this Plan.
(c) "Employer" shall mean the Employer (as defined in Section 1.1(q))
and any entity which is (1) a member of a controlled group including such
Employer, while it is a member of such controlled group (within the meaning of
Section 414(b) of the Code), (2) in a group of trades or businesses under common
control with such Employer, while it is under common control (within the meaning
of Section 414(c) of the Code), and (3) a member of an affiliated service group
including such Employer, while it is a member of such affiliated service group
(within the meaning of Section 414(m) of the Code).
(d) "Key Employee" shall mean any Employee or former Employee (or any
Beneficiary of such Employee or former Employee, as the case may be) who, at any
time during the Plan Year or during the four immediately preceding Plan Years is
one of the following:
(1) An officer of the Employer who has compensation greater than
50% of the amount in effect under Code 415(b)(1)(A) for the
Plan Year; provided, however, that no more than 50 Employees
(or, if lesser, the greater of three or 10% of the
Employees) shall be deemed officers;
(2) One of the 10 Employees having annual compensation (as
defined in Section 415 of the Code) in excess of the
limitation in effect under Section
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415(c)(1)(A) of the Code, and owning (or considered as owning,
within the meaning of Section 318 of the Code) the largest
interests in the Employer;
(3) Any Employee owning (or considered as owning, within the meaning
of Section 318 of the Code) more than 5% of the outstanding stock
of the Employer or stock possessing more than 5% of the total
combined voting power of all stock of the Employer; or
(4) Any Employee having annual compensation (as defined in Section
415 of the Code) of more than $150,000 and who would be described
in Section 10.2(d)(3) if "1%" were substituted for "5%" wherever
the latter percentage appears.
For purposes of applying Section 318 of the Code to the
provisions of this Section 10.2(d), Section 318(a)(2)(C) of the
Code shall be applied by substituting "5%" for "50%" wherever the
latter percentage appears. In addition, for purposes of this
Section 10.2(d), the provisions of Section 414(b), (c) and (m)
shall not apply in determining ownership interests in the
Employer. However, for purposes of determining whether an
individual has compensation in excess of $150,000, or whether an
individual is a Key Employee under Section 10.2(d)(1) and (2),
compensation from each entity required to be aggregated under
Sections 414(b), (c) and (m) of the Code shall be taken into
account. Notwithstanding anything contained herein to the
contrary, all determinations as to whether a person is or is not
a Key Employee shall be resolved by reference to Section 416 of
the Code and any rules and regulations promulgated thereunder.
(e) "Non-Key Employee" shall mean any Employee or former Employee (or
any Beneficiary of such Employee or former Employee, as the case may be) who is
not considered to be a Key Employee with respect to this Plan.
(f) "Permissive Aggregation Group" shall mean all plans in the
Required Aggregation Group and any other plans maintained by the Employer which
satisfy Sections 401(a)(4) and 410 of the Code when considered together with the
Required Aggregation Group.
(g) "Required Aggregation Group" shall mean each plan (including any
terminated plan) of the Employer in which a Key Employee is (or in the case of a
terminated plan, had been) a Participant in the Plan Year containing the
Determination Date or any of the four preceding Plan Years, and each other plan
of the Employer which enables any plan of the Employer in which a Key Employee
is a Participant to meet the requirement of Sections 401(a)(4) and 410 of the
Code.
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10.3 Calculation of Accrued Benefits.
(a) An Employee's Accrued Benefit shall be equal to:
(1) With respect to this Plan or any other defined contribution plan
(other than a defined contribution pension plan) in a Required
Aggregation Group or a Permissive Aggregation Group, the
Employee's account balances under the respective plan, determined
as of the most recent plan valuation date within a 12-month
period ending on the Determination Date, including contributions
actually made after the valuation date but before the
Determination Date (and, in the first plan year of a plan, also
including any contributions made after the Determination Date
which are allocated as of a date in the first plan year).
(2) With respect to any defined contribution pension plan in a
Required Aggregation Group or a Permissive Aggregation Group, the
Employee's account balances under the plan, determined as of the
most recent plan valuation date within a 12-month period ending
on the Determination Date, including contributions which have not
actually been made, but which are due to be made as of the
Determination Date.
(3) With respect to any defined benefit plan in a Required Aggregation
Group or a Permissive Aggregation Group, the present value of the
Employee's accrued benefits under the plan, determined as of the
most recent plan valuation date within a 12-month period ending
on the Determination Date, pursuant to the actuarial assumptions
used by such plan, and calculated as if the Employee terminated
Service under such plan as of the valuation date (except that, in
the first plan year of a plan, a current Participant's estimated
Accrued Benefit Plan as of the Determination Date shall be taken
into account).
(4) If any individual has not performed services for the Employer
maintaining the Plan at any time during the five-year period
ending on the Determination Date, any Accrued Benefit for such
individual shall not be taken into account.
(b) The Accrued Benefit of any Employee shall be further adjusted as
follows:
(1) The Accrued Benefit shall be calculated to include all amounts
attributable to both Employer and Employee contributions, but
shall exclude amounts attributable to voluntary deductible
Employee contributions, if any.
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(2) The Accrued Benefit shall be increased by the aggregate
distributions made with respect to an Employee under the plan or
plans, as the case may be, during the five-year period ending on
the Determination Date.
(3) Rollover and direct plan-to-plan transfers shall be taken into
account as follows:
(A) If the transfer is initiated by the Employee and made
from a plan maintained by one employer to a plan
maintained by another unrelated employer, the
transferring plan shall continue to count the amount
transferred; the receiving plan shall not count the
amount transferred.
(B) If the transfer is not initiated by the Employee or is
made between plans maintained by related employers, the
transferring plan shall no longer count the amount
transferred; the receiving plan shall count the amount
transferred.
(c) If any individual has not performed services for the Employer at
any time during the five-year period ending on the Determination Date, any
accrued benefit for such individual (and the account of such individual) shall
not be taken into account.
10.4 Determination of Top-Heavy Status.
This Plan shall be considered to be a top-heavy plan for any Plan Year
if, as of the Determination Date, the value of the Accrued Benefits of Key
Employees exceeds 60% of the value of the Accrued Benefits of all eligible
Employees under the Plan. Notwithstanding the foregoing, if the Employer
maintains any other qualified plan, the determination of whether this Plan is
top-heavy shall be made after aggregating all other plans of the Employer in the
Required Aggregation Group and, if desired by the Employer as a means of
avoiding top-heavy status, after aggregating any other plan of the Employer in
the Permissive Aggregation Group. If the required Aggregation Group is top-
heavy, then each plan contained in such group shall be deemed to be top-heavy,
notwithstanding that any particular plan in such group would not otherwise be
deemed to be top-heavy. Conversely, if the Permissive Aggregation Group is not
top-heavy, then no plan contained in such group shall be deemed to be top-heavy,
notwithstanding that any particular plan in such group would otherwise be deemed
to be top-heavy. In no event shall a plan included in a top-heavy Permissive
Aggregation Group be deemed a top-heavy plan unless such plan is also included
in a top-heavy Required Aggregation Group.
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10.5 Determination of Super Top-Heavy Status.
The Plan shall be considered to be a super top-heavy plan if, as of the
Determination Date, the Plan would meet the test specified in Section 10.4 above
for classification as a top-heavy plan, except that "90%" shall be substituted
for "60%" whenever the latter percentage appears.
10.6 Minimum Contribution.
(a) For any year in which the Plan is top-heavy, each Non-Key Employee who
has met the age and service requirements, if any, contained in the Plan, shall
be entitled to a minimum contribution (which may include forfeitures otherwise
allocable) equal to a percentage of such Non-Key Employee's compensation (as
defined in Section 415 of the Code) as follows:
(1) If the Non-Key Employee is not covered by a defined benefit plan
maintained by the Employer, then the minimum contribution under
this Plan shall be 3% of such Non-Key Employee's compensation.
(2) If the Non-Key Employee is covered by a defined benefit plan
maintained by the Employer, then the minimum contribution under
this Plan shall be 5% of such Non-Key Employee's compensation.
(b) Notwithstanding the foregoing, the minimum contribution otherwise
allocable to a Non-Key Employee under this Plan shall be reduced in the
following circumstances:
(1) The percentage minimum contribution required under this Plan
shall in no event exceed the percentage contribution made for the
Key Employee for whom such percentage is the highest for the Plan
Year after taking into account contributions under other defined
contribution plans in this Plan's Required Aggregation Group;
provided, however, that this Section 10.7(b)(1) shall not apply
if this Plan is included in a Required Aggregation Group and this
Plan enables a defined benefit plan in such Required Aggregation
Group to meet the requirements of Section 401(a)(4) or 410 of the
Code.
(2) No minimum contribution shall be required (or the minimum
contribution shall be reduced, as the case may be) for a Non-Key
Employee under this Plan for any Plan Year if the Employer
maintains another qualified plan under which a minimum benefit or
contribution is being accrued or made on account of such Plan
Year, in whole or in part, on behalf of the Non-Key Employee, in
accordance with Section 416(c) of the Code.
(c) For purposes of this Section 10.6, there shall be disregarded (1) any
Employer contributions attributable to a salary reduction or similar
arrangement, or (2) any Employer
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contributions to or any benefits under Chapter 21 of the Code (relating to the
Federal Insurance Contributions Act), Title II of the Social Security Act, or
any other federal or state law.
(d) For purposes of this Section 10.6, minimum contributions shall be
required to be made on behalf of only those Non-Key Employees, as described in
Section 10.7(a), who have not terminated Service as of the last day of the Plan
Year. If a Non-Key Employee is otherwise entitled to receive a minimum
contribution pursuant to this Section 10.6(d), the fact that such Non-Key
Employee failed to complete 1,000 Hours of Service or failed to make any
mandatory or elective contributions under this Plan, if any are so required,
shall not preclude him from receiving such minimum contribution.
10.7 Maximum Benefit Limitation.
For any Plan Year in which the Plan is a top-heavy plan, Section
5.6(d)(1)(B)(i) and Section 5.6(d)(2)(B)(i)shall be read by substituting "1.0"
for "1.25" wherever the latter figure appears; provided, however, that such
substitution shall not have the effect of reducing any benefit accrued under a
defined benefit plan prior to the first day of the plan year in which this
Section 10.8 becomes applicable.
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ARTICLE XI
ADMINISTRATION
11.1 Appointment of Administrator.
This Plan shall be administered by a committee consisting of up to
five persons, whether or not Employees or Participants, who shall be appointed
from time to time by the Board of Directors to serve at its pleasure. The
Sponsor may require that each person appointed as an Administrator shall signify
his acceptance by filing an acceptance with the Sponsor. The term
"Administrator" as used in this Plan shall refer to the members of the
committee, either individually or collectively, as appropriate. In the event
that the Sponsor shall elect not to appoint any individuals to constitute a
committee to administer the Plan, the Sponsor shall serve as the Administrator
hereunder.
11.2 Resignation or Removal of Administrator.
An Administrator shall have the right to resign at any time by giving
notice in writing, mailed or delivered to the Employer and to the Trustee. Any
Administrator who was an employee of the Employer at the time of his appointment
shall be deemed to have resigned as an Administrator upon his termination of
Service. The Board of Directors may, in its discretion, remove any Administrator
with or without cause, by giving notice in writing, mailed or delivered to the
Administrator and to the Trustee.
11.3 Appointment of Successors: Terms of Office, Etc.
Upon the death, resignation or removal of an Administrator, the Employer
may appoint, by Board of Directors' resolution, a successor or successors.
Notice of termination of an Administrator and notice of appointment of a
successor shall be made by the Employer in writing, with copies mailed or
delivered to the Trustee, and the successor shall have all the rights and
privileges and all of the duties and obligations of the predecessor.
11.4 Powers and Duties of Administrator.
The Administrator shall have the following duties and responsibilities in
connection with the administration of this Plan:
(a) To promulgate and enforce such rules, regulations and procedures
as shall be proper for the efficient administration of the Plan, such rules,
regulations and procedures to apply uniformly to all Employees, Participants and
Beneficiaries;
(b) To determine all questions arising in the administration,
interpretation and application of the Plan, including questions of eligibility
and of the status and rights of Participants, Beneficiaries and any other
persons hereunder;
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(c) To decide any dispute arising hereunder strictly in accordance with the
terms of the Plan; provided, however, that no Administrator shall participate in
any matter involving any questions relating solely to his own participation or
benefits under this Plan;
(d) To advise the Employer and the Trustee regarding the known future
needs for funds to be available for distribution in order that the Trustee may
establish investments accordingly;
(e) To correct defects, supply omissions and reconcile inconsistencies
to the extent necessary to effectuate the Plan;
(f) To advise the Employer of the maximum deductible contribution to
the Plan for each fiscal year;
(g) To direct the Trustee concerning all payments which shall be made
out of the Fund pursuant to the provisions of this Plan;
(h) To advise the Trustee on all terminations of Service by
Participants, unless the Employer has so notified the Trustee;
(i) To confer with the Trustee on the settling of any claims against
the Fund;
(j) To make recommendations to the Board of Directors with respect to
proposed amendments to the Plan and the Trust Agreement;
(k) To file all reports with government agencies, Employees and other
parties as may be required by law, whether such reports are initially the
obligation of the Employer, the Plan or the Trustee; and
(l) To have all such other powers as may be necessary to discharge its
duties hereunder.
Reasonable discretion is granted to the Administrator to affect the
benefits, rights and privileges of Participants, Beneficiaries or other persons
affected by this Plan. The Administrator shall exercise reasonable discretion
under the terms of this Plan and shall administer the Plan strictly in
accordance with its terms, such administration to be exercised uniformly so that
all persons similarly situated shall be similarly treated.
11.5 Action by Administrator.
The Administrator may elect a Chairman and Secretary from among its members
and may adopt rules for the conduct of its business. A majority of the members
then serving shall constitute a quorum for the transaction of business. All
resolutions or other action taken by the Administrator shall be by vote of a
majority of those present at such meeting and entitled to vote. Resolutions may
be adopted or other action taken without a meeting upon written consent signed
by at least a majority of the members. All documents, instruments, orders,
requests, directions,
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instructions and other papers shall be executed on behalf of the Administrator
by either the Chairman or the Secretary of the Administrator, if any, or by any
member or agent of the Administrator duly authorized to act on the
Administrator's behalf.
11.6 Participation by Administrators.
No Administrator shall be precluded from becoming a Participant in the
Plan if he would be otherwise eligible, but he shall not be entitled to vote or
act upon matters or to sign any documents relating specifically to his own
participation under the Plan, except when such matters or documents relate to
benefits generally. If this disqualification results in the lack of a quorum,
then the Board of Directors shall appoint a sufficient number of temporary
Administrators who shall serve for the sole purpose of determining such a
question.
11.7 Agents.
The Administrator may employ agents and provide for such clerical,
legal, actuarial, accounting, medical, advisory or other services as it deems
necessary to perform its duties under this Plan. The cost of such services and
all other expenses incurred by the Administrator in connection with the
administration of the Plan shall be paid from the Fund, unless paid by the
Employer.
11.8 Allocation of Duties.
The duties, powers and responsibilities reserved to the Administrator may
be allocated among its members so long as such allocation is pursuant to written
procedures adopted by the Administrator, in which case, except as may be
required by the Act, no Administrator shall have any liability, with respect to
any duties, powers or responsibilities not allocated to him, for the acts of
omissions of any other Administrator.
11.9 Delegation of Duties.
The Administrator may delegate any of its duties to other employees of
the Employer, to the Trustee with its consent, or to any other person or firm,
provided that the Administrator shall prudently choose such agents and rely in
good faith on their actions.
11.10 Administrator's Action Conclusive.
Any action on matters within the authority of the Administrator shall be
final and conclusive except as provided in Article XII.
11.11 Compensation and Expenses of Administrator.
No Administrator who is receiving compensation from the Employer as a full-
time employee, as a director or agent, shall be entitled to receive any
compensation or fee for his
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services hereunder. Any other Administrator shall be entitled to receive such
reasonable compensation for his services as an Administrator hereunder as may be
mutually agreed upon between the Employer and such Administrator. Any such
compensation shall be paid from the Fund, unless paid by the Employer. Each
Administrator shall be entitled to reimbursement by the Employer for any
reasonable and necessary expenditures incurred in the discharge of his duties.
11.12 Records and Reports.
The Administrator shall maintain adequate records of its actions and
proceedings in administering this Plan and shall file all reports and take all
other actions as it deems appropriate in order to comply with the Act, the Code
and governmental regulations issued thereunder.
11.13 Reports of Fund Open to Participants.
The Administrator shall keep on file, in such form as it shall deem
convenient and proper, all annual reports of the Fund received by the
Administrator from the Trustee, and a statement of each Participant's interest
in the Fund as from time to time determined. The annual reports of the Fund and
the statement of his own interest in the Fund, as well as a complete copy of the
Plan and the Trust Agreement and copies of annual reports to the Internal
Revenue Service, shall be made available by the Administrator to the Employer
for examination by each Participant during reasonable hours at the office of the
Employer, provided, however, that the statement of a Participant's interest
shall not be made available for examination by any other Participant.
11.14 Named Fiduciary.
The Administrator is the named fiduciary for purposes of the Act and
shall be the designated agent for receipt of service of process on behalf of the
Plan. It shall use ordinary care and diligence in the performance of its duties
under this Plan. Nothing in this Plan shall preclude the Employer from
indemnifying the Administrator for all actions under this Plan, or from
purchasing liability insurance to protect it with respect to its duties under
this Plan.
11.15 Information from Employer.
The Employer shall promptly furnish all necessary information to the
Administrator to permit it to perform its duties under this Plan. The
Administrator shall be entitled to rely upon the accuracy and completeness of
all information furnished to it by the Employer, unless it knows or should have
known that such information is erroneous.
11.16 Reservation of Rights by Employer.
Where rights are reserved in this Plan to the Employer, such rights shall
be exercised only by action of the Board of Directors, except where the Board of
Directors, by written resolution, delegates any such rights to one or more
officers of the Employer or to the Administrator.
48
<PAGE>
Subject to the rights reserved to the Board of Directors acting on behalf of the
Employer as set forth in this Plan, no member of the Board of Directors shall
have any duties or responsibilities under this Plan, except to the extent he
shall be acting in the capacity of an Administrator or Trustee.
11.17 Liability and Indemnification.
(a) The Administrator shall perform all duties required of it under
this Plan in a prudent manner. To the extent not prohibited by the Act, the
Administrator shall not be responsible in any way for any action or omission of
the Employer, the Trustee or any other fiduciaries in the performance of their
duties and obligations set forth in this Plan and in the Trust Agreement. To
the extent not prohibited by the Act, the Administrator shall also not be
responsible for any act or omission of any of its agents, or with respect to
reliance upon advice of its counsel (whether or not such counsel is also counsel
to the Employer or the Trustee), provided that such agents or counsel were
prudently chosen by the Administrator and that the Administrator relied in good
faith upon the action of such agent or the advice of such counsel.
(b) The Administrator shall not be relieved from responsibility or
liability for any responsibility, obligation or duty imposed upon it under this
Plan or under the Act. Except for its own gross negligence, willful misconduct
or willful breach of the terms of this Plan, the Administrator shall be
indemnified and held harmless by the Employer against liability or losses
occurring by reason of any act or omission of the Administrator to the extent
that such indemnification does not violate the Act or any other federal or state
laws.
11.18 Service as Trustee and Administrator.
Nothing in this Plan shall prevent one or more Trustees from serving
as Administrator under this Plan.
49
<PAGE>
ARTICLE XII
CLAIMS PROCEDURE
12.1 Notice of Denial.
If a Participant or his Beneficiary is denied any benefits under this Plan,
either in whole or in part, the Administrator shall advise the claimant in
writing of the amount of his benefit, if any, and the specific reasons for the
denial. The Administrator shall also furnish the claimant at that time with a
written notice containing:
(a) A specific reference to pertinent Plan provisions;
(b) A description of any additional material or information necessary
for the claimant to perfect his claim, if possible, and an explanation of why
such material or information is needed; and
(c) An explanation of the Plan's claim review procedure.
12.2 Right to Reconsideration.
Within 60 days of receipt of the information described in 12.1 above, the
claimant shall, if he desires further review, file a written request for
reconsideration with the Administrator.
12.3 Review of Documents.
So long as the claimant's request for review is pending (including the
60-day period described in Section 12.2 above), the claimant or his duly
authorized representative may review pertinent Plan documents and the Trust
Agreement (and any pertinent related documents) and may submit issues and
comments in writing to the Administrator.
12.4 Decision by Administrator.
A final and binding decision shall be made by the Administrator within
60 days of the filing by the claimant of his request for reconsideration;
provided, however, that if the Administrator feels that a hearing with the
claimant or his representative present is necessary or desirable, this period
shall be extended an additional 60 days.
12.5 Notice by Administrator.
The Administrator's decision shall be conveyed to the claimant in writing
and shall include specific reasons for the decision, written in a manner
calculated to be understood by the claimant, with specific references to the
pertinent Plan provisions on which the decision is based.
50
<PAGE>
ARTICLE XIII
AMENDMENTS, TERMINATION AND MERGER
13.1 Amendments.
The Employer reserves the right at any time and from time to time, and
retroactively if deemed necessary or appropriate by it, to the extent
permissible under law, to conform with governmental regulations or other
policies, to amend in whole or in part any or all of the provisions of this
Plan, provided that:
(a) No amendment shall make it possible for any part of the Fund to be
used for, or diverted to, purposes other than for the exclusive benefit of
Participants or their Beneficiaries under the Trust Agreement, except to the
extent provided in Section 4.4;
(b) No amendment may, directly or indirectly, reduce the vested portion of
any Participant's interest as of the effective date of the amendment or change
the vesting schedule with respect to the future accrual of Employer
contributions for any Participants unless each Participant with three or more
Years of Service with the Employer is permitted to elect to have the vesting
schedule in effect before the amendment used to determine his vested benefit;
(c) No amendment may eliminate an optional form of benefit;
(d) No amendment may increase the duties of the Trustee without its
consent; and
(e) No amendment that shall change any of the following types of
provisions shall be made more than once every six months, other than to comport
with changes in the Code, the Act or the regulations thereunder: (i) any
provision stating the amount and price of Employer Securities to be awarded to
designated officers and directors or categories of officers and directors; (ii)
any provisions specifying the timing of awards or allocations to officers and
directors; (iii) any provision setting forth a formula that determines the
amount, price and timing of allocations or awards, using objective criteria such
as earnings of the issuer, value of the Employer Securities, Years of Service,
job classification and Compensation levels.
Amendments may be made in the form of Board of Directors' resolutions or
separate written document. Copies of all amendments shall be delivered to the
Trustee.
13.2 Consolidation, Merger or Other Transactions of Employer.
Nothing in this Plan shall prevent the consolidation, merger,
reorganization or liquidation of the Employer, or prevent the sale by Employer
of any or all of its property. Any successor corporation or other entity formed
and resulting from any such transaction shall have the right to become a party
to this Plan by adopting the same by resolution and by appointing a new Trustee
as though the Trustee had resigned in accordance with the Trust Agreement, and
by
51
<PAGE>
executing a proper supplemental agreement with the Trustee. If, within 180
days from the effective date of such transaction, such new entity does not
become a party to this Plan as above provided, this Plan shall automatically be
terminated and the Trustee shall make payments to the persons entitled thereto
in accordance with Section 9.5.
13.3 Consolidation or Merger of Trust.
In the event of any merger or consolidation of the Fund with, or transfer
in whole or in part of the assets and liabilities of the Fund to, another trust
fund held under any other plan of deferred compensation maintained or to be
established for the benefit of all or some of the Participants of this Plan, the
assets of the Fund applicable to such Participants shall be transferred to the
other trust fund only if:
(a) Each Participant would receive a benefit under such successor trust
fund immediately after the merger, consolidation or transfer which is equal to
or greater than the benefit he would have been entitled to receive immediately
before the merger, consolidation or transfer (determined as if this Plan and
such transferee trust fund had then terminated);
(b) Resolutions of the Board of Directors under this Plan, or of any
new or successor employer of the affected Participants, shall authorize such
transfer of assets, and, in the case of the new or successor employer of the
affected Participants, its resolutions shall include an assumption of
liabilities with respect to such Participants' inclusion in the new employer's
plan; and
(c) Such other plan and trust are qualified under Sections 401(a) and
501(a) of the Code.
13.4 Bankruptcy or Insolvency of Employer.
In the event of (a) the Employer's legal dissolution or liquidation by any
procedure other than a consolidation or merger, (b) the Employer's receivership,
insolvency, or cessation of its business as a going concern, or (c) the
commencement of any proceeding by or against the Employer under the federal
bankruptcy laws, and similar federal or state statute, or any federal or state
statute or rule providing for the relief of debtors, compensation of creditors,
arrangement, receivership, liquidation or any similar event which is not
dismissed within 30 days, this Plan shall terminate automatically on such date
(provided, however, that if a proceeding is brought against the Employer for
reorganization under Chapter 11 of the United States Bankruptcy Code or any
similar federal or state statute, then this Plan shall terminate automatically
if and when said proceeding results in a liquidation of the Employer, or the
approval of any Plan providing therefor, or the proceeding is converted to a
case under Chapter 7 of the Bankruptcy Code or any similar conversion to a
liquidation proceeding under federal or state law including, but not limited to,
a receivership proceeding). In the event of any such termination as provided in
the foregoing sentence, the Trustee shall make payments to the persons entitled
thereto in accordance with Section 9.5 hereof.
52
<PAGE>
13.5 Voluntary Termination.
The Board of Directors reserves the right to terminate this Plan at any time by
giving to the Trustee and the Administrator notice in writing of such desire to
terminate. The Plan shall terminate upon the date of receipt of such notice,
the interests of all Participants shall become fully vested, and the Trustee
shall make payments to each Participant or Beneficiary in accordance with
Section 9.5. Alternatively, the Employer, in its discretion, may determine to
continue the Trust Agreement and to continue the maintenance of the Fund, in
which event distributions shall be made upon the contingencies and in all the
circumstances which would have been entitled such distributions on a fully
vested basis, had there been no termination of the Plan.
13.6 Partial Termination of Plan or Permanent Discontinuance of
Contributions.
In the event that a partial termination of the Plan shall be deemed to
have occurred, or if the Employer shall discontinue completely its contributions
hereunder, the right of each affected Participant to his interest in the Fund
shall be fully vested. The Employer, in its discretion, shall decide whether to
direct the Trustee to make immediate distribution of such portion of the Fund
assets to the persons entitled thereto or to make distribution in the
circumstances and contingencies which would have controlled such distributions
if there had been no partial termination or discontinuance of contributions.
53
<PAGE>
ARTICLE XIV
MISCELLANEOUS
14.1 No Diversion of Funds.
It is the intention of the Employer that it shall be impossible for any
part of the corpus or income of the Fund to be used for, or diverted to,
purposes other than for the exclusive benefit of the Participants or their
Beneficiaries, except to extent that a return of the Employer's contribution is
permitted under Section 4.4.
14.2 Liability Limited.
Neither the Employer nor the Administrator, nor any agents, employees,
officers, directors or shareholders of any of them, nor the Trustee, nor any
other person shall have any liability or responsibility with respect to this
Plan, except as expressly provided herein.
14.3 Incapacity.
If the Administrator shall receive evidence satisfactory to it that a
Participant or Beneficiary entitled to receive any benefit under the Plan is, at
the time when such benefit becomes payable, a minor, or is physically or
mentally incompetent to receive such benefit and to give a valid release
therefor, and that another person or an institution is then maintaining or has
custody of such Participant or Beneficiary, and that no guardian, committee or
other representative of the estate of such Participant or Beneficiary shall have
been duly appointed, the Administrator may direct the Trustee to make payment of
such benefit otherwise payable to such Participant or Beneficiary, to such other
person or institution, including a custodian under a Uniform Gifts to Minor Act,
or corresponding legislation (who shall be an adult, a guardian of the minor or
a trust company), and the release of such other person or institution shall be a
valid and complete discharge for the payment of such benefit.
14.4 Spendthrift Clause.
Except as permitted by the Act or the Code, no benefits or other
amounts payable under the Plan shall be subject in any manner to anticipation,
sale, transfer, assignment, pledge, encumbrance, charge or alienation. If the
Administrator determines that any person entitled to any payments under the Plan
has become insolvent or bankrupt or has attempted to anticipate, sell, transfer,
assign, pledge, encumber, charge or otherwise in any manner alienate any benefit
or other amount payable to him under the Plan or that there is any danger of any
levy or attachment or other court process or encumbrance on the part of any
creditor of such person entitled to payments under the Plan against any benefit
or other accounts payable to such person, the Administrator may, at any time, in
its discretion, direct the Trustee to withhold any or all payments to such
person under the Plan and apply the same for the benefit of such person, in such
manner and in such proportion as the Administrator may deem proper.
54
<PAGE>
14.5 Benefits Limited to Fund.
All contributions by the Employer to the Fund shall be voluntary, and the
Employer shall be under no legal liability to make any such contributions. The
benefits of this Plan shall be only as can be provided by the assets of the
Fund, and no liability for the payment of benefits under the Plan or for any
loss of assets due to any action or inaction of the Trustee shall be imposed
upon the Employer.
14.6 Cooperation of Parties.
All parties to this Plan and any party claiming interest hereunder agree to
perform any and all acts and execute any and all documents and papers which are
necessary and desirable for carrying out this Plan or any of its provisions.
14.7 Payments Due Missing Persons.
The Administrator shall direct the Trustee to make a reasonable effort to
locate all persons entitled to benefits under the Plan; however, notwithstanding
any provision in the Plan to the contrary, if, after a period of five years from
the date such benefit shall be due, any such persons entitled to benefits have
not been located, their rights under the Plan shall stand suspended. Before this
provision becomes operative, the Trustee shall send a certified letter to all
such persons at their last known address advising them that their interest in
benefits under the Plan shall be suspended. Any such suspended amounts shall be
held by the Trustee for a period of three additional years (or a total of eight
years from the time the benefits first became payable), and thereafter such
amounts shall be reallocated among current Participants in the same manner that
a current contribution would be allocated. However, if a person subsequently
makes a valid claim with respect to such reallocated amounts and any earnings
thereon, the Plan earnings or the Employer's contribution to be allocated for
the year in which the claim shall be paid shall be reduced by the amount of such
payment. Any such suspended amounts shall be handled in a manner not
inconsistent with regulations issued by the Internal Revenue Service and
Department of Labor.
14.8 Governing Law.
This Plan has been executed in the State of Tennessee and all questions
pertaining to its validity, construction and administration shall be determined
in accordance with the laws of that State, except to the extent superseded by
the Act.
14.9 Nonguarantee of Employment.
Nothing contained in this Plan shall be construed as a contract of
employment between the Employer and any Employee, or as a right of any Employee
to be continued in the employment of the Employer, or as a limitation of the
right of the Employer to discharge any of its Employees, with or without cause.
55
<PAGE>
14.10 Counsel.
The Trustee and the Administrator may consult with legal counsel, who may
be counsel for the Employer and for the Administrator or the Trustee (as the
case may be), with respect to the meaning or construction of this Plan and the
Trust Agreement, their respective obligations or duties hereunder or with
respect to any action or proceeding or any question of law, and they shall be
fully protected with respect to any action taken or omitted by them in good
faith pursuant to the advice of legal counsel.
IN WITNESS WHEREOF, the Sponsor has caused these presents to be executed by
its duly authorized officers and its corporate seal to be affixed on this ____
day of ________, 1998.
Attest: Cavalry Banking
____________________________ By:_______________________________
Secretary Ed C. Loughry, Jr.
President
56
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Registrant
- ----------
Cavalry Bancorp, Inc.
Percentage State of
Subsidiaries Owned Incorporation
- ------------ ----- -------------
Cavalry Banking (1)(2) 100% United States
___________
(1) Upon consummation of the Conversion, Cavalry Banking will become a wholly-
owned subsidiary of the Registrant.
(2) The Bank had three service corporation subsidiaries for which dissolution
proceedings were underway as of September 30, 1997. The subsidiaries were
either inactive or engaged in an insignificant level of activities that the
Bank is legally permitted to engage in directly.
<PAGE>
Exhibit 23.1
[LETTERHEAD APPEARS HERE]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Cavalry Banking
Murfreesboro, Tennessee
We consent to the use in this Application for Approval of Conversation on Form
AC of Calvary Banking, of our report dated September 25, 1997, relating to the
consolidated financial statements of Cavalry Banking and Subsidiaries contained
in the Prospectus, which is a part of such Application.
We also consent to the reference to our firm under the heading "Experts"
contained in such Prospectus.
/s/ Rayburn, Betts & Bates, P.C.
Nashville, Tennessee
November 11, 1997
<PAGE>
[LETTER HEAD OF FERGUSON & COMPANY APPEARS HERE]
November 10, 1997
Board of Directors
Cavalry Banking
114 West College Street
Murfreesboro, Tennessee 37130
Directors:
We hereby consent to the use of our firm's name in the Form AC Application
for Conversion of Cavalry Banking, Murfreesboro, Tennessee, and any amendments
thereto, in the Form S-1 Registration Statement of Cavalry Bancorp, Inc. and any
amendments thereto, and in the Application H-(e)1-S for Cavalry Bancorp, Inc.
We also hereby consent to the inclusion of, summary of, and references to our
Appraisal Report and our opinion concerning subscription rights in such filings
including the Prospectus of Cavalry Bancorp, Inc.
Sincerely,
/s/ Charles M. Herbert
Charles M. Hebert
Principal
<PAGE>
EXHIBIT 99.1
CAVALRY BANCORP, INC.
STOCK ORDER FORM
================================================================================
NUMBER OF SHARES
Fill in the number of Number Purchase Total
shares you wish to of Shares Price Amount
purchase and the total
amount due. No ______________ X $10.00 = $___________
fractional shares will be
issued. The minimum
purchase is 25 shares. [_] Enclosed is check or money order payable to
No Eligible Account Cavalry Bancorp, Inc.
Holder, Supplemental
Eligible Account Holder, [_] I authorize withdrawal from the following
or Other Member account(s):
(including all persons on
a joint account) may Account Number(s) Amount
purchase in their
capacity as such in the _______________________________ $___________
Subscription Offering
more than 60,000 shares _______________________________ $___________
(or $600,000) of the
Common Stock offered in _______________________________ $___________
the Conversion; no
person, together with Total Withdrawn $___________
associates of an persons
acting in concert with No penalty for early withdrawal
such person may purchase
in the Direct Community
Offering and the
Syndicated Community
Offering, in the
aggregate, more than
60,000 shares (or
$600,000) of Common Stock
issued in the Conversion, __________________________________________________
whichever is less; and no Name(s) in which your stock is to be registered
person (including all
persons on a joint __________________________________________________
account), together with Name(s) in which your stock is to be registered
associates of or persons
acting in concert with __________________________________________________
such person, may purchase Address
in the Stock Conversion
shares of Common Stock __________________________________________________
with an aggregate City State Zip Code
purchase price of more
than $600,000. [_] Individual [_] Joint Tenants
[_] Tenants in Common [_] Uniform Gifts to Minors
METHOD OF PAYMENT [_] Other _________________________________________
Check the appropriate
boxes that show how you
wish to pay for the
stock. If paying by Are you an officer, director, general partner,
check or money order, employee or agent of a National Association of
make it payable to Securities Dealers, Inc. ("NASD") member firm or
Cavalry Bancorp, Inc. related to such person?
Your funds will earn
interest at Cavalry [_] Yes [_] No
Banking's passbook rate
until the Offering is
completed. If paying by
withdrawal from a Cavalry
Banking deposit account,
write in the account
number(s) and the Daytime Phone ( )
amount(s) you wish to -------------------------------------
withdraw. If payment is
made from a CD account,
it will continue to earn
interest at the same CD Were you a member of Cavalry Banking as of
account rate. June 30, 1996 _____ __,1998
STOCK REGISTRATION [_] Yes [_] No [_] Yes [_] No
Print the name(s) in which
you want the stock
registered. If you are a
depositor or member, to
protect your rights over I acknowledge receipt of the Prospectus and the
other purchasers as provisions therein and understand that after
described in the delivery of this order form to Cavalry Bancorp,
Prospectus, you must take Inc., this order may not be modified or revoked.
-------------
ownership in at least one I certify that this order is for the above
-------------------------
of the account holders' account only and under penalties of perjury, I
----------------------
names. Subscription certify that the Social Security or Taxpayer ID
-----
rights are number given below is correct. I further
nontransferable. Enter certify that this order does not violate
the Social Security purchase limitations set forth more fully in
Number (or Tax ID Number) the Prospectus.
of one registered owner;
only one number is I acknowledge that the common stock offered is
required. See the not a savings or deposit account and is not
reverse side of this form insured or guaranteed by the Savings
for registration Association Insurance Fund, the FDIC or any
guidelines. other government agency.
NASD AFFILIATION _________________________________________________
The NASD's Interpretation Signature Date
with respect to Free _________________________________________________
Riding and Withholding Additional Signature (if required) Date
restricts the sale of _________________________________________________
certain initial public Social Security No. or Tax ID No.
offerings to certain NASD
members, affiliates and
family members. For an
exemption from these
restrictions, such
persons must comply with
the following conditions:
(i) to not sell or
transfer the shares for a
period of 150 days
following issuance and
(ii) to report this
subscription in writing
to the applicable NASD
member within one day of
payment therefor. By
signing this Stock Order
Form, you are certifying
that you will comply with
applicable NASD
regulations.
TELEPHONE INFORMATION
Please enter the daytime
telephone number where
you may be contacted in
the event we cannot
execute your offer as
given.
ACCOUNT VERIFICATION
If you were a depositor on
June 30, 1996, _____ __,
1998 or ___________ __,
1998, you must list full
title and account numbers
of all accounts you had
at that date in order to
insure proper
identification of your
purchase right or
preference.
ACKNOWLEDGMENT
Please read the
acknowledgement statement
carefully and sign on the
signature line. When
purchasing as a
custodian, corporate
officer, etc., add your
full title to your
signature. Enter the
Social Security number
(or Tax ID number) of the
registered owner and date
the form; only one number
is required.
Subscription priority
rights for members as
described in the
Prospectus will expire at
_:00 p.m., Central Time,
on _________, __, 1998.
The Direct Community
Offering may end as early
as 12:00 Noon, Central
Time, on _______ __,
1998, or any time
thereafter when orders
for all available shares
have been received, but
in no event later than
________ __, 1998. This
order form must be
properly completed and
received with payment at
the above address or at
any Cavalry Banking
office prior to the
expiration date.
================================================================================
THE ADDITION TO AN ORDER OF A NAME WHICH DOES NOT APPEAR ON THE
QUALIFYING ACCOUNT WILL RESULT IN THE LOSS OF SUBSCRIPTION
RIGHTS. FOR ASSISTANCE PLEASE CALL THE CAVALRY BANKING
STOCK INFORMATION CENTER AT
(615) ___-____
<PAGE>
GUIDELINES FOR REGISTERING STOCK
For reasons of clarity and standardization, the stock transfer industry has
developed uniform stockholder registrations which we will utilize in the
issuance of your Stock Certificates(s). If you have any questions, please
consult your legal advisor.
Stock ownership must be registered in one of the following manners:
- --------------------------------------------------------------------------------
INDIVIDUAL: Avoid the use of two initials. Include the first given name,
middle initial and last name of the stockholder. Omit words of
limitation that do not affect ownership rights such as "special
account", "single man", "personal property", etc.
- --------------------------------------------------------------------------------
JOINT: Joint ownership of stock by two or more persons shall be
inscribed on the certificate with one of the following types of
joint ownership. Names should be joined by "and"; do not connect
with "or". Omit titles such as "Mrs.", "Dr.", etc.
JOINT TENANTS--Joint Tenancy with Right of Survivorship and not
as Tenants in Common may be specified to identify two or more
owners where ownership is intended to pass automatically to the
surviving tenant(s).
TENANTS IN COMMON--Tenants in Common may be specified to identify
two or more owners. When stock is held as tenancy in common,
upon the death of one co-tenant, ownership of the stock will be
held by the surviving co-tenant(s) and by the heirs of the
deceased co-tenant. All parties must agree to the transfer or
sale of shares held in this form of ownership.
- --------------------------------------------------------------------------------
UNIFORM GIFT Stock may be held in the name of a custodian for a minor under
TO MINORS: the Uniform Gifts to Minors laws of the individual states. There
may be only one custodian and one minor designated on a stock
certificate. The standard abbreviation of custodian is "CUST",
while the description "Uniform Gifts to Minors Act" is
abbreviated "UNIF GIFT MIN ACT." Standard U.S. Postal Service
state abbreviations should be used to describe the appropriate
state. For example, stock held by John P. Jones under the
Tennessee Uniform Gift to Minors Act will be abbreviated:
JOHN P. JONES CUST SUSAN A. JONES
UNIF GIFT MIN ACT TN
- ------------------------------------------------------------------------------
FIDUCIARIES: Stock held in a fiduciary capacity must contain the following:
1. The name(s) of the fiduciary--
. If an individual, list the first given name, middle
initial, and last name
. If a corporation, list the corporate title.
. If an individual and a corporation, list the
corporation's title before the individual.
2. The fiduciary capacity--
. Administrator . Conservator
. Committee . Executor
. Trustee . Personal Representative
. Custodian
3. The type of document governing the fiduciary relationship.
Generally, such relationships are either under a form of
living trust agreement or pursuant to a court order.
Without a document establishing a fiduciary relationship,
your stock may not be registered in a fiduciary capacity.
4. The date of the document governing the relationship. The
date of the document need not be used in the description of
a trust created by a will.
5. Either of the following:
The name of the maker, donor or
testator or
The name of the beneficiary
Example of Fiduciary Ownership
JOHN D. SMITH, TRUSTEE FOR TOM A.
SMITH UNDER AGREEMENT DATED (Date)
<PAGE>
EXHIBIT 99.2
CAVALRY BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR CAVALRY BANKING)
MURFREESBORO, TENNESSEE
PROPOSED MARKETING MATERIALS
DRAFT NOVEMBER 4, 1997
<PAGE>
Marketing Materials for
Cavalry Banking
Table of Contents
-----------------
I. Press Release
A. Explanation
B. Schedule
C. Distribution List
D. Examples
II. Question and Answer Brochure
A. Explanation
B. Method of Distribution
C. Example
III. Officer and Director Brochure
A. Explanation
B. Method of Distribution
C. Example
IV. Counter Cards, Lobby Posters and a Tombstone Announcement
A. Explanation
B. Quantity
C. Examples
V. Community Meeting Invitation and Prospect Letters
A. Explanation
B. Examples
VI. IRA Mailing
A. Explanation
B. Example
VII. Letters
A. Explanation
B. Example
VIII. Proxygram
A. Explanation
B. Example
<PAGE>
I. Press Releases
A. Explanation
In an effort to ensure that all customers, community members, and other
interested investors receive prompt accurate information in a simultaneous
manner, Trident Securities, Inc. advises Cavalry Banking to forward press
releases to national and regional publications, newspapers, radio stations,
etc., at various points during the conversion process.
Only press releases approved by Conversion Counsel will be forwarded for
publication in any manner.
B. Press Releases
1. Approval of Conversion by the Office of Thrift Supervision and the
Securities and Exchange Commission
2. Close of Stock Offering
C. Distribution Lists (see attached)
D. Examples (see attached)
<PAGE>
National Media Distribution List
--------------------------------
American Banker
- ---------------
One State Street Plaza
New York, New York 10004
Michael Weinstein
Business Wire
- -------------
212 South Tryon
Suite 1460
Charlotte, Tennessee 28281
Wall Street Journal
- -------------------
World Financial Center
200 Liberty
New York, New York 10004
SNL Securities
- --------------
Post Office Box 2124
Charlottesville, Virginia 22902
Barrons
- -------
Dow Jones & Company
Barron's Statistical Information
200 Burnett Road
Chicopee, Massachusetts 01020
Investors Business Daily
- ------------------------
12655 Beatrice Street
Post Office Box 661750
Los Angeles, California 90066
Local Media List
----------------
(Forthcoming)
<PAGE>
D. Press Release
FOR IMMEDIATE RELEASE
---------------------
For More Information Contact:
Ed C. Loughry, Jr., President
Telephone: (615) 893-1234
CAVALRY BANKING
---------------
STOCK SALE APPROVED
-------------------
Murfreesboro, Tennessee, _________, 1998 - Ed C. Loughry, Jr., President of
Cavalry Banking, Murfreesboro, Tennessee, announced today that Cavalry Banking
has received approval from the Office of Thrift Supervision to convert from a
federally chartered mutual savings institution to a federally chartered stock
savings institution. In connection with the Conversion, Cavalry Banking has
formed a holding company, Cavalry Bancorp, Inc. to hold all of the outstanding
capital stock of Cavalry Banking.
A Prospectus and Proxy Statement describing the Plan of Conversion will be
mailed to certain members of Cavalry Banking on or about _________, 1998. Under
the Plan of Conversion, Cavalry Bancorp, Inc. is offering an estimated ________
shares of common stock at $10.00 per share. Certain of Cavalry Banking's past
and present depositors and borrowers will have the opportunity to purchase stock
through a Subscription Offering that closes on _________, 1998. Shares that are
not subscribed for during the Subscription Offering, if any, will be offered to
the general public, with preference given to natural persons and trusts of
natural persons who are permanent residents of Bedford and Rutherford Counties,
Tennessee, in a Community Offering. The offerings are being managed by Trident
Securities, Inc., of Raleigh, North Carolina.
As a result of the Conversion, Cavalry Banking will be structured in the
stock form, just like all commercial banks and an increasing number of savings
institutions, and will become a subsidiary of Cavalry Bancorp, Inc.
<PAGE>
According to Mr. Loughry, "Our day to day operations will not change as a
result of the Conversion, and deposits will continue to be insured by the FDIC
up to the applicable legal limits".
Cavalry Banking is headquartered in Murfreesboro, Tennessee. The Bank was
chartered in ____. At December 31, 1997, Cavalry Banking had total assets of
$_____ million and total equity of $___ million. Customers or interested
members of the community with questions concerning the stock offering should
call the institution at (615) _________ or visit Cavalry Banking's main office.
<PAGE>
D. Press Release FOR IMMEDIATE RELEASE
---------------------
Contact: Ed C. Loughry, Jr., President
Telephone: (615) 893-1234
CAVALRY BANCORP, INC. HOLDING COMPANY FOR
-----------------------------------------
CAVALRY BANKING,
----------------
COMPLETES INITIAL STOCK OFFERING
--------------------------------
Murfreesboro, Tennessee _________, 1998 - Ed C. Loughry, Jr., President of
Cavalry Banking, Murfreesboro, Tennessee, announced today that Cavalry Bancorp,
Inc., the proposed holding company for Cavalry Banking, has completed its
initial common stock offering. It is anticipated that the common stock of
Cavalry Banking Corporation will begin trading on the NASDAQ National Market
System on _________, 1998 under the symbol "____". Trident Securities, Inc.,
the manager of the offering, will be a market maker in the stock. Cavalry
Bancorp, Inc. will issue __________ shares of its common stock.
The net proceeds contributed to Cavalry Banking upon conversion will
substantially increase its capital. Cavalry Banking will use the funds
contributed to it for general corporate purposes, including, initially, local
lending and investment in short-term U.S. Government and agency obligations.
On _________, 1998, Cavalry Banking's Plan of Conversion was approved by
Cavalry Banking's depositor and borrower members at a Special Meeting that was
held at the main office of the institution.
Mr. Loughry stated, "The Officers and Board of Directors of Cavalry Banking
express their thanks for the response by customers and the community to the
stock offering. Cavalry Banking looks forward to serving the needs of its
customers as a stock institution."
<PAGE>
II. Question and Answer Brochure
A. Explanation
The Question and Answer brochure is an essential marketing piece in any
conversion. It serves to answer some of the most commonly asked questions
in "plain, everyday language." Although most of the answers are taken
verbatim from the Prospectus and Proxy Statement, it assists the individual
in finding answers to simple questions.
Conversion Counsel approves the language for each Question and Answer.
Trident Securities, Inc. and Cavalry Banking will be responsible for any
introductory or concluding remarks, design, layout, color, and paper stock.
This will be coordinated through Trident Securities, Inc. in conjunction
with the financial printer.
B. Method of Distribution
There are three primary methods of distribution of the Question and Answer
brochure. However, regardless of the method, the brochure is always
accompanied by a Prospectus.
1. A Question and Answer brochure is sent out in the initial mailing to
all members of Cavalry Banking.
2. Question and Answer brochures are available in Cavalry Banking's
offices.
3. Question and Answer brochures are sent out in a standard information
packet to all interested investors who phone the Stock Information
Center requesting information.
C. Example
<PAGE>
C. Example
CAVALRY BANKING
MURFREESBORO, TENNESSEE
Questions and Answers Regarding the Subscription and Community Offering
MUTUAL TO STOCK CONVERSION
--------------------------
CAVALRY BANKING'S Board of Directors has unanimously voted to convert CAVALRY
BANKING from its present mutual form to a stock institution, subject to approval
of the conversion by CAVALRY BANKING'S members and regulatory authorities.
Complete details on the conversion, including reasons for conversion, are
contained in the Prospectus and Proxy Statement. We urge you to read them
carefully.
This brochure is provided to answer basic questions you might have about the
conversion. Remember, the conversion will not affect the rate on any of your
savings accounts, deposit certificates, or loans.
1. Q. WHAT IS A "CONVERSION"?
A. Conversion is a change in the legal form of organization. CAVALRY
BANKING currently operates as a federally-chartered mutual savings
institution with no shareholders. Through the conversion, CAVALRY
BANKING will form a holding company, CAVALRY BANCORP, INC., which will
ultimately own all of the outstanding stock of the CAVALRY BANKING.
CAVALRY BANCORP, INC. will issue common stock in the conversion, as
described below, and will be a publicly-owned company.
2. Q. WHY IS CAVALRY BANKING CONVERTING?
A. As a federally-chartered mutual savings institution, CAVALRY BANKING
does not have stock holders and has no authority to issue stock. By
converting to the stock form of organization, CAVALRY BANKING will be
structured in the form used by all commercial banks, most business
entities and a growing number of savings institutions. The Conversion
will be important to the future growth and performance of CAVALRY
BANKING by providing a larger capital base from which it may operate,
enhance future access to capital markets and, if desired, enhance
CAVALRY BANKING'S ability to diversify and expand it's financial
service-related activities. Currently, CAVALRY BANKING has no specific
plans, agreements, arrangements or understandings regarding such
diversification. In addition, operating as a stock institution also
provides greater charter flexibility should CAVALRY BANKING determine
to become either a state of national bank or a state-chartered savings
bank.
<PAGE>
3. Q. WILL THE CONVERSION HAVE ANY EFFECT ON SAVINGS ACCOUNTS,
CERTIFICATES OF DEPOSIT OR LOANS WITH CAVALRY BANKING?
A. No. The conversion will not change the amount, interest rate or
withdrawal rights of any savings and checking accounts or certificates
of deposit. The rights and obligations of borrowers under their loan
agreements will not be affected. However, upon consummation of the
conversion, CAVALRY BANKING'S deposit account holders will no longer
have voting rights in Cavalry Banking, and will not have voting rights
in CAVALRY BANCORP, INC. unless they purchase common stock of CAVALRY
BANCORP, INC.
4. Q. WILL THE CONVERSION CAUSE ANY CHANGES IN PERSONNEL OR MANAGEMENT?
A. No. The conversion will not cause any changes in personnel or
management. The normal day-to-day operations will continue as before.
5. Q. DID THE BOARD OF DIRECTORS OF CAVALRY BANKING APPROVE THE
CONVERSION?
A. Yes. The Board of Directors unanimously adopted the Plan of Conversion
on August 7, 1997.
CONVERSION TO A TENNESSEE CHARTERED COMMERCIAL BANK
---------------------------------------------------
6. Q. WHEN WILL THE BANK CONVERSION BE UNDERTAKEN, IF AT ALL?
A. If undertaken, the Bank Conversion would take place simultaneously
with or as soon as practicable after the consummation of the Stock
Conversion. The decision of the Board of Directors of CAVALRY BANKING
whether or not to undertake the Bank Conversion will depend on the
economic and regulatory climate at that time, among other factors.
7. Q. WHAT APPROVALS MUST BE RECEIVED BEFORE THE BANK CONVERSION BECOMES
EFFECTIVE?
A. In addition to the adoption of the Plan of Conversion by the Board of
Directors of CAVALRY BANKING, which occurred on August 7, 1997, the
Bank Conversion must be approved by the Office of Thrift Supervision
and the Tennessee Department of Financial Institutions. The Board of
Governors of the Federal Reserve System also must approve the
application of CAVALRY BANCORP, INC. to become a bank holding company.
Finally, the Plan of Conversion must be approved by a majority of all
votes eligible to be cast by CAVALRY BANKING'S voting members at a
Special Meeting of Members that will be held on ________________, 1998
to consider and vote upon the Plan of Conversion.
<PAGE>
THE SUBSCRIPTION AND COMMUNITY OFFERING
---------------------------------------
8. Q. WHO IS ENTITLED TO SUBSCRIBE CAVALRY BANCORP, INC. COMMON STOCK?
A. Rights to subscribe for common stock will be given in order of
priority to (i) depositors of CAVALRY BANKING with a $50.00 minimum
deposit as of June 30, 1996 (the "Eligible Account Holders"); (ii)
CAVALRY BANKING'S employee stock ownership plan (the "ESOP"), a tax
qualified employee stock benefit plan; (iii) depositors of CAVALRY
BANKING, who are not Eligible Account Holders, with $50.00 or more on
deposit as of December 31, 1997 (the "Supplemental Eligible Account
Holders"); and (iv) depositors of CAVALRY BANKING as of ("Voting
Record Date") and borrowers of CAVALRLY BANKING who had loans
outstanding as of January 24, 1991, which continue to be outstanding
as of _____, 1998. ("Other Members"), subject to the purchase
limitations set forth in the Plan of Conversion.
IT IS THE RESPONSIBILITY OF EACH SUBSCRIBER QUALIFYING AS AN ELIGIBLE
ACCOUNT HOLDER, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER OR OTHER MEMBER
TO LIST COMPLETELY ALL ACCOUNT NUMBERS FOR QUALIFYING SAVINGS ACCOUNTS
AS OF THE QUALIFYING DATE ON THE STOCK ORDER FORM.
Shares that are not subscribed for during the Subscription Offering,
if any, may be offered to the general public through a Community
Offering with preference given to natural persons and trusts of
natural persons who are permanent residents of Bedford and Rutherford
Counties, Tennessee (the "Local Community"). It is anticipated that
any shares not subscribed for in the Subscription and Community
Offerings will be offered to certain members of the general public
through a syndicate of registered broker dealers pursuant to selected
dealers agreements in a Syndicated Community Offering.
9. Q. HOW DO I SUBSCRIBE FOR SHARES OF STOCK?
A. Eligible subscribers wishing to exercise their subscription rights
must return the enclosed Stock Order Form to CAVALRY BANKING. The
Stock Order Form must be completed and returned along with full
payment or appropriate instructions authorizing a withdrawal from a
deposit account at CAVALRY BANKING on or prior to the close of the
Subscription Offering which will be 12:00 noon, Central time, on
___________, 1998, unless extended.
10. Q. HOW CAN I PAY FOR MY SUBSCRIPTION STOCK ORDER?
A. First, you may pay for your order in cash (if delivered in person to
CAVALRY BANKING) or by check or money order. Subscription funds will
earn interest at CAVALRY BANKING'S passbook rate from the day we
receive them until the completion or termination of the conversion.
<PAGE>
Second, you may authorize us to withdraw funds from your CAVALRY
BANKING savings account or certificate of deposit without early
withdrawal penalty. These funds will continue to earn interest at the
rate in effect for your account until completion of the offering at
which time your funds will be withdrawn for your purchase. Funds
remaining in this account (if any) will continue at the contractual
rate unless the withdrawal reduces the account balance below the
applicable minimum in which case you will receive interest at the
passbook rate. A hold will be placed on your account for the amount
you specify for stock payment. You will not have access to these
funds from the day we receive your order until the completion or
termination of the conversion.
If you want to use funds in your Individual Retirement Account held at
CAVALRY BANKING to subscribe for stock, call our Stock Information
Center at (615) ____________ for assistance. There will be no early
withdrawal or IRS penalties incurred by these transactions. It takes
several days to process the necessary IRA forms and, therefore, it is
necessary that you make arrangements by ___________, 1998, to
accommodate your order.
11. Q. WHEN MUST I PLACE MY ORDER FOR SHARES OF STOCK?
A. To exercise subscription rights in the Subscription Offering, a Stock
Order Form must be received by CAVALRY BANKING with full payment for
all shares subscribed for not later than 12:00 noon, Central time, on
___________, 1998, unless extended.
Non-customers desiring to order shares through the Community Offering,
if any, must order shares before the close of the Community Offering,
if any, which will be no sooner than 12:00 noon, Central time on
___________, 1998, unless extended.
12. Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED?
A. CAVALRY BANCORP, INC. is offering up to _________ shares of common
stock at a price of $10.00 per share. The number of shares may be
decreased to _________ or increased to _________ in response to the
independent appraiser's final determination of the consolidated pro
---
forma market value of CAVALRY BANCORP, INC. and CAVALRY BANKING, as
-----
converted.
13. Q. WHAT IS THE MINIMUM AND MAXIMUM NUMBER OF SHARES THAT I CAN PURCHASE
DURING THE OFFERING PERIOD?
A. The minimum number of shares that may be purchased is 25 shares. No
Stock Order Form will be accepted for less than $250. The maximum
purchase in the Subscription Offering for any person, together with
associates or persons acting in concert, is 60,000 shares or $600,000.
<PAGE>
14. Q. HOW WAS IT DETERMINED THAT BETWEEN _________ SHARES AND _________
SHARES OF STOCK WOULD BE ISSUED AT $10.00 PER SHARE?
A. The share range was determined through an appraisal of CAVALRY
BANCORP, INC. and CAVALRY BANKING, as converted, by Ferguson &
Company, an independent appraisal firm specializing in the thrift
industry.
15. Q. MUST I PAY A COMMISSION ON THE STOCK FOR WHICH I SUBSCRIBE?
A. No. You will not pay a commission on stock purchased in the
Subscription Offering, the Community Offering, if any, or Syndicated
Community Offering, if any.
16. Q. WILL I RECEIVE INTEREST ON FUNDS I SUBMIT FOR STOCK PURCHASES?
A. Yes. CAVALRY BANKING will pay its current passbook rate from the date
funds are received (with a completed Stock Order Form) during the
subscription and Community Offerings until completion of the
conversion.
17. Q. IF I HAVE MISPLACED MY STOCK ORDER FORM, WHAT SHOULD I DO?
A. CAVALRY BANKING will mail you another order form, or you may obtain
one from CAVALRY BANKING'S main office. If you need assistance in
obtaining or completing a Stock Order Form, please call or visit the
Stock Information Center.
18. Q. WILL THERE BE ANY DIVIDENDS PAID ON THE STOCK?
A. The Board of Directors of the Holding Company anticipates paying
quarterly cash dividends on the Common Stock, subsequent to the
Conversion, at an annual rate equal to $.40 per share commencing in
the first full quarter following the Conversion, subject to the
following factors at the intended time of declaration and payment. In
determining the amount of any dividend, the Board of Directors of the
Holding Company will consider the following factors: the Bank's
current and projected earnings, financial condition, regulatory
capital requirements, including applicable statutory and regulatory
restrictions on the payment of dividends, and other relevant factors.
Accordingly, no present assurances can be given that any dividends
will be declared or, if declared, what the amount of dividends will be
or whether such dividends, once declared, will continue. The Holding
Company may pay stock dividends in lieu of or in addition to cash
dividends, or may combine periodic special dividends with regular
dividends.
19. Q. HOW MUCH STOCK DO THE DIRECTORS AND OFFICERS OF CAVALRY BANKING INTEND
TO PURCHASE THROUGH THE SUBSCRIPTION OFFERING?
A. Directors and executive officers intend to purchase approximately $__
million of
<PAGE>
the stock to be offered in the conversion (approximately
_% if _________ shares are sold in the offering). The purchase price
paid by directors and officers will be the same as that paid by
customers and the general public.
<PAGE>
20. Q. ARE THE SUBSCRIPTION RIGHTS TRANSFERABLE TO ANOTHER PARTY?
A. No. Pursuant to federal regulations, subscription rights granted to
Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members may be exercised only by the person(s) to whom they are
granted. Any person found to be transferring or selling subscription
rights will be subject to forfeiture of such rights and other
penalties.
21. Q. I CLOSED MY ACCOUNT SEVERAL MONTHS AGO. SOMEONE TOLD ME THAT I AM
STILL ELIGIBLE TO BUY STOCK. IS THAT TRUE?
A. If you were an account holder on the Eligibility Record Date (June 30,
1996) the Supplemental Eligibility Record Date (December 31,1997) or
the Voting Record Date (________, 1998) you are entitled to purchase
stock regardless of whether or not you continue to hold your CAVALRY
BANKING account.
22. Q. MAY I OBTAIN A LOAN FROM CAVALRY BANKING USING STOCK AS COLLATERAL TO
PAY FOR MY SHARES?
A. No. Federal regulations do not allow CAVALRY BANKING to make loans
for this purpose, but another financial institution may make a loan
for this purpose.
23. Q. WILL THE FDIC (FEDERAL DEPOSIT INSURANCE CORPORATION) INSURE THE
SHARES OF STOCK?
A. No. The shares will not be insured by the FDIC. However, the Savings
Association Insurance Fund of the FDIC will continue to insure savings
accounts and certificates of deposit up to the applicable limits
allowed by law.
24. Q. WILL THERE BE A MARKET FOR THE STOCK FOLLOWING THE CONVERSION?
A. CAVALRY BANCORP, INC. has never issued stock before, and consequently
there is no established market for its common stock. CAVALRY BANCORP,
INC. has received conditional approval to have the common stock listed
on the NASDAQ National Market System under the symbol "____". Trident
Securities, Inc. intends to make a market in the common stock.
However, purchasers of common stock should recognize that no assurance
can be given that an active and liquid trading market will develop or,
if developed, will be maintained.
25. Q. CAN I PURCHASE STOCK USING FUNDS IN A CAVALRY BANKING IRA ACCOUNT?
A. Yes. Contact the Stock Information Center for additional information.
It takes several days to process the necessary IRA forms and,
therefore, it is necessary that you make arrangements by ________,
1998, to accommodate your order.
<PAGE>
ABOUT VOTING "FOR" THE PLAN OF CONVERSION
-----------------------------------------
26. Q. AM I ELIGIBLE TO VOTE AT THE SPECIAL MEETING OF MEMBERS TO BE HELD TO
CONSIDER THE PLAN OF CONVERSION?
A. At the Special Meeting of Members to be held on ________, 1998, you
are eligible to vote if you are one of the "Voting Members," who are
holders of CAVALRY BANKING'S deposits or other authorized accounts as
of ________, 1998, the "Voting Record Date" for the Special Meeting or
if you are a borrower of CAVALRY BANKING with a loan outstanding as if
January 24, 1991, which continues to be outstanding as of the Voting
Record Date. However, members of record as of the close of business
on the Voting Record Date who cease to be depositors prior to the date
of the Special Meeting are no longer members and will not be entitled
to vote at the Special Meeting. If you are a Voting Member, you
should have received a proxy statement and proxy card with which to
vote.
27. Q. HOW MANY VOTES DO I HAVE AS A VOTING MEMBER?
A. Cavalry Banking's charter provides that each account holder is
entitled to one vote for each $100, or fraction thereof, on deposit in
such account. Borrowers of CAVALRY BANKING are entitled to 1 vote for
each loan outstanding as of January 24, 1991, which continues to be
outstanding as of ________, 1998. No member may cast more than 1,000
votes.
28. Q. IF I VOTE "AGAINST" THE PLAN OF CONVERSION AND IT IS APPROVED, WILL I
BE PROHIBITED FROM BUYING STOCK DURING THE SUBSCRIPTION OFFERING?
A. No. Voting against the Plan of Conversion in no way restricts you
from purchasing stock in either the Subscription Offering or the
Community Offering.
29. Q. WHAT HAPPENS IF CAVALRY BANKING DOES NOT GET ENOUGH VOTES TO APPROVE
THE PLAN OF CONVERSION?
A. The Conversion would not take place and CAVALRY BANKING would remain a
mutual savings institution.
30. Q. AS A QUALIFYING DEPOSITOR OF CAVALRY BANKING, AM I REQUIRED TO VOTE?
A. No. However, failure to return your proxy card will have the same
effect as a vote "Against" the Plan of Conversion.
31. Q. WHAT IS A PROXY CARD?
A. A Proxy Card gives you the ability to vote without attending the
Special Meeting in person. However, you may attend the meeting and
vote in person, even if you have previously returned your proxy card.
<PAGE>
32. Q. HOW DOES THE CONVERSION AFFECT ME?
A. The conversion is intended, among other things, to assist CAVALRY
BANKING in maintaining and expanding its many services to CAVALRY
BANKING'S customers and community. By purchasing stock, you will also
have the opportunity to invest in CAVALRY BANCORP, INC., the proposed
holding company for CAVALRY BANKING. However, there is no obligation
to purchase stock. The purchase of stock is strictly optional.
33. Q. HOW CAN I GET FURTHER INFORMATION CONCERNING THE STOCK OFFERING?
A. You may call the Stock Information Center, at (615) ___________ for
further information or a copy of the Prospectus, Stock Order Form,
Proxy Statement and Proxy Card.
THIS BROCHURE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY
COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. A PROSPECTUS CAN BE
OBTAINED AT A CAVALRY BANKING OFFICE OR BY CALLING THE STOCK INFORMATION CENTER.
THERE SHALL BE NO SOLICITATION OF AN OFFER OR SALE OF STOCK IN ANY JURISDICTION
IN WHICH ANY OFFER, SOLICITATION OF AN OFFER OR SALE OF STOCK WOULD BE UNLAWFUL.
THE COMMON STOCK IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED
OR GUARANTEED.
FOR YOUR CONVENIENCE
In order to assist you during the stock offering period, we have established a
Stock Information Center to answer your questions. Please call :
(615) __________
<PAGE>
III. Officer and Director Brochure
A. Explanation
An Officer and Director Brochure merely highlights the intended stock
purchases shown in the Prospectus.
B. Method of Distribution
There are three primary methods of distribution of Officer and Director
Brochures. However, regardless of the method, they are always accompanied
by a Prospectus.
1. An Officer and Director Brochure is sent out in the initial mailing to
all members of the Cavalry Banking.
2. Officer and Director Brochures will be available in any of Cavalry
Banking's offices.
3. Officer and Director Brochures are sent out in a standard information
packet to all interested investors who telephone the Stock Information
Center requesting information.
<PAGE>
OFFICER AND DIRECTOR STOCK PURCHASE COMMITMENTS
<TABLE>
<CAPTION>
Anticipated Anticipated Percent of Shares
Number of Dollar at Maximum of
Name and Position Shares Purchased Amount Purchased Valuation Range
- ----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C>
William H. Huddleston, III
Chairman of the Board
Ed C. Loughry, Jr.
President, Chief Executive Officer
and Director
Ronald F. Knight
Executive Vice President, Chief
Operating Officer and Director
Gary Brown
Director
Frank E. Crosslin, Jr.
Director
Tim J. Durham
Director
Ed Elam
Director
James C. Cope
Director
Terry G. Haynes
Director
Hillard C. "Bud" Gardner
Senior Vice President and Chief
Financial Officer
William S. Jones
Senior Vice President and Trust
Officer/ Investor Relations
David W. Hopper
Senior Vice President and Trust
Officer
</TABLE>
<PAGE>
R. Dale Floyd
Senior Vice President
Ira B. Lewis, Jr.
Vice President/CRA Compliance
Officer and Secretary
M. Glenn Layne
Vice President
Joy B. Jobe
Vice President
Other Officers (__ persons)
TOTAL
THIS BROCHURE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY
COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THERE SHALL BE NO
SOLICITATION OF AN OFFER OR SALE OF STOCK IN ANY JURISDICTION IN WHICH ANY
OFFER, SOLICITATION OF AN OFFER OR SALE OF STOCK WOULD BE UNLAWFUL.
THE COMMON STOCK IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR
GUARANTEED.
<PAGE>
IV. Counter Cards, Lobby Posters and the Tombstone Announcement
A. Explanation
Counter cards, lobby posters and the tombstone announcement serve three
-----
purposes: (1) As a notice to Cavalry Banking's customers and members of
the local community that the stock sale is underway; (2) to remind the
customers of the end of the Subscription Offering; and (3) to invite
members of the community to an informational meeting, if applicable.
Trident has learned in the past that many people need reminding of the
deadline for subscribing and therefore we suggest the use of these simple
reminders.
B. Quantity
Approximately 3 - 4 counter cards may be used at Cavalry Banking's offices,
at teller windows and on customer service representatives' desks. These
counter cards will be exact duplicates of the lobby poster and will be no
larger than 8-1/2" x 11".
Approximately 1 - 2 lobby posters may be used at the offices of Cavalry
Banking. These posters will be approximately 2' x 3'.
Tombstone announcements may be used for placement in local newspapers. The
advertisements will run no more than twice each in the local newspaper.
The ads will be no larger than 8-1/2" x 11".
C. Examples enclosed
<PAGE>
POSTER
Cavalry Banking
STOCK OFFERING MATERIALS
AVAILABLE HERE
Customer and Community Priority Rights, if any, for the Stock Offering
by Cavalry Bancorp, Inc.
Expire on ________, 1998
<PAGE>
- --------------------------------------------------------------------------------
This announcement is neither an offer to sell nor a solicitation of an offer
to buy these securities. The offer is made only by the Prospectus. These
shares have not been approved or disapproved by the Securities and Exchange
Commission, the Office of Thrift Supervision or the Federal Deposit Insurance
Corporation, nor has such Commission, Office or Corporation passed upon the
accuracy or adequacy of the Prospectus. Any representation to the contrary
is a criminal offense.
NEW ISSUE ________, 1998
UP TO _________ SHARES
These shares are being offered pursuant
to a Plan of Conversion whereby
CAVALRY BANKING
of Murfreesboro, Tennessee will convert
from a federal mutual savings institution
to a federal stock savings institution
and become the wholly-owned subsidiary of
CAVALRY BANCORP, INC.
COMMON STOCK
_______________
PRICE $10.00 PER SHARE
_______________
Copies of the Prospectus may be obtained in
any State in which this announcement
is circulated from such of the undersigned or
other brokers and dealers
as may legally offer these securities in such
state.
TRIDENT SECURITIES, INC.
For a copy of the Prospectus call (615) ________.
- --------------------------------------------------------------------------------
<PAGE>
V. Community Meeting Materials
A. Explanation
In order to educate the public about the stock offering, Trident suggests
holding Community meetings in various locations. In an effort to target a
group of interested investors, Trident requests that each Director of
Cavalry Banking submit a list of acquaintances that he or she would like to
invite to a Community meeting.
B. Method of Distribution of Invitations and Prospect Letters
Each Director submits his list of prospects.
Invitations are sent to each Director's prospects through the mail. All
invitations are preceded by a Prospectus and all attendees are given a
Prospectus at the meeting.
Prospect Letters are sent to prospects when appropriate.
C. Seminars for Customers
Advertisements will be run in the newspaper inviting customers to a brief
presentation and question and answer time.
D. Examples enclosed
<PAGE>
PROSPECT INVITATION
- --------------------------------------------------------------------------------
The Directors and Officers
of
Cavalry Banking
cordially invite you to attend a brief
presentation regarding the stock offering of
Cavalry Bancorp, Inc., our proposed holding
company.
Please join us at one of the following
meetings:
Place Place Place
Address Address Address
Date Date Date
at ____ p.m. at ____ p.m. at ____ p.m.
Hors d'oeuvres will be served.
Seating is limited, so please call (615) _______ if you plan to attend.
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 99.3
[LETTERHEAD OF FERGUSON & COMPANY APPEARS HERE]
August 7, 1997
Board of Directors
Cavalry Banking
114 West College Street
Murfreesboro, Tennessee 37130
Dear Directors:
This letter sets forth the agreement between Cavalry Banking ("Cavalry" or
"Bank"), Murfreesboro, Tennessee, and Ferguson & Company ("F&C"), Irving, Texas,
under the terms of which Cavalry has engaged F&C, in connection with its
conversion from mutual to stock form, to (1) determine the pro forma market
value of the shares of common stock to be issued and sold by Cavalry's holding
company; and (2) assist Cavalry in preparing a business plan to be filed with
the application for approval to convert to stock.
F&C agrees to deliver the written valuation and business plan to Cavalry at
the above address on or before a mutually agreed upon date. Further, F&C agrees
to perform such other services as are necessary or required in connection with
comments from the applicable regulatory authorities relating to the business
plan and appraisal and the preparation of appraisal updates as requested by
Cavalry or its counsel. It is understood that the services of F&C under this
agreement shall be limited as herein described.
F&C's fee for the business plan and initial appraisal valuation report and
any required updates shall be $25,000. In addition, Cavalry shall reimburse F&C
for all out-of-pocket expenses, which will not exceed $5,000. Payment under this
agreement shall be made as follows:
1. Seven thousand five hundred dollars ($7,500) upon execution of this
engagement letter.
2. Seven thousand five hundred dollars ($7,500) upon delivery of the
business plan.
3. Ten thousand dollars ($10,000) upon delivery of the completed
appraisal report.
4. Out-of-pocket expenses are to be paid monthly.
If, during the course of Cavalry's conversion, unforeseen events occur so
as to change materially the nature or the work content of the services described
in this contract, the terms of the contract shall be subject to renegotiation.
Such unforeseen events shall include, but not be limited to, major changes in
the conversion regulations, appraisal guidelines or processing procedures as
they relate to conversion appraisals, major changes in Cavalry's management or
operating policies, execution of a merger agreement with another institution
prior to completion of conversion, and excessive delays or suspension of
processing of conversions by the regulatory authorities such that
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Board of Directors
August 7, 1997
Page 2
completion of Cavalry's conversion requires the preparation by F&C of a new
appraisal report or business plan, excluding appraisal updates during the course
of the engagement.
To induce F&C to provide the services described above, Cavalry hereby
agrees as follows:
1. Cavalry shall supply in a timely manner to F&C such information with
respect to its business and financial condition as F&C reasonably may
request in order to make the aforesaid valuation. Such information
made available to F&C shall include, but not be limited to, annual
financial statements, periodic regulatory filings, material
agreements, debt instruments and corporate books and records.
2. Cavalry hereby represents and warrants, to the best of its knowledge,
that any information provided to F&C does not and will not, at any
time relevant hereto, contain any misstatement or untrue statement of
a material fact or omit any and all material facts required to be
stated therein or necessary to make the statements therein not false
or misleading in light of the circumstances under which they were
made.
3. (a) Cavalry shall indemnify and hold harmless F&C and any employees of
F&C who act for or on behalf of F&C in connection with the services
called for under this agreement, from and against any and all loss,
cost, damage, claim, liability or expense of any kind, including
reasonable attorneys fees and other expenses incurred in
investigating, preparing to defend and defending any claim or claims
(specifically including, but not limited to, claims under federal and
state securities laws) arising out of any misstatement or untrue
statement of a material fact contained in the information supplied by
Cavalry to F&C or by an omission to state a material fact in the
information so provided which is required to be stated therein in
order to make the statement therein not false or misleading.
(b) F&C shall not be entitled to indemnification pursuant to Paragraph
3(a) above with regard to any claim arising where, with regard to the
basis for such claim, F&C had knowledge that a statement of a fact
material to the evaluation and contained in the information supplied
by Cavalry was untrue or had knowledge that a material fact was
omitted from the information so provided and that such material fact
was necessary in order to make the statement made to F&C not false or
misleading.
(c) F&C additionally shall not be entitled to indemnification pursuant
to Paragraph 3(a) above notwithstanding its lack of actual knowledge
of an intentional misstatement or omission of a material fact in the
information provided if F&C is determined to have been negligent or to
have failed to exercise due diligence in the preparation of its
valuation.
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Board of Directors
August 7, 1997
Page 3
Cavalry and F&C are not affiliated, and neither Cavalry nor F&C has an
economic interest in, or held in common with, the other and has not derived a
significant portion of its gross revenue, receipts or net income for any period
from transactions with the other.
In order for F&C to consider this proposal binding, please acknowledge your
consent to the foregoing by executing the enclosed copies of this letter and
returning one copy to us, together with a check payable to Ferguson & Co., LLP
in the amount of $7,500. The extra copy of this letter is for your conversion
counsel.
Yours very truly,
/s/ Charles M. Hebert
Charles M. Hebert
Principal
Agreed to ($7,500 check enclosed):
Cavalry Banking
Murfreesboro, Tennessee
By: /s/ Ed. C. Loughry, Jr.
---------------------------
Ed C. Loughry, Jr.
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CAVALRY BANKING
114 WEST COLLEGE STREET
MURFREESBORO, TENNESSEE 37130
(615) 893-1234
NOTICE OF SPECIAL MEETING OF MEMBERS
TO BE HELD ON ____________ __, 1998
Notice is hereby given that a special meeting ("Special Meeting") of
members of Cavalry Banking ("Bank") will be held at the Bank's main office at
114 West College Street, Murfreesboro, Tennessee, on __________, ____________
__, 1998, at _:__ .m., Central Time. Business to be taken up at the Special
Meeting shall be:
(1) To approve a Plan of Conversion adopted by the Board of Directors on
August 7, 1997 to convert the Bank from a federally chartered mutual savings
bank to a federally chartered capital stock savings bank, to be held as a
wholly- owned subsidiary of a new holding company, Cavalry Bancorp,Inc.
including the adoption of a Federal Stock Charter and Bylaws for the Bank, and
the subsequent conversion of the Bank from a federally chartered capital stock
savings bank to a Tennessee-chartered commercial bank, pursuant to the laws of
the United States and the rules and regulations of the Office of Thrift
Supervision and the laws of the State of Tennessee and the rules and regulations
of the Tennessee Department of Financial Institutions; and
(2) To consider and vote upon any other matters that may lawfully come
before the Special Meeting.
Note: As of the date of mailing of this Notice, the Board of Directors is
not aware of any other matters that may come before the Special Meeting.
The members entitled to vote at the Special Meeting shall be those members
of the Bank at the close of business on ___________ __, 199 , and who continue
as members until the Special Meeting, and should the Special Meeting be, from
time to time, adjourned to a later time, until the final adjournment thereof.
BY ORDER OF THE BOARD OF DIRECTORS
IRA B. LEWIS, JR.
SECRETARY
Murfreesboro, Tennessee
__________ __, 1998
PLEASE SIGN AND RETURN PROMPTLY EACH PROXY CARD YOU RECEIVE IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. THIS WILL ASSURE NECESSARY REPRESENTATION AT THE SPECIAL
MEETING, BUT WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU SO DESIRE. THE
PROXY IS SOLICITED ONLY FOR THIS SPECIAL MEETING (AND ANY ADJOURNMENTS THEREOF)
AND WILL NOT BE USED FOR ANY OTHER MEETING. YOU MAY REVOKE YOUR WRITTEN PROXY
BY WRITTEN INSTRUMENT DELIVERED TO IRA B. LEWIS, JR., SECRETARY, CAVALRY
BANKING, AT THE ABOVE ADDRESS AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING.
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CAVALRY BANKING
114 WEST COLLEGE STREET
MURFREESBORO, TENNESSEE 37130
(615) 893-1234
PROXY STATEMENT
__________ __, 1998
YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD OF DIRECTORS OF
CAVALRY BANKING FOR USE AT A SPECIAL MEETING OF MEMBERS TO BE HELD ON
__________, ____________ __, 1998, AND ANY ADJOURNMENT OF THAT MEETING, FOR THE
PURPOSES SET FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING. YOUR BOARD OF
DIRECTORS AND MANAGEMENT URGE YOU TO VOTE FOR THE PLAN OF CONVERSION.
PURPOSE OF MEETING -- SUMMARY
A special meeting of members ("Special Meeting") of Cavalry Banking
("Bank") will be held at the Bank's main office at 114 West College Street,
Murfreesboro, Tennessee, on __________, ____________ __, 1998, at :__ .m.,
Central Time, for the purpose of considering and voting upon a Plan of
Conversion from Federal Mutual Savings Bank to State Chartered Commercial Bank
and Formation of a Holding Company ("Plan of Conversion"), which, if approved by
a majority of the total votes of the members eligible to be cast, will permit
the Bank to convert from a federally chartered mutual savings bank to a
federally chartered capital stock savings bank to be held as a subsidiary of
Security Bancorp, Inc. ("Holding Company"), a newly organized Tennessee
corporation formed by the Bank ("Stock Conversion"). The conversion of the Bank
to a federally chartered capital stock savings bank and its acquisition by the
Holding Company are collectively referred to herein as the "Stock Conversion."
Following completion of the Stock Conversion, the Bank may convert from a
federally chartered capital stock savings bank to a Tennessee chartered
commercial bank as a subsidiary of the Holding Company ("Bank Conversion"),
subject to the discretion of the Bank's Board of Directors. The Stock Conversion
and the Bank Conversion are referred to herein collectively as the "Conversion."
Members entitled to vote on the Plan of Conversion are members of the Bank
as of ___________ __, 199_ ("Voting Record Date") who continue as members until
the Special Meeting, and should the Special Meeting be, from time to time,
adjourned to a later time, until the final adjournment thereof. The Conversion
requires the approval of not less than a majority of the total votes eligible to
be cast at the Special Meeting.
The Plan of Conversion provides, among other things, that, after receiving
final authorization from the Office of Thrift Supervision ("OTS"), the Bank will
offer for sale shares of common stock of the Holding Company ("Common Stock"),
through the issuance of nontransferable subscription rights ("Subscription
Rights"), first to depositors of the Bank with $50.00 or more on deposit as of
June 30, 1996 ("Eligible Account Holders"), then to the Bank's employee stock
ownership plan ("ESOP"), then to depositors of the Bank with $50.00 or more on
deposit as of December 31, 1997 ("Supplemental Eligible Account Holders"), then
to depositors of the Bank as the Voting Record Date and borrowers of the Bank
with loans outstanding as of January 24, 1991, which continue to be outstanding
as of the Voting Record Date ("Other Members"), in a subscription offering
("Subscription Offering"), and then, if necessary, to certain members of the
general public in a direct community offering ("Direct Community Offering"). The
Subscription and Direct Community Offerings are referred to herein as the
"Subscription and Direct Community Offerings." It is anticipated that shares of
Common Stock not subscribed for in the Subscription and Direct Community
Offerings will be offered to the general public with the assistance of Trident
Securities, Inc. ("Trident Securities") and, if necessary, a syndicate of
registered broker-dealers to be managed by Trident Securities pursuant to
selected dealers' agreements in a syndicated offering ("Syndicated Community
Offering"). The Subscription, Direct Community and Syndicated Community
Offerings are referred to herein as the "Offerings."
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Adoption of a Federal Stock Charter ("Federal Stock Charter") and Bylaws
("Bylaws") of the Bank is an integral part of the Plan of Conversion. Copies of
the Plan of Conversion and the proposed Federal Stock Charter and Bylaws for the
Bank are attached to this Proxy Statement as exhibits. They provide, among other
things, for the termination of voting rights of members and of their rights to
receive any surplus remaining after liquidation of the Bank. These rights,
except for the rights of Eligible Account Holders and Supplemental Eligible
Account Holders in the liquidation account, will vest exclusively in the holders
of the stock in the Holding Company and the Bank. For further information, see
"THE CONVERSION -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Bank."
CAVALRY BANKING
The Bank is a federally chartered mutual savings bank located in
Murfreesboro, Tennessee, which is approximately 30 miles southeast of Nashville,
Tennessee. Chartered in 1929 as a Tennessee-chartered mutual building and loan
association under the name "Murfreesboro Building and Loan Association," the
Bank converted to a federal charter and adopted the name "Murfreesboro Federal
Savings and Loan Association," in 1936. In 1984, the Bank adopted the name
"Cavalry Banking Federal Savings and Loan Association." In 1991, the Bank
adopted the name "Cavalry Banking, A Federal Savings Bank," and in 1996 the Bank
amended its mutual charter to adopt its current name. As a result of the
Conversion, the Bank will convert to a federal capital stock savings bank and
will become a wholly-owned subsidiary of the Holding Company. The Bank is
regulated by the OTS, its primary regulator, and by the Federal Deposit
Insurance Corporation ("FDIC"), the insurer of its deposits. The Bank's deposits
have been federally-insured since 1936 and are currently insured by the FDIC
under the Savings Association Insurance Fund. The Bank has been a member of the
Federal Home Loan Bank System since 1936. At September 30, 1997, the Bank had
total assets of $275.9 million, total deposits of $242.0 million and total
equity of $29.5 million on a consolidated basis.
The Bank is a community-oriented financial institution whose primary
business is attracting deposits from the general public and using those funds to
originate a variety of loans to individuals residing within its primary market
area, and to businesses owned and operated by such individuals. The Bank
considers Rutherford, Bedford and Williamson Counties in Central Tennessee as
its primary market area.
The Bank believes that its operations more closely resemble those of a
traditional commercial bank than a traditional thrift institution. Unlike a
traditional thrift institution that primarily originates long-term residential
mortgage loans funded primarily with long term certificates of deposits, a
traditional commercial bank primarily originates commercial business, consumer
and other short term non-real estate loans funded primarily by non-interest
bearing demand deposit accounts and other short term liabilities. The Bank's
one- to- four family mortgage loan portfolio, as a percent of the total loan
portfolio, has decreased from 50.6% at December 31, 1992 to 32.7% at September
30, 1997. In addition, the Bank's certificates of deposit, as a percentage of
deposit accounts, have decreased from 60.7% at December 31, 1994 to 54.6% at
September 30, 1997. In addition to the change in its asset and liability mix,
the Bank is one of the few thrift institutions in its primary market area that
offers trust services. See "BUSINESS OF THE BANK -- Lending Activities," "--
Deposit Activities and Other Sources of Funds --Deposit Accounts" and "-- Trust
Department" contained in the Prospectus.
The Bank's lending activities are diverse. The Bank originates both
adjustable rate mortgage ("ARM") loans and fixed-rate mortgage loans. Generally,
ARM loans are retained in the Bank's portfolio and long-term fixed-rate mortgage
loans are originated for sale in the secondary market. In addition, the Bank
actively originates construction and acquisition and development loans. At
September 30, 1997, construction loans totalled $68.8 million, or 26.7% of total
loans receivable, and acquisition and development loans totalled $10.6 million,
or 4.1% of total loans receivable. The Bank also originates commercial real
estate, commercial business, and consumer and other non-real estate loans. At
September 30, 1997, commercial real estate loans totalled $37.1 million, or
14.4% of total loans receivable, commercial business loans totalled $22.1
million, or 8.6% of total loans receivable, and consumer and other non-real
estate loans totalled $33.3 million, or 12.9% of total loans receivable. The
Bank invests its excess liquidity in short-term U.S. Government and agency
securities.
2
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The Bank conducts its operations from its main office and four branch
offices located in Murfreesboro, Tennessee, a branch office in Shelbyville,
Tennessee (Bedford County) and three offices in Smyrna, Tennessee (Rutherford
County). The Bank also operates a mortgage loan origination office in Franklin,
Tennessee (Williamson County). See "BUSINESS OF THE BANK -- Properties" in the
Prospectus. The main office is located at 114 West College Street, Murfreesboro,
Tennessee 37130 and its telephone number is (615) 893-1234.
VOTING RIGHTS AND VOTE REQUIRED FOR APPROVAL
The Bank's Board of Directors has fixed the close of business on
___________ __, 199 as the record date for the determination of members
entitled to notice of and to vote at the Special Meeting. All holders of the
Bank's savings or other authorized accounts are members of the Bank under its
current charter. All members of record as of the close of business on the Voting
Record Date who continue to be members on the date of the Special Meeting or any
adjournment thereof will be entitled to vote at the Special Meeting or such
adjournment.
Each eligible depositor member will be entitled at the Special Meeting to
cast one vote for each $100, or fraction thereof, of the aggregate withdrawal
value of all of the depositor's savings accounts in the Bank as of the Voting
Record Date. Borrowers with loans outstanding as of January 24, 1991 which
continue to be outstanding as of the Voting Record Date will be entitled to cast
one vote for the period of time such borrowings remain in existence. No member
is entitled to cast more than 1,000 votes. Any number of members present and
voting, represented in person or by proxy, at the Special Meeting will
constitute a quorum.
Approval of the Plan of Conversion will require the affirmative vote of a
majority of the total outstanding votes of the Bank's members eligible to be
cast at the Special Meeting. As of the Voting Record Date for the Special
Meeting, there were approximately _________ votes eligible to be cast, of which
_________ votes may be cast by depositor members and _____ votes may be cast by
borrower members.
PROXIES
Members may vote at the Special Meeting or any adjournment thereof in
person or by proxy. Enclosed is a proxy which may be used by any eligible member
to vote on the Plan of Conversion. All properly executed proxies received by
management will be voted in accordance with the instructions indicated thereon
by the members giving such proxies. If no instructions are given, such proxies
will be voted in favor of the Plan of Conversion. If any other matters are
properly presented at the Special Meeting and may properly be voted on, all
proxies will be voted on such matters in accordance with the best judgment of
the proxy holders named therein. If the enclosed proxy is returned, it may be
revoked at any time before it is voted by written notice to the Secretary of the
Bank, by submitting a later dated proxy, or by attending and voting in person at
the Special Meeting. The proxies being solicited are only for use at the Special
Meeting and at any and all adjournments thereof and will not be used for any
other meeting. Management is not aware of any other business to be presented at
the Special Meeting.
The Bank, as trustee for individual retirement accounts at the Bank, will
vote in favor of the Plan of Conversion, unless the beneficial owner executes
and returns the enclosed proxy for the Special Meeting or attends the Special
Meeting and votes in person.
To the extent necessary to permit approval of the Plan of Conversion,
proxies may be solicited by representatives of Trident Securities and by
officers, directors or regular employees of the Bank, in person, by telephone or
through other forms of communication. Such persons will be reimbursed by the
Bank for their reasonable out-of-pocket expenses incurred in connection with
such solicitation. If necessary, the Special Meeting may be adjourned to an
alternative date.
3
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RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE PLAN
OF CONVERSION. VOTING IN FAVOR OF THE PLAN OF CONVERSION WILL NOT OBLIGATE ANY
VOTER TO PURCHASE ANY STOCK.
THE CONVERSION
THE OTS HAS APPROVED THE PLAN OF CONVERSION SUBJECT TO ITS APPROVAL BY THE
MEMBERS OF THE BANK ENTITLED TO VOTE THEREON AND TO THE SATISFACTION OF CERTAIN
OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. OTS APPROVAL DOES NOT
CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION.
GENERAL
On August 7, 1997, the Board of Directors of the Bank unanimously adopted
the Plan of Conversion, pursuant to which the Bank will be converted from a
federally chartered mutual savings bank to a federally chartered stock savings
bank and, in the discretion of the Board of Directors, subsequently convert to a
Tennessee-chartered commercial bank held by the Holding Company, a newly formed
Tennessee corporation. THE FOLLOWING DISCUSSION OF THE PLAN OF CONVERSION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN OF CONVERSION, WHICH IS
ATTACHED AS EXHIBIT A TO THE BANK'S PROXY STATEMENT AND IS AVAILABLE TO MEMBERS
OF THE BANK UPON REQUEST. The Plan of Conversion is also filed as an exhibit to
the Registration Statement. See "ADDITIONAL INFORMATION." The OTS has approved
the Plan of Conversion subject to its approval by the members of the Bank
entitled to vote on the matter at the Special Meeting, and subject to the
satisfaction of certain other conditions imposed by the OTS in its approval.
If the Board of Directors of the Bank decides for any reason, such as
possible delays resulting from overlapping regulatory processing or policies or
conditions that could adversely affect the Bank's or the Holding Company's
ability to consummate the Stock Conversion and transact its business as
contemplated herein and in accordance with the Bank's operating policies, at any
time prior to the issuance of the Common Stock, not to use the holding company
form of organization in implementing the Stock Conversion, the Plan of
Conversion will be amended to not use the holding company form of organization
in the Stock Conversion. In the event that such a decision is made, the Bank
will promptly refund all subscriptions or orders received together with accrued
interest, will withdraw the Holding Company's registration statement from the
SEC and will take all steps necessary to complete the Stock Conversion and
proceed with a new offering without the Holding Company, including filing any
necessary documents with the OTS. In such event, and provided there is no
regulatory action, directive or other consideration upon which basis the Bank
determines not to complete the Conversion, the Bank will issue and sell the
common stock of the Bank. There can be no assurance that the OTS would approve
the Stock Conversion if the Bank decided to proceed without the Holding Company.
The following description of the Plan of Conversion assumes that a holding
company form of organization will be utilized in the Stock Conversion. In the
event that a holding company form of organization is not utilized, all other
pertinent terms of the Plan of Conversion as described below will apply to the
conversion of the Bank from mutual to stock form of organization and the sale of
the Bank's common stock.
The Stock Conversion will be accomplished through adoption of a Federal
Stock Charter and Bylaws to authorize the issuance of capital stock by the Bank,
the issuance of all the Bank's capital stock to be outstanding upon consummation
of the Stock Conversion to the Holding Company, the offer and sale of the Common
Stock of the Holding Company and, if undertaken, the Bank Conversion. Upon
issuance of the Bank's shares of capital stock to the Holding Company, the Bank
will be a wholly owned subsidiary of the Holding Company. If undertaken, the
Bank Conversion, whereby the Bank would convert to a Tennessee-chartered
commercial bank, would be undertaken after the Stock Conversion. Pursuant to the
Plan of Conversion, 4,845,000 to 6,555,000 shares of Common Stock are being
offered for sale by the Holding Company at the Purchase Price of $10.00 per
share. As part of the Stock Conversion, the Bank will issue all of its newly
issued common stock (1,000 shares) to the Holding Company in exchange for 50% of
the net proceeds from the sale of Common Stock by the Holding Company.
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The Plan of Conversion provides generally that: (i) the Bank will convert
from a federally chartered mutual savings bank to a federally chartered stock
savings bank; (ii) the Common Stock will be offered by the Holding Company in
the Subscription Offering to persons having Subscription Rights; (iii) if
necessary, shares of Common Stock not subscribed for in the Subscription
Offering will be offered in a Direct Community Offering to certain members of
the general public, with preference given to natural persons and trusts of
natural persons residing in the Local Community, and then to certain members of
the general public in a Syndicated Community Offering through a syndicate of
registered broker-dealers pursuant to selected dealers agreements; (iv) the
Holding Company will purchase all of the capital stock of the Bank to be issued
in connection with the Conversion; and (v) subject to the discretion of the
Board of Directors, the Bank would convert to a Tennessee-chartered commercial
bank. The Stock Conversion will be effected only upon completion of the sale of
at least $48,450,000 of Common Stock to be issued pursuant to the Plan of
Conversion.
As part of the Stock Conversion, the Holding Company is making a
Subscription Offering of its Common Stock to holders of Subscription Rights in
the following order of priority: (i) Eligible Account Holders (depositors with
$50.00 or more on deposit as of June 30, 1996); (ii) the Bank's ESOP; (iii)
Supplemental Eligible Account Holders (depositors with $50.00 or more on deposit
as of December 31, 1997); and (iv) Other Members (depositors of the Bank as of
____________ __, 1997 and borrowers of the Bank with loans outstanding as of
January 24, 1991, which continue to be outstanding as of ___________ __, 1997).
Shares of Common Stock not subscribed for in the Subscription Offering may
be offered for sale in the Direct Community Offering to members of the general
public, with priority being given to natural persons and trusts of natural
persons residing in the Local Community. The Direct Community Offering, if one
is held, is expected to begin immediately after the Expiration Date, but may
begin at any time during the Subscription Offering. Shares of Common Stock not
sold in the Subscription and Direct Community Offerings may be offered in the
Syndicated Community Offering. Regulations require that the Direct Community and
Syndicated Community Offerings be completed within 45 days after completion of
the fully extended Subscription Offering unless extended by the Bank or the
Holding Company with the approval of the regulatory authorities. If the
Syndicated Community Offering is determined not to be feasible, the Board of
Directors of the Bank will consult with the regulatory authorities to determine
an appropriate alternative method for selling the unsubscribed shares of Common
Stock. The Plan of Conversion provides that the Stock Conversion must be
completed within 24 months after the date of the approval of the Plan of
Conversion by the members of the Bank.
No sales of Common Stock may be completed, either in the Subscription
Offering, Direct Community Offering or Syndicated Community Offerings unless the
Plan of Conversion is approved by the members of the Bank.
The completion of the Offerings, however, is subject to market conditions
and other factors beyond the Bank's control. No assurance can be given as to the
length of time after approval of the Plan of Conversion at the Special Meeting
that will be required to complete the Direct Community or Syndicated Community
Offerings or other sale of the Common Stock. If delays are experienced,
significant changes may occur in the estimated pro forma market value of the
Holding Company and the Bank as converted, together with corresponding changes
in the net proceeds realized by the Holding Company from the sale of the Common
Stock. In the event the Stock Conversion is terminated, the Bank would be
required to charge all Stock Conversion expenses against current income.
Orders for shares of Common Stock will not be filled until at least
4,845,000 shares of Common Stock have been subscribed for or sold and the OTS
approves the final valuation and the Stock Conversion closes. If the Stock
Conversion is not completed within 45 days after the last day of the fully
extended Subscription Offering and the OTS consents to an extension of time to
complete the Stock Conversion, subscribers will be given the right to increase,
decrease or rescind their subscriptions. Unless an affirmative indication is
received from subscribers that they wish to continue to subscribe for shares,
the funds will be returned promptly, together with accrued interest at the
Bank's passbook rate from the date payment is received until the funds are
returned to the subscriber. If such period is not extended, or, in any event, if
the Stock Conversion is not completed, all withdrawal authorizations will
5
<PAGE>
be terminated and all funds held will be promptly returned together with accrued
interest at the Bank's passbook rate from the date payment is received until the
Stock Conversion is terminated.
PURPOSES OF CONVERSION
The Board of Directors and management believe that the Conversion is in the
best interests of the Bank, its members and the communities it serves. The
Bank's Board of Directors has formed the Holding Company to serve as a holding
company, with the Bank as its subsidiary, upon the consummation of the
Conversion. By converting to the stock form of organization, the Holding Company
and the Bank will be structured in the form used by holding companies of
commercial banks and by a growing number of savings institutions. Management of
the Bank believes that the Conversion offers a number of advantages which will
be important to the future growth and performance of the Bank. The capital
raised in the Conversion is intended to support the Bank's current lending and
investment activities and may also support possible future expansion and
diversification of operations, although there are no current specific plans,
arrangements or understandings, written or oral, regarding any such expansion or
diversification. The Conversion is also expected to afford the Bank's members
and others the opportunity to become stockholders of the Holding Company and
participate more directly in, and contribute to, any future growth of the
Holding Company and the Bank. The Conversion will also enable the Holding
Company and the Bank to raise additional capital in the public equity or debt
markets should the need arise, although there are no current specific plans,
arrangements or understandings, written or oral, regarding any such financing
activities. The Bank, as a mutual savings bank, does not have the authority to
issue capital stock or debt instruments, other than by accepting deposits.
EFFECTS OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK
VOTING RIGHTS. Savings members and borrowers will have no voting rights in
the converted Bank or the Holding Company and therefore will not be able to
elect directors of the Bank or the Holding Company or to control their affairs.
Currently, these rights are accorded to savings members of the Bank. Subsequent
to the Stock Conversion, voting rights will be vested exclusively in the Holding
Company with respect to the Bank and the holders of the Common Stock as to
matters pertaining to the Holding Company. Each holder of Common Stock shall be
entitled to vote on any matter to be considered by the stockholders of the
Holding Company. A stockholder will be entitled to one vote for each share of
Common Stock owned.
After the Bank Conversion, if undertaken, holders of savings accounts in
and obligors on loans of the Bank will not have voting rights in the Bank.
Exclusive voting rights with respect to the Holding Company shall be vested in
the holders of the Common Stock, account holders and borrowers of the Bank will
not have any voting rights in the Holding Company except and to the extent that
such persons become stockholders of the Holding Company, and the Holding Company
will have exclusive voting rights with respect to the Bank's capital stock.
SAVINGS ACCOUNTS AND LOANS. The Bank's savings accounts, account balances
and existing FDIC insurance coverage of savings accounts will not be affected by
the Conversion. Furthermore, the Conversion will not affect the loan accounts,
loan balances or obligations of borrowers under their individual contractual
arrangements with the Bank.
TAX EFFECTS. The Bank has received an opinion from Breyer & Aguggia,
Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that: (i) no gain or loss will be recognized to the Bank in its
mutual or stock form by reason of the Stock Conversion; (ii) no gain or loss
will be recognized to its account holders upon the issuance to them of accounts
in the Bank immediately after the Stock Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Bank in its mutual
form plus interest in the liquidation account; (iii) the tax basis of account
holders' accounts in the Bank immediately after the Stock Conversion will be the
same as the tax basis of their accounts immediately prior to Stock Conversion;
(iv) the tax basis of each account holder's interest in the liquidation account
will be zero; (v) the tax basis of the Common Stock purchased in the Stock
Conversion will be
6
<PAGE>
the amount paid and the holding period for such stock will commence at the date
of purchase; (vi) no gain or loss will be recognized to account holders upon the
receipt or exercise of Subscription Rights in the Conversion, except to the
extent Subscription Rights are deemed to have value as discussed below; and
(vii) if the Bank Conversion is undertaken, the Bank (as a Tennessee-chartered
commercial bank), will be required to restate its tax reserve for bad debt to a
level generally based on its bad debt experience and the excess of the restated
amount is required to be included in its taxable income ratably over a six year
period. Unlike a private letter ruling issued by the IRS, an opinion of counsel
is not binding on the IRS and the IRS could disagree with the conclusions
reached therein. In the event of such disagreement, no assurance can be given
that the conclusions reached in an opinion of counsel would be sustained by a
court if contested by the IRS .
Based upon past rulings issued by the IRS, the opinion provides that the
receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan of Conversion will be
taxable to the extent, if any, that the Subscription Rights are deemed to have a
fair market value. Ferguson, a financial consulting firm retained by the Bank,
whose findings are not binding on the IRS, has issued a letter indicating that
the Subscription Rights do not have any value, based on the fact that such
rights are acquired by the recipients without cost, are nontransferable and of
short duration and afford the recipients the right only to purchase shares of
the Common Stock at a price equal to its estimated fair market value, which will
be the same price paid by purchasers in the Direct Community Offering for
unsubscribed shares of Common Stock. If the Subscription Rights are deemed to
have a fair market value, the receipt of such rights may only be taxable to
those Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members who exercise their Subscription Rights. The Bank could also recognize a
gain on the distribution of such Subscription Rights. Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members are encouraged to
consult with their own tax advisors as to the tax consequences in the event the
Subscription Rights are deemed to have a fair market value.
The Bank has also received an opinion from Bass, Berry & Sims PLC,
Nashville, Tennessee, that, assuming the Conversion does not result in any
federal income tax liability to the Bank, its account holders, or the Holding
Company, implementation of the Plan of Conversion will not result in any
Tennessee income tax liability to such entities or persons.
The opinions of Breyer & Aguggia and Bass, Berry & Sims PLC and the letter
from Ferguson are filed as exhibits to the Registration Statement. See
"ADDITIONAL INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, each depositor in the Bank would receive a
pro rata share of any assets of the Bank remaining after payment of claims of
all creditors (including the claims of all depositors up to the withdrawal value
of their accounts). Each depositor's pro rata share of such remaining assets
would be in the same proportion as the value of his deposit account to the total
value of all deposit accounts in the Bank at the time of liquidation.
After the Stock Conversion, holders of withdrawable deposit(s) in the Bank,
including certificates of deposit ("Savings Account(s)"), shall not be entitled
to share in any residual assets in the event of liquidation of the Bank.
However, pursuant to OTS regulations, the Bank shall, at the time of the Stock
Conversion, establish a liquidation account in an amount equal to its total
equity as of the date of the latest statement of financial condition contained
herein.
The liquidation account shall be maintained by the Bank subsequent to the
Stock Conversion for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who retain their Savings Accounts in the Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder shall, with
respect to each Savings Account held, have a related inchoate interest in a
portion of the liquidation account balance ("subaccount").
7
<PAGE>
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or a Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's "qualifying deposit" in the
Savings Account and the denominator is the total amount of the "qualifying
deposits" of all such holders. Such initial subaccount balance shall not be
increased, and it shall be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing day of the Bank subsequent to June 30, 1996 or December 31, 1997 is less
than the lesser of (i) the deposit balance in such Savings Account at the close
of business on any other annual closing date subsequent to June 30, 1996 or
December 31, 1997 or (ii) the amount of the "qualifying deposit" in such Savings
Account on June 30, 1996 or December 31, 1997, then the subaccount balance for
such Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of a
downward adjustment, such subaccount balance shall not be subsequently
increased, notwithstanding any increase in the deposit balance of the related
Savings Account. If any such Savings Account is closed, the related subaccount
balance shall be reduced to zero.
In the event of a complete liquidation of the Bank (and only in such event)
each Eligible Account Holder and Supplemental Eligible Account Holder shall be
entitled to receive a liquidation distribution from the liquidation account in
the amount of the then current adjusted subaccount balance(s) for Savings
Account(s) then held by such holder before any liquidation distribution may be
made to stockholders. No merger, consolidation, bulk purchase of assets with
assumptions of Savings Accounts and other liabilities or similar transactions
with another federally insured institution in which the Bank is not the
surviving institution shall be considered to be a complete liquidation. In any
such transaction the liquidation account shall be assumed by the surviving
institution.
If undertaken, the Bank Conversion shall not be deemed to be a complete
liquidation of the Bank for purposes of the distribution of the liquidation
account. The liquidation account, and all rights and obligations of the Bank in
connection therewith, would be assumed by the Bank as a Tennessee-chartered
commercial bank.
REVIEW OF OTS ACTION
Any person aggrieved by a final action of the OTS which approves, with or
without conditions, or disapproves a plan of conversion pursuant to this part
may obtain review of such action by filing in the court of appeals of the United
States for the circuit in which the principal office or residence of such person
is located, or in the United States Court of Appeals for the District of
Columbia, a written petition praying that the final action of the OTS be
modified, terminated or set aside. Such petition must be filed within 30 days
after the publication of notice of such final action in the Federal Register, or
----------------
30 days after the mailing by the applicant of the notice to members as provided
for in 12 C.F.R. (S)563b.6(c), whichever is later. The further procedure for
review is as follows: A copy of the petition is forthwith transmitted to the OTS
by the clerk of the court and thereupon the OTS files in the court the record in
the proceeding, as provided in Section 2112 of Title 28 of the United States
Code. Upon the filing of the petition, the court has jurisdiction, which upon
the filing of the record is exclusive, to affirm, modify, terminate, or set
aside in whole or in part, the final action of the OTS. Review of such
proceedings is as provided in Chapter 7 of Title 5 of the United States Code.
The judgment and decree of the court is final, except that they are subject to
review by the United States Supreme Court upon certiorari as provided in Section
1254 of Title 28 of the United States Code.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on
Form S-1 (File No. 333-_______) under the Securities Act of 1933, as amended,
with respect to the Common Stock offered in the Conversion. The accompanying
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the SEC. Such information may be inspected at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C.
8
<PAGE>
20549 and at its regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies may be obtained at prescribed rates from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Registration Statement also is available through the SEC's World Wide Web
site on the Internet (http://www.sec.gov).
The Bank has filed with the OTS an Application for Approval of Conversion.
The accompanying Prospectus omits certain information contained in such
Application. The Application, including exhibits and certain other information
that are a part thereof, may be inspected, without charge, at the offices of the
OTS, 1700 G Street, N.W., Washington, D.C. 20552 and at the office of the
Regional Director of the OTS at the Central Regional Office of the OTS, Madison
Plaza, 200 West Madison Street, Suite 1300, Chicago, Illinois 60606.
Copies of the Holding Company's Charter and Bylaws may be obtained by
written request to the Bank.
All persons eligible to vote at the Special Meeting should review both
this Proxy Statement and the accompanying Prospectus carefully. However, no
person is obligated to purchase any Common Stock. For additional information,
you may call the Stock Information Center at (615) ___-____.
BY ORDER OF THE BOARD OF DIRECTORS
IRA B. LEWIS, JR.
SECRETARY
Murfreesboro, Tennessee
__________ __, 1998
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT AND THE PROSPECTUS AND, WHETHER OR NOT YOU
PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, TO FILL IN, DATE, SIGN AND
RETURN THE ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE TO ASSURE THAT YOUR VOTES
WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND
THE SPECIAL MEETING. YOU MAY REVOKE YOUR PROXY BY WRITTEN INSTRUMENT DELIVERED
TO THE SECRETARY OF THE BANK AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING OR
BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS IN THOSE
JURISDICTIONS IN WHICH IT IS LAWFUL TO MAKE SUCH OFFER.
9
<PAGE>
EXHIBIT A
CAVALRY BANKING
MURFREESBORO, TENNESSEE
PLAN OF CONVERSION
FROM FEDERAL MUTUAL SAVINGS BANK
TO STATE CHARTERED COMMERCIAL BANK
AND FORMATION OF A HOLDING COMPANY
INTRODUCTION
------------
I. General
-------
On August 7, 1997, the Board of Directors of Cavalry Banking, Murfreesboro,
Tennessee ("Savings Bank"), after careful study and consideration, adopted by
unanimous vote this Plan of Conversion ("Plan"), which provides for (i) the
conversion of the Savings Bank from a federally chartered mutual savings bank to
a federally chartered stock savings bank ("Converted Savings Bank"), (ii) the
concurrent formation of a holding company for the Converted Savings Bank
("Holding Company"), and (iii) in the discretion of the Board of Directors, the
subsequent conversion of the Converted Savings Bank from a federally chartered
stock savings bank to a Tennessee chartered commercial bank ("Converted Bank").
The conversion of the Savings Bank to the Converted Savings Bank, the
acquisition of control of the Converted Savings Bank by the Holding Company and
the issuance of stock by the Holding Company as provided herein, are
collectively referred to herein as the "Stock Conversion." The conversion of the
Converted Savings Bank to the Converted Bank is referred to herein as the "Bank
Conversion." The Stock Conversion and the Bank Conversion are referred to herein
collectively as the "Conversion."
All capitalized terms contained in the Plan shall have the meanings
ascribed to them in Section II hereof.
Pursuant to this Plan, shares of Conversion Stock will be offered as part
of the Stock Conversion in a Subscription Offering pursuant to nontransferable
Subscription Rights at a predetermined and uniform price first to the Savings
Bank's Eligible Account Holders, second to the Tax-Qualified Employee Stock
Benefit Plans, third to Supplemental Eligible Account Holders, and fourth to
Other Members of the Savings Bank. Shares not subscribed for in the Subscription
Offering will be offered as part of the Stock Conversion to the general public
in a Direct Community Offering. Shares still remaining may then be offered to
the general public in a Syndicated Community Offering, an underwritten public
offering, or otherwise. The aggregate Purchase Price of the Conversion Stock
will be based upon an independent appraisal of the Savings Bank and will reflect
the estimated pro forma market value of the Converted Bank, as a subsidiary of
the Holding Company.
Consummation of the Bank Conversion is subject to the discretion of the
Board of Directors of the Savings Bank as set forth in Paragraph VIII.B. herein.
If the Bank Conversion is undertaken, the Holding Company, as the sole
stockholder of the Converted Savings Bank, shall approve the Bank Conversion,
and the Converted Savings Bank shall take such actions as may be necessary to
consummate the Bank Conversion.
The Stock Conversion is subject to regulations of the Director of the OTS
(Part 563b of the Rules and Regulations Applicable to All Savings Associations)
as promulgated pursuant to Section 5(i) of the Home Owners' Loan Act.
Consummation of the Conversion is subject to the approval of this Plan and
the Conversion by the OTS and by the affirmative vote of Members of the Savings
Bank holding not less than a majority of the total votes eligible to be cast at
a special meeting of the Members to be called to consider the Conversion.
Consummation of the Bank Conversion, if undertaken, would also require approval
of the Tennessee Commissioner of the Department of Financial Institutions and
the Federal Reserve Board.
<PAGE>
It is the desire of the Board of Directors to attract new capital to the
Savings Bank to increase its net worth, to support future savings growth, to
increase the amount of funds available for other lending and investment, to
provide greater resources for the expansion of customer services, to facilitate
future expansion and, because applicable laws and regulations do not provide for
the organization of mutual commercial banks, to enable the Savings Bank to
complete the Bank Conversion. In addition, the Board of Directors intends to
implement stock option plans and other stock benefit plans as part of the
Conversion in order to attract and retain qualified directors and officers. If
undertaken, the purpose of the Bank Conversion would be to provide the Savings
Bank with additional operating flexibility and enhance its ability to provide a
full range of banking products and services to its community. It is not
anticipated that the Savings Bank is engaged in any activities or currently has
any assets which are not authorized for Tennessee chartered commercial banks.
The Savings Bank is currently significantly in excess of the OTS reserve and
liquidity requirements and, if the Bank Conversion is undertaken, would be
significantly in excess of the Commissioner's and FDIC's requirements upon
conversion to a Tennessee chartered commercial bank. It is the further desire of
the Board of Directors to reorganize the Converted Savings Bank (or the
Converted Bank upon the Bank Conversion) as the wholly owned subsidiary of the
Holding Company to enhance flexibility of operations, diversification of
business opportunities and financial capability for business and regulatory
purposes and to enable the Converted Bank to compete more effectively with other
financial service organizations.
No change will be made in the Board of Directors or management of the
Savings Bank as a result of the Conversion.
II. Definitions
-----------
As used in this Plan, the terms set forth below have the following
meanings:
A. Acting in Concert: (1) Knowing participation in a joint activity or
-----------------
interdependent conscious parallel action towards a common goal whether or not
pursuant to an express agreement; or (2) a combination or pooling of voting or
other interests in the securities of an issuer for a common purpose pursuant to
any contract, understanding, relationship, agreement or other arrangement,
whether written or otherwise. A Person (as defined herein) who acts in concert
with another Person ("other party") shall also be deemed to be acting in concert
with any Person who is also acting in concert with that other party, except that
any Tax-Qualified Employee Stock Benefit Plan will not be deemed to be acting in
concert with its trustee or a Person who serves in a similar capacity solely for
the purpose of determining whether stock held by the trustee and stock held by
the Tax-Qualified Employee Benefit Plan will be aggregated.
B. Associate: When used to indicate a relationship with any Person,
---------
means (l) any corporation or organization (other than the Savings Bank or a
majority-owned subsidiary of the Savings Bank, or the Holding Company) of which
such Person is an officer or partner or is, directly or indirectly, the
beneficial owner of ten percent or more of any class of equity securities, (2)
any trust or other estate in which such Person has a substantial beneficial
interest or as to which such Person serves as trustee or in a similar fiduciary
capacity, except that it does not include a Tax-Qualified Employee Stock Benefit
Plan and (3) any relative or spouse of such Person, or any relative of such
spouse, who has the same home as such Person or who is a director or officer of
the Savings Bank, any of its subsidiaries, or the Holding Company.
C. Bank Conversion: The conversion of the Converted Savings Bank from a
---------------
federally chartered capital stock savings bank to a Tennessee chartered
commercial bank.
D. Capital Stock: Any and all authorized stock in the Savings Bank, as
-------------
converted.
E. Commissioner: The Commissioner of the Department of Financial
------------
Institutions of the State of Tennessee.
A-2
<PAGE>
F. Common Stock: Any and all authorized common stock in the Holding
------------
Company subsequent to the Conversion.
G. Conversion: Except as provided in Paragraph III.F herein, the term
----------
"Conversion" means the Stock Conversion and the Bank Conversion.
H. Conversion Stock: Holding Company stock to be issued and sold by the
----------------
Holding Company pursuant to the Plan.
I. Converted Savings Bank: Cavalry Banking, in its form as a federally
----------------------
chartered capital stock savings bank resulting from the conversion of the
Savings Bank to the stock form of organization in connection with the Stock
Conversion.
J. Converted Bank: The Tennessee chartered commercial bank resulting
--------------
from the Bank Conversion.
K. Direct Community Offering: The offering for sale of Conversion Stock
-------------------------
to the public.
L. Eligibility Record Date: June 30, 1996.
-----------------------
M. Eligible Account Holder: Holder of a Qualifying Deposit in the
-----------------------
Savings Bank on the Eligibility Record Date.
N. FDIC: Federal Deposit Insurance Corporation.
----
O. Federal Reserve Board: The Board of Governors of the Federal Reserve
---------------------
System.
P. Form AC Application: The application submitted to the OTS for
-------------------
approval of the Stock Conversion.
Q. H-(e)1 Application: The application submitted to the OTS on OTS Form
------------------
H-(e)1 or Form H-(e)1-S, if applicable, for approval of the Holding Company's
acquisition of all of the Capital Stock.
R. Holding Company: A corporation to be formed by the Savings Bank under
---------------
state law for the purpose of becoming a holding company through the issuance and
sale of its stock under the Plan, and concurrent acquisition of 100% of the
common stock of the Converted Savings Bank to be issued pursuant to the Plan.
S. Holding Company Stock: Any and all authorized stock of the Holding
---------------------
Company.
T. Local Community: Rutherford and Bedford Counties, Tennessee.
---------------
U. Market Maker: A dealer (i.e., any Person who engages directly or
------------
indirectly as agent, broker, or principal in the business of offering, buying,
selling, or otherwise dealing or trading in securities issued by another Person)
who, with respect to a particular security, (l) regularly publishes bona fide,
competitive bid and offer quotations in a recognized inter-dealer quotation
system or furnishes bona fide competitive bid and offer quotations on request
and (2) is ready, willing and able to effect transactions in reasonable
quantities at his quoted prices with other brokers or dealers.
V. Members: All Persons or entities who qualify as members of the
-------
Savings Bank pursuant to its Charter and Bylaws prior to the Conversion.
W. Officer: An executive officer of the Savings Bank, which includes the
-------
Chairman of the Board, President, Executive Vice President, Senior Vice
Presidents, Vice Presidents in charge of principal business functions, the
Secretary and the Treasurer as well as any other person performing similar
functions.
A-3
<PAGE>
X. Order Forms: Forms to be used for the purchase of Conversion Stock
-----------
sent to Eligible Account Holders and other parties eligible to purchase
Conversion Stock in the Subscription Offering pursuant to the Plan.
Y. Other Member: Holder of a Savings Account (other than Eligible
------------
Account Holders and Supplemental Eligible Account Holders) from the Savings Bank
as of the Record Date.
Z. OTS: Office of Thrift Supervision of the United States Department of
---
the Treasury.
AA. OTS Bank Conversion Application: The application submitted to the OTS
-------------------------------
for approval of the Bank Conversion.
BB. Person: An individual, corporation, partnership, association, joint
------
stock company, trust, unincorporated organization or a government or any
political subdivision thereof.
CC. Plan: This Plan of Conversion, which provides for the conversion of
----
the Savings Bank from a federally chartered mutual savings bank to a federally
chartered capital stock savings bank (i.e., the Converted Savings Bank), the
concurrent formation of a holding company for the Converted Savings Bank, and,
at the discretion of the Board of Directors, the subsequent conversion of the
Converted Savings Bank from a federally chartered capital stock savings bank to
a Tennessee chartered commercial bank (i.e., the Converted Bank).
DD. Qualifying Deposit: The deposit balance in any Savings Account, and
------------------
any certificate of deposit, demand deposit accounts and noninterest-bearing
deposit accounts, as of the Eligibility Record Date or the Supplemental
Eligibility Record Date, as applicable; provided, however, that no Savings
Account with a deposit balance of less than $50 shall constitute a Qualifying
Deposit.
EE. Record Date: Date which determines which Members are entitled to
-----------
vote at the Special Meeting.
FF. Registration Statement: The registration statement on Form S-1 or
----------------------
other applicable forms filed by the Holding Company with the SEC for the purpose
of registering the Conversion Stock under the Securities Act of 1933, as
amended.
GG. Savings Account(s): Withdrawable deposit(s) in the Savings Bank,
------------------
Converted Savings Bank or Converted Bank, as applicable.
HH. Savings Bank: Cavalry Banking, in its present form as a federally
------------
chartered mutual savings bank.
II. SEC: Securities and Exchange Commission.
---
JJ. Special Meeting: The special meeting of Members called for the
---------------
purpose of considering the Plan for approval.
KK. Stock Conversion: The conversion of the Savings Bank from a federally
----------------
chartered mutual savings bank to a federally chartered capital stock savings
bank through amendment of the Savings Bank's federal Charter and Bylaws, the
issuance and sale to the Holding Company of all the Capital Stock issued by the
Converted Savings Bank in connection therewith, and the issuance by the Holding
Company of the Conversion Stock, all in accordance with the Plan.
LL. Subscription Offering: The offering of Conversion Stock to Eligible
---------------------
Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental
Eligible Account Holders and Other Members under the Plan.
A-4
<PAGE>
MM. Subscription Rights: Nontransferable, nonnegotiable, personal rights
-------------------
of Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans,
Supplemental Eligible Account Holders and Other Members to purchase Conversion
Stock.
NN. Supplemental Eligibility Record Date: The last day of the calendar
------------------------------------
quarter preceding the approval of the Plan by the OTS.
OO. Supplemental Eligible Account Holder: Holder of a Qualifying Deposit
------------------------------------
in the Savings Bank (other than an Officer or director or their Associates) on
the Supplemental Eligibility Record Date.
PP. Tax Qualified Employee Stock Benefit Plan: Any defined benefit plan or
-----------------------------------------
defined contribution plan of the Savings Bank or Holding Company, such as an
employee stock ownership plan, bonus plan, profit-sharing plan or other plan,
which, with its related trust meets the requirements to be "qualified" under
section 401 of the Internal Revenue Code. A "non-tax-qualified employee stock
benefit plan" is any defined benefit plan or defined contribution plan that is
not so qualified.
QQ. Tennessee Conversion Application: The application submitted to the
--------------------------------
Commissioner for the approval of the Bank Conversion.
RR. Y-3 Application: The application submitted to the Federal Reserve
---------------
Board on Federal Reserve Board Form FR Y-3 for approval for the Holding Company
to maintain control of the Converted Bank.
III. Steps Prior to Submission of the Plan to the Members for Approval
-----------------------------------------------------------------
Prior to submission of the Plan to the Members for approval, the Savings
Bank must receive approval from the OTS of the Form AC Application. Prior to
such regulatory approval:
A. The Board of Directors shall adopt the Plan by a vote of not less than
two-thirds of its entire membership.
B. The Savings Bank shall notify the Members of the adoption of the Plan
by publishing a legal notice in a newspaper having a general circulation in each
community in which the Savings Bank maintains an office.
C. A press release relating to the proposed Conversion may be submitted
to the local media.
D. Copies of the Plan as adopted by the Board of Directors shall be made
available for inspection at each office of the Savings Bank.
E. The Savings Bank shall cause the Holding Company to be incorporated
under state law and the Board of Directors of the Holding Company shall concur
in the Plan by at least a two-thirds vote.
F. Also promptly following the adoption of this Plan, the Savings Bank
shall file the Tennessee Conversion Application and the OTS Bank Conversion
Application and the Holding Company shall file a draft Y-3 Application.
G. As soon as practicable following the adoption of this Plan, the
Savings Bank shall file the Form AC Application, and the Holding Company shall
file the Registration Statement, the H-(e)1 Application and the final Y-3
Application. Upon filing the Form AC Application, the Savings Bank shall publish
legal notice of the filing of the Form AC Application in a newspaper having a
general circulation in each community in which the Savings Bank maintains an
office and/or by mailing a letter to each of its Members, and shall publish such
other notices of the Conversion as may be required in connection with the H-(e)1
Application, the Y-3 Application and the Tennessee
A-5
<PAGE>
Conversion Application by the regulations and policies of the OTS, the Federal
Reserve Board and the Commissioner, respectively.
H. The Board of Directors of the Savings Bank, at any time, may elect
not to proceed with the Bank Conversion, in which event the Tennessee Conversion
Application, the OTS Bank Conversion Application and the Y-3 Application shall
be withdrawn. The decision whether or not to proceed with the Bank Conversion
will depend on the economic and regulatory climate at the time, among other
factors. In the event the Bank Conversion is not pursued, any references in this
Plan to the Conversion shall be deemed to constitute references to the Stock
Conversion and references to the Converted Bank shall be deemed to constitute
references to the Converted Savings Bank.
I. The Savings Bank shall obtain an opinion of its tax advisors or a
favorable ruling from the United States Internal Revenue Service which shall
state that the Stock Conversion will not result in any gain or loss for Federal
income tax purposes to the Savings Bank or its Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members. Receipt of a favorable
opinion or ruling is a condition precedent to completion of the Conversion.
IV. Meeting of Members
------------------
Subsequent to the approval of the Plan by the OTS, the Special Meeting
shall be scheduled in accordance with the Savings Bank's Bylaws. Promptly after
receipt of approval and at least 20 days but not more than 45 days prior to the
Special Meeting, the Savings Bank shall distribute proxy solicitation materials
to all Members and beneficial owners of accounts held in fiduciary capacities
where the beneficial owners possess voting rights, as of the Record Date. The
proxy solicitation materials shall include a copy of the proxy statement to be
used in connection with such solicitation ("Proxy Statement") and other
documents authorized for use by the regulatory authorities and may also include
a copy of the Plan and/or a prospectus ("Prospectus") as provided in Paragraph V
below. The Savings Bank shall also advise each Eligible Account Holder and
Supplemental Eligible Account Holder not entitled to vote at the Special Meeting
of the proposed Conversion and the scheduled Special Meeting, and provide a
postage prepaid card on which to indicate whether he wishes to receive the
Prospectus, if the Subscription Offering is not held concurrently with the proxy
solicitation.
Pursuant to OTS regulations, an affirmative vote of not less than a
majority of the total outstanding votes of the Members is required for approval
of the Plan. Voting may be in person or by proxy. The OTS shall be notified
promptly of the actions of the Members.
By voting in favor of the adoption of the Plan and the Conversion, the
Members will be voting in favor of (i) the Stock Conversion and the adoption by
the Savings Bank of the Federal Stock Charter and Bylaws and (ii) the subsequent
Bank Conversion and the adoption by the Converted Savings Bank of the Converted
Bank articles of incorporation and bylaws.
V. Summary Proxy Statement
-----------------------
The Proxy Statement furnished to Members may be in summary form, provided
that a statement is made in bold-face type that a more detailed description of
the proposed transaction may be obtained by returning an enclosed postage
prepaid card or other written communication requesting supplemental information.
Without prior approval of the OTS, the Special Meeting shall not be held less
than 20 days after the last day on which the supple mental information statement
is mailed to requesting Members. The supplemental information statement may be
combined with the Prospectus if the Subscription Offering is commenced
concurrently with or during the proxy solicitation of Members for the Special
Meeting.
A-6
<PAGE>
VI. Offering Documents
------------------
The Holding Company may commence the Subscription Offering and, provided
that the Subscription Offering has commenced, may commence the Direct Community
Offering concurrently with or during the proxy solicitation of Members. The
Holding Company may close the Subscription Offering before the Special Meeting,
provided that the offer and sale of the Conversion Stock shall be conditioned
upon approval of the Plan by the Members at the Special Meeting. The Savings
Bank's proxy solicitation materials may require Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members to return to the Savings
Bank by a reasonable certain date a postage prepaid card or other written
communication requesting receipt of a Prospectus with respect to the
Subscription Offering, provided that if the Prospectus is not mailed
concurrently with the proxy solicitation materials, the Subscription Offering
shall not be closed until the expiration of 30 days after the mailing of the
proxy solicitation materials. If the Subscription Offering is not commenced
within 45 days after the Special Meeting, the Savings Bank may transmit, not
more than 30 days prior to the commencement of the Subscription Offering, to
each Eligible Account Holder, Supplemental Eligible Account Holder and other
eligible subscribers who had been furnished with proxy solicitation materials a
notice which shall state that the Savings Bank is not required to furnish a
Prospectus to them unless they return by a reasonable date certain a postage
prepaid card or other written communication requesting the receipt of the
Prospectus.
Prior to commencement of the Subscription Offering, the Direct Community
Offering and the Syndicated Community Offering, the Holding Company shall file
the Registration Statement. The Holding Company shall not distribute the final
Prospectus until the Registration Statement containing same has been declared
effective by the SEC and the Prospectus has been declared effective by the OTS.
VII. Combined Subscription and Direct Community Offering
---------------------------------------------------
Instead of a separate Subscription Offering, all Subscription Rights may
be exercised by delivery of properly completed and executed Order Forms to the
Savings Bank or selling group utilized in connection with the Direct Community
Offering and the Syndicated Community Offering. If a separate Subscription
Offering is not held, orders for Conversion Stock in the Direct Community
Offering shall first be filled pursuant to the priorities and limitations stated
in Paragraph IX.C., below.
VIII. Consummation of the Conversion
------------------------------
A. Consummation of the Stock Conversion
------------------------------------
After receipt of all orders for Conversion Stock, the amendment of the
Savings Bank's Federal Mutual Charter and Bylaws to authorize the issuance of
shares of Capital Stock and to conform to the requirements of a federal stock
savings bank will be declared effective by the OTS, and the Savings Bank will
thereby be and become the Converted Savings Bank. At such time, the Conversion
Stock will be issued and sold by the Holding Company, the Capital Stock to be
issued in the Conversion will be issued and sold to the Holding Company, and the
Converted Savings Bank will become a wholly owned subsidiary of the Holding
Company. The Converted Savings Bank will issue to the Holding Company 1,000
shares of its common stock, representing all of the shares of Capital Stock to
be issued by the Converted Savings Bank in the Conversion, and the Holding
Company will make payment to the Converted Savings Bank of that portion of the
aggregate net proceeds realized by the Holding Company from the sale of the
Conversion Stock under the Plan as may be authorized or required by the OTS.
B. Consummation of the Bank Conversion
-----------------------------------
The Bank Conversion shall be deemed to occur and shall be effective upon
completion of all actions necessary or appropriate under applicable statutes and
regulations and the policies of the Commissioner and the OTS to complete the
conversion of the Converted Savings Bank to a Tennessee chartered commercial
bank, including without limitation the approval of the Bank Conversion by the
Holding Company as the sole stockholder of the
A-7
<PAGE>
Converted Savings Bank, and the Converted Savings Bank will thereby be and
become the Converted Bank. The Bank Conversion shall be consummated subject to
the judgment and discretion of the Board of Directors as to the regulatory and
political environment. If the Board determines that the regulatory and political
environment is adverse to the Bank Conversion, the Bank Conversion may be
delayed or terminated and the Converted Savings Bank will remain in the form of
a federal stock savings bank.
IX. Stock Offering
--------------
A. Number of Shares
----------------
The number of shares of Conversion Stock to be offered pursuant to the
Plan shall be determined initially by the Board of Directors of the Savings Bank
and the Board of Directors of the Holding Company in conjunction with the
determination of the Purchase Price (as that term is defined in Paragraph IX.B.
below). The number of shares to be offered may be subsequently adjusted by the
Board of Directors prior to completion of the offering.
B. Independent Evaluation and Purchase Price of Shares
---------------------------------------------------
All shares of Conversion Stock sold in the Conversion, including shares
sold in any Direct Community Offering, shall be sold at a uniform price per
share, referred to herein as the "Purchase Price." The Purchase Price shall be
determined by the Board of Directors of the Savings Bank and the Board of
Directors of the Holding Company immediately prior to the simultaneous
completion of all such sales contemplated by this Plan on the basis of the
estimated pro forma market value of the Converted Bank at such time. The
estimated pro forma market value of the Converted Bank shall be determined for
such purpose by an independent appraiser on the basis of such appropriate
factors not inconsistent with the regulations of the OTS. Immediately prior to
the Subscription Offering, a subscription price range shall be established which
shall vary from 15% above to 15% below the average of the minimum and maximum of
the estimated price range. The maximum subscription price (i.e., the per share
amount to be remitted when subscribing for shares of Conversion Stock) shall
then be determined within the subscription price range by the Board of Directors
of the Savings Bank. The subscription price range and the number of shares to be
offered may be revised after the completion of the Subscription Offering with
OTS approval without a resolicitation of proxies or Order Forms or both.
C. Method of Offering Shares
-------------------------
Subscription Rights shall be issued at no cost to Eligible Account
Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible
Account Holders and Other Members pursuant to priorities established by this
Plan and the regulations of the OTS. In order to effect the Conversion, all
shares of Conversion Stock proposed to be issued in connection with the
Conversion must be sold and, to the extent that shares are available, no
subscriber shall be allowed to purchase less than 25 shares; provided, however,
that if the purchase price is greater than $20 per share, the minimum number of
shares which must be subscribed for shall be adjusted so that the aggregate
actual purchase price required to be paid for such minimum number of shares does
not exceed $500. The priorities established for the purchase of shares are as
follows:
1. Category 1: Eligible Account Holders
-------------------------------------
a. Each Eligible Account Holder shall receive, without payment,
Subscription Rights entitling such Eligible Account Holder to purchase
that number of shares of Conversion Stock which is equal to the greater
of the maximum purchase limitation established for the Direct Community
Offering, one-tenth of one percent of the total offering or 15 times the
product (rounded down to the next whole number) obtained by multiplying
the total number of shares of Conversion Stock to be issued by a fraction
of which the numerator is the amount of the Qualifying Deposit of the
Eligible Account Holder and the denominator is the total amount of
Qualifying Deposits of all Eligible Account Holders. If the allocation
made in this paragraph results in an oversubscription, shares of
Conversion Stock shall be allocated among subscribing
A-8
<PAGE>
Eligible Account Holders so as to permit each such account holder, to the
extent possible, to purchase a number of shares of Conversion Stock
sufficient to make his total allocation equal to 100 shares of Conversion
Stock or the total amount of his subscription, whichever is less. Any
shares of Conversion Stock not so allocated shall be allocated among the
subscribing Eligible Account Holders on an equitable basis, related to
the amounts of their respective Qualifying Deposits as compared to the
total Qualifying Deposits of all Eligible Account Holders.
b. Subscription Rights received by Officers and directors of the
Savings Bank and their Associates, as Eligible Account Holders, based on
their increased deposits in the Savings Bank in the one-year period
preceding the Eligibility Record Date shall be subordinated to all other
subscriptions involving the exercise of Subscription Rights pursuant to
this Category.
2. Category 2: Tax-Qualified Employee Stock Benefit Plans
------------------------------------------------------
a. Tax-Qualified Employee Stock Benefit Plans shall receive,
without payment, non-transferable Subscription Rights to purchase in the
aggregate up to 8% of the Conversion Stock, including shares of
Conversion Stock to be issued in the Conversion as result of an increase
in the estimated price range after commencement of the Subscription
Offering and prior to the completion of the Conversion. The Subscription
Rights granted to Tax-Qualified Stock Benefit Plans shall be subject to
the availability of shares of Conversion Stock after taking into account
the shares of Conversion Stock purchased by Eligible Account Holders;
provided, however, that in the event the number of shares offered in the
Conversion is increased to an amount greater than the maximum of the
estimated price range as set forth in the Prospectus ("Maximum Shares"),
the Tax-Qualified Employee Stock Benefit Plans shall have a priority
right to purchase any such shares exceeding the Maximum Shares up to an
aggregate of 8% of the Conversion Stock. Tax-Qualified Employee Stock
Benefit Plans may use funds contributed or borrowed by the Holding
Company or the Savings Bank and/or borrowed from an independent financial
institution to exercise such Subscription Rights, and the Holding Company
and the Savings Bank may make scheduled discretionary contributions
thereto, provided that such contributions do not cause the Holding
Company or the Savings Bank to fail to meet any applicable capital
requirements.
3. Category 3: Supplemental Eligible Account Holders
--------------------------------------------------
a. In the event that the Eligibility Record Date is more than 15
months prior to the date of the latest amendment to the Form AC
Application filed prior to OTS approval, then, and only in that event,
each Supplemental Eligible Account Holder shall receive, without payment,
Subscription Rights entitling such Supplemental Eligible Account Holder
to purchase that number of shares of Conversion Stock which is equal to
the greater of the maximum purchase limitation established for the Direct
Community Offering, one-tenth of one percent of the total offering or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Conversion Stock to be issued
by a fraction of which the numerator is the amount of the Qualifying
Deposit of the Supplemental Eligible Account Holder and the denominator
is the total amount of the Qualifying Deposits of all Supplemental
Eligible Account Holders.
b. Subscription Rights received pursuant to this category shall be
subordinated to Subscription Rights granted to Eligible Account Holders
and Tax-Qualified Employee Stock Benefit Plans.
c. Any Subscription Rights to purchase shares of Conversion Stock
received by an Eligible Account Holder in accordance with Category Number
1 shall reduce to the extent thereof the Subscription Rights to be
distributed pursuant to this Category.
A-9
<PAGE>
d. In the event of an oversubscription for shares of Conversion
Stock pursuant to this Category, shares of Conversion Stock shall be
allocated among the subscribing Supplemental Eligible Account Holders as
follows:
(1) Shares of Conversion Stock shall be allocated so as to
permit each such Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares of Conversion Stock
sufficient to make his total allocation (including the number of
shares of Conversion Stock, if any, allocated in accordance with
Category Number 1) equal to 100 shares of Conversion Stock or the
total amount of his subscription, whichever is less.
(2) Any shares of Conversion Stock not allocated in accordance
with subparagraph (l) above shall be allocated among the subscribing
Supplemental Eligible Account Holders on an equitable basis, related
to the amounts of their respective Qualifying Deposits as compared
to the total Qualifying Deposits of all Supplemental Eligible
Account Holders.
4. Category 4: Other Members
--------------------------
a. Other Members shall receive, without payment, Subscription
Rights to purchase shares of Conversion Stock, after satisfying the
subscriptions of Eligible Account Holders, Tax-Qualified Employee Stock
Benefit Plans and Supplemental Eligible Account Holders pursuant to
Category Nos. l, 2 and 3 above, subject to the following conditions:
b. Each such Other Member shall be entitled to subscribe for the
greater of the maximum purchase limitation established for the Direct
Community Offering, or one-tenth of one percent of the total offering.
c. In the event of an oversubscription for shares of Conversion
Stock pursuant to Category No. 4, the shares of Conversion Stock
available shall be allocated among the subscribing Other Members pro rata
on the basis of the amounts of their respective subscriptions.
D. Direct Community Offering and Syndicated Community Offering
-----------------------------------------------------------
1. Any shares of Conversion Stock not purchased through the exercise of
Subscription Rights set forth in Category Nos. 1 through 4 above may be sold by
the Holding Company to Persons under such terms and conditions as may be
established by the Savings Bank's Board of Directors with the concurrence of the
OTS. The Direct Community Offering may commence concurrently with or as soon as
possible after the completion of the Subscription Offering and must be completed
within 45 days after completion of the Subscription Offering, unless extended
with the approval of the OTS. No Person, either alone or together with
Associates of or Persons Acting in Concert with such Person, may purchase shares
of Conversion Stock in the Direct Community Offering having an aggregate
purchase price of more than $600,000. The right to purchase shares of Conversion
Stock under this Category is subject to the right of the Savings Bank or the
Holding Company to accept or reject such subscriptions in whole or in part. In
the event of an oversubscription for shares in this Category, the shares
available shall be allocated among prospective purchasers pro rata on the basis
of the amounts of their respective orders. The offering price for which such
shares are sold to the general public in the Direct Community Offering shall be
the Purchase Price.
2. Orders received in the Direct Community Offering first shall be
filled up to a maximum of 2% of the Conversion Stock and thereafter remaining
shares shall be allocated on an equal number of shares basis per order until all
orders have been filled.
A-10
<PAGE>
3. The Conversion Stock offered in the Direct Community Offering shall
be offered and sold in a manner that will achieve the widest distribution
thereof. Preference shall be given in the Direct Community Offering to natural
Persons and trusts of natural Persons residing in the Local Community.
4. Subject to such terms, conditions and procedures as may be
determined by the Savings Bank and the Holding Company, all shares of Conversion
Stock not subscribed for in the Subscription Offering or ordered in the Direct
Community Offering may be sold by a syndicate of broker-dealers to the general
public in a Syndicated Community Offering. No Person, either alone or together
with Associates of or Persons Acting in Concert with such Person, may purchase
shares of Conversion Stock in the Syndicated Community Offering having an
aggregate purchase price of more than $600,000. Each order for Conversion Stock
in the Syndicated Community Offering shall be subject to the absolute right of
the Savings Bank and the Holding Company to accept or reject any such order in
whole or in part either at the time of receipt of an order or as soon as
practicable after completion of the Syndicated Community Offering. The Savings
Bank and the Holding Company may commence the Syndicated Community Offering
concurrently with, at any time during, or as soon as practicable after the end
of the Subscription Offering and/or Direct Community Offering, provided that the
Syndicated Community Offering must be completed within 45 days after the
completion of the Subscription Offering, unless extended by the Savings Bank and
the Holding Company with the approval of the OTS.
5. If for any reason a Syndicated Community Offering of shares of
Conversion Stock not sold in the Subscription Offering and the Direct Community
Offering cannot be effected, or in the event that any insignificant residue of
shares of Conversion Stock is not sold in the Subscription Offering, Direct
Community Offering or Syndicated Community Offering, the Savings Bank and the
Holding Company shall use their best efforts to obtain other purchasers for such
shares in such manner and upon such conditions as may be satisfactory to the
OTS.
6. In the event a Direct Community Offering or Syndicated Community
Offering do not appear feasible, the Savings Bank will immediately consult with
the OTS to determine the most viable alternative available to effect the
completion of the Conversion. Should no viable alternative exist, the Savings
Bank may terminate the Conversion with the concurrence of the OTS.
E. Limitations Upon Purchases
--------------------------
The following additional limitations and exceptions shall be imposed upon
purchases of shares of Conversion Stock:
1. Purchases of shares of Conversion Stock in the Conversion, including
purchases in the Direct Community and the Syndicated Community Offering by any
Person, together with Associates of or Persons Acting in Concert with such
Person, shall not exceed an aggregate purchase price of $600,000, except that
Tax-Qualified Employee Stock Benefit Plans may purchase up to 8% of the total
Conversion Stock issued and shares held or to be held by the Tax-Qualified
Employee Stock Benefit Plans and attributable to a Person shall not be
aggregated with other shares purchased directly by or otherwise attributable to
such Person.
2. Officers and directors of the Savings Bank and Associates thereof
may not purchase in the aggregate more than 30% of the shares issued in the
Conversion.
3. The Savings Bank's and Holding Company's Boards of Directors will
not be deemed to be Associates or a group of Persons Acting in Concert with
other directors or trustees solely as a result of membership on the Board of
Directors.
4. The Savings Bank's Board of Directors, with the approval of the OTS
and without further approval of Members, may, as a result of market conditions
and other factors, increase or decrease the purchase limitation in paragraphs 1
and 4 above or the number of shares of Conversion Stock to be sold in the
Conversion. If the Savings Bank or the Holding Company, as the case may be,
increases the maximum purchase limitations or the number of
A-11
<PAGE>
shares of Conversion Stock to be sold in the Conversion, the Savings Bank or the
Holding Company, as the case may be, is only required to resolicit Persons who
subscribed for the maximum purchase amount and may, in the sole discretion of
the Savings Bank or the Holding Company, as the case may be, resolicit certain
other large subscribers. If the Savings Bank or the Holding Company, as the case
may be, decreases the maximum purchase limitations or the number of shares of
Conversion Stock to be sold in the Conversion, the orders of any Person who
subscribed for the maximum purchase amount shall be decreased by the minimum
amount necessary so that such Person shall be in compliance with the then
maximum number of shares permitted to be subscribed for by such Person.
Each Person purchasing Conversion Stock in the Conversion shall be deemed
to confirm that such purchase does not conflict with the purchase limitations
under the Plan or otherwise imposed by law, rule or regulation. In the event
that such purchase limitations are violated by any Person (including any
Associate or group of Persons affiliated or otherwise Acting in Concert with
such Person), the Holding Company shall have the right to purchase from such
Person at the actual Purchase Price per share all shares acquired by such Person
in excess of such purchase limitations or, if such excess shares have been sold
by such Person, to receive from such Person the difference between the actual
Purchase Price per share paid for such excess shares and the price at which such
excess shares were sold by such Person. This right of the Holding Company to
purchase such excess shares shall be assignable by the Holding Company.
F. Restrictions On and Other Characteristics of the Conversion Stock
-----------------------------------------------------------------
1. Transferability. Conversion Stock purchased by Officers and
---------------
directors of the Savings Bank and officers and directors of the Holding Company
shall not be sold or otherwise disposed of for value for a period of one year
from the date of Conversion, except for any disposition (i) following the death
of the original purchaser or (ii) resulting from an exchange of securities in a
merger or acquisition approved by the regulatory authorities having
jurisdiction.
The Conversion Stock issued by the Holding Company to such Officers and
directors shall bear a legend giving appropriate notice of the one-year holding
period restriction. Said legend shall state as follows:
"The shares evidenced by this certificate are restricted
as to transfer for a period of one year from the date of
this certificate pursuant to Part 563b of the Rules and
Regulations of the Office of Thrift Supervision. These
shares may not be transferred prior thereto without a
legal opinion of counsel that said transfer is permissible
under the provisions of applicable laws and regulations."
In addition, the Holding Company shall give appropriate instructions to the
transfer agent of the Holding Company Stock with respect to the foregoing
restrictions. Any shares of Holding Company Stock subsequently issued as a stock
dividend, stock split or otherwise, with respect to any such restricted stock,
shall be subject to the same holding period restrictions for such Persons as may
be then applicable to such restricted stock.
2. Subsequent Purchases by Officers and Directors. Without prior
----------------------------------------------
approval of the OTS, if applicable, Officers and directors of the Savings Bank
and officers and directors of the Holding Company, and their Associates, shall
be prohibited for a period of three years following completion of the Conversion
from purchasing outstanding shares of Holding Company Stock, except from a
broker or dealer registered with the SEC. Notwithstanding this restriction,
purchases involving more than 1% of the total outstanding shares of Holding
Company Stock and purchases made and shares held by a Tax-Qualified or non-Tax-
Qualified Employee Stock Benefit Plan which may be attributable to such
directors and Officers may be made in negotiated transactions without OTS
permission or the use of a broker or dealer.
3. Repurchase and Dividend Rights. For a period of three years
------------------------------
following the consummation of the Conversion, any repurchases of Holding Company
Stock by the Holding Company from any Person shall be subject to the then
applicable rules and regulations and policies of the OTS. The Converted Savings
Bank may not declare
A-12
<PAGE>
or pay a cash dividend on or repurchase any of its Capital Stock if the result
thereof would be to reduce the regulatory capital of the Converted Savings Bank
below the amount required for the liquidation account described in Paragraph
XIII. Further, any dividend declared or paid on the Capital Stock shall comply
with the then applicable rules and regulations of the OTS. These restrictions
and limitations upon repurchases shall not apply following consummation of the
Bank Conversion as set forth in Paragraph VIII.B. herein unless the OTS approval
of the Bank Conversion otherwise requires.
4. Voting Rights. After the Stock Conversion, holders of Savings
-------------
Accounts in and obligors on loans of the Converted Savings Bank will not have
voting rights in the Converted Savings Bank. After the Bank Conversion, holders
of Savings Accounts in and obligors on loans of the Converted Bank will not have
voting rights in the Converted Bank. Exclusive voting rights with respect to the
Holding Company shall be vested in the holders of Conversion Stock; holders of
Savings Accounts in and obligors on loans of the Converted Savings Bank and the
Converted Bank will not have any voting rights in the Holding Company except and
to the extent that such Persons become stockholders of the Holding Company, and
the Holding Company will have exclusive voting rights with respect to the
Converted Savings Bank's and Converted Bank's Capital Stock.
G. Mailing of Offering Materials and Collation of Subscriptions
------------------------------------------------------------
The sale of all shares of Conversion Stock offered pursuant to the Plan
must be completed within 24 months after approval of the Plan at the Special
Meeting. After approval of the Plan by the OTS and the declaration of the
effectiveness of the Prospectus, the Holding Company shall distribute
Prospectuses and Order Forms for the purchase of shares of Conversion Stock in
accordance with the terms of the Plan.
The recipient of an Order Form shall be provided not less than 20 days
nor more than 45 days from the date of mailing, unless extended, properly to
complete, execute and return the Order Form to the Holding Company or the
Savings Bank. Self-addressed, postage prepaid, return envelopes shall accompany
all Order Forms when they are mailed. Failure of any eligible subscriber to
return a properly completed and executed Order Form within the prescribed time
limits shall be deemed a waiver and a release by such eligible subscriber of any
rights to purchase shares of Conversion Stock under the Plan.
The sale of all shares of Conversion Stock proposed to be issued in
connection with the Conversion must be completed within 45 days after the last
day of the Subscription Offering, unless extended by the Holding Company with
the approval of the OTS.
H. Method of Payment
-----------------
Payment for all shares of Conversion Stock may be made in cash, by check
or by money order, or if a subscriber has a Savings Account(s) in the Savings
Bank such subscriber may authorize the Savings Bank to charge the subscriber's
Savings Account(s). The Savings Bank shall pay interest at not less than the
passbook rate on all amounts paid in cash or by check or money order to purchase
shares of Conversion Stock in the Subscription Offering from the date payment is
received until the Conversion is completed or terminated. The Savings Bank is
not permitted knowingly to loan funds or otherwise extend any credit to any
Person for the purpose of purchasing Conversion Stock.
If a subscriber authorizes the Savings Bank to charge the subscriber's
Savings Account(s), the funds shall remain in the subscriber's Savings
Account(s) and shall continue to earn interest, but may not be used by such
subscriber until the Conversion is completed or terminated, whichever is
earlier. The withdrawal shall be given effect only concurrently with the sale of
all shares of Conversion Stock proposed to be sold in the Conversion and only to
the extent necessary to satisfy the subscription at a price equal to the
Purchase Price. The Savings Bank shall allow subscribers to purchase shares of
Conversion Stock by withdrawing funds from certificate accounts held with the
Savings Bank without the assessment of early withdrawal penalties, subject to
the approval, if necessary, of the applicable regulatory authorities. In the
case of early withdrawal of only a portion of such account, the certificate
A-13
<PAGE>
evidencing such account shall be canceled if the remaining balance of the
account is less than the applicable minimum balance requirement. In that event,
the remaining balance shall earn interest at the passbook rate. This waiver of
the early withdrawal penalty is applicable only to withdrawals made in
connection with the purchase of Conversion Stock under the Plan.
Tax-Qualified Employee Stock Benefit Plans may subscribe for shares by
submitting an Order Form, along with evidence of a loan commitment from a
financial institution for the purchase of shares, during the Subscription
Offering and by making payment for the shares on the date of the closing of the
Conversion.
I. Undelivered, Defective or Late Order Forms; Insufficient Payment
----------------------------------------------------------------
If an Order Form (i) is not delivered and is returned to the Holding
Company or the Savings Bank by the United States Postal Service (or the Holding
Company or the Savings Bank is unable to locate the addressee); (ii) is not
returned to the Holding Company or the Savings Bank, or is returned to the
Holding Company or the Savings Bank after expiration of the date specified
thereon; (iii) is defectively completed or executed; or (iv) is not accompanied
by the total required payment for the shares of Conversion Stock subscribed for
(including cases in which the subscribers' Savings Accounts are insufficient to
cover the authorized withdrawal for the required payment), the Subscription
Rights of the Person to whom such rights have been granted shall not be honored
and shall be treated as though such Person failed to return the completed Order
Form within the time period specified therein. Alternatively, the Holding
Company or the Savings Bank may, but shall not be required to, waive any
irregularity relating to any Order Form or require the submission of a corrected
Order Form or the remittance of full payment for the shares of Conversion Stock
subscribed for by such date as the Holding Company or the Savings Bank may
specify. Subscription orders, once tendered, shall not be revocable. The Holding
Company's and Savings Bank's interpretation of the terms and conditions of the
Plan and of the Order Forms shall be final.
J. Members in Non-Qualified States or in Foreign Countries
-------------------------------------------------------
The Holding Company and the Savings Bank 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 Holding Company and the Savings Bank 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 (i) a small number of
persons otherwise eligible to subscribe for shares of Common Stock reside in
such state; or (ii) the Holding Company or the Savings Bank determines that
compliance with the securities laws of such state would be impracticable for
reasons of cost or otherwise, including but not limited to a request or
requirement that the Holding Company and the Savings Bank or their officers,
directors or trustees register as a broker, dealer, salesman or selling agent,
under the securities laws of such state, or a request or requirement to register
or otherwise qualify the Subscription Rights or Common Stock for sale or submit
any filing with respect thereto in such state. Where the number of persons
eligible to subscribe for shares in one state is small relative to other states,
the Holding Company and the Savings Bank will base their decision as to whether
or not to offer the Common Stock in such state on a number of factors, including
the size of accounts held by account holders in the state, the cost of reviewing
the registration and qualification requirements of the state (and of actually
registering or qualifying the shares) or the need to register the Holding
Company, its officers, directors or employees as brokers, dealers or salesmen.
X. Federal Stock Charter and Bylaws and Bank Articles of Incorporation and
-----------------------------------------------------------------------
Bylaws
- ------
As part of the Stock Conversion, a Federal Stock Charter and Bylaws will
be adopted to authorize the Converted Savings Bank to operate as a federal stock
savings bank. By approving the Plan, the Members of the Savings Bank will
thereby approve the Federal Stock Charter and Bylaws. Prior to completion of the
Conversion, the Federal Stock Charter and Bylaws may be amended in accordance
with the provisions and limitations for amending the Plan under Paragraph XVII
below. The effective date of the adoption of the Federal Stock Charter and
Bylaws shall be the date of the issuance of the Conversion Stock, which shall be
the date of consummation of the Stock Conversion.
A-14
<PAGE>
As part of the Bank Conversion, articles of incorporation and bylaws for
the Converted Bank will be adopted to allow the Converted Bank to operate as a
state chartered commercial bank. By approving the Plan, the Members of the
Savings Bank will thereby approve such articles of incorporation and bylaws.
Prior to completion of the Bank Conversion, the articles of incorporation and
bylaws may be amended in accordance with the provisions and limitations for
amending the Plan under Paragraph XVII below. The effective date of the articles
of incorporation and bylaws of the Converted Bank shall be the date of the
consummation of the Bank Conversion.
XI. Post Conversion Filing and Market Making
----------------------------------------
In connection with the Conversion, the Holding Company shall register the
Conversion Stock with the SEC pursuant to the Securities Exchange Act of 1934,
as amended, and shall undertake not to deregister such Conversion Stock for a
period of three years thereafter.
The Holding Company shall use its best efforts to encourage and assist
various Market Makers to establish and maintain a market for the shares of its
stock. The Holding Company shall also use its best efforts to list its stock
through The Nasdaq Stock Market or on a national or regional securities
exchange.
XII. Status of Savings Accounts and Loans Subsequent to Conversion
-------------------------------------------------------------
All Savings Accounts shall retain the same status after Conversion as
these accounts had prior to Conversion. Each Savings Account holder shall
retain, without payment, a withdrawable Savings Account(s) after the Conversion,
equal in amount to the withdrawable value of such holder's Savings Account(s)
prior to Conversion. All Savings Accounts will continue to be insured by the
Savings Association Insurance Fund of the FDIC up to the applicable limits of
insurance coverage. All loans shall retain the same status after the Conversion
as they had prior to the Conversion. See Paragraph IX.F.4. with respect to the
termination of voting rights of Members.
XIII. Liquidation Account
-------------------
After the Conversion, holders of Savings Accounts shall not be entitled
to share in any residual assets in the event of liquidation of the Converted
Savings Bank. However, the Savings Bank shall, at the time of the Conversion,
establish a liquidation account in an amount equal to its total net worth as of
the date of the latest statement of financial condition contained in the final
Prospectus. The function of the liquidation account shall be to establish a
priority on liquidation and, except as provided in Paragraph IX.F.3 above, the
existence of the liquidation account shall not operate to restrict the use or
application of any of the net worth accounts of the Converted Savings Bank.
The liquidation account shall be maintained by the Converted Savings Bank
subsequent to the Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who retain their Savings Accounts in the
Converted Savings Bank. Each Eligible Account Holder and Supplemental Eligible
Account Holder shall, with respect to each Savings Account held, have a related
inchoate interest in a portion of the liquidation account balance
("subaccount").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder and/or a Supplemental Eligible Account Holder shall be determined
by multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's Qualifying Deposit in the
Savings Account and the denominator is the total amount of the Qualifying
Deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders. Such initial subaccount balance shall not be increased, and it shall
be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account
Holder or Supplemental Eligible Account Holder at the close of business on any
annual closing date subsequent to the Eligibility Record Date is less than the
lesser of (i) the deposit balance in such Savings Account at the close of
business on any other annual closing
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date subsequent to the Eligibility Record Date or the Supplemental Eligibility
Record Date or (ii) the amount of the Qualifying Deposit in such Savings Account
on the Eligibility Record Date or the Supplemental Eligibility Record Date, then
the subaccount balance for such Savings Account shall be adjusted by reducing
such subaccount balance in an amount proportionate to the reduction in such
deposit balance. In the event of a downward adjustment, such subaccount balance
shall not be subsequently increased, notwithstanding any increase in the deposit
balance of the related Savings Account. If any such Savings Account is closed,
the related subaccount balance shall be reduced to zero.
In the event of a complete liquidation of the Converted Savings Bank each
Eligible Account Holder and Supplemental Eligible Account Holder shall be
entitled to receive a liquidation distribution from the liquidation account in
the amount of the then current adjusted subaccount balance(s) for Savings
Account(s) then held by such holder before any liquidation distribution may be
made to stockholders. No merger, consolidation, bulk purchase of assets with
assumptions of Savings Accounts and other liabilities or similar transactions
with another federally-insured institution in which the Savings Bank is not the
surviving institution shall be considered to be a complete liquidation. In any
such transaction, the liquidation account shall be assumed by the surviving
institution.
The Bank Conversion shall not be deemed to be a complete liquidation of
the Converted Savings Bank for purposes of the distribution of the Liquidation
Account. Upon consummation of the Bank Conversion, the Liquidation Account, and
all rights and obligations of the Converted Savings Bank in connection
therewith, shall be assumed by the Converted Bank.
XIV. Regulatory Restrictions on Acquisition of Holding Company
---------------------------------------------------------
A. OTS regulations provide that for a period of three years following
completion of the Conversion, no Person (i.e, individual, a group Acting in
Concert, a corporation, a partnership, an association, a joint stock company, a
trust, or any unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of
securities of an insured institution or its holding company) shall directly, or
indirectly, offer to purchase or actually acquire the beneficial ownership of
more than 10% of any class of equity security of the Holding Company without the
prior approval of the OTS. However, approval is not required for purchases
directly from the Holding Company or the underwriters or selling group acting on
its behalf with a view towards public resale, or for purchases not exceeding 1%
per annum of the shares outstanding. Civil penalties may be imposed by the OTS
for willful violation or assistance of any violation. Where any Person,
directly or indirectly, acquires beneficial ownership of more than 10% of any
class of equity security of the Holding Company within such three-year period,
without the prior approval of the OTS, stock of the Holding Company 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 matter submitted to the stockholders for a vote. The
provisions of this regulation shall not apply to the acquisition of securities
by Tax-Qualified Employee Stock Benefit Plans provided that such plans do not
have beneficial ownership of more than 25% of any class of equity security of
the Holding Company.
Upon consummation of the Bank Conversion, no Person (i.e., an individual,
a group Acting in Concert, a corporation, a partnership, an association, a joint
stock company, a trust or any unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution or its holding company) shall
directly, or indirectly, offer to purchase or actually acquire the beneficial
ownership of more than 10% of any class of Holding Company Stock without the
prior approval of the Federal Reserve Board.
B. The Holding Company may provide in its articles/certificate of
incorporation, or similar document, a provision that, for a specified period of
up to five years following the date of the completion of the Conversion, no
Person shall directly or indirectly offer to acquire or actually acquire the
beneficial ownership of more than 10% of any class of equity security of the
Holding Company. Such provisions would not apply to acquisition of securities by
Tax-Qualified Employee Stock Benefit Plans provided that such plans do not have
beneficial ownership of more
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than 25% of any class of equity security of the Holding Company. The Holding
Company may provide in its articles/ certificate of incorporation, or similar
document, for such other provisions affecting the acquisition of its stock as
shall be determined by its Board of Directors.
XV. Directors and Officers of the Converted Savings Bank
----------------------------------------------------
The Conversion is not intended to result in any change in the directors
or Officers. Each Person serving as a director of the Savings Bank at the time
of Conversion shall continue to serve as a member of the Converted Savings
Bank's Board of Directors, subject to the Converted Savings Bank's charter and
bylaws. The Persons serving as Officers immediately prior to the Conversion will
continue to serve at the discretion of the Board of Directors in their
respective capacities as Officers of the Converted Savings Bank. In connection
with the Conversion, the Savings Bank and the Holding Company may enter into
employment agreements on such terms and with such officers as shall be
determined by the Boards of Directors of the Savings Bank and the Holding
Company.
XVI. Executive Compensation
----------------------
The Savings Bank and the Holding Company may adopt, subject to any
required approvals, executive compensation or other benefit programs, including
but not limited to compensation plans involving stock options, stock
appreciation rights, restricted stock grants, employee recognition programs and
the like.
XVII. Amendment or Termination of Plan
--------------------------------
If necessary or desirable, the Plan may be amended by a two-thirds vote
of the Savings Bank's Board of Directors, at any time prior to submission of the
Plan and proxy materials to the Members. At any time after submission of the
Plan and proxy materials to the Members, the Plan may be amended by a two-thirds
vote of the Board of Directors only with the concurrence of the OTS. The Plan
may be terminated by a two-thirds vote of the Board of Directors at any time
prior to the Special Meeting, and at any time following such Special Meeting
with the concurrence of the OTS. In its discretion, the Board of Directors may
modify or terminate the Plan upon the order of the regulatory authorities
without a resolicitation of proxies or another meeting of the Members.
In the event that mandatory new regulations pertaining to conversions are
adopted by the OTS, the Federal Reserve Board or the Commissioner prior to the
completion of the Conversion, the Plan shall be amended to conform to the new
mandatory regulations without a resolicitation of proxies or another meeting of
Members. In the event that new conversion regulations adopted by the OTS prior
to completion of the Conversion contain optional provisions, the Plan may be
amended to utilize such optional provisions at the discretion of the Board of
Directors without a resolicitation of proxies or another meeting of Members.
By adoption of the Plan, the Members authorize the Board of Directors to
amend and/or terminate the Plan under the circumstances set forth above.
XVIII. Expenses of the Conversion
--------------------------
The Holding Company and the Savings Bank shall use their best efforts to
assure that expenses incurred in connection with the Conversion shall be
reasonable.
XIX. Contributions to Tax-Qualified Plans
------------------------------------
The Holding Company and/or the Savings Bank may make discretionary
contributions to the Tax-Qualified Employee Stock Benefit Plans, provided such
contributions do not cause the Savings Bank to fail to meet its regulatory
capital requirements.
* * *
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EXHIBIT B
FEDERAL STOCK CHARTER
CAVALRY BANKING
SECTION 1. CORPORATE TITLE. The full corporate title of the bank is
Cavalry Banking ("Savings Bank").
SECTION 2. OFFICE. The home office shall be located in the City of
Murfreesboro, in the State of Tennessee.
SECTION 3. DURATION. The duration of the Savings Bank is perpetual.
SECTION 4. PURPOSE AND POWERS. The purpose of the Savings Bank is to
pursue any or all of the lawful objectives of a Federal savings and loan
association chartered under section 5 of the Home Owners' Loan Act and to
exercise all of the express, implied, and incidental powers conferred thereby
and by all acts amendatory thereof and supplemental thereto, subject to the
Constitution and laws of the United States as they are now in effect, or as they
may hereafter be amended, and subject to all lawful and applicable rules,
regulations, and orders of the Office of Thrift Supervision ("Office").
SECTION 5. CAPITAL STOCK. The total number of shares of all classes of
the capital stock that the Savings Bank has the authority to issue is 10,000 of
which 1,000 shares shall be common stock, of par value of $1.00 per share and of
which 9,000 shares shall be serial preferred stock having no par value. The
shares may be issued from time to time as authorized by the board of directors
without the approval of its shareholders except as otherwise provided in this
Section 5 or to the extent that such approval is required by governing law,
rule, or regulation. The consideration for the issuance of the shares shall be
paid in full before their issuance and shall not be less than the par value.
Neither promissory notes nor future services shall constitute payment or part
payment for the issuance of shares of the Savings Bank. The consideration for
the shares shall be cash, tangible or intangible property (to the extent direct
investment in such property would be permitted to the Savings Bank), labor or
services actually performed for the Savings Bank, or any combination of the
foregoing. In the absence of actual fraud in the transaction, the value of such
property, labor, or services, as determined by the board of directors of the
Savings Bank, shall be conclusive. Upon payment of such consideration, such
shares shall be deemed to be fully paid and nonassessable. In the case of a
stock dividend, that part of the retained earnings of the Savings Bank that is
transferred to common stock or paid-in capital accounts upon the issuance of
shares as a stock dividend shall be deemed to be the consideration for their
issuance.
Except for shares issuable in connection with the conversion of the
Savings Bank from the mutual to stock form of capitalization, no shares of
common stock (including shares issuable upon conversion, exchange or exercise of
other securities) shall be issued, directly or indirectly, to officers,
directors, or controlling persons of the Savings Bank other than as part of a
general public offering or as qualifying shares to a director, unless their
issuance or the plan under which they would be issued has been approved by a
majority of the total votes eligible to be cast at a legal meeting.
Nothing contained in this section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share, except as
to the cumulation of votes for the election of directors: Provided, that this
restriction on voting separately by class or series shall not apply:
(i) To any provision which would authorize the holders of
preferred stock, voting as a class or series, to elect some
members of the board of directors, less than a majority
thereof, in the event of default in the payment of dividends on
any class or series of preferred stock;
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(ii) To any provision which would require the holders of
preferred stock, voting as a class or series, to approve the
merger or consolidation of the Savings Bank with another
corporation or the sale, lease, or conveyance (other than by
mortgage or pledge) of properties or business in exchange for
securities of a corporation other than the Savings Bank if the
preferred stock is exchanged for securities of such other
corporation: Provided, that no provision may require such
approval for transactions undertaken with the assistance or
pursuant to the direction of the Office or the Federal Deposit
Insurance Corporation;
(iii) To any amendment which would adversely change the
specific terms of any class or series of capital stock as set
forth in this Section 5 (or in any supplementary sections
hereto), including any amendment which would create or enlarge
any class or series ranking prior thereto in rights and
preferences. An amendment which increases the number of
authorized shares of any class or series of capital stock, or
substitutes the surviving Savings Bank in a merger or
consolidation for the Savings Bank, shall not be considered to
be such an adverse change.
A description of the different classes and series, if any, of the Savings
Bank's capital stock and a statement of the designations, and the relative
rights, preferences, and limitations of the shares of each class of and series,
if any, of capital stock are as follows:
A. COMMON STOCK. Except as provided in this Section 5 (or in any
supplementary sections thereto) the holders of common stock shall exclusively
possess all voting power. Each holder of shares of common stock shall be
entitled to one vote for each share held by such holder, except as to the
cumulation of votes for the election of directors.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and of sinking fund, retirement fund, or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock and on any class or
series of stock entitled to participate therewith as to dividends out of any
assets legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the
Savings Bank, the holders of the common stock (and the holders of any class or
series of stock entitled to participate with the common stock in the
distribution of assets) shall be entitled to receive, in cash or in kind, the
assets of the Savings Bank available for distribution remaining after: (i)
payment or provision for payment of the Savings Bank's debts and liabilities;
(ii) distributions or provision for distributions in settlement of its
liquidation account; and (iii) distributions or provision for distributions to
holders of any class or series of stock having preference over the common stock
in the liquidation, dissolution, or winding up of the Savings Bank. Each share
of common stock shall have the same relative rights as and be identical in all
respects with all the other shares of common stock.
B. PREFERRED STOCK. The Savings Bank may provide in supplementary
sections to its charter for one or more classes of preferred stock, which shall
be separately identified. The shares of any class may be divided into and
issued in series, with each series separately designated so as to distinguish
the shares thereof from the shares of all other series and classes. The terms
of each series shall be set forth in a supplementary section to the charter.
All shares of the same class shall be identical except as to the following
relative rights and preferences, as to which there may be variations between
different series:
(a) The distinctive serial designation and the number of shares
constituting such series;
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(b) The dividend rate or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so, from
which date(s) the payment date(s) for dividends, and the participating or other
special rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of shares of such
series;
(d) Whether the shares of such series shall be redeemable and, if so,
the price(s) at which, and the terms and conditions on which such shares may be
redeemed;
(e) The amount(s) payable upon the shares of such series in the event of
voluntary or involuntary liquidation, dissolution, or winding up of the Savings
Bank;
(f) Whether the shares of such series shall be entitled to the benefit
of a sinking or retirement fund to be applied to the purchase or redemption of
such shares, and if so entitled, the amount of such fund and the manner of its
application, including the price(s) at which such shares may be redeemed or
purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock of the Savings
Bank and, if so, the conversion price(s) or the rate(s) of exchange, and the
adjustments thereof, if any, at which such conversion or exchange may be made,
and any other terms and conditions of such conversion or exchange;
(h) The price or other consideration for which the shares of such series
shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any other
series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
The board of directors shall have authority to divide, by the adoption of
supplementary charter sections, any authorized class of preferred stock into
series, and, within the limitations set forth in this section and the remainder
of this charter, fix and determine the relative rights and preferences of the
shares of any series so established.
Prior to the issuance of any preferred shares of a series established by
a supplementary charter section adopted by the board of directors, the Savings
Bank shall file with the secretary to the Office a dated copy of that
supplementary section of this charter establishing and designating the series
and fixing and determining the relative rights and preferences thereof.
SECTION 6. PREEMPTIVE RIGHTS. Holders of the capital stock of the
Savings Bank shall not be entitled to preemptive rights with respect to any
shares of the Savings Bank which may be issued.
SECTION 7. LIQUIDATION ACCOUNT. Pursuant to the requirements of the
Office's Regulations (12 CFR Subchapter D), the Savings Bank shall establish and
maintain a liquidation account for the benefit of its savings account holders as
of June 30, 1996 and December 31, 1997. In the event of a complete liquidation
of the Savings Bank, it shall comply with such regulations with respect to the
amount and the priorities on liquidation of each of the Savings Bank's eligible
savers' inchoate interest in the liquidation account, to the extent it is still
in existence: Provided, that an eligible savers' inchoate interest in the
liquidation account shall not entitle such eligible saver to any voting rights
at meetings of the Savings Bank's stockholders.
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SECTION 8. DIRECTORS. The Savings Bank shall be under the direction of
a Board of Directors. The authorized number of directors, as stated in the
Savings Bank's bylaws, shall not be fewer than five nor more than fifteen except
when a greater or lesser number is approved by the Director of the Office, or
his or her delegate.
SECTION 9. AMENDMENT OF CHARTER. Except as provided in Section 5, no
amendment, addition, alteration, change, or repeal of this charter shall be
made, unless such is proposed by the Board of Directors of the Savings Bank,
approved by the shareholders by a majority of the votes eligible to be cast at a
legal meeting, unless a higher vote is otherwise required, and approved or
preapproved by the Office.
Attest: _____________________________ By: _________________________________
Secretary Chief Executive Officer
Cavalry Banking Cavalry Banking
Attest: _____________________________ By: __________________________________
Secretary Director
Office of Thrift Supervision Office of Thrift Supervision
Effective Date: ______________, 1998
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<PAGE>
EXHIBIT C
BYLAWS
CAVALRY BANKING
ARTICLE I - HOME OFFICE
The home office of Cavalry Banking ("Savings Bank"), shall be located at
114 West College Street, in the City of Murfreesboro, the County of Rutherford,
in the State of Tennessee.
ARTICLE II - SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. All annual and special meetings of
shareholders shall be held at the home office of the Savings Bank or at such
other convenient place as the Board of Directors may determine.
SECTION 2. ANNUAL MEETING. A meeting of the shareholders of the Savings
Bank for the election of directors and for the transaction of any other business
of the Savings Bank shall be held annually within 150 days after the end of the
Savings Bank's fiscal year on the _______ _______ day of April, if not a legal
holiday, and if a legal holiday, then on the next day following which is not a
legal holiday, at _:00 p.m., Central Time, or at such other date and time within
such 150-day period as the Board of Directors may determine.
SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders for any
purpose or purposes, unless otherwise prescribed by the regulations of the
Office, may be called at any time by the Chairman of the Board, the President,
or a majority of the Board of Directors, and shall be called by the Chairman of
the Board, the President, or the Secretary upon the written request of the
holders of not less than one-tenth of all of the outstanding capital stock of
the Savings Bank entitled to vote at the meeting. Such written request shall
state the purpose or purposes of the meeting and shall be delivered to the home
office of the Savings Bank addressed to the Chairman of the Board, the
President, or the Secretary.
SECTION 4. CONDUCT OF MEETINGS. Annual and special meetings shall be
conducted in accordance with the most current edition of Robert's Rules of Order
unless otherwise prescribed by regulations of the Office or these bylaws or the
Board of Directors adopts another written procedure for the conduct of meetings.
The Board of Directors shall designate, when present, either the Chairman of the
Board or President to preside at such meetings.
SECTION 5. NOTICE OF MEETINGS. Written notice stating the place, day, and
hour of the meeting and the purpose(s) for which the meeting is called shall be
delivered not fewer than 20 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the Chairman of
the Board, the President, or the Secretary, or the directors calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the mail,
addressed to the shareholder at the address as it appears on the stock transfer
books or records of the Savings Bank as of the record date prescribed in Section
6 of this Article II with postage prepaid. When any shareholders' meeting,
either annual or special, is adjourned for 30 days or more, notice of the
adjourned meeting shall be given as in the case of an original meeting. It shall
not be necessary to give any notice of the time and place of any meeting
adjourned for less than 30 days or of the business to be transacted at the
meeting, other than an announcement at the meeting at which such adjournment is
taken.
SECTION 6. FIXING OF RECORD DATE. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the Board of Directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall
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be not more than 60 days and, in case of a meeting of shareholders, not fewer
than 10 days prior to the date on which the particular action requiring such
determination of shareholders is to be taken. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any adjournment.
SECTION 7. VOTING LISTS. At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer books for
shares of the Savings Bank shall make a complete list of the shareholders of
record entitled to vote at such meeting, or any adjournment thereof, arranged in
alphabetical order, with the address and the number of shares held by each.
This list of shareholders shall be kept on file at the home office of the
Savings Bank and shall be subject to inspection by any shareholder at any time
during usual business hours for a period of 20 days prior to such meeting. Such
list shall also be produced and kept open at the time and place of the meeting
and shall be subject to inspection by any shareholder of record or any
shareholder's agent during the entire time of the meeting. The original stock
transfer book shall constitute prima facie evidence of the shareholders entitled
to examine such list or transfer books or to vote at any meeting of
shareholders.
In lieu of making the shareholder list available for inspection by
shareholders as provided in the preceding paragraph, the Board of Directors may
elect to follow the procedures prescribed in Section 552.6(d) of the Office's
regulations as now or hereafter in effect.
SECTION 8. QUORUM. A majority of the outstanding shares of the Savings
Bank entitled to vote, represented in person or by proxy, shall constitute a
quorum at a meeting of shareholders. If less than a majority of the outstanding
shares is represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The share holders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum. If a quorum is present, the
affirmative vote of the majority of the share represented at the meeting and
entitled to vote on the subject matter shall be the act of the shareholders,
unless the vote of a greater number of shareholders voting together or voting by
classes is required by law or the Savings Bank's charter. Directors, however,
are elected by a plurality of the votes cast at an election of directors.
SECTION 9. PROXIES. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his or her duly
authorized attorney in fact. Proxies may be given telephonically or
electronically as long as the holder uses a procedure for verifying the identity
of the shareholder. Proxies solicited on behalf of the management shall be
voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the Board of Directors. No proxy shall be valid
more than eleven months from the date of its execution except for a proxy
coupled with an interest.
SECTION 10. VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS. When
ownership stands in the name of two or more persons, in the absence of written
directions to the Savings Bank to the contrary, at any meeting of the
shareholders of the Savings Bank any one or more of such shareholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose names shares of stock stand, the vote or votes to
which those persons are entitled shall be cast as directed by a majority of
those holding such shares and present in person or by proxy at such meeting, but
no votes shall be cast for such stock if a majority cannot agree.
SECTION 11. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the Board of Directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his or her name.
Shares standing in the name of a trustee may be voted by him or her, either in
person
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or by proxy, but no trustee shall be entitled to vote shares held by him or her
without a transfer of such shares into his name. Shares held in trust in an IRA
or Keogh Account, however, may be voted by the Savings Bank if no other
instructions are received. Shares standing in the name of a receiver may be
voted by such receiver, and shares held by or under the control of a receiver
may be voted by such receiver without the transfer into his or her name if
authority to do so is contained in an appropriate order of the court or other
public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Savings Bank nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the Savings
Bank, shall be voted at any meeting or counted in determining the total number
of outstanding shares at any given time for purposes of any meeting.
SECTION 12. CUMULATIVE VOTING. Unless otherwise provided in the Savings
Bank's charter, every shareholder entitled to vote at an election for directors
shall have the right to vote, in person or by proxy, the number of shares owned
by the shareholder for as many persons as there are directors to be elected and
for whose election the shareholder has a right to vote, or to cumulate the votes
by giving one candidate as many votes as the number of such directors to be
elected multiplied by the number of shares shall equal or by distributing such
votes on the same principle among any number of candidates.
SECTION 13. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the Board of Directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the Chairman of the Board or the President may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails
or refuses to act, the vacancy may be filled by appointment by the Board of
Directors in advance of the meeting or at the meeting by the Chairman of the
Board or the President.
Unless otherwise prescribed by regulations of the Office, the duties of
such inspectors shall include: determining the number of shares and the voting
power of each share, the shares represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies; receiving votes,
ballots, or consents; hearing and determining all challenges and questions in
any way arising in connection with the rights to vote; counting and tabulating
all votes or consents; determining the result; and such acts as may be proper to
conduct the election or vote with fairness to all shareholders.
SECTION 14. NOMINATING COMMITTEE. The Board of Directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the Savings Bank. No nominations for
directors except those made by the nominating committee shall be voted upon at
the annual meeting unless other nominations by shareholders are made in writing
and delivered to the Secretary of the Savings Bank at least five days prior to
the date of the annual meeting. Upon delivery, such nominations shall be posted
in a conspicuous place in each office of the Savings Bank. Ballots bearing the
names of all persons nominated by the nominating committee and by shareholders
shall be provided for use at the annual meeting. However, if the nominating
committee shall fail or refuse to act at least 20 days prior to the annual
meeting, nominations for directors may be made at the annual meeting by any
shareholder entitled to vote and shall be voted upon.
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SECTION 15. NEW BUSINESS. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the Secretary of the Savings
Bank at least five days before the date of the annual meeting, and all business
so stated, proposed, and filed shall be considered at the annual meeting; but no
other proposal shall be acted upon at the annual meeting. Any shareholder may
make any other proposal at the annual meeting and the same may be discussed and
considered, but unless stated in writing and filed with the Secretary at least
five days before the meeting, such proposal shall be laid over for action at an
adjourned, special, or annual meeting of the shareholders taking place 30 days
or more thereafter. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors,
and committees; but in connection with such reports, no new business shall be
acted upon at such annual meeting unless stated and filed as herein provided.
SECTION 16. INFORMAL ACTION BY SHAREHOLDERS. Any action required to be
taken at a meeting of the shareholders, or any other action which may be taken
at a meeting of shareholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.
ARTICLE III - BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the Savings Bank
shall be under the direction of its Board of Directors. The Board of Directors
shall annually elect a Chairman of the Board and a President from among its
members and shall designate, when present, either the Chairman of the Board or
the President to preside at its meetings.
SECTION 2. NUMBER AND TERM. The Board of Directors shall consist of nine
members and shall be divided into three classes as nearly equal in number as
possible. The members of each class shall be elected for a term of three years
and until their successors are elected and qualified. One class shall be
elected by ballot annually.
SECTION 3. REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held without other notice than this bylaw following the annual meeting
of shareholders. The Board of Directors may provide, by resolution, the time
and place for the holding of additional regular meetings without other notice
than such resolution. Directors may participate in a meeting by means of a
conference telephone or similar communications device through which all persons
participating can hear each other at the same time. Participation by such means
shall constitute presence in person for all purposes.
SECTION 4. QUALIFICATION. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the Savings
Bank unless the Savings Bank is a wholly owned subsidiary of a holding company.
SECTION 5. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board, the President,
or one-third of the directors. The persons authorized to call special meetings
of the Board of Directors may fix any place, within the Savings Bank's normal
lending territory, as the place for holding any special meeting of the Board of
Directors called by such persons.
Members of the Board of Directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other. Such participation
shall constitute presence in person for all purposes.
SECTION 6. NOTICE. Written notice of any special meeting shall be given
to each director at least 24 hours prior thereto when delivered personally or by
telegram or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall
be deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if mailed, when delivered to the telegraph company if sent by telegram,
or when the Savings Bank receives notice of delivery if electronically
transmitted. Any director may waive notice of any meeting by a writing filed
with the Secretary. The attendance of a director at a meeting shall
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constitute a waiver of notice of such meeting, except where a director attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any meeting of the Board of Directors need
be specified in the notice of waiver of notice of such meeting.
SECTION 7. QUORUM. A majority of the number of directors fixed by Section
2 of this Article III shall constitute a quorum for the transaction of business
at any meeting of the Board of Directors; but if less than such majority is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time. Notice of any adjourned meeting shall be given in
the same manner as prescribed by Section 6 of this Article III.
SECTION 8. MANNER OF ACTING. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, unless a greater number is prescribed by regulation of the Office
or by these bylaws.
SECTION 9. ACTION WITHOUT A MEETING. Any action required or permitted to
be taken by the Board of Directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
SECTION 10. RESIGNATION. Any director may resign at any time by sending a
written notice of such resignation to the home office of the Savings Bank
addressed to the Chairman of the Board or the President. Unless otherwise
specified, such resignation shall take effect upon receipt by the Chairman of
the Board or the President. More than three consecutive absences from regular
meetings of the Board of Directors, unless excused by resolution of the Board of
Directors, shall automatically constitute a resignation, effective when such
resignation is accepted by the Board of Directors.
SECTION 11. VACANCIES. Any vacancy occurring on the Board of Directors
may be filled by the affirmative vote of a majority of the remaining directors
although less than a quorum of the Board of Directors. A director elected to
fill a vacancy shall be elected to serve only until the next election of
directors by the shareholders. Any directorship to be filled by reason of an
increase in the number of directors may be filled by election by the Board of
Directors for a term of office continuing only until the next election of
directors by the shareholders.
SECTION 12. COMPENSATION. Directors, as such, may receive a stated salary
for their services. By resolution of the Board of Directors, a reasonable fixed
sum, and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the Board of Directors.
Members of either standing or special committees may be allowed such
compensation for attendance at committee meetings as the Board of Directors may
determine.
SECTION 13. PRESUMPTION OF ASSENT. A director of the Savings Bank who is
present at a meeting of the Board of Directors at which action on any Savings
Bank matter is taken shall be presumed to have assented to the action taken
unless his or her dissent or abstention shall be entered in the minutes of the
meeting or unless he or she shall file a written dissent to such action with the
person acting as the secretary of the meeting before the adjourn ment thereof or
shall forward such dissent by registered mail to the Secretary of the Savings
Bank within five days after the date a copy of the minutes of the meeting is
received. Such right to dissent shall not apply to a director who voted in
favor of such action.
SECTION 14. REMOVAL OF DIRECTORS. At a meeting of shareholders called
expressly for that purpose, any director may be removed for cause by a vote of
the holders of a majority of the shares then entitled to vote at an election of
directors. If less than the entire board is to be removed, no one of the
directors may be removed if the votes cast against the removal would be
sufficient to elect a director if then cumulatively voted at an election of the
class of directors of which such director is a part. Whenever the holders of
the shares of any class are entitled to elect one or more directors by the
provisions of the charter or supplemental sections thereto, the provisions of
this
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section shall apply, in respect to the removal of a director or directors so
elected, to the vote of the holders of the outstanding shares of that class and
not to the vote of the outstanding shares as a whole.
ARTICLE IV - EXECUTIVE AND OTHER COMMITTEES
SECTION 1. APPOINTMENT. The Board of Directors, by resolution adopted by
a majority of the full board, may designate the chief executive officer and two
or more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the Board of Directors, or any director,
of any responsibility imposed by law or regulation.
SECTION 2. AUTHORITY. The executive committee, when the Board of
Directors is not in session, shall have and may exercise all of the authority of
the Board of Directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the Board of
Directors with reference to: the declaration of dividends; the amendment of the
charter or bylaws of the Savings Bank, or recommending to the shareholders a
plan of merger, consolidation, or conversion; the sale, lease, or other
disposition of all or substantially all of the property and assets of the
Savings Bank otherwise than in the usual and regular course of its business; a
voluntary dissolution of the Savings Bank; a revocation of any of the foregoing;
or the approval of a transaction in which any member of the executive committee,
directly or indirectly, has any material beneficial interest.
SECTION 3. TENURE. Subject to the provisions of Section 8 of this Article
IV, each member of the executive committee shall hold office until the next
regular annual meeting of the Board of Directors following his or her
designation and until a successor is designated as a member of the executive
committee.
SECTION 4. MEETINGS. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee
may be called by any member thereof upon not less than one day's notice stating
the place, date, and hour of the meeting, which notice may be written or oral.
Any member of the executive committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in person.
The notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
SECTION 5. QUORUM. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
SECTION 6. ACTION WITHOUT A MEETING. Any action required or permitted to
be taken by the executive committee at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the members of the executive committee.
SECTION 7. VACANCIES. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full Board of Directors.
SECTION 8. RESIGNATIONS AND REMOVAL. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full Board of Directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the President or Secretary of the Savings Bank. Unless otherwise
specified, such resignation shall take effect upon its receipt; the acceptance
of such resignation shall not be necessary to make it effective.
SECTION 9. PROCEDURE. The executive committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of
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its proceedings and report the same to the Board of Directors for its
information at the meeting held next after the proceedings shall have occurred.
SECTION 10. OTHER COMMITTEES. The Board of Directors may by resolution
establish an audit, loan, or other committee composed of directors as they may
determine to be necessary or appropriate for the conduct of the business of the
Savings Bank and may prescribe the duties, constitution, and procedures thereof.
ARTICLE V - OFFICERS
SECTION 1. POSITIONS. The officers of the Savings Bank shall be a
President, one or more Vice Presidents, a Secretary, and a Treasurer or
Comptroller, each of whom shall be elected by the Board of Directors. The Board
of Directors may also designate the Chairman of the Board as an officer. The
offices of the Secretary and Treasurer or Comptroller may be held by the same
person and a Vice President may also be either the Secretary or the Treasurer or
Comptroller. The Board of Directors may designate one or more vice presidents
as Executive Vice President or Senior Vice President. The Board of Directors
may also elect or authorize the appointment of such other officers as the
business of the Savings Bank may require. The officers shall have such
authority and perform such duties as the Board of Directors may from time to
time authorize or determine. In the absence of action by the Board of
Directors, the officers shall have such powers and duties as generally pertain
to their respective offices.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the Savings Bank
shall be elected annually at the first meeting of the Board of Directors held
after each annual meeting of the stockholders. If the election of officers is
not held at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until a successor has been duly
elected and qualified or until the officer's death, resignation, or removal in
the manner hereinafter provided. Election or appointment of an officer,
employee, or agent shall not of itself create contractual rights. The Board of
Directors may authorize the Savings Bank to enter into an employment contract
with any officer in accordance with regulations of the Office; but no such
contract shall impair the right of the Board of Directors to remove any officer
at any time in accordance with Section 3 of this Article V.
SECTION 3. REMOVAL. Any officer may be removed by the Board of Directors
whenever in its judgment the best interests of the Savings Bank will be served
thereby, but such removal, other than for cause, shall be without prejudice to
any contractual rights, if any, of the person so removed.
SECTION 4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by the Board
of Directors for the unexpired portion of the term.
SECTION 5. REMUNERATION. The remuneration of the officers shall be fixed
from time to time by the Board of Directors.
ARTICLE VI - CONTRACTS, LOANS, CHECKS, AND DEPOSITS
SECTION 1. CONTRACTS. To the extent permitted by regulations of the
Office, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the Board of Directors may authorize any officer,
employee, or agent of the Savings Bank to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Savings Bank. Such
authority may be general or confined to specific instances.
SECTION 2. LOANS. No loans shall be contracted on behalf of the Savings
Bank and no evidence of indebtedness shall be issued in its name unless
authorized by the Board of Directors. Such authority may be general or confined
to specific instances.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for
the payment of money, notes, or other evidences of indebtedness issued in the
name of the Savings Bank shall be signed by one or more officers,
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employees, or agents of the Savings Bank in such manner as shall from time to
time be determined by the Board of Directors.
SECTION 4. DEPOSITS. All funds of the Savings Bank not otherwise employed
shall be deposited from time to time to the credit of the Savings Bank in any
duly authorized depositories as the Board of Directors may select.
ARTICLE VII - CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares of
capital stock of the Savings Bank shall be in such form as shall be determined
by the Board of Directors and approved by the Office. Such certificates shall
be signed by the Chief Executive Officer or by any other officer of the Savings
Bank authorized by the Board of Directors, attested by the Secretary or an
Assistant Secretary, and sealed with the corporate seal or a facsimile thereof.
The signatures of such officers upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or a registrar
other than the Savings Bank itself or one of its employees. Each certificate
for shares of capital stock shall be consecutively numbered or otherwise
identified. The name and address of the person to whom the shares are issued,
with the number of shares and date of issue, shall be entered on the stock
transfer books of the Savings Bank. All certificates surrendered to the Savings
Bank for transfer shall be canceled and no new certificate shall be issued until
the former certificate for a like number of shares has been surrendered and
canceled, except that in the case of a lost or destroyed certificate, a new
certificate may be issued upon such terms and indemnity to the Savings Bank as
the Board of Directors may prescribe.
SECTION 2. TRANSFER OF SHARES. Transfer of shares of capital stock of the
Savings Bank shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney authorized by a duly executed power of attorney and filed with the
Savings Bank. Such transfer shall be made only on surrender for cancellation of
the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the Savings Bank shall be deemed by the Savings Bank
to be the owner for all purposes.
ARTICLE VIII - FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Savings Bank shall end on the 31st day of December
of each year. The appointment of accountants shall be subject to annual
ratification by the shareholders.
ARTICLE IX - DIVIDENDS
Subject to the terms of the Savings Bank's charter and the regulations and
orders of the Office, the Board of Directors may, from time to time, declare,
and the Savings Bank may pay, dividends on its outstanding shares of capital
stock.
ARTICLE X - CORPORATE SEAL
The Board of Directors shall provide a Savings Bank seal which shall be two
concentric circles between which shall be the name of the Savings Bank. The
year of incorporation or an emblem may appear in the center.
ARTICLE XI - AMENDMENTS
These bylaws may be amended in a manner consistent with regulations of the
Office and shall be effective after: (i) approval of the amendment by a
majority vote of the authorized Board of Directors, or by a majority vote of the
votes cast by the shareholders of the Savings Bank at any legal meeting, and
(ii) receipt of any applicable regulatory approval. When the Savings Bank fails
to meet its quorum requirements, solely due to vacancies on the Board, then the
affirmative vote of a majority of the sitting Board will be required to amend
the bylaws.
* * *
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REVOCABLE PROXY
SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
OF
CAVALRY BANKING
FOR THE SPECIAL MEETING OF MEMBERS
TO BE HELD ON ____________ __, 1998
The undersigned member of Cavalry Banking ("Bank") hereby appoints the Board
of Directors, with full powers of substitution, as attorneys-in-fact and agents
for and in the name of the undersigned, to vote such shares as the undersigned
may be entitled to cast at the Special Meeting of Members ("Meeting") of the
Bank to be held at the Bank's main office at 114 West College Street,
Murfreesboro, Tennessee, on the date and time indicated on the Notice of Special
Meeting of Members, and at any adjournment thereof. They are authorized to cast
all votes to which the undersigned is entitled, as follows:
FOR AGAINST
(1) To approve a Plan of Conversion adopted by the
Board of Directors on August 7, 1997 to convert
the Bank from a federally chartered mutual savings
bank to a federally chartered capital stock
savings bank to be held as a wholly-owned
subsidiary of a new holding company, Cavalry
Bancorp, Inc., including the adoption of a Federal
Stock Charter and Bylaws for the Bank, and the
subsequent conversion of the Bank from a federally
chartered capital stock savings bank to a
Tennessee-chartered commercial bank, pursuant to
the laws of the United States and the rules and
regulations of the Office of Thrift Supervision
and the laws of the State of Tennessee and the
rules and regulations of the Tennessee Department
of Financial Institutions.
[ ] [ ]
NOTE: The Board of Directors is not aware of any other matter that may come
before the Meeting.
IMPORTANT: PLEASE SIGN DATE AND RETURN THIS PROXY IN THE PRE-ADDRESSED ENVELOPE
PROVIDED. VOTING FOR THE PLAN OF CONVERSION IN NO WAY OBLIGATES YOU TO BUY ANY
STOCK.
<PAGE>
THIS PROXY WILL BE VOTED FOR THE PROPOSITION
STATED IF NO CHOICE IS MADE HEREIN
Should the undersigned be present and elect to vote at said Meeting or at
any adjournment thereof and, after notification to the Secretary of the Bank at
said Meeting of the member's decision to terminate this Proxy, then the power of
said attorney-in-fact or agents shall be deemed terminated and of no further
force and effect.
The undersigned acknowledges receipt of a Notice of Special Meeting of
Members of the Bank called on the date and time indicated on the Notice of
Special Meeting, and a Proxy Statement relating to said Meeting from the Bank,
prior to the execution of this Proxy.
_________________________
Date
_________________________
Signature
_________________________
Signature
Note: Only one signature is required in the case of a joint account but all
account holders should sign, if possible. When signing as an attorney,
administrator, agent, corporate officer, executor, trustee, guardian or
other fiduciary capacity, indicate your full title.
